Allcity Ins. Co., Matter of

• Decision Date: 01 March 1979
• Citation: 413 N.Y.S.2d 929,66 A.D.2d 531
• Parties: In the Matter of the Rehabilitation of ALLCITY INSURANCE COMPANY, Respondent. Re (1) Mark Kondak (2) Elaine Perri, Gail Perri, Lynn Perri and Vincent Perri, Claimants-Appellants.
• Court: New York Supreme Court — Appellate Division

Page 929

413 N.Y.S.2d 929

66 A.D.2d 531

In the Matter of the Rehabilitation of ALLCITY INSURANCE

COMPANY, Respondent.

Re (1) Mark Kondak

(2) Elaine Perri, Gail Perri, Lynn Perri and Vincent Perri,

Claimants-Appellants.

Supreme Court, Appellate Division, First Department.

March 1, 1979.

Larry E. Ribowsky, Ozone Park, for claimants-appellants.

Norman H. Dachs, Mineola, of counsel (Leonard H. Minches, New York City, and Shayne, Dachs, Weiss, Kolbrener, Stanisci & Hardwood, Mineola), for respondent.

Before EVANS, J. P., and FEIN, SULLIVAN, LUPIANO and LYNCH, JJ.

SULLIVAN, Justice.

The question presented is whether the Court has the power to require that all disputes between an insured and insurer under the New York Automobile Accident Indemnification Endorsement issued by an insurer, now insolvent, be resolved by the Court in rehabilitation proceedings instead of arbitration, as provided in the endorsement. We hold that it does.

Claimants-appellants are insureds who filed claims against Allcity Insurance Company, a domestic insurer, on April 27, 1977, pursuant to the uninsured motorist endorsement of the latter's policy, as authorized by Section 167(2-a) of the Insurance Law. These claims were disallowed by the Superintendent of Insurance, who, by order of Special Term, entered August 31, 1977, had been appointed as Rehabilitator for Allcity upon its adjudication as insolvent. ^*

Thereafter, by order to show cause, the Superintendent moved to have all insurance claims against Allcity, including those claims under the uninsured motorist endorsement, disallowed. (Insurance Law, § 526.) Claimants cross-moved for an order directing the Rehabilitator to proceed to arbitration with their claims before the American Arbitration Association as required by the uninsured motorist endorsement. Claimants had previously served the requisite notice of intention to arbitrate, pursuant to CPLR § 7503(c).

Special Term directed a reference to hear and report on those disallowed claims as to which there were objections. Appellants' claims were among those referred. The instant appeal resulted.

Claimants argue that they cannot be divested of their contractual right to a resolution of their uninsured motorist claims in arbitration. In support of this position they contend that their claim is not against the assets of the insurance company itself, but rather against the "property and liability insurance security fund" (security fund) established pursuant to Insurance Law, §§ 333, 334, to pay policy claims against insolvent insurers. Claimants maintain that inasmuch as the security fund is generated by assessments levied against insurers, based upon the amount of premiums written by the insurer (Insurance Law, §§ 333, 334), and since the premiums for their insurance coverage, as originally written, have been paid, they are policyholders of a replacement policy, which they refer to as "Insolvency Insurance". (This "insolvency insurance" is, in fact, the security fund.) Therefore, they argue that their Allcity coverage has not lapsed, but instead has been subsumed by the security fund, and all contractual provisions remain outstanding, including their right to arbitration.

Claimants also note that inasmuch as their contractual right of recovery under the uninsured motorist endorsement is the embodiment of a statutorily mandated provision (Insurance Law, § 167(2-a)), the integrity of the contract should be respected so as not to impair their statutory rights.

The Rehabilitator responds that the statutory scheme for the rehabilitation of insolvent insurers delineates a claims procedure which preempts the provisions for arbitration found in the endorsement.

Rehabilitation is a design of the Legislature which permits the Superintendent of Insurance to take possession of the property of a domestic insurer and to conduct its business, when, among other reasons, it becomes insolvent as defined by Section 93 of the Insurance Law. (See, Insurance Law, §§ 511, 512(1).) The Superintendent is "to take such steps toward the removal of the causes and conditions which have made such proceeding necessary as the Court shall direct." (Insurance Law, § 512(1).)

The Rehabilitator is to retain control of the property and conduct the business of the insurer until the Rehabilitator or an interested party applies for an order terminating the rehabilitation proceeding. The termination order, however, cannot be issued until the Court has conducted a full hearing and determined "that the purposes of the proceeding have been fully accomplished." (Insurance Law, § 512(3).)

During rehabilitation the Superintendent must obtain permission from the court to perform such functions as are necessary for the exercise of his duties. For instance, an order must be obtained to borrow money or execute notes (Insurance Law, § 540); to compensate any special deputy superintendents, counsel, clerks or assistants as are appointed by the Superintendent (Insurance Law, § 518(3)); and to sell property or to settle claims in excess of $2500. (Insurance Law, § 539.) And, if the Superintendent deems that further efforts to rehabilitate the insurer would be futile, he must apply to the court for an order of liquidation. (Insurance Law, § 512(2).)

