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Arizona Receivership Law Lawyer Attorney

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									                        RECEIVERSHIP OF INSOLVENT
                          INSURANCE COMPANIES


                                       FINAL REPORT OF THE
                TORT AND INSURANCE PRACTICE SECTION
                    TASK FORCE ON INSURER INSOLVENCY




                                                   MAY, 2000
                                               As Updated January, 2003




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                                               TIPS Insolvency Task Force


The TIPS Insolvency Task Force consists of a representative group of TIPS lawyers
who have expertise in all major areas of insurance insolvency law and practice. The
Task Force was charged to review the current state system of liquidation of insurance
companies, and to make reports and recommendations to the TIPS Council regarding
improvements or alternatives to it. This report completes that charge by describing the
current state system, listing issues in the current system, and identifying the range of
possible solutions, as seen through the varied practices of TIPS lawyers.

                                                  Task Force Members

Francine L. Semaya (Chair)                       Cozen O‟Connor                New York, New York
Jonathan F. Bank                                 Tawa Associates Ltd.          Los Angeles, California
Jack H. Blaine                                   Sutherland Asbill & Brennan   Washington, D.C.
Alan N. Gamse                                    Semmes, Bowen & Semmes        Baltimore, Maryland
Paul M. Gulko                                    Guaranty Fund Management Boston, Massachusetts
                                                 Services
Jo Ann Jay Howard                                360 Insurance Services, Inc.     Austin, Texas
                                                 (formerly) Administrator Federal
                                                 Insurance
Robert M. Mangino, Sr.                           Attorney/Arbitrator (retired)    Chatham, New Jersey
David M. Spector                                 Schiff, Hardin & Waite        Chicago, Illinois
Richard R. Spencer, Jr.                          Bressler, Amery & Ross        Morristown, New
                                                                               Jersey
Rita M. Theisen                                  (formerly) Health Insurance   Washington, D.C.
                                                 Association of America
Milton S. (Bud) Wolke, Jr.                       (Deceased)
Lenore S. Marema (Reporter) Alliance of American Insurers                      Downers Grove, Illinois

The Task Force acknowledges the contributions of Charles Havens, partner at the
Washington, D.C. office of LeBoeuf, Lamb, Greene & MacRae, LLP in the initial
deliberations of the Task Force. His expertise and experience were a valuable part of
the early work of the Task Force.

The contents of the TIPS Task Force report reflect the composite analysis of all
members of the Task Force. It would be inappropriate, and possibly inaccurate, to
attribute any particular recital contained in the report to any individual Task Force
member. Similarly, nothing contained in the Task Force report should be considered to

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                                                     -INTRO - i -
constitute any view or legal position of any firm or other entity with which a member of
the Task Force may be affiliated, or any client or member of such firm or other entity.


                                               About the TIPS Task Force

Jonathan F. Bank

Jonathan F. Bank is the Senior Vice President of Tawa Associates Ltd. Tawa is a
specialist business formed in the UK to acquire and manage non-life insurance
operations, with a focus on reinsurance and property and casualty companies that have
ceased writing new business. Prior to forming Tawa, Mr. Bank was the insurance
practice leader at PricewaterhouseCoopers. He was previously a partner in the firm of
Chadbourne & Parke, where he specialized in reinsurance and insurance dispute
resolution and related matters. Mr. Bank is a member of the state bars of in California,
New York, and Nebraska.

Mr. Bank is a member of the American Bar Association, Tort and Insurance Practice
Section, the International Association of Insurance Counsel (AIDA), the Federation of
Regulatory Counsel, Inc., and the Society of Financial Examiners. He is a charter
member of the International Association of Insurance Receivers and an associate
member of the Excess/Surplus Lines Claims Association. He is past-president of the
Los Angeles Conference of Insurance Counsel.

Mr. Bank previously served on the Advisory Committee on Reinsurance for the National
Association of Insurance Commissioners, and was a member of the National
Association of Insurance Commissioners Rehabilitators and Liquidators Task Force.
He is on the Board of Directors of Platinum Underwriters Holding, Ltd.

In addition, Mr. Bank currently teaches reinsurance for the Insurance Educational
Association. He has served as an arbitrator and umpire in reinsurance arbitrations, and
as an expert witness in reinsurance disputes.

Jack H. Blaine

Jack H. Blaine is of counsel to the Washington, D.C., office of Sutherland Asbill &
Brennan, LLP. Prior to joining the firm in 1998 he was President and chief executive
officer of the National Organization of Life and Health Insurance Guaranty Associations
(NOLHGA). Mr. Blaine served in that position from February 1992 until his retirement
December 31, 1997. NOLGHA acts as the national coordinating body for the 52 state,
District of Columbia and Puerto Rico insolvency guaranty associations.

Prior to being named President of NOLHGA, Mr. Blaine was of counsel to the law firm
of LeBoeuf, Lamb, Greene & MacRae, in Washington, D.C. Mr. Blaine had previously
served as President of the Reinsurance Association of America (RAA), where he was
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                                                    -INTRO - ii -
employed from 1989 until 1991. The RAA is a trade association of property/casualty
reinsurance companies. Before joining the RAA, Mr. Blaine was Vice President, State
Relations and General Counsel for the American Council of Life Insurance. During his
tenure at ACLI from 1966 until 1989, he worked extensively with state insurance
regulators. His responsibilities included the ACLI‟s state government relations efforts in
all of the states, the District of Columbia and Puerto Rico, as well as the association‟s
litigation and corporate affairs.

Mr. Blaine served from 1964 to 1966 as Director of Professional Services for the Illinois
State Bar Association and from 1961 to 1964 as Assistant to the Executive Secretary of
the Wisconsin State Medical Society.

A native of Ohio, Mr. Blaine attended Bowling Green State University and graduated
from the University of Dayton with a B.S. degree in 1958. He obtained his law degree
at the University of Wisconsin School of Law in 1961. He served two years in the Army.

Mr. Blaine is a member of the bars of Wisconsin, Illinois and the District of Columbia.
He has been active in the American Bar Association for many years, serving as a
member of the Council of the Tort and Insurance Practice Section, Chair of the Life
Insurance Law Committee and as a member of various other committees. He is also a
member of the Association of Life Insurance Counsel and the Association of Fraternal
Benefit Counsel. Mr. Blaine currently serves as Vice Chair of the Board of Directors of
the Journal of Insurance Regulation.

Alan N. Gamse

Alan N. Gamse is a Principal in the law firm of Semmes, Bowen & Semmes, a
Professional Corporation. He practices in the firm‟s offices in Baltimore, Maryland and
Washington, D.C. and is Chair of the firm‟s Insurance Regulatory and Corporate
Practice Area.

A native of Baltimore, Maryland, Mr. Gamse received a B.S. in Industrial Management
from the Sloan School of Management of the Massachusetts Institute of Technology in
1964. He received a Juris Doctor Degree in 1967 from the University of Maryland Law
School where he served as Recent Developments Editor of the University of Maryland
Law Review. Following law school, Mr. Gamse served as a Law Clerk for Judge
Reuben Oppenheimer on the Maryland Court of Appeals; after Judge Oppenheimer‟s
retirement, he served as Law Clerk to Judge Frederick J. Singley. Mr. Gamse joined
Semmes, Bowen & Semmes at the conclusion of his clerkships and is a member of the
Bars in Maryland and the District of Columbia.

Mr. Gamse‟s practice is concentrated in the areas of insurance, regulatory and
corporate law. He represents insurers, agents and rating bureaus with respect to all
aspects of regulatory matters including licensure, market conduct examinations,
ratemaking, acquisitions, and compliance. He has served as general counsel to
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                                               -INTRO - iii -
residual market entities, guaranty associations and self-insurance programs. Mr.
Gamse presently serves as Outside General Counsel for the District of Columbia
Insurance Guaranty Association and has been appointed as Special Deputy Insurance
Commissioner of the District of Columbia for the Liquidation of Atlantic & Pacific
International Assurance Company and for the Liquidation of Capital Casualty Insurance
Company.

Mr. Gamse is a member of the Tort and Insurance Practice Section of the American Bar
Association. He has served on the Section Council of TIPS and in many other
leadership positions. He has been active in the Public Regulation of Insurance Law
Committee of TIPS and is a former Chair of that committee. Mr. Gamse is a member of
the International Association of Insurance Receivers, the Federation of Regulatory
Counsel, Inc. and the Defense Research Institute.

Paul M. Gulko

Paul M. Gulko is President of Guaranty Fund Management Services (“GFMS”) which
services the Property & Casualty Insurance Guaranty Associations for Massachusetts,
Rhode Island, Connecticut, Maine, Vermont, New Hampshire, District of Columbia and
Virginia. Mr. Gulko has served in that capacity since GFMS was organized in 1980.

Prior to being named President, he was manager of the Massachusetts Insurers
Insolvency Fund. Before his involvement with guaranty funds, Mr. Gulko was counsel
to the Commissioner of Insurance for the Commonwealth of Massachusetts.

Mr. Gulko is a graduate of Northeastern University and Suffolk University Law School.
He is a member of the bars of Massachusetts, the Federal District Court for
Massachusetts and the United States Supreme Court.

He is a past chair of the Public Regulation of Insurance Law Committee of the TIPS
section of the American Bar Association. His is a past chair of the National Conference
of Insurance Guaranty Funds (“NCIGF”) and currently serves on the NCIGF Board of
Directors and Executive Committee. He chairs many of the NCIGF coordinating
committees and has served or is serving on many other NCIGF Committees. Mr. Gulko
is a past chair of the Industry Advisory Committee to the Rehabilitators and Liquidators
Task Force of the National Association of Insurance Commissioners.

Mr. Gulko has served as an arbitrator for guaranty fund issues and has spoken before
many insurance industry groups about guaranty funds. In addition he has had various
articles published through the years concerning guaranty funds.

Jo Ann Jay Howard

Jo Ann Howard is President of 360 Insurance Services, Inc. and 360 Insurance Agency,
Texas corporations involved in financial services, including insurance, as authorized by
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                                               -INTRO - iv -
the Gramm-Leach-Bliley Act. Prior to acquiring these firms in 2001, she served as the
Federal Insurance Administrator at the Federal Emergency Management Agency
(FEMA) from 1998-2001 after having been nominated by President Clinton and
confirmed by the Senate. As the Federal Insurance Administrator, she was responsible
for more than $500 billion of flood insurance in force in the National Flood Insurance
Program (NFIP) throughout the United States and its territories.

Before her federal appointment, Mrs. Howard was president of Jo Ann Howard and
Associates, P.C., a Texas law firm specializing in handling the legal and administrative
aspects of insurance insolvencies. She was selected by the Commissioner of
Insurance as Special Deputy Receiver for three Texas insolvent property/casualty
insurance estates and served as legal counsel for some fifteen other insolvent Texas
insurers in receivership.

Mrs. Howard was an associate in the Clark, Thomas, Winters & Newton Law Firm, in
Austin, and in the Texarkana law firm of Young, Patton & Folsom, prior to opening her
firm in 1992.

In 1989, she was appointed by the Governor to the Texas State Board of Insurance
(now, Texas Department of Insurance), and, as a member of the National Association
of Insurance Commissioners, served as chair of the Federal Legislation Working Group
and Vice Chair of the State and Federal Health Insurance Legislative Policy Task
Force. Jo Ann Howard served as Vice Chair of the American Bar Association Tort and
Insurance Practice Section‟s Public Regulation of Insurance Law Committee and
served on the Advisory Board of the Texas Center for Legal Ethics and Professionals.
She is a charter member of the International Association of Insurance Receivers (IAIR).

A native of Texas, Mrs. Howard earned her B.S. in Education from the Abilene Christian
University and an M.A, in Public Administration from Texas A&M--Texarkana. She
earned her J.D. from the University of Texas School of Law and is a member of the
Texas, Arkansas and District of Columbia bars.




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                                               -INTRO - v -
Lenore S. Marema

Lenore S. Marema is Vice President-Legal and Regulatory Affairs for the Alliance of
American Insurers in Downers Grove, Illinois. Ms. Marema graduated magna cum
laude from Wheaton College in Wheaton, Illinois and the University of Illinois College of
Law. She received her Chartered Property and Casualty Underwriter (CPCU)
designation in 1990. She currently serves on the National Steering Committee of the
Legislative and Regulatory Section of the Society of CPCU. She has served on the
Board of Directors of the Chicago Northwest Suburban Chapter of CPCU.

She joined the Alliance in 1979. Her duties include legal counsel and legislative
analysis on a variety of insurance related issues, including antitrust, financial regulation,
solvency surveillance, civil justice reform and all company operations issues such as
licensing, holding companies and corporate governance. Ms. Marema has represented
the interests of Alliance members on insolvency law issues since 1979. Ms. Marema is
also responsible for directing the trade association‟s overall involvement with the
activities of the National Association of Insurance Commissioners (NAIC).

Ms. Marema served a three-year term on the Council of the Tort and Insurance Practice
Section (TIPS) from 1993-1996. She previously chaired the TIPS Public Regulation of
Insurance Law Committee and the TIPS Emerging Issues Committee. She was the first
editor of the TIPSTER, a leadership newsletter of TIPS. She has also chaired the
Insurance Law Committee of the Chicago Bar Association.

Ms. Marema is the author of many internal publications for the Alliance of American
Insurers. Her works on a wide variety of topics in insurance regulation have also
appeared in publications such as Best’s Insurance Review, Tort and Insurance Law
Journal, National Law Journal, For The Defense, and many CPCU publications. Ms.
Marema was the Editor in Chief of the first edition of the Reference Handbook on
Insurance Company Insolvency, published by the American Bar Association in 1986.

Robert M. Mangino, Sr.

Robert M. Mangino, Sr. served as General Counsel for the Swiss Re U.S. Group from
1972 to 1998. During that time he was involved in various industry assignments,
including Chairman of ARIAS-U.S., the Excess, Surplus Lines and Reinsurance
Committee of the American Bar Association, the Eastern Life Claims Conference, the
Law Committee of the Reinsurance Association of America, the Legislative Committee
of the Life Insurance Council of New York, and the Reinsurance Committee of the
American Council of Life Insurance. He is currently a member of the Association of Life
Insurance Counsel and serves on the Board of Directors of the Insurance Federation of
New York. In addition, he has been a lecturer on programs of the National Association
of Insurance Commissioners.


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                                               -INTRO - vi -
Mr. Mangino graduated with honors from Rutgers University and Rutgers Law School,
where he was a member of the Law Review. He is admitted to practice law in New
York and New Jersey. He is also a Chartered Life Underwriter (CLU) and an ARIAS
certified arbitrator (ACA). He has published several articles on reinsurance law and has
appeared before industry groups to speak on various related topics. He has served as
Councilman in his former home town of West Orange, New Jersey and currently
resides in Chatham, New Jersey.

Francine L. Semaya

Francine L. Semaya is a senior member in the New York office of Cozen O'Connor, and
is Chair of the firm‟s Insurance, Corporate and Regulatory Practice Group. She
concentrates her practice on insurance regulatory, reinsurance and insolvency matters.
She is the former Reinsurance Counsel of Integrity Insurance Company in Liquidation.

She is a member of the American and New York State Bar Associations. Ms. Semaya
serves as a Section Delegate to the ABA House of Delegates. She served a three year
term as Council Member of the Tort Trial and Insurance Practice Section (TIPS) of the
ABA (1994-1997). She chaired the TIPS Task Force on Insurance Insolvency from
1994 – 2001. She is also Past Chair of the TIPS Professionalism Committee, the
Public Relations Committee, and the Public Regulation of Insurance Law Committee.
Ms. Semaya is the Author of “Insurance Insolvencies A New Generation” in
Reinsurance Law and Practice: New Legal and Business Developments in a Changing
Global Environment (PLI (2001); “Regulation of Insurance: Who, What, When, Why and
How?” in Insurance Law: Understanding the ABC‟s (PLI) (2000); and “Insurance
Insolvency - 1999 and Beyond” and “Insurer Insolvencies – A New Generation” in
Reinsurance Law & Practice: New Legal & Business Developments in a Changing
Global Environment (PLI) (1999 and 2000). Ms. Semaya is co-author of Insurance
Law, 49 Syracuse L. Rev. (1999) and 50 Syracuse L. Rev. (2000). She was Co-Chair
of the 1991 ABA National Institute on the State of Insurance Regulation: Today and
Tomorrow, Chair of the 1990 ABA Satellite Seminar on Insurer Insolvency and the 1999
and 1989 ABA National Institute on State of Insurance Regulation: Today and
Tomorrow, as well as the 1999 and 1989 ABA National Institute on Insurer Insolvency
Revisited. Ms. Semaya is Contributing Author of “Regulation of Insurance Companies,”
FICC Update (July 1994), Contributing Author of “Public Regulation of Insurance Law:
Recent Developments,” (ABA) Tort and Insurance Law Journal (1994), Contributing
Editor of the (ABA) Reference Handbook on Insurance Company Industry, Third Edition
(1993) and Fourth Edition (1999); Co-Editor of the State of Insurance Regulation:
Today and Tomorrow (ABA) (1991) and the Editor of the Law and Practice of Insurance
Company Insolvency Revisited (ABA) (1989). Ms. Semaya served as Co-Chair of the
NAIC Receiver‟s Handbook Writing Group from its inception in June 1990 and currently
serves as its Research Group Co-Chair. She is a member of the Association of the Bar
of the City of New York and served as a member of the Insurance Law Committee. Ms.
Semaya is a member of the Practicing Law Institute‟s Insurance Law Advisory Board,
the Federation of Regulatory Counsel, Inc. and International Association of Insurance
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                                               -INTRO - vii -
Receivers. She is a frequent speaker and author on insurance regulatory, insolvency
and reinsurance issues.

David M. Spector

DAVID M. SPECTOR is a Chicago based partner in the law firm of Schiff Hardin &
Waite. He was chair of the 1993 American Bar Association National Institute on Life
Insurer Insolvency, was co-chair of the 1988 ABA National Institute on International
Reinsurance Collections and Insolvency and chair of the 1986 ABA National Institute on
Insurance Company Insolvency. Mr. Spector is the editor or co-editor of three texts on
insurance company insolvency: Law and Practice of Life Insurer Insolvency Law (ABA
1993); Law and Practice of International Reinsurance Collections and Insolvency (ABA
1988) and; Law and Practice of Insurance Company Insolvency (ABA 1986). He
served as chair of the Committee on Public Regulation of Insurance Law of the Tort and
Insurance Practice Section of the ABA during 1988-89. Mr. Spector is the author of
numerous articles on insurance and reinsurance law and is a frequent speaker at
insurance conferences in Canada, England, Bermuda and the United States. His
practice is concentrated in the areas of insurance and reinsurance business counseling,
litigation, arbitration and insurance regulatory matters.

Richard R. Spencer, Jr.

Richard R. Spencer, Jr. is a shareholder in the law firm of Bressler, Amery & Ross, P.C.
which has offices in Morristown, New Jersey and New York City. He directs the firm's
insurance practice group. His practice is concentrated in the area of representation of
insurance companies in their corporate activities and regulatory matters before
departments of insurance. His expertise includes mergers and acquisitions as well as
insolvency proceedings of regulated corporations.

Mr. Spencer has taught the insurance law course as a member of the adjunct faculty of
Rutgers Law School. He has also published numerous articles and lectured on
insurance-related topics before various national organizations.

He and his firm serve as retained general counsel for the New Jersey Property-Liability
Insurance Guaranty Association, the New Jersey Surplus Lines Insurance Guaranty
Fund and the New Jersey Life and Health Insurance Guaranty Association, having
represented each such entity since its statutory creation. He serves as a member of
the Legal Committee of the National Conference of Insurance Guaranty Funds. Mr.
Spencer is a frequent participant in the activities of the National Association of
Insurance Commissioners, the National Conference of Insurance Guaranty Funds and
the National Organizations of Life and Health Guaranty Associations. He is currently
Vice-Chair of the Board of Directors of the Federation of Regulatory Counsel and has
served as a Vice-Chair of the Public Regulation of Insurance Law Committee of the
TIPS Section of the American Bar Association.

Rita M. Theisen
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                                               -INTRO - viii -
Rita M. Theisen is Assistant Vice President, State Affairs for the Health Insurance
Association of America. A native Montana, she is a graduate of the University of
Montana and Boalt Hall School of Law, University of California, Berkeley.

She began her insurance career in 1978 as Chief Counsel to the Montana Insurance
Department. In 1979 she joined HIAA for the first time. During her six-year tenure, she
represented commercial health insurers in state government affairs and at the NAIC. In
1985 she joined the Washington, D.C. office of LeBoeuf, Lamb, Greene & MacRae,
LLP, first as associate, then partner and finally of counsel to the firm. She recently
retired from LeBoeuf and rejoined HIAA.

Ms. Theisen has been an active member of TIPS since 1978, serving as a member of
the TIPS Council, Chair of the Health Insurance Law Committee and the
Professionalism Committee, and for more than ten years as the TIPS representative to
the ABA AIDS Coordinating Committee.




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                                               -INTRO - ix -
                         Receivership of Insolvent
                          Insurance Companies

                                               Final Report

                                                  of the

                       Tort and Insurance Practice Section

                          Task Force on Insurer Insolvency




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                                               Dedication to Bud Wolke

Before this project was completed, the TIPS Insolvency Task Force lost Bud Wolke, an
active member, to an untimely death from cancer. The Task Force lost a friend, a
philosopher, and one of the great scholars of the insurance industry. His significant
knowledge of and experience with insurer insolvencies was sorely missed in the Task
Force‟s deliberations, as was his quick and dry with Most of all, the insurance industry
and the Task Force lost one of its free thinkers. Bud Wolke thought outside of the box
long before any of his legal and insurance colleagues ever heard of the box and found
out what was in it. Bud rarely encountered a long-standing industry principle or policy
that he did not question. He was not afraid to suggest and support a novel solution,
even if it had not been tried before. Task Force members who had the privilege of
knowing Bud and debating insolvency issues with him always knew they were in for an
energetic and enthusiastic exchange with Bud.

At the time of his death, Milton S. (“Bud”) Wolke was Senior Counsel for CIGNA
Property/casualty Companies in Philadelphia. Prior to that, Bud had worked at the
Kemper Group, Aviation Associates Insurance Group and United Equitable. He earned
a BA from Cornell College in 1961 and a JD from the University of Chicago in 1964.

The Task Force respectfully dedicates its report to the career and memory of Bud
Wolke.




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                           Receivership of Insolvent Insurance Companies

Introduction - Task Force Members ................................................................................. i

I. Executive Summary and Recommendations .............................................................. 1
      A. Introduction to Insurer Insolvency ................................................................... 1
      B. Key Problems in the Current State Insurance Receivership System .............. 2
      C. Task Force Conclusions.................................................................................. 2
      D. Task Force Recommendations ..................... Error! Bookmark not defined.4

II. Introduction ................................................................................................................ 6

III. An Overview of State Administrationof Insolvent Insurance Companies................... 8
       A. Insurance Receivership Proceedings in General ............................................ 8
       B. State Guaranty Funds ..................................................................................... 9
              1.     The Property/Casualty Guaranty Funds ........................................ 10
              2.     The Life-Health Guaranty Funds ................................................... 11
       C. Ancillary Receivers ........................................................................................ 12
       D. Task Force Discussion and Analysis of Key Problems in the Current State
          System ...................................................................................................... 12

IV. Improving the Current State Insurance Receivership System ................................ 17
      A. Background on the Current State System ..................................................... 17
      B. Improving the State Insurance Receivership System .................................... 17
             1.    State Liquidation Bureaus ............................................................. 17
             2.    Permanent State Oversight Boards .............................................. 19
             3.    Prequalification and/or Certification of Receivers ......................... 20
             4.    Guaranty Fund Standing and Intervention .................................... 25
             5.    State Advisory Committees ........................................................... 30
             6.    Use of Special Masters ................................................................. 35
      C. Task Force Discussion and Analysis of the Current State Insurance
         Receivership System .................................................................................... 36

V. Privatization of Insurance Receiverships ................................................................. 37
       A. Background on Privatization ......................................................................... 37
       B. Existing Statutory Authority ........................................................................... 37
       C. How Privatization Would Work ...................................................................... 38
       D. Task Force Discussion and Analysis of Privatization .................................... 42

VI. Interstate Compacts for Insurance Receiverships .................................................. 46
       A. Background on Interstate Compacts ............................................................. 46
       B. Interstate Compacts and the Insurance Industry .......................................... 46
       C. NAIC Midwest Zone Interstate Compact for Insurance Receiverships.......... 47
       D. How an Insurance Receivership Compact Would Work ............................... 49
       E. Possible Legal Issues ................................................................................... 50
       F. Impact of the Compact on the State Guaranty Funds ................................... 51




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                                                               -i-
          G. Task Force Discussion and Analysis of Interstate Compacts ....................... 54

VII. Federal Bankruptcy Alternatives to Insurance Receiverships ................................ 58
       A. Background on Federal Bankruptcy .............................................................. 58
       B. History of Excluding Insurance Companies From the Federal Bankruptcy
          Laws       ...................................................................................................... 58
       C. Federal Bankruptcy Alternatives ................................................................... 60
             1.      The Federal Bankruptcy Code ...................................................... 60
             2.      Special Insurance Provisions in the Federal Bankruptcy Code ..... 63

VIII. Other Federal Alternatives to Insurance Receiverships ........................................ 70
       A. Background on Federal Alternatives ............................................................. 70
       B. Federal Minimum Standards Legislation ....................................................... 70
       C. National Private Receivership Corporation ................................................... 72
       D. Federal Insurance Receivership Corporation ................................................ 74
       E. Receivership Proceedings For Federal Financial Institutions........................ 76
       F. Task Force Discussion and Analysis of Federal Alternatives ........................ 82

IX. Insurance Receiverships Outside the United States ............................................... 85
       A. The United Kingdom Insurance Receivership System .................................. 85
             1.    Overview of the System ................................................................ 85
             2.    Schemes of Arrangement ............................................................. 87
             3.    Discussion of the U.K. System ...................................................... 89
       B. Task Force Discussion and Analysis of the United Kingdom System ........... 89

X. Closing the Estates of Insolvent Insurers ................................................................. 92
      A. Background on Closure of Estates ................................................................ 92
      B. Closure of Life-Health Estates ...................................................................... 92
      C. Closure of Property/Casualty Estates ........................................................... 93
      D. Methods to Close an Insolvent Insurer‟s Estate ............................................ 94
             1.     Cutoff Options ............................................................................... 94
             2.     Runoff Options .............................................................................. 95
             3.     Liquidating Trust ........................................................................... 96
             4.     Claims Estimation ......................................................................... 98
             5.     Modified Claims Estimation ......................................................... 100
             6.     Time Limit on the Estate ............................................................. 101
      E. Task Force Discussion and Analysis of Closure ......................................... 101

XI. Conclusions and Recommendations .................................................................... 103
      A. Task Force Recommendations ................................................................... 105
      B. Future Directions ......................................................................................... 105




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                                                            - ii -
Appendix A .................................................................................................................. 109
     How State Insurance Departments Handle ...................................................... 109
              I.         Administrative Procedures/Informal Actions ............................... 109
    A. Cease and Desist Orders ............................................................................ 109
    B. Corrective Orders/Supervision Proceedings ............................................... 109
              II.        Court-Ordered Receiverships/Formal Proceedings .................... 110
    A. Conservation Proceedings and Seizure Orders .......................................... 110
    B. Rehabilitation Proceedings ......................................................................... 111
    C. Liquidation Proceedings .............................................................................. 112

Appendix B .................................................................................................................. 114
     International Association of Insurance Receivers (IAIR) .................................. 114
              Designation Programs ........................................................................... 114

Appendix C.................................................................................................................. 139
     Functions of An Insurance Receiver................................................................. 139
             Administrative Duties ............................................................................. 139
             Reporting and Accounting Functions ..................................................... 139
             Communications .................................................................................... 140
             Maximizing Assets ................................................................................. 140
             Investments and Sale of Assets ............................................................ 141
             Determine Liabilities and Distribute Assets ............................................ 141

Appendix D.................................................................................................................. 143
     An Analysis of the Interstate Insurance Receivership Compact ....................... 143
             Article I. Purposes ................................................................................. 143
             Article II. Definitions .............................................................................. 143
             Article III. Establishment of the Commission and Venue ...................... 144
             Article IV. Powers of the Commission ................................................... 144
             Article V. Organization of the Commission ........................................... 145
             Article VI. Meetings and Acts of the Commission ................................. 146
             Article VII. .............................................................................................. 146
             Article VIII. Oversight and Dispute Resolution by the Commission ....... 147
             Article IX. Receivership Functions of the Commission ......................... 148
             Article X. Finance .................................................................................. 149
             Article XI. Compacting States, Effective Date and Amendment ........... 149
             Article XII. Withdrawal........................................................................... 150
             Article XIII. Severability and Construction ............................................. 150
             Article XIV. Binding Effect of Compact and Other Laws ....................... 150

Appendix E .................................................................................................................. 152
     History of Excluding Insurance Companies From Federal Bankruptcy Laws ... 152
     Construing the Term “Insurance Company " for Purposes of the Bankruptcy
         Exclusion .................................................................................................... 158

Appendix F .................................................................................................................. 160
     Model Legislation to Improve State Insurance Receiverships .......................... 160




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                                                             - iii -
                    A.         Authorization of Special Masters................................................. 160
                    B.         Authorization of Privatization of Insurance Receiverships .......... 160
                    C.         Uniform Receivership Law (URL) Chapter 8 ............................... 163
                    D.         Uniform Receivership Law (URL) Chapter 9 ............................... 178




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                                                          - iv -
                             I. Executive Summary and Recommendations

A.        Introduction to Insurer Insolvency

The insolvency of an insurance company can cause disruption in the lives of individuals
and in the operations of businesses. An insurer insolvency can disrupt the flow of
periodic payments, such as annuities, pensions and workers compensation benefits,
that individuals depend on for financial support. It can delay personal injury and other
civil litigation involving the insolvent insurer or its insureds. The insolvency of an insurer
can delay claims payments. Businesses can find that they are suddenly responsible for
losses that they previously insured with a now insolvent insurer. An insurer insolvency
causes unemployment, which is significant to individual employees and sometimes to
the community in which the insolvent insurer was based. The consequences of an
insurer insolvency are many and varied. The insolvency can have a devastating impact
on those affected, and can erode the public‟s confidence in the insurance industry and
in government‟s ability to regulate the insurance industry.

The insurance industry is largely a state-regulated industry. Insurer insolvencies are
administered under state insurance laws, rather than under the federal bankruptcy
code. The state insurance receivership system is unique in that the private sector
honors the policy contracts of licensed insolvent insurers through the guaranty fund
mechanism. All states have enacted guaranty fund statutes to mitigate the impact of an
insolvency. The state guaranty funds provide benefits, as defined by statute, on a
relatively prompt and timely basis, to insureds and third party claimants. The guaranty
funds, to the extent of claims paid, then file claims as creditors with the receiver of the
insolvent insurer‟s estate for payment out of the insolvent insurer‟s remaining assets.

A defining characteristic of insurer insolvencies is that each one is different. Life and
health estates are different from property/casualty estates. Individual insolvencies vary
further by lines of business written, the number of states in which the insurer did
business, the assets available, the condition of the insurer‟s books and records upon
insolvency, the magnitude and mix of claims and the underlying causes of the
insolvency. Given these variables, there is no one single or best way to administer an
insurer insolvency.

Fortunately, insurer insolvencies have never involved either a large segment of the
insurance industry or a significant percentage of the industry‟s premium volume.
Recent insurer insolvencies have, however, generated significant legal, practical, and
administrative issues, as well as questions about the adequacy of the current state
insurance receivership system, which merit review.




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                                               -1-
B.        Key Problems in the Current State Insurance Receivership System

Criticism of the state insurance receivership system often focuses on the lack of
uniformity among state insurance insolvency laws. The Task Force concluded that
there were more significant issues. Key problems identified by the Task Force in the
current insurance receivership system are the selection of qualified receivers, the
accountability for and oversight over their performance, and the lack of incentives,
statutory authority and procedures to bring estates to closure. The Task Force believes
that any significant weaknesses of the state receivership system relate back, directly or
indirectly, to these three issues.

Under most state insurance receivership laws, the insurance commissioner, becomes
the statutory receiver, but the commissioner, in turn, appoints a “special deputy
receiver” as the de facto receiver to administer the day-to-day operations of the
insolvent insurer‟s estate. While some individual special deputy receivers have been
well qualified to do the job, the Task Force believes that the current appointment
process generally does not provide adequate assurances that qualified persons will be
administering insurance receiverships.

There is also inadequate oversight over receivers in many states. Insurance
departments have limited resources for such functions. State receivership courts
routinely approve the actions of receivers because there is no adverse party before the
court to challenge a receiver‟s activities. Because there are relatively few insurer
insolvencies, judges may be assigned an insurer insolvency only once in their careers.
Receivership courts do not generally gain the insolvency expertise needed to effectively
oversee an insolvent insurer‟s estate.

Appointed special deputy receivers often have little incentive to bring an estate to
prompt closure. Even where some receivers want to bring estates to closure, they
sometimes lack the statutory authority and procedures to do so. The current state
insurance receivership system has a virtual built in incentive to prolong the
administration of estates, rather than structural incentives for efficient administration
and early closure of estates.

