In prior postings I have described New York’s five (5) insurance security/guaranty funds: three non-life security funds administered by the superintendent of insurance (the property/casualty fund, the workers comp fund and the public motor vehicle liability fund); and two life funds. The Life Insurance Company Guaranty Corporation, a separate entity with its own Board of life industry representatives, administers the guaranty fund protecting current life and annuity policies. There is also a life guaranty fund covering pre-1983 policies that still remains extant. (Part III of my series of articles on the receivership process in New York, posted October 9, 2008, describes in detail the operation of and reporting requirements for these funds).
The P/C Security Funds
The p/c insurance security funds are accounts funded through industry assessments, with the commissioner of taxation and finance as custodian, and with the control of the funds vested with the superintendent as receiver. Although there is no detailed reporting by any of these funds or the superintendent, I have accumulated certain information over the years on the distributions from and recoveries to the funds on an estate-by-estate basis.
Following are schedules of the ten estates that have received the greatest amount of payments from the three p/c funds on a net basis (distributions less recoveries) for the past 11 years for the p/c fund and the past 7 years for the motor vehicle and w/c funds:
PROPERTY/CASUALTY INSURANCE SECURITY FUND
COMPANY ------------------------ COST TO FUND ------ % of Total
Reliance Ins Co --------------------- $315,954,788 ------- 27.09%
Group Council Mutual Ins Co ---- $200,954,041 ------- 17.23%
First Central Ins Co ----------------- $117,736,140 ------- 10.10%
Legion Insurance Co ---------------- $88,451,306 -------- 7.58%
Transtate Ins Co --------------------- $78,139,954 --------- 6.70%
Villanova Insurance Co ------------- $73,655,030 -------- 6.32%
American Agents Insurance Co ---- $51,956,695 --------- 4.46%
Galaxy Insurance Company -------- $28,211,496 --------- 2.42%
Home Mut. Ins of Binghampton --- $28,183,527 -------- 2.42%
Union Indemnity Ins of NY -------- $26,526,835 --------- 2.27%
TOTALS --------------------------- $1,166,156,055 ------ 100.00%
PUBLIC MOTOR VEHICLE LIABILITY SECURITY FUND
COMPANY ----------------------- COST TO FUND ------- % of Total
NY Merchant Bakers Ins. Co ------ $47,211,782 -------- 49.95%
Capital Mutual Ins Co -------------- $27,173,134 -------- 28.75%
Reliance Ins Co --------------------- $10,969,398 -------- 11.61%
Legion Insurance Co ---------------- $3,972,573 ---------- 4.20%
Acceleration National Ins Co ------- $3,690,371 ---------- 3.90%
United Community Ins Co ---------- $1,553,331 ---------- 1.64%
Security Indemnity Ins. Co ----------- $564,418 ---------- 0.60%
Indemnity Insurance Co. ------------- $469,670 ---------- 0.50%
American Eagle Ins Co ---------------- $232,562 ---------- 0.25%
Carriers Casualty Co -------------------- $179,615 ---------- 0.19%
TOTALS ------------------------------ $94,517,565 ------- 100.00%
WORKERS’ COMPENSATION SECURITY FUND
COMPANY ------------------------COST TO FUND ----- % of Total
Reliance Ins Co -------------------- $203,014,868 -------- 52.76%
Legion Insurance Co ---------------- $76,450,563 -------- 19.87%
Home Insurance Co ---------------- $34,006,976 ---------- 8.84%
Fremont Indemnity Co ------------- $14,632,437 ---------- 3.80%
American Mut. Ins Co of Boston --- $12,055,131 ---------- 3.13%
American Mut. Liability Ins Co ---- $10,636,047 ---------- 2.76%
Realm National Insurance Co ------- $9,927,261 ---------- 2.58%
Commercial Comp. Casualty Co ----- $9,756,611 ---------- 2.54%
First Central Ins Co ------------------- $3,414,102 ---------- 0.89%
Villanova Insurance Co --------------- $3,004,611 --------- 0.78%
TOTALS ----------------------------- $384,789,415 ------ 100.00%
One caveat on recoveries: the department of taxation and finance keeps detailed records on payments from the security funds to each estate, but for some unexplained reason does not keep records of recoveries or payments to the funds from estates. The liquidation bureau has included a schedule of recoveries by estate as part of its annual report to the legislature. The 2008 schedule shows no repayments to any security fund from any estate, although the superintendent’s annual report states that $36 million was received from the Reliance estate and another $18 million from another source (Merchant Bankers) in 2008 that it were reimbursed to the security funds. These sums are not included in the charts above because they are not included in the bureau’s schedule of recoveries.
The Life Funds
Unlike the p/c funds, the superintendent does not include any information on the life funds in the annual report to the legislature, and there is no financial information included on the Life Insurance Company Guaranty Corporation web site (www.nylifega.org), which contains more disclaimers than useful information. Also, while I have successfully obtained information on the p/c funds from the department of taxation and finance and the insurance department under the freedom of information law (FOIL), no useful information is accessible on the life funds through FOIL or through the funds themselves.
As I have pointed out in the past, it is ironic that there is more information available on the p/c funds – controlled by the superintendent and his agents at the liquidation bureau -- than is available on the industry administered life funds.
Tuesday, October 20, 2009
Friday, June 12, 2009
New Office Address and Phone Number
NEW OFFICE ADDRESS:
Peter H. Bickford, Esq.
50 Park Avenue
12th Floor
New York, NY 10016
NEW OFFICE PHONE NUMBER:
(212) 889-7384
SAME OLD E-MAIL
pbickford@pbnylaw.com
SAME OLD ME!
Peter H. Bickford, Esq.
50 Park Avenue
12th Floor
New York, NY 10016
NEW OFFICE PHONE NUMBER:
(212) 889-7384
SAME OLD E-MAIL
pbickford@pbnylaw.com
SAME OLD ME!
Monday, April 13, 2009
Insolvency Process in New York -- Encore!
Last month I posted the final installment in my series of articles on the insurance insolvency process in New York. Since completing the series I have received a number of requests for the entire series. To accommodate these requests I have combined the series into one document and have posted it in pdf format on my web site, which can be accessed here: www.pbnylaw.com.
