Gersenson v. Life and Health Ins. Guar.

• Decision Date: 08 April 1999
• Parties: Herbert A. GERSENSON, on behalf of himself and all others similarly situated, Appellee v. PENNSYLVANIA LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION, an unincorporated association, Appellant.
• Court: Pennsylvania Superior Court

729 A.2d 1191

Herbert A. GERSENSON, on behalf of himself and all others similarly situated, Appellee v. PENNSYLVANIA LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION, an unincorporated association, Appellant.

Superior Court of Pennsylvania.

Argued February 4, 1999.

Filed April 8, 1999.

Reargument Denied June 16, 1999.

Jane L. Dalton, Philadelphia, for appellant.

J. Dennis Faucher, Philadelphia, for appellee.

Before JOHNSON, SCHILLER, and BROSKY, JJ.

JOHNSON, J.:

¶ 1 Pennsylvania Life and Health Insurance Guaranty Association (PLHIGA) appeals the trial court's orders denying PLHIGA's motion for summary judgment, certifying the class plaintiffs and, subsequently, granting the plaintiff's motion for summary judgment. PLHIGA asserts that the court erred in its rulings by refusing to grant full faith and credit to an order of the California Superior Court, which purported to extinguish the Plaintiff's right of recovery under Pennsylvania's Life and Health Insurance Guaranty Association Act, 40 P.S. § 1801-1824 (repealed 1992; current version at 40 P.S. § 991.1701-1718) (sometimes hereafter "the Act"). We find that the California court did not extend due process in the form of adequate notice and we conclude that, consequently, the trial court did not err in refusing to grant full faith and credit. Accordingly, we affirm the trial court's respective orders denying PLHIGA's motion for summary judgment, granting the Plaintiff's motion for summary judgment, and certifying the class plaintiffs. ¶ 2 This action arises out of the insolvency of Executive Life Insurance Company (ELIC), a California insurer licensed to conduct business in Pennsylvania and numerous other states. ELIC was one of the largest life insurance companies operating in the United States and its failure was "the most far-reaching and financially serious insolvency in the [insurance] industry's history." Memorandum of Law in Support of [ELIC's] Motion for Summary Judgment, at 20. During the 1980s, the plaintiff, Herbert A. Gersenson, and over 20,000 other Pennsylvania residents entered guaranteed annuities and other forms of insurance contracts with ELIC. To establish the requisite reserves underlying its contracts, ELIC relied on the value of non-investment grade securities commonly known as "junk bonds." ELIC's holdings failed to perform as projected and, in 1991, the California Department of Insurance commenced a conservation action against ELIC seeking appointment of the California insurance commissioner as conservator and rehabilitator. See Garamendi, Insurance Commissioner v. Executive Life Insurance Company, 17 Cal.App.4th 504, 21 Cal.Rptr.2d 578 (1993)

. On December 6, 1991, the Superior Court of the State of California for the County of Los Angeles (the conservation court) found ELIC insolvent and ordered the company liquidated to satisfy the claims of creditors and policyholders. The conservation court appointed the insurance commissioner of California as conservator and rehabilitator. To avoid a "fire-sale" liquidation, the commissioner coordinated a rehabilitation plan pursuant to which ELIC's assets would be combined with contributions from participating state insurance guaranty associations to provide a resource from which ELIC's policy obligations would be paid. Each guaranty association's participation was "predicated on a release from [the ELIC] policyholders stating that the [association's participation in the plan] fully satisfied each state guaranty association's statutory obligations and releasing each guaranty association from any potential claims." Memorandum of Law, supra at 23. PLHIGA agreed to participate in the plan.

¶ 3 Under the terms of the plan, ELIC's assets were transferred to Aurora National Life Assurance Company (Aurora), an insurer newly formed under California law to assume the ELIC policies. ELIC policyholders residing in the states where guaranty associations participated in the plan were provided the option either to opt in to benefits under the plan or to opt out. Those who failed to opt out were deemed participants in the plan subject to the same terms as those who affirmatively opted in. Herbert Gersenson failed to opt out and was deemed a participant in the rehabilitation plan as if he had opted in. All participants received new policies issued by Aurora with restructured terms less favorable than those guaranteed by ELIC. The plan required participants to submit to the jurisdiction of the conservation court and to release their legal rights under their respective state guaranty statutes. The plan required those who opted out to accept the liquidation values of their policies, at levels dramatically below those forecast for payment under the new policies issued by Aurora.