C.        Task Force Conclusions

Based on its study of the existing state system and the alternatives to it, the Task Force
drew the following conclusions:

          1.        The Task Force does not endorse the current state insurance receivership
                    system in all respects. After studying the deficiencies in the present
                    system and noting the absence of reliable cures in alternative
                    approaches, however, the Task Force concluded that a complete
                    replacement, or even a major modification, of the present system is not
                    warranted.
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                                               -2-
          2.        The Task Force believes that the best way to improve insurance
                    receiverships is to provide practical and politically realistic solutions, rather
                    than merely theoretical alternatives.

          3.        While it is not feasible to privatize the entire insurance receivership
                    process, the Task Force believes it is possible to substantially improve the
                    system by providing that the selection and oversight of insurance
                    receivers will no longer be exclusive functions of state government. The
                    Task Force advocates privatization of additional receivership functions as
                    well to achieve efficiencies in the administration of estates.

          4.        An interstate compact provides a new and unique type of oversight over
                    insurance receiverships, and assures that the insolvency expertise of the
                    compact commission will be applied to all insolvencies in compacting
                    states. Potential constitutional and legal problems exist with the compact
                    mechanism, however, and state concerns with sovereignty and delegation
                    of powers make it a politically unattractive alternative and one unlikely to
                    be widely enacted among other states.

          5.        The receivership systems in the United Kingdom appears to work well and
                    may provide a model, in whole or in part, for the United States. However,
                    differences in the legal, political and social aspects of the two systems
                    makes it unlikely that the United Kingdom‟s model could be fully
                    transferred to and workable in the same manner in the United States.

          6.        While there are no existing federal models for insurer insolvencies, the
                    Task Force reviewed federal bankruptcy approaches, the existing federal
                    receivership systems for financial institutions and new federal alternatives.
                    The Task Force concluded that these are not viable to address the needs
                    of insurer insolvencies. There is no guarantee that shifting insurer
                    insolvency proceedings to a different level of government or to a different
                    structure would cure the defects identified in the current state system.

          7.        All insurer estates should work toward the goal of prompt closure so that
                    the assets of the estate can be administered effectively and distributed to
                    creditors in a timely manner. In many cases, the state statutory
                    framework needs to be improved to provide receivers with a variety of
                    options to expeditiously bring estates to closure.

D.        Task Force Recommendations

While not endorsing the current state insurance receivership system because it has the
three key weaknesses identified, the Task Force decided that the best approach was to
recommend improvements within the existing system to correct these deficiencies. The
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                                                  -3-
Task Force did not think that it was reasonable to conclude that movement to
alternative systems would effectively cure the problems in the current state system. In
fact, alternative approaches may contain the same weaknesses and may generate
additional problems as well.

The Task Force developed a series of recommendations designed to improve the
current state insurance receivership system. The recommendations are not mutually
exclusive. They can be used individually or in combination, although the Task Force
believes states should adopt all of them.

                   To improve the selection and oversight of insurance receivers, the Task
                    Force recommends:

                    –          Privatize the selection, oversight and compensation process
                               for receivers by allowing qualified individuals or businesses
                               to serve as receivers of insolvent insurers through a
                               competitive bidding process.

                    –          Transfer the role of the insurance commissioner in
                               appointing and overseeing the receiver, once a final order of
                               liquidation has been issued, to a three-person panel,
                               consisting of representatives of the commissioner, the
                               guaranty funds and the receivership court. This panel would
                               select and subsequently oversee the receiver, subject to the
                               jurisdiction of the receivership court.

                    –          Use special masters to assist receivership courts in
                               administering the estates of insolvent insurers.

                    –          Experiment with the appointment of private institutional
                               receivers.

                    –          Grant a statutory right of standing and intervention in
                               receivership proceedings to the state guaranty funds to
                               assist to maximize the assets of receivership estates, to
                               assist in oversight of estates and to bring estates to closure;

                    –          Permit states to experiment with voluntary restructurings
                               similar to “schemes of arrangement” in the United Kingdom.

                   To enhance the ability of receivers to bring estates to more efficient and
                    expeditious closure, the Task Force recommends:

                    –          Amendments to state laws to provide a menu of options
                               available to receivers, including cutoff dates for filing claims,
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                                                      -4-
                               runoff provisions, liquidating trusts, and a reliable method for
                               estimating outstanding claims.




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                                                     -5-
                                               II. Introduction

Throughout the 1990s, there was considerable discussion of insolvency in the
insurance industry. There were several focal points and concerns. First and foremost
were the number and characteristics of insurance company insolvencies which began in
the mid-1980s.

Property/casualty insolvencies historically involved small insurance companies, largely
writing automobile liability insurance or other personal lines coverages. The insolvent
insurers generally operated in a single state or were regional writers. The aggregate
dollar amounts of these insolvencies were not substantial as compared with more
recent insolvencies.

In the 1980s, the property/casualty insurance industry witnessed the insolvency of large
multi-line insurers. These insurers wrote complex commercial coverages in many or all
states, giving rise to new problems of cooperation and coordination among the states.
The costs of insolvencies substantially increased.

As the insurance coverages and issues involved in receiverships 1 have increased in
their complexity, the volume of litigation in connection with insurance company
liquidation has also increased. Litigation against directors and officers, lawyers,
accountants, cedents, reinsurers and ancillary receivership estates in other states are
now common occurrences. The recovery of reinsurance proceeds in commercial lines
insolvencies has become controversial and litigious. The end result is that the
administrative costs of the receiverships are higher than ever before.

There have been increases in the number and size of insolvencies on the life and
health side of the insurance industry as well. Generally speaking, life insolvencies in
the past were disposed of through the negotiation and sale of the insolvent insurer‟s
business to other financially sound insurers, which continued and serviced the
coverage.      Some of the recent life insolvencies, like their property/casualty
counterparts, have been larger, more complex and more litigious.                  Unlike
property/casualty insolvencies, which are usually caused by problems on the liability
side of the balance sheet, life company insolvencies usually result from problems with
the company‟s investments and assets. Recent life insurer insolvencies have raised
exceedingly difficult issues regarding the insolvent insurer‟s investments in commercial
real estate, junk bonds, or other vehicles. Current life insolvencies also involve more
complex products, which may impose significant liquidity risks. The insolvencies of life



1 “Receivership” is used generically throughout this paper to refer to any insolvency proceedings against
an insurer under state law, including conservatorship, rehabilitation and liquidation. “Receiver” is also
used generically to include the insurance commissioner, who is designated as the statutory receiver of
most insolvent insurers, as well as persons appointed by the commissioner as special deputy receivers,
who serve as the de facto receiver.
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                                                     -6-
insurers writing such coverages may have a potentially devastating impact on pensions,
annuities, benefits, and other sources of retirement income.

An additional concern about solvency in the insurance industry stems from analogy to
the savings and loan debacle. There have been predictions that insurers will be the
next “savings and loan crisis.” U.S. Representative John Dingell (D-Michigan) issued a
report in the late 1980s, entitled Failed Promises2, based upon his investigation of the
Integrity, Mission and Transit insolvencies. In that report, Representative Dingell drew
many parallels between the insurance industry and the savings and loan industry,
further fueling concerns about solvency in the insurance industry. The Dingell report is
also significant in that it suggested not only that something must be done about the
solvency of insurers, but also that something must be done about state insurance
regulation. The report inferred that the states have failed to properly regulate the
insurance industry.

The TIPS Insurance Insolvency Task Force (the “Task Force”) was created to analyze
the current state-based system for dealing with insurance insolvencies, to consider
improvements or alternative structures, and to make recommendations. In considering
possible alternative structures, the Task Force considered an interstate compact, the
existing federal receivership system for federal financial institutions, a federal
bankruptcy approach, other federal alternatives, and the insurance receivership system
in the United Kingdom.




2 Failed Promises: Insurance Company Insolvencies, A report by the Subcommittee on Oversight and
Investigations of the Committee on Energy and Commerce, U.S. House of Representatives, H.R. 100-
227, 100th Cong. 2nd Sess. (1988).
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                                               -7-
           III. An Overview of State Administration of Insolvent Insurance Companies

A.        Insurance Receivership Proceedings in General

Every state has a statute that governs insurance company receivership proceedings. 3
Such statutes, which usually comprise a separate chapter in the state‟s insurance code,
provide that if an insurer becomes financially impaired or insolvent or if its continued
operation would be hazardous to its policyholders or the public, the state‟s insurance
commissioner may commence a judicial proceeding for the purpose of placing the
insurer in conservation or rehabilitation or, where necessary, liquidating the company
and distributing its remaining assets to its creditors.

Generally, when an insurer is placed in receivership, the insurance commissioner of the
insurer‟s state of domicile, pursuant to statute, will be appointed to serve as the
receiver. The receiver‟s principal function is to marshal the remaining assets of the
insolvent‟s estate and then distribute these assets to claimants in accordance with
statutory priority provisions. Insurance company receivership proceedings are usually
state proceedings because insurance is specifically excluded from coverage under the
federal Bankruptcy Code.          Because of their many other duties, insurance
commissioners rarely act personally as the day-to-day receiver of an insolvent insurer.
Most usually appoint a “special deputy receiver” to operate the day-to-day receivership
functions.

A typical liquidation order will: cancel all insurance policies issued by the insolvent
insurer; stay all actions pending against the insolvent insurer and preclude the insolvent
insurer from continuing to defend its insureds. In some jurisdictions, the state guaranty
funds may also obtain a stay of proceedings against policyholders to afford the funds
sufficient time to arrange for defense of the insured. A typical liquidation order may
also require that all creditors be provided with a copy of the order and a proof of claim
form to be completed and returned to the receiver on or before a date certain (the bar
date). The receiver acts on behalf of the insolvent insurer, marshaling the estate‟s
assets for the benefit of its policyholders, third-party claimants and all other creditors.
The receiver may commence and defend actions in the name of the insolvent insurer or
in the receiver‟s own name on the insurer‟s behalf. Generally, any assets recovered
become general assets of the insolvent insurer‟s estate.

When the receiver receives a completed proof of claim, the receiver must either allow
or disallow the claim within a prescribed period of time, and then provide a notice of the

3 To put the insurer insolvency issue in its proper perspective, it is essential to begin with a description
and explanation of the current state insurance receivership system. Additional background on state
regulatory tools to deal with an insurance company in financial trouble, including conservatorship and
rehabilitation, are found in Appendix A to this Report.


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                                                   -8-
determination to the claimant. Should the claim be disallowed in whole or in part, the
claimant may object to the receiver‟s determination, in which event the coverage issue
will be disposed of by the state receivership court in which the receivership proceeding
is pending, with standard rights of appellate review. It is important to recognize that
when an insurer has been placed in receivership, a determination that a policyholder‟s
claim is covered is distinct from the payment of that claim. While a solvent insurer will
pay a loss upon finding coverage (such that claims adjustment and loss payment
become two parts of the claim process), the receiver of an insolvent insurer may allow a
claim in full, but never pay out in full, or at all, on the related loss as the insolvent
insurer generally does not have enough assets to pay all its debts.

Since an insolvent insurer‟s liabilities almost always exceed its marshaled assets at the
time of distribution, and given that administrative expenses of an insolvency are usually
substantial, it is unlikely that policyholders and third-party claimants will receive full
reimbursement from the estate, just as it is quite likely that general creditors will receive
nothing. However, with respect to some policyholders and third-party claimants, there
is also the remedy afforded by the guaranty funds, as described below.

B.        State Guaranty Funds4

Guaranty funds are involuntary, statutorily mandated, not-for-profit entities composed of
all the solvent insurers licensed to transact business in a state for the lines of coverage
protected by the guaranty fund. Guaranty funds exist to pay the covered claims as
defined in each state statute for most insolvent insurers. Guaranty funds operate
through a board of directors composed largely of representatives of licensed insurers in
that state. Many guaranty funds hire a full time fund manager and staff, as appropriate,
to operate their day-to-day operations. The original intent of guaranty funds was to
provide rapid payment to individual and small business policyholders and third-party
claimants, who were usually unsophisticated in insurance matters and most likely to
need protection in case of an insurer insolvency. As matters have evolved, however,
many large corporate insureds are now able to avail themselves of guaranty fund
coverage.

After an insolvency, insurers which are members of the guaranty fund are assessed,
based on their premium volume in the state, to pay the covered claims of the insolvent
insurer in that state. Guaranty funds are mechanisms for collecting and pooling money
of solvent insurers to pay certain policy obligations of the insolvent insurer. Life-health
guaranty associations are additionally required to assure continuation of coverage



4 “Guaranty fund” is used throughout this report generically to refer to both the life-health and
property/casualty entities that have been created in all states to assess solvent licensed insurers to pay
the claims of those insolvent insurers. In most states, the funds are called “guaranty associations” under
state law.

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                                                  -9-
through reinsurance or guarantees. Unauthorized insurers and surplus lines insurers
are not covered under the guaranty funds and are not subject to assessments. 5

          1.        The Property/Casualty Guaranty Funds

The individual state property/casualty guaranty fund laws are substantially similar to
each other as they are based on the NAIC Model Property/Casualty Guaranty Fund
Act.6 In order for a claim to be covered by a guaranty fund, it must usually arise under a
policy issued by an insurer that was licensed to transact business in the state. The
claim must also be covered under the terms and conditions of the insurance policy
issued to the insured by the now insolvent insurer. Most property/casualty guaranty
funds exclude coverage for losses arising under life, accident and health insurance,
annuities, fidelity and surety bonds, credit insurance, mortgage guaranty insurance, title
insurance, investment type products, ocean marine insurance and insurance provided
by or guaranteed by the government.

Guaranty funds also pay only certain types of claims made by certain types of
claimants, and their liability is further limited by maximum dollar amounts (caps) with
respect to each covered claim ranging from $50,000 to $1 million. Should a covered
claim exceed the guaranty fund‟s statutory cap, the claimant retains a claim for the
excess directly against the estate of the insolvent insurer. To the extent that guaranty
funds pay claims, they stand in the shoes of the policyholder or claimant and can seek
reimbursement from the receiver out of the assets of the estate of the insolvent insurer.

Insurers may recoup their guaranty fund assessments in one of three ways as provided
by state statutes: by imposing surcharges on premiums for insurance policies written in
the future, by increasing premium rates for policies sold in the state, or by set-off
against the premium tax obligations imposed by that state. After the guaranty fund has
paid a covered claim, it becomes subrogated to the claimant‟s rights against the
insolvent insurer‟s estate, occupying the same priority level as claims of policyholders,
beneficiaries, insureds, and third-party claimants.       However, unlike these other
claimants, the guaranty funds are entitled to periodic early access to the estate‟s assets
to reimburse them for claims they have paid. 7 The guaranty funds are also entitled to
reimbursement for their costs of administration and claims handling; these costs are


5 The exception is New Jersey, which has established a guaranty fund comprised of all surplus lines
insurers approved to write business in that state.

6 Post-Assessment Property and Liability Insurance Guaranty Fund Model Act, reprinted in III NAIC
Model Laws, Regulations and Guidelines, at 540-1, et seq. (1999).

7 Early access provisions allow the guaranty fund to receive funds from the estate prior to any general
distribution to claimants. In the event of an overpayment, as determined by the final distribution made by
an estate, the guaranty fund must reimburse the estate.

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                                                 - 10 -
generally afforded the same priority as administrative expenses of the estate, usually
the highest priority available under the state statute.

          2.        The Life-Health Guaranty Funds

The state life-health guaranty funds are also created by state law to protect
policyholders of an insolvent insurance company up to the statutory benefit limits in the
state of residence of the policyholder or beneficiary. The life-health guaranty fund laws
are also substantially similar due to the NAIC Model Life-Health Guaranty Fund Act.8
All insurance companies licensed to sell life insurance, annuities or health insurance
must be members. The life-health guaranty funds cooperate with the insurance
commissioner and the deputy receiver in determining whether an insurance company
can be rehabilitated, or whether the insurer is insolvent and will have to be liquidated
with its policies transferred to, and assumed by, other insurance companies. If an
insurance company is insolvent and ordered to be liquidated, each state life-health
guaranty fund in which the insolvent insurer was a “member” will levy assessments
against member insurers to provide the money needed to fund a transfer of the covered
policies to a solvent insurer.

The life-health guaranty funds also pay covered claims of insolvent insurers. However,
during the period of time following an order of rehabilitation or the order of liquidation,
the receiver typically continues payment of claims. Policyholders in all 50 states, the
District of Columbia and Puerto Rico, are covered by guaranty funds in their state of
residence, up to certain statutory limits. These benefits are usually $300,000 for life
insurance death benefits, $100,000 for cash surrender value of life insurance, $100,000
for health insurance claims and $100,000 in present value of an annuity. Individual
coverage generally does not exceed an aggregate of $300,000 regardless of the
number or types of policies. State laws in this area also vary as to what insurance
products are covered by the life-health guaranty funds.

State life-health guaranty fund laws focus on the continuation of coverage of life
insurance, annuities and health insurance for the policyholders because many may no
longer be insurable, or insurable on the same terms, due to health conditions or age.
The statutory obligation of the guaranty funds is to “assume, reinsure or guaranty . . .
the contractual obligations” of the insolvent insurer. If the policies involved are
cancelable, such as contracts of group life insurance or group health insurance, they
may be terminated on the terms set forth in the contract. The life-health guaranty funds
are a more recent phenomenon than their property/casualty counterparts, which have
been in existence in all states for nearly 30 years. Not until 1991 did the last four
jurisdictions – Colorado, District of Columbia, Louisiana and New Jersey – enact their
respective life-health guaranty fund laws.


8 Life and Health Insurance Guaranty Association Model Act, reprinted in III NAIC Model Laws,
Regulations and Guidelines at 520-1, et seq. (1999).
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                                               - 11 -
C.        Ancillary Receivers

An ancillary receiver may be appointed by a court in a non-domiciliary state in which the
insolvent insurer maintains assets, which may include general and special deposits.
The ancillary receiver's primary responsibility is to marshal the local assets of the
insolvent insurer. These funds may be used to pay certain claims against special
deposits and to reimburse the costs of administering the ancillary receivership. Excess
funds are transferred to the domiciliary receiver and become part of the general assets
of the estate.

Depending on statutory provisions, claimants in an ancillary state may exercise the
option of having the ancillary receiver adjudicate their claims against the insolvent
insurer, provided the domiciliary receiver is provided with notice and an opportunity to
contest the claim. The option is designed to afford greater convenience to the out-of-
state claimant so that, at least for purposes of allowance or disallowance of a claim
against the insolvent insurer, the claimant need not travel to or retain counsel in the
state in which the insolvent insurer was domiciled. Assuming appropriate notice has
been provided to the domiciliary receiver, coverage determinations made by the
ancillary receiver will receive full faith and credit in the domiciliary receivership
proceeding, and there is no discrimination between ancillary and domiciliary claimants
with respect to the adjudication of coverage or the distribution of the estate‟s assets.
Although the ancillary claimants must still seek distributions from the domiciliary
receiver, they may come to the ancillary forum with claims that have already been
liquidated.

D.        Task Force Discussion and Analysis of Key Problems in the Current State
          System

To analyze the insurance receivership system, the Task Force believes that insolvency
in the insurance industry must first be put into its proper perspective:




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                                               - 12 -
                   Number of Insolvencies

          Historically, the number of property/casualty insurer company failures has been
          small by almost any measure. From 1969 through 2000, approximately 400
          property/casualty companies failed. In the worst year, 1985, there were 49 new
          insolvencies and between 1986-1990, the average number of failures per year
          was approximately 30 companies. Given that there are of approximately 3,800
          property/casualty insurance companies nationwide, this means that less than 1
          percent of the property/casualty industry becomes insolvent in a given year.

          From 1983 to 2000, 157 life, health and annuity insurers doing business in more
          than one state failed. The worst years for life insurance company failures were
          1989 through 1992 when 83 insurers (61 percent of the total failures) were
          placed into rehabilitation or liquidation.

          By way of comparison, the banking industry was comprised of approximately
          2,100 companies in the years 1987-1989 when the average number of failures
          exceeded 200 per year. There were approximately 225 thrift failures in 1988
          alone.

                   Cost of Insolvencies

          The financial drain imposed on the property/casualty industry by guaranty fund
          assessments has never exceeded $1 billion in a year, and these assessments
          have consistently represented less than 0.5 percent of net premiums written.

          Some of the multi-state life insolvencies are large. The top ten insolvencies in
          terms of estimated costs to the life-health insurance guaranty funds are:
          Confederation Life Insurance Company (U.S.) (0), American Integrity ($78
          million), Executive Life Insurance Company ($2.7 billion), National Heritage Life
          Insurance Company ($247 million), Guarantee Security Life Insurance Company
          ($181 million), Corporate Life Insurance Company ($259.51 million) Inter-
          American Life Insurance Company of Illinois ($219 million), Inter-American Life
          Insurance Company ($133 million), Kentucky Central Life Insurance Company
          ($7 million), Mutual Security Life Insurance Company ($45 million), Mutual
          Benefit Life Insurance Company (0), Summit National Life Insurance Company
          ($42 million), and New Jersey Life Insurance Company ($81.6 million).

          Since 1988 when the National Organization of Life Health Guaranty Associations
          (NOLHGA) was formed and began maintaining aggregate assessment data, total
          life, health and annuity assessments have totaled about $5.6 billion. Compare
          these figures, however, with the fact that in 1988 alone, the cost of failed thrifts
          exceeded $33 billion, and failed banks added another $6-7 billion to the tab.
          Further, the total bill taxpayers will be asked to pay for failed thrifts will exceed
          $200 billion.
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                   Scope of Insolvencies

          Seven states accounted for 73 percent of the property/casualty insolvencies in
          the year 2000: California, Hawaii, Massachusetts, Missouri, New Jersey, Ohio
          and Pennsylvania. These states have regulatory oversight for less than 40
          percent of all domestic companies in the industry. The average failure frequency
          for three of the seven states is higher than the national average of 0.7 percent.

          When put in its proper context, insolvency is not a large problem in the insurance
          industry, but individual estates have been costly for the solvent insurer members
          of the guaranty funds and have caused problems of coordination and
          cooperation among the states that need to be addressed.

          Although statutory finetuning of the guaranty funds to reflect current law and
          practice is always appropriate, the Task Force believes that the state guaranty
          funds are currently working as intended to pay claims. Accordingly, it focused its
          attention on the insurance receivership process.

          Although criticisms of the state receivership system often revolve around
          uniformity, or the lack thereof, the real problem may not lie in differences among
          the state laws. The NAIC Model Rehabilitation and Liquidation Act (the “NAIC
          Model Liquidation Act”)9, while being a compromise document, is a good model
          law. The Task Force concluded that the major dissatisfactions with the current
          state system are in the selection, qualification, performance and accountability of
          insurance receivers. Most of the problems in the current system relate back,
          directly or indirectly, to these issues. The Task Force also believes that
          receivers sometimes lack the proper statutory authority and procedures to bring
          the estates of insolvent insurers to closure. Sometimes the closure problem is
          also related to the selection, qualification and accountability of insurance
          receivers.

          Under state insurance receivership laws, the insurance commissioner becomes
          the statutory receiver, but the commissioner in turn appoints a special deputy to
          serve as the de facto receiver to administer the day-to-day operations of the
          insolvent insurer‟s estate. Appointees may have little or no insurance expertise,
          which exacerbates the many complicated problems that exist in administering an
          insolvent insurer‟s estate, particularly in the initial phases. For example, the
          disarray in which the books and records of an insolvent insurance company are
          usually found can be compounded by an inexperienced receiver who doesn‟t

9 Most states have adopted the NAIC Model Rehabilitation and Liquidation Act or provisions which are
substantially similar. The Model Act is reprinted in III NAIC Model Laws, Regulations and Guidelines, at
551-1, et seq. (1999). The Uniform Insurer‟s Liquidation Act is also a model statute upon which many
state laws were based prior to the adoption of the NAIC Model Liquidation Act.
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                                                - 14 -
          understand insurance company operations. Similarly, unless the receiver acts
          promptly upon appointment, certain assets of the estate can be diminished.
          Furthermore, invested assets of the estate, such as real estate and mortgages,
          may need prompt attention to preserve their value. Sometimes receivers retain
          outside consultants, including lawyers and accountants, who may have little
          insurance expertise. Such actions may prolong the duration of the estate,
          dissipate its assets and increase the expenses of administration.

          The system of one receiver for each estate poses problems among the states
          and even internally within a state. Each insurance company insolvency creates a
          wholly different estate and administration, with different demands for proof of
          claims, bar dates, and financial reporting. Guaranty funds often complain that
          there is no uniformity from insolvency to insolvency and that they are often asked
          to produce the same information in multiple insolvencies or perform the same
          functions in various formats. Reinsurers complain that although most state laws
          permit offsets in liquidation, they have had to relitigate the issue in many states
          and sometimes in multiple insolvencies in the same state.

          There is also inadequate oversight over receivers in many of the states. Due to
          financial constraints and other regulatory obligations, insurance commissioners
          and state insurance departments may not have the resources or the time to
          diligently exercise their statutory authority to supervise receivers. Moreover, the
          receivership courts essentially rubber stamp the actions of special deputy
          receivers. Even when a receivership court actively exercises its supervisory
          authority, there may still be little institutional memory. With different receivership
          courts in each state for every insolvency, oversight is “hit or miss” rather than a
          consistent part of the state receivership system.10

          Receivers have little incentive to police themselves. Receivers have little or no
          motivation to bring an estate to an early closure. There is almost a built-in
          incentive to prolong the administration of the estate because there is no structure
          to provide any reward for prompt resolution of claims or efficient administration.
          The longer an estate is open, the more difficult it becomes to retain a
          professional staff. Most times, the receiver will retain at least some former
          company employees to assist in the runoff of its business. The most qualified
          persons, understanding the lack of any certainty, look elsewhere for permanent
          employment.


10 In Maryland and the District of Columbia, for example, insurer receiverships are assigned to the trial or
circuit courts, in which there is a rotation of judges. In some other states, where each insolvency is
assigned to a single court, the judge who presides over the entire receivership proceeding may have had
no prior receivership experience and may not handle another insolvency again. If another insurer
becomes insolvent in the state, it may be assigned to a different judge in the circuit.


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                                                  - 15 -
          The Task Force concluded that these are the major problems in the current state
          receivership system that must be addressed. In its deliberations and final report,
          the Task Force explored ways to improve the current system, as well as
          alternatives to it.




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                                               - 16 -
               IV. Improving the Current State Insurance Receivership System

A.        Background on the Current State System

Having identified the problems in the current state receivership system as the selection
of qualified receivers, the accountability for and oversight of their performance and lack
of incentives and statutory authority and procedures to bring estates to timely closure,
the Task Force explored solutions to these problems within the context of the current
system. While the current receivership system may not be perfect, it is in place and
functioning. Furthermore, it appears unlikely to be replaced in the near future.

B.        Improving the State Insurance Receivership System

The Task Force examined the following methods to improve the selection, qualification,
performance and oversight of state insurance receivers:

          1.        State Liquidation Bureaus

                   Description – State liquidation bureaus are state government agencies,
                    staffed by state employees, whose sole purpose is to administer all
                    insurer insolvencies in the state. State liquidation bureaus can be housed
                    in the insurance department or in a separate location, but in all cases,
                    they are under the control of the insurance commissioner as statutory
                    receiver. The bureau concept is intended to give states the ability to
                    retain competent and professional persons by creating permanency,
                    career paths, and opportunities that would be absent for the staff of an
                    individual estate with an uncertain, but finite duration. States with a large
                    number of domestic insolvencies that are likely to remain open over an
                    extended period of time might benefit from a state liquidation bureau.

                   Statutory Authority – Several states have liquidation bureaus: including
                    Arkansas, California, Florida, Illinois, Missouri, New York, and West
                    Virginia. No special statutory authorization is needed to create a
                    liquidation bureau. Insurance commissioners establish bureaus under
                    their authority as statutory receiver of insolvent domestic insurance
                    companies. Some states use a combination of an in-house bureau and
                    independent receivers.         California, for example, handles small
                    insolvencies in its liquidation bureau but engages independent receivers
                    for larger insolvencies.       New York has traditionally handled all
                    insolvencies internally in its liquidation bureau, but has recently gone
                    outside in at least one insolvency.          Texas formerly handled all
                    insolvencies internally with a liquidation bureau, but it abolished the
                    bureau and has now “privatized” the function with appointments of outside
                    receivers.
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                    Unsuccessful legislation introduced in California in 1995 (A.B. 1274)
                    would have established a nonprofit public benefit corporation, which would
                    have been authorized to consolidate various estates for ease and
                    economy of administration. This entity would have the authority to sue
                    and be sued, to enter into contracts necessary to act on behalf of the
                    Commissioner and to exercise the powers of the Commissioner set forth
                    in the California Insurance Code. Under the California legislation, it was
                    unclear whether this commission or bureau would become the liquidation
                    bureau or whether it would be a separate entity that would exist alongside
                    of the existing structure. If it were the latter, it would have raised
                    substantial concerns of dual and conflicting administration. It would have
                    been the first statutorily created liquidation bureau outside an insurance
                    department. Later, the California Insurance Department reorganized and
                    created a separate liquidation bureau within the Department, which
                    administers all domestic insolvencies.

                   Discussion – A well-managed liquidation bureau can be an efficient
                    option for the administration of insurer insolvencies, assuring a sufficient
                    volume of activity. The Task Force believes that where sufficient volume
                    exists, the liquidation bureau approach may work to improve the current
                    state system. In theory, the advantage to a liquidation bureau is the
                    continuity of insurance insolvency expertise within the insurance
                    department. Some of the liquidation bureaus have worked well; others
                    have not. In some cases, the bureau concept has helped the states to
                    obtain and retain qualified professionals who are available to handle
                    insolvencies. Often, the liquidation bureaus hire employees from the
                    insolvent insurance company to administer the estate. As the bureaus
                    take on new insolvencies, new staff is added from the newly insolvent
                    companies, with the result that the bureaus can become an overstaffed
                    conglomeration of the former employees of insolvent companies.
                    Experience also indicates that liquidation bureaus have no greater
                    incentive than private receivers to close estates earlier or more efficiently;
                    the bureaus can take on a life of their own. Funding for a liquidation
                    bureau generally comes from the assets of the estates.

                    Therefore, the Task Force does not recommend that states create
                    liquidation bureaus as vehicles to improve the administration of insolvent
                    insurers‟ estates. Actual experience with liquidation bureaus has not been
                    consistent.

                    As a less formal alternative to the establishment of a formal liquidation
                    bureau, the Task Force recommends that each state insurance
                    department designate at least one person at the deputy or assistant
                    commissioner level who is charged with the responsibility for becoming
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                                                 - 18 -
                    and remaining expert in insolvency matters. Thus, each state insurance
                    department would have at least one insolvency expert on hand should an
                    insolvency occur, and that person would be charged with primary
                    regulatory responsibility over all insolvency matters.

          2.        Permanent State Oversight Boards

                   Description – Another approach to solve the key problems in the
                    administration of insolvent insurer‟s estates that the Task Force discussed
                    would be a permanent state oversight board created to oversee the
                    administration of domestic insurer insolvencies. To the extent that the
                    receivership courts and state insurance departments are not able or
                    willing to effectively supervise insurance receivers, a permanent structure
                    could be statutorily created to perform the oversight.

                   Statutory Authority – No such oversight board currently exists. A 1995
                    Missouri legislative proposal (H.B. 6744), which failed, would have created
                    such a board.         Under the bill, a “Missouri Insurers' Insolvency
                    Commission” would have been created, consisting initially of the following
                    appointed members: (1) an attorney who has practiced in the area of
                    insurance insolvency; (2) an accountant who has practiced in the area of
                    insolvency or insurance accounting; (3) a retired judge with experience in
                    cases involving insolvent estates; (4) a person with management level
                    experience in the administration of a property/casualty insurance
                    company; (5) a person with management level experience in the
                    administration of a life-health insurance company; (6) a former creditor of
                    an insolvent insurance company or a former regulator of insurance
                    companies; and (7) a member of the general public.

                    Under the Missouri bill, on or after a specified date, three certified
                    insolvency practitioners would have served on the Commission and the
                    remaining four commissioners would have been as follows:

                               –         a public member;

                               –         a person with either a legal or accounting background
                                         with at least five years‟ experience in insurance
                                         insolvency;

                               –         a retired state or federal judge with insolvency
                                         experience or a creditor or former regulator of an
                                         insurance company, and

                               –         a person with management level experience in either
                                         a property/casualty or a life-health company.
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                                                      - 19 -
                    The bill provided that after a specified date, only persons certified as an
                    insolvency practitioner by the Commission could be appointed as a
                    receiver for an insolvent insurer. Such a receiver would have all the
                    powers under the current state receivership law, but the receiver would be
                    accountable directly to the Insolvency Commission and to the liquidation
                    court. The state insurance department was specifically relieved of any
                    duties and responsibilities regarding the insolvency once the receiver was
                    appointed. The Commission would have had standing in the receivership
                    court and would have had the same immunity from liability given to the
                    receiver. Members of the Insolvency Commission were not to be
                    compensated, although they were to be entitled to reimbursement of
                    expenses as approved by the receivership court.

                   Discussion – The Task Force recognized that the oversight board
                    approach creates a permanent and formal supervisory process for
                    insurance receivers. The approach should generate some consistency in
                    handling estates as the same commission would oversee every
                    insolvency in a state. At the very least, it would create institutional
                    memory in a state‟s receivership process.

