Deiter v. XL Specialty Ins. Co. (In re a Question of Law From the United States Dist. Court), 29663-MES

CourtSupreme Court of South Dakota
Writing for the CourtSALTER, JUSTICE
Citation2022 S.D. 51
PartiesIn the Matter of the CERTIFICATION OF A QUESTION OF LAW FROM THE UNITED STATES DISTRICT COURT, DISTRICT OF SOUTH DAKOTA, CENTRAL DIVISION, Pursuant to the Provisions of SDCL 15-24A-1, and Concerning Federal Action Civ. 3:20-cv-03009-RAL, Titled as Follows: v. XL SPECIALTY INSURANCE CO., Defendant. LARRY DEITER, Director of Insurance of the State of South Dakota, as Liquidator of RELIAMAX SURETY COMPANY, in Liquidation, Plaintiff,
Docket Number29663-MES
Decision Date24 August 2022

2022 S.D. 51

In the Matter of the CERTIFICATION OF A QUESTION OF LAW FROM THE UNITED STATES DISTRICT COURT, DISTRICT OF SOUTH DAKOTA, CENTRAL DIVISION, Pursuant to the Provisions of SDCL 15-24A-1, and Concerning Federal Action Civ. 3:20-cv-03009-RAL, Titled as Follows:

LARRY DEITER, Director of Insurance of the State of South Dakota, as Liquidator of RELIAMAX SURETY COMPANY, in Liquidation, Plaintiff,
v.

XL SPECIALTY INSURANCE CO., Defendant.

No. 29663-MES

Supreme Court of South Dakota

August 24, 2022


Argued on November 8, 2021

Original Proceeding

STEVEN W. SANFORD of Cadwell, Sanford, Deibert & Garry, LLP Sioux Falls, South Dakota FRANK A. MARNELL of South Dakota Division of Insurance Pierre, South Dakota Attorneys for plaintiff.

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EDWIN E. EVANS MARK W. HAIGH of Evans, Haigh & Hinton, LLP Sioux Falls, South Dakota JASON C. REICHLYN THOMAS J. JUDGE of Dykema Gossett PLLC Washington, D.C. Attorneys for defendant.

SALTER, JUSTICE

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[¶1.] This matter is before us as two certified questions of law from the United States District Court for the District of South Dakota,[1] asking whether SDCL 58-29B-56 provides a state insurance liquidator an additional 180 days to provide notice of a claim under a claims-made professional liability policy.[2] We hold that it does.

Background

State Regulation of the Insurance Industry

[¶2.] At the outset, we set this case within the larger legal context by noting that the regulation of the insurance industry is generally a matter of state law. Congress has expressly recognized as much by enacting the McCarran-Ferguson Act which acknowledges state preeminence, subject only to a handful of exceptions not applicable here. See 15 U.S.C. § 1012(a). As a result, insurers that become insolvent are subject to state regulation and may not seek protection under the United States Bankruptcy Code (Bankruptcy Code). See Callon Petroleum Co. v. Frontier Ins. Co., 351 F.3d 204, 208-09 (5th Cir. 2003) ("Congress has evinced a strong federal policy in favor of deferring to state regulation of insolvent insurance companies . . . and the express exclusion of insurance companies from the federal Bankruptcy Code." (citation omitted)).

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[¶3.] Consistent with the primacy of state regulation over the insurance industry, our Legislature has enacted statutory procedures allowing state officials to supervise or rehabilitate financially distressed insurers. Regulators are also authorized, where necessary, to liquidate an insolvent insurer's assets and pay remaining claims. See SDCL ch. 58-29B (entitled, "Insurers Supervision, Rehabilitation and Liquidation"). This latter, terminal type of intervention- liquidation-is commenced with a petition filed by the director of insurance after determining that efforts to rehabilitate an insolvent insurer have proven unsuccessful or would be futile. SDCL 58-29B-39. If the petition is granted, the circuit court enters an order of liquidation which, among other things, contains the appointment of a liquidator. SDCL 58-29B-42.

[¶4.] The liquidator is vested with broad statutory authority to take title and control of the insurer's assets, including "all property, contracts, and rights of action . . . as of the entry of the final order of liquidation." Id.; see also SDCL 58-29B-49 (listing powers of the liquidator). As it relates to the certified questions here, the liquidator is statutorily authorized to "prosecute and institute in the name of the insurer or in the liquidator's name any and all suits and other legal proceedings" and specifically to "[p]rosecute any action which may exist on behalf of the creditors, members, policyholders, or shareholders of the insurer against any officer of the insurer[.]" SDCL 58-29B-49(12) to (13).

ReliaMax Surety Company's Insolvency and Liquidation Proceedings

[¶5.] On June 12, 2018, South Dakota Director of Insurance Larry Deiter filed a petition for an order of liquidation of ReliaMax Surety Company (RSC) in

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Hughes County, which is within the Sixth Judicial Circuit. The circuit court entered an order of liquidation on June 27, 2018, declaring RSC to be insolvent and directing RSC's liquidation. The court appointed Deiter to serve as the liquidator (the Liquidator) with the full measure of statutory authority set out in SDCL chapter 58-29B.