It is quite clear, and the Courts have long recognized, that "(T)he provisions of the Insurance Law with reference to liquidation by the Superintendent are exclusive in their operation and furnish a complete procedure for the protection of the rights of all parties interested." (Matter of Lawyers Tit. & Guar. Co., 254 App.Div. 491, 492, 5 N.Y.S.2d 484, 486; see, also, Matter of Second Russian Ins. Co. (Hamburg Ins. Co.), 219 App.Div. 46, 219 N.Y.S. 366, appeal dismissed, 244 N.Y. 606, 155 N.E. 916.) "(I)t may . . . be fairly said that the Legislature never contemplated turning over liquidation proceedings, and incidental actions and proceedings, to private arbitrators to administer." (Matter of Knickerbocker Agency (Holz), 4 N.Y.2d 245, 251, 173 N.Y.S.2d 602, 607, 149 N.E.2d 885, 889.)

There is a difference, of course, between liquidation and rehabilitation; but both are delinquency proceedings envisioned by Article XVI of the Insurance Law. (See, Insurance Law, § 517(2).) Sometimes the statute makes reference to delinquency proceedings, generically, and other times specifies one or some of the four Article XVI proceedings, i. e., rehabilitation, liquidation, conservation and dissolution. When interpreting a statute we should look to the enactment as a whole, to discern "the purpose and policy underlying the statute, and . . . (give) the words a meaning, which serves, rather than defeats, the ends intended by the Legislature." (MVAIC v. Eisenberg, 18 N.Y.2d 1, 3, 271 N.Y.S.2d 641, 643, 218 N.E.2d 524, 525.) Nowhere in the statute is there any indication that the Legislature intended to have rehabilitation effected in any forum but a court of law. Indeed, Section 526 provides that any proceeding under Article XVI shall be commenced "by an application to the supreme court, or to any justice thereof . . ., for an order directing such insurer to show cause why the superintendent should not have the relief prayed for." "The Legislature had the power to permit the superintendent of insurance to liquidate or Rehabilitate such (insolvent) companies, but the extent to which that power shall be used must be supervised by the courts" (emphasis added). (Matter of People by Van Schaick (Nat. Surety Co.), 239 App.Div. 490, 496, 268 N.Y.S. 88, 95.)

Rehabilitation is distinguished from liquidation in that it is " directed toward preservation, whenever possible, of the business of an insurance company threatened with insolvency. . . .." (29 N.Y. Jur., Insurance § 298.) While liquidation is the inevitable aftermath of an unsuccessful attempt at rehabilitation, it can often be the initial proceeding commenced by the Superintendent when he is convinced that rehabilitation would be unavailing. Liquidation, of course, brings to a conclusion the affairs of a company. (Insurance Law, § 514.)

An order of rehabilitation must be read in the context of the provisions of the statute which authorizes it. (See, In Re Morgan, 277 N.Y. 203, 210, 14 N.E.2d 39, 41, 29 N.Y.Jur. Insurance § 299.) Although it has been stated that "Statutes relating to bankruptcy, liquidation and receivership are not applicable to rehabilitation . . . " (Matter of Title & Mort. Guar. Co. of Buffalo, 152 Misc. 428, 434, 274 N.Y.S. 270, 276), the case cited dealt with the priority of certificate holders of a title company, and decided that priority could not be determined in advance of liquidation, since the Insurance Law at that time was "silent upon the subject of priorities." (Id., At p. 434, 274 N.Y.S. at p. 276.) Aside from this exception, which deals not with forum or procedure, all the statutes and the cases interpreting them lead to the conclusion that rehabilitation is within the exclusive province of the courts, and is regulated by Article XVI of the Insurance Law.

Claimants' principal argument is that the rehabilitation proceedings cannot deprive them of their contractual right to arbitrate their disputes under the uninsured motorist endorsement. Yet, in Matter of Knickerbocker Agency (Holz), supra, 4 N.Y.2d 245, 173 N.Y.S.2d 602, 149 N.E.2d 885, the Court of Appeals rejected the notion that a statutory liquidator, standing in the shoes of an insolvent insurer, was bound by contractual provisions requiring arbitration. The justification for the exclusivity rule was given by the Knickerbocker court, citing a quotation from Bernhardt v. Polygraphic Co., 350 U.S. 198, 76 S.Ct. 273, 100 L.Ed. 199:

The change from a court of law to an arbitration panel may make a difference in ultimate result. . . . Arbitrators do not have the benefit of judicial instruction on the law; they need not give their reasons for their results, the record of their proceedings is not as complete...