Chapter 3. Surety Law Issues

Transcription

1 CITE AS 23 Energy & Min. L. Inst. ch. 3 (2003) Chapter 3 Surety Law Issues By Maureen D. Carman Wyatt, Tarrant & Combs Frankfort, Kentucky Synopsis Introduction Overview Rehabilitation and Liquidation [1] General Powers of Rehabilitator...95 [a] Dissolution or Rehabilitation Power...95 [b] Liquidation Power...98 [c] Power to Maintain Actions or Enjoin Proceedings [2] Special Powers Given by States [a] Jurisdictional Power [b] Reciprocal States Agreements [c] Attorney Fees [3] Open Records Act State Guaranty Funds Introduction. The wave of insurer insolvencies during the late 1990s and early 2000s has generated renewed interest in the nature of insurance company rehabilitation and liquidation among mineral law practitioners whose clients post irrevocable surety bonds and have coverage for workers compensation. Since insurance companies underwrite and adjust surety claims, the financial health of these companies has become increasingly important for the mineral and energy industry. The rehabilitation and liquidation of insurance companies are governed by state law, not federal law. Insurance companies are specifically excluded from the application of the federal Bankruptcy Code. 1 Further, the 1 11 U.S.C Insurance companies can not be debtors in bankruptcy under the Code.

2 3.02 ENERGY & MINERAL LAW INSTITUTE McCarran Ferguson Act provides that [n]o act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance... unless such Act specifically relates to the business of insurance In rehabilitation, the goal is to assist the insurance company in becoming a viable operating entity again. This process is one of evaluation and restructuring. On the other hand, if a determination is made by the appointed receiver that an insurance company is so impaired that liabilities make it impossible to rehabilitate, or that the company is insolvent and cannot be rehabilitated, a petition for liquidation may be made to the state court of competent jurisdiction. Upon the issuance of an order of liquidation, an injunction is issued, to obtain judgments, and to deal with preferences, garnishments, attachments or liens against the insurer, its assets or policyholders, and to prevent any other action which would impair the company s assets or prejudice the rights of policy holders. Eventually there is a distribution following a statutorily prescribed order Overview. The right of the states to regulate and control insurance companies includes the right to manage their restructuring, dissolution and liquidation. Each state has developed and enacted legislation encompassing the rehabilitation and/or liquidation of insolvent insurance companies conducting business within its borders. 3 If the business of an insurance company and its financial conditions are such that it cannot continue its operations with safety to the public, it may be dissolved at the insistence of the state. The difficulties encountered in the forced liquidation or rehabilitation of insurance companies with assets and liabilities distributed in two or more states has led to the adoption of the Uniform Insurers 2 15 U.S.C Most states have adopted either the Uniform Insurers Liquidation Act (the Uniform Act ) from the National Conference of Commissioners on Uniform State Laws or the Insurers Rehabilitation and Liquidation Model Act (the Model Act ) promulgated by the National Association of Insurance Commissions (NAIC). The uniform law is similar to Article III of the NAIC model. 92

3 SURETY LAW ISSUES 3.02 Liquidation Act 4 (the Uniform Act ) or the Insurance Rehabilitation and Liquidation Model Act 5 (the Model Act ) by the enactment of state statutes modeled after the two Acts. 6 The purpose of the Acts is to ensure equal 4 The following states have substantially adopted the Uniform Act: Alabama, Ala. Code et seq. (1975); Alaska, Alaska Stat et seq. (1966); Arizona, Ariz. Rev. Stat. Ann et seq. (1954); Arkansas, Ark. Code Ann et seq. (1959); California, Cal. Ins. Code to (1988); Delaware, Del. Code Ann to 5944 (1953); Florida, Fla. Stat to (1959); Idaho, Idaho Code et seq. (1961); Illinois, 25 Ill. Rev. Stat. 5/187 to 5/221/ 13 (1941); Kentucky, Ky. Rev. Stat. Ann et seq. (1950); Louisiana, La. Rev. Stat. Ann. 22:1 et. seq. (1948); Maryland, Md. Code Ann. Ins to (1963); Massachusetts, Mass. Gen. L A to 180L (1939); Nevada, Nev. Rev. Stat. 696B.010 et seq. (1959); New Mexico, N.M. Stat. Ann. 59A-41-1 et seq. (1953); New York, N. Y. Ins. Law 7401 to 7435 (1940); Oklahoma, Okla. Stat. tit to 1812 (1957); Oregon, Or. Rev. Stat et seq. (1967); Puerto Rico, P.R. Laws Ann. tit to 4024 (1978); Washington, Wash. Rev. Code Ann et seq. (1947); West Virginia, W. Va. Code to (1958); Wisconsin, Wis. Stat et seq. (1965); Wyoming, Wyo. Stat et seq. (1967). 5 The following states have adopted the Model Act: Connecticut, Conn. Gen. Stat. 38a-903 to 38a-961 (1979); District of Columbia, D.C. Code Ann (1993); Georgia, Ga. Code to (1991); Hawaii, Haw. Rev. Stat. 431: to 431: (1988); Indiana, Ind. Code to (1979); Iowa, Iowa Code 507C.1 to 507C.59 (1984); Kansas, Kan. Stat. Ann to (1991); Maine, Me. Rev. Stat. Ann. tit. 24-A 4351 to 4407 (1970); Michigan, Mich. Comp. Laws Ann to (1990); Minnesota, Minn. Stat. 60B.01 to 60B.61 (1969); Montana, Mont. Code Ann to (1979); New Hampshire, N.H. Rev. Stat. Ann. 402-C:1 to 402-C:61 (1969); North Carolina, N.C. Gen. Stat to (1989); North Dakota, N.D. Cent. Code to (1991); Ohio, Ohio Rev. Code Ann to (1982); Pennsylvania, Pa. Cons., Stat. 40 P.S et seq.; South Carolina, S.C. Code Ann et seq. (1988); South Dakota, S.D. Codified Laws 58-29B-1 to 58-29B-161 (1989); Tennessee, Tenn. Code Ann to (1991); Utah, Utah Code Ann. 31A to 31A (1986); Vermont, Vt. Stat. Ann. tit to 7100 (1991); Virgin Islands, V.I. Code Ann to 1285 (1968). 6 The following states have adopted substantial provisions from both the Uniform Act and the Model Act: Colorado, Colo. Rev. Stat et seq.; Mississippi, Miss. Code Ann et seq. (1942); Missouri, Mo. Rev. Stat et seq. (1976); Nebraska, Neb. Rev. Stat to ; to (1989); New Jersey, N.J. Stat. Ann. 17:30C-1 et seq.; 17B:32-31 et seq. (1975); Rhode Island, R.I. Gen. Laws to ; to (1993). Neither Texas, Tex. Ins. Code Ann et seq. (1951) nor Virginia, Va. Code Ann et seq. (1986) have adopted either Act; however, their statutory schemes are similar to that of the Acts. 93