                    The Task Force, however, saw significant downsides to this approach. It
                    might be cumbersome and relatively expensive to create a commission in
                    every state. It could be very inefficient in states with only a few
                    insolvencies. A different commission in each state may increase rather
                    than resolve problems of cooperation and coordination of a multi-state
                    insurer insolvency. Additionally, although there may be more oversight of
                    receivers generally, this may not necessarily result in more consistency in
                    the administration of estates from state to state. There is also no
                    guarantee that an appointed board, selecting and overseeing insurance
                    receivers, would bring more qualified persons to the process. Another
                    concern with this approach is that the overall impact may be to add
                    another costly layer of administration on top of the current system.

                    Because each insurer insolvency is very different, it cannot be said that
                    one Board under this approach would be workable in all situations.
                    Therefore, the Task Force cannot recommend the creation of a formal
                    oversight board. The Task Force does, however, adopt some of the
                    concepts underlying an oversight board or panel in the discussion of
                    privatization in Chapter V.

          3.        Prequalification and/or Certification of Receivers

                   Description – Currently, receivers are generally appointed by the
                    domestic insurance commissioner. The insurance receivership statutes
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                                                - 20 -
                    contain neither a job description nor any experience or other requirements
                    for this position. Assertions are often made that receivers are selected
                    without regard to competence or experience or that political
                    considerations may be an overriding factor in the selection. Some of the
                    dissatisfaction may arise from disagreement with decisions made by a
                    receiver during the pendency of the receivership process.

                    Entities such as the International Association of Insurance Receivers
                    (IAIR), have suggested that a certification program for prospective
                    receivers be established. Prospective insurance receivers would have to
                    prequalify and receive certification as a receiver under a specific set of
                    standards before they could be appointed as a receiver. Generally, such
                    certification proposals have focused on prior experience as a receiver or
                    as a member of a receiver‟s staff for estates of insolvent insurers of
                    certain predetermined size. See Appendix B for the IAIR certification
                    requirements as an example of a certification program.

                   Statutory Authority – No known statute or qualification or certification
                    proposal sets forth objective qualifications or measures for an insurance
                    receiver‟s knowledge or competency. While the NAIC Model Liquidation
                    Act is a comprehensive and continuously updated document regarding the
                    administration of an insolvent insurer‟s estate from appointment of the
                    receiver to closure of the estate, it is silent on the qualifications of the
                    receiver. The NAIC Model Liquidation Act provides that the domestic
                    insurance commissioner becomes the receiver and appoints special
                    deputy receivers as needed. Some state laws require that the receiver be
                    a state resident.

                    An unsuccessful 1995 Missouri proposal (HB 6744) would have created
                    the Insolvency Practitioner Certification in an attempt to address the
                    qualifications of an insurance receiver.         The Missouri Insolvency
                    Commission would have been responsible for setting appropriate
                    standards for the certification of insolvency practitioners. Tests would be
                    waived for insolvency practitioners practicing before the effective date of
                    the statute if they met certification requirements through experience. To
                    be credited on the basis of experience, an applicant must have served as
                    a special deputy receiver or in a senior management capacity for at least
                    five consecutive years and had at least 3,000 hours of actual work during
                    that period. The Commission would have been permitted to refer to the
                    federal standards for trustees in bankruptcy, to standards in other states
                    that certify or license insolvency practitioners, and to similar standards
                    used in the United Kingdom.

                   Discussion – There is no generally accepted list of required
                    characteristics or qualifications for a receiver that will assure success in
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                                                - 21 -
                    that role and there are problems with developing a list of qualifications for
                    receivers. Not only are there a limited number of new insolvencies in any
                    given year, but the insolvencies vary greatly in company characteristics
                    and underlying causes. Insolvencies may involve property/casualty
                    insurers, life-health insurers, HMOs, sureties or title insurers. An
                    insolvency could involve a multinational or international insurer or it may
                    involve a small county mutual insurer. In some instances, the insolvent
                    insurer‟s business might be written on an admitted basis with adequate
                    guaranty fund coverage. In others, the business could be written on a
                    surplus lines or unauthorized basis so that guaranty fund coverage would
                    not be available to assist policyholders and claimants. Issues underlying
                    the insolvency that could define the role of the receiver may include some
                    or all of the following: mismanagement, fraud, poor underwriting, poor
                    investment of assets, catastrophic claims, uncollectible reinsurance, and
                    creditors‟ rights or collection problems. In some instances, there are
                    substantial assets available for the management of the estate, either
                    through liquid assets on hand or from the collection of reinsurance
                    proceeds. In other instances, there are virtually no assets available for
                    the management of the estate and payment of claims against the estate.

                    Another significant factor will be the condition of the insurer at the time it is
                    placed in receivership.       Where the insurer is an operating entity,
                    employees are in place and computers and other management systems
                    are operational. At the other end of the spectrum are insurers that have
                    been physically disassembled with employees discharged prior to the time
                    the receiver gains control of the company. A company in such disarray
                    would require a receiver with substantial industry experience to
                    reconstruct its history and records.

                    Considering all of the possible combinations and configurations of the
                    characteristics of an insolvent insurer, the Task Force concluded that
                    there is no single description of an ideal insurance receiver. Rather, it is
                    more important to consider the needs of each individual insurance
                    receivership and to select the appropriate person or entity to act as the
                    receiver or special deputy for that insolvency.

                    It is important to note that, in most instances, the receiver will be acting as
                    a manager or the chief operating officer of an insurance runoff company.
                    Thus, the receiver could be an accountant, a lawyer, or a person with
                    some business experience as an insurance executive, or even an
                    institution or firm. The real need is to select the appropriate person or
                    entity to manage the insolvent insurance company in the receivership
                    process as its assets are marshaled, its claims are adjusted and its
                    insurance business is sold. In the selection process, it is important to
                    determine early on whether the receivership duties require employment of
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                                                  - 22 -
                    a full-time receiver on a salaried or contract basis, or whether an attorney,
                    accountant or other professional serving part-time will be most cost
                    effective.

                    Looking at the general requirements for selection of receivers, the Task
                    Force believes that the most likely and important quality would be
                    knowledge of insurance company operations. Other areas of knowledge
                    that would be helpful for the receiver include experience with insurance
                    fraud, creditors‟ rights issues, professional liability issues, asset
                    management and insurance receivership issues regarding state law and
                    procedures in the domiciliary jurisdiction. Beyond the knowledge of
                    insurance company operations, the need for other specialized knowledge
                    will be dictated by the size, type, corporate and financial configurations
                    and causes of insolvency of the failed insurer. Ultimately, the goal in
                    selection should be a result-oriented manager who will make every effort
                    to liquidate the company in an efficient, timely and expeditious manner.

                    The Task Force‟s conclusion may come as a surprise to many current
                    receivers and practitioners in this area. The discussion and debate on the
                    qualifications of insurance receivers in other forums have focused a great
                    deal on experience in past insolvencies and whether single estate or
                    multiple estate experience is preferable. By contrast, the Task Force
                    concluded that a receiver‟s job is that of an insurance operations
                    manager, and the best receiver should have experience in the industry
                    and management experience rather than only experiences with insurer
                    insolvencies. Because each receivership is unique, past receivership
                    experience should not necessarily qualify an individual or firm to serve as
                    a receiver in a different insolvency.

                    There are also too few insurer insolvencies to build up a pool of
                    experienced insurance receivers in most states. Thus, if prior experience
                    as an insurance receiver were determined to be a significant requirement
                    in the receiver selection process, the pool of prospective receivers would
                    have to be national, not state specific.           Particularly for smaller
                    receiverships, however, state specific experience may be very valuable.
                    Since there are few insurer insolvencies in any given time period, not
                    many individuals would have the incentive to go through a certification
                    process with little likelihood of future employment.

                    The suggestion that pre-certification of receivers is appropriate may
                    unduly restrict the pool of potential candidates, particularly if prior
                    experience with a receivership becomes a precondition to appointment as
                    receiver for any new insolvency. Knowledge of local law and the judicial
                    system of a specific state may be important to the success of managing
                    an insurer insolvency, and prior receivership experience requirement
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                                                - 23 -
                    could be an unreasonable restriction on the receivership selection
                    process. This is particularly the case where prior receivership experience
                    may not be evidence of competence of other specific requirements
                    needed for a specific insolvency. A certification process may simply steer
                    receivership appointments to those who are certified, which may not
                    necessarily be those who have the expertise needed in the particular
                    insolvency.

                    Another factor is the problem of determining the appropriate entity to
                    certify receivers. Typically, the licensure process is undertaken as a
                    function of governmental regulation. There may be antitrust problems if a
                    private entity or trade association were to certify only its own members.
                    There would also seem to be an insufficient need in most states for a
                    public board, the establishment of which would clothe the selection
                    process with the cloak of state action. Indeed, in some states the
                    frequency of need could be so low that even well qualified people would
                    not find it worthwhile to participate and seek certification in the state.

                    As part of its deliberations, the Task Force also compared the
                    appointment of individual persons to the appointment of institutional
                    receivers, such as law firms, accounting firms, consultants, and similar
                    organizations.      Traditionally, individuals have been appointed as
                    receivers, although there is generally no prohibition on the appointment of
                    institutional receivers. In Canada, for example, institutional receivers have
                    been used with success. As previously discussed, the Task Force
                    believes that there is no one format or approach for appointment of
                    receivers other than substantial insurance industry and management
                    background.

                    The appointment of an institutional receiver has some beneficial aspects.
                    A firm brings with it many resources in terms of staff, office space and
                    equipment; an individual receiver may have to obtain such resources. For
                    example, a firm may have branch offices or ready contacts in all states in
                    which the insolvent insurer did business; by contrast the individual
                    receiver may need to develop such a network. An institutional receiver is
                    an ongoing business, which can attract and retain a qualified and
                    professional staff. The business of the firm will go on after the insolvent
                    insurer‟s estate is closed, whereas jobs in an individual receivership office
                    are of limited duration. The firm‟s reputation is on the line, giving it an
                    incentive to do an effective and efficient job so that it will be retained for
                    future receivership business. Institutional receivers may be more likely to
                    have errors and omissions and professional malpractice insurance
                    coverage.


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                                                 - 24 -
                    There are disadvantages to institutional receivers as well. While an
                    individual receiver will most likely need to retain outside professionals to
                    assist in the liquidation and can tailor the qualification and number of such
                    persons to the exact needs of the estate, institutional receivers may bring
                    unneeded staff and expense to an estate. While institutional receivers
                    may also present themselves as cost efficient, the cheapest receiver isn‟t
                    always the best. Some institutional receivers might not bring insurance
                    company management experience and expertise to the insolvency.

                    The Task Force believes that it would be appropriate to experiment with
                    institutional receivers. One of the hallmarks of state insurance regulation
                    is that individual states can experiment with use of new regulations or
                    techniques, which may be exported to other states if successful.

                    Another issue that is often overlooked at the time a receiver is selected is
                    that of conflict of interest. Sometimes actual conflicts may preclude the
                    retention of a qualified person or institution as the receiver. This could
                    happen when the proposed receiver is a lawyer in a firm which represents
                    entities that will be in an adverse position to the insolvent insurer‟s estate.
                    In some states, there may also be a perceived conflict when the proposed
                    receiver is a professional who represents clients in other matters opposing
                    the insurance department. Issue conflicts can also arise and efforts
                    should be made to identify them at an early time. For instance, an
                    accountant should not be employed as a receiver or in a key support role
                    where the receiver will be pursuing professional liability claims against the
                    insolvent insurer‟s accountants and the receiver‟s accounting firm is
                    defending similar malpractice claims brought by other receivers in other
                    insolvencies. In this context, it has been suggested that conflict of interest
                    provisions be implemented.

                    The Task Force concluded that efforts to develop a list of “standard”
                    qualifications and/or to prequalify or certify qualified persons as insurance
                    receivers will not in itself improve the current state receivership system. It
                    is not possible to develop a single list of objective qualifications for
                    insurance receivers as the skills and experience needed will vary greatly
                    by insolvency. More qualified and competent receivers will be appointed
                    only when insurance commissioners understand the necessity of
                    appointing persons with substantial knowledge of insurance company
                    operations. The state receivership process will also be improved when
                    the other recommendations in this report regarding the accountability and
                    oversight of receivers are implemented.

          4.        Guaranty Fund Standing and Intervention


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                                                 - 25 -
                   Description – The property/casualty guaranty funds have been in
                    existence since 1969 and have developed considerable expertise in
                    insolvency law and practice. Several of the life-health guaranty funds
                    have also been in existence since the early 1970s. This expertise should
                    be utilized in the state insurance receivership system by providing for
                    participation by guaranty funds in the receiver selection process and the
                    subsequent oversight and review of the receiver‟s performance. The
                    particular institutional expertise of guaranty funds in the administration
                    and claims handling activities of insolvent insurers should also be used by
                    granting the funds standing to formally participate in the proceedings.

                   Statutory Authority – The NAIC Model Property/casualty Guaranty Fund
                    Act does not grant a guaranty fund either a right of standing or the right to
                    intervene as a party in receivership proceedings. Some state laws
                    recognize standing and the right of the guaranty funds to intervene in
                    receivership proceedings. By contrast, the Model Life-Health Guaranty
                    Fund Act recognizes both rights. The following provision has been
                    enacted into the laws of the vast majority of states for the life-health
                    guaranty funds:

                               The Association will have standing to appear before any
                               court in this state with jurisdiction over an impaired or
                               insolvent insurer concerning which the Association is or may
                               become obligated under this Act. Such standing will extend
                               to all matters germane to the powers and duties of the
                               Association, including, but not limited to, proposals for
                               reinsuring, modifying or guaranteeing the policies or
                               contracts of the impaired or insolvent insurer and the
                               determination of the policies or contracts and contractual
                               obligations. The Association will also have the right to
                               appear or intervene before a court in another state with
                               jurisdiction over an impaired or insolvent insurer for which
                               the Association is or may become obligated or with
                               jurisdiction over a third party against whom the Association
                               may have rights through subrogation of the insurer’s
                               policyholders.11

                    In the 1997 revision of the Model Life-Health Guaranty Fund Act, this
                    section was made even stronger by adding the express right of the life-
                    health funds to intervene in any court or agency proceeding. The
                    difference between the laws concerning the life-health and
                    property/casualty guaranty funds lies in the differences between life-health

11 Life and Health Insurance Guaranty Association Act, reprinted in III NAIC Model Laws, Regulations
and Guidelines, at 520-17J (1999).
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                                                   - 26 -
                    and property/casualty insolvencies. On the life-health side, the guaranty
                    fund takes over and continues the policies of, or finds qualified insurers to
                    purchase books of business from, the insolvent company. Thus, one of
                    the major rationales for granting the life-health guaranty association
                    standing and the right to intervene is that all of the foreign state life-health
                    guaranty funds with covered resident policyholders are directly affected by
                    the rehabilitation/liquidation plan, either by assumption and sale of the
                    business or otherwise in the disposition of the insolvent insurers‟
                    insurance liabilities. By contrast, the receiver in most property/casualty
                    insolvencies cancels all policies. The property/casualty guaranty funds do
                    not assume and continue the insolvent insurer‟s business. Nevertheless,
                    they are responsible for the administration and payment of covered
                    claims. There should be close cooperation between the receiver and the
                    guaranty funds in conjunction with the payment of covered claims and the
                    collection of reinsurance recoverables.            In most instances, the
                    property/casualty guaranty funds are the largest creditor of the estate due
                    to their payment of covered claims.

                    From the guaranty fund perspective, the statutory right to intervene in
                    receivership proceedings is more important than standing, although the
                    Task Force felt that both are desirable. With standing, the guaranty fund
                    can provide information, but the receiver and/or receivership court are not
                    obliged to consider or respond to it since the guaranty fund‟s right to
                    participate in receivership matters is discretionary with the receivership
                    court. With the full right to intervene, the courts must recognize the
                    guaranty funds and their right to raise issues, protect rights and assert
                    claims.

                   Discussion – The right for the guaranty funds to intervene in all types of
                    receivership proceedings is important. A declaration of insolvency without
                    a final order of liquidation triggers property/casualty guaranty fund
                    coverage in some states. In the Empire Mutual rehabilitation proceeding
                    in New York, for example, the court declared the insurer insolvent, but a
                    final court order of liquidation was not issued. Guaranty funds collectively
                    tried to intervene in this proceeding in order to receive reimbursement for
                    the payment of covered claims when the company was released from
                    rehabilitation proceedings. Thus, the right to intervene in rehabilitation
                    proceedings is as significant as intervention in a liquidation.

                    Providing the property/casualty guaranty funds with the right to intervene
                    will help address a key problem in the current state receivership system,
                    namely, the lack of effective oversight over receivers. Currently, when
                    receivers appear before the state receivership court to seek approval and
                    ratification of their expenses, settlements and other receivership activities,
                    there is no adverse party before the court. Thus, most receivership courts
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                                                 - 27 -
                    simply routinely approve the receiver‟s actions. Creditor groups in life-
                    health insolvencies have appeared or intervened in several jurisdictions,
                    including California, Michigan and New Jersey.

                    The Task Force believes that if the property/casualty guaranty funds were
                    given the right to intervene in receivership proceedings, receivers would
                    be subject to more active oversight in receivership courts. As court
                    proceedings are costly, it is likely that the guaranty funds would invoke the
                    right to intervene sparingly and only to challenge major abuses or
                    inefficiencies. Thus, the Task Force does not believe this would generate
                    substantial new litigation in receivership proceedings.

                    A statutory right of intervention would not be significant for some guaranty
                    funds. These funds assert that they can best influence the operation of
                    an insolvency estate by retaining good relations and an open channel of
                    communications with receivers. They believe that the guaranty funds can
                    provide their most effective form of input into the administration of an
                    estate through a more indirect route. The Task Force concurs that
                    intervention by litigation is not always necessary but believes that the
                    statutory authority to intervene should exist to allow intervention when
                    appropriate.

                    The Task Force also discussed whether a state‟s guaranty fund should be
                    appointed as the receiver for the insolvency of a single state insurer. It
                    concluded that there were many reasons why guaranty funds should not
                    be used in this manner. There are likely to be conflicts of interest if the
                    guaranty funds served as receiver. For example, the receiver acts as a
                    check upon arbitrary determinations by the guaranty fund that claims are
                    not covered claims. In addition, there is an actual tension between the
                    guaranty fund‟s efforts to recoup its claims payments from the assets of
                    the insolvency estate and the obligation of the receiver to maximize
                    payments to policyholders and claimants who may not be eligible for
                    guaranty fund coverage.

                    There are circumstances, however, where a guaranty fund may
                    appropriately perform services for the insolvency estate. In the insolvency
                    of a single state writer in which the guaranty fund handles a high percent
                    of the claims against the estate, there is a considerable amount of
                    duplication of effort by the guaranty funds and the receiver. In these
                    situations, the guaranty fund could contract or otherwise agree to provide
                    the receiver with claims handling, accounting and other administrative
                    services. The Task Force notes that such situations represent a small
                    minority of the insolvencies in the industry and are not the cases that drive
                    the current state insurance receivership system.

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                    The Task Force concluded that the administration of insolvencies would
                    be improved if the guaranty funds had standing and the right to intervene
                    in insolvency proceedings. Accordingly, the Task Force believes that
                    Section 8 B (3) of the NAIC Model Property/casualty Guaranty Fund Act
                    and the state guaranty fund laws should be amended as follows:

                               (3) Sue or be sued, such power to sue includes the power
                               and right to intervene as a party before any court that has
                               jurisdiction over an insolvent insurer as defined in this Act
                               and the power to intervene as a party in any administrative
                               proceeding before the Insurance Commissioner if the result
                               of such proceeding may in the future impose obligations
                               under the fund should one or more of the companies to the
                               proceeding become insolvent.




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                                                    - 29 -
          5.        State Advisory Committees

                   Description – Another approach is an insurance industry and/or
                    policyholder advisory committee that would be established to perform a
                    watchdog function over the commissioner and the receiver in every
                    insolvency. It is believed that, to a considerable degree, some of the
                    costs, delays, and disputes that tend to both prolong and complicate
                    insurer insolvencies might be alleviated if each of the significant
                    constituencies were afforded a more direct participatory role. One
                    concept that moves in the direction of this goal is the utilization of
                    “advisory” roles.

                    It is envisioned that such an advisory committee could also put peer
                    pressure on receivers to grant the guaranty funds early access to the
                    assets of the insolvent insurer‟s estate. While state statutes contain
                    provisions permitting early access, some receivers have not implemented
                    the early access provisions in a timely manner. Similarly, receivers have
                    alleged that they have problems with guaranty funds‟ handling of claims.
                    Receivers claim they turn files over to guaranty funds, which in turn retain
                    outside adjusters or third party administrators, who take a long time to
                    analyze, adjust and pay claims. In the meantime, the receiver may get
                    numerous complaints from claimants regarding the claims, which are now
                    in the hands of guaranty funds. An advisory committee would serve as a
                    buffer or mediator between the receiver and the guaranty funds, and
                    develop, for example, a realistic schedule for reporting, transferring and
                    settlement of claims.

                    The advisory committee should be distinguished from a creditors‟
                    committee. Creditors in an insurer insolvency are not in a better position
                    to develop a plan for the receivership of an insurance company than the
                    insurance commissioner and the appointed receiver. Creditors do not
                    have any particular expertise in insurance and/or bankruptcy. It would
                    also be rare in any insurance company insolvency for all policyholders,
                    claimants or creditors to have sufficiently common interests to be
                    represented by a single creditors‟ committee. It is likely that many
                    different creditors‟ committees would have to be formed and each would
                    likely have the right to be reimbursed for the costs of its activities, further
                    dissipating the assets of an insolvent insurer's estate.             Creditors‟
                    committees in one state would likely also cause conflict with other states
                    as the ancillary receivers in other states would not know with whom they
                    should deal or who speaks or acts definitively on behalf of the insolvent
                    insurer – the insurance department, the receiver, the creditors‟ committee
                    or a combination thereof.


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                                                 - 30 -
                   Statutory Authority – This change can be achieved within the current
                    state system and in fact, there is already precedent for it in the existing
                    model legislation and in various state laws.           The NAIC Insurers
                    Rehabilitation and Liquidation Model Act provides, at Section 24. A. (3),
                    that the liquidator shall have the power to appoint, with court approval, an
                    “advisory committee” comprised of such creditors as “policyholders,
                    claimants or other creditors including guaranty associations . . .“ The
                    commissioner has “the sole discretion” for appointment of the committee,
                    and the committee serves “at the pleasure of the commissioner.” The
                    committee may not receive compensation or expense reimbursement. No
                    other committee of any nature may be appointed by the commissioner “in
                    liquidation proceedings conducted under [the NAIC Model Liquidation]
                    Act.”

                    According to NAIC legislative history, paragraph (3) was added to Section
                    24.A. in 1990, and a “last-minute amendment” was made to paragraph
                    (3), “to make clear that the committee serves at the pleasure of the
                    insurance commissioner and without compensation.”12

                    During the NAIC‟s 1994 Proceedings, one regulator suggested changing
                    paragraph (3) to give the receivership court, and not the liquidator, the
                    authority to appoint advisory committees. The same regulator also
                    suggested that the supervising court should have the discretion to order
                    the payment of expenses of the advisory committee out of estate assets.
                    However, other insurance regulators observed that “past experience with
                    advisory committees had been negative.”13 The NAIC deleted all
                    references to payment for expenses, and adopted the draft with a
                    provision vesting the commissioner with the sole discretion to appoint the
                    advisory committee.

                    Fourteen states already have express “advisory committee” language
                    similar to that used in Section 24. A. (3) of the NAIC Model Act –
                    Colorado, Connecticut, District of Columbia, Georgia, Illinois, Kansas,
                    Mississippi, Missouri, Nebraska, New Jersey, North Dakota, Rhode Island,
                    South Dakota, and Tennessee. The minor differences among these 14
                    jurisdictions‟ provisions are set forth below.

                   Committee Members – 13 of the 14 jurisdictions retain the Model Act
                    language stating, “an advisory committee of policyholders, claimants, or
                    other creditors including guaranty funds,” and Illinois includes the clause


12 NAIC Proceedings, Volume IA., page 409 (1990).

13 NAIC Proceedings, Fourth Quarter, page 594 (1994).
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                                                - 31 -
                    “guaranty funds and” in front of “guaranty associations.”                  Missouri,
                    however, deletes the clause “including guaranty funds . . ..”

                                        Court Approval – 13 of the 14 jurisdictions require
                                         court approval before the appointment of an advisory
                                         committee. Kansas does not require the court‟s
                                         approval before an advisory committee is appointed.

                                        Authority to Appoint the Advisory Committee – 12
                                         of the 14 jurisdictions expressly provide for both the
                                         “rehabilitator” and the “liquidator” to appoint, with
                                         court approval, “advisory committee.” Illinois differs in
                                         that it grants the appointment authority broadly, to the
                                         “Director,” while Missouri grants the authority only to
                                         the “rehabilitator.”

                    Three additional jurisdictions – Arizona, Arkansas and New York – provide
                    for an advisory entity to assist the receiver. Arkansas‟s provisions
                    address the interests of creditors of an insolvent insurer. New York‟s and
                    Arizona‟s advisory entities concern themselves only with the solvency
                    status of insurers, and not with the interests of the claimants of insolvent
                    insurers.

                    Arkansas provides for an advisory entity to counsel the commissioner on
                    insurers‟ insolvency status. However, Arkansas allows the advisory entity,
                    if requested by the commissioner, to counsel the commissioner on
                    matters concerning payments of “covered claims” made against the
                    impaired or insolvent insurers.14

                    Interestingly, the Arkansas Property and Casualty Advisory Association
                    provides that the Association will be composed of eight insurers who
                    serve four-year terms. Although members shall receive no compensation
                    for their services, certain of their expenses will be reimbursed. 15 Their
                    basic charge is to “advise and counsel with the commissioner upon
                    matters relating to the solvency of insurers.”16

                    In Arizona, there is a “guaranty fund board” statutorily established for the
                    purpose of advising and counseling with the director (of the Arizona
                    Department of Insurance) “upon matters relating to the solvency of



14 Ark, Stat. § 23-90-108(b).
15 Ark. Stat. § 23-90-106; Ark. Stat. § 25-16-901, et seq. (expense reimbursement).
16 Id. at § 23-90-108 (a).
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                                                        - 32 -
                    insurers.”17 The board does not have statutory authority to consider the
                    interests of creditors of insolvent or impaired insurers.

                    In New York, the Life Insurance Company Guaranty Corporation‟s Board
                    of Directors is statutorily required to establish a panel of “advisors,
                    consisting of representatives of at least thirteen member insurers not
                    serving on the board of directors” for the purpose of advising the board on
                    potential impairment or insolvency of any insurer doing business in New
                    York.18 However, the panel of advisors is neither authorized nor required
                    to address the interests of claimants.

                    Finally, New Jersey also has a statutory provision for an “advisory
                    organization” for activities associated with solvent surplus lines insurers. 19
                    This surplus lines “advisory organization” is authorized to “submit reports
                    and make recommendations to the commissioner regarding the financial
                    condition of any surplus lines insurer.”20 Thus, while the surplus lines
                    “advisory organization” was not created by adoption of the NAIC Model
                    Act, it does have some tangential relation to insurer insolvency in its
                    authorized role of advising the commissioner of the financial condition of a
                    surplus lines insurer. This approach is augmented by the creation in New
                    Jersey of an “advisory body” comprised of surplus lines insurer
                    representatives, which serve in conjunction with the activities of the New
                    Jersey surplus lines insurance guaranty fund.21

                   Discussion – It is recognized that the advisory role concept is not without
                    certain limitations and risks. Although, as noted above, the concept has
                    been included in a number of state statutes and has been recognized in
                    the NAIC Model Liquidation Act, it nonetheless remains untested in most
                    jurisdictions. There are concerns about added costs, although this can be
                    dealt with in most situations by a statutory prohibition against payment of
                    advisory personnel notwithstanding reasonable travel and/or out of pocket
                    expenses.

                    There is also a concern about potential liability for participating in such an
                    advisory function. For example, an advisory committee member may
                    incur some statutory or other liability which, absent such participation,

17 Ariz. Stat. § 20-663 D.

18 N.Y. Ins. Law § 7711 (d).

19 N.J.S.A. 17:22-6.55a.

20 Id.

21 N.J.S.A. 17:22-6.73.
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                                                 - 33 -
                    would normally be confined solely to the receiver. There may also be
                    some confidentiality issues. An advisory committee has no fiduciary
                    obligation to maintain confidential information obtained from the
                    receivership in performing its function. Therefore, it would be necessary
                    to incorporate a confidentiality agreement between the advisory
                    committee and the receiver. There is some concern that the existence of
                    an advisory committee would interfere with the receiver‟s authority.
                    However, such concerns are unfounded since an advisory group, whether
                    implemented through a “body,” “association,” “committee,” or “trust” would
                    not have any determinative or dispositive authority.

                    The insurance industry may be concerned that it does not get a “real vote”
                    on administrative issues before a receivership, since an advisory board
                    would provide only a voice, but would not carry any authority. It has no
                    statutory authority to intervene or any standing to appear before the
                    receivership court to contest actions of the receivership deemed
                    detrimental to the receivership, its creditors and the insurance industry,
                    should they occur.       The receiver is not obligated to follow the
                    recommendations of the advisory committee so the industry may wind up
                    paying the costs to implement the advisory committee concept with little
                    benefit or protection. Experience also indicates that the insurance
                    industry has not been pleased with many of the insurance consumer
                    advocates or other watchdog groups that attempt to perform a similar
                    function regarding insurance rating and other regulatory functions for
                    solvent companies.

                    On the other hand, the advisory role concept might offer substantial
                    assistance to a receivership, and the creation thereof can be
                    accomplished within the current system. Receivers may be more
                    receptive to this informal role rather than to statutory rights of intervention,
                    which could generate litigious relations.            For example, advisory
                    participation may be called upon to help resolve statutory and/or policy
                    coverage issues.        Similarly, advisory participation may assist the
                    receivership court in establishing procedural guidelines, as well as
                    providing the input of the larger constituent groups through the effective
                    monitoring of court proceedings. Advisory personnel might also assist in
                    creating distribution guidelines and notice procedures. Perhaps the
                    greatest potential benefit lies in the area of advisory activities related to
                    complex multi-state and/or multi-party issues. Advisory bodies can help
                    maximize mediation and other ADR techniques and, in appropriate
                    instances, might even serve as an ADR vehicle.

                    The advisory role concept offers benefits which, among others, include:
                    (a) shortened learning curves; (b) expert experience; (c) enhancement of
                    critical dialogue; (d) avoidance of disputes and territorialism; (e) readily
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                                                 - 34 -
                    available mediating techniques; and (f) efficiency in expediting the
                    liquidating distributions and closeouts of estates. These benefits appear
                    to be attractive to the principal players: courts, receivers, guaranty funds,
                    creditors, and solvent insurers who, at least with regard to guaranty fund
                    assessments, financially support the cost of an insolvency.

                    While certainly not a panacea, the advisory role concept has merit. It can
                    help promote creativity, flexibility, efficiency, and meaningful collaboration
                    among diverse parties. In essence, it can help reduce conflict throughout
                    the administration of insurer insolvencies, which historically have provided
                    fertile ground for dissention, delays and disputes. It would appear that the
                    concept is underutilized, even in those jurisdictions where there already
                    exists some authorizing statutory framework. Given the concept‟s almost
                    unlimited flexibility, it deserves support from legislative, regulatory, and
                    industry sources.

                    The success or failure of an advisory board would depend on who makes
                    the appointments to the advisory committee, what persons are chosen
                    and to whom they report. There is precedent for this process with the
                    guaranty fund boards according to which industry board positions are
                    often confirmed by the insurance commissioner. This might be a viable
                    option for a receivership. In addition, it would also have to be determined
                    whether the advisory committee reports to the insurance commissioner,
                    the receiver, the receivership court, the insurance industry, the public, or
                    all of the above. If it is to be a watchdog group, it cannot report to the
                    insurance commissioner, and if it is an advisory group, it may have no
                    standing to report to a receivership court. Therefore, in order for this
                    approach to be viable, the advisory committee‟s composition, appointment
                    and reporting relationships need to be carefully structured to make it
                    effective.

                    The Task Force believes that the advisory committee concept has merit
                    and if implemented, would be a device that could improve the handling of
                    some insolvencies.

          6.        Use of Special Masters

                   Description – An alternative to provide oversight over receivers and to
                    assist state receivership courts can be built into the judicial process rather
                    than through the use of advisory committees. The state insurance
                    receivership laws should require, as part of the appointment process for
                    receivers, that an independent special master be appointed to assist the
                    receivership court‟s oversight of a receiver‟s performance. This should be
                    an integral part of the receivership process.

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                                                 - 35 -
                   Statutory Authority – Courts of equity have historically exercised their
                    authority to appoint and use special masters.

                   Discussion – The Task Force believes that with the use of special
                    masters, expertise will develop and become part of the judicial process
                    governing insurance insolvencies. Currently, judges may not have the
                    expertise in the many complex issues and procedures involved in an
                    insurer insolvency proceeding.

                    The judge responsible for an insolvency proceeding may have no
                    incentive to develop such expertise as the judge may never be assigned
                    another insurer insolvency. The fact also remains that states are not
                    realistically going to revamp their state court systems, procedures, and
                    funding just to accommodate the needs of the occasional insurer
                    insolvency.     The use of special masters could allow experienced
                    individuals to play an important role in the receivership proceeding. This
                    can be accomplished in a way that is least intrusive to the current state
                    court system.