As I state in the introduction to this article, since the Mid-1980s I have represented managements, shareholders, policyholders, claimants, reinsurers (both as creditors and as debtors) and purchasers of insurance operations in liquidation or rehabilitation in New York. During that time I have observed the handling (or mishandling) of the receivership process spanning the administrations of five Governors and eight superintendents. Each new administration has vowed to “do something” about the system, and in particular address the “mess” at the Liquidation Bureau. What has been clear from these efforts over the years is that the “mess” has been largely misunderstood and the entrenchment and resilience of the Bureau grossly underestimated.
It is hoped that this article will help those trying to wend their way through the maze of the insolvency process to pursue their interests in an insolvent estate; and in the process spotlight the myths and misunderstandings surrounding the roles -- statutory or de facto -- of the superintendent, the Insurance Department, the Liquidation Bureau and the security funds.
If you have a problem in accessing the article through the link above, please e-mail me at pbickford@pbnylaw.com, and I will send you the article by return e-mail.
As I state in the introduction to this article, since the Mid-1980s I have represented managements, shareholders, policyholders, claimants, reinsurers (both as creditors and as debtors) and purchasers of insurance operations in liquidation or rehabilitation in New York. During that time I have observed the handling (or mishandling) of the receivership process spanning the administrations of five Governors and eight superintendents. Each new administration has vowed to “do something” about the system, and in particular address the “mess” at the Liquidation Bureau. What has been clear from these efforts over the years is that the “mess” has been largely misunderstood and the entrenchment and resilience of the Bureau grossly underestimated.
It is hoped that this article will help those trying to wend their way through the maze of the insolvency process to pursue their interests in an insolvent estate; and in the process spotlight the myths and misunderstandings surrounding the roles -- statutory or de facto -- of the superintendent, the Insurance Department, the Liquidation Bureau and the security funds.
If you have a problem in accessing the article through the link above, please e-mail me at pbickford@pbnylaw.com, and I will send you the article by return e-mail.
Saturday, March 7, 2009
The Liquidation Process in New York - Part VII: It’s a Wrap!
The last glimmer of hope for enlightened management of the insolvency process in New York by the current administration was dimmed at the end of February!
In Part II of this series (“The Right Stuff,” posted September 12, 2008), I applauded the one estate being run openly and efficiently by an agent of the receiver, free from the stifling and secretive bureaucracy of the Liquidation Bureau. This one estate, United Community Insurance Company, demonstrated that the tools necessary for an efficient, open and accountable process exist in the law today, requiring only the will of the administration to use that authority. Unfortunately, it appears that this will does not currently exist. Direct control of the United Community estate has been turned over to the Liquidation Bureau effective March 1st. There are no more agents of the superintendent as receiver independent of the Bureau!
But let’s look at the bright side! In the parlance of the market, you have to find the bottom before you can start to rebuild. With that possibility in mind, it is time to wrap up this series of articles on the receivership process in New York with some thoughts on how that rebuilding can occur.
As has been pointed out repeatedly (some may say ad nauseum) throughout this series, the receivership process in New York lacks meaningful transparency and accountability. Yet the tools to address these deficiencies are, for the most part, already in place. Following are some thoughts on the steps that can be pursued to restore confidence and integrity to the process, focusing on three principal areas:
As discussed on numerous occasions in this series, the Liquidation Bureau’s talk about transparency belies reality. The first step to achieving true openness, however, is relatively simple and uncomplicated: communicate material information on a regularly basis to all groups legitimately interested in an estate, including its policyholders, creditors, reinsurers, guaranty funds, the courts and, yes, even its shareholders. To accomplish this, the superintendent as receiver need simply direct all of his agents (unfortunately, at the moment that is only the Liquidation Bureau) to:
• Prepare regular periodic reports on a standard format, including a narrative on developments and standard (i.e. statutory) financial and cash flow statements;
• File those reports with the appropriate receivership court and post them on the agent’s web site;
• Invite input from all interested parties particularly policyholders, claimants, creditors, guaranty funds, and reinsurers; and
• Hold regular conferences with the receivership court, with notice to all interested parties.
The receivership process should be about finding the greatest value for the policyholders, claimants and creditors of an estate. For this to be achieved, the process needs to be truly open and communicative with these parties and not just pay lip service to their concerns.
Third Party Participation
The Courts
For the most part, the liquidation and rehabilitation courts in New York have been minimally involved in the oversight of management of the estates before them. Although it often seems that the courts grant undue deference to the receiver, it would be unfair to characterize them as merely rubber-stamping the requests of the receiver. The courts have a difficult job with a matter that is not the typical court case, and which often has no clear time frame to reach a conclusion.
There have been a number of exceptions, however, including New York Supreme Court Justice Shackman for the Constellation Re estate, Justices Kirschenbaum and Cahn for the various insolvent New York Insurance Exchange syndicates, and more recently Justice Stallman for the Midland Insurance Company estate and Justice Williams for the United Community Insurance Company estate Upstate. The involvement of these judges demonstrates the value that an attentive judge can bring to bear on the effective management of an estate.
However, even the most involved judges are limited to addressing only those matters before them, and if the receiver is not providing the judge with meaningful and timely information on a regular basis, and other interested parties are not able or willing to pursue matters with the court, the courts can only provide limited protection from systemic abuse.
The Regulators
A continuing regulatory role by the Insurance Department – separate and apart from the Liquidation Bureau or any other agent of the superintendent as receiver – would help ensure that the estates will be run openly and pursuant to the same standards and rules promulgated by the regulators for the rest of the insurance industry. In other words, when the superintendent of insurance is appointed receiver of an insolvent insurer, the same standards he applies to the rest of the industry should be applied to his own conduct of the business of the company in receivership.
The regulatory oversight of a licensed company should not end with the entering of an order of liquidation or rehabilitation. It makes no sense that when an insurance entity is placed in receivership the commissioner ceases to be the regulator and becomes the manager of an unregulated insurance business. Why shouldn’t the superintendent as receiver be held to the same standards that he imposes on the rest of the industry as its regulator? Why shouldn’t he apply his own rules to himself? (For a fuller discussion of this point, see my November 2004 article presented at a conference on insurance insolvency titled “Who Protects us from the Receiver?” A pdf copy of this article can be accessed at http://www.pbnylaw.com/publications.html.