4 3.02 ENERGY & MINERAL LAW INSTITUTE treatment for all creditors wherever situated and to prevent attempts by local creditors to seize the assets within the state of a foreign insurer for whom a receiver had been appointed in a foreign state, thus giving them an advantage over other creditors similarly situated. Additionally, these insurance codes protect the interest of the insured, creditors and the public generally with minimum interference with the normal prerogative of the proprietors. Liquidation provisions have been enacted in similar form by most states for the purpose of dissolving financially troubled insurance companies. Rehabilitation provisions provide for the rehabilitation of insolvent insurance companies through the insurance commissioner, subject to approval of the court, for the purpose of preventing depreciation in assets. These insurance codes provide a basic framework to be followed by insurance commissioners and the courts when intervention in management of allegedly insolvent insurance companies becomes necessary. This chapter will generally explore some basic powers of insurance commissioners over insolvent companies within its jurisdiction. A brief survey of states suggests that insurance commissioners acting as liquidators, rehabilitators or receivers have the power to declare insolvent, rehabilitate and/or liquidate insurance companies; stay other proceedings against such company going through insolvency proceedings; exercise the authority to maintain actions on behalf of the company and, if necessary, distribute assets. 7 Basically, the insurance company has the power to step in the shoes of management and take control of the entire company. This chapter will also discuss certain state statutes that set up special proceedings to assert personal jurisdiction in liquidation proceedings, and some powers and limitations which are conferred by reciprocal state agreements. Finally, this chapter will address the nature and role of state guaranty associations in state insolvency proceedings. 7 The Uniform Act was enacted to provide a uniform, orderly, and equitable method of making and processing claims against financially troubled insurers and to provide for fair procedures for rehabilitating the business of such insurers and, if necessary, for distributing their assets. Herstam v. Bd. of Directors of Silvercreek Water and Sanitation Dist., 895 P.2d 1131 (Colo. App. 1995). 94

5 SURETY LAW ISSUES Rehabilitation and Liquidation. [1] General Powers of Rehabilitator. 8 [a] Dissolution or Rehabilitation Power. The procedure for rehabilitating or dissolving an insurance company is a matter of statutory provision. State statutes provide for the initiation of proceedings for the liquidation or rehabilitation of such a company for proper cause on the petition of a state official, such as the Attorney General or Insurance Commissioner. Rehabilitation is directed toward preservation of an insurance company threatened with insolvency. After a rehabilitator has been appointed, the officers and directors cannot manage the affairs of the company. A rehabilitator has broad authority in dealing with the policies of insurance companies. However, during rehabilitation the rehabilitator must obtain permission from the court to perform such functions as are necessary for the exercise of his duties. Once a petition for rehabilitation is filed, the insurance company does, however, have the authority to rebut the allegations in the petition. The commissioner or other rehabilitator must then prove that the insurance company is in fact insolvent. The insurance company may present evidence that it is solvent and void the petition. For example, in Florida Dep t of Ins. v. Cyprus Ins. Co., 9 the Department of Insurance petitioned for a determination that a reinsurer was statutorily insolvent and that a receiver should be appointed for liquidation. The circuit court dismissed the petition, determining that the reinsurer was solvent. The Department appealed. The court of appeals held that: (1) the reinsurer did not violate the temporary injunction by reaching a settlement agreement with reinsured in connection with claims arising from Hurricane Andrew; (2) the Department approval was not required for surplus notes issued by the reinsurer; and (3) the court was not required to defer to the Department s interpretation of the statute. The petition alleged that the Department was empowered by the Florida statute to apply for the order to show cause because Cyprus was insolvent 8 For a recent case discussing the powers of an Insurance Commissioner acting as a rehabilitator and receiver, see Primehealth Corp. v. Ins. Comm r of State of Maryland, 758 A.2d 539 (Md. 2000). 9 Florida Dep t of Ins. v. Cyprus Ins. Co., 660 So. 2d 1177 (Fla. 1995). 95

