Professional Receivership - Supervision Administration

RICHARD S. DARLING, CIR-ML

(CERTIFIED INSURANCE RECEIVER – MULTIPLE LINES)*

 

FREQUENTLY ASKED QUESTIONS

 

 

Insurance

1553, "engagement to marry," a variant of ensurance. Commercial sense of "security against loss or death in exchange for payment" is from 1651. Assurance was the older term for this (late 16c.). Contract that, by redistributing risk among a large number of people, reduces losses from accidents incurred by an individual.

 

 

DISCLAIMER

 

The information contained herein is for informational purposes only; it does not constitute legal, financial or other professional advice. You should not act upon any information contained in this web site without consulting your legal, financial or other professional advisor.

 

  1. What is a receivership?
  2. What is Conservation?
  3. Why are most Conservations confidential?
  4. What is Rehabilitation?
  5. My insurance company has been placed into Rehabilitation. What may happen to my policy?
  6.  

  7. I have a claim against a company in Rehabilitation. What will happen?
  8. Who can propose a Plan of Rehabilitation to the supervisory court?
  9. What is Liquidation?
  10. Am I still insured? - Property and Casualty
  11. Am I still insured? – Life and Health
  12.  

  13. My company is in Liquidation. How will my claims be paid?
  14. Why was my settlement check stopped?
  15. What is a Guaranty Fund or Association?
  16. Where does the funding for the Guaranty Funds or Associations come from?
  17. The Guaranty Fund has a $100 deductible on my unearned premium claim, and won’t cover over $10,000. What now?
  18.  

  19. My claim is in excess of the limits of the Guaranty or Association, or it is not Covered. Now what do I do?
  20. I’m having problems with the Guaranty Fund or Association. What do I do?
  21. Do I need to file a Proof of Claim with the Liquidator in order to get Guaranty Fund or Association coverage?
  22. Do I need to contact the Guaranty Fund or Association?
  23. What about a hardship issue or claim?
  24.  

  25. How do I find my Guaranty Fund or Association?
  26. What is a proof of claim?
  27. When will I receive a proof of claim form?
  28. What is a claim filing deadline or bar date?
  29. I have a previously unreported claim. Who do I contact?
  30.  

  31. What is an approved late claim?
  32. My car was insured by another company, but your policyholder was at fault. My company settled my collision claim. However, I have a collision deductible in my own policy, which I paid. How do I file for this?
  33. I was insured when I was involved in an accident, and the other party’s insurance company paid their claim. Their company is now coming after me for the amount of the claim. What do I do?
  34. I was collecting temporary total disability payments every week or month and they have stopped. What happens now?
  35. What happens to the premium I paid since my property and casualty policy has been cancelled by the Liquidation Order?
  36.  

  37. I have been paying my insurance premiums to a finance company on an installment basis, and still owe money. What happens now?
  38. I am an agent. My agency paid the premium, but I have not yet been paid by my client. Can I have the return premium refunded to me?
  39. What happens to my agency commission?
  40. What is an allowed claim?
  41. I have received notice that my claim has been allowed in the estate. Will I receive the full amount of my claim?
  42.  

  43. Can there be multiple distributions in an estate?
  44. What is the schedule of priorities for distribution of company assets?
  45. I have a claim for pre-liquidation fees and/or expenses incurred on behalf of an insured, or I rendered services, provided supplies, equipment, or leased property to the insurer before it was placed into receivership. Why has my claim been classified as a general creditor?
  46. I have moved since the company’s Liquidation date. What should I do?
  47. What happens to unclaimed, uncashed or undeliverable distribution checks?

 

 

  1. What is a receivership?
    Receivership is the process whereby an appropriate court orders the Insurance Commissioner as Receiver to take control of an insurance company that is judged to be insolvent or otherwise a risk to its policyholders and creditors. The Receiver as Conservator may take immediate steps to remove the problem creating the receivership or propose a plan of Rehabilitation. The Receiver as Liquidator determines a company’s liabilities, marshals all the company's assets and converts them to cash to pay creditor's claims in accordance with statutory priorities.

     

    There are three common forms of Insurance Receiverships in most states, Conservation, Rehabilitation, and Liquidation. Hopefully, these FAQs will give you some insight and answer many of the questions you might have regarding the process, and what the consumer can expect.

