The Liquidation Process in New York – Part VI: Oscar Season

February 9, 2009

If there were such an award, the current administration of the New York Liquidation Bureau would win the Orwellian Double-Speak Oscar. The Bureau has taken every public opportunity to promote a new era of openness and accountability, and to paint itself as the champion of the interests of policyholders and insureds. However, reality can be quite the opposite as this series has shown.

As previously detailed, under the banner of transparency the Bureau has actually reduced the scope of its reporting (for example, by issuing consolidated rather than the statutorily required individual statements for companies under its management), and has succeeded in obtaining legislation requiring the preparation of untimely reports at the expense of the estates that will be of little or no value as an oversight or management tool while needlessly tying the hands of estate managers in the future.

But these actions pale in audacity to its recent unprecedented use of the courts to further insulate itself from outside scrutiny and accountability!

As discussed in this series, the Bureau acts as the agent for the superintendent of insurance in his separate and private role as liquidator or rehabilitator, marshalling assets, paying claims and, in the case of rehabilitation, managing the business and acting to remove the causes of insolvency to restore the company to the marketplace. The courts have held that the liquidator or rehabilitator “stands in the shoes” of management so that, in theory at least, the Bureau and its employees are subject to the same standards of care and responsibility as any manager of any insurance entity.

Of course, given the circumstances of taking over an insolvent company, the law provides for certain protections for the estate, such as providing the courts with the authority to issue injunctions or orders “necessary to prevent interference with the superintendent or the proceeding, or waste of the assets of the insurer, or the commencement or prosecution of any actions, the obtaining of preferences, judgments, attachments or other liens, or the making of any levy against the insurer, its assets or any part thereof.” (Insurance Law § 7419; emphasis added)

These powers are clearly intended for the protection of the estate and its assets, and to allow for an orderly administration of an estate. They are not intended, and have not in the past been used overtly for the personal protection of the rehabilitator or liquidator and his agents – until now.

Since the start of the current administration in January 2007, there have been four liquidation and two rehabilitation orders issued. Each of these orders has included the following provision that did not exist in any such order entered into prior to 2007:

“The Superintendent as [rehabilitator] [liquidator] of [the company], his successors in office and their agents and employees are relieved of any liability or cause of action of any nature against them for any action taken by any one or more of them when acting in accordance with this Order and/or in the performance of their powers and duties pursuant to Article 74 of the New York Insurance Law;”

By adding this paragraph to the form of court order of liquidation or rehabilitation, the Bureau seeks to obtain immunity without any basis in the law, and for which there is no precedent in any of the hundreds of liquidation and rehabilitation petitions filed in the past. This immunity, by the way, is no garden-variety immunity from mere negligence. It bestows absolute immunity – including for gross negligence or intentional acts committed while acting as liquidator or rehabilitator of an estate.

Once again the current administration of the Liquidation Bureau has acted counter to its own pronouncements of openness and accountability. The Bureau repeatedly states that it is protecting the interests of policyholders and claimants of insolvent estates, and has publicly invoked its “fiduciary” role more than a few times. In the law, of course, fiduciaries are held to a higher standard of care than mere managers. Not only is the Bureau not prepared to assume even the most basic standard of care for its actions or inactions, the Bureau seeks to escape any and all responsibility.

Add this unprecedented immunity to the lack of existing institutional oversight or regulation, and you have the perfect setting for unbridled and undiscoverable abuse.

“And the Double-Speak Award goes to . . .”


A Note About the NAIC Insurance Receivers Model Act (IRMA):

Some readers familiar with IRMA might think: “What’s the big deal? IRMA provides immunity for receivers and their agents.” While IRMA provides a couple of immunity options – a limited and an absolute immunity — only two states (Texas and Oklahoma) have adopted IRMA. The immunity provisions were and remain controversial, as many industry observers do not understand the logic in exempting receivers and their agents from responsibility for their actions, particularly for their gross mismanagement or worse.

But most significantly, immunity for receivers is a protection granted by law, and not to be taken through an unsuspecting court in a largely unopposed setting. This taking, combined with the lack of institutional oversight, is quite contrary to the “open and accountable” mantra of the administration.

What do you think?

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