State ex rel. Neidig v. Superior Nat. Ins.

• Jurisdiction: Oregon
• Parties: STATE of Oregon ex rel. Mary NEIDIG, Director, Department of Consumer and Business Services, Petitioner, and Oregon Insurance Guaranty Association, an association, Petitioner on Review, v. SUPERIOR NATIONAL INSURANCE COMPANY, a California corporation, and Commercial Compensation Casualty Company, a California corporation, Respondents on Review.
• Citation: 173 P.3d 123,343 Or. 434
• Docket Number: (00C-18554; CA A124825; SC S54315).
• Court: Oregon Supreme Court
• Decision Date: 29 November 2007

173 P.3d 123

343 Or. 434

STATE of Oregon ex rel. Mary NEIDIG, Director, Department of Consumer and Business Services, Petitioner, and Oregon Insurance Guaranty Association, an association, Petitioner on Review, v. SUPERIOR NATIONAL INSURANCE COMPANY, a California corporation, and Commercial Compensation Casualty Company, a California corporation, Respondents on Review.

(00C-18554; CA A124825; SC S54315).

Supreme Court of Oregon, En Banc.

Argued and Submitted May 3, 2007.

Decided November 29, 2007.

On review from the Court of Appeals.^*

John L. Langslet, of Martin Bischoff Templeton Langslet & Hoffman LLP, Portland, argued the cause and filed the brief for petitioner on review. With him on the brief was Justin M. Thorp.

James N. Westwood, of Stoel Rives LLP, Portland, argued the cause and filed the brief for respondents on review.

BALMER, J.

This ancillary receivership action concerns a $10.6 million deposit that an insurance company made with the Department of Consumer and Business Services (DCBS). The case presents the issue whether DCBS may use the statutory deposit of one insurer to satisfy the statutory liabilities of another insurer that has become insolvent. Our resolution of that issue in this case requires us to consider three legal questions: first, whether an insurer that indirectly reinsures another insurer — by reinsuring the insurer's direct reinsurer and therefore acting as a "second-level" reinsurer — is a "reinsurer" for the purposes of the insurance code, making its statutory deposits subject to control by DCBS; second, whether DCBS may use the deposits of a reinsurer to pay the claims of the insolvent insurer even though neither the insurer nor the reinsurer had indicated to DCBS that the reinsurer's deposits were intended to cover the insurer's liabilities; and, third, whether an insurer's violation of the insurance code justifies piercing the corporate veil between the insurer and another insurer that is under common ownership and control with the first insurer.

The trial court concluded that the deposit was available to DCBS to pay the obligations of the insolvent insurer. The Court of Appeals reversed. State ex rel Neidig v. Superior National Ins. Co., 208 Or.App. 1, 144 P.3d 1030 (2006). For the reasons set out below, we reverse the decision of the Court of Appeals and affirm the judgment of the trial court.

I. BACKGROUND

In reviewing a decision of the Court of Appeals that is an appeal from a suit in equity, this court may review de novo or may limit its review to questions of law. ORS 19.415(4); see O'Donnell-Lamont and Lamont, 337 Or. 86, 89, 91 P.3d 721 (2004), cert. den., 543 U.S. 1050, 125 S.Ct. 867, 160 L.Ed.2d 770 (2005) (recognizing court has that choice, electing to review child custody proceeding de novo). In this case, as in O'Donnell-Lamont, we elect to review the record de novo, because we conclude that the Court of Appeals erred in some respects in determining the legal issues that must be addressed and that, once they are identified, those legal issues require additional or different factual findings. In the interest of a prompt resolution of this case, we address those factual issues, rather than remanding to the Court of Appeals or the trial court for further proceedings in that regard. As our discussion will make clear, however, we appreciate the close attention that the trial court and the Court of Appeals gave to the factual and legal issues in this complex case, and we agree with many of their findings and conclusions.

A. Context: Required Deposits by Insurance Companies

A brief discussion of the regulatory scheme for private workers' compensation insurers will establish the legal context for the factual details and procedural history of this case. Every workers' compensation insurer in Oregon (other than the State Accident Insurance Fund Corporation) must post certain deposits with DCBS. ORS 731.628. Those deposits, known as "Schedule P" deposits, are based on the premiums earned by the insurer and the insurer's loss experience in Oregon. Every workers' compensation insurer must make a deposit of at least $100,000. At the beginning of each calendar year, each insurer calculates its required Schedule P deposit based on a formula that includes the insurer's premium revenue and loss experience through the end of the last calendar year and, if necessary, makes an additional deposit. ORS 731.628(1)(b). The insurer must file the Schedule P form showing that calculation by March 1 of each year and make any additional required deposit by March 31. The deposits are intended to cover the insurer's obligations under the policies that it has written in Oregon. They are intended to ensure that, if the insurer becomes insolvent and is unable to pay claims, DCBS will be able to pay any claims brought under those policies. ORS 731.608(3).

