Receivers in insurance insolvencies always look for creative ways to manage their insolvent estate. Some try to close the estate early by accelerating reinsurance recoverables. Others, as in the case discussed below, try to allocate estate assets to others so that claims in excess of the guaranty fund limit might be paid in part.
In In Re: Penn Treaty Network America Insurance Company (In Liquidation), Nos. 1 PEN 2009, 1 ANI 2009 (Pa. Commw. Ct. Dec. 22, 2021), the Commonwealth Court of Pennsylvania, sitting, en banc, reaffirmed an order from a three-judge panel from the same court, which denied the receiver of two insolvent long-term care insurance companies’ application to allocate estate assets away from the Pennsylvania Life and Health Guaranty Association and to a captive insurance company set up by the receiver to pay claims in excess of the limits of the guaranty association.
Essentially, the receiver wanted to provide some benefits to policyholders in excess of the level that the guaranty association would pay on long-term care policies where the claims would accrue more than 30-days after the termination of the policies because of the insolvency. The receiver contended that it had the authority under statute to allocate the estate assets to the captive.
Notably the guaranty association trade association intervened to oppose the application because it would result in a much larger assessment against members of the association (who have to be members as a condition of doing business in the state). The three-member panel of the court found that the receiver’s proposal to use estate assets to set up an excess coverage insurer departed from Article V of The Insurance Department Act of 1921 and the PLHIGA Act.
The receiver filed exceptions to the three-member court’s findings and asked for the full court to reverse. The court refused and reaffirmed the three-member court’s holding. In doing so the court rejected the receiver’s claim that policyholders are entitled to coverage in excess of guaranty association coverage, either by a transfer of policy obligations to the Captive or by direct payments from the estate for Non-GA Policy Benefit claims. “We disagree with the Liquidator’s premise that policyholders [seeking Non-GA Policy Benefits] have class (b) claims against the Companies’ estates.”
The liquidation statutes terminated the policies, which could remain in-force for only 30-days after the order of liquidation. Accordingly, with the estate’s liabilities being fixed upon liquidation and the Non-GA Policy Benefit claims occurring after 30-days has expired, none of those claims were allowable under the estate. The court also rejected the receiver’s claim that termination of the policies under the statute gave rise to a breach of contract claim for the policyholders.
Notably, the receiver cited to a National Organization of Life and Health Insurance Guaranty Association’s report in support of its position. That organization appeared in the case and opposed what the receiver was proposing (allowing policyholders to have benefits exceeding the guaranty association’s limits). At the end of the day, the receiver could not allocate assets from the estate to a captive to pay non-guaranty association benefit claims.