     

    Approximately 70% of all receiverships are entered into at the request of or with the agreement of the company’s management, Board of Directors and the Insurance Commissioner. Frequently, this occurs when the company believes it has problems that may prevent it from maintaining a viable business on an on going basis. Receiverships can be used to provide a platform for Rehabilitation of the company through various types of reorganization plans. If the company believes that it cannot continue for various reasons such as significant asset loss, it may in fact have be ordered into Liquidation. There is also potential liability of the company’s officers and directors for allowing a situation to continue unabated.

     

    The remaining approximately 30% of receiverships begin with a “quick take” or seizure of the company by the Insurance Commissioner. This is normally done on an ex parte basis, that being on behalf of the Insurance Commissioner, and in absence of and without notice to the company of the court proceeding. This order immediately allows the Commissioner as Receiver, without advance notice to the company, to seize all of the company’s bank accounts and depositories, its books and records, as well as the company’s place of doing business. While this may seem to be a drastic measure, it is usually undertaken when the Commissioner is concerned that without such an order, there will be a risk of losing control of records, or a sudden depletion or removal of assets, cash or otherwise. The company is ordered to show cause in a subsequent hearing why the Commissioner as Receiver should not be appointed permanent receiver. In most states this would be a Conservation order.



  2. What is Conservation?
    A Conservation proceeding begins with a filing of a verified complaint for Conservation by the Commissioner of Insurance and a judge’s entry of an order of Conservation. During the conservation proceeding, most statutes require that the court supervise the receivership proceedings. Under an order of Conservation, the Commissioner of Insurance becomes Conservator of an insurance company and, as Conservator, obtains possession and control of the property, business, books, records and accounts of a company and of the premises used by it for transaction of its business. In order to maintain the status quo of the company, conservation orders and proceedings are typically subject to a confidentiality order (sometimes referred to as a sequestration order). Conservation proceedings allow the Conservator to evaluate the condition of the company in order to determine its future direction: (1) discharge from conservation; (2) rehabilitation; or (3) liquidation. Depending on the asset position of the company, there may also be a court ordered moratorium on the payment of claims, loss adjustment expenses, or the writing of new business.


  3. Why are most Conservations confidential?
    Confidentiality may be required by statute or requested by the Commissioner of Insurance because in many cases if creditors and the public become aware of an insurer’s potential problems, the insurer could suffer irreparable harm even though the condition requiring Conservation may be curable. Although only intended to be temporary, a confidentiality order may be lifted by a further order of the court, either by petition of the Conservator upon good cause shown, or with agreement with, or at the request of company management.


  4. What is Rehabilitation?
    Through an Order of Rehabilitation, the Commissioner of Insurance becomes Rehabilitator of an insurance company, and as Rehabilitator, is vested with title to the company’s property, assets, rights of action or lawsuits, books, records and premises wherever located. Rehabilitation can be used as a mechanism by which the Commissioner as Rehabilitator tries to restructure, sell or otherwise run-off the company’s business. Normally, the Rehabilitator will restrict or forbid the writing of any new business in a company placed into Rehabilitation. Historically, Rehabilitations have only occasionally been successful, with the company actually returning to the market.


  5. My insurance company has been placed into Rehabilitation. What may happen to my policy?
    Your policy may be kept in-force, modified or cancelled by court order, non-renewed, sold or transferred to another company by the Rehabilitator, or cancelled by your agent, if the Order of Rehabilitation allows. Depending on the type of business written by your company, such as certain life, accident and health, or annuity companies, a moratorium may also be declared on the payment of benefits, dividends, accumulation of value, or surrenders. Further, the payment of return premiums or commissions may not be allowed until the disposition of the company is known. Finally, depending on the financial condition of the company, certain changes to your policy may not be allowed, such as the addition of an automobile, increases in coverage, or reinstatement of a lapsed policy.


  6. I have a claim against a company in Rehabilitation. What will happen?
    When the court supervising the proceeding enters an Order of Rehabilitation on petition of the Commissioner of Insurance, the court will also generally approve a mechanism proposed by the Commissioner for handling claims. Potential claimants of the company, as identified by the company’s books and records, will be given notice by the Rehabilitator as to how to proceed. If you are a third party claimant having a claim against an insured of the subject company and are insured elsewhere, it may be expedient to discuss the claim with your own carrier for possible interim relief.