[¶6.] RSC is a subsidiary of ReliaMax Holding Company (RHC), which had earlier obtained for itself and its subsidiaries two insurance policies providing directors and officers (D&O) liability coverage. The primary policy was with Pioneer Special Risk Insurance Services, Inc. (Pioneer)[3] and was subject to a liability limit of $3 million.

[¶7.] The second, excess policy was issued by XL Specialty Insurance Company (XL Specialty) and provided an additional $2 million limit of D&O liability coverage. Both were claims-made policies and provided coverage for the policy period of July 1, 2017, through July 1, 2018.[4] RHC later paid to extend the Pioneer policy through July 1, 2021. It did not purchase an optional extension period for the XL Specialty policy, though it is unclear if such an option was available.

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[¶8.] The underlying Pioneer policy issued to RHC defines the insured "Company" as "the Parent Company" and "any Subsidiary." An "Insured" is defined, under the XL Specialty policy, as "those persons or organizations designated as insureds in the Underlying Insurance." "Insured Persons," as defined in the Pioneer policy, include "all persons who were, now are, or shall be directors, officers or risk managers of the Company." Many of the underlying Pioneer policy's provisions are incorporated into the XL Specialty policy.

[¶9.] In this regard, the Pioneer policy and, in turn, the XL Specialty policy provide that "Insured Persons" are afforded coverage for "Loss resulting from any Claim first made against the Insured Persons during the Policy Period . . . for a Wrongful Act . . . ." The controlling definition of a "Wrongful Act" for both policies is "any actual or alleged act, error, omission, misstatement, misleading statement, neglect or breach of duty . . . by any of the Insured Persons, while acting in their capacity as such[.]" The Pioneer policy and the XL Specialty policy allow the Insured to recover for a claim made after the policy period ends so long as written notice was received during the policy period. Finally, both policies require that "Insureds shall give to Underwriters notice in writing of any Claim . . . as soon as practicable . . ., but in no event later than[ ] sixty (60) days after the end of the Policy Period . . . ."

[¶10.] On November 1, 2018, four months after XL Specialty's policy period ended, the Liquidator sent Pioneer and XL Specialty a letter providing notice of a claim. The letter to XL Specialty alleged various wrongful acts by officers and directors of RHC, including the claim that RSC loaned RHC more than $21 million

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without a discernible means for repayment.[5] The letter further stated that "[a] claim has been filed under the [Pioneer] Policy, and given the size of the claim, it will exhaust the $3 million available policy limit." Pioneer did not contest the timeliness of the claim. However, XL Specialty, in a response letter dated November 28, 2018, stated, "Based upon the limited information provided, it does not appear that this matter constitutes a Claim first made in the Policy Period, as required by the Insuring Agreement of the XL Policy."

[¶11.] The Liquidator, in letters to XL Specialty, dated April 4, 2019 and October 21, 2019, stated his view that the November 1, 2018 notice of claim was timely because it was filed within 180 days of the June 27, 2018 liquidation order. The legal basis for his position, the Liquidator explained, was SDCL 58-29B-56, which provides in relevant part:

If, by any agreement, a period of limitation is fixed for instituting a suit or proceeding upon any claim, or for filing any claim, proof of claim, proof of loss, demand, notice, or the like, or where in any proceeding, judicial or otherwise, a period of limitation is fixed, either in the proceeding or by applicable law, for taking any action, filing any claim or pleading, or doing any act, and where in any such case the period had not expired at the date of the filing of the petition, the liquidator may, for the benefit of the estate, take any such action or do any such act, required of or permitted to the insurer, within a period of one hundred eighty days subsequent to the entry of an order for liquidation, or within such further period as is shown to the
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satisfaction of the court not to be unfairly prejudicial to the other party.

[¶12.] On December 17, 2020, the Liquidator commenced an underlying action against the directors and officers of RHC and RSC, alleging that the directors and officers provided bonus payments while insolvent, wrongfully deprived RSC of the ability to fund other ventures, provided misleading financial information, manipulated loan servicing responsibilities, and abused intra-organization borrowing power. The parties executed a settlement agreement, which granted the Liquidator a final judgment of $10 million against the directors and officers. The Liquidator agreed not to execute the judgment and received an assignment of the directors' and officers' claims for coverage under the XL Specialty excess policy. XL Specialty refused to pay, asserting the Liquidator's November 1, 2018 notice of claim was untimely because it was not filed within the policy period.

[¶13.] The Liquidator originally filed this current action against XL Specialty in circuit court. The initial complaint sought, among other things, a declaration that XL Specialty was liable "under the XL Policy for the claims asserted in the [Liquidator's] notices[.]" XL Specialty removed the action to federal court, citing diversity of citizenship as the basis for...

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