The Liquidation Process in New York – Part IV-A: Information Highway or By-way?

November 13, 2008

The current administration has repeatedly stated its intent to be more transparent in its operation of the liquidation process in New York. The Liquidation Bureau has demonstrated this intent by issuing numerous press releases on its activity and has posted significant information and documents on its web site ( Most recently it has posted the long-awaited audit of the Bureau and the estates under its management for calendar year 2006, and has sought and received significant press coverage of this event (“NY Liquidation Bureau Issues First Complete Independent Financial Audit In Its 99-Year History … Bureau Receives Unqualified ‘Clean’ Opinion from Auditor on its 2006 Financial Data” – Press release of October 29, 2008). The administration has also touted the passage of the legislation it proposed requiring the audit of the Bureau and the estates it manages in the future (“Bureau Sought Change to State Insurance Law to Provide Greater Transparency” – Press release of August 7, 2008).

But does this seeming plethora of information constitute true transparency – in the open and helpful sense? Does it provide meaningful information to interested parties in insolvent estates including policyholders, creditors, other claimants, reinsurers, guaranty funds, regulators, courts and legislators? What does the law require and are the receiver and his agents complying with those requirements? What information is required to be made available by the security funds in New York? Is information available from the security funds consistent with the statutory requirements? How helpful is the Freedom of Information Law (FOIL) to anyone seeking additional information about an insolvent estate or a security fund?

In order to present this material in manageable bites, I have divided the subject into two parts: in this Part IV-A I will cover the reporting requirements and practices of the rehabilitator and liquidator, including the Liquidation Bureau. My next installment (IV-B) will then cover the reporting requirements and practices of the security funds.

Licensed New York insurers are required by statute to file financial statements on a statutory accounting basis with the Insurance Department on or before March 1 of each year (Insurance Law §307(a)(1)). Within five months of the end of a calendar year, each licensed insurer (other than companies with minimal premium volume) are required to file audited financial statements, which statements together with the auditor’s opinion, are to be made publicly available by the Department ((§307(b)(1)). In addition to the reporting requirements, the superintendent of insurance has the power to examine the affairs of an insurer “as often as he deems it expedient,” but at least every 3 to 5 years depending on the business of the insurer (§309).

But what happens to these reporting and examination requirements when an insurer is placed into liquidation or rehabilitation in New York? Interestingly, the liquidation and rehabilitation article of the insurance law (Article 74) is silent on the subject. Under a plain reading of the law, so long as the insolvent insurer remains licensed it should continue to be subject to the statutory reporting requirements as solvent insurers. The statute does not provide for automatic withdrawal or stay of the license or licenses of insolvent insurers. Liquidators may argue that once an order of liquidation is entered, that entity ceases to be a licensed entity. This argument is not supported by the law as written and is further belied by the common practice of liquidators treating licenses as tangible assets that can be sold. Even if you accept that argument for companies in liquidation, the same argument is not applicable to companies in rehabilitation, where the specific charge of the rehabilitator is “to conduct the business thereof, and to take such steps toward the removal of the causes and conditions which have made such proceeding necessary as the court shall direct.” (§7403).

The other argument posed is that under Article 74 the courts assume responsibility for the conduct of the liquidators and rehabilitators of an estate, thus taking the place of the regulators. However, while the law requires court approval of the material actions or plans of the liquidator or rehabilitator, it does not remove the applicability of §§307 and 309, and it does not provide the court with the necessary authority or tools to perform regulatory oversight of an estate. For example, none of the statutorily required reports discussed in this article are required to be filed with the rehabilitation or liquidation court. In fact, there is no statutory requirement for the liquidator or rehabilitator of an estate to file any report on the status of an estate with the court except for a final report to close the estate. (Note: I referred in my last installment to the requirement in §7422 that the expenses of an estate are subject to the court’s approval. A review of the docket of any of the significant estates under the Liquidation Bureau’s management shows that this requirement is followed more in the breach than in the practice).

Only one of the current estates in liquidation files regular annual statements on a statutory basis (and that estate is the one estate not managed by the Liquidation Bureau). The two estates in rehabilitation have started filing statutory statements, but no estate – liquidation or rehabilitation – prepares and files with the superintendent annual audited statements within five months of the end of the calendar year (Note: the recently enacted statutory requirement for annual audited statements of the Bureau and each estate under its management has less strenuous requirements in terms of time and content and does not specifically eliminate the requirements of §307. That legislation, which is not effective until December 31, 2009, and which directly conflicts with existing law, will be addressed in a later installment of this series).

