Failure To Communicate Could Expose Receivers

Failure To Communicate Could Expose Receivers

When is the appropriate time to involve guaranty associations in the financial analysis of a troubled insurer and the evaluation of structural alternatives to resolve such a situation? The goal of early communication is to:

Maximize policyholder benefits through prudent management of insurer assets and claims.

Reduce unreasonable delay of guaranty association payments if insolvency ensues.

Minimize the ultimate cost of an insolvency to the guaranty association system.

In evaluating the appropriate time to share with guaranty associations information concerning a troubled insurer, discussion has centered around:

The first signals of financial difficulty.

Informal oversight by the domestic regulator.

The initiation of conservation or rehabilitation proceedings against the impaired insurer.

The initiation of liquidation proceedings.

The benefits of early communication with the guaranty associations can be significant. The various state guaranty associations and their national organizations bring a warehouse of expertise and resources to help resolve and manage the various complex issues that may arise.

Early communication and coordination with the guaranty associations may enable the receiver to maximize the value of the estate for the benefit of policyholders, and at the same time resolve any coverage issues in advance of a plan of liquidation so that benefits are not delayed.

The added value of early communication with the guaranty associations needs to be weighed, however, against the costs that may be associated with obtaining such input. That is, the guaranty associations will, upon their involvement, do their own actuarial, financial and legal review of the insurers financial condition.

To the extent that the receiver has significant experience involving impairment and insolvency, a thorough and sophisticated analysis of the insurers actuarial, accounting and legal issues would already have been done. Another such evaluation could prove to be duplicative and would be paid for by the insolvent insurer.

Furthermore, there can be considerable uncertainty concerning the need for guaranty association intervention for a significant period of time. Factors such as investment results and claims experience may need to play out for multiple years, even a decade or more, before a receiver will know whether assets will be sufficient to meet all (or guaranty association covered) liabilities.

To commence the sharing of information with the guaranty associations and the incurrence of associated expenses well before actual liquidation could effectively use assets of the insurer to the detriment of its policyholders.

However, does a careful economic analysis and possible resulting reluctance to communicate early with the guaranty associations carry with it the possibility of negative repercussions for receivers in terms of potential exposure (including, at a minimum, heightened political scrutiny) for receivers and their assistants?

A solution to such potential exposure may be available under the proposed of the Insurers Rehabilitation and Liquidation Model Act by a National Association of Insurance Commissioners The proposed section leaves intact the concept of immunity of the receiver and the receivers assistants and contractors, provided that such protection is not construed to include immunity loss, liability caused by the intentional or willful and wanton misconduct of the receiver, any assistant However, the proposal continues by adding an entirely new concept to Section 9 that provides for a safe harbor from liability for the receiver and the receivers assistants and contractors to the extent that such liability relate to matters subject to review by the supervising court.

Specifically, the new subsection provides for absolute judicial immunity for receivers and their assistants or contractorsboth personally and in their official capacitiesfor any claim for damage or loss “caused by or resulting from any alleged act, error or omission of the receiver, assistant or contractor arising out of, or by reason of any matters that have been subject to review by the court after notice and opportunity to be heard, provided that the alleged act, error or omission was not disapproved or disallowed by the court.”

Court opportunity to review critical decisions by a receiverwhich would include a decision to postpone guaranty association involvement that was reasonably supported by the facts and circumstances of a particular estatewould enable a receiver to avoid potential exposure. Such court review would also likely be of great value in mitigating possible criticism or scrutiny that could potentially arise from a decision to delay guaranty association involvement at a later time with the benefit of 20/20 hindsight.

In sum, there is likely to be increased pressure on receivers to share information concerning financially troubled or impaired insurers with the guaranty association system at the earliest possible juncture. This will bring to bear the benefit of guaranty association expertise and resources, and will undoubtedly in many cases help maximize provision of policyholder protection.

However, receivers must have flexibility to analyze the issue of early coordination on a case-by-case basis. This is particularly true in those situations where the insurers ultimate financial experience will take years to develop. Such a situation could prove quite stressful to a receiver in the face of increased emphasis on early communication, particularly if a liquidation scenario does ultimately ensue.

Court review of a receivers decisionincluding to wait-and-seeshould provide the receiver with protection from liability or possible political fallout. In fact, this protection would most likely result from court review as described above irrespective of whether the proposed additional language to Section 9 is adopted by the states.

Adoption of the statutory language would, however, formalize such protection and perhaps provide additional psychic comfort for receivers and their respective assistants and contractors.

Gayle P. Levy is a partner in the Insurance and Reinsurance Department of Edwards & Angell, a national law firm focusing on financial services, technology and private equity & venture capital. She may be reached at: glevy@EdwardsAngell.com.

Reproduced from National Underwriter Edition, January 6, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.