Policyholders, claimants and other creditors
Creditor representatives played a major role in the successful release of Constellation Reinsurance Company from liquidation in 1992, forcing the addition of significant value to the plan. Yet through the final hearing before Supreme Court Justice Shackman the Liquidation Bureau protested the involvement of the very people it was purporting to protect. Although he deferred to the Bureau by not formally approving the creditors’ committee, Justice Shackman allowed the active participation of the creditors’ representatives in all phases of the proceedings – much to the chagrin of the Bureau but to the benefit of the policyholders and other claimants. This attitude of the Bureau towards interested third parties is unproductive and contributes significantly to the outside distrust of the Bureau.
The Bureau’s justification for its position – that the involvement of third parties would interfere with the administration of an estate and be a waste of estate assets -- is disingenuous in view of the Bureau’s lack of openness and accountability.
Guaranty Funds
Guaranty funds as a group generally become the largest creditor as they pay claims against an estate. While the Bureau is quick to pass off claims to the guaranty funds of the various states, it is not very quick to provide meaningful or timely information on the status of the estate, the likelihood of immediate access to funding for the payment of claims, or the long-term prospects for distributions. Cooperation of the funds of the various states is essential for the efficient and cost effective management of an estate, and the receiver’s agents must bring the funds into in dialogue on an estate at the earliest possible moment, and to keep them involved over the life of the estate.
Of course, as described in Part III of this series [posted October 9, 2008], the property/casualty funds in New York are not separate entities as they are in all other states: rather they are bank accounts funded by the rest of the industry and administered by the superintendent of insurance as receiver. This bank account approach concentrates all the authority in the receiver’s agent (the Bureau) and eliminates the insight and perspective of the people that have to pay the assessments to meet the guaranty funds’ obligations.
The failure of the life funds, which are separately run, to provide independent guidance is more a matter of inertia than anything. Life insolvencies have been few and far between over the past two decades, so that when a situation arises, there is no tested infrastructure in place to address the matter. This could be easily rectified by the superintendent invoking his authority over the life funds to require them to meet regularly, provide appropriate, publicly available reports, and establish procedures and protocols for the handling of claims, collection of assessments and involvement in plans for insolvent insurers.
Legislation
All of the foregoing changes and improvements can be accomplished within the existing statutes. But the law should be revised to address some of its weaknesses, shortcomings and foibles, which have been addressed in the various parts of this series. Among the matters that should or could be addressed through legislation are the following – in no particular order of importance:
• Require the same standard of reporting (both as to timeliness and form) as is required of licensed insurers (i.e. based on statutory accounting principles); granting authority to the superintendent – as regulator – to waive by regulation or circular letter certain redundant, excessive or unnecessary requirements.
• Confirm the authority (and requirement) of the Insurance Department to maintain regulatory oversight over estates in receivership.
• Strengthen and standardize the requirement for regular, statutory statements and standardized reports to the liquidation or rehabilitation courts.
• Grant discretion to the Courts to recognize representatives of interested parties, including policyholders, creditor, guaranty funds and reinsurers.
• Eliminate the newly enacted audit requirements, and substitute a realistic oversight regimen over the receivership process and the agents of the receivership.
• Either eliminate the Liquidation Bureau altogether or clarify its status, standing and oversight.
• Place the p/c guaranty funds under the control of a separate entity with industry participation – similar to the funds in other states.
• Strengthen the reporting requirements and oversight of all the guaranty funds, p/c and life.
• Ultimately, allow for the appointment of receivers other than the superintendent of insurance, who would be held accountable on the same basis as any other licensee.
In other words, let the professional managers manage, and the regulators regulate!
Final Thoughts
Through this series of articles I have attempted to show the errant path taken by New York’s receivership process over the past several decades, and the need to repair and reshape the process. The system is not irrevocably broken, but it continues to move down a path that can only lead to eventual total mistrust and abuse. In view of the severe economic issues facing our industry today, the threat of massive insolvencies are not out of the question, and New York is ill prepared to handle such an event.
Throughout my 23+ years representing creditors, policyholders, reinsurers, managements, and other interested parties of insolvent insurance companies, I have been told by a succession of Liquidation Bureau personnel that my proposals to open up the process to greater scrutiny and oversight, and to allow the active participation of third parties, would interfere with the administration of the estates by placing an unnecessary burden on the receivers and add significant cost to the estates. The reality is quite the opposite. I seek nothing more than to apply the same rules of business conduct to insolvent companies as are applicable to solvent ones.
Finally, the cocoon of secrecy that the Bureau has wrapped itself in over the years, and which is being enhanced by the current administration under an Orwellian ruse of transparency, has resulted in a bloated, unresponsive and arrogant bureaucracy deeply mistrusted by those most directly affected. It does not have to be that way.
POSTSCRIPT: Last week The Liquidation Bureau announced a plan to seek a private buyer for Midland Insurance Company, which has been in liquidation in New York for 23 years. Definitive action on this estate is long overdue, and the plan may prove to be an appropriate course of action. However, one cannot help but question whether the plan is an admission by the administration that the Liquidation Bureau is not equipped to or capable of performing the responsibilities of a receiver for a substantial company - a sobering thought given the current financial climate.
By the way, in announcing its Midland plan, the Liquidation Bureau inaccurately claims that it “would be the first sale of a U.S. insurance company in liquidation.” Not so! (See, e.g., New York’s own Constellation Re).
In Part II of this series (“The Right Stuff,” posted September 12, 2008), I applauded the one estate being run openly and efficiently by an agent of the receiver, free from the stifling and secretive bureaucracy of the Liquidation Bureau. This one estate, United Community Insurance Company, demonstrated that the tools necessary for an efficient, open and accountable process exist in the law today, requiring only the will of the administration to use that authority. Unfortunately, it appears that this will does not currently exist. Direct control of the United Community estate has been turned over to the Liquidation Bureau effective March 1st. There are no more agents of the superintendent as receiver independent of the Bureau!
But let’s look at the bright side! In the parlance of the market, you have to find the bottom before you can start to rebuild. With that possibility in mind, it is time to wrap up this series of articles on the receivership process in New York with some thoughts on how that rebuilding can occur.