                    Receivership court judges should welcome the expertise of special
                    masters. Many judges currently acknowledge that they do not and cannot
                    effectively oversee insurance receivers. The special master would assist
                    the receivership court judges in performing several functions, including the
                    oversight functions. The special master would bring continuity to those
                    state court systems where the trial or circuit court judges rotate. The
                    special master could stay with the insolvency even if the judge is replaced.

                    The use of a special master would not be without cost. The Task Force
                    believes that a special master should be considered an administrative
                    expense of the insolvent insurer‟s estate.

                    Model legislation authorizing the use of special masters is contained in
                    Appendix F.

C.        Task Force Discussion and Analysis of the Current State Insurance
          Receivership System

While the Task Force could not endorse the current system in all respects because of
the three major problems the Task Force identified in it, the Task Force felt it was
practical to discuss remedies for these problems in the current system as it is unlikely to
be replaced in the foreseeable future. The recommendations in this Chapter are not
mutually exclusive, but can be used individually or in combination, although the Task
Force believes that states should consider and adopt all of them. For specific statutory
amendments, See Appendix F.

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                                                - 36 -
                               V. Privatization of Insurance Receiverships

A.        Background on Privatization

“Privatization” is the outsourcing of a function from a government agency to a private
party. In the context of insurance receiverships, privatization might involve the entire
receivership function or just particular functions or projects.

Historically, most receivers of financially impaired insurers were private parties. The
appointment of the domestic insurance commissioner as the receiver of an insolvent
domestic insurer began in the 1930s. The major shift in this direction occurred as
states adopted the Wisconsin insolvency statute and the subsequent NAIC model
liquidation acts. It is now the law in most states that the domestic insurance
commissioner is appointed as the statutory receiver, although in some states, private
parties are still hired to act as receivers for insolvent insurers.

Consistent with its approach of offering realistic solutions, the Task Force considered
privatization proposals that were structured to correct the key problems that the Task
Force identified in the current state system, which are the selection of qualified
receivers, the accountability for and oversight of their performance, and the lack of
incentives and statutory authority and procedures to bring estates to closure. The Task
Force did not believe that it was practical for the entire receivership function to be
privatized and administered by the private sector with no involvement of state
government.

B.        Existing Statutory Authority

Privatization can be achieved within the current state receivership system with or
without amendments to existing state law. Under the current statutory framework, when
an insurer becomes insolvent, the domestic insurance commissioner becomes the
statutory receiver. The commissioner is authorized to appoint one or more special
deputies, subject to court approval, who have all of the authority and powers granted to
the commissioner as receiver. The Special Deputies serve at the pleasure of the
commissioner. In some jurisdictions, the commissioner may need court approval to
terminate a receiver.22 Privatization may be achieved if insurance commissioners use
their existing statutory authority as receivers to seek competitive proposals from private
vendors to administer the insolvent insurer‟s estates. However, due to the regulatory
and political pressures in the appointment process for most receivers, there may be
little incentive to voluntarily seek such proposals for receiverships.

While privatization may be achieved under the structure of current state law, it is more
likely to be utilized if new statutory provisions that specifically encourage or mandate
the privatization of receiverships were developed and enacted. Privatization statutes

22 See for example, NAIC Model Liquidation Act, §§ 13, 14, 18, 21 referenced in Footnote 9.
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                                                  - 37 -
could be developed to specifically address incentive compensation, performance
standards to be achieved within a specific contractual period, and a bidding or
negotiation process as the basis for selecting private receivers. A model for such a new
statutory mandate is included in Appendix F.

C.        How Privatization Would Work

The Task Force recommends that states should begin to experiment under the current
receivership system with privatization of insurance receiverships. Key to this proposal
is the concept that the domestic insurance commissioner would become the receiver in
name only. Outside vendors would be retained as receivers to manage all or portions
of an insolvent insurer‟s estate on a contractual basis. The insurance commissioner
would issue a Request for Proposals (RFP), and all interested vendors would respond
with their own proposals. Interested parties would present their proposals in response
to the RFP to a panel consisting of the domestic insurance commissioner, a
representative of the affected guaranty funds, and a special master appointed by the
receivership court. This three-person panel would select and oversee the receiver.
The actions of the panel would be subject to the oversight and ratification of the
receivership court.23

Private receivers could be employed under incentive compensation contracts,
developed with the panel, for a specific and limited period. This would change the
current state receivership system in which receivers, outside counsel, accountants, and
other consultants are paid by the hour or on a salaried basis. Under their contracts, the
compensation of private receivers would be task-based, with bonuses for early and/or
more efficient closure of the estate.

The Task Force envisions that key elements of privatization would work in detail as
follows:

                   Appointment, Supervision, Control – Under most current state
                    insurance receivership statutes, the insurance commissioner, as receiver,
                    has the power to appoint one or more special deputies, who will have all
                    the powers and responsibilities of the receiver in conducting the
                    insolvency proceeding, with the approval of the receivership court. The
                    insurance commissioner sets the compensation of the special deputy
                    receiver, subject to standards of reasonableness and court oversight. The


23 There are some insolvencies, such as many of those involving surety, for which there is no guaranty
fund coverage. Even in such situations, the Task Force believes that a representative of the guaranty
funds should serve on the panel that selects the receiver as the guaranty funds still have the expertise and
experience necessary to choose a receiver. In determining the composition of the panel, the domiciliary
state guaranty fund is not always the state guaranty fund with the highest percentage or dollar amounts of
claims against the estate, so the domestic guaranty fund is not necessarily an automatic choice for the
panel in every case.
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                                                  - 38 -
                    special deputy receiver serves at the pleasure of the insurance
                    commissioner.

                    Statutory amendments would need to be enacted providing that upon the
                    insolvency of a domestic insurer, the domestic insurance commissioner
                    would be appointed as the initial receiver. The permanent receiver would
                    be chosen by a panel consisting of the domestic insurance commissioner,
                    a representative of the affected guaranty funds, and a court appointed
                    special master. The actions of the panel would be subject to the oversight
                    of the receivership court.24

                   The Proposal and Negotiating Process – The insurance commissioner
                    would prepare a RFP with the specifications upon which the applicants
                    would submit their proposals for either the entire receivership or particular
                    phases or functions of the receivership. The panel described above
                    would select the proposal that best meets the need of the particular
                    receivership. At the discretion of the panel, the receivership may be
                    divided into several task-based or time-based phases, with an RFP
                    process for each phase.

                    The proposal and selection process could be substantially different, at
                    least initially, as the concept of private receivers becomes accepted. If
                    appropriate, the commissioner could schedule pre-bid orientation
                    sessions for all vendors in connection with the RFP. In order for the RFP
                    to be properly completed, prospective receivers should be given access to
                    relevant records and documents of the insolvent insurer so that they can
                    fully determine what the task encompasses and submit their bids
                    accordingly. The RFP process would include full and complete disclosure
                    of the known elements of the particular phase of the receivership, with as
                    specific parameters and goals as possible for performance and
                    compensation. The risk of unforeseen difficulties and delays would shift
                    to the private receiver, in the absence of explicit provisions in the
                    receivership contract to the contrary.



24 Rather than the three-person panel as envisioned by the Task Force, a general creditors committee
might seem to be an obvious alternative group to select the receiver. The Task Force‟s discussions of
creditors committees is contained in Chapter IV at page 27 in this report. The Task Force believes that a
general unsecured creditors committee or policyholders committee should be avoided as there is no
guarantee that creditors will be better able to administer an insolvency or that a creditors committee will
operate the insolvency equitably as to all types of creditors. Some state insurance receivership laws allow
appointment of a creditors committee. The Task Force believes that such committees should be limited to
principals, rather than agents of principals, and that no funding of the expenses of any creditors committee
should be permitted from estate assets, especially the fees of the attorney(s) for the creditors committee.
If creditors are allowed to participate in insurer receivership proceedings, they should do so based on their
own cost/benefit motivation.
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                    The RFP process will evolve over time. Initially, the process may involve
                    intensive negotiations. Each applicant may propose a package of
                    objectives to be achieved during the initial period of the receivership in
                    exchange for a compensation package. The panel could then select
                    among the packages or could submit counter proposals based on
                    different responses. Such a negotiation process should still result in a
                    more efficiently run receivership.

                    As experience with private receivers is gained in pricing runoff services,
                    and as the panels develop more experience in setting objectives and
                    performance standards, the RFP process will eventually become more
                    standardized. However, while the RFP process may ultimately become
                    more sophisticated and standardized, the strength of this process is that it
                    should be flexible enough to accommodate the unique features of each
                    insolvency.25

                   Incentive-Based Compensation – Part and parcel of privatization is an
                    incentive-based compensation structure. Most receivers are currently
                    paid on an hourly or salary basis, plus expenses. This gives insurance
                    receivers scant incentive to bring the estate to closure, promotes
                    inefficiency, delays payment to creditors, and discourages early closure of
                    the estate.

                    In contrast, under privatization the private receiver would receive monthly
                    or periodic compensation or fees, which would be negotiated during the
                    RFP process. Bonuses could also be built into the contract on an annual
                    or “per phase” basis, based on whether the private receiver meets goals
                    specified in the contract for managing the estate, or for early closure of
                    the receivership. For example, the private receiver could receive a much
                    greater bonus the earlier the estate was closed, or in the alternative, be
                    given a contract that guarantees compensation or fees for a fixed number
                    of years, even if the estate is closed earlier than expected. The Task
                    Force recognizes that due to the unique nature of each insolvent insurer‟s
                    estate, different incentives would have to be developed for each estate or
                    for all similarly situated estates.

25 A procurement process initiated in 1992 in Texas is similar, although not identical, to the private
receivers envisioned by the TIPS Task Force. In Texas, the insurance commissioner is still the receiver of
an insolvent domestic insurer. However, a pool of some twenty-five experienced Special Deputy
Receivers (SDRs) has developed. From this group, eight to ten contractors are generally selected by the
commissioner‟s staff to receive bid packets for new insolvencies. All potential bidders are provided the
same information packet with pertinent company data. In some cases, the top three respondents are
asked to attend an oral interview conducted by a selection panel. The selected private receiver is required
to furnish a fidelity bond upon signing the Oath of Receiver. The contractor-SDR serves as an appointee
of the Commissioner, who is still the statutory receiver, and is required to enter into a standard contract for
services, and may be removed at the discretion of the commissioner.
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                   Limited Contract Period – The private receiver's initial contract should
                    be for a definite duration, such as one year. The initial contract would
                    provide for the performance of certain services and the attainment of
                    certain objectives during the initial time period. The length of each contact
                    will necessarily be established based upon the composition and needs of
                    the individual receivership. The contract with a private receiver who does
                    not reach the objectives during the established time period would not be
                    automatically renewed to permit such a receiver to perform receivership
                    duties in a subsequent period or phase of the estate.

                   Performance Standards – The panel, subject to the jurisdiction of the
                    receivership court, would provide the oversight in each domestic
                    insolvency.     The Task Force believes that the development of
                    performance standards to be achieved under contract will enable the
                    panel to evaluate the performance of the private receiver. The use of
                    such standards could be the basis for comparing private receivers with
                    other receivers.

                    Appendix C sets forth the general functions of an insurance receiver. It
                    also contains guidelines for setting general performance standards. The
                    actual performance standards will depend on the needs of the individual
                    insolvency.

                    The panel would have a set of performance standards tailored to the
                    particular insolvency including a timetable for accomplishing specific
                    objectives. Developing specific performance standards and specific
                    objectives is a difficult process for the commissioner's staff which is under
                    a great deal of pressure to move quickly on an insolvent insurer's estate,
                    before assets are dissipated. The Task Force strongly believes that to
                    effectuate the private receivership system it envisions, the groundwork
                    must be established before the insurer insolvency occurs.

                    As part of their regulatory duties, prior to any new insurer insolvencies,
                    state insurance regulators could commence the process of an incentive-
                    based, marketplace-driven receivership by analyzing past and current
                    receivership proceedings with persons who are or were involved.
                    Questions should be explored, such as: What was accomplished? What
                    went right? If the person had it all to do over again, what would he/she
                    change? What caused the biggest waste of time and money? What are
                    the first steps a new receiver should take? How long does each step
                    take? From these questions and the answers derived, potential objectives
                    and procedures can be developed. This study could be conducted on an
                    individual state basis, by a task force of the National Association of
                    Insurance Commissioners (NAIC) or by several state insurance regulators
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                                                - 41 -
                    working together. The scope of the inquiry could then be opened to the
                    public, which would include turnaround specialists, potential receivers and
                    other parties interested in the insurer receivership process. Checklists
                    and sample specifications can be developed that an insurance
                    commissioner can then tailor to fit a particular insolvency.

D.        Task Force Discussion and Analysis of Privatization

The Task Force believes that privatization has substantial merit to resolve key problems
in the current state receivership system, namely, the selection and oversight of qualified
insurance receivers. Many appointed insurance receivers have little or no insurance
industry experience and are often not subject to meaningful oversight by the insurance
commissioners and the receivership courts. Privatization would solve this problem by
changing the appointment process to an RFP process, under which private individuals
or institutions would compete to handle an insolvent insurer‟s estate, and would provide
an appropriate professional staff to administer the estate. While such private receivers
would still be subject to the oversight of the panel and the receivership court, a private
receiver would have significant economic and other independent incentives to
administer the estate economically and efficiently in order to receive bonuses and
obtain more insolvency business in the future. The panel that selects and oversees the
private receiver would also have the insolvency expertise, to perform these tasks as
opposed to the receivership courts, which lack the expertise as well as the incentive to
gain the expertise, and have crowded dockets to deal with. Privatization improves the
appointment process in insurance receiverships from the outset, rather than creating
some form of oversight over inexperienced or unqualified receivers. The process
minimizes political motives in the selection of a receiver.

The Task Force debated how privatization would improve the current state insurance
receivership system. The persons appointed through the current process are most
often “private” receivers rather than government employees. Key to this discussion was
the possibility of developing standards or qualifications that potential private receivers
would have to meet, on which they would base their proposals to be selected as the
receiver, and which would be used as standards to evaluate their performance once
hired. The group considered who would be charged to monitor and measure the
performance of the private receiver throughout the receivership process.

On one hand, the Task Force saw little value added from a privatized system unless
private receivers were required to meet predetermined qualifications and performance
standards.      Otherwise, there would be no way to eliminate incompetent and
inexperienced receivers from the process. Privatization could just be “business as
usual” under the current state insurance receivership system. Absent predetermined
and objective standards, receivers would be private vendors, but would still likely be
either political appointees and/or inexperienced receivers.


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On the other hand, the Task Force concluded that there is no single “best” way to
administer every insurer insolvency. Each insolvency is different, depending on a
variety of factors such as the lines of business written, the number of states where
business was written, the assets available, the condition of the books and records of
the company upon insolvency, and the underlying causes of the insolvency. No
predetermined qualifications can be set that would apply to every insolvency. Previous
attempts at developing standards and qualifications for receivers have been
problematic. For example, a requirement of prior receivership experience would
eliminate potentially new and competent entrants into the business and would reduce
competition. There is also no guarantee that past receivership experience would
assure efficient and effective performance in another and different insolvency in the
future.

The Task Force analyzed different procedures to assure that only qualified persons or
firms could submit RFPs, absent a requirement that applicants meet predetermined
qualifications. The Task Force considered the insurer receivership systems in the
United Kingdom (U.K.), which require insurance insolvency practitioners to be first
licensed as professionals – lawyer or CPA – subject to professional discipline, and then
licensed as an insolvency practitioner, after completion of required work experience
with a firm in the insolvency business.

The Task Force wanted to avoid a major drawback of those systems, namely, that the
field of potential receivers is limited largely to the major accounting firms. The Task
Force did not find it prudent to limit the competition in the U.S. marketplace for qualified
receivers. Privatization in the United States should include the favorable elements of
these systems, including the privatized selection and oversight of insurance receivers.
Although representatives of the U.K. system may deny that politics plays a role in the
appointment of insurance receivers, the Task Force believes that may not necessarily
be the case. The Task Force believes that, in reality, these systems operate to assure
that an appointed receiver is employed in a qualified firm, which has all the necessary
staff and resources to effectively administer an insolvency. In the U.K. receivership
system, the inefficiencies resulting from appointed receivers have been carefully
controlled.

The Task Force concluded that privatization of the selection of insurance receivers in
the current state insurance receivership system could place insurer insolvencies into
the hands of able and competent receivers. The Task Force recognized that the
current receivership system would go through a learning curve at first as it adjusts to
privatization. Initially, potential private receivers would have to submit proposals for
receivership work based on their own qualifications and the skill and expertise they
would bring to the insolvency, rather than in response to any predetermined
qualifications. The newly created three-person panels would have to select the receiver
who is the best match for an insolvency, based on their knowledge of the insurer, the
lines of business written, the assets of the estate, the projected costs of administration,
and the expertise that is needed to administer the particular estate. The benefits of
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                                               - 43 -
such privatization would be achieved because the panels would be comprised of
representatives who have knowledge of the insolvent insurer and about the state
receivership system in general. The panel would choose receivers based on what is
needed, which will not always result in the lowest bid being accepted, although costs of
administration will always be a factor in the selection of a receiver.

The Task Force is confident that privatization can work in the U.S., and that competent
private runoff firms will develop. Privatization will lead to the development of national
insolvency experts, and even to the development of expertise in liquidating unique
assets, such as oil and gas interests and real estate. Currently, some states have so
few insolvencies that there is no incentive for local parties to gain the insolvency
expertise. To the extent that insolvency firms are formed, they will be able to submit
RFPs in many states, and they will bring their expertise to where it is needed. As
experience with privatization is gained, a body of knowledge will be developed that will
assist future panels in the establishment of the qualifications and selection of the
receiver, as well as in setting performance standards.

The Task Force also identified other benefits to privatization. It would create the
incentive for efficient work and early closure of estates. Private receivers would have
the incentive to do the best possible job so they would earn incentive compensation
and obtain additional insolvency business in the future. Private receivers may also
substantially reduce the cost of administering an insolvent insurer's estate because they
would likely have to be organizations that would have the necessary staff, overhead,
and other resources necessary to handle the insolvency. Private receivers can tailor
the receivership staff size so that the work force corresponds to the tasks at hand,
which peaks at the outset of the estate and diminishes over time. Appointed receivers
now retain outside experts, consultants and others to perform many functions, which is
often very costly and inefficient. Privatization may also improve the quality of the
receivership staff in that jobs with private receivers would provide permanent and full-
time employment, whereas jobs on current receivership staffs are of limited duration,
either until the estate closes or the need for the outside assistance ceases. Private
receivers would have the incentive to obtain and retain a professional and qualified
staff.

The Task Force also saw some potential downsides to the privatization process.
Although it is not intended, the process of selecting the private receiver may be subject
to state procurement laws26 and other such laws that state agencies must follow in
contracting with third parties. However, since the debts of an insolvent insurer‟s estate
are private obligations, and not state obligations, the Task Force did not believe this
would be a widespread problem. Experience shows that RFPs for state government
business does not necessarily take politics out of awarding state contracts. Creation of
a panel or oversight committee to choose and oversee the receiver may also open the
door for creditors' committees, which have not been successful, at least in the few

26 Only Texas has taken the position that the state procurement laws are applicable to private receivers.
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                                                 - 44 -
instances that they have been used in U.S. property/casualty insolvencies. In addition,
it is not likely that a private receiver's contract would be terminated, absent gross abuse
or negligence, after the contract is initially awarded because of the time and cost factors
involved in constantly changing receivers. Finally, it is often argued that the least
expensive receiver would not necessarily be the best one, and a privatized system
tends to gravitate toward awarding the runoff contract to the lowest bidder.

Overall, the Task Force believes that the possible benefits and improvements likely to
result in the current state insurance receivership system from privatization outweigh any
contingent downsides. The Task Force believes that privatization of at least the
process for selection and oversight of insurance receivers in the current insurance
receivership process will result in maximizing the payout to creditors, speeding up the
receivership process, improving the fairness with which receivers deal with debtors and
creditors, and accelerating the closure of estates. The change to privatization can also
be achieved within the current state system.

While it may not be feasible to privatize the entire insurance receivership process, the
Task Force concluded that it is possible to substantially improve it by at least removing
the selection and oversight of insurance receivers as exclusive functions of state
government. The Task Force advocates privatization of other receivership functions as
well to achieve efficiencies in the administration of estates.




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                        VI. Interstate Compacts for Insurance Receiverships

A.        Background on Interstate Compacts

An interstate compact is a contract or treaty among states which is entered into in order
for the participating states to deal with a specifically defined subject. Article 1, Section
10 of the U.S. Constitution grants the states the ability to enter into such mutual
agreements, but it requires that they be approved by Congress. The laws of
compacting states that are signatories to an interstate compact cannot validly conflict
with such a compact, albeit federal legislation can always conflict with the provisions of
interstate compacts and can supersede them.

An interstate compact is governed generally by contract law, and the establishment of a
compact mirrors the offer and acceptance protocol for entering into a contract. An offer
must come in the form of a law enacted by the offering state. The acceptance must
also be in the form of substantially identical legislation enacted in each of the other
states that wishes to accept the offer and join in the compact.

There are over 140 interstate compacts in existence addressing a wide range of public
works, taxation, social and transportation issues. Most of these interstate compacts
administer the programs created under them through the vehicle of a permanent
interstate agency. Historically, interstate compacts have permitted states to take
cooperative action in order to accomplish functions that one state could not perform that
as efficiently or effectively alone. But for the utilization of the interstate compact
concept, these areas might either be inadequately regulated by independently acting
states or subjected to federal regulation.

B.        Interstate Compacts and the Insurance Industry

Interstate compacts have been proposed and generally rejected from time to time in
connection with the issue of regulation of insurance company insolvencies. In the early
1970s in response to solvency problems in the insurance industry and the threat of
federal regulation, the National Association of Insurance Commissioners (NAIC)
considered and rejected an interstate compact for insurer insolvencies.

Those opposing the interstate compact concept in the 1970s focused upon the concern
that such a compact might not be universally enacted and accordingly would not
achieve its purpose of creating uniformity and consistency among the state guaranty
fund and receivership laws. Additionally, the possible adoption of a compact by some,
but not all, of the states was viewed as being a potentially polarizing event that might
cause greater conflicts between compacting and non-compacting states. There was
also a fear that the compact would require Congressional consent at a time when there
were some pressures for an increased federal role in the insurance arena. Those
favoring the status quo of state regulation feared that seeking Congressional consent
would be considered as an admission that state regulation was not working. This, in
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                                               - 46 -
turn, might lead to federal regulation of insurance insolvencies or even of insurance
generally.

The issue of an interstate compact arose again in the context of the increase in number
and size of insurer insolvencies in the mid 1980s when concern was expressed
regarding whether insurance regulators could adequately monitor the industry for
solvency. In 1992, in the context of an ongoing state versus federal insurance
regulation debate, the National Conference of Insurance Legislators (NCOIL) adopted
an interstate compact covering both insurance receiverships and guaranty fund
operations. The NCOIL compact has never been enacted. For all practical purposes, it
has been superseded by the NAIC Midwest Zone interstate compact, which has been
the subject of legislation and enactments. The NAIC Midwest Zone developed a
compact to deal only with insurance receiverships. This compact was never endorsed
by the NAIC or the insurance industry.27

Some state insurance regulators contend that compacts will improve state insurance
regulation by increasing cooperation and coordination among the participating states
and thereby further ward off the specter of federal regulation. Others argue that
interstate compacts do not achieve anything that cannot be achieved by the states
individually through the adoption of the NAIC's model insolvency legislation. Still others
believe that interstate compacts are perceived in Congress as a sign of a weakness in
state insurance regulation and serve to demonstrate the need for federal regulation.
Consistent with the Task Force‟s approach to search for realistic and practical solutions,
the NAIC Midwest Zone compact was the focus of the Task Force‟s discussions as it
has been enacted in several states.

C.        NAIC Midwest Zone Interstate Compact for Insurance Receiverships

The Interstate Insurance Receivership Compact (the “Compact”) originated in
September, 1995, when it was first adopted by Nebraska and followed by New
Hampshire. The stated purposes of the compact are, through joint and cooperative
action among the compacting states, “to promote, develop and facilitate orderly,
efficient, cost effective and uniform insurer receivership laws and operations” and “to
create the Interstate Insurance Receivership Commission.” An additional purpose,
however, is “to coordinate interaction between insurer receivership and guaranty fund
operations.”

The Compact is an all encompassing statute which creates the Interstate Insurance
Receivership Commission (the “IIRC” or the “Commission”). The broad scope and
general language of the Compact permits the IIRC to perform or take virtually any

27 The National Association of Insurance Commissioners (NAIC) is divided into four geographical zones.
The Midwest Zone consists of the following states: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota,
Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota and Wisconsin. The interstate
compact was endorsed by these states, but not the NAIC as a whole.
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action in the area of insurance insolvencies, albeit such broad authority may be
effectively reduced as rules, procedures and operating protocols are established by the
Commission. For instance, the powers granted to the IIRC by the Compact include
oversight and monitoring of insolvencies, acting as a deputy receiver, and acting as a
receiver in compacting states. Where invited to do so by the insurance commissioner
in non-compacting states, the IIRC can act as deputy receiver for any insurer domiciled
or doing business in such state. While all receivership functions handled by the IIRC
are intended to be funded from the estates administered or otherwise paid for by the
compacting state, the expenses of operating the IIRC are to be borne by the
compacting states and the insurers writing direct insurance in those states on a
25%-75% basis.

The states that have enacted the Compact legislation and are presently active
members of the IIRC are Illinois, Nebraska and Michigan. California enacted compact
legislation in January, 1996, and joined the Commission, but subsequently determined
that there were material differences between the legislation it had adopted and that
adopted by the other compacting states. Accordingly, even before January 1, 1998,
when its law was due to sunset as to property/casualty insurers, the California
Insurance Commissioner sent a notice of withdrawal to the IIRC, and the IIRC accepted
California's resignation. New Hampshire was also a member, but its legislature
repealed its compact law in 1997, and it withdrew from the Compact. Wisconsin
enacted a non-conforming compact in 1996 and did not join the IIRC.

In its first Annual Report in 1996, the IIRC explicitly stated its view of the perceived
benefits of the Compact and its implementation. The approach of the compact is
intended to combine “the effectiveness of state regulation of insurance with the
efficiencies of interstate cooperation to improve the insurance receivership system in
fundamental ways.” Particular problems identified in the present state-based system
included:

                    (1) lack of relevant information about receiverships; (2) absence of
                    any meaningful oversight of the domiciliary receiver; (3) difficulty of
                    sharing resources and expertise between the states; (4) an
                    absence of standards for the operation and performance of
                    receivers.

The IIRC believes that the Compact addresses these problems while retaining the
benefits of the current state-based insurance regulatory system. The Annual Report
states that the Compact effectively establishes a forum for peer review of receiverships
and also gives affected states standing to provide input into receivership proceedings.
Specific improvements are:

                    (1) making the laws and operating procedures governing
                    receiverships more uniform; (2) establishing reasonable, objective
                    standards for the operation and performance of receivers: (3)
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                                                 - 48 -
                    enhancing the ability of regulators, receivers and of all affected
                    states to act in an effective, coordinated manner in the case of
                    receiverships of multi-state insurers; and (4) providing a
                    mechanism for the effective oversight of receivership operations.

D.        How an Insurance Receivership Compact Would Work

The drafters of the NAIC Midwestern Zone Compact envisioned it as a solution to many
of the key problems that the Task Force has identified in the current state receivership
system, which are the selection of qualified receivers, the accountability for and
oversight for their performance, and the lack of incentives and statutory authority and
procedures to bring estates to closure. The drafters of the Compact concluded that
insurance receivers are not subject to meaningful supervision for their expenses and
other activities. The state receivership courts must approve certain expenses and
procedures, but the receivership courts largely rubber stamp the activities of receivers
because there is no adverse party before the court to challenge or question any of the
items that need to be approved.

The drafters believed that a compact commission would subject state insurance
receivers to at least the peer review of other members of the compact commission.
States participating in the interstate compact would be able to meet with the receivers in
other compacting states, through the Commission, on an ongoing basis and review the
receiver‟s expenses and object to them where appropriate. The Commission would
also have standing in state receivership courts of all compacting states when receivers
seek approval for expenses or a plan of action to administer the estate. As a last
resort, the Commission could petition the receivership court to have the Commission
assume the administration of the estate. Without an interstate compact, there is no
formal or statutory means for interested states to provide input into receivership
proceedings in other states. Some states have sought to intervene in receivership
proceedings in other states, but have been largely unsuccessful. The right to intervene
is not assured under current state insurance receivership or civil procedure laws.
Drafters of the Compact contend that such oversight cannot be accomplished through
the NAIC‟s model legislation activities or even by uniform amendments to state
receivership laws. Rather, a compact is the only way to formalize oversight over
receivers.

The drafters of the Compact were also concerned about the lack of uniformity among
the 50 state insurance receivership laws and procedures. Few states have any
incentive to update their receivership law to reflect amendments of the NAIC Model
Liquidation Act until there is an insolvency, and then it‟s too late. The Compact initially
resolves this problem by its provisions requiring the compact commission to draft a
Uniform Receivership Law (URL), and making the URL binding and effective in all the



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                                               - 49 -
compacting states when enacted by a majority of the compacting states.28 Also, each
estate is often handled by a different receiver and there is no consistency in
administration from state to state or even among receivers in the same state applying
the same law. It is difficult to get data and other needed information about insolvencies
from receivers. Under the Compact, a uniform state receivership law and procedures
would be developed for the compacting states. The Compact is intended to resolve this
problem by promulgating uniform rules and procedures, which will be binding on all
compacting states.

The Task Force reviewed in detail the provisions of the interstate compact law, creating
the Compact Commission and setting forth its procedures. This in depth analysis is
contained in Appendix D.

E.        Possible Legal Issues

Some questions have been raised about the legality and constitutionality of the new
compact commission and the scope of its authority and activities. These issues are
summarized as follows:

                   Congressional Consent – The U.S. Constitution requires Congressional
                    approval for interstate compacts. However, many believe that the
                    McCarran-Ferguson Act, which delegates to the states the authority to
                    regulate the business of insurance, provides such Congressional consent
                    for insurance interstate compacts. There is no clear legal authority under
                    which the U.S. Supreme Court would adopt this rationale if congressional
                    approval were not obtained for an insurance compact and if the compact
                    commission‟s legitimacy was challenged.

                   Court Jurisdiction – The U.S. Supreme Court has original jurisdiction
                    regarding disputes arising out of an interstate compact, rather than the
                    state courts. The Compact, however, addresses conflicts by providing
                    that disputes will be settled in the state where the compact commission‟s
                    principal office is located.

                   Delegation of Authority – Under the McCarran-Ferguson Act, states are
                    given the authority to regulate the business of insurance, and some
                    regulators have questioned whether it is lawful to delegate such authority
                    to an interstate compact commission. Others are concerned that, to the
                    extent an insurance interstate compact commission makes rules that are

28 The Uniform Receivership Law (URL) was finalized in December 1998 and is now in the process of
being introduced and enacted in the compacting states. The URL is generally perceived to be a
significantly improved model insurance receivership law. It is also being considered in some states as
model to update their insurance receivership law even though these states have no desire to join the
Compact.
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                    binding on the states, this would be an improper delegation of legislative
                    authority to the compact. The case law in this area indicates that as long
                    as a compacting state retains freedom to adopt or reject rules and
                    regulations of a compact commission, there is no unlawful delegation of
                    authority. The provision in the Compact permitting compacting states to
                    reject a commission rule only after the rule has been in effect for two
                    years, is intended to prevent a state legislature from taking immediate
                    action and may be problematic in terms of delegation of authority issues.
                    The Compact also requires unanimous consent of all compacting states to
                    amend the Compact, which may also frustrate state legislatures from
                    taking immediate action.       Another Compact provision states that
                    conflicting law in a compacting state is superseded by the laws, rules and
                    regulations of the compact commission. This may also raise questions
                    about unlawful delegation of authority to the compact commission.

                    In short, regulators‟ three primary concerns, the necessity of
                    Congressional consent, court jurisdiction and problems regarding unlawful
                    delegation of authority, have no definite answer in the limited case law
                    precedents that exist for interstate compacts.

F.        Impact of the Compact on the State Guaranty Funds

Earlier compact drafts had encompassed state guaranty funds, however, any
references to the regulating of guaranty funds was removed before the current compact
was enacted. Nevertheless, the Compact is still expected to impact both life-health and
property/casualty state insurance guaranty funds in several ways.




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The compact in Article IV empowers the Commission:

                    To monitor the activities and functions of Guaranty Associations in
                    the compacting states.

Under Article VIII:

                    6. The Commission shall analyze and correlate records, data,
                    information and reports received from Receivers and Guaranty
                    Associations, and shall make recommendations for improving their
                    performance to the compacting states.

That article also limits the powers of the Commission with regard to lawsuits against
guaranty funds.

                    “10. To bring or prosecute legal proceedings or actions on behalf
                    of an Estate or its policyholders and creditors; provided, that any
                    Guaranty Association‟s standing to sue or be sued under
                    applicable law shall not be affected.”

That article also empowers the Commission:

                    “26. To provide and receive information relating to Receiverships
                    and Guaranty Associations, and to cooperate with law enforcement
                    agencies.”