  7. Who can propose a Plan of Rehabilitation to the supervisory court?
    In most states only the Commissioner of Insurance, as Rehabilitator, can submit a proposed plan of rehabilitation to the court supervising the receivership proceeding.


  8. What is Liquidation?
    Through an order of Liquidation, the Commissioner of Insurance becomes Liquidator of an insurance company and, as Liquidator, is vested with title to the company’s property, assets, rights of action or lawsuits, books, records and premises, wherever located. Notices are immediately mailed to the company’s agents and policyholders regarding the status of the company and their policies. Additionally, notices known as Proofs Of Claim (POC) are mailed to all persons and entities reflected on the company’s books and records as being potential creditors of the company, providing for a bar date, or claim filing deadline, that being the last date set by the supervising court to file a claim with the Liquidator. The bar date is normally six (6) to twelve (12) months following the date of Liquidation. Claims properly and timely filed against the company are evaluated and adjudicated by the Liquidator. At the same time, while claims filed with the Liquidator against the insolvent company are being evaluated, the Liquidator will also be working to marshal the assets of the company. This will include contractual balances due the company, such as reinsurance proceeds, deductibles, subrogation, as well as filing lawsuits when warranted. When sufficient assets have been marshaled in the company and claims liabilities have been finalized, the Liquidator will obtain court approval to make a partial or final distribution of assets. Unlike a Federal bankruptcy, where most creditors are pari passu, “with equal step” or “without partiality,” state controlled proceedings distributions are made by priority level and are made on a pro-rata basis, meaning that each allowed creditor at the same level receives payment at the same percentage of its claim. Each superior level of creditor must be paid or reserved at 100% before subordinate levels are paid. Subsequent to a final distribution of assets, the estate of the company is closed.


  9. Am I still insured? - Property and Casualty
    The rights and liabilities of the company and its policyholders and other creditors are fixed as of the date of the Liquidation order. However, all policies covered by a Property & Casualty Guaranty Fund will be continued and covered by such Guaranty Fund to the extent defined under your state’s law for 30 days from the liquidation date, or the policy’s expiration date, or the cancellation date requested by the insured or agent, whichever occurs first, provided your premium is paid for such period of time. The policies covered by the Guaranty Fund will normally be cancelled effective 12:01a.m. local time on the 30th day after the Liquidation date, unless the policy has been terminated at an earlier date for any reason. Policies not covered by a Guaranty Fund are cancelled effective upon the entry of the Order of Liquidation. To determine if your company is a member of the Guaranty Fund, thereby affording coverage, contact your Department of Insurance or Guaranty fund. Locate your Department of insurance web site here: http://naic.org/state_web_map.htm


  10. Am I still insured? – Life and Health
    The rights and liabilities of the company and its policyholders and other creditors are fixed as of the date of Liquidation order. However, all policies covered by a Life & Health Guaranty Association will be continued and covered by such Guaranty Association to the extent defined under your state’s law for an undetermined amount of time, provided your premium continues to be paid. Under most state statutes, Life & Health Guaranty Associations will continue your policy, or reinsure it with another company up to statutory limits. Certain products marketed by these companies have specific or reduced limits, which should be discussed with your Guaranty Association. You will receive notice from your Guaranty Association with regard to the termination or disposition of your policy. Policies not covered by a Guaranty Association are cancelled effective upon the entry of the Order of Liquidation. In most states, a company not licensed in your state may still be afforded Guaranty Association coverage for residents if certain and specific criteria are met in respect to your policy. To determine if your company is a member of the Guaranty Association, contact your Department of Insurance, or Guaranty Association. Locate your Department of insurance web site here: http://naic.org/state_web_map.htm


  11. My company is in Liquidation. How will my claims be paid?
    Claims in existence prior to the Liquidation or incurred during the policy term and reported within any extended coverage beyond that date will be paid by the Guaranty Fund or Association subject to the limitations and restrictions of the Guaranty Fund or Association laws of the state in which you are a resident, including unearned premium claims in the case of the Property and Casualty Funds. Claims in excess of applicable Guaranty Fund or Association limits, but still within your limit of coverage, or claims that are not covered by a Guaranty Fund or Association will be evaluated, adjudicated and paid by the Liquidator on a prorated basis, depending upon the assets available in the company and the amount of all claims allowed at the priority level at which the funds are being distributed.