6 3.03 ENERGY & MINERAL LAW INSTITUTE within the meaning of the statute due to excessive losses caused in part by Hurricane Andrew in that all the assets of the insurer, if made immediately available, would not be sufficient to discharge all of its liabilities, and due to Cyprus failure to meet the minimum capital surplus required by the Florida statutes. 10 The petition additionally alleged that Cyprus also met the definition of insolvency under the statute because it was unable to pay its debts as they became due in the usual course of business. The court ruled that the Department had made a prima facie showing that Cyprus was statutorily insolvent, which justified the appointment of a receiver, and ordered Cyprus to show good cause, if any, why the Department should not be appointed as receiver for the purposes of liquidation. Additionally the order enjoined all persons and specified entities within its jurisdiction from doing any act that might waste or otherwise dispose of Cyprus assets, books and records, and commencing actions or obtaining any preferences, judgments, for example, against Cyprus or its assets. Cyprus filed a response to the order alleging it was not statutorily insolvent. Cyprus argued that it had entered into a settlement agreement with another entity limiting Cyprus hurricane injury losses to a one million dollar cash payment and four surplus notes payable only out of future earnings, with a provision that the obligation to make future payments on the note was conditional in that such payments must never render Cyprus statutorily insolvent. Moreover, Cyprus proved that the settlement agreement had been approved by the Oklahoma Department of Insurance, receiver for another insolvent insurance company, and that the only unsatisfied conditions of the agreement was the approval of the Oklahoma County District Court and dismissal of these receivership proceedings. In a motion for summary judgment, Cyprus argued that as a result of the settlement agreement, Cyprus was not statutorily insolvent because its assets were sufficient to discharge all of its liabilities and pay its debts, and that Cyprus was not statutorily impaired within the meaning of the Florida statutes. 10 Id. 96

7 SURETY LAW ISSUES 3.03 The Department filed a response that included a motion requesting immediate appointment as receiver for Cyprus for purposes of rehabilitation based on the following reasons. The Department argued that the Florida insurance code provided that a delinquency proceeding is the sole and exclusive method of liquidating and rehabilitating an insurer. Thus, it argued, once the Department had commenced the delinquency proceeding, all parties including the insurer were enjoined from transferring or encumbering any of the insurer s assets, an act Cyprus clearly accomplished by its settlement agreement and the circuit court s show cause order. The court agreed that the Florida statute in question did provide that a delinquency proceeding was the sole and exclusive method of liquidating, rehabilitating, reorganizing, or conserving an insurer. 11 However, contrary to the Department s argument, the court found that no provision of the Florida statute at issue prohibited an insurer that is the subject of a delinquency proceeding from entering into an agreement with a creditor to lawfully settle or compromise outstanding liabilities or claims and thereby render the insurer statutorily solvent. Relying principally on the financial statements of Cyprus, the court said that Cyprus was solvent based on the definition of insolvency in the Florida statutes, and that Cyprus assets were sufficient to make the one million dollar cash payment and leave capital surplus in excess of $2.5 million. 12 The state court of appeals affirmed the circuit court s decision. However, in Foster v. Westmoreland Casualty Co., 13 the court granted the insurance commissioner s petition seeking to dissolve Westmoreland Casualty Company. The insurance commissioner of Pennsylvania filed a petition for liquidation seeking involuntary dissolution of Westmoreland Casualty and a formal liquidation order pursuant to Article 5 of the Insurance Department Act of 1921 based on the company s financial condition. Westmoreland filed preliminary objections. An independent actuarial firm analyzed Westmoreland s financial condition and found significant reserve deficiencies and operating losses which threatened its financial integrity. 11 Id. 12 Id. 13 Foster v. Westmoreland Casualty Co., 540 A.2d 347 (Pa. 1988). 97

8 3.03 ENERGY & MINERAL LAW INSTITUTE Westmoreland s initial preliminary objection alleged that the instant petition lacked specificity as it failed to identify what acts constituted grounds for liquidation. The court found that this argument was clearly without merit. The court held that the petition in question not only averred insolvency and hazardous financial conditions as general grounds for liquidation, but it also referred specifically to the result of the investigation conducted by the independent actuarial firm as well as the allegedly improper actions of key company officers. Second, Westmoreland objected to the filing of a liquidation petition prior to an administrative hearing. Westmoreland argued that the petition s averments, as well as the entry of the suspension order, constituted adjudication thereby mandating a hearing pursuant to the administrative agency law. Again, the court disagreed. The court interpreted the applicable state statute to provide for an administrative hearing after an appropriate filing only where the Commission requests a judicial declaration of insolvency in conjunction with a pending liquidation proceeding. In contrast, the commissioner may directly petition this court for a liquidation order pursuant to which court hearings would then be held. Finally, the court rejected Westmoreland s contention that averments contained in the liquidation petition, whether considered alone or combined with the suspension order, constitutes in any respect an adjudication subject to the notice and hearing provisions of administrative agency law. The court found that Westmoreland misapprehended the fundamental distinction between mere averments which may or may not be credited by a factfinding body and a final agency determination which has a direct and substantial effect on personal or property rights. The court also noted that the suspension order entered into in this matter was properly accompanied by a hearing notice. Accordingly, the court overruled the preliminary objections of Westmoreland. [b] Liquidation Power. Additionally, state statutes provide for the appointment of a receiver, or provide for the appointment of the commissioner of insurance as a statutory receiver or liquidator in proceedings for the liquidation and dissolution or for the rehabilitation of an insurance company. As such, the receiver is empowered with authority to collect and distribute assets belonging to the company. 98