As has been pointed out repeatedly (some may say ad nauseum) throughout this series, the receivership process in New York lacks meaningful transparency and accountability. Yet the tools to address these deficiencies are, for the most part, already in place. Following are some thoughts on the steps that can be pursued to restore confidence and integrity to the process, focusing on three principal areas:
- Estate Management
- Third Party Participation, including the Courts, Regulators, Policyholders, claimants and creditors, Guaranty funds, and Reinsurers
- Legislation
As discussed on numerous occasions in this series, the Liquidation Bureau’s talk about transparency belies reality. The first step to achieving true openness, however, is relatively simple and uncomplicated: communicate material information on a regularly basis to all groups legitimately interested in an estate, including its policyholders, creditors, reinsurers, guaranty funds, the courts and, yes, even its shareholders. To accomplish this, the superintendent as receiver need simply direct all of his agents (unfortunately, at the moment that is only the Liquidation Bureau) to:
• Prepare regular periodic reports on a standard format, including a narrative on developments and standard (i.e. statutory) financial and cash flow statements;
• File those reports with the appropriate receivership court and post them on the agent’s web site;
• Invite input from all interested parties particularly policyholders, claimants, creditors, guaranty funds, and reinsurers; and
• Hold regular conferences with the receivership court, with notice to all interested parties.
The receivership process should be about finding the greatest value for the policyholders, claimants and creditors of an estate. For this to be achieved, the process needs to be truly open and communicative with these parties and not just pay lip service to their concerns.
Third Party Participation
The Courts
For the most part, the liquidation and rehabilitation courts in New York have been minimally involved in the oversight of management of the estates before them. Although it often seems that the courts grant undue deference to the receiver, it would be unfair to characterize them as merely rubber-stamping the requests of the receiver. The courts have a difficult job with a matter that is not the typical court case, and which often has no clear time frame to reach a conclusion.
There have been a number of exceptions, however, including New York Supreme Court Justice Shackman for the Constellation Re estate, Justices Kirschenbaum and Cahn for the various insolvent New York Insurance Exchange syndicates, and more recently Justice Stallman for the Midland Insurance Company estate and Justice Williams for the United Community Insurance Company estate Upstate. The involvement of these judges demonstrates the value that an attentive judge can bring to bear on the effective management of an estate.
However, even the most involved judges are limited to addressing only those matters before them, and if the receiver is not providing the judge with meaningful and timely information on a regular basis, and other interested parties are not able or willing to pursue matters with the court, the courts can only provide limited protection from systemic abuse.
The Regulators
A continuing regulatory role by the Insurance Department – separate and apart from the Liquidation Bureau or any other agent of the superintendent as receiver – would help ensure that the estates will be run openly and pursuant to the same standards and rules promulgated by the regulators for the rest of the insurance industry. In other words, when the superintendent of insurance is appointed receiver of an insolvent insurer, the same standards he applies to the rest of the industry should be applied to his own conduct of the business of the company in receivership.
The regulatory oversight of a licensed company should not end with the entering of an order of liquidation or rehabilitation. It makes no sense that when an insurance entity is placed in receivership the commissioner ceases to be the regulator and becomes the manager of an unregulated insurance business. Why shouldn’t the superintendent as receiver be held to the same standards that he imposes on the rest of the industry as its regulator? Why shouldn’t he apply his own rules to himself? (For a fuller discussion of this point, see my November 2004 article presented at a conference on insurance insolvency titled “Who Protects us from the Receiver?” A pdf copy of this article can be accessed at http://www.pbnylaw.com/publications.html.
Policyholders, claimants and other creditors
Creditor representatives played a major role in the successful release of Constellation Reinsurance Company from liquidation in 1992, forcing the addition of significant value to the plan. Yet through the final hearing before Supreme Court Justice Shackman the Liquidation Bureau protested the involvement of the very people it was purporting to protect. Although he deferred to the Bureau by not formally approving the creditors’ committee, Justice Shackman allowed the active participation of the creditors’ representatives in all phases of the proceedings – much to the chagrin of the Bureau but to the benefit of the policyholders and other claimants. This attitude of the Bureau towards interested third parties is unproductive and contributes significantly to the outside distrust of the Bureau.
The Bureau’s justification for its position – that the involvement of third parties would interfere with the administration of an estate and be a waste of estate assets -- is disingenuous in view of the Bureau’s lack of openness and accountability.
Guaranty Funds
Guaranty funds as a group generally become the largest creditor as they pay claims against an estate. While the Bureau is quick to pass off claims to the guaranty funds of the various states, it is not very quick to provide meaningful or timely information on the status of the estate, the likelihood of immediate access to funding for the payment of claims, or the long-term prospects for distributions. Cooperation of the funds of the various states is essential for the efficient and cost effective management of an estate, and the receiver’s agents must bring the funds into in dialogue on an estate at the earliest possible moment, and to keep them involved over the life of the estate.
Of course, as described in Part III of this series [posted October 9, 2008], the property/casualty funds in New York are not separate entities as they are in all other states: rather they are bank accounts funded by the rest of the industry and administered by the superintendent of insurance as receiver. This bank account approach concentrates all the authority in the receiver’s agent (the Bureau) and eliminates the insight and perspective of the people that have to pay the assessments to meet the guaranty funds’ obligations.
The failure of the life funds, which are separately run, to provide independent guidance is more a matter of inertia than anything. Life insolvencies have been few and far between over the past two decades, so that when a situation arises, there is no tested infrastructure in place to address the matter. This could be easily rectified by the superintendent invoking his authority over the life funds to require them to meet regularly, provide appropriate, publicly available reports, and establish procedures and protocols for the handling of claims, collection of assessments and involvement in plans for insolvent insurers.
Legislation
All of the foregoing changes and improvements can be accomplished within the existing statutes. But the law should be revised to address some of its weaknesses, shortcomings and foibles, which have been addressed in the various parts of this series. Among the matters that should or could be addressed through legislation are the following – in no particular order of importance:
• Require the same standard of reporting (both as to timeliness and form) as is required of licensed insurers (i.e. based on statutory accounting principles); granting authority to the superintendent – as regulator – to waive by regulation or circular letter certain redundant, excessive or unnecessary requirements.
• Confirm the authority (and requirement) of the Insurance Department to maintain regulatory oversight over estates in receivership.
• Strengthen and standardize the requirement for regular, statutory statements and standardized reports to the liquidation or rehabilitation courts.
• Grant discretion to the Courts to recognize representatives of interested parties, including policyholders, creditor, guaranty funds and reinsurers.
• Eliminate the newly enacted audit requirements, and substitute a realistic oversight regimen over the receivership process and the agents of the receivership.
• Either eliminate the Liquidation Bureau altogether or clarify its status, standing and oversight.
• Place the p/c guaranty funds under the control of a separate entity with industry participation – similar to the funds in other states.
• Strengthen the reporting requirements and oversight of all the guaranty funds, p/c and life.
