On July 7, 1994 a consensual order of rehabilitation was entered against United Community Insurance Company (UCIC) in Upstate New York. Less than a month later, on August 3, 1994, the then superintendent of insurance, Sal Curiale, filed a petition to liquidate UCIC with the New York Supreme Court in Schenectady. The management of UCIC, having just consented to rehabilitation, vehemently opposed the petition and the issue of the actual financial condition of the company became the subject of an evidentiary hearing and the hiring by the court of an independent actuary. In the meantime, the New York Liquidation Bureau was effectively dismantling the company under the rehabilitation order.
When the new superintendent, Ed Muhl, reviewed the stalemate in early 1995, he made an extraordinary decision: he appointed a special agent from outside of the Liquidation Bureau to assess the financial status of UCIC and to handle the rehabilitation or liquidation of UCIC, whichever was warranted. The special agent put together a small team of experts and a plan of action and advised the court of those plans. The special agent determined to the satisfaction of the court that the company was insolvent and an order of liquidation was entered on November 9, 1995 — more than 14 months after the petition had been filed – and this time with the consent of UCIC’s owner and board of directors.
The management of the UCIC estate by the special agent and his team since 1995 has been an example of how efficiently and transparently an estate can be managed for the benefit of policyholders and creditors in New York under the existing statutory scheme. This was accomplished by the special agent working closely with the various state guaranty funds, creditors and reinsurers, by staffing commensurate with the actual needs and activity of the estate, and by being accountable to the liquidation court through regular conferences and reports. UCIC is the only company in liquidation in New York that has consistently filed with the liquidation court annual statements prepared on a statutory accounting basis. While dividend declarations by estates in liquidation in New York are rare, UCIC has paid dividends over the years totaling 35% of recorded liabilities. Information on the estate is regularly provided by the special agent to the liquidation court and all interested parties, including representatives of the principal creditors, reinsurers and guaranty funds.
The Liquidation Bureau, however, has done its best over the years to downplay the record of UCIC and bring the estate into the fold of the Bureau. For instance, if you look up UCIC on the Bureau’s website you will find no reference to the special agent (the contact person listed is an employee of the Bureau and not the special agent), an indication that no dividends have been paid, and no reference to any filed documents other than the order of liquidation. If it were not for the level of involvement by the liquidation court, creditors, and guaranty funds fostered by the special agent over the years, this estate would have years ago become just one more mishandled estate in the Bureau’s quiver.
What was extraordinary about Superintendent Muhl’s decision to use a special agent outside of the Liquidation Bureau was not that it was outside of the statutory scheme – quite the opposite. The UCIC case is extraordinary because it is squarely within the statutory scheme, and it is the only estate that actually follows the original concept of the statute. (For a discussion of the statutory scheme and its history, see Part I of this series, posted on August 19, 2008). It is the only estate that works closely with the court, files regular reports, prepares its annual statements on a statutory basis, and gets all its expenses and actions approved with full disclosure to all interested parties. This feat could not have been accomplished, however, without the foresight of Superintendent Muhl to understand the scope of his authority as receiver, and the pro-active participation of the court.
The original statutory scheme recognizes that each estate is different and allows the superintendent to bring the appropriate expertise to bear on each individual circumstance. Unfortunately, the Liquidation Bureau by its very nature (a fixed staff of 500 people, most of who are protected by a union contract) is a one-size-fits-all operation with a voracious appetite but little flexibility. The result is a statutory process that has been high-jacked by a non-statutory entity accountable to no one.
It will take more than adding layers of reports and audits to this already cumbersome operation to provide efficient and transparent management of insolvent estates. It will take a return to the actual intent and structure of the statutory scheme!
Postscript: The legislation sought by the Liquidation Bureau as a “reform” action, requiring the annual audit of the Bureau and the estates under its management, was signed into law as Chapter 540 on September 4, 2008. A future installment in this series on the liquidation process in New York will address this law and why it will move the Bureau even further from proper oversight, and make the administration of insolvent estates even more costly and inefficient. The next installment in this series, however, will cover the State’s statutory insurance [in] security funds.