The monitoring function referred to in Art. IV, 7. is directly related to the data, records
and reports received and analyzed by the Commission under Art. VIII, 6. Thus, the
monitoring function seems to lead to the recommendations for improving “their
performance.”

To limit the authority of the Commission over guaranty funds, Article VII, which sets for
the Commission‟s rule making functions, contains a proviso in Section 1:

                    that the Commission shall not promulgate any Rules: (I) directly
                    relating to Guaranty Associations, including, but not limited to,
                    Rules governing coverage, funding, or assessment mechanisms; or
                    (ii) (except pursuant to rules promulgated under Article VII (3) of
                    this compact) altering the statutory priorities for distributing assets
                    out of an Estate.29



29 Article VII (3) provides for the adoption of operating rules of the Commission and states that the first
rule to be considered shall be uniform provisions governing insurer receiverships.
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Therefore, it appears that Article VII (1), when read in conjunction with Article VII (3),
permits the Commission to adopt a rule that would change the statutory priority in all
compacting states for distribution of estate assets. This could impact directly the
guaranty funds, since in most receiverships the guaranty fund is the largest creditor.

Another provision of the Compact which impacts guaranty funds is Article VIII Section B
(4), which provides that “the Commission shall facilitate voluntary dispute resolution for
disputes among guaranty associations and receivers.”

The Compact provisions applicable specifically applicable to guaranty funds would
appear to relate to receiving and providing information; monitoring activities; analyzing
records and data received from guaranty funds; making recommendations on
performance; and facilitating voluntary dispute resolutions. The one specific section
that is limiting in scope prohibits the making of rules directly relating to guaranty funds.

Guaranty funds will be impacted by the Compact when the Commission acts as a
receiver of an insurer domiciled in, or doing business in, a compacting state or when the
Commission acts as deputy receiver of insurers domiciled in, or doing business in a
non-compacting state.

In its capacity as receiver of an estate, there could be significant effects on the
relationship that ordinarily exists between the receiver and the state guaranty funds
affected by the insolvency, and perhaps more so in the case of life-health insurance
guaranty funds. For example, in a multi-state life-health insolvency, the National
Organization of Life and Health Guaranty Association (NOLGHA) routinely appoints a
task force composed of representatives of states affected by the insolvency, including
the domiciliary state. The task force then becomes the contact point for the receiver.
Currently, the receiver speaks only for the domiciliary state while the NOLGHA guaranty
fund task force essentially speaks for all of the affected states (ratification of
substantive decisions is routinely cleared through the Members Participation Council,
with each state retaining the right to opt out of the final plan for disposing of the
policyholder liabilities). If the Commission, as receiver, speaks on behalf of a large
number of state regulators, it would seem to carry significant political weight with state
guaranty funds in those states, some of whom may be required to obtain regulatory
consent to participate in various disposition plans. The effect could be helpful in that it
could result in a far greater acceptance of disposition agreements between the receiver
and the NOLGHA task force, although there have been very few states which have
opted-out of multi-state plans in the last few years.

The result could also be somewhat intimidating for guaranty funds since the receiver
would be speaking not only for the domiciliary state, but also for all other compacting
states. The same concerns that non-domiciliary regulators now have regarding ultimate
disposition plans, or assumption reinsurance transactions, would probably have a better
forum before the Commission and those foreign state regulators would not have to
appear in the domiciliary state receivership court to express those concerns. To the
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extent the affected state guaranty funds agree with the concerns of those other state
regulators, the result could be positive from their standpoint; if they don‟t agree, then it
would be unfavorable. Experience would seem to indicate that the state guaranty funds
would be better served by having a forum for input from foreign state regulators before
the disposition plan is finalized.

Because the powers and authority of the Commission to make uniform rules is quite
broad, it is very likely that there will be proposals for receiverships that will not be
popular with guaranty funds, notwithstanding the limitations referred to above in Article
VII. For example, there have been proposals before the NAIC to include in the NAIC
Model Liquidation Act provisions that would have the effect of triggering state guaranty
fund liability before a plan for disposing of the insurance liabilities is in place, or by
limiting the time period that a company may be in rehabilitation. Similarly, the guaranty
funds were at odds with some of the drafters of that NAIC Model Liquidation Act with
regard to the priority of claims by guaranty funds for their administrative claims. The
current version of the NAIC Model Liquidation Act included a compromise provision that
has been accepted by all sides but the issue could be reopened in a proposed rule by
the Commission. Of course, these and other statutory issues could be raised in any
state legislature considering the NAIC Model Liquidation Act or a version of it. The
answer is that the guaranty funds and the insurance industry will have the opportunity
both at public hearings before the Commission and in compacting state legislatures to
voice any objections.

G.        Task Force Discussion and Analysis of Interstate Compacts

Because the Compact was a reality but still only in its developmental stages, the TIPS
Task Force decided to evaluate the relative merits of the compact approach as of this
time.

In support of the interstate compact:

                   It is a reality so that state insurance regulators, insolvency
                    practitioners and other interested parties need to be involved and
                    have an impact on its development;

                   State insurance regulators and the receivership courts provide
                    minimal oversight for receivers. At least receivers would be subject
                    to the jurisdiction and rules of the compact commission for every
                    insolvency administered. Amendments to state laws alone cannot
                    give one state standing/oversight in a receivership court in another
                    state. The compact vehicle provides the necessary means to
                    accomplish this;



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                   An interstate compact commission could develop an experienced
                    and professional staff and maintain some continuity among the
                    personnel that administer the estates of insolvent insurers;

                   Uniformity among state laws, and particularly among the
                    administrative practices and procedures, is needed, and has not
                    been accomplished through the NAIC model legislation process.
                    Uniformity likely could not be achieved solely through the state
                    legislative process as some of the most troublesome problems are
                    in the different requirements and administrative procedures set by
                    individual receivers;

                   Interstate compacts have worked well in other contexts.

On the other hand:

                   An interstate compact commission is not accountable to any unit or
                    body. There are no checks and balances in this system;

                   While an interstate compact may work well initially among only a
                    few states, it is likely to create a bureaucracy in the future if many
                    states join. It will eventually generate a life and purpose of its own
                    that will be more costly to maintain than the current state
                    receivership system;

                   An interstate compact may result in dual regulation. There is little
                    that the compact commission will do that can‟t already be done
                    through the existing state legislative process;

                   Virtually all compact proposals are dependent on insurance
                    industry funding either in whole or in part. Such funding of the
                    compact may prove more costly than the current receivership
                    system;

                   State regulators may use the compact to take over the functions of
                    the guaranty funds and/or to make onerous changes to the
                    guaranty fund laws, such as increases in the caps on claims;

                   In other contexts, compacts have expanded – without further
                    legislative sanction – well beyond their original purpose;

                   There is no reason to believe that a compact commission will be
                    able to solve disputes among states/receivers regarding the
                    appropriate receivership law and procedures when these same
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                    players have been unable to agree on issues at the NAIC and in
                    other forums;

                   Not all states would join an interstate compact, possibly increasing
                    the problems of cooperation and coordination among compacting
                    and non-compacting states;

                   States will not likely give up their legislative authority to an
                    interstate compact commission; and even were they to do so, there
                    is a question of due process regarding input into the laws and
                    regulations that the compact commission will promulgate and their
                    binding authority on the states.

The Task Force reviewed the interstate compact mechanism as a potential solution for
problems it identified in the current state insurance system because it is an approach
that is currently being implemented. The Task Force believes that if the interstate
compact works as it is intended, it may bring some improvement to the state insurance
receivership system. However, the interstate compact law that has been enacted is
vague and expansive, so that its ultimate direction and success will depend on how the
new interstate compact commission implements it. Only as the compact develops and
operates over time will an accurate analysis of its scope, functions, and viability be
possible. At this time, the Task Force believes that the interstate compact is a solution
that should be monitored.

The interstate compact is a vehicle which may be utilized to deal with the difficulties
caused by the multi-state operations of an insolvent insurer and the differing regulatory
and statutory requirements imposed by the impacted states. While there is legitimacy
to the view that enactment of the NAIC Model Liquidation Act will provide the common
legal basis to deal with multi-state insolvencies, there is the invariable tinkering with and
“improving” of model legislation as it moves through the legislative process which
makes statutory uniformity practically impossible. The same pressures which mitigate
against the uniform enactment of model acts also bear upon attempts to enact
consistent compacting legislation. This is particularly the case where legislatures, and
some insurance commissioners, are strongly resisting efforts of the NAIC to require
adoption of particular legislation.

Perhaps the greatest benefits which might come out of the interstate compact would be
the oversight function over insolvency activities in the member states, the uniformity of
operational and reporting procedures that the compact could impose and the ability of
compacting states with little expertise in the complexities of insurer liquidations to obtain
assistance, either by direct delegation or through the oversight function, from the
compact commission.

The mere creation of an interstate compact to deal with insurance receiverships may
not, in and of itself, materially assist in overcoming the difficulties of a multi-state
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liquidation. Without any actual experience, it is difficult to predict whether there is a
critical mass in number of members or in geographic concentration required for the
successful operation of such a compact. Further, a group of compacting states which
grew too large might result in the imposition of a regulatory infrastructure which may be
more difficult, burdensome, and costly to deal with than the current system.

The Task Force concluded that an interstate compact provides a new and unique type
of oversight over insurance receiverships, and assures that the insolvency expertise of
the compact commission will be applied to all insolvencies in compacting states.
Potential constitutional and legal problems exist with the compact mechanism. State
concerns with sovereignty and delegation of powers also make it politically unattractive
so that it is unlikely to be widely enacted in all states and it is not viable as a complete
alternative to the current state receivership system.




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              VII. Federal Bankruptcy Alternatives to Insurance Receiverships

A.        Background on Federal Bankruptcy

Unlike all other insurance receivership systems the Task Force studied, a federal
insurance receivership does not exist. There is a comprehensive federal Bankruptcy
Code, but insolvent insurers are exempt from it and have always been liquidated under
state law. Yet the Task Force believed that the parameters of federal involvement in
insurer insolvencies deserved a thoughtful analysis as a solution to problems in the
current state system.

The Task Force acknowledges the difficulty in comparing the known state receivership
system to a non-existent federal system. It consciously struggled to avoid the trap of
comparing an existing but imperfect state system with an imaginary federal system that
works perfectly. There is no system that can be devised – state or federal – that will be
free of human weaknesses. Rather, the Task Force sought to view federal proposals
discussed in Chapters VII and VIII in the context of existing federal judicial and
receivership structures, because no newly developed federal alternatives for insurance
insolvencies would likely operate in a significantly different manner than the federal
examples in existence.

B.        History of Excluding Insurance Companies From the Federal Bankruptcy
          Laws30

Before the modern Bankruptcy Code was enacted in 1978, “insurance corporations”
were excluded from the federal bankruptcy scheme by a 1910 amendment to the
Bankruptcy Act of 1898. Battle lines over federal or state control of insolvent insurance
companies were redrawn during the evolution of the present Bankruptcy Code.

In 1974, the National Conference of Bankruptcy Judges introduced legislation which
would have repealed the exclusion. Proponents of this bill criticized the exemption of
insurers from federal bankruptcy proceedings because individual state receivers did not
have jurisdiction sufficient to marshal assets and resolve claims on a multi-state basis.

A report of the Commission on the Bankruptcy Laws of the United States, established
by Congress in 1970 to study and recommend changes to the bankruptcy laws,
acknowledged the defects in state receivership proceedings for insurance companies.
The Report nevertheless concluded that the exceptions from bankruptcy for financial
and insurance institutions should be continued because the laws regulating them
provide competent, specialized dissolution and reorganization processes.        The
Commission bill therefore retained the exclusion.


30 For a complete discussion of the history of excluding insurers from the federal Bankruptcy Code, See
Appendix E.
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Members of the Commission emphasized in their report that the adequate statutory
schemes for administering the affairs of insolvent insurers existed at the state level and
concluded that the scheme of bankruptcy administration contemplated by the
Bankruptcy Act was not suited to the settlement of the affairs of an insurer with its
thousands of policyholders, and claimants with liability actions against policyholders as
well as other creditors. The specialized state insurance receivership legislation that
evolved for the protection of policyholders, including the establishment of reserves and
the development of remedies to prevent deterioration of the financial condition of
insurance companies before insolvency occurs, should not be jeopardized by the
federal Bankruptcy Code.

After Congressional hearings, the federal Bankruptcy Code was redrafted. Both the
U.S. House and Senate agreed to retain the exclusions. Section 109(b) (2) of the
Bankruptcy Code provides:

                    A person may be a debtor under Chapter 7 of this title only if such
                    person is not:

                    (2) a domestic insurance company, bank, savings bank,
                    cooperative bank, savings and loan association, building and loan
                    association, homestead association, a small business investment
                    company licensed by the Small Business Investment Act of 1958,
                    credit union, or industrial bank or similar institution which is an
                    insured bank as defined in section 3(h) of the Federal Deposit
                    Insurance Act; or

                    (3) a foreign insurance company, bank, savings bank, cooperative
                    bank, savings and loan association, building and loan association,
                    homestead association, or credit union, engaged in such business
                    in the United States.

11 U.S.C. § 109(b). This exclusion from eligibility to file a petition under Chapter 7 of
the Bankruptcy Code extends also to Chapter 11, which are rehabilitations in which the
debtor works out an arrangement with its creditors and is eventually released. Under
Chapter 7, the debtor is dissolved.




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C.        Federal Bankruptcy Alternatives

          1.        The Federal Bankruptcy Code

If Congress were to determine that insurance companies should now be eligible for
relief under the federal bankruptcy laws, the simplest method for restoring this eligibility
would be to delete the terms “domestic insurance company” and “foreign insurance
company” from Section 109(b) of the Bankruptcy Code. The effect of such a change
would be that insurance company debtors would be treated no differently than any
other business debtors under the Bankruptcy Code. The claims of policyholders would
have equal standing with claims of all other general unsecured creditors of the debtor
insurance company.

                   Discussion – Some believe that liquidating insurers under the federal
                    Bankruptcy Code would solve the key problems that the Task Force
                    identified in the current state insurance receivership system, which are the
                    selection of qualified receivers, the accountability for and oversight of their
                    performance, and the lack of incentives and statutory authority and
                    procedures to bring estate to closure. Insolvency law is a specialized area
                    of practice, and a federal bankruptcy approach brings with it specialized
                    courts and trustees whose only practice is insolvency. Federal bankruptcy
                    courts appoint trustees for estates from a pool of practitioners who
                    regularly practice before the courts, and who are removed from the
                    political appointment process.        Bankruptcy trustees are under the
                    supervision of specialized federal bankruptcy judges, by contrast to the
                    state receivership courts, in which judges may be assigned an insurer
                    insolvency infrequently throughout their careers. Bankruptcy trustees are
                    lawyers, by contrast to the state process in which nonlawyers may be
                    appointed as receivers. Trustees practicing before bankruptcy courts
                    have incentives to administer estates effectively so that the bankruptcy
                    courts will appoint them as trustees in future estates. While bankruptcy
                    courts and trustees may initially lack insurance-specific expertise, with
                    their concentrated insolvency experience, they could gain such expertise.
                    The federal Bankruptcy Code has the statutory provisions to bring estates
                    to closure. The federal bankruptcy courts regularly fix and enforce bar
                    dates for claims in all kinds of estates and bring them to closure, which
                    resolves another key problem in the state system.

                    The Task Force saw some benefits to a federal bankruptcy approach.
                    The bankruptcy courts have nationwide service of process and could likely
                    obtain jurisdiction more easily over all persons and assets than state
                    receivership courts. The federal bankruptcy approach may provide some
                    efficiencies in the insolvency of an insurance holding company system.
                    Under the current state system, a different receiver is appointed in the
                    state of domicile for each of the insurers in the holding company system.
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                    A federal bankruptcy court could establish one proceeding for the entire
                    entity. This may become more important in the future to the extent the
                    current legal boundary lines between insurers and financial services
                    institutions are eliminated. The Task Force saw these results as
                    beneficial in some insurer insolvencies, but not as improvements so
                    significant and necessary as to merit a major change from a state process
                    to a federal bankruptcy system.

                    The Task Force did not believe that the historical reasons for excluding
                    insurers from federal bankruptcy code have been resolved, and saw those
                    issues as continuing and unresolved obstacles to a federal bankruptcy
                    approach for insurer insolvencies:

                              Creditors can initiate federal bankruptcy proceedings against
                               debtors. This would mean that disgruntled claimants, their
                               attorneys, vendors and others could initiate bankruptcy
                               proceedings for reasons unrelated to the solvency of the
                               insurer.    Insurers could also initiate voluntary federal
                               bankruptcy proceedings, and might do so to avoid claims
                               payment. This situation creates the potential for significant
                               abuse of insurer insolvency proceedings to the detriment of
                               policyholders and third party claimants.        The federal
                               bankruptcy approach has been deemed not to work well for
                               banks and savings & loans, in part for similar reasons, and
                               they are exempt from federal bankruptcy jurisdiction. As
                               discussed later in this chapter, financial institutions are
                               liquidated by their federal regulators;

                              Policyholders and third party claimants would not be given
                               priority over other creditors as they currently are under state
                               law. Under state insurance laws, a high priority is given to
                               fulfilling the insolvent insurer‟s obligations under its policies,
                               and policyholders and third party claimants are given priority
                               to payment out of the remaining assets in the estate over
                               other types of creditors. Many times, these are the personal
                               injury victims or small businesses who can least afford the
                               insolvency of their insurer. Under the Bankruptcy Code, all
                               creditors are treated equally. Policyholders and third-party
                               claimants, as creditors, could be forced to take only a
                               percentage of their claims;

                              Creditors committees are permitted under the federal
                               Bankruptcy Code. Yet, they have not worked well in state
                               insurance receivership proceedings. There is no reason to

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                               assume that they will work in federal insurance bankruptcy
                               proceedings;31

                              Proceedings under the federal Bankruptcy Code are far
                               different than state insurance receivership proceedings. In
                               reality, the federal Bankruptcy Code is not a liquidation act,
                               but a rehabilitation or work out act. Federal bankruptcy law
                               focuses on the debtor in possession concept and the
                               rehabilitation and release from bankruptcy proceedings,
                               rather than liquidation. The goal of the Code is to keep the
                               debtor in business by forcing creditors to accept a lesser
                               percentage of what is owed to them. The bankruptcy courts
                               actually conduct few liquidations in which the debtor is
                               dissolved. It is questionable how this would work in the
                               context of effective insurance regulation. Policyholders and
                               third party claimants could be forced to accept lesser
                               payment on their claims, and then see their insurer freed
                               from bankruptcy proceedings and writing policies again.
                               Insurers would have lesser incentive to engage in sound
                               underwriting practices in order to be able to honor all of their
                               policy contracts.

                    The Task Force also noted that in the existing state receivership system,
                    the costs of the state courts are borne by the state taxpayers in the
                    insolvent insurer‟s state of domicile. The court costs of a state insolvency
                    would be shifted to all federal taxpayers who bear the costs of the federal
                    bankruptcy courts, if the bankruptcy approach were used. While this
                    would have the advantages of spreading the costs of an insurer
                    insolvency to the broadest possible base of taxpayers, it may be a
                    disadvantage to taxpayers in those states which have relatively few
                    insurer insolvencies vis-a-vis taxpayers in states with greater numbers of
                    insolvencies.

                    Overall, the Task Force could not conclude that a federal bankruptcy
                    approach would solve the three key problems it identified in the current
                    state receivership system. The Task Force doubted that more qualified
                    insurance receivers would consistently be appointed in the federal
                    bankruptcy courts. No specific expertise in insurance receiverships
                    currently exists in the federal bankruptcy courts or with federal trustees
                    because insurers have never been subject to federal bankruptcy
                    jurisdiction. The federal bankruptcy courts and the existing pool of
                    bankruptcy trustees also have no particular expertise in insurance
                    coverage issues and in litigating and/or settling insurance claims ranging

31 See Task Force‟s discussion on creditors committees in Chapter IV, page 28, supra.
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                                                     - 62 -
                    from personal injury to complex commercial risks. In fact, federal
                    bankruptcy courts often abstain from exercising jurisdiction over litigation
                    matters. It is unclear how they would treat insurance coverage litigation.
                    It is unknown how the federal bankruptcy courts would deal with long tail
                    claims. It is also questionable how rapidly such insurance expertise would
                    be developed at the federal level, if at all.

                    The Task Force could also envision a situation in which the federal
                    bankruptcy approach would be enacted as an addition to the existing state
                    receivership system rather than as an alternative to it. It would be far
                    easier for Congress to add a federal layer on top of the existing state
                    system rather than eliminate long standing state functions and jobs. The
                    Task Force saw such a dual, and possibly competing system as the worst
                    of all alternatives. There are substantive differences in the laws and
                    objectives of the respective state and federal insolvency systems as noted
                    above. A dual system could well result in a race to the court house door
                    between state insurance regulators and creditors to place the insurer in
                    receivership proceedings. Since creditors could petition to place a debtor
                    under the Bankruptcy Code, it would be in their interest to do so to avoid
                    the priority given to policyholder claims in state proceedings. State
                    insurance regulators might want to work with a financially troubled insurer
                    to avoid insolvency but may have no choice but to initiate receivership
                    proceedings to protect policyholders from federal bankruptcy proceedings.

          2.        Special Insurance Provisions in the Federal Bankruptcy Code

Congress could specifically tailor provisions for the liquidation and/or reorganization of
insurance companies, and either add them to the Bankruptcy Code, such as those that
exist for the liquidation of a stockbroker (11 U.S.C. §§ 721-28), the liquidation of a
commodity broker (11 U.S.C. §§ 1161-74), or enact them as stand-alone federal
insurance insolvency statute administered by the federal bankruptcy courts.

The Task Force is aware that in 1992, the Commercial Financial Services Committee of
the ABA‟s Business Law Section formed a Task Force on Insurance Insolvency. This
task force drafted a comprehensive federal insurance bankruptcy law entitled, Federal
Insurance Reorganizations and Liquidation Act (“FIRLA”), and released it in 1994.
FIRLA was intended to place insurer insolvencies under the jurisdiction of the federal
bankruptcy courts under a new federal insolvency statute, designed especially for
insurer insolvencies, but based on the Bankruptcy Code. Neither the ABA nor its
Business Law Section endorsed FIRLA.

In keeping with its course of reviewing alternatives in the context of existing examples,
the Task Force reviewed the FIRLA proposal as a way of improving the current state
insurance receivership system by centralizing insurer insolvencies in the federal

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bankruptcy courts and in applying of the principles of the Bankruptcy Code, as modified
to meet the unique needs of insurer insolvencies.

Highlights of FIRLA include:

                              The domestic insurance commissioner initiates receivership
                               proceedings by filing a petition with the federal district court.
                               FIRLA allows for abstention by the federal district court in
                               the interest of justice or comity. If the federal district court
                               grants the petition, the insolvency is transferred to the
                               federal bankruptcy courts for administration. The federal
                               bankruptcy court hears and determines all core proceedings.
                               Venue for insurer insolvency under FIRLA is in the federal
                               district court of the insurer‟s state of domicile state;

                              The federal bankruptcy courts would be vested with
                               exclusive jurisdiction over the insolvent insurer and its
                               assets, wherever located. The bankruptcy courts would use
                               their multistate jurisdiction and nationwide service of process
                               in administering the estates of insolvent insurers;

                              FIRLA receivership proceedings are effectuated by a “plan”
                               that provides notice to all parties in interest and allows
                               objections to the intended course of action. If the Plan
                               allows the insolvent insurer or its successor to continue in
                               the business of insurance, it would be contingent on state
                               regulatory approval;

                              A federal Insurance Certification and Oversight Board is
                               established under FIRLA to certify qualified trustees and
                               state guaranty funds for two-year intervals. The Oversight
                               Board is composed of seven members, which are the U.S.
                               Secretary of the Treasury, two state insurance
                               commissioners nominated by the NAIC, two insurance
                               industry representatives, and two presidential-appointed
                               public representatives.    No more than three of the
                               appointees may be from the same political party and the
                               members serve three-year terms. The Oversight Board is
                               given broad statutory criteria for certification of trustees.
                               This Board may employ staff, receive allowances for travel,
                               lodging and food in carrying out duties, as well as
                               independent members receiving per diem pay and additional
                               compensation and benefits comparable to federal bank and
                               insurance regulatory agencies. Funding for the Oversight
                               Board is accomplished by imposing administrative fees of
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                               0.5% on the general assets of each receivership estate, up
                               to $25,000 per estate;

                              The insurance commissioner of the insolvent insurer‟s state
                               of domicile could serve as Interim Trustee pending a ruling
                               on the liquidation petition. Once the federal district court
                               issues the liquidation order, however, the commissioner
                               must appoint a trustee, who has been previously certified by
                               the Oversight Board.        While the domestic insurance
                               commissioner retains power to remove a trustee for cause,
                               the FIRLA trustee is primarily accountable to the bankruptcy
                               court. The Oversight Board also supervises the trustees in
                               the sense that all trustees must be recertified every two
                               years;

                              A certified trustee and the firm which he or she associates
                               may act as attorney for the estate. No FIRLA trustee can
                               have a conflict of interest with the business of the estate.
                               The trustee may retain professionals if the Court determines
                               it is necessary and the professionals meet the test of
                               disinterest in estate matters. The Court does not have
                               authority to determine which professionals are retained.
                               After notice to parties in interest and a hearing, the District
                               Court may award the trustee or professional person
                               reasonable compensation and actual expenses. A deputy
                               trustee or professional person must provide the court with a
                               detailed statement of activities undertaken and expenses
                               incurred no less than every 120 days. If the FIRLA trustee
                               requests, a state guaranty fund could be appointed to
                               administer the operations of the estate with respect to the
                               insolvent insurer;

                              Unlike the federal Bankruptcy Code, FIRLA incorporates a
                               priority scheme so that all creditors are not treated equally.
                               Rather, it tracks the state insurance receivership
                               proceedings and gives policyholders and third party
                               claimants a high priority of payment out of the assets of an
                               insolvent insurer‟s estate;

                              FIRLA incorporates a short-track commutation section,
                               which provides for commutation of reinsurance contracts if
                               requested by a FIRLA trustee, reinsurer or a ceding insurer,
                               which ceded reinsurance to the insolvent company. This is
                               intended to bring estates to closure and resolve the problem
                               of long tail claims;
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                              FIRLA is structured as a participatory process to a much
                               greater degree than state receivership proceeding laws in
                               that FIRLA contemplates the appointment of automatic and
                               discretionary creditors committees. The trustee would have
                               to form a committee of creditors, equity securityholders and
                               other interested parties in the receivership process. The
                               FIRLA trustee would propose such a creditors committee to
                               the Court for approval. If a party in interest requests, the
                               Court may appoint additional committees.               These
                               committees could hire professionals to consult with the
                               FIRLA trustee and reinsurers. It is not clear as to how these
                               committees would be paid, but it may be inferred that the
                               committees‟ expenses would be administrative costs, just as
                               those of the trustee.

                   Discussion – The Task Force acknowledge that the FIRLA proposal uses
                    the specialized federal bankruptcy courts for insurer insolvencies, which
                    may improve the oversight and administration of insurer insolvencies as
                    many general bankruptcy principles would relate to an insurer insolvency.
                    As noted before, the bankruptcy courts have nationwide service of
                    process, and would be given exclusive jurisdiction over an insolvent
                    insurer‟s estate under FIRLA, which brings the advantage of multi-state
                    jurisdiction. Trustees under FIRLA for the estates of insolvent insurers
                    can also rely on the identical and substantial body of bankruptcy case law
                    for interpretation and implementation of FIRLA. These aspects of FIRLA
                    may represent improvements over the state system, in which the state
                    receivership courts are courts of general jurisdiction and have neither
                    specialized solvency expertise nor a uniform body of case law.

                    The Task Force also saw the FIRLA proposal as theoretically eliminating
                    some of the historical objections to use of the federal bankruptcy system
                    for insurer insolvencies. For instance, FIRLA eliminates the ability of
                    creditors to initiate bankruptcy proceedings, and incorporates the state
                    priority provisions to protect policyholders and third party claimants, which
                    are two of the traditional obstacles to the federal bankruptcy approach.

                    However, FIRLA still does not address the traditional opposition to using
                    the Bankruptcy Code that federal bankruptcy courts operate on the debtor
                    in possession concept, and do not liquidate many debtors. How would
                    bankruptcy courts adjust to insurance coverage determinations and
                    litigation, the valuation of insurance claims, and the long tail nature of
                    some property/casualty claims? These questions remain unresolved
                    under FIRLA, and may create more problems than FIRLA would resolve.

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                    The Task Force thought it was doubtful, however, that the FIRLA proposal
                    would correct the major problems it identified in the current state
                    receivership system. FIRLA Trustees for insurer insolvencies would be
                    certified and appointed by the Oversight Board, which is composed of
                    state, federal and industry representatives. The Task Force does not
                    believe that moving the appointment process for insurance receivers from
                    the state to the federal level would produce meaningful change and result
                    in appointment of more qualified receivers. FIRLA attempts to address
                    this weakness by creating the Oversight Board to certify receivers, and by
                    providing that only certified receivers can be appointed. The Oversight
                    Board, however, sets the terms and conditions of certification as an
                    insurance receiver, and certifies all such receivers. Thus, the Task Force
                    questions to whom the Oversight Board is accountable, which is unclear
                    under FIRLA. Presumably, if insurer insolvencies are placed under the
                    jurisdiction of the federal bankruptcy courts, the Oversight Board would be
                    subject to Congress and/or some federal agency. The Task Force could
                    not assume that the Oversight Board, given its composition, would assure
                    that only qualified persons would be certified as receivers. For example, it
                    is not a given that the U.S. Secretary of the Treasury has expertise on the
                    qualification of insurance receivers. Questions such as what interests
                    would the two industry members represent on the Oversight Board –
                    guaranty funds, property/casualty or life-health companies, reinsurers,
                    agents, among others – and how would they be chosen are unanswered.
                    In any case, as the Task Force concluded in its evaluation and discussion
                    of improvements to the current state receivership system, pre-certification
                    of insurance receivers will not necessarily produce qualified receivers in
                    future insolvencies as each insolvency is unique.32

                    The Task Force believes that the use of the federal courts under FIRLA
                    may not work in practice as theoretically proposed. Upon application to
                    the federal district court, the presiding judge is required under FIRLA to
                    rule within 14 days if the insurer consents or if the court makes the finding
                    of insolvency under the conditions enumerated by FIRLA. The federal
                    district courts already have overcrowded dockets, including a criminal
                    caseload, so how they will effectively respond in 14 days is uncertain.
                    Nothing preempts their ability to grant continuances on these matters. If
                    the insurer contests the insolvency, which is often the case, there is no
                    evidence that the federal district courts would be better than state courts
                    to resolve the insolvency issue, when both are courts of general
                    jurisdiction. Neither is a specialized bankruptcy court. The Task Force
                    questioned how the federal district courts would gain insurance insolvency
                    expertise, in a 14-day window, to make a finding of insolvency more
                    effectively than the state courts. Given the fact that there are few insurer

32 See Task Force discussion in Chapter IV on pages 16-33.
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                    insolvencies, just like the state courts, the federal district judges may be
                    assigned an insurer insolvency petition once in a career, if at all.

                    Even assuming that the process moves smoothly in the federal district
                    court, the insolvent insurer‟s estate is then referred to the federal
                    bankruptcy courts, which are granted exclusive jurisdiction under FIRLA.
                    The Task Force presumes that the federal bankruptcy courts must accept
                    the referral. Otherwise, the Task Force assumes the estate would go
                    back to the federal district court to administer the estate under the federal
                    insolvency law enacted under FIRLA. The Task Force engaged in many
                    lively debates as to whether state or federal district courts could better
                    oversee insurer insolvencies and concluded that the federal courts remain
                    untested in this area.

                    FIRLA applies to insurance liquidations and reorganizations. What will
                    happen to other state insurance proceedings for insurers in hazardous
                    financial condition, such as supervision, seizure, conservatorship and
                    rehabilitation, which are all proceedings short of insolvency and
                    liquidation?    The Task Force viewed the superceding insolvency
                    proceedings in the federal bankruptcy courts as duplicative of existing
                    state proceedings. In the majority of insurer insolvencies, the state
                    insurance commissioner does not proceed immediately to liquidation, but
                    already has another proceeding underway. The federal bankruptcy or
                    FIRLA Trustee would need to recreate receivership proceedings that have
                    already been initiated and developed at the state level.

                    The Task Force also questions the role creditors committees would play in
                    FIRLA, particularly since FIRLA incorporates the priority provisions from
                    the existing state insurance liquidation laws. One of the traditional
                    obstacles to use of federal bankruptcy proceedings is that creditors are all
                    treated equally, and negotiate a settlement with the debtor through
                    creditors committees. Yet, FIRLA contains the existing state priority
                    provisions under which no other class of creditors are paid anything until
                    the claims of policyholders and third party claimants are paid in full. With
                    those statutory priorities for the payment of claims out of the assets of an
                    insolvent insurer‟s estate, it is questionable what role would a creditors
                    committee would play, and more importantly, who the creditors‟
                    committees would benefit. Why have creditors‟ committees for low priority
                    creditors who may never be paid in most insolvencies?

                    The FIRLA proposal states that “interested parties” often have limited
                    opportunity to participate in state insurance receivership proceedings, and
                    that FIRLA remedies this by its mandatory and discretionary creditors
                    committees. The state guaranty funds, however, would continue to pay
                    the majority of the claims of policyholders and third party claimants under
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                    FIRLA, just as under the current state system, so policyholders and
                    claimants will not benefit from the committee. The Task Force could not
                    see who this benefits and how this improves the current state system.

