On October 3, 2001, Reliance Insurance Company was placed into liquidation by Order of the Commonwealth Court of Pennsylvania. In her Petition to the Commonwealth Court seeking an Order to place Reliance into liquidation, Commissioner of Insurance Diane M. Koken indicated that Reliance had a negative surplus of over one billion dollars. Reliance, at the time, was considered to be one of the largest failures, if not the largest failure, of a property and casualty insurer. Yet 13 years after being placed into liquidation, in July 2014, the Statutory Liquidator filed an Application in the Commonwealth Court seeking the issuance of a Bar Date Order as the first step in the effort to bring closure to Reliance’s liquidation proceedings. By Order dated December 22, 2015, the Court established March 31, 2016 as the Bar Date. As a result, it is anticipated that Reliance may be brought to a close within two to four years. How is it that one of the largest liquidations of a P&C company in U.S. history could be brought to closure in less than 20 years?
The Claim Process
As of December 31, 2015, Reliance received over 163,296 Proofs of Claims. More than fourteen years into liquidation, Reliance has issued 159,125 Notices of Determination, thereby addressing 98% of the Proofs of Claims. Several factors have facilitated the speedy resolution of the claims.
The priority of claims in the Reliance liquidation is governed by section 221.44 of Article V of the Pennsylvania Insurance Department Act (the “Act”). This section sets forth the order by which a claim receives a distribution from the Reliance estate. It further provides that each class has to be paid in full before the next class receives any payment. There are nine classes in total. Early in the Reliance liquidation, it became apparent that it was unlikely that the estate would make any distributions to creditors beyond class (b).1 Therefore, wherever possible, the claims of creditors with a priority lower than class (b) have not been evaluated. This has economized the time of everyone involved – whether it is the creditor that needs to submit documentation to support its claim or the evaluator who needs to review the documents to determine if a valid claim exists and, if so, reach a value for the claim. Instead, over 67,000 Notices of Determinations were issued with a class only determination. As such, whether it was a claim under a reinsurance contract, i.e., class (e), or claims for subrogation, class (g), Notices of Determination would be issued with class only and no value. Additionally, the Claims Information Orders that the Commonwealth Court issued in 2007 assisted significantly in compelling creditors to provide timely documentation to support their claims.
In all cases in respect of the Reliance liquidation proceedings, the Commonwealth and Pennsylvania Supreme Courts have unanimously upheld that claims under a reinsurance contract are claims of a general creditor and are entitled to a lower priority than claims by policyholders and claimants under policies of insurance. The reasoning is to protect direct consumers of insurance over sophisticated creditors such as reinsurers so that claims under a reinsurance contract are assigned class (e) priority as claims of a general creditor. See, e.g., Alabama Ins. Guar. Assoc. v. Reliance Ins. Co. in Liquidation, 100 A.3d 702 (Pa. Commw. 2014), aff’d per curiam, 121 A.3d 954 (Pa. 2015); CSAC Excess Ins. Auth. v. Reliance Ins. Co., No. 1 REL 2007 (Pa. Commw. Nov. 8, 2012), aff’d, 78 A.3d 1058 (Pa. 2013); Consedine v. Reliance Ins. Co., 35 A.3d 1232, 1240 (Pa. Commw. 2011); Koken v. Reliance Ins. Co., No. 269 N.D. 2001, Slip Op. at 4-5 (Pa. Commw. Dec. 8, 2005). Whether the challenge to class (e) priority was brought by an insurance company, a captive, or a pool of entities seeking to underwrite risks, the courts have consistently upheld claims under reinsurance agreements as priority (e).
For the full article, refer to page 6 in the Spring 2016 issue. https://www.airroc.org/assets/docs/matters/airroc%20matters%20spring%202016%20vol%2012%20no%201.pdf