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In re Liquidation of Integrity Insurance Co.

December 13, 2007


On appeal from the Superior Court, Appellate Division.


(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

The issue in this appeal is whether claims that have been incurred but not yet reported (IBNR claims) qualify for participation in the final distribution of an insolvent insurer's liquidated estate pursuant to N.J.S.A. 17:30C-28(a)(1), which provides that "no contingent claim shall share in a distribution of the assets" of an insolvent insurer except for such claims that have become "absolute against the insurer."

The Court previously described the history of this case in In re Liquidation of Integrity Ins. Co., The opinion of the court was delivered by: Justice Rivera-soto

Argued September 24, 2007

JUSTICE LONG, joined by JUSTICE ALBIN,has filed a separate DISSENTING opinion expressing the view that the statutory language "absolute as to the insurer" does not clearly bar the Liquidator's plan to allow actuarially-estimated IBNR claims to participate in the distribution of the estate's assets. Such a plan is consistent with the aims underlying the Rehabilitation and Liquidation Act, N.J.S.A. 17:30C-1 to -31, to afford the broadest protection to the public and the various claimants and beneficiaries.

CHIEF JUSTICE RABNER and JUSTICE WALLACE join in JUSTICE RIVERA-SOTO's opinion. JUSTICE LONG has filed a separate dissenting opinion, in which JUSTICE ALBIN joins. JUSTICES LaVECCHIA and HOENS did not participate.

This appeal presents the latest -- and not yet final --chapter in the now almost twenty-one-year-old liquidation of Integrity Insurance Company (Integrity). Determining that claims against Integrity's reinsurers that have been incurred but not reported (IBNR claims) could be included as part of the most recent final distribution plan, the Chancery Division also established a mechanism, via a special master and in substitution of contractually agreed-upon arbitration provisions, for the determination of those IBNR claims. The Appellate Division, however, reversed in both respects, concluding that IBNR claims do not qualify for participation in the final distribution of an insolvent insurer's liquidated estate pursuant to N.J.S.A. 17:30C-28(a), and that the special master dispute resolution mechanism adopted by the Chancery Division could not be sustained.

The plain language of N.J.S.A. 17:30C-28(a) requires that, in order to be cognizable in liquidation, a claim against the liquidated estate must be "absolute against the insurer on or before the last day fixed for filing of proofs of claim against the assets of [an insolvent] insurer[.]" That language does not permit the substitution of estimated claims for "absolute" ones, even when those estimated claims result from the application of sophisticated actuarial estimation methodologies. Because the very claims that would have been subject to the special master dispute resolution process cannot be part of the insolvent insurer's estate, whether that process may override the contractually provided arbitration process becomes moot.


We previously summarized the history of this case as follows:

Prior to 1986, [Integrity] was a property and casualty insurer licensed to transact business in every state. Most of its risks were subject to reinsurance. Many of the risks (for example, environmental and products liability) were not expected to translate into reportable claims until many years after the policies were issued. In addition, Integrity wrote excess and umbrella policies, under which a duty to pay does not arise until underlying coverages are exhausted.

In December 1986, the Superior Court, Chancery Division entered an order declaring Integrity to be insolvent. The court directed the rehabilitation of Integrity and appointed the New Jersey Commissioner of Insurance and his statutory successors in office as rehabilitators. On March 27, 1987, the court ordered Integrity into liquidation, and appointed the Commissioner as liquidator pursuant to N.J.S.A. 17:30C-9. The Commissioner was directed to marshal Integrity's assets and liquidate its liabilities for the benefit of all claimants against its estate.

On June 17, 1996, the Commissioner filed a Final Dividend Plan (FDP) with the court to effect the early termination of the Integrity estate. That novel plan to wind up Integrity's affairs essentially reduced the actuarial estimates of Integrity's future liabilities to present value. Briefly summarized, under the FDP, the liquidator was to (1) estimate and allow the present value of all Contingent Claims, including claims for IBNR losses; (2) collect from reinsurers the present value of any reinsurance that will be due on such claims; (3) arrive at a final determination of Integrity's assets and liabilities; (4) calculate the percentage to be paid on the Fourth Priority [policyholder] claims; and (5) pay a final dividend on all claims accorded Fourth Priority or higher status. The FDP will require Integrity's reinsurers to pay off approximately []800 million dollars of debt. [In re Liquidation of Integrity Ins. Co., 165 N.J. 75, 80 (2000) (footnote omitted).]