                    The Task Force also questions why FIRLA envisions a federal insurance
                    insolvency law rather than amendments to the federal Bankruptcy Code to
                    address the unique aspects of insurer insolvencies to which the existing
                    Bankruptcy Code is ill-suited. The Task Force is not aware of any
                    precedent for the federal bankruptcy courts being mandated to administer
                    insolvencies under any federal law other than the Bankruptcy Code. The
                    Task Force believes that this makes the FIRLA proposal impractical and
                    unlikely to be enacted as drafted.

                    Overall, the Task Force concluded that a federal bankruptcy approach
                    was not a viable alternative to the current state insurance receivership
                    system. In its current form, the historical reasons for excluding insurer
                    insolvencies from the federal bankruptcy code remain as obstacles to this
                    approach. Even if the federal bankruptcy code could be amended to
                    reflect concerns unique to insurer insolvencies, the Task Force did not
                    think that it was reasonable to conclude that a modified federal
                    bankruptcy approach could effectively cure the three major weaknesses
                    that the Task Force identified in the current state system: the selection of
                    qualified receivers, the oversight and accountability of receivers, and the
                    absence of incentives and statutory provisions to bring estates to closure.
                    In fact, the modified federal bankruptcy approach that the Task Force
                    reviewed may generate new and additional problems.




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                  VIII. Other Federal Alternatives to Insurance Receiverships

A.        Background on Federal Alternatives

There are several ways in which federal agencies or other new entities and the federal
courts could either assume the responsibility for the administration of insolvent insurers‟
estates or become involved in supplementing and/or improving the current state
insurance receivership system. These approaches are described below, and were
evaluated by the Task Force in terms of how they would resolve the three key problems
in the current state receivership system, namely, the selection of qualified receivers,
accountability for and oversight of their performance, and the lack of incentives and
statutory authority and procedures to bring estates to closure consistent with its
approach in Chapter VII on federal bankruptcy alternatives, the Task Force reviewed
existing models, rather than theoretical ones, believing that federal alternatives for
insurer insolvencies would not operate significantly differently than comparable existing
federal alternatives.

B.        Federal Minimum Standards Legislation

Federal minimum standards for insurance receiverships have been suggested so that in
all insurer insolvencies, policyholders and claimants of the same insolvent insurer are
treated alike, both in the procedures utilized by receivers to process their claims, and in
the amount of their claims paid. The federal minimum standards or guidelines could
encompass substantive provisions that must be in state laws, procedures that must be
followed, staffing requirements, minimum qualifications for receivers and staff, among
other factors. Generally, the process is that Congress enacts a law and states must
either enact something substantially similar or be subject to the federal law. For
insurance receiverships, Congress could enact a uniform receivership law and states
would have to enact it or their domestic insurers would face federal insolvency
proceedings.

                   Discussion – Federal minimum standards for insurance receiverships
                    have never existed, but a possible federal model for insurer receiverships
                    might be the federal minimum standards that currently govern the
                    regulation of Medicare supplement insurance, long-term care insurance
                    and, with the enactment of the Health Insurance Portability and
                    Accountability Act (HIPAA) in 1994, most forms of hospital and medical
                    expense insurance. In these examples, Congress enacted federal
                    standards based largely on the model laws and regulations of the National
                    Association of Insurance Commissioners (NAIC).               States were
                    encouraged to enact the NAIC standards. Where the standards were not
                    enacted, they were implemented by regulation by federal agencies.
                    Congress also imposed other federal obligations, typically more onerous
                    than the NAIC standards, independent of the states‟ actions. HIPAA
                    coverages, in particular, are highly regulated under federal law by three
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                    separate federal agencies, the Health Care Financing Administration, the
                    Internal Revenue Service, and the Department of Labor.

                    Federal minimum standards for Medicare supplement, long-term care and
                    HIPAA coverages were enacted to address specific regulatory issues in
                    the marketing of those products, including the need to address those
                    regulatory issues on a nationwide basis.

                    The Task Force believed that before considering federal minimum
                    standards for insurance receiverships, it is necessary to identify the
                    regulatory need that has not been met at the state level. The NAIC Model
                    Liquidation Act and the NAIC model guaranty fund laws, or at least some
                    version of them, are already the law in all states. Federal minimum
                    standards would not necessarily improve the substance of insurance
                    insolvency law. If state laws require updating to reflect changes in the
                    NAIC models, that can be done through the current state legislative
                    process.

                    Nor do federal minimum standards enhance uniformity.                 Federal
                    standards set a floor, and states are free to enact additional requirements,
                    as they do for Medicare supplement, long-term care and HIPAA
                    coverages. Even if more uniformity is desired in the conduct of insurance
                    receiverships, it will not likely be achieved through federal minimum
                    standards, based on experience with existing federal minimum standards.

                    Federal minimum standards for insurer insolvencies purport to give states
                    the necessary incentive to continually update their insurance receivership
                    law. Yet, states may have no incentive to implement the federal minimum
                    standards until an insolvency occurs, just as they do not currently have
                    the incentive to continually update their receivership laws. Changes to
                    state law can and would still have to be made in the state legislatures.

                    Perhaps the most difficult issue is the consequence of a state‟s failure to
                    enact the prescribed minimum standards. Under the federal models in
                    existence, insolvent insurers in states without the minimum standards
                    would be subject to federal insolvency proceedings. Because there is no
                    existing federal insolvency mechanism available for insurers, a new one
                    would have to be created. The issues this Report has identified with
                    respect to various federal alternatives would apply equally to the “fallback”
                    federal receivership under a minimum standards law. Even worse,
                    assuming that most states would have enacted the minimum standards,
                    the fallback federal receivership would be rarely activated. The legal,
                    administrative and judicial structure created to handle a potential
                    insolvency would be wasted.

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                    Another major problem of this approach, like many other federal
                    alternatives, is that it separates the authority and decision making process
                    for insolvency standards from the realities of how those standards work
                    and are applied in practice. There would be one federal standard for all
                    insolvencies, yet each company and each insolvency is different. The
                    Task Force believes that no cookie cutter approach is possible or
                    necessary. In fact, the Task Force does not believe that exact uniformity
                    is needed to make the state insurance receivership system work better.
                    State tort and other laws differ and reflect local needs and conditions; not
                    all states need the exact law in place.

                    Finally, the Task Force questioned whether the minimum federal law
                    would be as good or better than those already in place in the states.
                    What happens to a state that is not in compliance with the federal
                    minimum standards – a federal receivership/federal regulation? Where
                    do federal minimum standards end and wholesale federal regulation
                    begin? Have federal standards to assure minimum state performance
                    ever been used successfully in an area as diverse and complex as insurer
                    insolvency? The Task Force concluded that a federal minimum standards
                    approach would be an uneasy and ultimately unsatisfactory compromise
                    between enhancing the state receivership system and jettisoning it for the
                    hoped-for benefits of a federal system. In sum, it would raise more issues
                    than it would resolve.

C.        National Private Receivership Corporation

Federal legislation could create a private National Insurance Receivership Corporation
(the Corporation), funded and administered by the insurance industry in a similar
manner to the enactment and implementation of the 50 state guaranty funds in the late
1960s. Such legislation would preempt existing state insurance receivership laws, at
least as to the appointment of a receiver, as the Corporation would become the receiver
for all insurers doing business in the United States. The Corporation would be
governed by a Board of Directors of industry representatives, who would hire the
Corporation‟s receivership staff. The staff could have property/casualty and life-health
experts to handle the different insolvencies. The insurance industry would have to be
assessed for the start up costs of the Corporation. The costs of administration of
estates and the payment of claims would still be out of the assets of the estate of the
insolvent insurer. The 50 state guaranty funds would operate as usual.

Over time, the industry may wish to consider the creation of a national guaranty fund
corporation as a counterpart to this National Insurance Receivership Corporation. The
Corporation could either administer an insurer insolvency under the receivership law of
the insurer‟s state of domicile or under a uniform federal receivership law that would be
enacted with the federal legislation creating the Corporation. Several models exist for
such a federal receivership law such as the NAIC Model Liquidation Act and the
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Uniform Receivership Law discussed in previous chapters. State insurance regulators
would still initiate all receivership proceedings. The Corporation would have no other
regulatory authority such as to examine insurers or to take actions against impaired
insurers. The Corporation would only administer receivership of insolvent insurers.

                   Discussion – This approach, more than any other, highlights the
                    difficulties and impracticalities in considering conceptual solutions that
                    have not existed in reality. If this proposal works exactly as intended, it
                    may well solve the problems in the existing state insurance receivership
                    system. It “privatizes” the state insurance receivership system all at once
                    on a national basis in that what is now a state government function would
                    become an insurance industry administered function.            A National
                    Receivership Corporation should encourage the development of a
                    permanent and qualified receivership staff. In fact, there are already
                    consultants and specialists in run off business that could become
                    receivers for the Corporation. While state courts would still have
                    jurisdiction over insurer insolvencies, the primary oversight of receivers
                    would be the Corporation, which would be in the form of an employer-
                    employee relationship with receivers. This may also resolve the problem
                    of politically appointed receivers.

                    A National Receivership Corporation may make administration and
                    closure of estates easier.       The Corporation could likely achieve
                    economies of scale in amalgamating resources in handling all insurer
                    insolvencies, as opposed to a separate estate being created for each
                    insolvency, with separate staff, offices, computer systems, claims
                    processes and other such functions. The Corporation would create
                    uniform receivership procedures to be used in all insurer insolvencies.
                    There is some duplication of effort in the current state receivership
                    system. To the extent that numerous individual receiverships are
                    avoided, estates may be easier to close. If the National Receivership
                    Corporation proposal additionally created a single national guaranty fund
                    to replace the existing 50 state system, the benefits of scale may be
                    further enhanced. The state guaranty funds can sometimes make
                    administration and closure of estate more complicated.

                    Another potential benefit of this approach is that it does not attempt to
                    carve out insurer insolvencies from the state system, but yet consolidates
                    the administration of all insolvencies in one place. Federal legislation,
                    however, would be necessary to achieve this. State regulators would also
                    not necessarily be allowed to turn over the failures of state regulation
                    (insolvent insurers) to a different level of government. The Corporation,
                    and the potential national publicity, may make state regulators more
                    accountable.

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                    The Task Force believes, however, that this approach is also the least
                    politically feasible. There is no reason to believe that Congress would be
                    willing to enact legislation which preempts an existing state government
                    function and places it in the hands of private industry. There is no
                    precedent for such federally mandated “privatization” of state government
                    functions. There is also no known precedent of any major industry in the
                    United States being permitted to administer the insolvencies of its
                    competitors. Congress would be more likely to enact legislation creating a
                    federal agency to perform state receivership functions if the state
                    receivership system is held out to be dysfunctional. Even if Congress
                    does not opt for a federal agency, it is likely to enact some form of federal
                    regulation or supervision over the National Receivership Corporation.

                    The Task Force also questioned whether a permanent National
                    Receivership Corporation is needed for insurer insolvencies. While
                    insurer insolvencies were significant in number and size in the mid 1980s,
                    just the opposite is true in the 1990s. The Task Force expects there will
                    continue to be peaks and valleys in insurer insolvencies, given the cyclical
                    nature of the insurance business. A national corporation may not
                    necessarily be able to adequately react to these changes. Once it staffs
                    up in peak periods to administer insolvencies, will it downsize in response
                    to periods of far less activity? The Task Force also noted in some of the
                    industry mechanisms that are currently administered by all-industry
                    boards, such as the guaranty funds and the residual market mechanisms,
                    there has been turnover in board membership recently due to insurer
                    downsizings and consolidations. The level of expertise, time and
                    commitment of board members has begun to vary considerably in some
                    cases, which may prove to be the pattern for the proposed National
                    Receivership Corporation as well.

D.        Federal Insurance Receivership Corporation

Legislation has been introduced in Congress at various times to federalize insurance
receiverships. These proposals have generally involved the creation of a not-for-profit
federal receivership corporation (federal corporation) that would be an instrumentality of
the United States. Board members of the federal corporation would be federal
regulators or federal political appointees. The federal corporation would retain a
receivership staff, who would likely be subject to the federal civil service laws,
requirements and employee pay scale, unless the enabling legislation exempts the
federal corporation employees from such requirements.

In some federal legislation that has been introduced historically, the federal corporation
becomes the receiver for all insolvent insurers. In other proposals, the federal
corporation becomes the receiver only for insurers that opt for a federal license. State
receivership proceedings would continue for insurers who do not seek a federal license,
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but state regulators could ask the federal corporation to administer a state licensed
insurer insolvency. Generally, by obtaining a federal license and subjecting itself to
federal insolvency proceedings, an insurer would also submit to federal solvency
regulation in general. That is, the federal proposals to date have not carefully carved
out insurance receiverships from the system of state insurance regulation, but have
usually involved some federal regulation of the industry as well. Many proposals have
also involved some form of dual state-federal regulation.

A uniform federal insurance receivership law has been part of all federal legislation
introduced to date. The NAIC Model Liquidation Act has been used as the basis for the
federal law. The federal corporation would liquidate insurers under federal law and in
the federal district courts. Usually, the federal corporation is given authority to initiate
liquidation proceedings against all federally-licensed insurers. In all the federal
proposals to date, the legislation has also preempted the state guaranty fund laws and
created a single national guaranty fund, usually under the control of the federal
corporation. In some cases, the national guaranty fund has a board which includes
representatives of the insurance industry. The insurance industry would be assessed
by the national fund to pay claims. A uniform federal guaranty fund law is usually also
part of the legislation.

                   Discussion – As with other federal alternatives, the Task Force
                    concluded that merely shifting a state process to the federal level would
                    not solve the three key problems in the state receivership system. It may
                    just shift these problems, or create new issues, at the federal level.
                    Therefore, the Task Force could not conclude that the federal regulators
                    or other federal appointees on the board of a federal receivership agency
                    or corporation would select more qualified receivers than their current
                    state counterparts.

                    A federal receivership corporation, staffed by federal employees and
                    appointees, would have the same benefits of consolidation of resources
                    and economies of scale as would that national receivership corporation
                    discussed above, staffed with employees from the private sector.




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E.        Receivership Proceedings For Federal Financial Institutions

A federal insurance receivership system has never existed. Consistent with its
approach of using current examples, the Task Force explored the procedures and legal
structure of financial institutions that are now regulated and liquidated by agencies of
the federal government in order to determine whether there were advantages in the
existing federal receivership process that might be beneficial for insurer insolvencies.

There are two principal types of federal financial institutions regulated by federal
agencies, which are savings associations (S&Ls) and banks.33 All these federally
chartered financial institutions are subject to federal receivership proceedings, by either
the Office of the Comptroller of the Currency (OCC) for banks or the Office of Thrift
Supervision (OTS) for savings associations. State banks or savings institutions insured
by the Federal Deposit Insurance Corporation (FDIC) may be subject to receivership
proceedings by the FDIC under circumstances discussed below.

Since the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA) the OTS has regulated savings associations. That Act made sweeping
changes in banking regulation. In addition to the elimination of the National Home Loan
Bank Boards and its replacement by the OTS, FIRREA abolished the Federal Savings
and Loan Insurance Corporation (FSLIC) and accounts in savings associations are now
insured by the Savings Association Insurance Fund (SAIF), which is administered by
the FDIC. The Permanent Insurance Fund of the FDIC is now called the Bank
Insurance Fund (BIF), and assessment rates are set by the FDIC independently for BIF
and SAIF.

The OTS was created in the Department of the Treasury to act as principal federal
regulator of savings associations, much as the Office of the Comptroller of the Currency
(OCC) acts as federal regulator of national banks. The OTS is headed by a single
director who is subject to general oversight by the Secretary of the Treasury. It has the
authority to grant charters to federal savings associations and to supervise all federal
and insured state savings associations.

FIRREA also created the Resolution Trust Corporation (RTC), which had the
responsibility of merging or liquidating all savings associations that failed between
January 1, 1989 and August 9, 1992. 34 The FDIC is responsible for resolving failures
that occurred after August 9, 1992. The RTC terminated December 31, 1996 and FDIC


33 Credit unions are also regulated and chartered under federal law; however, the Task Force felt that it
was sufficient to examine the laws and procedures for banks and savings institutions for purposes of
comparison with state insurance laws and receivership proceedings.
34 It will be recalled that the peak of bank and savings institution failures was in this period of time, and
the RTC was established by Congress on a “special case” basis to dispose of the billions of dollars of
assets held by defaulted depository institutions.

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succeeded it as receiver or conservator in all cases in which RTC was acting at the
time.

The Director of the OTS may appoint a receiver/conservator for a savings association if
it is determined that one of the statutory grounds exist. 35 Historically, the basis for
closing a depository institution was a finding that it was insolvent, in that either its
assets taken at ascertainable fair market value were less than its liabilities, or that it
was unable, through inadequate liquidity, to meet the demands of its depositors and
creditors as they matured. FIRREA changed that standard to provide that an insured
institution, other than a national bank, can be taken over, closed, sold, merged, or
liquidated if it is found to be in danger of default, defined as:

                    (a)        The institution is not likely to be able to meet obligations or
                               depositor demands in the normal course of business; or

                    (b)        The institution has incurred or is likely to incur losses that
                               will deplete all or substantially all its capital and there is no
                               reasonable prospect for the institution to become adequately
                               capitalized without federal assistance. In the case of a
                               troubled bank the Comptroller may close the bank and
                               appoint a receiver whenever he is satisfied that the bank is
                               insolvent.

In the case of a national bank, the OCC is required to appoint the FDIC as receiver. If
the Comptroller has not made a finding of insolvency and decides to appoint a
conservator, it need not be the FDIC, and the conservator has all of the powers of a
receiver if there is a determination that it is necessary to conserve the assets for the
benefit of depositors and creditors.

The OTS has the power to appoint conservators and receivers for federal savings
associations and state chartered savings associations. The Director of the OTS may
appoint the FDIC as conservator but is now also required to appoint FDIC as receiver
for purposes of liquidating a savings association.

The grounds for appointment of a conservator are set forth in the federal banking
statutes and are subject to judicial review. If challenged, the court order to terminate a
conservatorship must be based on a finding by the court that the decision to place the
bank in conservatorship was arbitrary, capricious, an abuse of discretion, or otherwise
not in accordance with law.36 However, if the OCC appoints a conservator for a bank
because (a) the bank‟s board of directors consents to it, or (b) the FDIC has terminated
its deposit insurance, that appointment is not subject to judicial review. The Comptroller
may appoint FDIC as conservator and may replace a conservator without notice or

35 12 USC 1821 (c)(5).
36 12 USC 203.
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hearing. The conservator has all of the powers of the directors, officers and
shareholders of the bank and essentially operates the bank subject to whatever
conditions are imposed by the Comptroller, and subject to all of the laws and
regulations applicable to banks. All depositors and creditors similarly situated must be
treated ratably, and depositors are not given priority over other creditors. If State law,
however, gives a preference to depositors of state chartered savings associations, that
priority would be honored.

Termination of the conservatorship by the Comptroller is subject to approval by the
FDIC Board of Directors if FDIC is the receiver, when the Comptroller is satisfied that it
is in the public interest and it is safe to do so. Termination may include returning the
bank to the control of its Board and shareholders on terms and conditions prescribed by
the Comptroller, upon a merger, sale, consolidation, purchase and assumption, change
in control, or voluntary dissolution and liquidation.

The OTS Director may appoint a conservator or receiver on any one of the grounds
specified in the statutes. This can be done ex parte and without notice. The OTS also
has the authority to appoint a conservator or receiver, without notice, hearing, or other
action, if the savings association board consents to the appointment, if its deposit
insurance is terminated or if it is removed from membership in any Federal Home Loan
Bank. A federal savings association has 30 days after appointment of a conservator or
receiver to bring an action in U.S. District Court for an order requiring the Director to
remove the conservator or receiver. Such actions take precedence over other cases
pending before the court and are required by statute to be expedited.

The statutes give the conservator all powers of the stockholder, directors, officers and
members of the association. The conservator is also authorized to operate the
association in its own name or to conserve the assets in the manner authorized by the
Director. The FDIC is given a wide range of alternatives for dealing with an insolvent
depository institution. If the institution is closed and other alternatives, as outlined
below, are not utilized, the FDIC is statutorily required to pay insured deposits as soon
as possible. FDIC is then subrogated to the claims of depositors against the assets of
the closed institution.

As the receiver or conservator of a depository institution, the FDIC has authority to (a)
take over the assets of and operate the institution; (b) collect all obligations and money
due the institution; and (c) perform all functions of the institution which is consistent with
receivership or conservatorship. FDIC has the authority to effect a merger of the
insolvent institution with another insured institution, including a transfer of assets and
liabilities. These actions are not subject to judicial review. FDIC preclosure actions
include the offering of the depository institution for sale to qualified buyers. The goal of
FDIC is apparently to sell the entire depository institution but individual branches may
be sold off separately or in groups if this would increase value. Buyers of insolvent
depository institutions typically are most interested in the depositor base and may take
few if any of the other assets, such as the loan portfolio or certain types of loans.
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Subsidiaries of the defaulted institution, such as mortgage servicing companies, are
usually sold separately. The overall goal of FDIC is to maximize assets while protecting
depositors.

In addition to the options of sale of the failed institution or closure and liquidation, FDIC
may exercise other alternatives for national banks. The statutes authorize FDIC to
organize a “New Bank,” without capital or a board of directors. The receiver of the
defunct bank transfers the deposits to New Bank, which assumes them, but the
receiver retains the assets as well as uninsured deposits and other liabilities.
Apparently the New Bank approach is intended to give FDIC an opportunity to
encourage local communities to establish and capitalize the new bank before a final
disposition of its insured deposits is made.37 The FDIC is also empowered, under
certain specified criteria, to lend financial assistance to an institution that is in danger of
failing. Assistance to insured banks is provided from the BIF and to insured savings
institutions from the SAIF. Such assistance may include loans to the institution,
purchase of assets or providing deposits. These so-called “bailouts” have engendered
some criticism over the years.

The FDIC also has authority to provide financial assistance in the sale or merger of an
insured institution to or with another institution, subject to the criteria set forth in the
statutes. Such assistance may include loans, purchase of assets, assumption of
liabilities or purchase of securities (other than voting or common stock) of the acquiring
institution, and the providing of guarantees. The statutes limit the amount of assistance
to that which is estimated to be the savings to be gained by not liquidating the failing
institution.

In the case of an insured state-chartered depository institution the FDIC may appoint
itself as the sole conservator or receiver if it is determined that: a) it has been subject to
takeover for 15 consecutive days and depositors are unable to withdraw insured deposit
funds; b) the institution has been closed by or under state law; and c) at the time a
conservator, receiver or other legal custodian is appointed, or when it is closed, or
during appointment of a conservator, receiver or legal custodian while it is closed (i) the
institution is insolvent; (ii) it has suffered substantial dissipation of assets or earnings
due to violation of law or regulation or due to unsafe or unsound practice; (iii) it is in
unsafe or unsound condition to transact business; (iv) there has been a willful violation
of a cease-and-desist order that has become final; (v) any concealment of books,
papers, records or assets or any refusal to submit books and records to examination;
(vi) a likelihood the institution will be unable to meet its obligations to depositors in the
ordinary course of business; (vii) it has incurred or is likely to incur losses that will
deplete all or substantially all of its capital with no reasonable prospect for
replenishment, without federal assistance; or (viii) there is a violation of law or
regulation, or an unsafe or unsound practice or condition likely to cause insolvency or

37 Cobb, Federal Regulation of Depository Institutions: Enforcement Powers and Procedures, Warren,
Gorham & Lamont, 1984, 1991 Cumulative Supplement.
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substantial dissipation of assets or earnings, or likely to weaken the condition of the
institution or otherwise seriously prejudice the interests of its depositors.

Having appointed itself as conservator the FDIC may later appoint itself receiver without
prior notice or hearing. However, a self-appointment is subject to judicial review in an
action filed in federal district court within 30 days of the appointment.

The FDIC acts in two capacities: as a receiver when a federal financial institution is
taken over, and as insurer of the deposits of the institution, in its corporate capacity.
Therefore, to reduce its losses as insurer, the FDIC as receiver, attempts to sell the
deposits and the assets of the defunct institution to another insured institution, with the
amount paid for the deposits reducing the shortfall in assets needed to support the
deposit liabilities. The FDIC, in its corporate capacity, then advances the cash needed
to make up the remaining shortfall in assets. Those assets that are unacceptable to the
purchasing institution have essentially been paid for in cash by FDIC in its corporate
capacity, which then proceeds to liquidate the remaining assets. The corporate FDIC
agrees to pay over to FDIC/receiver the excess it realizes on the assets over what it
paid for them, less the costs of liquidation and interest expense. A variation would be
for FDIC as the receiver to retain the assets and then borrow cash from FDIC-corporate
to close the assumption and sale using the bad assets as security. The FDIC in its
corporate capacity will frequently purchase the assets from FDIC/receiver in order to
accelerate the liquidation and permit early distributions to the FDIC as insurer,
uninsured depositors and other creditors.38 FIRREA provides for federal jurisdiction for
virtually all civil actions to which FDIC is a party, whether as receiver or in its
corporate/insurer capacity.

                   Discussion – The Task Force believed that, overall, the federal
                    corporation approach has produced qualified receivers for banks and
                    S&Ls. A body of insolvency expertise has been developed and may well
                    become institutionalized such that receivers in future insolvencies do not
                    have to reinvent the wheel. The federal corporation approach may retain
                    a qualified receivership staff by creating permanent jobs and career paths
                    within the corporation. Under this approach, the need for oversight of the
                    receivership staff may be lessened as the same federal agencies that
                    regulate banks and S&Ls also administer their insolvencies, without much
                    judicial review. In essence, the federal agencies are handling their own
                    problems and are subject to the oversight of Congress. The Task Force
                    lacked empirical data to demonstrate how and in what time frames the
                    insolvencies of banks and S&Ls were brought to closure. However, in
                    terms of paying claimants (depositors) quickly, the federal corporation
                    approach seems to work well.


38 Cobb, op cit.

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                    The federal corporation may be able to administer and close estates more
                    effectively as well since the FDIC acts as both the receiver of the insolvent
                    depository institution as well as the guarantor of performance by the
                    institution to its depositors, up to the statutory limit of $100,000. This has
                    the virtue of vesting in one agency the responsibility of capturing all of the
                    assets of the institution, determining all of its liabilities and assuring
                    protection for the depositors either through an arranged sale of the
                    deposits or otherwise. There is no other agency or entity with whom to
                    have a dispute over the plan of liquidation or course of action to take.
                    Being vested with federal court jurisdiction, the FDIC has the ability to
                    reach assets in any jurisdiction and to resolve disputes within a single
                    body of federal law.39 It can move expeditiously since it is unencumbered
                    with challenges to the take-over and court supervision over its actions.

                    The Task Force expressed concern, however, about the very broad
                    discretion that federal agencies have in acting to place an insured
                    depository institution into either conservation or liquidation. With respect
                    to liquidation of national banks, at least in a preclosure proceeding, the
                    OCC‟s decision is not subject to judicial review.40 In addition, the
                    determination of insolvency is a matter delegated by law to the discretion
                    of the agency and is not subject to judicial review under the Administrative
                    Procedure Act.        Such broad discretionary authority may be an
                    infringement on constitutional due process. Some will argue that such
                    discretion is necessary in the case of financial institutions because a delay
                    may have a significant effect on the economy of the nation and the
                    fiduciary obligations owed to depositors and other creditors.

                    The lack of judicial review over OCC and OTS take-over of institutions,
                    and the lack of ongoing court supervision, provide substantially less
                    safeguards against abuse of due process than is common in state
                    insurance receivership proceedings. While for some observers, this broad
                    discretion is a strength, the Task Force saw it as an opportunity for abuse
                    in the hands of the wrong administrators. The Task Force found that
                    there are increasing concerns about the unprecedented regulatory
                    authority given to federal banking regulatory agencies, and increasing
                    allegations of abuse of that power.41



39 This may not be true in the case of federally insured state institutions if the receivership is under state
supervision.

40 American Bank v. Clarke, 933 F. 2d 899, (10th Cir. 1991).

41 See, e.g., “Banking on Fear,” ABA Journal, July 1999 at pg. 41.
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                    The Task Force noted that the FDIC, through its subrogation rights, has
                    the same claim against the assets as the insured depositors, and it has
                    equal stature as a creditor with other unsecured creditors of the failed
                    financial institution. However, it also controls the assets and their
                    disposition. Task Force members expressed concern that conflicts could
                    arise in how assets are distributed and the timing of distributions. For
                    example, the Comptroller may exercise bad judgment in “bailing out”
                    certain institutions, which has given rise to the phrase “too big to fail.”
                    Essentially, if the institution is badly managed, it ought not be rewarded by
                    being saved from extinction with FDIC insurance funds, nor should the
                    uninsured deposits be protected with such funds. The Task Force viewed
                    the combination of the broad discretionary powers of the FDIC and the
                    availability of a large pool of funds in FDIC from which to draw, as a
                    disadvantage in that too much power and control over the purse strings
                    was concentrated in one agency.

                    The Task Force concluded that the federal banking receivership approach
                    was an impractical and inexact model for insurer insolvencies. In bank
                    insolvencies, federal banking authorities are the regulator and receiver.
                    Translated into the insurance industry, the states would be the regulator
                    and the federal government would be the receiver unless regulation of
                    solvent insurers also transferred to the federal level. Further, in bank
                    insolvencies, the federal receivers know exactly what the liabilities are –
                    the amount in depositors‟ accounts that are federally insured. They do
                    not have to deal with unliquidated claims, long tail claims, and coverage
                    questions to determine either the amount that‟s owed to any individual
                    claimant or to determine the overall liability (debt) of the estate. The Task
                    Force also noted that the FDIC provides pre-insolvency funding for the
                    failures of the banking industry. The Task Force questioned how well this
                    mechanism would work in the current state post-insolvency assessment
                    guaranty fund system, or whether it is realistic to assume that it would be
                    practically and politically possible to move the industry to a federal
                    receivership system in which a federal agency/corporation pre-assessed
                    insurers for insolvencies and administered the estates of insolvent
                    insurers with those funds. Yet, in order to maximize the benefits of federal
                    banking approach for insurer insolvencies, a single federal insurance
                    guaranty fund would be desirable.

F.        Task Force Discussion and Analysis of Federal Alternatives

Each of the various federal approaches addresses and could potentially cure some or
all the deficiencies in the state receivership system. The actual results of any of these
systems remains unknown.


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Each federal approach presents a common threshold issue that must be answered: can
insurance receiverships be carved out of the comprehensive system of state insurance
regulation and dealt with in another way at a different level of government? Some
believe that insolvency is a distinct and specialized function of state insurance
regulation that could be extricated out and transplanted, in some form, to the federal
level. Under this view, the current state insurance receivership system would be
improved under any federal model from the aggregation of resources on a national
basis and from the development of a permanent receivership staff.

The Task Force concluded, however, that the potential benefits of a federal system do
not justify the costs of the transition to a federal system. Carving out insolvencies
would adversely affect the regulation of the solvent insurers at the state level. Shifting
the insolvency portion of state regulation to the federal level may diminish the quality of
regulation. State insurance regulators would have little incentive to assure that rates
are adequate or to otherwise regulate insurers‟ financial condition if they could avoid the
consequences of regulatory failures by turning over insolvent insurers to the federal
government. Regulation at the state level and “clean up” at the federal level divorces
state insurance regulation from accountability.

Under all federal alternatives, a new federal entity or agency would have to be created
and staffed to administer insurer insolvencies. This would be costly in terms of the start
up costs and transition time. At a minimum, the state system would have to continue to
close existing estates. In many federal proposals, the state receivership system is not
eliminated, but rather a federal system is superimposed on it to administer insolvencies
of insurers who are somehow designated for or who voluntarily opt to be governed by
the federal law. In most federal proposals, the insurance industry is assessed to pay
the costs of the new federal entity, in addition to the costs it already bears through the
guaranty funds for the state insurance receivership system.

Proposals for a federal insurance insolvency mechanism demonstrate the difficulty in
carving out insurer insolvencies from the state insurance regulatory system and
administering them in a new entity or agency at the federal level. Virtually all federal
insolvency mechanisms have also involved some form of federal regulation or
preemption of state insurance regulation, ranging from optional federal licensing and
federal regulation to preemption of the state guaranty funds and other functions to
creation of minimum financial regulation for all insurers.

Along with adding new layers of administration on top of the existing state receivership
system, a federal approach also has the potential to create serious regulatory confusion
and litigation over the boundaries and division of labor between the various state and
federal regulatory entities. For example, while proposals create a federal mechanism to
administer insurer insolvencies, what about supervision, rehabilitation or other
proceedings intended to save the insurer? These are presumably still state functions
unless they are unsuccessful, in which case the federal entity takes over and essentially
recreates an existing state proceeding that might otherwise be converted in and
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continued on as a state receivership proceeding. If the now federal agency or entity
can conduct investigations, and initiate and conduct proceedings against insurers other
than and prior to insolvency, then the line between federal authority and state insurance
regulation becomes blurred as is the case in most federal proposals.

The Task Force noted that all federal proposals to date borrow heavily from state
insurance regulatory and insolvency laws and standards. In the previous discussion of
most of these proposals, it has also been indicated that new federal insurance
receivership agencies or entities would at least initially draw heavily on persons from
the states for staff. This further led the Task Force to question why a federal alternative
is necessary.