  12. Why was my settlement check stopped?
    All assets of the company may have been frozen by the order of Conservation, Rehabilitation, or Liquidation. Honoring of your draft or check will likely be at the discretion of the Conservator, Rehabilitator, or Liquidator. Provided, all similarly situated recipients are treated equally.


  13. What is a Guaranty Fund or Association?
    All 50 states, Puerto Rico, the U.S. Virgin Islands (Property and Casualty only) and the District of Columbia, have a “safety net” in place for the payment of covered claims arising from the insolvency of an insurer licensed to do business in that state or jurisdiction. Normally, for property and casualty business they are referred to as “Guaranty Funds” and for life and health they are typically referred to as “Guaranty Associations”. Five states provide some sort of a guaranty mechanism for HMOs. Business written on an excess and surplus lines basis, that being by a company “admitted” in your state but not “licensed” by your state Department of Insurance, is normally not a member of the Property and Casualty Guaranty Fund and which would not afford coverage for such claims in the event of an insolvency of such a company. In the case of life and health insurance, the Guaranty Association also provides for the continuation of eligible contracts that would otherwise terminate because of the insolvency. The Guaranty Funds or Associations are activated upon the entry of an Order of Liquidation with a finding of insolvency by a court of competent jurisdiction. Coverage will vary from state to state. You should contact your Guaranty Fund or Association to determine if it will provide coverage as a result of the Liquidation of your insurer and the level of coverage that may be provided.


  14. Where does the funding for the Guaranty Funds or Associations come from?
    Insurance Guaranty Funds and Associations obtain the funds necessary to pay claims and administrative expenses by assessing solvent members of the insurance industry writing similar lines of insurance in your state on a licensed basis. By law, all companies licensed in a state are required to be a member of the Guaranty Fund or Association within that state. Guaranty Funds and Associations are subrogated to the interests of the policyholders on whose behalf they pay claims and therefore receive a pro-rata distribution from the Liquidator in the event of a distribution in the same level of priority as the claimant or policyholder creditor. Administrative expenses of the Guaranty Fund or Association are normally accorded a higher priority of distribution than such creditors. Companies recoup these assessments in various ways, the most common being in the rates charged their policyholders, a policy surcharge or through premium tax offsets.


  15. The Guaranty Fund has a $100 deductible on my unearned premium claim, and won’t cover over $10,000. What now?
    Most states have this provision in their Guaranty Fund statutes. In this event you will need to file a Proof of Claim on a timely basis with the Liquidator in the amount of the deductible or premium not covered by your fund. In most states, this claim will be at the same priority level with all other policy benefit related claims, and would be distributed accordingly.


  16. My claim is in excess of the limits of the Guaranty or Association or it is not Covered. Now what do I do?
    As above you will need to file a Proof of Claim on a timely basis with the Liquidator. If the claim has not been previously reported, or is contingent in nature, you should contact the Liquidator for additional information. Generally, a contingent claim is one in which, on the date of liquidation, it may be reasonably inferred, based upon the proof presented, a judgment may be obtained against the insured. In any case you need to file your Proof of Claim prior to the bar date in order to protect your interests.


  17. I’m having problems with the Guaranty Fund or Association. What do I do?
    The Liquidators office may be able to help if it is a problem with records or information provided by the Liquidator. Otherwise, you should contact your Department of Insurance for assistance. Guaranty Funds and Associations are statutorily responsible to the Commissioner.


  18. Do I need to file a Proof of Claim with the Liquidator in order to get Guaranty Fund or Association coverage?
    Not in all cases, but some Guaranty Funds or Associations do require this. Contact your Fund or Association for further information.


  19. Do I need to contact the Guaranty Fund or Association?
    Initially no, the Guaranty Fund or Association will not be in a position to assist you until the Liquidator has transferred the company’s claim files and information to the Fund or Association. If you have determined that the files have been transferred, give them a call.


