People ex rel. Hammer v. Lumbermens Mut. Cas. Co. (In re Liquidation of Lumbermens Mut. Cas. Co.)

Citation2018 IL App (1st) 170996,107 N.E.3d 388
Decision Date01 June 2018
Docket NumberNo. 1–17–0996,1–17–0996
Parties IN RE LIQUIDATION OF LUMBERMENS MUTUAL CASUALTY COMPANY, (People of the State of Illinois ex rel. Jennifer Hammer, Director of Illinois Department of Insurance, Plaintiff–Appellant, v. Lumbermens Mutual Casualty Company, an Illinois domestic property and casualty mutual company, American Manufacturers Mutual Insurance Company, an Illinois domestic property and casualty mutual company, and American Motorists Insurance Company, an Illinois domestic stock insurance company, Defendants, (California Insurance Guarantee Association, Claimant–Appellee)).
CourtUnited States Appellate Court of Illinois

2018 IL App (1st) 170996
107 N.E.3d 388

IN RE LIQUIDATION OF LUMBERMENS MUTUAL CASUALTY COMPANY,

(People of the State of Illinois ex rel.
Jennifer Hammer, Director of Illinois Department of Insurance, Plaintiff–Appellant,
v.
Lumbermens Mutual Casualty Company, an Illinois domestic property and casualty mutual company, American Manufacturers Mutual Insurance Company, an Illinois domestic property and casualty mutual company, and American Motorists Insurance Company, an Illinois domestic stock insurance company, Defendants,

(California Insurance Guarantee Association, Claimant–Appellee)).

No. 1–17–0996

Appellate Court of Illinois, First District, SIXTH DIVISION.

Opinion filed: June 1, 2018


Joel A. Haber, James L. Oakley, and Patrick Morales-Doyle, of Thompson Coburn LLP, of Chicago, for appellant.

Rowe W. Snider, Hugh S. Balsam, Ashlee M. Knuckey, and Alyssa M. Falk, of Locke Lord LLP, of Chicago, for appellee.

Eric M. Madiar, of Madiar Government Relations, of Springfield, and Office of the California Attorney General, of Los Angeles, California (Lisa W. Chan, Deputy Attorney General, of counsel), for amicus curiae Dave Jones, Insurance Commissioner of the State of California.

PRESIDING JUSTICE HOFFMAN delivered the judgment of the court, with opinion.

107 N.E.3d 391

¶ 1 The People of the State of Illinois ex rel. Jennifer Hammer, Director of Insurance (Director), brought this action against the defendants, Lumbermens Mutual Casualty Company, American Manufacturers Mutual Insurance Company, and American Motorists Insurance Company (collectively referred to as "Lumbermens"), seeking to liquidate Lumbermens' assets. The Director filed a petition for the interim allowance of claims for administrative expenses of certain guaranty associations. The claimant, California Insurance Guarantee Association (CIGA), objected on grounds that the petition improperly required it to reimburse itself from funds held in a special deposit. The circuit court sustained CIGA's objection, finding that California law prohibited CIGA from using special deposits to pay for general administrative expenses. The Director filed this interlocutory appeal pursuant to Rule 304(b)(2) ( Ill. S. Ct. R. 304(b)(2) (eff. Mar. 8, 2016) ), seeking reversal of that order. For the reasons that follow, we affirm.

¶ 2 The facts giving rise to the instant appeal are not in dispute. Lumbermens is a multi-state property and casualty insurance company organized under the laws of Illinois. Among other things, it provided workers' compensation insurance services to California residents. California insurance law required Lumbermens to "deposit cash instruments" or "interest bearing securities" at a California bank (hereinafter referred to as a "special deposit"), which would be held in trust for the benefit of "workers in [that] state" as a condition to Lumbermens writing workers' compensation insurance in California. See Cal. Ins. Code § 11691 (West 2012). By requiring insurance carriers to maintain such special deposits, California ensures that adequate funds are available to pay compensable workers' compensation claims in the event that the insurer becomes insolvent.

¶ 3 For many years, Lumbermens was successful and earned profits from its insurance operations and, by year-end 2000, it ranked among the top 20 largest property and casualty insurance companies and the top 5 largest workers' compensation insurers in the United States with $2.7 billion in net premiums and more than $2 billion in surplus. The four largest states for its insurance business were California, Illinois, New York, and Texas, which collectively comprised more than 40% of the insurance group's insurance business. Beginning in 2003, however, Lumbermens began suffering from certain financial difficulties and, in July 2003, the company agreed to operate under a runoff plan subject to "corrective orders" issued by the Director.1 See 215 ILCS 5/186.1 (West 2002). During this time, the Director issued over 500 corrective orders and Lumbermens' liability was reduced from nearly $7 billion to just under $1 billion.

