Parties Spar Over Court's Role In Insurance Liquidation Process

Max Mitchell, The Legal Intelligencer
September 16, 2014


An attorney representing the Pennsylvania insurance commissioner argued before the state Supreme Court that when considering a rehabilitator's plan to liquidate an insurance carrier, the courts should defer to the experts.

According to attorney Carl M. Buchholz of DLA Piper, who represented state Insurance Commissioner Michael F. Consedine in Consedine v. Penn Treaty Network America Insurance during oral arguments before the justices last Wednesday, the state General Assembly intended to give Consedine a "sphere of discretion" when determining whether to continue implementing a rehabilitation plan or if liquidation would be the best course of action.

When the Commonwealth Court rejected his client's petition in 2012 to convert a rehabilitation plan into liquidation proceedings, it was an error, Buchholz argued, because the court failed to give the commissioner the proper discretion.

"This is a case of national importance. Insurance regulators are watching the outcome of this case," Buchholz said. "Never before has a liquidation failed."

However, Douglas Y. Christian of Ballard Spahr, an attorney representing the embattled insurance carriers, said the job of the courts in these proceedings is to make factual determinations, and special deference for commissioners is not required.

"There is no administrative deference," Christian said. "The job of fact finding is the job of the fact finder. Deference is not a part of that analysis."

The Commonwealth Court's decision to deny the Pennsylvania Insurance Department's request to liquidate two insurers was apparently a first in the state's history.

In her 173-page opinion, Judge Mary Hannah Leavitt denied a request by Consedine to liquidate Penn Treaty Network America Insurance Co. and its subsidiary, American Network Insurance Co. Consedine had been brought in to rehabilitate the two long-term care insurers, but later requested those rehabilitations be converted into liquidations.

Leavitt found that Consedine did not undertake a meaningful effort to rehabilitate the companies, and had "acted to frustrate rehabilitation."

According to Leavitt's opinion, the two insurers had a combined $1 billion in assets, no debts and were meeting their obligations as they came due. The cash flow of the companies was more than $200 million per year, which had been sufficient to pay all policyholder claims on a timely basis, she said. According to Leavitt, the parties did not dispute that the companies would be able to continue paying all policyholder obligations for years to come.

However, the companies were insolvent because their premium rates were too low to fund all expected future claims, and the companies could not renew those underpriced policies, Leavitt said.

The insurers agreed to enter rehabilitation in 2009, and the commissioner was appointed as the statutory rehabilitator.

According to Leavitt, in order for a rehabilitation to be converted to a liquidation, the rehabilitator must prove that continued rehabilitation is either futile or will substantially increase the risk of loss to policyholders, creditors and the public.

The rehabilitator promised a final plan by October 2009, but when that month rolled around, petitions were instead filed for liquidation. The insurance companies intervened to oppose the liquidations and 2010 was spent in settlement talks and then discovery. A trial in the case began Jan. 3, 2011, but was stopped for additional settlement discussions. It resumed in October 2011.

After Leavitt heard about 30 days of testimony and received thousands of pages of documents, she determined that the rehabilitator's evidence showed that the rate regulation was "governed by politics, not actuarial evidence or legal principles." She called the claims that the companies masked their true financial health "unfounded."

The rehabilitator's expert placed PennTreaty's statutory surplus at negative $2.1 billion and American Network's at negative $137 million as of Dec. 31, 2009. The insurers' expert projected the statutory surpluses of the companies at negative $333 million and negative $600,000, respectively, according to the opinion.
Leavitt rejected the rehabilitator's expert, but said that even if she did accept those numbers, they wouldn't mean revenues in the next 10 to 20 years could not be increased sufficiently to pay the claims.

Along with denying the liquidation petition, Leavitt ordered Consedine to create a plan for rehabilitation of the companies within 90 days. She said the plan was to address and eliminate the "unfairly discriminatory" premium rates for the companies' older insurance plans.

According to Buchholz, placing the burden on the rehabilitator to prove that liquidation is necessary was an error by Leavitt.

This is "nowhere in the statute," Buchholz said.

Buchholz urged the justices to look at the legislative intent behind the law that was developed in Wisconsin and used as the basis for Pennsylvania's law. The commissioners' decisions regarding the validity of the actuarial projections was within the "zone of discretion for the commissioner," he said.

Justice Max Baer contended the court would be only a "potted plant" if it could not make determinations about the credibility of experts. Buchholz countered that, under the Commonwealth Court's holding, it would be risky for any commissioner to attempt rehabilitation rather than liquidation.

"It's ironically easier to put it into liquidation today," he said.

However, according to Christian, it was important to note that the commissioner had initiated the process, and had requested the court review their actuarial projections. He added that, during those proceedings, the commissioner had stated that it was his job to convince the court of his findings.

"The rehabilitator invited that process" when it petitioned to liquidate the companies, Christian said. "And now that the decision is done, the rehabilitator attacks the very process he invited."