  20. What about a hardship issue or claim?
    This is always a difficult situation. Many Liquidators will build hardship provisions into their orders. Guaranty Funds and Associations will also attempt to work around these issues. Many people will differ on what actually constitutes a hardship, but it doesn’t hurt to inquire.


  21. How do I find my Guaranty Fund or Association?
    Both the Guaranty Funds and Associations maintain a web site through their respective organizations, which includes contact information for all Funds and Associations.

    Property and Casualty:
    • National Conference of Insurance Guaranty Funds (NCIGF)
    • 300 North Meridian Street, Suite 1020
    • Indianapolis, Indiana 46204
    • Phone 317-464-8199
    • Fax 317-464-8180
    • www.ncigf.org

    Life and Health:
    • National Organization of Life & Health Insurance Guaranty Associations (NOLHGA)
    • 13873 Park Center Road
    • Herndon, Virginia 20171
    • Phone 703-481-5206
    • Fax 703-481-5209
    • www.nolhga.com


  22. What is a proof of claim?
    A proof of claim consists of a notarized, written statement, setting forth the details of the claim against an insurance policy issued by the insolvent insurer. The claim must be based upon a known loss or occurrence. A proof of claim may also be used for other debts of the insurer, such as trade payables or loss adjustment expenses owed by the insurer or unpaid as of the Liquidation date. If a proper proof of claim is not received by the Liquidator by the claim filing deadline or bar date established for the company, you will not have a timely filed claim in the estate and your chances of participating in any potential distribution of estate assets will be greatly diminished, if at all. Late filed claims under most statutes participate in the estate only after all superior creditors, including general creditors, are paid in full, but before equity or shareholders of the company.


  23. When will I receive a proof of claim form?
    There are variables as to when a proof of claim form will be mailed, such as the location or condition of the company’s books and records. Under normal circumstances, the Liquidator will attempt to mail the proof of claim forms within 90 days of the Liquidation date. If you believe you should receive a proof of claim and have not received it within a reasonable time period, you should contact the Liquidator’s office.


  24. What is a claim filing deadline or bar date?
    The claim filing deadline or bar date is the last date on which a proof of claim can be received by the Liquidator and accepted as timely filed for purposes of participating in any distributions of estate assets that may be allowed on timely filed claims.


  25. I have a previously unreported claim. Who do I contact?
    Both the receiver and your Guaranty Fund or Association. The Receiver will provide you with a proof of claim so you may file your claim against the company. The Guaranty Fund or Association will handle your covered claim. Your proof of claim will be subject to the claims filing deadline for the company. In some, but not all cases, a Guaranty Fund or Association will require a proof of claim be filed with the Liquidator prior to handling your claim.


  26. What is an approved late claim?
    In certain specific circumstances, the receiver can petition the supervising court to accept a late filed claim: that is, one filed with the receiver after the claim filing deadline or bar date, if good cause exists as timely. Normally, late filed proofs of claim participate in distributions of company assets, if at all, only after all timely filed claims of general creditors have been paid in full.


  27. My car was insured by another company, but your policyholder was at fault. My company settled my collision claim. However, I have a collision deductible in my own policy, which I paid. How do I file for this?
    You may file a proof of claim with the Liquidator in the amount of your policy deductible. In addition, in some cases you may be able to recover your deductible from your state Guaranty Fund.


  28. I was insured when I was involved in an accident, and the other party’s insurance company paid their claim. Their company is now coming after me for the amount of the claim. What do I do?
    This is known as subrogation: that is, collecting from your company the amount the other company paid on the claim. Since your company is now in Liquidation and cannot pay it, they are attempting to collect the debt directly from you. Under most Guaranty Fund statutes they will not pay another insurance company’s claim for subrogation, however most of these same statutes provide for a prohibition against any attempt to collect from a former insured of an insolvent company. You should contact your Guaranty Fund for information in this case.


  29. I was collecting temporary total disability payments every week or month and they have stopped. What happens now?
    The insurance company paying your disability payments has been placed into Liquidation and is unable to continue the weekly payments. In some cases, the receiver can make advance payments before the liquidation date, depending on the asset position of the company, knowing that they will be stopped once the Liquidation order is entered. This may have occurred in your case. In any event, you may be entitled to continued payments from your Guaranty Fund or Association if it covers claims as a result of the Liquidation of the company. Furthermore, you should also file a proof of claim with the receiver.