¶ 4 Though the conservation court ordered that its approval and implementation of the plan "does not affect the rights of any contract holder who opts out vis-à-vis his or her respective state insurance guaranty association," PLHIGA apprised Pennsylvania policyholders that it considered its statutory obligations discharged by its participation in the rehabilitation plan. Of approximately 17,500 policyholders certified in this action, over 16,000 opted to participate or were waived into the rehabilitation plan when they failed to opt out. The conservation court approved the plan based on the participating policyholders' putative release of their statutory claims and issued an Implementation Order. Implementation Order, Reproduced Record (R.R.) at 0615a. Thereafter, PLHIGA contributed over $150,000,000 to fund the plan.

¶ 5 Subsequently, Gersenson commenced this action, asserting that the terms of the rehabilitation plan violated the provisions of the Life and Health Insurance Guaranty Association Act, 40 P.S. § 1801-1824 (repealed 1992). See 40 P.S. § 991.1718, effective December 18, 1992 (directing that successor provision "shall not apply to any insurer which was declared insolvent before the effective date of this article"). Gersenson claimed that the value ultimately payable under the restructured policy, including PLHIGA's contribution, was less than the value for which ELIC was liable under the former policy, and so violated 40 P.S. § 1807(j). PLHIGA denied all material allegations and, subsequently, moved for entry of summary judgment. PLHIGA argued that Gersenson's claim of statutory benefits was barred by his participation in the rehabilitation plan because participation included a release of all claims. PLHIGA reasoned that because the release of claims was confirmed by the Implementation Order of the conservation court, the Pennsylvania trial court was bound to enforce the release by the doctrine of full faith and credit. The trial court, the Honorable Bernard J. Avellino, rejected PLHIGA's argument, however, concluding that "California does not have jurisdiction to adjudicate claims between a Pennsylvania agency and Pennsylvania residents that arise under a Pennsylvania statute designed to benefit [the residents]." Order, 2/10/95, at 1.

¶ 6 Thereafter, Plaintiff moved for class certification seeking inclusion in the class of all former ELIC policyholders resident in Pennsylvania, including those who had opted out of the California rehabilitation. PLHIGA stipulated to all certification prerequisites, except as they applied to the policyholders who had opted out. PLHIGA opposed their inclusion in the certified class on the assertion that their claims did not share common issues of law and fact with those of policyholders who had participated in the rehabilitation. Subsequently, following a class certification hearing, Judge Avellino certified former ELIC policyholders as members of the class on the basis of the type of policy they had purchased, and without recognition of their status under the California rehabilitation. The court described the class as:

All Pennsylvania residents on December 6, 1991, who were owed contractual obligations under any of the following types of individual insurance or annuity products issued by Executive Life: annual premium whole life contracts; single premium whole life contracts; single premium deferred annuities, including custom qualified retirement annuities and allocated qualified retirement annuities which were not in payment status; and flexible premium retirement annuities.

Order, 4/12/95, at 1.

¶ 7 Subsequently, both parties submitted actuarial reports on the extent of the loss suffered by the class plaintiffs under the terms of the restructured insurance policies, including PLHIGA's contribution under the rehabilitation plan. Both actuaries agreed that the obligations guaranteed by PLHIGA through the plan were lower in value than ELIC's obligation under the original policies. Consequently, Plaintiff moved for summary judgment asserting that the experts' reports eliminated any question of material fact concerning PLHIGA's violation of 40 P.S. § 1807. Section 1807 requires that PLHIGA "guarantee, assume or reinsure" the contractual obligations of insolvent insurers writing policies in Pennsylvania, and that the obligations so assumed "shall be as great as but no greater than the contractual obligations of the insolvent insurer would have been in the absence of an insolvency unless such obligations are reduced as permitted by subsection (d)." 40 P.S. § 1807(c)(1), (j) (emphasis added).

¶ 8 Plaintiff's motion proceeded in the trial court before the Honorable Stephen E. Levin. Upon review, Judge Levin concluded that PLHIGA's contribution under the California rehabilitation plan was not "as great as" ELIC's obligation under its former policies, and so did not satisfy its obligation to individual ELIC policyholders under the Pennsylvania statute. In deference to Judge Avellino's finding that the conservation court lacked jurisdiction to adjudicate Plaintiff's claims, Judge Levin declined to grant full faith and credit to the Implementation Order and entered judgment for the...