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Matter of Liquidation of Integrity Ins. Co.

November 15, 1996

IN THE MATTER OF THE LIQUIDATION OF INTEGRITY INSURANCE COMPANY


Meehan, P.j.s.c.

The opinion of the court was delivered by: Meehan

Civil Action

MEEHAN, P.J.S.C.

Integrity Insurance Company was a New Jersey stock insurance company that issued various types of insurance policies as well as surety bonds. This court declared Integrity insolvent by Order of Liquidation dated March 24, 1987, under Section 6 of the New Jersey Insurer Liquidation Act, N.J.S.A. 17:30C (hereinafter the "Act") and the Commissioner of Insurance was appointed Liquidator. Pursuant to procedures established in N.J.S.A. 17:30C-20 and implemented by Order dated July 8, 1987, approximately 26,000 claims were filed against the Integrity estate in liquidation (hereinafter "Integrity" or the "Estate"), of which an estimated 856 arose from surety bonds written by Integrity. The court then assigned Special Masters to hear and recommend allowances of these claims.

It is important to note that many of Integrity's excess and umbrella insurance policies are not typically triggered until exhaustion of underlying coverages. Further, the nature of many of these losses are related to environmental contamination and product liability. Thus, there will be a long delay in reporting these claims to Integrity and the various reinsurers. To the extent these losses have not yet been reported, they are known as incurred but not yet known or reported losses (hereinafter "IBNKR"). In addition, there are losses which have been reported but not yet reduced to judgment or settlement. These losses are referred to as case reserves.

The Commissioner of Insurance, acting in her capacity as Liquidator of the Estate, brought this motion to establish procedures for court approval of a final plan for distribution of the Integrity assets. However, before this court can approve any proposed plan, a threshold issue of statutory interpretation must be resolved. The precise issue presented to this court is whether the Liquidator has the legal authority to estimate the value of IBNKR losses and reported case reserves in order to allow such contingent claims to participate in the final distribution of assets. If so, contingent claims of third parties and policyholders are entitled to the fourth priority of distribution of assets, rather than being excluded entirely from the final distribution of assets. The statute provides that the priority of distribution in a liquidation proceeding is as follows:

(1) Expenses of administration;

(2) Compensation of employees as provided in subsection (a) of this section;

(3) Claims for taxes and debts due to Federal or any state or local government which are secured by liens perfected prior to the commencement of delinquency proceedings;

(4) Claims by policyholders, beneficiaries and insurers arising from and within the coverage of and not in excess of the applicable limits of insurance policies and insurance contracts issued by the company and liability claims against insurers which claims are within the coverage of and not in excess of the applicable limits of insurance policies and insurance contracts issued by the company and claims presented by the New Jersey Property-Liability Insurance Guaranty Association and claims presented by any similar organization in another state;

(5) All other claims.

[N.J.S.A. 17:30C-26(c).]

The significance of this issue is illustrated by the fact that there are approximately $349 million in outstanding case reserves, i.e. pending claims that have not yet been resolved. Furthermore, there are an estimated $1.321 billion of IBNKR losses as of December 31, 1995, which may not become absolute as to liability, coverage, and amount for thirty years or more. Pursuant to the plan, Integrity's reinsurers will be obligated to pay on these contingent claims an estimated $876 million. The Liquidator would then utilize this additional source of assets to pay distributions to policyholders and claimants.

I

The Liquidator has outlined three possible options with respect to the Conclusion of Integrity's liquidation. The first option involves a run-off approach and continuing the liquidation until all or substantially all contingent claims become absolute as to value and amount. This option, the Liquidator argues, would result in continuing the liquidation for at least another 10 years (likely longer), thereby delaying the full final dividend to claimants and policyholders, and causing the Estate to incur administrative expenses over the next 10 years of approximately $45 million.

The second option involves a cut-off approach whereby the Estate's liability for any IBNKR losses would be terminated. The Liquidator argues that this approach would be manifestly unfair to many policyholders and third parties with contingent claims who would lose any recourse to the assets of Integrity's Estate. Further, this approach would have a serious impact on the insurance-consuming public because many of the contingent claims would be paid, in part or in full, by state insurance guaranty associations (hereinafter "IGAs"). If the Estate avoids implementing a cut-off plan, the IGAs would have recourse to Integrity's assets, including reinsurance assets marshaled by the Liquidator. If, however, all contingent claims are terminated and reinsurance not collected, the IGAs would lose this source of funding and would have to recoup their claim payments exclusively through assessments on member insurers. The member insurers, in turn, would levy surcharges on purchasers of insurance policies to recoup the assessments.

The third alternative, which is outlined in the Liquidator's Final Dividend Plan, proposes to estimate and, in appropriate cases, allow contingent claims at their net present value using an independent actuarial consulting firm, and collect any reinsurance that may be due on the claims. The Liquidator contends that such an approach will: (1) protect the interests of claimants with contingent claims, (2) abbreviate the delay in making final payment to claimants, (3) maximize the assets of the Estate, (4) reduce administrative expenses, and (5) lighten the burden of Integrity's insolvency on the IGAs and the insurance-consuming public. If such a plan is implemented, the Liquidator hopes to conclude the liquidation of Integrity's Estate within three years.

The respondents in this matter object to the Liquidator's proposed Final Dividend Plan on the grounds that the proposal rests, not on the express provisions of New Jersey's insurance statutes, but instead on a series of sweeping assertions by the Liquidator. In support of its objection, the respondents contend that historically virtually all insurer insolvencies have been resolved on the basis of specific, individual claims for ...


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