What does it mean to Stand in the Shoes of an Insolvent Insurance Company?

April 29, 2008

The courts in most jurisdictions – including New York — have consistently held that a receiver “stands in the shoes” of the insolvent company and does not get to change the contractual or legal obligations of the insolvent company simply because an order of rehabilitation or liquidation has been issue. It is not clear, however, if the current management of the New York Liquidation Bureau accepts that they are private managers of insurance entities and are not imbued with the super powers of a governmental agency. The courts continue to do their part to remind the Bureau of its role, but judging from the number of times they need to do so, it does not seem that the message is getting through.

Last October the New York Court of Appeals confirmed that the Bureau was not a state agency (Dinallo v. DiNapoli, October 11, 2007, Decision 111). Although this was a position espoused by the Bureau itself, the Bureau’s motive was not to restrict its powers but to avoid scrutiny by the state comptroller (See my web entry for October 12, 2007). In finding that the Bureau was not a state agency, the Court also restated the broadly accepted principle that the receiver “for all practical purposes takes the place of the insolvent insurer.” (Decision at p.3). It is this limiting role that the Bureau seems to have a problem accepting.

Granted, the receiver has certain necessary powers to assist in the marshalling of estate assets and court protection from unwarranted assaults, but these powers are not intended to alter contractual relationships or create obligations that did not exist pre-receivership. For instance, in Matter of Midland Ins. Co., 79 NY2d 253, 265 (1992), the New York Court of Appeals stated that “liquidation cannot place the liquidator in a better position than the insolvent company he takes over, authorizing him to demand that which the company would not have been entitled to prior to liquidation. . . . Those rights were not altered merely because a liquidation order was entered.” Notwithstanding this clear pronouncement, the Bureau frequently attempts – even in the Midland Insurance Company estate — to alter contractual rights of others under the guise of acting as a “fiduciary” or under some implied or threatened super authority.

In January 2008 the Midland liquidation court (Justice Stallman) issued a lengthy decision that, while supporting the primary claim handling authority of the liquidator, also took the Bureau to task for not adequately protecting the interposition rights of reinsurers, and requiring the Bureau to revise the claims protocol in this regard (See my February 21, 2008 web entry on this decision). Now Justice Stallman has again reminded the Bureau of the limitations of its authority and power to define the rights of others – this time regarding the Bureau’s attempt to apply New York law across the board to all Midland creditors.

In a recent 24-page decision (In the Matter of the Liquidation of Midland Insurance Company, Motion Seq. No. 69, April 15, 2008), Justice Stallman has directed that the law applicable to each policy is not New York law in all cases; rather the applicable law is to be determined following the ‘grouping of contacts’ approach of the Restatement (Second) of Conflicts of Laws. The decision rejects the Bureau’s interpretation of the Appellate Division finding in the Lac d’Amiante du Quebec claim in Midland (269 AD2d 50 [1st Dept 2000]) that all creditors are to be treated equally requires that New York law must apply to all Midland contracts. Instead the Court turns to the Foster Wheeler Corp. holding (36AD3d 17 [1st Dept 2006]) that the “grouping of contacts” principle of the Restatement (Second) of Conflicts of Law applies in New York and is consistent with the principles of the Uniform Insurers Liquidation Act (Insurance law Section 7048 et seq.) for the equitable administration of estates. Furthermore, the court found that the establishment of nine statutory classes of claimants in the 1999 amendment to the priority of distribution scheme under Article 74 eliminates any basis for applying the equal treatment reading of the Lac d’Amiante decision.

The decision is an interesting read, but the bottom line is that the court rejected equating equal treatment with equitable treatment, and again confirmed that “standing in the shoes” does not mean trampling the contractual rights of others.

What do you think?

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