9 SURETY LAW ISSUES 3.03 Garamendi v. Ryles 14 involved an ancillary receivership proceeding. A dispute arose as to whether the California insurance commissioner appointed as the domiciliary liquidator of an insolvent California insurer, or whether the Georgia insurance commissioner appointed as ancillary receiver had title to insurers Georgia assets. The lower court granted summary judgment for the Georgia Commissioner, and the California Commissioner appealed. The court of appeals held that the former Uniform Act did not supercede common law, under which the California Commissioner, rather than the Georgia Commissioner, held title to insurers Georgia assets. The Missions Companies, a group of insurance companies having their principal place of business in California, became insolvent. The California Insurance Commissioner was appointed as the domiciliary liquidator. The Georgia Insurance Commissioner was appointed as the ancillary receiver. A dispute arose as to who was entitled to Mission Companies Georgia assets. The court found, under common law, Appellant acting as receiver for a corporation in the state of [California], is acting by authority of the statutes of [California], as well as the authority with which he is clothed by the decree in the [California] court designating him as receiver. By the [California] statute, he is clothed with the same authority that the Mission Companies had before [they were] adjudged insolvent and the receiver appointed. 15 Thus the court held that appellee cannot seize the assets of a defunct corporation of California which are located in Georgia, and apply them in satisfaction of the claims of citizens in Georgia. Contrary to appellee s contentions, it is not made to appear that justice cannot be done in the state of [California], or that [appellant], a state officer in [California], will unjustly discriminate against the creditors of the insurance compan[ies] who are citizens of Georgia. 16 The court said under California law, appellant was deemed to be a trustee for the benefit of all creditors and other persons interested in the estate of Mission Companies Garamendi v. Ryles, 420 S.E.2d 633 (Ga. 1992). 15 Garamendi (quoting Wilson v. Missouri State Life Ins. Co., 190 S.E. 552 (Ga. 1937)). 16 Garamendi (quoting O Malley v. Wilson, 185 S.E. 109 (Ga. 1936)). 17 Id. 99

10 3.03 ENERGY & MINERAL LAW INSTITUTE Appellee argued that the statutory enactment of the Uniform Act superceded the common law. Arguing under this law, the appellee said that title to the Mission Companies Georgia assets would vest in appellant if California was a reciprocal state. Since, according to appellee, California was not a reciprocal state, the title to the Mission Companies Georgia assets would vest in him by default. The court found that this construction of the former Uniform Act was erroneous. The court stated, that it was still appropriate to extend comity to California by allowing its insurance commissioner, acting as a liquidator by statute, to acquire title to the assets of the Mission Companies and to distribute them according to California law, even if California was not a reciprocal state. The court found that the Uniform Act nowhere prohibits such a privilege to a nonreciprocal state and the purpose of the Act was to enlarge the operation of interstate comity. Even under common law Georgia courts have extended comity to delinquency proceedings in foreign states. Therefore, the court found the former Uniform Act did not supercede the common law of Georgia, and found that the order vesting title in appellee to the Mission Companies Georgia assets was reversed with direction that an order vesting title in appellant be entered. Not only can commissioners declare an insurance company insolvent and order rehabilitation, the commissioners may move for an order terminating the rehabilitation proceeding. The termination order, however, cannot be issued until the court has conducted a full hearing and determined that the purpose of the proceedings has been fully accomplished. In the case of Grode v. Mutual Fire, Marine & Inland Ins. Co., 18 the court held that a petition to terminate rehabilitation of the insurance company would be granted where insurer had collected substantially all of the collectible obligations due it, and had sufficient assets to pay or fully reserve all remaining unpaid claims, and rehabilitator and her special deputy developed post-rehabilitation plan of operations for insurer. The facts establish that 10 years ago, the court granted the Commonwealth Insurance Commissioner the power to rehabilitate Mutual 18 Grode v. Mutual Fire, Marine & Inland Ins. Co., 688 A.2d 233 (Pa. 1997). 100

11 SURETY LAW ISSUES 3.03 Fire. The Commissioner was appointed statutory rehabilitator and given authority to take possession of its assets in order to manage and administer them under orders of the court. After years of implementing the plan, which included (1) payment of claims to policyholders and third parties; (2) settlements representing adjusted claims; (3) surety bond participant claims and (4) payment to certain class claimants, the court ordered termination of the rehabilitation plan. The court relied on the rehabilitator s petition to terminate, the rehabilitator s status report and financial claims reports filed by the rehabilitator, and immediately restored possession of Mutual Fire s property and control of its business back to the company. [c] Power to Maintain Actions or Enjoin Proceedings. State statutes give commissioners of insurance who have been appointed rehabilitators or receivers of insolvent insurance companies exclusive standing to pursue claims on behalf of the company or against agents of the company. Pursuant to this authority, the commissioner can enjoin claims brought by others. In Four Star Ins. Agency, Inc. v. Hawaiian Electric Indus., Inc., 19 the insurance commissioner brought suit against the parent company of insolvent insurers undergoing liquidation or rehabilitation and entered into settlement on behalf of creditors, policyholders and others. Independent insurance agents who were owed commissions by the defunct insurers or their parent then brought suit against the parent company to recover premiums earned. The Supreme Court of Hawaii held that the insurance commissioner had exclusive standing to pursue the parent on behalf of creditors and policyholders of defunct insurers and the suit by agents was barred. The agents contended that their claims were unique and personal and therefore the Commissioner did not have authority to settle their claims. The court relied exclusively on the Hawaii Rehabilitation and Liquidation Act. Based upon the plain language of the Act, the court concluded the 19 Four Star Ins. Agency, Inc. v. Hawaiian Electric Indus., Inc., 974 P.2d 1017 (Haw. 1999). 101