Furthermore, once an insurer is placed in rehabilitation or liquidation in New York, the insurance department ceases to continue the regular periodic §309 examinations of those entities even though the insurance law does not exempt those entities from such examination. While I have been informed that there have been instances of insurance department examination of companies in receivership in the distant past, the practice has evolved that once a company is ordered into liquidation or rehabilitation, the insurance department ceases to be the regulator of that entity – perhaps to avoid the inherent conflict of the superintendent regulating himself.

Assuming for the moment that insolvent estates are no longer subject to §§ 307 and 309 (as seems to be the unstated position of the Liquidation Bureau and the bureaus of the insurance department responsible for the regulation of licensed companies), what reports are they subject to? There are only two other reporting requirements in the Insurance law regarding estates in liquidation or rehabilitation: §§ 206 and 7405(g).

§206 requires the superintendent to include in his annual report to the Legislature “Lists of . . . insurers organized, admitted, merged, withdrawn, or placed in liquidation, conservation, or rehabilitation” (§206(a)(5); and “Tables relative to liquidation, conservation or rehabilitation proceedings by the department for prior years including the preceding calendar year” (§206(b)(3). The 247 page annual report for 2007 (obtainable in pdf format from the Department’s web site at has 10 pages devoted to the receivership process: 4 pages of narrative about the Liquidation Bureau, 2½ pages listing all the estates under its management, and an income and disbursements sheet for each of the three p/c security funds. There are no statements or other financial data for any of the estates.

The other applicable section, §7405(g), requires the rehabilitator or liquidator to submit to the insurance department an annual report for each estate in rehabilitation or liquidation within 120 days of the end of the calendar or fiscal year for that estate, which report is to be prepared “upon whichever standard the corporation conducts its financial affairs” and “shall include a financial review of the assets and liabilities of the corporation, the claims accrued or paid in that period, and a summary of all other corporate activity and a narrative of the actions of the rehabilitator or liquidator respecting such corporation.” The report, therefore, need not be on a statutory basis, and need not be a full and complete financial report. Also, even though §307(a)(1) requires licensed insurers to file on a calendar year basis, the §7405(g) reports do not have to be on a calendar year basis. The last sentence of §7405(g) is also interesting. It states that the report under this section “shall be separate and apart from other reports issued by the liquidation bureau of the department in the normal course of its business.” This statement seems to further support the conclusion that the law does not excuse the liquidator or rehabilitator from the filing requirements of §307 or from examination under §309.

Even if the rehabilitator or liquidator does not file §307 statutory statements by March 1 each year, at least you can get a copy of the §7405(g) report on an estate after April 30, right? Well, yes but not from the Liquidation Bureau. You see, the Bureau is not a state agency (as confirmed by the NY Court of Appeals last year) and therefore is not subject to the Freedom of Information Law (FOIL). Unless the Bureau voluntarily provides the report, it cannot be compelled to do so under FOIL. At this time, the Bureau does not voluntarily provide the report and has not posted in on its web site. All is not lost, however. Because the report is filed with the insurance department, which is subject to FOIL, a copy can be obtained from the department. However, even if you get the report, it is not going to be terribly helpful in analyzing an estate. With the exception of the estates in rehabilitation and the one estate in liquidation mentioned above, the reports are on a “modified cash basis” rather than on a statutory basis. Furthermore, while in the past there was a separate report on each estate as required by §7405(g), the new administration has presented the report on a combined basis with financial data in columns and only a brief narrative for each estate.

Simply put — the reporting and compliance requirements of the law for licensed insurers have not been applied to companies in receivership in New York even though there appears to be no exemption from these requirements. Information about estates in receivership — whether in rehabilitation or liquidation — is minimal and of limited value to interested parties. And the Liquidation Bureau, despite its repeated expressions of openness and transparency, only posts what it wants to post, and only makes available what it wants to make available — and only in the manner and format it wants you to see.

Next time, I will explore the reporting requirements for and practices of the New York insurance security funds to see if they are any more transparent than the receivers and the Liquidation Bureau – and some of the results may be surprising.

What do you think?

Leave a Reply

Your email address will not be published. Required fields are marked *