• Ultimately, allow for the appointment of receivers other than the superintendent of insurance, who would be held accountable on the same basis as any other licensee.
In other words, let the professional managers manage, and the regulators regulate!
Final Thoughts
Through this series of articles I have attempted to show the errant path taken by New York’s receivership process over the past several decades, and the need to repair and reshape the process. The system is not irrevocably broken, but it continues to move down a path that can only lead to eventual total mistrust and abuse. In view of the severe economic issues facing our industry today, the threat of massive insolvencies are not out of the question, and New York is ill prepared to handle such an event.
Throughout my 23+ years representing creditors, policyholders, reinsurers, managements, and other interested parties of insolvent insurance companies, I have been told by a succession of Liquidation Bureau personnel that my proposals to open up the process to greater scrutiny and oversight, and to allow the active participation of third parties, would interfere with the administration of the estates by placing an unnecessary burden on the receivers and add significant cost to the estates. The reality is quite the opposite. I seek nothing more than to apply the same rules of business conduct to insolvent companies as are applicable to solvent ones.
Finally, the cocoon of secrecy that the Bureau has wrapped itself in over the years, and which is being enhanced by the current administration under an Orwellian ruse of transparency, has resulted in a bloated, unresponsive and arrogant bureaucracy deeply mistrusted by those most directly affected. It does not have to be that way.
POSTSCRIPT: Last week The Liquidation Bureau announced a plan to seek a private buyer for Midland Insurance Company, which has been in liquidation in New York for 23 years. Definitive action on this estate is long overdue, and the plan may prove to be an appropriate course of action. However, one cannot help but question whether the plan is an admission by the administration that the Liquidation Bureau is not equipped to or capable of performing the responsibilities of a receiver for a substantial company - a sobering thought given the current financial climate.
By the way, in announcing its Midland plan, the Liquidation Bureau inaccurately claims that it “would be the first sale of a U.S. insurance company in liquidation.” Not so! (See, e.g., New York’s own Constellation Re).
Monday, February 9, 2009
The Liquidation Process in New York - Part VI: Oscar Season
If there were such an award, the current administration of the New York Liquidation Bureau would win the Orwellian Double-Speak Oscar. The Bureau has taken every public opportunity to promote a new era of openness and accountability, and to paint itself as the champion of the interests of policyholders and insureds. However, reality can be quite the opposite as this series has shown.
As previously detailed, under the banner of transparency the Bureau has actually reduced the scope of its reporting (for example, by issuing consolidated rather than the statutorily required individual statements for companies under its management), and has succeeded in obtaining legislation requiring the preparation of untimely reports at the expense of the estates that will be of little or no value as an oversight or management tool while needlessly tying the hands of estate managers in the future.
But these actions pale in audacity to its recent unprecedented use of the courts to further insulate itself from outside scrutiny and accountability!
As discussed in this series, the Bureau acts as the agent for the superintendent of insurance in his separate and private role as liquidator or rehabilitator, marshalling assets, paying claims and, in the case of rehabilitation, managing the business and acting to remove the causes of insolvency to restore the company to the marketplace. The courts have held that the liquidator or rehabilitator “stands in the shoes” of management so that, in theory at least, the Bureau and its employees are subject to the same standards of care and responsibility as any manager of any insurance entity.
Of course, given the circumstances of taking over an insolvent company, the law provides for certain protections for the estate, such as providing the courts with the authority to issue injunctions or orders “necessary to prevent interference with the superintendent or the proceeding, or waste of the assets of the insurer, or the commencement or prosecution of any actions, the obtaining of preferences, judgments, attachments or other liens, or the making of any levy against the insurer, its assets or any part thereof.” (Insurance Law § 7419; emphasis added)
These powers are clearly intended for the protection of the estate and its assets, and to allow for an orderly administration of an estate. They are not intended, and have not in the past been used overtly for the personal protection of the rehabilitator or liquidator and his agents – until now.
Since the start of the current administration in January 2007, there have been four liquidation and two rehabilitation orders issued. Each of these orders has included the following provision that did not exist in any such order entered into prior to 2007:
“The Superintendent as [rehabilitator] [liquidator] of [the company], his successors in office and their agents and employees are relieved of any liability or cause of action of any nature against them for any action taken by any one or more of them when acting in accordance with this Order and/or in the performance of their powers and duties pursuant to Article 74 of the New York Insurance Law;"
By adding this paragraph to the form of court order of liquidation or rehabilitation, the Bureau seeks to obtain immunity without any basis in the law, and for which there is no precedent in any of the hundreds of liquidation and rehabilitation petitions filed in the past. This immunity, by the way, is no garden-variety immunity from mere negligence. It bestows absolute immunity – including for gross negligence or intentional acts committed while acting as liquidator or rehabilitator of an estate.
Once again the current administration of the Liquidation Bureau has acted counter to its own pronouncements of openness and accountability. The Bureau repeatedly states that it is protecting the interests of policyholders and claimants of insolvent estates, and has publicly invoked its “fiduciary” role more than a few times. In the law, of course, fiduciaries are held to a higher standard of care than mere managers. Not only is the Bureau not prepared to assume even the most basic standard of care for its actions or inactions, the Bureau seeks to escape any and all responsibility.
Add this unprecedented immunity to the lack of existing institutional oversight or regulation, and you have the perfect setting for unbridled and undiscoverable abuse.
“And the Double-Speak Award goes to . . .”
__________________
A Note About the NAIC Insurance Receivers Model Act (IRMA):
Some readers familiar with IRMA might think: “What’s the big deal? IRMA provides immunity for receivers and their agents.” While IRMA provides a couple of immunity options – a limited and an absolute immunity -- only two states (Texas and Oklahoma) have adopted IRMA. The immunity provisions were and remain controversial, as many industry observers do not understand the logic in exempting receivers and their agents from responsibility for their actions, particularly for their gross mismanagement or worse.
But most significantly, immunity for receivers is a protection granted by law, and not to be taken through an unsuspecting court in a largely unopposed setting. This taking, combined with the lack of institutional oversight, is quite contrary to the “open and accountable” mantra of the administration.
As previously detailed, under the banner of transparency the Bureau has actually reduced the scope of its reporting (for example, by issuing consolidated rather than the statutorily required individual statements for companies under its management), and has succeeded in obtaining legislation requiring the preparation of untimely reports at the expense of the estates that will be of little or no value as an oversight or management tool while needlessly tying the hands of estate managers in the future.
