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not reported losses (IBNR). The Superior Court approved the plan and the
reinsurers appealed. The California Court of Appeals held that because the
pertinent state insurance statute expressly forbade claimants with
contingent or unliquidated claims from participating in a liquidation plan, the
Commissioner's proposed liquidation plan was not authorized under the
statute. The court further found that absent contrary language in the
reinsurance policy, the reinsurer is not required to pay the original insolvent
insurer's estate unless the claim is certain and allowed by the conservator,
liquidator or statutory successor. The court remanded with instructions to
the trial court to order the Commissioner to submit a new plan that
complied with the statute.
Illinois In re Conservation of Alpine Ins. Co., 318 Ill.App.3d 457, 741 N.E.2d 663 (2000).
Director of Insurance brought liquidation action against insolvent insurance
company. Insurer sought to implement proposed rehabilitation plan, which
Director had previously found impermissibly discriminatory and preferential.
Insurer’s proposal subordinated multiple policy insureds to insurer‐only
insureds. Insurer argued its plan treated all insureds equally, requiring all
insureds to look other coverage first. The court rejected the exhaustion of
non‐extent coverage as a precondition to participation in a distribution. The
court found that 215 Ill. Comp. Stat. 5/201(1), which prioritizes distribution of an
insolvent insurer’s assets, prevents “punishment of multiple policy insureds
based on the fortuitous circumstances of their seeking out additional
coverage.”
Kentucky
Mississippi
Kentucky Cent. Life Ins. Co. v. Stephens, 897 S.W.2d 583 (Ky. 1995). Although
rehabilitation is preferable to liquidation, a commissioner’s reorganization plan
calling for liquidation will not be overturned lightly. The commissioner has
broad discretion to deal with the insurance company’s problems and when
contesting a decision by the commissioner, the burden of proof rests with those
challenging the decision.
Bank of Miss. v. Miss. Life & Health Ins. Guar. Ass’n, 850 So. 2d 127 (Miss. Ct. App.
2003). An annuity purchased by a pension plan was assigned to a liquidating
trust for the benefit of the beneficiaries of the pension plan upon the insolvency
of the insurance company that sold the annuity. The trustee of the liquidating
trust participated in the rehabilitation plan of the insolvent insurer and accepted
a lower interest rate from a second insurance company that assumed the
annuity. The trustee filed a claim with the Mississippi Life and Health Insurance
Guaranty Association (“MLHIGA”) for reimbursement of the losses resulting
from the insolvent insurer’s default. MLHIGA denied the claim because the
pension plan had been protected by the Pension Benefit Guaranty Corporation.
The trustee challenged the denial and, ultimately, the Supreme Court of
Mississippi agreed with the trustee that the losses were covered by MLHIGA.
On remand, two disputes again arose between the parties. First, the trustee
argued that MLHIGA was required to pay to the trust interest accruing after the
original annuity contract’s maturity date at the rate contracted for in the original
annuity (issued by the insolvent insurance company), or alternatively, the
slightly lower legal statutory interest rate. MLHIGA argued that the interest rate
should be an even lower interest rate than that stated in the agreement with
the second insurance company that assumed the annuity under the
rehabilitation plan. The court held that the rehabilitation plan’s lower interest
rate should be applied, reasoning that the relationship with the insolvent insurer
ended at insolvency. By participating in the rehabilitation plan, the trust sought
to mitigate its losses. To award the interest rate in the original contract, or at
the statutory rate, would give the trust greater damages than if it were to