  30. What happens to the premium I paid since my property and casualty policy has been cancelled by the Liquidation Order?
    You now have a claim for unearned premium from the now insolvent insurer. For example, if a one year policy was in force for six months when it was cancelled as a result of the Liquidation Order, then half (50%) of the total premium was earned by the company for the coverage provided, and is known as earned premium. The balance is unearned premium, and results in a claim against the company, for which a proof of claim should be filed with the receiver, and/or the coverage from the Guaranty Fund, subject to statutory limitations or deductibles.


  31. I have been paying my insurance premiums to a finance company on an installment basis, and still owe money. What happens now?
    The premium finance company probably advanced your entire premium to the insolvent company on your behalf at the start of your policy. You are now paying that company plus any additional fees on an installment basis. This is a separate contract from your insurance contract, and you still owe them the amount of the unpaid premium plus what ever contractual fees you agreed to. You will have an unearned premium claim against the company in Liquidation, for which you should file a proof of claim. Additionally, most Guaranty Funds provide for unearned premium claims, subject to statutory limits or deductibles. Your premium finance company may allow you to assign your unearned premium claim from the Guaranty Fund and or the receiver directly to the finance company, perhaps mitigating your exposure. However, any shortage in these amounts may still be your responsibility.


  32. I am an agent. My agency paid the premium, but I have not yet been paid by my client. Can I have the return premium refunded to me?
    It will be necessary for you to obtain an Assignment of Interest from your client. This form will assign the right to the return premium to whatever party the policyholder designates. If applicable, the Guaranty Fund will also need this form in order to pay you the return premium, subject to statutory limitations or deductibles.


  33. What happens to my agency commission?
    In the event of a property and casualty insolvency any policies cancelled as a result of the Liquidation will not only generate unearned premiums, but unearned commissions as well which must be paid to the receiver gross. Any premiums in your possession on the Liquidation date must also be paid to the receiver gross and not net of commission. The same will apply to a life or health insolvency: even through the policies are not normally cancelled, there is Guaranty Association coverage available for the Liquidation. Agents will have a general creditor claim against the estate for any commissions due. You need to complete and file a timely proof of claim with the receiver for these amounts.


  34. What is an allowed claim?
    A proof of claim becomes an allowed claim in the Liquidation proceedings when an order is entered in the supervising court stating that the claim is allowed at a sum certain for purposes of participating in any distributions of company assets at any particular priority level.


  35. I have received notice that my claim has been allowed in the estate. Will I receive the full amount of my claim?
    When a distribution has been approved at a given priority level, all claims allowed at that level will receive the same percentage of their claims. This is referred to as a pro rata distribution. Although some estates have enough assets to pay all allowed policyholder related claims at that level in full, this is the exception. The pro rata amount of a claim that is paid is based on the dollar amount of all claims at a specific level to the remaining assets of the estate available for distribution. For example, if you have a claim that was allowed in the amount of $10,000 and a 50% pro rata distribution is being made on all claims at your priority level then you will receive a payment from the Liquidator in the amount of $5,000. The receiver will usually not know what the distribution percentage will be until shortly before the supervisory court is petitioned for authority to make a distribution. A responsible receiver will never make an early estimate as to the amount of assets available for distribution at any given point in the Liquidation process. When the Liquidator determines that there are sufficient assets available to make payment in whole or in part on allowed claims against the company, a petition will be filed with the supervising court requesting authorization to do so. There are multiple levels of priority and no claims at a lower priority level may be paid until all claims at the immediately higher levels of priority have been paid in full, or the Liquidator has sufficient assets to reserve funds with which to pay all such claims. Interest in most cases is neither earned nor paid on allowed claims, until all claims in an estate are paid in full (except equity or shareholders). This rarely if ever occurs, assuming the company was insolvent to start with.