But these actions pale in audacity to its recent unprecedented use of the courts to further insulate itself from outside scrutiny and accountability!
As discussed in this series, the Bureau acts as the agent for the superintendent of insurance in his separate and private role as liquidator or rehabilitator, marshalling assets, paying claims and, in the case of rehabilitation, managing the business and acting to remove the causes of insolvency to restore the company to the marketplace. The courts have held that the liquidator or rehabilitator “stands in the shoes” of management so that, in theory at least, the Bureau and its employees are subject to the same standards of care and responsibility as any manager of any insurance entity.
Of course, given the circumstances of taking over an insolvent company, the law provides for certain protections for the estate, such as providing the courts with the authority to issue injunctions or orders “necessary to prevent interference with the superintendent or the proceeding, or waste of the assets of the insurer, or the commencement or prosecution of any actions, the obtaining of preferences, judgments, attachments or other liens, or the making of any levy against the insurer, its assets or any part thereof.” (Insurance Law § 7419; emphasis added)
These powers are clearly intended for the protection of the estate and its assets, and to allow for an orderly administration of an estate. They are not intended, and have not in the past been used overtly for the personal protection of the rehabilitator or liquidator and his agents – until now.
Since the start of the current administration in January 2007, there have been four liquidation and two rehabilitation orders issued. Each of these orders has included the following provision that did not exist in any such order entered into prior to 2007:
“The Superintendent as [rehabilitator] [liquidator] of [the company], his successors in office and their agents and employees are relieved of any liability or cause of action of any nature against them for any action taken by any one or more of them when acting in accordance with this Order and/or in the performance of their powers and duties pursuant to Article 74 of the New York Insurance Law;"
By adding this paragraph to the form of court order of liquidation or rehabilitation, the Bureau seeks to obtain immunity without any basis in the law, and for which there is no precedent in any of the hundreds of liquidation and rehabilitation petitions filed in the past. This immunity, by the way, is no garden-variety immunity from mere negligence. It bestows absolute immunity – including for gross negligence or intentional acts committed while acting as liquidator or rehabilitator of an estate.
Once again the current administration of the Liquidation Bureau has acted counter to its own pronouncements of openness and accountability. The Bureau repeatedly states that it is protecting the interests of policyholders and claimants of insolvent estates, and has publicly invoked its “fiduciary” role more than a few times. In the law, of course, fiduciaries are held to a higher standard of care than mere managers. Not only is the Bureau not prepared to assume even the most basic standard of care for its actions or inactions, the Bureau seeks to escape any and all responsibility.
Add this unprecedented immunity to the lack of existing institutional oversight or regulation, and you have the perfect setting for unbridled and undiscoverable abuse.
“And the Double-Speak Award goes to . . .”
__________________
A Note About the NAIC Insurance Receivers Model Act (IRMA):
Some readers familiar with IRMA might think: “What’s the big deal? IRMA provides immunity for receivers and their agents.” While IRMA provides a couple of immunity options – a limited and an absolute immunity -- only two states (Texas and Oklahoma) have adopted IRMA. The immunity provisions were and remain controversial, as many industry observers do not understand the logic in exempting receivers and their agents from responsibility for their actions, particularly for their gross mismanagement or worse.
But most significantly, immunity for receivers is a protection granted by law, and not to be taken through an unsuspecting court in a largely unopposed setting. This taking, combined with the lack of institutional oversight, is quite contrary to the “open and accountable” mantra of the administration.
Thursday, January 8, 2009
The Liquidation Process in New York - Part V: The Legislative Cure – Masking the Disease?
Can you imagine a domestic New York insurer going to the Legislature with a proposed bill that would increase the insurers reporting requirements and expand its regulatory oversight? At the very least, one would expect the Legislature to look at the request with skepticism and seek to understand the motives behind the request. One would certainly not expect the Legislature to pass the bill or for the Governor to sign it without any significant airing of the problems and discussion of the proposed solution. That, however, is essentially what happened last year when the Liquidation Bureau presented the Legislature with a bill requiring annual audits of the Bureau and the estates under its management. The bill, as requested by the Bureau and without any significant public airing, was passed by the Legislature last June and signed into law in September [Laws of 2008, Chapter 540, amending §7405(g)].
So what could be so bad about requiring the Bureau to conduct annual audits? Why wouldn’t the revised law “provide greater transparency for policyholders and the public and to improve the Bureau’s fiscal accountability” as proclaimed by the Bureau’s August 7, 2008 press release? As Shakespeare wrote, let me count the ways!
A Failure to Provide an Oversight Function
First and foremost, providing for audits assumes that an oversight function already exists. It does not. As discussed in earlier installments of this series, the moment an order of rehabilitation or liquidation is signed, the superintendent of insurance becomes the receiver responsible for managing the estate and ceases to be its regulator – a void that is not addressed by the law. Providing for audits without providing for oversight responsibility, therefore, is placing the proverbial carriage before the horse.
Supporters point out that the new law provides that the audits be provided to the insurance department and the Legislature, therefore making them publicly available. But for what purpose and effect? Once an order of rehabilitation or liquidation is signed, the insurance department ceases regulating the insolvent company and has been given no charge – statutorily or otherwise – to conduct any review or analysis of the audited statements. Because the Court of Appeals has determined that the Liquidation Bureau is not a state agency, in large part because it does not involve the management or use of state funds, the state comptroller has no audit authority over it. It is also doubtful that the Legislature intends to assume any responsibility for the oversight of the estates or the Liquidation Bureau. And if members of the general public sought to fill this oversight void by challenging the reports or their methodologies, I suspect they would be ignored or summarily tossed for lack of standing.
Curiously, the law does not provide for submitting the reports to one entity with statutory authority over insolvent estates – the courts. In fact, the law does not provide for any regular reports or statements to be filed with the liquidation or rehabilitation court. And if the court were provided with the audited statements, it would most likely be quick to point out that its function is limited to ruling on matters put before them by the receiver, and not to act as the regulator of the estate or its managers.