12 3.03 ENERGY & MINERAL LAW INSTITUTE Commissioner, as liquidator of an insurer undergoing liquidation, has the power to prosecute any and all lawsuits on behalf of the insurer and all creditors, shareholders, policyholders or members of the insurer. 20 The court found that the Act affords broad powers to the Commissioner, as liquidator, to prosecute and settle any action to protect the rights of all interested parties. Additionally, to promote the goals of the Act, 21 the statute also provides for an automatic stay of all proceedings against the insolvent insurance company and the liquidator. Thus, the court held as a matter of law, that the Commissioner... had exclusive standing to assert all claims arising out of the insolvent insurance company s liquidation and rehabilitation on behalf of not only the company, but also its creditors. 22 More recently, in Crawford v. American Standard Life and Accident Ins. Co., 23 the court refused to allow stockholders, equity holders and creditors of an insurer, placed in receivership and ordered liquidated, to intervene in the liquidation proceedings. The stockholders, equity holders and creditors argued that intervention as a matter of right was warranted in order to pursue a claim owned by the receiver. The insurance commissioner argued that the claimants did not have any interest relating to the property and transactions of the insolvent insurance company. Moreover, he argued that the Oklahoma Uniform Insurers Liquidation Act controlled the matter. The court agreed. The court stated, if any action existed in favor of [the insurance company], it was and is now vested in the Receiver. 24 Therefore, the court held that the appellants were properly denied intervention for lack of standing. The court found that [g]eneral creditors in the receivership do not have the direct interest in any single asset of the receivership to justify intervention in the Receiver s action to administer the assets Id. at The legislature enacted the Hawaii Act to facilitate the orderly and fair liquidation of an insolvent insurer for the protection of the interests of insurance, claimants, creditors and public generally. Four Star Ins. 22 Id. at Crawford v. American Standard Life and Accident Ins. Co. 37 P.3d 971 (Okla. 2001). 24 Id. at Id. 102

13 SURETY LAW ISSUES 3.03 [2] Special Powers Given by States. [a] Jurisdictional Power. Five states, Idaho, 26 Kentucky, 27 Montana, 28 Nevada, 29 and Wisconsin, 30 have special jurisdictional statutes applicable in liquidation proceedings. These statues allow the exercise of jurisdiction over any person who is obligated to the applicable state s insurer in any way as an incident to an agency or brokerage agreement. The Wisconsin statute reads as follows: (5) PERSONAL JURISDICTION, GROUNDS FOR. In addition to other grounds for jurisdiction provided by the law of this state, a court of this state having jurisdiction of the subject matter has jurisdiction over a person served pursuant to Section in an action brought by the receiver of a domestic insurer or an alien insurer domiciled in this state: (a) If the person served is obligated to the insurer in any way as an incident to any agency or brokerage arrangement that may exist or has existed between the insurer and the agent or broker, in any action on or incident to the obligation; At least one court has addressed the constitutionality of such statutes. In the case of Matter of All-Star Ins. Corp., 32 the court addressed the sole issue of whether the exercise of jurisdiction pursuant to Wisconsin s jurisdictional statute was constitutional. The facts of the case were as follows: All-Star, a Wisconsin corporation formerly engaged in the business of insurance, was ordered into liquidation on March 1, A commissioner was appointed for All-Star s liquidation. In that capacity, 26 Idaho Code Section (Supp. 1981). 27 Ky. Rev. Stat. Sec (1981). 28 Mont. Code Ann. Sec (1981). 29 Nev. Rev. Stat. Sec. 696B.200 (1980). 30 W.S.A et seq. 31 Wis (5)(a). 32 Matter of All-Star Ins. Corp., 327 N.W.2d 648 (Wis. 1983). 103

14 3.03 ENERGY & MINERAL LAW INSTITUTE the Commissioner commenced action against two companies to recover sums allegedly due under separate agency contracts between the defendants and All-Star. Both defendants had agency agreement with All-Star and acted as agents soliciting applications for insurance for All-Star. The only contacts either defendant ever had to Wisconsin were their agency contracts with All-Star and their actions incident to those contracts. Nevertheless, the Supreme Court of Wisconsin held that the assertion of jurisdiction pursuant to (5)(a) did not violate due process. The court relied principally on the Supreme Court s decision in McGee v. International Life Ins. Co. 33 Like the Supreme Court in McGee, this court found that due process was not violated by the exercise of jurisdiction based on the minimal contacts noted above: It is sufficient for purposes of due process that the suit was based on a contract which had substantial connection with that State. 34 The court reasoned that McGee is based on the principle that states have a strong interest in providing their citizens with a forum for insurance disputes. Thus, the court held where a state s interest in providing effective means of redress for its residents is strong, as in the highly regulated area of insurance, the minimum contacts requirements of International Shoe can be met through a single violated contract. 35 The court found that Wisconsin s statute was based substantially on the Uniform Act and enacted a special jurisdictional statute which asserts the state s manifest interest in providing an efficient and inexpensive forum for the liquidation of Wisconsin s insurers. Therefore, the court concluded that it was fair and reasonable to exercise jurisdiction over the defendants, who by virtue of their actions had enough links to Wisconsin and the Wisconsin insurer. [b] Reciprocal States Agreements. Generally speaking, the Uniform Act applies only if the domiciliary state of the insurer is a so-called reciprocal state within the contemplation 33 McGee v. Int l Life Ins. Co., 355 U.S. 220, 78 S. Ct. 199, 2 L. Ed. 2d 223 (1957). 34 McGee, supra, at 355 U.S. at 223, 78 S. Ct Matter of All-Star, 327 N.W.2d 648, 652 (quoting Zerbel v. H.L. Federman & Co., 48 Wis. 2d 54, 60, 179 N.W.2d 872 (Wis. 1970)). 104