Overall, while there are no existing federal models for insurer insolvencies, the Task
Force reviewed federal bankruptcy approaches, the existing federal receivership
systems for financial institutions and new federal alternatives. The Task Force
concluded that none of these approaches are viable to address the needs of insurer
insolvencies because there is no guarantee that shifting insurer insolvency proceedings
to a different level of government or to a different structure would cure the defects
identified in the current state system.




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                      IX. Insurance Receiverships Outside the United States

          A. The United Kingdom Insurance Receivership System

The Task Force reviewed the receivership system in the United Kingdom (“U.K.”) to
determine if it includes any concepts or practices that would be useful in the U.S.
insurance receivership system.

          1.        Overview of the System

United Kingdom (U.K.) Insolvency law was totally revised by the Insolvency Act of 1986
and in implementing rules (The Insolvency Rules of 1986). Most parts of this law apply
to insolvencies of any corporation, including insurers. A “winding up” (the equivalent of
a liquidation) is either voluntary on the part of the corporation or court-ordered upon
petition by the company's creditors. “Administration,” a concept introduced by the 1986
Act (and similar to a conservatorship), is not available for insurance companies.

There are also other specific provisions in the U.K. law dealing with insolvent insurers.
Insurance companies in the U.K. are regulated under the Insurance Companies Act of
1982, which contains regulatory requirements as well as winding up provisions. A
winding up petition can be obtained from a court by the Department of Trade and
Industry (DTI), by the insurer's management, or by ten or more policyholders owning
policies with an aggregate value of 10,000 pounds or more. The Insurance Companies
(Winding Up) Rules of 1985 implement the Act and contain detailed provisions for the
liquidation of insurers. If the liquidation law and rules under the Insolvency Act of 1986
conflict with specific insurance insolvency law and rules, the insurance law governs.

Insurers in the U.K. can be liquidated or reorganized in three different ways: a) a
company voluntary arrangement; b) a scheme of arrangement, between the insurer and
its creditors; or c) a court-ordered or voluntary liquidation:

                              Company voluntary arrangements are allowed under the
                               Insolvency Act of 1986. In theory, an insurer can arrange a
                               voluntary runoff by calling a meeting of its creditors and by
                               having creditors, representing 75 percent of the creditors,
                               present and voting in favor of the arrangement offered by
                               the company. Voluntary arrangements are seldom used by
                               insurers because they do not bind creditors who did not
                               receive notice of the meeting. For insurers, particularly
                               those writing long tail property/casualty lines, voluntary
                               arrangements will not be effective because all creditors will
                               not and cannot be known until what could be decades later.

                   Schemes of arrangement are essentially contracts between an insurer
                    and its creditors regarding how the insurer will handle its liabilities when it
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                    cannot meet them. The key part of a scheme is that if a majority of the
                    known creditors representing three-fourths of the insurer's liabilities agree
                    to the scheme, it becomes binding on all creditors, known or unknown,
                    whether or not they've received notice of the proposed scheme and
                    creditors meeting.42 A majority is calculated by reference to those
                    creditors who actually attend and vote at the meeting, rather than to the
                    creditor population as a whole, based on numbers of creditors rather than
                    the value of their interests. A scheme can be between an insurer and all
                    of its creditors or specific classes of them. The scheme must be
                    approved by the High Court, which uses due diligence standards similar to
                    what an U.S. court would apply. The court rarely fails to sanction a
                    scheme of arrangement that the creditors have devised and approved.

                   Corporate liquidations can be accomplished under various methods
                    contained in the Insolvency Act of 1986, which can all be applied to
                    insurance companies. These include compulsory liquidation, following a
                    petition to the court; creditors voluntary liquidation, when the creditors of
                    an insolvent company resolve at a general meeting that the company
                    should be placed into liquidation; and members voluntary liquidation,
                    when the shareholders of a solvent company resolve that it should be
                    placed into liquidation.

                    Voluntary insolvency proceedings may be more common in the U.K. than
                    in the U.S. because the “wrongful trading” provisions in the U.K.
                    insolvency laws require the board of directors of an insurer to recognize its
                    financial problems and take steps to prevent further loss if they determine
                    that the company is insolvent. These provisions permit a liquidator to
                    pursue present or past officers and directors of the insurer for contribution
                    to the insolvent insurer‟s estate if business was continued beyond the
                    point of insolvency.




42 Reinsurers are generally not bound by the scheme of arrangement because they are generally debtors
and not creditors of the estate.
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          2.        Schemes of Arrangement

This report will focus on schemes of arrangement because they are the most common
form of an insurance insolvency proceeding used in the U.K. Most companies
voluntarily initiate insolvency proceedings through a winding up petition in the High
Court. The company always applies for an immediate order for provisional liquidation,
and individual proceedings against the insurer are stayed while the insurer develops its
scheme of arrangement.43 Independent provisional liquidators will be appointed by the
court to run the company's affairs, and to develop and implement schemes, usually with
the help of the directors.44

                   Provisional Liquidators and Scheme Administration. A provisional
                    liquidator takes over the administration of the company. Usually the
                    provisional liquidator will have been identified prior to the petition by the
                    board of directors, but the creditors have the right to demand a different
                    provisional liquidator.     The provisional liquidator drafts a proposed
                    scheme together with explanatory materials and sends them to all
                    creditors. A creditors meeting will be called to vote on the scheme. In
                    theory, a provisional liquidator is intended to serve for a brief period, but
                    under a scheme of arrangement, the period can be extended to several
                    years. Once the scheme is approved by the court, the provisional
                    liquidator is dismissed and a scheme administrator is appointed. An
                    individual, not the individual‟s firm, is appointed as a provisional liquidator
                    or scheme administrator.

                    The scheme administrator is approved by the creditors‟ committee and is
                    identified in the scheme. The person chosen has the contractual powers
                    and duties set forth in the scheme. There are no statutory requirements
                    governing the appointment or powers of a scheme administrator. It is not
                    uncommon for alternative dispute resolution (ADR) provisions to be
                    included in the scheme.

                   Qualifications      for    Provisional     Liquidators     and    Scheme
                    Administrators. Provisional liquidators and scheme administrators must
                    be licensed insolvency practitioners. The vast majority of licensed
                    insolvency practitioners in the U.K. are accountants, and they are licensed

43 In the absence of an order for a provisional liquidation, there would be no automatic stay of
proceedings against the insurer, and the directors would be required to seek stays of individual actions on
a case-by-case basis. In addition, given their involvement in the company‟s financial distress, the
directors may not be able to maintain the confidence of the company‟s creditors during the period in which
a scheme is being formulated.

44 Although the High Court technically appoints the provisional receiver, the management of the insolvent
insurer usually nominates the individual.
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                    for all types of insolvencies, not just those of insurers. There are seven
                    licensing bodies, which include the DTI, the law society and the
                    accountant society.      To be licensed, a person must take written
                    examinations administered by the Joint Insolvency Education Board, and
                    must have job experience of at least two years. All licensed practitioners
                    by law must post a bond, which is similar to an errors and omissions
                    insurance policy in the United States. A Joint Insolvency Monitoring Unit,
                    which is financed by a portion of the annual license fees paid by
                    insolvency practitioners, monitors all of an insolvency practitioner's cases.

                   Creditors Committees. An informal creditors committee is typically
                    appointed in connection with the development of the scheme of
                    arrangement. Once the scheme is approved a scheme administrator
                    usually appoints a formal creditors committee, although it is not required
                    by statute. Expenses of the creditors committees are reimbursed by the
                    company, but members of the committee are not otherwise compensated
                    for their time.

                    The powers of the creditors committee are also contractual and set forth
                    in the scheme. Generally, the creditors committee takes the place of the
                    liquidation court in supervising the scheme administrator. The creditors
                    committee approves the compensation of the scheme administrator. The
                    creditors also have the right to request information about the insolvent
                    company and the administrator's expenses from the scheme
                    administrator, which enables them to review and oversee the
                    administration of the scheme.

                   Debtors. It should be noted that schemes of arrangements are contracts
                    that bind the creditors of an insolvent insurer when approved by a majority
                    of the creditors. Debtors to an insolvent insurer's estate, such as
                    reinsurers, are not bound. Debtors can, and often do, voluntarily become
                    contractual parties to the scheme of arrangement.

                   Priorities. The Insolvency Act of 1986 and its implementory rules provide
                    limited categories of preferential creditors, largely for tax and employee
                    wage claims. These apply to insurance companies. There is no
                    preference given to policyholders over other creditors of the insolvent
                    insurer.

                   Guaranty Fund. The Policyholders Protection Board (PPB) is essentially
                    the national guaranty fund in the U.K. Under the Policyholders Protection
                    Act, upon liquidation of a U.K. insurer, specified policyholders can obtain
                    payment of 90% of amounts the insolvent insurer owes them under U.K.
                    policies. If the U.K. policy is compulsory insurance, then policyholders
                    can recover 100%. Claims for these protected amounts are filed with the
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                                                - 88 -
                    PPB, which is funded by levies on the insurance industry. The PPB is
                    subrogated to the protected policyholders‟ rights against the insolvent
                    company, and thus, becomes a major creditor in the insolvency of many
                    U.K. companies.

                    The PPB was created to administer assessments and pay the claims.
                    The PPB can also make interim payments to policyholders to prevent
                    hardship. It also has discretionary powers to assist insurers in financial
                    difficulty.  The PPB uses these powers to support schemes of
                    arrangement for companies that are otherwise threatened with liquidation.
                    In response to the many insurer insolvencies in the U.K. in recent years,
                    the PPB has developed a relatively consistent approach to this
                    discretionary involvement, which is reflected in the contents of most
                    existing schemes. While a creditor submits a claim, primary adjustment
                    rests with the insurer, although the PPB has a right to review the claim.
                    The PPB often agrees to use the insurer‟s claims-handling protocols.

          3.        Discussion of the U.K. System

A scheme of arrangement provides more flexibility than a liquidation. The Insolvency
Law contains detailed provisions regarding liquidations, but a scheme is not bound by
these rules. This flexibility effectively permits faster and more efficient distribution of
the assets of the insurer. A scheme can also provide alternative methods for resolving
claims disputes, whereas in liquidations disputed claims likely result in litigation. There
are also investment and tax advantages to a scheme. Once the scheme is approved by
the High Court, the scheme administrator can implement the scheme without further
court supervision. The scheme administrator operates in consultation with a creditors‟
committee.

One major disadvantage to a scheme, however, is that the “antecedent transactions”
provisions in U.K. Insolvency law would not be available. Under these provisions, if the
insurer is liquidated, the liquidator has broad powers to investigate the causes of the
insolvency. If there has been fraud or other illegal activity by prior management,
recovery from officers, directors or third parties under the antecedent transactions
provisions may be a significant asset of the estate.

B.        Task Force Discussion and Analysis of the United Kingdom System

The U.K. system is a privately managed system rather than one operated by
government bureaus. As a privatized system, it offers receivers long-term economic
and career incentives for efficient administration of insolvent estates, including
incentives for early closure. Moreover, the system of private management allows the
concentration of limited available expertise in resources in a few entities rather than
dissipating this valuable experience among fifty separate insurance departments as is
done in the United States. The Task Force acknowledges that in the absence of
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reliable data it is difficult to compare the costs of administration between the U.K. and
the U.S. system.

In contrast to the receivership system in the United States, the U.K. system is not
subject to overt political influence. Rather, the U.K. system has institutionalized a
businesslike approach to insolvency in which the litigious positions of receivers vs.
policyholders vs. reinsurers, so prevalent in the United States have been substantially
minimized.

Under the U.K. system, once a scheme of arrangement is approved by the High Court,
the scheme administrator can proceed to collect assets and pay claims without further
court supervision, although there is supervision of the creditors‟ committee. Schemes
seem to put money in the hands of an insolvent insurers creditors more quickly because
a scheme administrator can pay claimants what they are owed according to the terms
of the scheme without fear of recourse.

There is, however, a major difference between the U.K. and U.S. receivership system in
that in the United States, policyholders are given a higher priority than most other
creditors. In the U.K., all unsecured creditors are treated equally. While there may be
merit in treating all creditors equally, as a practical and political matter, it is unlikely that
such a rule would receive the widespread support that would be needed to make this
major change in the U.S. receivership system. The Task Force believes that it is
unlikely that schemes of arrangement would work in the U.S. in the current context of
the different classes of creditors and different priorities for payment that exist in state
insurance receivership laws.

The U.K. also relies upon the supervision over the administration of the estate by
diligent creditors committees. There is little experience in the United States with such
creditors committees in the context of insurer insolvencies. It is not clear that such
committees would always be effective without the participation of banks, reinsurers,
creditors, and brokers who frequently serve on the U.K. creditors committees. Again,
within the context of the priority scheme in the U.S. system, it is unclear how creditors
committees would be formed and how they could function effectively.

The Task Force also believes that the U.K. receivership system may be less litigious
than the U.S. receivership system, because of differences in the legal, political and
cultural systems of the two countries. The U.K. wrongful trading laws, mentioned
above, may eliminate much of the directors‟ and officers‟ liability litigation that takes
place in the U.S. receivership system. The Task Force also questions how debtors,
such as reinsurers, are persuaded to sign onto schemes of arrangements. There is
certainly less litigation with reinsurers in U.K. insolvencies than in the U.S., but at what
price? In many property/casualty insolvencies, reinsurance recoverables are the largest
asset of the estate.


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The Task Force also thought schemes of arrangement would be better suited to
insolvencies in property/casualty commercial lines, where there may be more
sophisticated policyholders as creditors, rather than personal lines insolvencies, where
there will be many individuals as creditors. Schemes would not be suitable for all types
of insurer insolvencies.

The Task Force concluded that the privatized schemes of arrangement in the U.K.
receivership system represent an important model, which appears in many respects to
be more efficient and equitable than the current U.S. receivership system. The Task
Force could not, however, recommend incorporation of schemes of arrangement into
the current state insurance receivership system at this time. Differences in the legal,
political and social aspects of the systems in which schemes of arrangement currently
operate would prevent them from being fully transferable and workable in the same
manner in the U.S. On an individual state basis, the Task Force believes that states
should experiment with voluntary restructurings, to gain experience within the U.S.
system to fully evaluate the merits of this approach.




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                               X. Closing the Estates of Insolvent Insurers

A.        Background on Closure of Estates

As a general rule, the longer an estate is open, the more costly the insolvency. An
estate‟s administrative expenses are paid out of the estate‟s assets, so that the longer
the estate is open the fewer assets will be available to pay policyholders, claimants and
other creditors. Closing an estate to save administrative costs needs to be balanced,
however, with collecting and distributing the assets of the insolvent insurer fairly and
equitably among creditors. While early closure of estates might at first glance appear to
be an admirable goal, the Task Force recognized that the mission of a receivership is to
enhance recoveries for policyholders, claimants and creditors so that early closure is
not always possible or desirable.

While the estates of all insolvent insurers need to be brought to closure, the issue of
closure is largely a property/casualty issue and particularly a commercial lines issue.

B.        Closure of Life-Health Estates

Closure issues are less problematic for life-health insolvencies than they are for
property/casualty insolvencies life-health insolvencies do not have the problem of long
tail liability claims of property/casualty insolvencies. Unlike the property/casualty
insolvency, where most policies are terminated shortly after an insurer is placed in
receivership, the receiver of a life insurance company is highly motivated to keep intact
the insurer‟s blocks of life insurance, annuities, and most health insurance business, as
well as any corresponding reinsurance. These blocks of business produce an income
stream and therefore constitute assets of the estate. The receiver has a fiduciary
obligation to maximize these assets by disposing of the blocks of business promptly.
Otherwise, the value of the business may dissipate as policies lapse or coverage is
non-renewed.

On the entry of a final order of liquidation with a finding of insolvency, life-health
guaranty funds are required to assume, guaranty or reinsure, or cause to be assumed,
guaranteed or reinsured the contractual obligations of the insolvent insurer. The
guaranty funds, therefore, are typically responsible for disposing of the blocks of
business. The disposition of the business usually takes place in a cooperative,
coordinated venture involving the receiver and the state guaranty funds, generally
through the National Organization of Life and Health Guaranty Associations (NOLHGA)
task force structure. Ideally, the blocks of business and related liabilities are sold to a
solvent insurer, along with the assets that back the business, including reinsurance.

Once the receiver has sold all the business possible and removed all of the insurance
liabilities from the books of the insolvent life-health insurer, the receiver‟s remaining
task is to recover assets due the estate and satisfy remaining claims. This will involve
liquidating assets that were not transferred to an assuming insurer, and recovering
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assets that are not immediately available to the estate. 45 As the largest creditor of the
estate,46 the guaranty funds want to recover as much of their funds as possible, as
soon as possible. Moreover, the longer the estate is open, the more expenses will
continue to drain assets. Policyholder claims that were not satisfied in full by the
guaranty funds also must be resolved.

One of the major sources of recovery is from litigation brought against former directors,
officers and third parties, such as the insurer‟s auditors. It may be years before the
litigation results in recoveries for the estate. In some instances, the guaranty funds,
through NOLHGA, have negotiated the right to participate in the oversight or
management of that litigation.

It is in the interest of all creditors that the receiver maximize the assets. There are
several different options for maximizing the assets in a life estate. One is to leave the
assets under the control of the receiver for disposition under favorable market
conditions. Another is to sell or transfer them to another entity. How the assets are
managed in a life estate determines how and when the estate can be brought to
closure. The life guaranty funds try to negotiate with the receiver for the option that
gives them the best opportunity to manage any illiquid assets to their satisfaction.

C.        Closure of Property/Casualty Estates

Prompt closure should be considered for every insolvent estate, keeping in mind the
primary objective of obtaining the maximum recovery for the benefit of policyholders,
claimants and other creditors. Prompt closure is more difficult to achieve for
commercial lines than it is for personal lines insolvencies, because of the long-tail
exposure in many commercial lines.

Insurance receivers marshal the assets of an insolvent insurer and use them to pay
known and fixed claims. This is not a complex process in the case of personal lines
insolvencies, which represented the majority of estates before the 1980s. Beginning
with a rash of commercial lines insolvencies in the mid-1980s, receivers were faced
with huge numbers of contingent and unliquidated claims. A claim is “contingent” if the
loss insured against has occurred but the event triggering the insurer‟s obligation to pay
has not. A claim is “unliquidated” if the amount of the claim has not been determined. 47
Commercial lines insolvencies often involve substantial numbers of unliquidated and
contingent claims (including IBNR claims), which may take decades to mature.

45 For example, there are some assets for which the title may be in dispute. This needs to be resolved
before the assets can be surrendered to an estate.

46 To the extent that guaranty funds pay claims of the insolvent insurer, they have a right of subrogation
against the estate.

47 NAIC Model Liquidation Act, Section 41B.
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Creative efforts are being explored to wind up many of the commercial lines estates of
the mid-1980s. The receivers have identified most of the assets of these estates, which
in many cases primarily consist of reinsurance receivables. The receiver must choose
to either keep the estate open, possibly for decades, waiting for long-tail claims to
mature, or find some way to close the estates earlier to save administrative costs.

D.        Methods to Close an Insolvent Insurer’s Estate

To impose an orderly administration and ultimately to bring a property/casualty estate to
closure, receiverships typically establish deadlines for filing claims against the insolvent
insurer‟s estate. Every receivership will have a “bar date,” provided for by statute and
fixed by the receivership court. All claims must be filed with the receiver (and, by
statutory mandate, also with most guaranty associations) by the bar date. Under the
NAIC Model Liquidation Act, late filings are permitted and may be treated as though
they were not late if the claim is unknown and the claimant files as soon as reasonably
possible after becoming aware of the claim. Other late-filed claims may receive later-
declared distributions of equal or lower priority. In both cases, however, the estate
need consider late-filed claims only if doing so will not prejudice the orderly
administration of the estate.

Another deadline typical of many property/casualty estates is the “cutoff date.” This is
the date by which all claims against the estate, even if timely filed, must be liquidated.
A previously-filed unliquidated claim may share in a distribution of assets of the estate
if, at the time of the claim‟s allowance by the court, the amount has been determined.

Most estates go through a “runoff” period, during which the receiver adjusts, values,
and pays claims. Runoff continues until the last claim is settled. If a receivership
imposes relatively short cutoff dates, the runoff period will be limited. A receivership
might not impose a cutoff date at all, and the runoff period will continue as long as
claims are submitted and assets are available to pay them.

Estates have experimented with innovative techniques in “early closing” plans. 48 The
conceptual underpinnings of such plans are varied, but the common feature of almost
all such plans is the use of actuarial estimation techniques.

          1.        Cutoff Options

Description – A date could be established after which claims against the estate would
not be allowed, even if valid.

48 A more appropriate term would probably be “efficient” closing plans. The elevation of early closing as
an arbitrary goal may not always be in the best interests of estate claimants and creditors. Efficient
closing techniques more accurately convey the need to tailor acceleration techniques to the particular
characteristics of each estate.
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                   Discussion – Cutting off unliquidated claims is a simple solution, easily
                    understood and implemented. It has precedent in federal bankruptcy law
                    and in some state insurance receivership laws.              However, cutoff
                    terminates payment rights that claimants would otherwise retain, and
                    therefore may be perceived as inequitable. Also, cutoff may relieve
                    reinsurers of their obligations, reducing the assets that would otherwise be
                    available to policyholders, claimants, and other creditors of the estate.

          2.        Runoff Options

Guaranty Fund Runoff – The receiver estimates claims and pays a final liquidating
dividend to the guaranty fund, which handles the runoff of remaining claims.

                   Discussion – Using guaranty funds, which have claims-handling
                    capabilities in place, eliminates the need for the receiver to engage
                    separate staff and incur additional administrative expense. Guaranty
                    funds also have an incentive to assure that the estate will be administered
                    economically. They can establish long-term relationships with reinsurers,
                    making it easier to collect the remaining receivables. This approach may
                    be especially effective when there is a one-state insolvency and the
                    guaranty fund is the principal creditor.

                    Regulators and receivers may resist delegating their statutory authority to
                    private parties such as guaranty funds, and may argue that the guaranty
                    funds have a conflict of interest in settling non-covered claims. Practical
                    questions arise, such as whether all guaranty funds are competent to
                    perform this function and whether they expose themselves to new
                    liabilities as statutory successor to the receiver. There is also no
                    assurance that the guaranty funds would receive the runoff business in
                    time to achieve cost savings. State guaranty fund legislation may need to
                    be amended to authorize the funds to service claims on behalf of
                    receivers.

Contractor Runoff – This approach is similar to guaranty fund runoff, except that a
private contractor, other than the guaranty fund, bids to handle the runoff business.
The contractor purchases the assets and accepts the remaining liabilities of the estate,
which includes the right to collect reinsurance receivables as they become due. The
receiver would make distributions of the assets received from the contractor to the
guaranty funds and other creditors. The contractor would then proceed to settle and
pay claims, and collect the reinsurance recoverables, which presumably would be
profitable.



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                   Discussion – Distributions are made earlier to the guaranty funds
                    because there is an influx of funds into the estate that are not contingent
                    on the receiver‟s ability to collect reinsurance. The competitive bidding
                    process should provide an advantage to efficient contractors, thus
                    improving the over-all efficiency of the receivership process. The estate
                    may close earlier as the contractor will likely be experienced in runoffs.
                    There are now firms that perform runoff functions for solvent companies.

                    Not every estate will be amenable to the bidding process. If the profit
                    potential is low, there may be few if any bidders. There is no assurance
                    that the private vendor‟s bids would cost less than the receiver‟s cost of
                    administering the estate, not that the estate will actually close sooner.
                    The oversight over the contractor may be less than over the receiver. Any
                    oversight will be contained in the contract negotiated with the receiver. It
                    also remains to be seen if the creditors paid by the contractor are treated
                    the same as they would have been by the receiver. The potential for
                    abuse exists.

          3.        Liquidating Trust

Description – There are provisions, developed by reinsurers, contained in the Uniform
Receivership Law (URL)49 which provide for closure of estates through a liquidating
trust. Under the provisions of the URL, a receiver could reserve amounts and continue
to administer the payout of claims or it could petition the court for an order approving a
Liquidation Plan, which could provide, among other matters, for the establishment of a
liquidating trust to which the insolvent insurer‟s assets and liabilities would be
transferred. The receiver, after estimating the potential payout of future claims, would
determine an appropriate percentage of claims to pay to current claimants. The
receiver would then set aside a reserve that would be sufficient to pay out a similar
percentage of claims to all future claimants. The estimation part of this process does
not require reinsurers to be assessed in advance for the reimbursement of future
claims.

Future claims would be entitled to share in the proceeds of the liquidating trust only
when, and to the extent that, a future claim is reported and approved for payment. After
the court-approved transfer of assets and liabilities to the liquidating trust the receiver
may terminate the estate free and clear of any obligations to future claimants.

The trust agreement governing a liquidating trust is entered into between the receiver
and a trustee, which must be a qualified United States financial institution. The trust
agreement, in addition to other typical trust provisions shall: specify the types of assets
and categories of investments that may be held in the trust account; provide that the

49 The Uniform Receivership Law (URL) was developed by the Interstate Insurance Receivership
Commission (IIRC), which is discussed in Chapter VI.
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trustee shall be liable for its negligence, willful misconduct or lack of good faith; provide
financial information periodically to the receiver and the beneficiaries and provide for
the termination of the trust.

The liquidating trust was used in the Executive Life insolvency without any specific
statutory provisions such as those in the URL for the liquidation of specific assets of the
Executive Life estate. In a court-approved proceeding, three trustees were appointed:
the commissioner appointed one, the National Organization of Life-Health Guaranty
Associations (NOLGHA) appointed a second and a group of creditor/policyholders
appointed the third. All these persons were highly qualified and well compensated.
The costs of their retainers, meeting fees and indemnification were paid out of the
estate of Executive Life. The Board of Trustees also retained its own outside counsel,
who was also paid out of the assets of the estate.

The assets transferred to the trusts by the receiver were those not accepted by the
assuming insurer. They consisted primarily of aliquot real estate, mortgages, securities,
and other assets subject to legal impediments (such as transfer restrictions or
environmental impairments); and liquid assets necessary to continue the functioning of
the rehabilitation plan from the receiver‟s perspective. Personnel needed to run trust
operations were from the estate‟s staff. The trusts were established as grantor trusts
and were part of the same taxable entity as the estate. Over time, most of the staff who
were hired by the receiver in the early stages of the insolvency were replaced by new
professionals who were jointly chosen by the trustees, saving the estate substantial
costs.

Subsequently, similar trust arrangements were crafted in the National Heritage Life and
Confederation Life insolvencies.

                   Discussion – It removes the estate or some specified assets from the
                    receiver‟s control so that the receiver cannot use the assets of the estate
                    as long term job security for the receiver and the staff. It takes control of
                    the estate further away from the political arena. It would provide for better
                    management and investment of assets of most estates. Many receivers
                    now hold assets in cash or treasury notes.

                    It places a tremendous burden on a financial institution as trustee to run-
                    off an estate, perhaps without the critical expertise needed in settling
                    claims and collecting from reinsurers. It is also questionable whether
                    there is adequate supervision of the financial institution. At a minimum,
                    the trustee would have to provide an annual report. Presumably, the
                    receiver would be the grantor of the liquidating trust and the receivership
                    court would retain jurisdiction. If the receiver remains involved somehow
                    as the grantor of the trust, the liquidating trust may add another layer on
                    top of the existing estate, which may be more expensive. Overall, a

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                    liquidating trust may not shorten the estate, but rather change the parties
                    who are administering it.

                    This option may be more appropriate to life-health insolvencies that
                    involve asset management problems for known liabilities. From the
                    perspective of the life-health guaranty funds and the policyholders, the
                    benefits of the Board of Trustees infrastructure in Executive Life far
                    outweighed the costs. The guaranty fund had a real vote and continued
                    to be involved in the administration of the estate. Whenever the receiver
                    wanted to take action regarding distribution of the assets of the estate, the
                    receiver needed at least one more vote, either that of NOLGHA or the
                    policyholders‟ Trustee, to take any action. The policyholders also felt that,
                    through the Board of Trustees they played a role in the management of
                    the remaining assets of the estate and supervised major activities, such
                    as hiring outside professionals and managing the major litigation for and
                    against the estate. Another substantial benefit was that the trust
                    arrangement substantially defused the acrimony and ill will among
                    receivers, guaranty funds, insurance regulators, and major policyholders.
                    The fact that the commissioner needed “one more vote” to take any action
                    also reduced the possibility of the politicization of the process. The Task
                    Force is not aware of any examples of its use in property/casualty estates.

                    It is questionable how a trustee in a financial institution, overseeing a
                    liquidating trust, would settle liability claims made against the trust in a
                    property/casualty insolvency, particularly long tail claims. A third party
                    administrator or the receivership staff may have to be hired, in which case
                    the trustee and third party administrator may be at least as expensive as
                    keeping the estate open with the receiver and staff in place.

                    In an appropriate case, a liquidating trust is a potential alternative to the
                    receiver performing the functions of the trust. However, this could be an
                    expensive infrastructure. There is no hard data to show that the benefits
                    of Board exceeded its costs in the Executive Life estate, although it is
                    believed to be the case. There are also concerns about the qualifications
                    of the persons who would be appointed to the Board of Trustees. In the
                    Executive Life case, the appointments appeared to have worked out very
                    well. However, there is no guarantee that this would be true in all
                    insolvencies.

          4.        Claims Estimation

Description – Several receivers are attempting to close their estates through claims
estimation. Under this approach, the receiver estimates the value of contingent and
unliquidated claims that cannot be determined as of a specified date. Estimated claims
would be considered final, and reinsurance receivables would be triggered. Once
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reinsurance is collected, a final liquidating dividend would be made and the estate
would be closed.

The NAIC Model Liquidation Act and the liquidation laws of three states (Illinois,
Missouri and Utah) have been amended to recognize claims estimation. Receivers in
other states contend that they can require claims estimation even without express
statutory authorization. They argue that their statutory and fiduciary duties as receivers
authorize them to take the steps necessary to administer the estate and bring it to
closure.

                   Discussion – If claims estimation can be made to work in a way that is
                    acceptable to all parties, the estates of insolvent insurers will close much
                    earlier, possibly decades sooner, at substantial savings in administrative
                    costs. If the guaranty funds can receive distributions based on estimated
                    claims, they will recoup funds for claims paid earlier, bringing down the
                    costs of guaranty fund assessments and expenses to the insurance-
                    buying public. The rights of policyholders and claimants should not be
                    affected if the claims estimation process is handled properly and the
                    estimation is accurate.

                    In some insolvencies, the losses that eventually develop might be greater
                    than those estimated, while in other cases some losses might never
                    mature. In general, the value of the claims against the estate will be
                    greater than the amount of assets available for distribution. While
                    estimation is not a perfect solution, it is a method of closing an estate by
                    seeking payments from reinsurers that they ultimately would pay under
                    their contracts anyway. Reinsurers engage voluntarily in this practice and
                    commute their liabilities under terms acceptable to them.

                    Reinsurers view mandatory claims estimation as a form of forced
                    commutation, which is a direct infringement of their contractual rights.
                    Mandatory acceleration of reinsurance recoverables based on claims
                    estimation forces reinsurers to pay today for recoverables that may not be
                    due for a decade or more or not at all. Reinsurers pay for future claims in
                    today‟s dollars, and lose the investment income on funds that they would
                    otherwise have held, possibly for many years, until the claims became
                    legally due under the reinsurance contract. Had the ceding insurer
                    remained solvent, reinsurers argue, it would have had no legal right to
                    demand payment under the reinsurance contract for unliquidated claims.

                    Reinsurers also question the actuarial estimates for lines such as
                    asbestos and environmental coverage, and note that even the industry‟s
                    best actuaries can differ by millions of dollars in their estimations.
                    Accelerated payments based on flawed estimates may mean greater
                    liability for reinsurers than would ultimately have been due.
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                    There is no guarantee that a specific claims estimation protocol would be
                    generally acceptable. A claims estimation process generates litigation by
                    reinsurers, which would dissipate the assets of the estate and delay its
                    closure. In a particular estate, some claims may be more difficult if not
                    impossible to estimate.

          5.        Modified Claims Estimation

Description – Variations on claims estimation have been suggested to make the
concept more acceptable to reinsurers. One variation is to place a cap on the
estimation of IBNR in an amount equal to five or ten times case reserves. Another
variation would require reinsurers to pay estimated receivables in periodic installments.
A third would require the supervising court to set a date (e.g., when actuarial projections
indicate the bulk of contingent claims would be reported) by which the claims estimation
process must be implemented. Another alternative is the bifurcated approach, under
which estimated claims could be used as the basis of making distributions of assets out
of the estates to the guaranty funds and other creditors, but estimated claims could not
be used to accelerate reinsurance recoverables. Another variation is to limit claims
estimation and acceleration of reinsurance recoverables to reported claims only.

Procedural safeguards may also make the estimation process more acceptable to
reinsurers. For example, a three-person arbitration panel, rather than the receiver or
guaranty funds, would estimate claims. Reinsurers would be given an opportunity to
appoint one of the two arbitrators, who would then appoint a third umpire.

Claims estimation could be limited by fixing a more reasonable time for the process to
be triggered, such as not earlier than five years and not later than ten years after the
final order of liquidation. This would give reinsurers a fixed period of time to commute
their liabilities voluntarily, or to participate in the claim estimation process if and when it
is triggered.

