In re Penn Treaty Network Am. Ins. Co.

• Decision Date: 09 July 2021
• Docket Number: No. 1 ANI 2009,No. 1 PEN 2009,1 PEN 2009
• Citation: 259 A.3d 1028
• Parties: IN RE: PENN TREATY NETWORK AMERICA INSURANCE COMPANY (In Liquidation) In re: American Network Insurance Company (In Liquidation)
• Court: Pennsylvania Commonwealth Court

259 A.3d 1028

IN RE: PENN TREATY NETWORK AMERICA INSURANCE COMPANY (In Liquidation)

In re: American Network Insurance Company (In Liquidation)

No. 1 PEN 2009

No. 1 ANI 2009

Commonwealth Court of Pennsylvania.

Argued March 18, 2021

Decided July 9, 2021

Michael J. Broadbent, Philadelphia, for Plaintiffs Jessica K. Altman and Insurance Commissioner of the Commonwealth of Pennsylvania.

Harold S. Horwich (Pro Hac Vice), Hartford, Connecticut, for Intervenors Aetna Life Insurance Company; Anthem, Inc.; Cigna Corporation; HM Life Insurance Company; Horizon Healthcare Services, Inc. d/b/a Horizon Blue Cross Blue Shield of New Jersey; QCC Insurance Company; United Concordia Life and Health Insurance Company; United Concordia Insurance Company; and UnitedHealthcare Insurance Company.

BEFORE: HONORABLE P. KEVIN BROBSON, President Judge, HONORABLE MARY HANNAH LEAVITT, Judge (P.), HONORABLE J. ANDREW CROMPTON, Judge

OPINION BY JUDGE LEAVITT

The Pennsylvania Insurance Commissioner, Jessica K. Altman, in her capacity as Statutory Liquidator of Penn Treaty Network America Insurance Company (In Liquidation) (PTNA or Penn Treaty) and American Network Insurance Company (In Liquidation) (ANIC) (together, the Companies), has applied to this Court for a declaration that she is authorized under Article V of The Insurance Department Act of 1921 (Article V)¹ to allocate assets from the Companies’ estates to pay policyholder claims for benefits that exceed applicable statutory guaranty association limits and accrue more than 30 days after the Companies’ policies were terminated by virtue of the Companies’ liquidation. Intervenors Anthem, Inc. and UnitedHealthcare Insurance Company (Health Insurers) oppose the Liquidator's application as contrary to Article V and the applicable state guaranty association statutes. For the reasons set forth herein, the Liquidator's application is denied.

Background

The Companies were organized as Pennsylvania-domiciled stock life insurance companies and specialized in long-term care insurance. Long-term care insurance provides coverage for some of the costs of skilled nursing care, intermediate care and custodial care, whether provided in a nursing home, an assisted living facility or the policyholder's home. To be eligible for coverage, a policyholder must satisfy the policy's benefit triggers, which vary depending on whether the policy is tax qualified or non-tax qualified.²

The Companies’ policies contained terms typical of long-term care insurance. After a predetermined waiting period, typically 30 to 60 days, the policies paid a daily benefit ranging from $60 to $300 per day without regard to the actual cost of the services incurred by the policyholder. The Companies’ policies had benefit periods ranging from 1 to 10 years. Some policies provided unlimited lifetime benefits; other policies limited the lifetime benefit by dollar amount, e.g. , $100,000. A policyholder goes off claim upon death or if he or she recuperates from the condition that caused the claim.

The Companies’ long-term care insurance policies were guaranteed renewable, meaning that policyholders were guaranteed the right to renew their annual policies irrespective of their advanced age or declining health, so long as they paid their premiums. Further, their premiums could not increase because of the policyholder's age or medical condition. The policies authorized the Companies to increase premium rates, subject to approval by state insurance regulators, only where the increases were warranted given the claims experience of the cohort of policyholders covered by the same policy form. The policies usually suspended the policyholder's obligation to pay the premium when the policyholder goes on claim.

