Koken v. Legion Ins. Co.
| Decision Date | 26 June 2003 |
| Citation | 831 A.2d 1196 |
| Parties | M. Diane KOKEN, Insurance Commissioner, Commonwealth of Pennsylvania, Plaintiff, v. LEGION INSURANCE COMPANY, Defendant. Re Petition for Liquidation of Legion Insurance Company (In Rehabilitation). |
| Court | Pennsylvania Commonwealth Court |
Gaetan J. Alfano, David M. Laigaie, Philadelphia, for Rehabilitator.
David L. Bricker and Amy L. Weber, Harrisburg, for Insurance Department.
Michael L. Browne and Douglas Y. Christian, Philadelphia, for Mutual Risk Management, Ltd.
Jay H. Calvert, Jr. and Richard F. McMenamin, Philadelphia, for American Airlines, Inc.
Timothy P. Law, Philadelphia, for Pulte Homes, Inc. Terence P. Cummings, New York, NY, for Psychiatrists' Risk Purchasing Group, Inc.
David R. Moffitt and Michael F. Consedine, Harrisburg, for Rural/Metro Corp.
James I. Rubin, Teresa L. Snider, Chicago, IL, and Helen L. Gemmill, Harrisburg, for Syndicate 271.
OPINION BY JUDGE LEAVITT.
Before this Court are Petitions for the Liquidation of Legion Insurance Company (In Rehabilitation) (Legion) and of Villanova Insurance Company (In Rehabilitation) (Villanova) that were filed on August 29, 2002, and amended on October 18, 2002. The Petitions were filed by the Pennsylvania Insurance Commissioner, Honorable M. Diane Koken, in her capacity as Rehabilitator of Legion and Villanova. The Rehabilitator asserts the following grounds for a liquidation: Legion and Villanova have consented to their liquidation; Legion and Villanova are insolvent;1 further rehabilitation of Legion and Villanova is futile and may substantially increase the risk of loss to creditors, policyholders and the public. The Rehabilitator also asserts the need to trigger state guaranty funds.
The ultimate controlling shareholder of Legion and Villanova, Mutual Risk Management, Ltd. (MRM), was granted intervention2 to contest the liquidation of these insurers. MRM asserts that Legion and Villanova did not consent to their liquidation. It also contests the Rehabilitator's claim that "further" rehabilitation would be futile, noting that a reasonable attempt at rehabilitation has yet to be initiated. Far from preventing harm to creditors and policyholders, MRM asserts that a liquidation will adversely affect these parties. Further, it denies that shifting the claims of Legion and Villanova to state guaranty funds is in the best interests of either the policyholders or the public.
Article V of The Insurance Department Act of 1921, Act of May 17, 1921, P.L. 789, added by Section 2 of the Act of December 14-1977, P.L. 280, as amended, 40 P.S. ?? 221.1-221.63 (Article V), governs the rehabilitation and liquidation of insolvent insurers. It specifies the procedure and grounds for the conversion of an insurance company rehabilitation into a liquidation. It states, in relevant part, as follows:
Whenever he has reasonable cause to believe that further attempts to rehabilitate an insurer would substantially increase the risk of loss to creditors, policy and certificate holders, or the public, or would be futile, the rehabilitator may petition the Commonwealth Court for an order of liquidation. A petition under this subsection shall have the same effect as a petition under section 520. The Commonwealth Court shall permit the directors to take such actions as are reasonably necessary to defend against the petition and may order payment from the estate of the insurer of such costs and other expenses of defense as justice may require.
Section 518(a) of Article V, 40 P.S. ? 221.18(a). It is against this statutory provision that the positions of the Rehabilitator and MRM must be measured.
A pre-hearing conference was held on October 4, 2002. Evidentiary hearings were conducted on November 7, 8, 14, 15 and 22, 2002. Prepared statements were received from interested persons,3 who were not granted party status as intervenors. The Rehabilitator and MRM each submitted post-hearing briefs; the final brief was submitted on January 13, 2003. Amicus curiae briefs were filed by several state insurance departments and state guaranty associations.4
Thereafter, certain policyholders petitioned to intervene, and other policyholders, who had been previously denied intervention, requested that their denials be certified for immediate appeal. A conference was conducted on February 11, 2002, at the request of the policyholders. The Court granted intervention to American Airlines, Inc., Rural/Metro Corporation, Pulte Homes, Inc. and the Psychiatrists' Purchasing Group, Inc. (collectively Policyholder Intervenors). The record was opened to allow Policyholder Intervenors to present evidence on their position that a liquidation would be harmful to their interests.