A Failure to Address the Reporting Deficiencies
Secondly, the new law perpetuates and further imbeds the reporting deficiencies of the current law. Rather than following the §307 standard for all other licensed companies (filing statutory statements by March 1 with the statements audited by June 1 each year – see Part IV-A of this series), the current law allows statements to be filed for each estate subject to rehabilitation or liquidation “upon whichever standard the [estate] conducts its financial affairs.” Also, these statements do not have to be filed until the end of April, and are unaudited. These statements have proven to be of little value to policyholders, creditors, regulators, legislators, guaranty funds, investors or other interested parties, or even as a management tool to the Liquidation Bureau itself. Unfortunately, the new law not only fails to address these reporting deficiencies, it perpetuates them and wraps them in the protective cloak of an audit.
Most significantly:
• The new law dilutes the reporting requirements even further by allowing for combining the statements of the individual estates rather than requiring separate statements for each company in liquidation or rehabilitation. This combining is directly contrary to the whole receivership concept. Each estate is a separate entity with a distinct book of business under the supervision of a designated Supreme Court Justice. The idea of combining the results of these separate entities is new with the current administration and serves no useful disclosure purpose. Parties interested in one estate may have no interest in another estate, and reviewing combined statements would be of no help to interested parties in determining such things as the cost or effectiveness of the management of an estate, its success in marshalling assets, the likelihood of distributions to policyholders, guaranty funds or other creditors, or the prospects for new investor interest.
• Rather than seeking reporting consistency, such as by requiring reports to be filed on a basis consistent with other licensed companies under §307, the new law maintains the old reporting standard (“upon whichever standard each corporation conducts its respective financial affairs”). The new law, therefore, perpetuates the Liquidation Bureau’s open ended ability to prepare statements on some hybrid or mixed (or unknown) accounting basis, which has been one of the main reasons for the lack of meaningful and reliable information about the various estates and the Liquidation Bureau itself over the years.
• As stated before, there is no statutory requirement for the filing of any kind of regular, periodic report – financial or otherwise – with the liquidation or rehabilitation court.
• The new law provides for the filing of the audited statements by August 1 of each year without any explanation why auditors would need two more months than all other licensed companies are allowed under §307. By the time anyone can review and consider the consequences of these statements, they will be significantly out of date thereby diluting any value or insight they may have provided.
• The bill memorandum in support of the new law stated that the cost of the financial statements and audit opinions “will be below $300,000 annually.” That is for about 30 estates plus the Bureau itself – about $10,000 per audit. Based on the original engagement letters as posted on the Liquidation Bureau’s web site and subsequently removed, the cost of the 2006 audits was estimated to exceed $1.1 million and to be completed by Fall 2007. Those engagement letters were only for 2006, and the Bureau subsequently expanded the engagement to cover 2007 as well (although the engagement letters for 2007 were never posted). The 2006 audits were not completed until October 2008, and the 2007 audits, promised by year-end 2008, are still not completed. The full cost of these audits – all of which are fully borne by the creditors and policyholders of the estates – is unknown, but scary to anticipate. Believing that 30 plus audits can be done annually for “less than $300,000” is even scarier.
• The new law requires an audit of every estate “subject to liquidation or rehabilitation” no matter the size, age or status of the estate. There is no discretion or de minimus exception, which is likely to result in totally unnecessary and disproportionately costly audits for some estates, particularly those at the end of the liquidation process or with minimal remaining assets or exposure. Even §307 exempts small companies from the audit requirement.
Summary
Financial audits have their place and can be useful control and management tools. However, without having first established a meaningful oversight function; without having first established a consistent, recognized reporting standard; and without providing for timeliness of the reports; these audits are nothing more than a costly waste of estate assets for appearances sake – a rush to fix a problem without understanding the problem.
If there is a theme to this series of articles it is that the problems with the liquidation process in New York are systemic. The new law does not address these systemic problems. On the contrary, it protects the past through an audit of what is rather than an examination of what should be. The new law gives all the appearances of providing “greater transparency and accountability” while in fact it further imbeds the current deficiencies of the receivership system and makes the task of future, meaningful change that much more difficult to recognize and achieve.
Audit Endnote
On October 29, 2008 the Liquidation Bureau issued a press release proclaiming:
“NY LIQUIDATION BUREAU ISSUES FIRST COMPLETE
INDEPENDENT FINANCIAL AUDIT IN ITS 99-YEAR HISTORY
Bureau Receives Unqualified “Clean” Opinion from Auditor on its 2006 Financial Data”
The full 128-page report is posted on the Bureau’s web site, including the auditor’s opinion letters. Very impressive! The audit firm, Amper, Politziner & Mattia LLP, is a respected mid-level accounting firm and there is no reason to believe that they performed their review other than thoroughly, diligently and competently. Although the original engagement letters (posted and subsequently removed from the Bureau’s web site) were more akin to a review than an audit – primarily because the sampling and access to records was to be provided by Bureau personnel not the auditors – it is reasonable to assume based on the opinion letters that the scope of the engagement was expanded and changed before the completion of the audits.
One wonders, however, what the Bureau was seeking to convey by its proclamation of a “clean” 2006 audit. Without getting into a discussion of what constitutes a “clean” opinion, it is interesting to note that the “clean” year 2006 pre-dates the current administration, which has repeated castigated the prior Bureau leadership as having been fraught by incompetence, greed and corruption. If that was the case, how was it possible for the report to be “clean”? Yes, the current administration could take credit for cleaning up the mess created by their predecessors, but then the 2006 report would not have been “clean” – 2007 or 2008 maybe, but not 2006. Is it possible that their predecessors were not as evil as pictured? Is it possible that the problems with the Bureau are the system and not the personnel?
So what could be so bad about requiring the Bureau to conduct annual audits? Why wouldn’t the revised law “provide greater transparency for policyholders and the public and to improve the Bureau’s fiscal accountability” as proclaimed by the Bureau’s August 7, 2008 press release? As Shakespeare wrote, let me count the ways!
A Failure to Provide an Oversight Function
First and foremost, providing for audits assumes that an oversight function already exists. It does not. As discussed in earlier installments of this series, the moment an order of rehabilitation or liquidation is signed, the superintendent of insurance becomes the receiver responsible for managing the estate and ceases to be its regulator – a void that is not addressed by the law. Providing for audits without providing for oversight responsibility, therefore, is placing the proverbial carriage before the horse.
Supporters point out that the new law provides that the audits be provided to the insurance department and the Legislature, therefore making them publicly available. But for what purpose and effect? Once an order of rehabilitation or liquidation is signed, the insurance department ceases regulating the insolvent company and has been given no charge – statutorily or otherwise – to conduct any review or analysis of the audited statements. Because the Court of Appeals has determined that the Liquidation Bureau is not a state agency, in large part because it does not involve the management or use of state funds, the state comptroller has no audit authority over it. It is also doubtful that the Legislature intends to assume any responsibility for the oversight of the estates or the Liquidation Bureau. And if members of the general public sought to fill this oversight void by challenging the reports or their methodologies, I suspect they would be ignored or summarily tossed for lack of standing.