15 SURETY LAW ISSUES 3.03 of the applicable statute. The Act provides for delinquency proceedings against insurers domiciled outside the state. The Act contains a provision against the filing of attachment, garnishment or execution proceedings against the delinquent insurer or its assets. Moreover, any lien obtained by any such action within four months prior to the commencement of a delinquency proceeding or anytime thereafter is void as against any rights arising in the delinquency proceeding. Under the Uniform Act, a domiciliary receiver receives title to all property wherever located so that title and control over an insurer s business is vested in the commissioner in the domicile state. Creditors in non-domicile states are prevented from gaining unfair preferences by securing attachments of the insurer s property in the foreign state. In Herstam v. Bd. of Directors of Silvercreek Water and Sanitation Dist. Co., 36 the Arizona director of insurance brought an action as receiver for the insolvent life insurer to obtain an injunction against the water and sanitation district to protect insurer s security interest in Colorado property. The District had previously notified the insolvent insurer that it intended to conduct a public hearing assessing property taxes and penalties against the insurer. The insurance director commenced suit seeking an injunction to enjoin the public hearing. The receiver relied on the fact that Arizona and Colorado were reciprocal states, thus he was entitled to an injunction. The court found that Arizona had enacted the Uniform Act as had Colorado; however, Colorado had amended the Act under the Model Act. Notwithstanding the different enactments, the court found that the purposes of both Acts were the same and both were reciprocal states. The court found that in order to be reciprocal, the corresponding provisions of the states be similar in substance and effect. 37 The court concluded that Arizona has in substance and effect, a law that is similar to and required by Colorado law. Accordingly, the court held that Colorado is a reciprocal state to Arizona and since Colorado is a reciprocal state to Arizona, the Arizona order must be afforded full 36 Herstam v. Bd. of Directors of Silvercreek Water and Sanitation Dist. Co., 895 P.2d 1131 (Colo. 1995). 37 Herstam, supra, at 1136 to those specified in the reciprocal state sections. 105

16 3.03 ENERGY & MINERAL LAW INSTITUTE faith and credit and the receiver is entitled to an injunction. 38 In fact, one state might operate under the Model Act, while the other state has adopted provisions of the Uniform Act. The test is whether the language employed by the state statutes is in substance and effect sufficiently similar to make those states reciprocal states. It does not matter if one statute contains additional or even different language. 39 [c] Attorney Fees. Several state statutes allow costs and expenses to be paid out of the insolvent insurer s estate for expenses of defending against the petition for liquidation. Typical language is found in N.C. Gen. Stat. Section (a) (1991), which provides: The court shall permit the directors of the insurer to take such actions as are reasonably necessary to defend against the petition and may order payment from the estate of the insurer of such costs and other expenses of defense as justice may require. (emphasis added). This language indicates that the trial court has broad discretion to award fees and costs incurred in defending against a petition for liquidation. The standard utilized by courts is whether the respondent had a good faith defense. [A]ll of the facts and circumstances of a particular case should be examined in determining whether the defense was brought in good faith, with the solvency of the company examined as one of many factors, and not as the sole factor, in the ultimate decision to award fees and costs. 40 [3] Open Records Act. Generally, documents in the possession of the Insurance Commissioner acting as either a liquidator, rehabilitator, or receiver are not otherwise available for public disclosure under the Open Records Act. For example, in Farrimond v. State ex rel. Fisher, 41 the Supreme Court of Oklahoma 38 Herstam, supra, at Allied Fidelity Ins. Co. v. Ruth, 57 Wash. App. 783, 790 P.2d 206 (Wash. 1990). 40 State ex rel. Long v. American Sec. Life Assur. Co. of North Carolina, 428 S.E.2d 200 (N.C. 1993). 41 Farrimond v. State ex rel. Fisher, 8 P.3d 872 (Okla. 2000). 106