  36. Can there be multiple distributions in an estate?
    Yes, it can take several years to fully liquidate an estate, however depending on the success the Liquidator has had in marshalling the company’s assets, he may make several distributions over time. Or in some cases he must wait until the estate is ready to close and make one partial distribution at that time. Some of the tasks undertaken by the Liquidator include: organizing the company’s records, mailing proof of claim forms, evaluating, negotiating and adjudicating claims, and marshalling assets due to the company from numerous sources, which may require lengthy litigation, as well as collecting reinsurance recoveries, plus allowing the Guaranty Funds and Associations to complete handling covered claims.


  37. What is the schedule of priorities for distribution of company assets?
    These will vary from state to state; you should check your individual state receivership statutes for specific information. However, in general the schedule of priorities in most states are based in some fashion on the Insurer Receivership Model Act, promulgated by the National Association Of Insurance Commissioners (NAIC), which are:

     

    “The priority of payment of distributions on unsecured claims shall be in accordance with the order in which each class of claims is set forth in this section. Every claim in each class shall be paid in full or adequate funds retained for their payment before the members of the next class receive payment. All claims within a class shall be paid substantially the same percentage. Except as provided in Subsections A(1)(e), K and M, subclasses shall not be established within a class. No claim by a shareholder, policyholder or other creditor shall be permitted to circumvent the priority classes through the use of equitable remedies.

    The order of distribution of claims shall be:
    A. Class 1.
    (1) The costs and expenses of administration expressly approved or ratified by the liquidator, including but not limited to the following:
    • (a) The actual and necessary costs of preserving or recovering the property of the insurer;
    • (b) Reasonable compensation for all services rendered on behalf of the administrative supervisor or receiver;
    • (c) Any necessary filing fees;
    • (d) The fees and mileage payable to witnesses;
    • (e) Unsecured loans obtained by the receiver. Any such obligation, unless by its terms otherwise provided, shall have priority over all other costs of administration. Absent agreement to the contrary, all claims in this sub-class shall share pro-rata; and
    • (f) Expenses approved by the conservator or rehabilitator of the insurer, if any, incurred in the course of the conservation or rehabilitation that are unpaid at the time of the entry of the order of liquidation.
    (2) Except as expressly approved by the receiver, any expenses arising from a duty to indemnify the directors, officers or employees of the insurer are excluded from this class and, if allowed, are Class 7 claims.

     

    B. Class 2.
    The reasonable expenses of a guaranty association, including overhead, salaries and other general administrative expenses allocable to the receivership to include administrative and claims handling expenses and expenses in connection with arrangements for ongoing coverage, other than expenses incurred in the performance of duties under Section [insert citation to guaranty fund law detection and prevention powers] or similar duties under the statute governing a similar organization in another state. In the case of property and casualty guaranty associations, the expenses shall include, but not be limited to, loss adjustment expenses, which shall include adjusting and other expenses and defense and cost containment expenses.

     

    C. Class 3.
    All claims under policies of insurance including third party claims, claims under annuity contracts and funding agreements, claims under non-assessable policies for unearned premium, claims of obligees (and, subject to the discretion of the receiver, completion contractors) under surety bonds and surety undertakings (not to include bail bonds, mortgage or financial guaranty or other forms of insurance offering protection against investment risk, or warranties), claims by principals under surety bonds and surety undertakings for wrongful dissipation of collateral by the insurer or its agents, and claims incurred during the extension of coverage provided for.. All other claims incurred in fulfilling the statutory obligations of a guaranty association not included in Class 2, including but not limited to indemnity payments on covered claims and, in the case of a life, health and annuity guaranty association, all claims as a creditor of the impaired or insolvent insurer for all payments of and liabilities incurred on behalf of covered claims or covered obligations of the insurer and for the funds needed to reinsure those obligations with a solvent insurer. Notwithstanding any other provision of this Act, the following claims shall be excluded from Class 3 priority and paid as claims in Class 7, except as otherwise provided in this section:
    • (1) Obligations of the insolvent insurer arising out of reinsurance contracts;
    • (2) Obligations incurred pursuant to an occurrence policy, or reported pursuant to a claims made policy, after the expiration date of the insurance policy or after the policy has been replaced by the insured or cancelled at the insured’s request or after the policy has been cancelled as provided in this Act. Notwithstanding this subsection, unearned premium claims on policies, other than reinsurance agreements, shall not be excluded;
    • (3) Obligations to insurers, insurance pools or underwriting associations and their claims for contribution, indemnity or subrogation, equitable or otherwise, except for direct claims under policies where the insurer is the named insured;
    • (4) Any amount accrued as punitive or exemplary damages unless expressly covered under the terms of the policy, which shall be paid as claims in Class 9;
    • (5) Tort claims of any kind against the insurer, and claims against the insurer for bad faith or wrongful settlement practices; and
    • (6) Claims of the guaranty associations for assessments not paid by the insurer.