¶ 4 Nonetheless, in August 2012, the Director filed a complaint for rehabilitation pursuant to section 192 of the Illinois Insurance Code (Code) ( 215 ILCS 5/192 (West 2012) ). The Director alleged that Lumbermens' financial condition rendered further transaction of business by the company hazardous to its policyholders, its creditors, and the public. The board of directors of Lumbermens voted to submit voluntarily to rehabilitation proceedings, and on August 16, 2012, an agreed order

107 N.E.3d 392

was entered appointing the Director rehabilitator of the company.

¶ 5 On March 8, 2013, the Director filed a complaint for liquidation with a finding of insolvency pursuant to section 188 of the Code ( 215 ILCS 5/188 (West 2012) ). On May 8, 2013, the circuit court entered an order of liquidation with a finding of insolvency and authorized the Director to liquidate Lumbermens.2 The liquidation order triggered the statutory obligations of state guaranty associations, such as CIGA, to pay the covered claims of Lumbermens' insureds located within their respective states.

¶ 6 On May 28, 2013, shortly after the circuit court entered the liquidation order, the Commissioner of the California Department of Insurance issued an administrative order pursuant to section 11698(a) of the California Insurance Code ( Cal. Ins. Code § 11698(a) (West 2012) ), directing that the funds held in Lumbermens' special deposit be immediately transferred to CIGA and held in a segregated account. Tracking the language of section 11698.3(b), the administrative order states, in pertinent part, as follows:

"AND, FURTHER, that CIGA shall use the proceeds of the workers' compensation deposit and any interest earned thereon * * * solely in accordance with the provisions of CIC section 11698.3(b) for the payment of compensable workers' compensation claims arising under the insolvent insurer's policies and which are otherwise covered claims, * * * and all expenses related thereto."

Finally, the administrative order provides that "CIGA shall return the surplus to the Liquidator of [the Lumbermens Estate]."

¶ 7 In the months following entry of the liquidation order, guaranty associations began adjusting claims under Lumbermens' policies and also began submitting claims to the Director for reimbursement of administrative expenses related to the payment of covered claims.

¶ 8 On November 19, 2014, the Director filed a petition for the interim allowance of claims for administrative expenses of certain state guaranty associations pursuant to section 205(1)(a) of the Code ( 215 ILCS 5/205(1)(a) (West 2014) ). A key element in the Director's petition was the treatment of guaranty associations that had access to Lumbermens' special deposits. Some guaranty associations, such as CIGA, had access to the special deposit that Lumbermens posted as a condition of entering that state's insurance marketplace. Other guaranty associations, however, did not have access to special deposits or, if they did, had either returned the deposit to Lumbermens or already used the funds by paying covered claims.3

¶ 9 Relevant here, the Director's petition provides that the amount distributed to a guaranty association for administrative expenses would be reduced by the amount

107 N.E.3d 393

that the guaranty association has received, or can receive, from a special deposit. In other words, guaranty associations such as CIGA would be required to exhaust the funds held in their state's special deposit before they could receive disbursements for administrative expenses from the general assets of the Lumbermens estate. The Director sought to prevent guaranty associations from receiving a preference by virtue of having access to a special deposit.

¶ 10 In January 2016, CIGA filed the instant objection to the Director's petition. It argued that, under California law, it could not use the special deposit to reimburse itself for general administrative expenses such as rent, postage, telephone, lighting, cleaning, heating, and electricity because those expenses are not "related" to the payment of a "compensable workers' compensation claim." More specifically, CIGA argued that, pursuant to section 11698.3(b) of the California Insurance Code, special deposits shall only be used to pay "compensable workers' compensation claims" and "all expenses related thereto." Cal. Ins. Code § 11698.3(b) (West 2012). According to CIGA, the phrase "all expenses related thereto" applies to "allocated loss adjustment expenses" (ALAE), which are expenses attributable to the processing of specific insurance claims. CIGA argued that the imposition of an exhaustion requirement is not only contrary to California law, but defeats the purpose of the special deposit—namely, to protect California residents who had workers' compensation insurance with Lumbermens. Second, CIGA argued that the Director is required under Illinois law to "promptly pay the guaranty associations' expenses out of estate assets within [her] control " (emphasis in original), and may not discriminate or give preferential treatment to guaranty associations based on whether or not they have access to a special deposit. The record reflects that CIGA had submitted over $8 million in...

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