17 SURETY LAW ISSUES 3.03 held that an insurer s business records did not come within the scope of the term record, and thus were not government records subject to public disclosure under the Open Records Act. In this case, the plaintiff brought a declaratory judgment action against the Insurance Commissioner seeking an order declaring that the records of Mid-Continent Life Insurance Company, which had come into the Insurance Commissioner s hands as a result of a court order naming him the receiver, were subject to public inspection under the Oklahoma Open Records Act. The court found that the language of the Open Records Act limited the application of the Act to government records and the records of the insolvent insurance company did not fit the statutory definition of record contained in the Act. 42 The court held that the records at issue here did not come... into the custody, control or possession of the public officials... in connection with the transaction of public business, the expenditure of public funds or the administering of public property, as required by 51 O.S. Supp A.3(1). The court stated that under the terms of the Oklahoma Uniform Act, the Insurance Commissioner may become an insurer s receiver and be vested with title to the insurer s property only by court order. Thus, the court found that the receivership property is in the possession of the court, the receiver is the representative of the court, and the right of the receiver to the receivership property is derived from the entity which has been placed in receivership. Declining to agree that the business records of an insolvent insurance company in receivership become public records when the court appoints a receiver, the court held that records in the hands of the Insurance Commissioner were not government records within the meaning of the state open records law. Similarly, the Kentucky Court of Appeals reached the same conclusion in Kentucky Cent. Life Ins. Co. By and Through Stephens v. Park Broadcasting of Kentucky, Inc. 43 There, the court held that the fact that 42 The statutory definition of record contained in 51 O.S. Supp A.3 (1) states that the Act applies only to records... created by, received by, under the authority of, or coming into the custody, control or possession of public officials, public bodies, or their representatives in connection with the transaction of public business, the expenditure of public funds or the administering of public property. (Emphasis added.) 43 Kentucky Cent. Life Ins. Co. By and Through Stephens v. Park Broadcasting of Kentucky, Inc., 913 S.W.2d 330 (Ky. 1996). 107

18 3.04 ENERGY & MINERAL LAW INSTITUTE possession by the Insurance Commissioner of records of the insurer who was in receivership did not convert the insurer s record into public records, subject to disclosure under Kentucky s Open Records Act. The court said,... Clearly the rehabilitator is performing a traditionally nongovernmental function, the primary purpose of which is to protect insureds and creditors. Kentucky Central remains financially responsible for all aspects of the rehabilitation process... Clearly, the rehabilitator was not functioning as a unit of government in his endeavors to rehabilitate Kentucky Central. Instead, he was the functional equivalent of a receiver of a private company in liquidation and reorganization charged with administering the company s affairs. 44 Finally, the court held, We conclude the records at issue are the private records of Kentucky Central. We have no doubt that the legislature did not intend to convert companies such as Kentucky Central into public agencies through the Rehabilitation Act.... Subjecting Kentucky Central s records to the broad disclosure contemplated under the Open Records Act would completely frustrate the purpose and intent of the law. The records that were made by, or generated for, [Insurance Commissioner s] use in his capacity as rehabilitator are within the exclusive jurisdiction of the court and are not public records subject to the Open Records Act State Guaranty Funds. Inevitably, some claims on surety bonds issued by an insurer which becomes insolvent, arise prior to a determination of insolvency or shortly thereafter, but before the terms of the surety bond expire. In this situation, the state guaranty associations, otherwise known as guaranty funds provide a mechanism for prompt payment of covered claims of an insolvent insurer according to the statutory definitions and limits which govern the 44 Kentucky Central, 913 S.W.2d at Kentucky Central, 913 S.W.2d at

19 SURETY LAW ISSUES 3.04 actions of a guaranty association. 46 The legislatures of all states and several jurisdictions have enacted legislation to create guaranty associations. 47 Surety bond claims are handled by property and casualty insurance guaranty associations; therefore, comments in this chapter are limited to property and casualty insurance guaranty associations and to a limited extent, worker s compensation insurance guaranty associations. There are, however, other statutorily created guaranty associations for life and health insurance lines as well as some other specific guaranty associations associated with pension benefits, health insurance policies, annuity contracts, and contracts supplemental to life and health insurance policies. Insurance companies writing property and casualty lines of business are members of the state created guaranty association. Each association, run by a board of directors or other governing body, pays only certain kinds of 46 The Supreme Court of Kentucky held that the Kentucky Insurance Guaranty Association must respond to the individual claims of the Natural Resources and Environmental Protection Cabinet, and that failure of the Cabinet to order bond forfeiture written thirty (30) days after the determination of an insurer s insolvency, was not a complete defense to the claim. Kentucky Ins. Guar. Ass n v. Natural Resources and Envtl. Protection Cabinet, 781 S.W. 2d 519 (Ky. 1989). 47 Alabama, Ala. Code et seq.; Alaska, Al. Stat et seq.; Arizona, Ariz. Rev. Stat et seq.; Arkansas, Ark. Code Ann et seq.; California, Cal. Ins. Code 1063; Colorado, Colo. Rev. Stat et seq.; Connecticut, Conn. Gen.. Stat. 38a-836; Delaware, Del. Code Ann. 4201; District of Columbia, D.C. Code Ann ; Florida, Fla. Stat and (Workers Compensation); Georgia, Ga. Code Chapter 36, ; Hawaii, Haw. Rev. Stat. 431:16-101; Idaho, Idaho Code et seq.; Illinois, 25 Ill. Rev. Stat. 5/532; Indiana, Ind. Code ; Iowa, Iowa Code 515B.1; Kansas, Kan. Stat. Ann ; Kentucky, Ky. Rev. Stat. Ann et seq.; Louisiana, La. Rev. Stat. 375 Indiana, Ind. Code ; Maine, Me. Rev. Stat. Ann. tit. 4431; Maryland, Md. Code. Ann. Ins ; Massachusetts, Mass. Gen. 1; Michigan, Mich. Comp. Laws Ann ; Minnesota, Minn. Stat. 60C.0; Mississippi, Miss. Code Ann et seq.; Missouri, Mo. Rev. Stat et seq.; Montana, Mont. Code Ann ; Nebraska, Neb. Rev. Stat ; Nevada, Nev. Rev. Stat. 687a.010; New Hampshire, N. H. Rev. Stat. Ann. 404-B.1; New Jersey, N.J. Stat. Ann. 17:30A-1 and 34: (Workers Compensation); New Mexico, N. M. Stat. Ann. 59A-43-1 et seq.; New York, N.Y. Ins. Law 7601; North Carolina, N.C. Gen. Stat ; North Dakota, N.D. Cent. Code ; Ohio, Ohio rev. Code Ann ; Oklahoma, Okla. Stat. tit 200; Oregon, Or. Rev. Stat et seq.; Pennsylvania, Pa. Stat. 40 p.s and 40 P.S. 109