     

    D. Class 4.
    All claims under policies of insurance for mortgage guaranty, financial guaranty or other forms of insurance offering protection against investment risk, or warranties.

     

    E. Class 5.
    Claims of the federal government not included in Classes 3 or 4.

     

    F. Class 6.
    Debts due employees for services or benefits to the extent that they do not exceed $5,000 or two (2) months’ salary, whichever is the lesser, and represent payment for services performed within one year before the entry of the initial order of receivership. This priority is in lieu of any other similar priority that may be authorized by law as to wages or compensation of employees.

     

    G. Class 7.
    Claims of other unsecured creditors not included in Classes 1 through 6, including claims under reinsurance contracts, claims of guaranty associations for assessments not paid by the insurer, and other claims excluded from Classes 3 or 4 above, unless otherwise assigned to Classes 8 through 13.

     

    H. Class 8.
    Claims of any state or local governments, except those specifically classified elsewhere in this section. Claims for services rendered and expenses incurred in opposing a formal delinquency proceeding. In order to prove the claim, the claimant must show that the insurer that is the subject of the delinquency proceeding incurred the fees and expenses based on its best knowledge, information and belief, formed after reasonable inquiry indicating opposition was in the best interests of the insurer, was well grounded in fact and was warranted by existing law or a good faith argument for the extension, modification or reversal of existing law, and that opposition was not pursued for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of the litigation.

     

    I. Class 9.
    Claims for penalties, punitive damages or forfeitures, unless expressly covered under the terms of a policy of insurance.

     

    J. Class 10.
    Except as provided in Subsections 701B and C, late filed claims that would otherwise be classified in Classes 3 through 9.

     

    K. Class 11.
    Surplus notes, capital notes or contribution notes or similar obligations, and premium refunds on assessable policies, and any other claims specifically assigned to this class. Claims in this class shall be subject to any subordination agreements, related to other claims in this class, which existed prior to the entry of a liquidation order.

     

    L. Class 12.
    Interest on allowed claims of Classes 1 through 11, according to the terms of a plan to pay interest on allowed claims proposed by the liquidator and approved by the receivership court.

     

    M. Class 13.
    Claims of shareholders or other owners arising out of their capacity as shareholders or other owners, or any other capacity except as they may be qualified in Class 3, 4, 7 or 12 above. Claims in this class shall be subject to any subordination agreements, related to other claims in this class, that existed prior to the entry of a liquidation order.”

     

    ©2007 National Association of Insurance Commissioners – October 2007 – www.naic.org

     



  38. I have a claim for pre-liquidation fees and/or expenses incurred on behalf of an insured, or I rendered services, provided supplies, equipment, or leased property to the insurer before it was placed into receivership. Why has my claim been classified as a general creditor?
    As stated before, company assets are distributed according to a detailed statutory schedule of priority levels as outlined above. When a type of creditor such as defense attorneys, or related to goods and services provided to the insurer are not otherwise expressly identified in the schedule of priorities, they are classified as a general creditor, or class G above.


  39. I have moved since the company’s Liquidation date. What should I do?
    You have the responsibility to advise the Liquidator of your current address. You should include full identification such as your proof of claim number, policy/claim number or other information, as may be appropriate. In most cases, the Liquidator will not otherwise try and locate you.


  40. What happens to unclaimed, uncashed or undeliverable distribution checks?
    When funds which have been issued to pay distributions or dividends are unclaimed, uncashed or undeliverable, they must by statute be delivered to your state’s Treasurer’s office or Unclaimed Property Division. Known as “escheatment” they must be delivered as abandoned property. The time frame and requirements for this vary from state to state, under your state’s Unclaimed Property Act or other appropriate statute. You should contact the division of your state that handles these matters for further instructions. Locate your state Treasurer’s web site here: http://www.nast.org/


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