An insurer may reduce the amount otherwise required for its Schedule P deposit if it reinsures a portion of its liability with another insurer (the "reinsurer") and the reinsurer makes a deposit with DCBS. ORS 731.628(1)(b). In that circumstance, the insurer may take a credit against its required deposit in the amount of the deposit that the reinsurer makes. ORS 731.628(3). As a result, the deposits made by an insurer and any reinsurers must add up to the total amount required by the formula set out in ORS 731.628(1)(b).

B. Superior Group's Acquisition of Insurance Companies Doing Oregon Business

This case arises out of the insolvency of defendant Commercial Compensation Casualty Company (CCCC) and other insurance companies under common ownership with CCCC.¹ On de novo review, we find the following facts. In 1998, Superior National Insurance Group, Inc. (Superior Group), an insurance holding company, acquired several commonly owned insurance companies, including CCCC, California Compensation Insurance Company (CalComp), and Business Insurance Company (BICO). Under the prior owner, CCCC had written few policies in Oregon, while BICO had substantial workers' compensation insurance business in the state. Superior Group, in turn, sold BICO's name and its certificate to write workers' compensation insurance in Oregon, but not BICO's assets or liabilities, to an unrelated company, Centre Insurance Group (Centre).

To remove BICO's assets and liabilities before that sale, Superior Group transferred the assets to another company owned by Superior Group, defendant Superior National Insurance Company (SNIC). Those assets included $10.6 million in securities that BICO previously had deposited with DCBS in connection with the workers' compensation insurance policies that it had issued in Oregon, as required by Schedule P and ORS 731.628. As to BICO's liabilities, another Superior Group subsidiary, CalComp, agreed to reinsure all of BICO's pre-1999 liabilities, i.e., those based on the policies that BICO had written in Oregon before 1999. CalComp, in turn, reinsured its own reinsurance obligation as to those liabilities with its affiliated company, SNIC.

In May 1999, BICO and SNIC reported those transfers and agreements to DCBS on their respective Schedule P forms. Superior Group's cover letter stated that "SNIC is the ultimate 100% reinsurer [of BICO's pre-1999 liabilities]," and BICO's Schedule P form noted that "[SNIC] through [CalComp]" was the reinsurer of those liabilities.² Thus, as of May 1999, SNIC owned the $10.6 million deposit that had been made with respect to BICO's pre-1999 liabilities and also was the ultimate reinsurer of those liabilities.

In December 1999, the Superior Group companies entered into a second transaction with Centre, the company that had purchased BICO. The Superior Group companies made certain payments to Centre (as part of a much larger transaction) and Centre, in turn, agreed to release CalComp's and SNIC's reinsurance obligations with respect to the pre-1999 policies issued by BICO (with the exception of any liabilities in excess of $180 million). In that transaction, Centre also agreed to, and did, deposit securities with a market value of $10.2 million with DCBS to cover the pre-1999 liabilities that it had assumed. As a result, SNIC's $10.6 million deposit no longer was required under ORS 731.648 because SNIC no longer had any obligations with respect to the pre-1999 policies, except in the unlikely event that claims under those policies exceeded $180 million.

C. The Pooling Agreement

In 1999, but with an effective date of December 31, 1998, CCCC, CalComp, SNIC, and two other insurers owned by Superior Group entered into what they denominated an intercompany pooling agreement (the "pooling agreement"). The agreement was signed on behalf of each of the five signatory companies by the same individual, J. Chris Seaman, who was the executive vice president and chief financial officer of each company. Each company was owned, directly or indirectly, by Superior Group and each had identical officers and directors (except for the formality that one New York resident served on CCCC's board, but not on the other boards, because CCCC had been domesticated in New York).

The pooling agreement covered all workers' compensation insurance policies written by the five companies. It had two primary effects. First, the four parties other than CalComp agreed to "cede and transfer" all the losses and expenses related to those policies to CalComp, and CalComp agreed to "reinsure[ ] and assume[ ]" all those losses and expenses. Second, CalComp then agreed to "retrocede[ ] and transfer[ ]" back to the other four companies, and each of those companies agreed to "reinsure and assume from CalComp," an agreed-upon percentage of the pooled business.³ Those percentages were based on the relative financial surplus of each company at the time the agreement was signed, as set out in the agreement, and the pooling agreement provided that they could change each year depending on the changing financial surplus of each company.

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