On March 5, 2003, a collection of underwriters from Lloyds of London, known as Syndicate 271, filed an emergency petition to intervene in this liquidation proceeding for the purpose of opposing the request for relief of Policyholder Intervenor, American Airlines, Inc. Intervention was granted to Syndicate 271, but its request for a 45 day postponement of the hearing was denied.
Evidentiary hearings on the Policyholder Intervenors' petitions were conducted on March 6, 7, 19, and 20, 2003. The Rehabilitator and Syndicate 271 presented evidence on April 3, 2003. Post-hearing briefs were filed by the Policyholder Intervenors, Syndicate 271 and the Rehabilitator. An amicus curiae brief was filed by the Reinsurance Association of America (Reinsurance Association). The last brief was filed on May 27, 2003.
The matter now is ready for disposition.
Legion and Villanova are property and casualty insurers organized and existing under the laws of the Commonwealth of Pennsylvania that operated principally as "fronting companies" in various commercial insurance programs. As fronting companies, Legion and Villanova issued policies of insurance that were largely reinsured by other insurers. The commercial insurance they "fronted" generally fell into two basic categories: corporate account business and program business. The goal in writing this business was to generate earnings from fees, not underwriting profits; accordingly, Legion Group retained little underwriting risk. Instead, the insured retained most of the risk of loss, but the insured's total loss was capped at a certain point through excess coverage or a reinsurance agreement. The corporate account business was written in two ways. Legion and Villanova issued a guaranteed cost policy that was reinsured by a captive reinsurer,5 owned or rented by the policyholder.6 Legion and Villanova also issued a large loss deductible policy. Under this policy, the insured retained a large, per-occurrence risk through a large deductible.7 The insured then purchased a second policy, called a deductible reimbursement policy, from a Legion affiliate, Mutual Indemnity Reinsurer. The insured posted collateral with the Mutual Indemnity Reinsurer to secure the amounts to be paid by the Mutual Indemnity Reinsurer. Legion and Villanova billed losses and expenses that fell under the insured's deductible obligation directly to the appropriate Mutual Indemnity Reinsurer.
The program business consisted of a group of commercial risks that were homogenous in their business and risk. This business was usually presented to Legion Group by a Managing General Agent or by a reinsurer. Legion Group ceded all, or nearly all, of the underwriting risk to one or more reinsurers. The program of Policyholder Intervenor, Psychiatrists Risk Purchasing Group, Inc., is an example of this second type of Legion business.
Under the corporate account and program business, Legion Group's insureds were policyholders in name only; in effect, they were self-insureds8 that used Legion and Villanova as the means of obtaining stop-loss coverage from a reinsurer. Because Legion and Villanova did not function as true insurers, their underwriting and claims departments were minimally staffed; typically, claims were handled by a third-party administrator that was engaged and paid by the insured. Legion and Villanova did not place the reinsurance or negotiate its terms;9 as is appropriate for a fronting company, Legion Group evaluated the reinsurance for quality. By all accounts, the reinsurers of Legion Group are financially strong and responsible companies.
This paradigm began to change somewhat in early 2000, when Legion and Villanova began to accept some underwriting risk in order to generate more cash flow through increased premium retention. Nevertheless, its total responsibility for claims, in the aggregate, for all years and all lines, did not exceed 10%.
In most cases, Legion Group funded the loss payouts and then sought reimbursement from the reinsurers. Beginning in 1999, Legion Group began to experience cash flow problems, which it attempted to remedy by establishing loss escrow accounts and by billing reinsurers on a more timely and accurate basis.10 However, reinsurance disputes developed between 1999 and 2000. Because of these increased reinsurance disputes, A.M. Best reduced the rating of Legion and Villanova from A to A?€”in December 2000. At the end of 2000, MRM contributed $50 million to both companies. However, on February 15, 2001, A.M. Best placed Legion and Villanova "under review with negative implications." In September of 2001, MRM made a capital contribution to Legion and Villanova of approximately $80 million. Despite this infusion of additional capital, by December 2001, A.M. Best again placed the A?€”rating of Legion and Villanova "under review," citing the need for even more capital.
In February of 2002, Ernst & Young determined that a deferred tax asset could no longer be carried as an admitted asset on the respective statutory financial statements of Legion and Villanova; this charge reduced their collective admitted assets by approximately $50...
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