One commentator has described that "novel plan" -- the process of estimating IBNR claims -- thusly:

A new and significant issue arising in insurer insolvency proceedings with significant impact on reinsurers is the authority of liquidators to estimate the value of contingent claims. Liability insurers facing environmental and similar "long-tail" claims may face substantial losses that have already occurred but which have not yet been reported. These losses are referred to in the insurance industry as IBNR (incurred but not reported losses). Ordinarily, a liquidation proceeding for an insolvent insurer would continue until all claims become fixed. But awaiting the fixation of claims in some contexts would result in substantial delays in resolving the proceedings. In the meantime, there may be losses of potential reinsurance recoveries due to intervening reinsurer insolvencies, and the administrative costs of the proceeding would continue to mount.

One approach recently tried by receivers and liquidators of insolvent insurance companies is to estimate . . . the value of IBNR claims and seek reinsurance recoveries based upon the estimated value. Reinsurers have resisted the estimation approach, understandably fearing an incentive to inflate reinsurance claims on an available deep pocket. [14-106 Appleman on Insurance 2d § 106.9 (2007).]

Ultimately allowing IBNR claims as part of Integrity's final distribution plan, the Chancery Division explained that the Commissioner of Banking and Insurance (Liquidator) had presented "three possible options with respect to the conclusion of Integrity's liquidation." In re Liquidation of Integrity Ins. Co., 299 N.J. Super. 677, 680 (Ch. Div. 1996). It succinctly outlined those options:

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 [IBNR] 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. . . . .

The third alternative . . . 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 [state insurance guarantee associations] 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. [Id. at 680-81.]

Embracing the third option, the Chancery court concluded that "the Liquidator has the statutory authority to determine contingent claims and to permit such contingent claims to participate in distributing [the] assets from the Estate." Id. at 692.

Eight years later, when it considered Integrity's fourth amended final dividend plan, the Chancery Division explained that, because it already had determined that IBNR claims could be included as part of the distribution of Integrity's estate, "the central issue before this Court [was] limited to whether the proposed Fourth Amended Final Dividend Plan achieve[d] that objective (1) using generally accepted estimation techniques; (2) in a commercially reasonable manner; and (3) while protecting the policyholders, insureds, and the public." The Chancery court acknowledged that "an actuarial estimate is not a 100% guarantee. Rather it is an evaluation generated by an actuary using the most up-to-date technology available." It noted that actuarial estimation "is a process that is employed and relied upon by major insurance and reinsurance companies . . . on a regular basis for such transactions as commutations, takeovers and mergers." Concluding that the procedure proposed by the Liquidator satisfied the three prongs of the court's test, the Chancery court authorized the final dividend plan using actuarial estimates for IBNR claims and allowing for a special master to resolve any disputes arising therefrom.

The resolution of Integrity's IBNR claims is of significant import to Integrity's reinsurers. As the Chancery court noted in 1996, "there are an estimated $1.321 billion of [IBNR] losses as of December 31, 1995, which may not become absolute as to liability, coverage, and amount for thirty years or more." Id. at 680. It explained that, "[p]ursuant 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." Ibid.

In an unpublished opinion, the Appellate Division reversed. Siding with the position advanced by respondent Reinsurance Association of America (RAA), the panel noted that "[s]ome 26,000 claims, including several thousand policyholder protection claims, have been filed" as part of Integrity's liquidation. It explained that "[t]hese claims fall into three categories: 'paid loss' claims; 'outstanding losses;' and 'incurred-but-not-reported' (IBNR) claims." It defined "paid loss" claims as "those in which liability to a specific claimant in a specific amount has been identified." It described "outstanding losses" as "those for which a claim has been made by an identified party but the fact of liability and the amount of the claim are unresolved." Finally, and most germane to this appeal, the panel defined IBNR claims as "those that may, by virtue of historical experience, be expected to be filed, although the claimant, the nature of the claim, the responsibility for the claim and the amount of the claim are all unknown." It is estimated that the contingent claims -- the "outstanding losses" and the IBNR claims -- represent over $2 billion in the aggregate.

Addressing the propriety of recognizing IBNR claims as part of a liquidation plan, the panel concluded that IBNR claims are actuarial estimates and are, therefore, not absolute. They are derived from standards of measurement that vary according to the judgment of the valuator. They are nothing more than an estimate of the value of a potential actual loss that accounts both for the possibility that the loss will not occur and for the possibility that the extent of the loss will differ from the ...

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