Curiously, the law does not provide for submitting the reports to one entity with statutory authority over insolvent estates – the courts. In fact, the law does not provide for any regular reports or statements to be filed with the liquidation or rehabilitation court. And if the court were provided with the audited statements, it would most likely be quick to point out that its function is limited to ruling on matters put before them by the receiver, and not to act as the regulator of the estate or its managers.
A Failure to Address the Reporting Deficiencies
Secondly, the new law perpetuates and further imbeds the reporting deficiencies of the current law. Rather than following the §307 standard for all other licensed companies (filing statutory statements by March 1 with the statements audited by June 1 each year – see Part IV-A of this series), the current law allows statements to be filed for each estate subject to rehabilitation or liquidation “upon whichever standard the [estate] conducts its financial affairs.” Also, these statements do not have to be filed until the end of April, and are unaudited. These statements have proven to be of little value to policyholders, creditors, regulators, legislators, guaranty funds, investors or other interested parties, or even as a management tool to the Liquidation Bureau itself. Unfortunately, the new law not only fails to address these reporting deficiencies, it perpetuates them and wraps them in the protective cloak of an audit.
Most significantly:
• The new law dilutes the reporting requirements even further by allowing for combining the statements of the individual estates rather than requiring separate statements for each company in liquidation or rehabilitation. This combining is directly contrary to the whole receivership concept. Each estate is a separate entity with a distinct book of business under the supervision of a designated Supreme Court Justice. The idea of combining the results of these separate entities is new with the current administration and serves no useful disclosure purpose. Parties interested in one estate may have no interest in another estate, and reviewing combined statements would be of no help to interested parties in determining such things as the cost or effectiveness of the management of an estate, its success in marshalling assets, the likelihood of distributions to policyholders, guaranty funds or other creditors, or the prospects for new investor interest.
• Rather than seeking reporting consistency, such as by requiring reports to be filed on a basis consistent with other licensed companies under §307, the new law maintains the old reporting standard (“upon whichever standard each corporation conducts its respective financial affairs”). The new law, therefore, perpetuates the Liquidation Bureau’s open ended ability to prepare statements on some hybrid or mixed (or unknown) accounting basis, which has been one of the main reasons for the lack of meaningful and reliable information about the various estates and the Liquidation Bureau itself over the years.
• As stated before, there is no statutory requirement for the filing of any kind of regular, periodic report – financial or otherwise – with the liquidation or rehabilitation court.
• The new law provides for the filing of the audited statements by August 1 of each year without any explanation why auditors would need two more months than all other licensed companies are allowed under §307. By the time anyone can review and consider the consequences of these statements, they will be significantly out of date thereby diluting any value or insight they may have provided.
• The bill memorandum in support of the new law stated that the cost of the financial statements and audit opinions “will be below $300,000 annually.” That is for about 30 estates plus the Bureau itself – about $10,000 per audit. Based on the original engagement letters as posted on the Liquidation Bureau’s web site and subsequently removed, the cost of the 2006 audits was estimated to exceed $1.1 million and to be completed by Fall 2007. Those engagement letters were only for 2006, and the Bureau subsequently expanded the engagement to cover 2007 as well (although the engagement letters for 2007 were never posted). The 2006 audits were not completed until October 2008, and the 2007 audits, promised by year-end 2008, are still not completed. The full cost of these audits – all of which are fully borne by the creditors and policyholders of the estates – is unknown, but scary to anticipate. Believing that 30 plus audits can be done annually for “less than $300,000” is even scarier.
• The new law requires an audit of every estate “subject to liquidation or rehabilitation” no matter the size, age or status of the estate. There is no discretion or de minimus exception, which is likely to result in totally unnecessary and disproportionately costly audits for some estates, particularly those at the end of the liquidation process or with minimal remaining assets or exposure. Even §307 exempts small companies from the audit requirement.
Summary
Financial audits have their place and can be useful control and management tools. However, without having first established a meaningful oversight function; without having first established a consistent, recognized reporting standard; and without providing for timeliness of the reports; these audits are nothing more than a costly waste of estate assets for appearances sake – a rush to fix a problem without understanding the problem.
If there is a theme to this series of articles it is that the problems with the liquidation process in New York are systemic. The new law does not address these systemic problems. On the contrary, it protects the past through an audit of what is rather than an examination of what should be. The new law gives all the appearances of providing “greater transparency and accountability” while in fact it further imbeds the current deficiencies of the receivership system and makes the task of future, meaningful change that much more difficult to recognize and achieve.
Audit Endnote
On October 29, 2008 the Liquidation Bureau issued a press release proclaiming:
“NY LIQUIDATION BUREAU ISSUES FIRST COMPLETE
INDEPENDENT FINANCIAL AUDIT IN ITS 99-YEAR HISTORY
Bureau Receives Unqualified “Clean” Opinion from Auditor on its 2006 Financial Data”
The full 128-page report is posted on the Bureau’s web site, including the auditor’s opinion letters. Very impressive! The audit firm, Amper, Politziner & Mattia LLP, is a respected mid-level accounting firm and there is no reason to believe that they performed their review other than thoroughly, diligently and competently. Although the original engagement letters (posted and subsequently removed from the Bureau’s web site) were more akin to a review than an audit – primarily because the sampling and access to records was to be provided by Bureau personnel not the auditors – it is reasonable to assume based on the opinion letters that the scope of the engagement was expanded and changed before the completion of the audits.
One wonders, however, what the Bureau was seeking to convey by its proclamation of a “clean” 2006 audit. Without getting into a discussion of what constitutes a “clean” opinion, it is interesting to note that the “clean” year 2006 pre-dates the current administration, which has repeated castigated the prior Bureau leadership as having been fraught by incompetence, greed and corruption. If that was the case, how was it possible for the report to be “clean”? Yes, the current administration could take credit for cleaning up the mess created by their predecessors, but then the 2006 report would not have been “clean” – 2007 or 2008 maybe, but not 2006. Is it possible that their predecessors were not as evil as pictured? Is it possible that the problems with the Bureau are the system and not the personnel?
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