The Insurance Commissioner of Pennsylvania has placed Lincoln General Insurance Company into liquidation in Pennsylvania. As a result, the Insurance Commissioner as Liquidator takes over the property, business, and affairs of Lincoln General; collects assets; resolves claims; and ultimately, distributes assets to creditors, including policyholders and claimants.
Lincoln General discontinued writing new business on February 9, 2009. It specialized in providing property and casualty insurance products to the transportation industry. Its main liabilities will likely relate to auto insurance, workers’ compensation insurance, commercial liability insurance, and surety bonds.
Insurance companies are not subject to the federal bankruptcy law. Instead, the Pennsylvania Commonwealth Court will oversee the liquidation and ensure that the Liquidator complies with Pennsylvania law. Some common issues often arise in Pennsylvania insurance company liquidations.
Stays of Litigation The Order of Liquidation purports to stay litigation against Lincoln General not just in Pennsylvania, but also “elsewhere.” Because the stay is issued by a state court in Pennsylvania, it does not actually stay litigation in other jurisdictions. Under principles of comity, however, some federal courts and courts in other states will stay litigation in their jurisdictions. Pennsylvania law provides that no action at law or equity shall be brought by or against the insurance company, whether in Pennsylvania or elsewhere, nor shall any such existing actions be continued after the Order of Liquidation. However, the Liquidator may intervene in actions inside and outside of Pennsylvania, if the court where the action is pending permits, and may continue the action.
Proof of Claim Process The Liquidator has established a proof of claim deadline of July 6, 2016. The proof of claim process is the manner by which policyholders and claimants can obtain a direct distribution from the estate of the liquidating insurance company. The Liquidator has established a proof of claim form to be completed. Claims filed after the deadline may be penalized by being granted a lower priority in the distribution scheme.
After the proof of claim form is filed, the Liquidator can approve or reject the claim. Moreover, the Liquidator will assign a priority to the claim in accordance with the priorities established in the liquidation statute. Administrative expenses of the estate are the highest priority, with claims for losses under insurance policies and surety bonds next, followed by other types of claims, such as general creditor claims. If the Liquidator rejects the claim or assigns it a lower priority than warranted, a policyholder may object to the proof of claim determination. If an objection is filed, the Pennsylvania Commonwealth Court reviews the Liquidator’s determination.
Guaranty Associations By statute, states have created insurance guaranty associations as a safety net to pay claims owed by insolvent insurance companies. Although the requirements for obtaining recovery from insurance guaranty associations vary by state, several key points should be considered.
First, recovery may be possible from more than one guaranty association. Because each state’s statute provides its own eligibility requirements, more than one may be applicable, including: (1) the state where the “insured” was a resident at the time of the insured event; (2) the state where the “claimant” was a resident at the time of the insured event; and (3) the permanent location of property from which the claim arises.
Second, “per claim” or “per claimant” limits on the guaranty association’s responsibility may not limit recovery. Where there are multiple claimants, but a single insured, multiple “per claim” or “per claimant” limits may apply.
Third, although many guaranty association statutes may limit or prevent recovery for a policyholder with a “net worth” of more than $25 million or $50 million, roughly half the state guaranty associations contain no net-worth limitation.
“Cut Through” to Reinsurance Pennsylvania precedent is clear that policyholders may obtain direct access to the insolvent insurance company’s reinsurance where the policyholder is an intended third-party beneficiary of the reinsurance. See Koken v. Legion Insurance Company, 831 A.2d 1196, 1241 (Pa. Commw. 2003), aff’d, 878 A.2d 51 (Pa. 2005).
Drop-Down of Umbrella Insurance Umbrella insurance policies often have explicit statements that they will not drop down to provide primary coverage when the primary insurance company becomes insolvent. Where there is no clear and unambiguous expression of that intent in the umbrella insurance policy, policyholders have sometimes successfully obtained recovery from their umbrella insurance company for amounts that would have been covered by the insolvent insurance company.
Premium Disputes When insurance companies enter insolvency, they often become very active in seeking potential recoveries from any possible source. As a result, insolvent insurance companies regularly sue policyholders for premiums, particularly those premiums that can be retrospectively adjusted based upon loss experience. In retrospective premium disputes, insurance companies may not be permitted to collect retrospective premium based upon incurred loss that is inflated because of poor claim handling or inaccurate reserving.
Collateral and Loss Payment Accounts Following statutory amendments, Pennsylvania law now protects collateral and loss payment accounts from being commingled with the general assets of the estate.
Conclusion The Liquidation of Lincoln General will create the risk of serious financial loss for both corporations and individuals. In many instances, however, claimants and policyholders can make a full recovery or mitigate their losses by pursuing all appropriate avenues of recovery.
Client Alert 2015-318