The Companies’ long-term care policies were priced at a level premium for the life of the policy. In a level premium policy, the insurer collects more premium in the early years than it pays in claims; this pattern reverses in later years as policyholders age and present claims. See 31 Pa. Code § 84a.3 (explaining that in a "level premium" policy the "premium is more than needed to provide for the cost of benefits during the earlier years of the policy and less than the actual cost in the later years. The building of a prospective contract reserve is a natural result of level premiums."). Because of this mismatch in cash flows, long-term care insurers set aside and invest the excess cash flow collected in the early years to establish an active life reserve for policies that are not yet on claim. As the block of business ages, the insurer draws down the active life reserve to pay claims as they develop in the later years of the policy's duration. The active life reserve constitutes a liability of the insurer.³

Under Section 503 of Article V, an insurer is insolvent if it cannot "pay its obligations when they are due, or whose admitted assets do not exceed its liabilities plus the greater of (i) any capital and surplus required by law for its organization, or (ii) its authorized and issued capital stock." 40 P.S. § 221.3. In 2009, the Insurance Commissioner concluded that the Companies were insolvent within the meaning of Section 503 and, with the agreement of the Companies, requested this Court to place the Companies into receivership. The Companies’ insolvency was largely attributed to the underpricing of non-tax qualified policies that were issued before 2001 and rich in benefits. As the availability of assisted living facilities expanded, claims rose to a degree not anticipated when the level premium was established. Similarly, the actuarial assumptions for policy persistency and the frequency and severity of claims did not develop as expected. Accordingly, the Companies’ active life reserves became understated.⁴

On March 1, 2017, after attempts to rehabilitate the Companies were unsuccessful, the Court placed the Companies into liquidation. The Court's liquidation orders directed the Liquidator to take possession of the Companies’ property, business and affairs and to administer them in accordance with Article V. See generally In Re: Penn Treaty Network America Insurance Company in Rehabilitation (Pa. Cmwlth., No. 1 PEN 2009, order filed March 1, 2017).⁵ The Court further ordered:

Not later than thirty (30) days from the effective date of this Liquidation Order, the Liquidator will transfer policy obligations, including the continued payment of claims and continued coverage arising under PTNA's policies, to state guaranty funds . The Liquidator will make PTNA's facilities, computer systems, books, records, and third-party administrators (to the extent possible) available to any guaranty association (and to states and state officials holding statutory deposits for the benefit of such claimants).

Id. at 5 (emphasis added).

Subsequently, the Court ordered that policyholders were not required to file proofs of claim with the Liquidator for losses arising under their policies because responsibility for policy claims had been transferred to the state guaranty associations. In Re: Penn Treaty Network America Insurance Company in Liquidation (Pa. Cmwlth., No. 1 PEN 2009, order filed March 7, 2017).⁶ The Court also authorized the Liquidator, pursuant to Section 536 of Article V, 40 P.S. § 221.36, to advance funds from the Companies’ estates to the state guaranty associations that had assumed responsibility for the Companies’ policy claim and coverage obligations. These so-called early access agreements require the guaranty associations to return distributions that prove, over time, to exceed their proportional share of estate assets.

Under the applicable statutes in each policyholder's state of residence, guaranty associations have continued the long-term insurance coverage for the Companies’ policyholders. In Pennsylvania, the Pennsylvania Life and Health Insurance Guaranty Association (PLHIGA) fulfills that statutory duty. PLHIGA's enabling act is codified in Article XVII of The Insurance Company Law of 1921, Act of May 17, 1921, P.L. 682, as amended , added by the Act of December 18, 1992, P.L. 1519, 40 P.S. §§ 991.1701 – 1717 (PLHIGA Act).⁷ Generally, each state's guaranty association continues coverage in accordance with the policy's terms but limits the total benefits a resident policyholder may receive to the amount prescribed in the applicable guaranty association statute. See, e.g. , Section 1703(c)(1)(ii)(A) of the PLHIGA Act, 40 P.S. § 991.1703(c)(1)(ii)(A) (coverage of Pennsylvania residents insured by insolvent long-term care insurer capped at $300,000 in lifetime benefits). Guaranty association coverage is provided per person, not per policy. Id. In no case does the resident receive more than was provided in her policy. Accordingly, if the guaranty association pays up to $300,000, and the policy had a lifetime maximum of $100,000, the guaranty association pays up to $100,000.

A cap of $300,000 is followed by most state guaranty associations.⁸ Most states allow the guaranty association to meet its obligations either by reissuing the insolvent insurer's policies or by issuing alternative policies, in each case at actuarially justified rates. See, e.g. , Section 1706(c) and (d) of the PLHIGA Act, 40 P.S. § 991.1706(c), (d). Guaranty associations are funded by distributions of estate assets and by assessments paid by their member insurers. Because long-term care insurance is a form of accident and health insurance, the member insurers that are responsible for the costs of continuing the long-term care insurance coverage of the Companies’ policyholders are health insurers, who may or may not have written long-term care insurance. See, e.g. , Section 1707 of the PLHIGA Act, 40 P.S. § 991.1707. Some state guaranty association laws authorize member insurers to recoup some of their assessments through premium tax offsets. Pennsylvania is one such state. Section 1711 of the PLHIGA Act, 40 P.S. § 991.1711.

At the time of the Companies’ liquidation,...