20 3.04 ENERGY & MINERAL LAW INSTITUTE claims made by discrete categories of claimants. Claims are also subject to applicable statutes of limitation. 48 The funding of a guaranty association is based on assessments of member insurers based on their proportionate share of premiums written on covered lines of business in that state, including those states which cover surety claims. 49 The assessments made by a guaranty association may be made repeatedly, based on the performance of insurers within the jurisdiction. These assessments are usually subject to an annual limitation of the percentage of each insurers premium written in any given year. Four states have separate workers compensation guaranty funds by statute. 50 A court order of liquidation or insolvency, will trigger the property and insurance guaranty association s authority. Most state guaranty association statutes are based on the National Association of Insurance Commissioners Model Act with the exception of the statutes of California, Michigan, New York and Wisconsin, which vary primarily because the legislation in these states was enacted prior to the adoption of the NAIC Model Act. The acts of the states and other jurisdictions provide definitions for covered claims and the issue of whether a surety bond default is 1051(Workers compensation); Puerto Rico, P.R. Laws Ann ; Rhode Island, R.I. Gen. Laws ; South Carolina, S.C. Code Ann et seq.; South Dakota, S. D. Codified Laws 58-29A-54. Repealed by SL 2001, Ch. 247, 57; Tennessee, Tenn. Code Ann ; Texas, Tex. Ins. Code 1et seq.; Utah, Utah Code Ann. 31A to 31A ; Vermont, Vt. Stat. Ann. tit. 361; Virgin Islands, V.I. Code Ann. 3061; Virginia, Va. Code Ann et seq.; Washington, Wash. Rev. Code ann et seq.; West Virginia, W. Va. Code ; Wisconsin, Wis. Stat et seq.; Wyoming, Wyo. Stat et seq. 48 In Natural Resources and Envtl. Protection Cabinet v. Kentucky Ins. Guar. Ass n, 972 S.W. 2d 276 (Ky. App. 1997), the appellate court held that since the Cabinet had not initiated administrative actions against the Kentucky Insurance Guaranty Association within the seven-year statute of limitations for actions against sureties, claims on bonds subject to this statute were time-barred and filing of proofs of claim in the insurer s liquidation proceedings did not toll the running of the statute. 49 The following jurisdictions do not exclude certain surety bond claims: Arkansas, Kansas, Kentucky, Maryland, Maine, Michigan, Minnesota, New York, and Puerto Rico. 50 Florida, New Jersey, Pennsylvania, and New York. 110

21 SURETY LAW ISSUES 3.04 considered a claim, can be subject to judicial interpretation. 51 Most claims are subject to a maximum dollar limit, which varies from state to state, but which is currently $300,000 in most states with some specific exceptions. 52 The guaranty association acts are liberally construed by courts in various fact patterns to effect maximum prevention or reduction of losses to claimants of insolvent surety companies. 53 Generally, only residents of the state in which the lines of business are written by an insolvent insurer are covered claims within that jurisdiction. 54 Other topics which are covered by state guaranty association statutes include the definition of insolvent insurer; the governance of the association under the enabling statute; whether notice of a claim to a liquidator is also notice to the association; the priority of expenses of the association with regard to the expenses of a liquidator; the relationship between the association and the state insurance department; whether and to what extent an association may receive direct reinsurance proceeds regarding a particular covered claim; and any statutory immunity of the state association. 51 Surety bonds are understood to be insurance under New Jersey law. In the Matter of the Liquidation of Integrity Ins. Co., 598 A.2d 940 (N.J. 1991). 52 States and jurisdictions with dollar limitations less than $300, per claim or per occurrence, whichever each enactment dictates, include Alabama, Arizona, Colorado, Georgia, Michigan, New Mexico, Oklahoma, Puerto Rico, Tennessee, Virgin Islands and Wyoming. Jurisdictions which allow in excess of $300,000 per claim or occurrence include Alaska, California, and New York. 53 Kansas Department of Health and Environment v. Kansas Ins. Guar. Ass n, 869 P. 2d 692 (Kan. 1994). 54 See In the Matter of the Liquidation of Union Indemnity Ins. Co. of New York, Manufacturers and Traders Trust Co. v. Superintendent of Ins., 650 N.Y. S.2d 227 (N.Y. A.D. 1 Dept., 1996); and Kentucky Ins. Guar. Ass n v. Natural Resources and Envtl. Protection Cabinet, 885 S.W.2d 315 (Ky. 1994), discretionary review denied by Supreme Court,

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