Another variation on claims estimation is a process under which the receiver could
initiate a claims estimation process to be used for purposes of dividends and
distributions to guaranty funds, but not to trigger acceleration of reinsurance payments.
Reinsurance recoverables would continue to be collected as claims materialized. This
approach does not close the estate.

                   Discussion – If the guaranty funds could receive distributions from
                    estates based on estimated claims, they would benefit greatly over the
                    current process, under which dividends are paid over time and are largely
                    dependent on the collection of reinsurance recoverables. A bifurcated
                    process would be some improvement over the current system. Even if
                    claims estimation could not be used to accelerate reinsurance
                    recoverables, it may encourage voluntary commutations.
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                    Claims estimation could be an expensive process and may not be
                    worthwhile if it does not accelerate reinsurance recoverables and close
                    the estate. Some of the other triggers and caps suggested to make
                    claims estimation more workable may be difficult to implement, and may
                    only generate more litigation from the reinsurers. Also, receivers would
                    not likely allow such distribution of dividends to be made without imposing
                    a reimbursement or recapture obligation on the entity receiving the funds.

          6.        Time Limit on the Estate

Description – It has been suggested that state insurance liquidation laws should be
amended to include a time limit on receiverships. The NAIC once considered a model
provision under which a receiver would have seven years to bring an estate to closure,
after which the receiver would have to petition the receivership court annually and
provide reasons for keeping the estate open another year.

                   Discussion – Setting a time limit for closing the estate informs the newly-
                    appointed receiver that the job is finite in duration. It also gives the courts,
                    insurance regulators, legislators, and other interested parties a
                    benchmark by which to measure the receiver‟s performance. It also may
                    have the effect of closing estates sooner.

                    Time limits would not cure one of the key weaknesses of the current
                    system namely, ineffective supervision of the receiver. If the receivership
                    court continues to approve a receiver‟s request to continue the estate,
                    nothing will have been accomplished.

E.        Task Force Discussion and Analysis of Closure

Because every insolvent insurer is different, every receiver has to evaluate the
characteristics of the estate to determine how best to administer and eventually to close
the estate and the method to bring the estate to closure. There is no single solution for
every insolvency.

Early closure with a corresponding savings in administrative costs is a desirable goal. It
cannot, however, outweigh the rights of the participants in the process. It is equally
important that the assets are properly marshaled to enhance recoveries, and that
claims are paid quickly and efficiently. If these goals require that the estate remain
open indefinitely, the focus should be on the most cost-effective administration of the
estate for the long term. Any, the institutional incentives for keeping the estate open
primarily for the benefit of those who are paid for administering it must be removed.

If early closure is possible, it should be fully explored and state insurance receivers
should have a variety of closure options available to them in their receivership law. The
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Task Force believes that existing state receivership laws are currently deficient in this
area. State laws could be substantially improved by enacting the statutory list of
closure options contained in Chapter 8 or the Uniform Receivership Law, which are
reprinted in Appendix F. In choosing a closure option, the receiver, guaranty funds,
reinsurers and creditors, should be employed to achieve the most efficient result.




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                                  XI. Conclusions and Recommendations

When it completed its study of the state insurance receivership system and alternatives
to it, the Task Force found that it could not endorse without qualification the existing
state system due to three key weaknesses: the selection of qualified receivers, the
oversight and accountability of receivers, and the absence of incentives and statutory
provisions to bring estates to timely closure. The Task Force concluded, however, that
these three problems could best be resolved by solutions implemented within the
framework of the current state insurance receivership system.

Moving the current state insurance receivership system to a different level of
government or a different framework may not solve any of the identified weaknesses.
Moving the appointment process for insurance receivers from the state to the federal
regulatory systems, for example, would not necessarily result in the appointment of
more qualified receivers.

With any major change in insurer insolvency proceedings, there will also be transition
issues. Presumably any change would be “prospective only” in application, meaning
that the current state system would continue indefinitely with respect to existing
insolvencies until they are finally brought to closure. At a minimum, there would be the
additional costs of operating dual systems. Because all of the expertise in insurer
insolvency currently resides at the state level, any transition of the process to a new
level of government would also involve start up costs for a new administrative structure
and a learning curve in implementing the new approach to insurer insolvencies. It is
speculative as to how rapidly such insurance experience and insolvency expertise
would develop.

Even if transition to a new level of government or structure could resolve some or all of
the key problems in the current state receivership system, such a transition could cause
new problems. For example, it is unclear how the states that have enacted the
interstate compact will interact with non-compacting states. Similarly, moving to a
federal insolvency system may necessarily bring with it some degree of federal
regulation of solvent insurers.

In addition, while many of the features of non-U.S. alternative receivership systems
studied appeared to work effectively, the Task Force concluded that these methods or
systems may not function as well in the United States. Schemes of arrangement, for
example, seem to work well in the United Kingdom (“U.K.”), but they are administered in
the context of a different legal, political and regulatory environment. Unlike the U.S.
system, there is little litigation in U.K. insolvencies against auditors, officers, directors,
and agents of the insurer. Under the U.K. insurance regulatory system, officers and
directors of an insurer are subject to personal liability for continuing the operations of an
insurer after it is insolvent, so there is strong incentive for insurers to initiate
receivership proceedings voluntarily, whereas in the U.S., insurers often contest
regulatory actions. Due to these considerations, U.K. insurers may be placed in
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insolvency earlier and with their books and records in better order than has been the
case in U.S. insolvencies. Moreover, while schemes have been used largely for
insolvencies of commercial insurers and reinsurers, schemes are untested for personal
lines insolvencies, which may have many individual policyholders as creditors.

Likewise, the federal system for liquidating banks and savings and loans seems to work
well for those financial institutions. Yet, what may make this system successful in the
banking system is that all liabilities are known as of the outset of any insolvency. The
claimants are the depositors, and the values of their claims are their deposits in the
insolvent financial institution. There are no third party liability claims in which the value
of the claim must be fixed. Nor are there IBNR (incurred but not reported) or long tail
claims that are not known and which may not even be reported for decades after the
inception of the insolvency proceedings. Furthermore, the federal regulatory agency
responsible for insuring depositors against loss from insolvency has almost absolute
authority over the assets of the insolvent financial institution, without any judicial review
or oversight of Congress. This is far different from the regulatory structure of the
insurance industry.

Overall, the Task Force found that no alternative it reviewed provided significant
assurances that it could effectively correct the weaknesses identified in the current
state insurance receivership system. The fact remains that substantially all of the
professional expertise and practical experience in addressing the problems in an
insurer insolvency now exists at the state level. Changing to a federal or other
framework involves transitional problems, the risk that the new system will not cure the
defects in the current state insurance receivership system and the possibility that it will
create new problems. The Task Force concluded that the best approach was to
recommend solutions within the current state insurance receivership system. Such a
course of action is more likely to accomplish meaningful improvement than any
fundamental change to a new structure or shift to a different level of government.

The Task Force also strived to recommend pragmatic and politically realistic solutions
to cure the three key problems it identified in the state insurance receivership system.
Complete privatization of the state system, would be an unrealistic goal. Similarly, an
interstate compact, such as the Interstate Insurance Receivership Compact, might
resolve problems concerning the oversight of receivers and other weaknesses in the
current state insurance insolvency system, but experience to date indicates that this is
not a solution that will be readily accepted on a 50-state basis.

In reviewing possible federal alternatives, the Task Force was particularly careful not to
recommend theoretical solutions. A federal receivership system for insurer insolvencies
has never existed. Rather than attempt to craft a hypothetical system, which would
work on a purely theoretical basis, the Task Force reviewed existing federal
receivership systems for federally regulated entities under the assumption that a federal
insurance receivership system would function similar to these existing federal systems.
The Task Force‟s practical approach is reflected in its recommendations.
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                                               - 104 -
A.        Task Force Recommendations

The Task Force developed a series of recommendations designed to improve the
current state insurance receivership system. The recommendations are not mutually
exclusive. They can be used individually or in combination, although the Task Force
believes states should adopt all of them.

                   To improve the selection and oversight of insurance receivers, the Task
                    Force recommends:

                    –          Transfer certain receivership functions to qualified
                               individuals or entities in the private sector to achieve
                               efficiencies in the administration of estates of insolvent
                               insurers.

                    –          Transfer the role of the insurance commissioner in
                               appointing and overseeing the receiver, once a final order of
                               liquidation has been issued, to a three-person panel,
                               consisting of representatives of the commissioner, the
                               guaranty funds and the receivership court. This panel would
                               select and oversee the receiver, subject to the jurisdiction of
                               the receivership court.

                    –          Encourage the use of special masters to assist receivership
                               courts in administering the estates of insolvent insurers.

                    –          Experiment with the appointment of private institutional
                               receivers.

                    –          Grant a statutory right of standing and intervention in
                               receivership proceedings to the state guaranty funds to
                               assist in oversight of estates and to bring estates to closure
                               expeditiously;

                    –          Permit voluntary restructurings similar to schemes of
                               arrangement in the United Kingdom.

                   To enhance the ability of receivers to bring estates to more efficient and
                    expeditious closure, by amending state laws to provide a menu of options
                    to be used in connection with long term obligations of the insolvent
                    insurer, including, for example, cutoff dates, runoff provisions, liquidating
                    trusts, and a reliable method for estimating outstanding claims.

B.        Future Directions
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                                                    - 105 -
The Task Force believes its report is relevant because the basic causes of insurer
insolvencies still exist and a new waive of insurer insolvencies is developing. Many
property/casualty insolvencies are caused by unanticipated claim liabilities. Some
insurers expand their books of business too rapidly by under pricing competitors; others
charge premiums that later prove to be inadequate due to expanding tort liability, new
exposures or catastrophic events. The result is the same in either case: inadequate
premiums lead to deficient loss reserves, which deplete capital and surplus. These
situations have been compounded by difficulties in collection of reinsurance
recoveables. On the life insurance side, insolvencies have historically resulted from
liquidity problems, namely, a significant share of the insurer‟s assets become illiquid or
are invested in depressed markets with a resulting loss in value. Health insurers‟ and
HMOs‟ solvency problems are more similar to those of property/casualty companies in
that premiums prove to be inadequate to cover the risks assumed.

A 1999 study of insurance insolvency noted that, more often than not, insolvency stems
from poor management practices.50 This study suggests that the decrease in new
insurer insolvencies at the time of the study was due to consolidation in the industry.
Because of a then strong economy, insurers had cash for acquisitions. As a result,
some companies in hazardous financial condition were targeted for acquisition. The
acquired insurers were then adequately recapitalized before state regulators could
place them in receivership. This study predicted that, in the near future, insurer
insolvencies would remain at comparable levels to those of the previous five years but
forecasted that the rate of insurer insolvencies would increase again in the long run. 51

Catastrophes did not play a major role in causing insurance insolvencies during the
years in which the Task Force undertook its study. In 1992, where Hurricane Andrew
struck Florida and Louisiana, there were 63 insolvencies, a 30-year high.52
Catastrophes could once again lead to insolvencies in the future. 53

The Task Force also believes that the state insurance receivership system could be
tested in the future in a variety of new ways. The passage of the Gramm-Leach-Bliley
Act54, which legalizes the move toward an integrated financial services market, has
created opportunities for insurers, banks and other financial services institutions to

50 Matthews, Patrick “Insolvency: Will Historic Trends Return?” Best’s Review, March 1999 at page 59.

51 See Matthews, supra, at page 67.

52 Panko, Ron "P/C Insolvencies Reach Lowest Level in 27 Years," BestWeek, November 29, 1999 at
page 1.
53 The events of September 11, 2001 occurred after the Task Force concluded its study. At this point,
however, it is too early to predict the ultimate financial impact of those events on the insurance industry.

54 The Gramm-Leach-Bliley Act, Pub.L.No. 106-102, 133 Stat. 1338 (1999).
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                                                   - 106 -
affiliate in the same holding company system. The specter of an insolvency in a
Financial Holding Company System will raise issues of first impression as to which
regulatory entity or entities should be the receiver; whether insolvencies should be
administered at the state or federal level; whether primary responsibility will reside with
state or federal regulators; and what court system should have jurisdiction over the
estate. Additional issues may arise as receivers and trustees from markedly different
regulatory and receivership systems compete for the remaining assets within the
sphere of the holding company system. With the increasing globalization of the
insurance industry, it is also possible that, in future insolvencies, significant assets will
not be held in the U.S. All of these potential factors may add to the complexity of future
insurer insolvencies.

Similarly, the self-insurance entities formed in the 1980s are increasingly converting to
licensed insurance companies. Self-insurers and self-insurance groups or pools have
not previously been regulated as licensed insurers, and there may be problems with the
accuracy of their accounting methods and the adequacy of their reserves. Such
converted self-insurers are now participants in the state insurance receivership system
and may bring with them a new wave of insolvencies. While not converting to licensed
insurers, insurance exchanges created in the 1980s have either ceased to function or
are generating questions regarding their financial viability.

The health insurance industry continues to reorganize and provide coverage under
different corporate structures and coverage arrangements. A developing issue is how
insolvent health maintenance organizations (HMOs) should be liquidated and by whom.
Some HMOs are considered insurance companies and are subject to state insurance
receivership proceedings, but in a few cases, insolvent HMOs were determined not to
be insurers and were liquidated under the federal Bankruptcy Code. In a few states,
funds established for HMOs cover the claims of participants and some medical
providers of an HMO insolvency. There are also new and evolving issues regarding
priority of payments in HMO insolvencies since medical providers, rather than
policyholders, are the likely claimants against the insolvent HMO‟s estate. Some of
these developments represent a major departure from current practice in the state
insurance receivership system.

In 2002, bills were introduced in Congress proposing a system of optional federal
charters for insurance companies.            Introduction of these bills followed public
discussions by various organizations representing banks, insurance companies, and
agents and brokers. The two bills that were the subject of hearings before the House
Financial Services Subcommittee in June 2002 took divergent approached to the
handling of insolvencies of federally chartered insurers. The life insurance industry bill
would essentially preserve the state receivership and guaranty funds structure in all
states meeting the standards incorporated in the act. The bill favored by banking
interests would use the federal bankruptcy system and create a new federal insurance
guaranty fund. No definitive action is expected on these bills in the foreseeable future;
therefore no detailed analysis of the bills is included in this report.
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                                               - 107 -
The Task Force is confident that its report and recommendations will be relevant to
both change in the existing state insurance receivership system to reflect the lessons
learned from past insolvencies, and to provide the framework for addressing new issues
and challenges that the state insurance receivership system will undoubtedly face in the
future.




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                                              Appendix A
                               How State Insurance Departments Handle
                              Financially Troubled Insurance Companies55

I.        Administrative Procedures/Informal Actions

When the insurance commissioner determines that either a domestic, foreign, or other
company is operating in the state in a manner that threatens to render it insolvent or
makes the continuance of its business under these conditions hazardous to its
policyholders, creditors, and/or the public, the commissioner may provide short term
relief through the insurance department‟s administrative process.

          A.        Cease and Desist Orders

                    1.         These are most often used or connected with foreign or
                               alien insurers, rather than domestics. Most orders suspend
                               or revoke the license to do business in the state, or order the
                               insurer to stop writing insurance in the state if the insurer is
                               not licensed.

                    2.         These orders can be issued without resort to the courts.

                    3.         Generally, these must be followed by an administrative
                               hearing, usually within 30 days, and companies can appeal
                               these orders.

                    4.         These orders may or may not be kept confidential. Many
                               state laws do not require confidentiality by statute.

          B.        Corrective Orders/Supervision Proceedings

                    1.         Most state laws give the insurance commissioner broad
                               administrative authority to order their domestic insurers to
                               take specific corrective actions until the hazardous financial
                               conditions have been remedied. Many state laws in this
                               area are based on the NAIC Model Hazardous Financial
                               Condition Regulation.

                    2.         These orders can be issued without resort to the state
                               courts, but are subject to judicial review if the company
                               wants to contest the action. These orders are usually aimed
                               at domestic companies in a state.

55 This document was prepared by the Alliance of American Insurers as part of its Introduction to
Insurance Regulation Seminar (1994).
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                    3.         Short term relief that the insurance department can order
                               can include: an infusion of capital; purchase of additional
                               reinsurance; reduction of agents‟ commissions or other
                               specified expenses; limitation of new and renewal business,
                               among many other actions;

                    4.         The administrative order, as well as administrative and
                               judicial proceedings to challenge or enforce the order, are
                               typically kept confidential for the protection of the insurer.

                    5.         The Insurance department can appoint a specific supervisor
                               to oversee the company as it complies with the supervisory
                               or corrective order.

                    6.         These proceedings are usually for a fixed (60-90 day) period
                               of time, which is set by law.

                    7.         Each state law has civil and/or criminal penalties for violation
                               of these orders.

II.       Court-Ordered Receiverships/Formal Proceedings

Provisions in state insurance codes authorize the insurance commissioner to seek a
court order to seize the assets and business of an insurer.         Generally, the
commissioner has to prove that the insurer‟s financial condition is such that the
interests of the policyholders, creditors and/or the public demand immediate and
extraordinary action.

          A.        Conservation Proceedings and Seizure Orders

                    1.         These are court proceedings which are generally ex parte,
                               or without the participation of the insurer, to prevent
                               dissipation of the insurer‟s assets, and are usually
                               accompanied by an injunction against the company‟s
                               officers and directors from the further transaction of
                               business.

                    2.         The commissioner applies to the court for an order to seize
                               control of the insurer‟s books, records, assets and accounts.

                    3.         These proceedings are generally confidential to protect the
                               insurer‟s business, but confidentiality can be removed by the
                               supervision court upon a showing of good cause that they be
                               made public.
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                    4.         Seizure orders remain in effect either for the time specified
                               by statute and/or as approved by the court.

                    5.         The mechanisms of seizure and conservation are designed
                               to maintain the status quo while the state insurance
                               department makes a quick determination of the financial
                               health of the company and decides what needs to be done.

          B.        Rehabilitation Proceedings

Rehabilitation is intended to be used when the insurance commissioner believes that
there is a chance to save a financially troubled company, and that a corrective order or
supervision will not remedy the company‟s financial problems.

                    1.         Grounds for rehabilitation are set forth in the state statute,
                               and usually include impairment, consent by a majority of
                               directors, “hazardous condition,” and insolvency in some
                               states.

                    2.         Rehabilitation proceedings require a court order, with an
                               opportunity for the company to be heard.

                    3.         The court order usually appoints the commissioner as the
                               rehabilitator and gives the rehabilitator the authority to take
                               whatever action is necessary to revitalize the company.

                    4.         The intent of rehabilitation is to allow the insurance
                               commissioner to develop a plan to revitalize the company.

                    5.         The court supervises the rehabilitation proceeding and
                               generally approves all major steps, such as the
                               commissioner‟s rehabilitation plan.

                    6.         Claims may still be paid, but cedents‟ and other general
                               creditors‟ claims usually are not; direct policyholder claims
                               may be paid if it appears sufficient assets exist to pay them
                               all such claims.

                    7.         Guaranty funds are not triggered in most states, even if the
                               insurer is found to be insolvent.

                    8.         The rehabilitation can last as long as the court determines
                               that the causes and conditions which necessitated the
                               proceeding still exist. The commissioner can apply to either
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                                                    - 111 -
                               end the proceeding or initiate liquidation proceedings if the
                               rehabilitation has failed.

                    9.         True rehabilitations are rare and usually involve sale,
                               recapitalization, merger, or some reorganization of the
                               business. Generally, rehabilitation proceedings are usually
                               a controlled run-off of the insurer‟s business as a prelude to
                               liquidation.

          C.        Liquidation Proceedings

These are usually initiated based on a finding of insolvency – on a statutory basis
(statutory liabilities exceed admitted assets).     When the company is beyond
rehabilitation, the commissioner or rehabilitator applies to the court for an order to
liquidate the company.

                    1.         All states have liquidation laws. Many are now based on the
                               NAIC Model Rehabilitation and Liquidation Act. Others are
                               based on the NCCUSL Uniform Insurance Liquidation Act.

                    2.         Under most state liquidation laws, the insurance
                               commissioner of the insolvent company‟s state of domicile is
                               appointed as the liquidator.

                    3.         The commissioner must go to the state courts to obtain a
                               final order of liquidation, which gives the commissioner, as
                               liquidator, title to all the company‟s books, records, assets,
                               accounts and property.

                    4.         The liquidation process involves a number of steps:

                                        marshaling assets;

                                        identifying and evaluating claims;

                                        distributing assets;

                                        disposition of company records;

                                        closing the liquidation.

                    5.         Guaranty fund coverage is triggered or activated in all states
                               where the insurer was licensed, upon entry of a final
                               liquidation order, with a finding of insolvency.
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                    6.         The liquidation remains open, under court supervision, for as
                               long as it takes to wind up the affairs of the insolvent
                               insured.




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                                             Appendix B
                      International Association of Insurance Receivers (IAIR)
                                        Designation Programs
                                Accredited Insurance Receiver (AIR)
                                                 and
                                 Certified Insurance Receiver (CIR)

Standards for Certification as an Accredited Insurance Receiver (AIR)

To Obtain AIR Designation the Applicant Must:
1.        Have at least five (5) years of experience in the business of insurance;
2.        Be able to demonstrate substantial involvement over a period of three years with
          one or more insurance insolvencies in the practice area(s) (defined below).
3.        Have attended approved continuing education (CE) of at least thirty (30) hours
          within the two (2) calendar years preceding the date of the application for the AIR
          designation;

4.        Have at least a bachelors degree or business experience of at least ten (10)
          years;
5.        Submit an initial non-refundable designation application fee of one hundred
          dollars ($150.00);
6.        Meet the specific requirements set forth below for each of the designated
          practice areas; and
7.        Be a Member in good standing of IAIR.

Practice Areas

Applicant must, in addition to the above requirements, meet the following requirements
for applicant‟s selected practice area(s):

         Reinsurance: Document substantial involvement and special competence in the
          reinsurance area, as well as specific experience in one or more of the following
          areas:

                   Reinsurance accounting;

                   Underwriting of reinsurance, or

                   Experience in the negotiation of, including pricing, of assumptions,
                    commutations and/or portfolio transfers.
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         Claims/Guaranty Funds: Document substantial involvement and special
          competence involving claims and guaranty funds (or similar organizations that
          exist in other countries), and also the following:

                   Working knowledge of the claims function as it exists in an ongoing
                    insurer, as well as the particulars involved with insolvencies;

                   Understanding of insurer insolvency and guaranty fund laws as
                    such are involved with in the administration of claims, and

                   If Applicant‟s experience involves receiverships administered in the
                    United States, Applicant must demonstrate a basic understanding
                    of the NAIC Uniform Data Standards.

          To the extent applicable, claims experience may be                     obtained   by
          employment/engagements with companies or Guaranty Funds.

         Legal: Applicant must have a law degree, be admitted to practice in at least one
          jurisdiction and document substantial involvement and special competence with
          legal matters arising in connection with insurance insolvencies.

         Accounting/Financial Reporting: Document substantial involvement and special
          competence with accounting principles, tax issues and financial reporting
          required in insurance insolvencies. An applicant may qualify under this practice
          area regardless of whether the applicant is professionally licensed as a Certified
          Public Accountant, or Chartered Accountant or similar designation that exists in
          other countries, so long as the applicant otherwise qualifies hereunder.

         Asset Management: Document substantial involvement and special competence
          in the management of the variety of assets typically found in insurance
          insolvencies, including the unique legal issues that may arise.

         Actuarial: Applicant must be: (i) a Member of the American Academy of
          Actuaries, have an ASA, ACAS or higher designation, or be a member of a
          similar recognized organization and possess a similar recognized designation
          from another country, and (ii) document substantial involvement and special
          competence with engagements involving insurance receiverships.


         Data Management: Document substantial involvement and special competence
          with information technology as applied to insurance receiverships.



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                                               - 115 -
Have: (i) satisfactorily completed and submitted the required application, (ii)
satisfactorily completed a personal interview with representatives of the IAIR
Accreditation and Ethics Committee or the IAIR membership, if requested by the
Committee, at which interview questions may be asked in order to assist in determining
whether the various experience requirements as set forth above are met.
Have provided all information requested by the IAIR Accreditation and Ethics
Committee and/or the IAIR Board of Directors. Such information may or may not be
expressly called for by these standards, but in the judgment of the Committee or the
Board may be needed to determine whether the above standards are met.
Applicant must submit a list of three names, addresses and phone numbers of persons
to be contacted as references to attest to applicant‟s substantial involvement and
special competence in the specialty area being applied for.          The references,
themselves, shall be knowledgeable of applicant‟s work engagements as they relate to
applicant‟s insurance insolvency involvement. Applicants shall not submit partners or
associates to serve as references. The IAIR Accreditation and Ethics Committee
and/or the IAIR Board of Directors may deny certification based upon information
received from references.

To Maintain AIR Designation the Applicant must:
1.        Be a member in good standing of IAIR;
2.        Timely remit to IAIR annual designation maintenance dues (presently at $50 per
          year but subject to periodic adjustment);
3.        Participate in approved continuing education activities of at least thirty (30) hours
          every two (2) years; and
4.        Submit evidence of 3. above on the approved IAIR membership renewal form.
The Applicant is requested to provide the information necessary to establish Applicant's
fulfilling each of the foregoing requirements for certification as an Accredited Insurance
Receiver (AIR) in summary form on one or more copies of the IAIR Statement of
Qualifications which should be attached to the AIR Application at the time of
submission. Additional documentation is not to be submitted with this Application.
Standard #1, Membership in IAIR, will be confirmed by the IAIR Executive Director at
the time the Application is submitted. Applicants who are not IAIR members may
submit an Application for IAIR membership simultaneously with the submission of this
Application. IAIR membership Applications may be obtained by contacting IAIR at the
address listed below.
The Accreditation and Ethics Committee and/or the IAIR Board of Directors may, in
their discretion, request additional documentation and information as a part of the


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                                               - 116 -
certification process. The AIR Application form with the Statement of Qualifications and
$150 application fee should be sent to:

                              International Association of Insurance Receivers
                                            174 Grace Boulevard
                                        Altamonte Springs, FL 32714




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                                             Application for
                               Accredited Insurance Receiver Designation

Guidelines for Completing Statement of Qualifications

1.        Please provide the information requested on the Statement of Qualifications
          form. Do not submit supporting documentation. In the event the Accreditation
          and Ethics Committee/IAIR Board requires additional supporting documentation
          the committee or board will contact the applicant.
2.        When listing multiple activities in response to any of the qualification standards,
          list in reverse chronological order, the most current first.
3.        If the Statement of Qualifications form does not provide sufficient space for the
          data you are submitting please photocopy or otherwise reproduce the applicable
          page(s) as necessary.
4.        When answering questions, be sure to carefully and completely answer each
          question. Missing information and/or incomplete answers will require follow-up
          and will delay processing of the application.

Guide to Application of the Certification Standards
1.        Provide only that information necessary to establish a particular standard is met.
          It is not necessary to include information exceeding the stated standards.
2.        In providing information concerning the amount of assets for which the applicant
          has been responsible provides a brief description of the method used for
          determining that value, i.e. liquidation value, appraised value, etc.
3.        In providing information concerning reinsurance experience briefly describe the
          commutation activities, amounts sought and amounts realized or settlement
          amounts for ceded/assumed reinsurance. For activities involving the transfer of
          liabilities include information concerning the number of policies, the amounts
          involved, etc.
4.        It is the overall goal of these standards that the designation only is awarded to
          those candidates that currently possess the entire spectrum of skills required to
          manage an entire receivership operation. Accordingly, timeliness of experience
          will be a factor in considering applications.




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                                                - 118 -
                           International Association of Insurance Receivers
                                            Application for
                              Accredited Insurance Receiver Designation

I am hereby applying for certification by the International Association of Insurance
Receivers (IAIR) as an Accredited Insurance Receiver (AIR).

I certify that I have read and understand the requirements to quality for and maintain
the designation of Accredited Insurance Receiver reproduced in the information packet
with this Application and that I intend to meet the requirements to maintain the AIR
designation in an active status. Further, I understand that the requirements to obtain or
maintain the AIR designation may, from time to time, be modified by IAIR in accordance
with its By-Laws, which modification may include, but is not limited to, a requirement
that all seeking or holding an AIR designation may be required to take and pass an
examination. I understand that my application may be denied if any one or more of the
qualifications have not been met or no reasonable basis for an exception is shown by
sufficient evidence or demonstrated adequately in a hearing by the IAIR Accreditation
and Ethics Committee.

Following is my completed Statement of Qualifications for certification. I verify and
affirm that the information contained in the Statement of Qualifications is accurate and
complete and acknowledge that the Accreditation and Ethics Committee and/or IAIR
Board of Directors may, in their discretion, request that I provide such additional
information as they deem appropriate.

Please enclose $150.00 non-refundable designation application fee.

Name:________________________________________________________________
Business Name:________________________________________________________
Address:______________________________________________________________
                         Street                        Suite
_____________________________________________________________________
City/State/Country ZIP+4
Phone:(           )
Fax:      (      )

Dated this ______ day of _______________, 20__.

Applicant‟s Signature


_________________________________________


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                                                - 119 -
                           International Association of Insurance Receivers
                                            Application for
                              Accredited Insurance Receiver Designation

Statement of Qualifications

The following information is submitted in support of my Application for designation as:
Accredited Insurance Receiver. Please check designated practice area(s):

                   Reinsurance
                   Claims/Guaranty Funds
                   Legal
                   Accounting/Financial Reporting
                   Asset Management
                   Actuarial
                   Data Management

1.        Insurance Business Experience. Standard:              Have at least five (5) years
          experience in the business of insurance.

For each qualifying experience in the business of insurance, please provide the
following:
Company:
Beginning & Ending Dates:
Type of Company: Life [ ] Health [ ] Accident [ ] P&C [ ] HMO [ ]
Other [ ] (Describe):
Description of Duties:




City:                                          State/Country:




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                                                - 120 -
2.        Insurance Receivership Experience: Standard: Application must be able to
          document substantial involvement over a period of three (3) years with one or
          more insurance insolvencies in the practice area(s) applied for.

For each qualifying receivership, provide the following to the extent applicable to the
requested designation:

Company:
Beginning & Ending Dates:


Type of Company: Life [ ] Health [ ] Accident [ ] P&C [ ] HMO [ ]

Other [ ] (Describe):
City:                                                    State/Country:

Describe the nature of your engagement with each receivership, and carefully explain
how such experience constituted substantial involvement. Please elaborate on the
requirements outlined in Standard 6 for the particular practice area applied for.




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                                               - 121 -
3.        Approved Continuing Education.

Provide the following for the Continuing Education Activities which you believe should
be approved.

Dates:________________ ___________                       Number of Hours:
City:                                          _         State/Country:
Title of Article/Program
Sponsor:
Topics:

Dates:____________________________                       Number of Hours:
City:                                          _         State/Country:
Title of Article/Program
Sponsor:
Topics:

Dates:___________________________                        Number of Hours:
City:                                                    State/Country:
Title of Article/Program:
Sponsor:
Topics:

Dates:___________________________                        Number of Hours:
City:                                                    State/Country:     ___
Title of Article/Program:
Sponsor:
Topics:




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                                               - 122 -
Dates:___________________________                             Number of Hours:
City:                                                         State/Country:     ___
Title of Article/Program:
Sponsor:
Topics:


Dates:___________________________                             Number of Hours:
City:                                          ______         State/Country:
Title of Article/Program:
Sponsor:
Topics:




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                                                    - 123 -
4.        Formal Education/Business Experience. Standard: The applicant must have at
          least a bachelors degree or business experience of at least ten (10) years.

Provide the following information concerning any degrees held or equivalent business
experience.

Degree:                                                  Date Obtained:
Educational Institution:
City:                                                    State/Country:


Degree:                                                  Date Obtained:
Educational Institution:
City:                                                    State/Country:

Degree:                                                  Date Obtained:
Educational Institution:
City:                                                    State/Country:

Describe briefly the qualifying business experience including dates.




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Standards to Obtain Designation as a Certified Insurance Receiver (CIR)
To Obtain a CIR Designation the Applicant Must:
1.        Overall - Have had the overall control and management responsibility on a day to
          day basis of all facets and parts of, or participated on a day to day basis as a
          member of the senior level team that worked directly with the receiver to assist
          with one or more domiciliary, core or main receivership operations or
          proceedings for a cumulative minimum of three (3) years and have gained
          experience in each of the different areas specified in 2 through 7 below.
2.        Management - Applicant must have substantial experience in the general area of
          management, and also a working knowledge of the data management area.
3.        Reinsurance - Applicant must have a working knowledge of the reinsurance
          area, which would include experience in such areas as commutations and
          negotiations/transfers of one or more books of business.
4.        Claims/Guaranty Funds - Applicant must have a working knowledge of the claims
          function as it exists in an ongoing insurer, as well as the particulars involved with
          insolvencies. Applicant must also have a basic understanding of the operation of
          guaranty funds (or similar organizations that exist in other countries), and the
          interaction between receivers and guaranty funds or similar organizations. If
          Applicant is claiming experience with receiverships administered in the United
          States, Applicant must have a basic understanding of the NAIC Uniform Data
          Standards, and their application in insolvency proceedings. To the extent
          applicable, claims experience may be obtained by working either for companies
          or for guaranty funds.
5.        Legal - Applicant must have a working knowledge of the legal principles involved
          with insurance receiverships, and be able to document knowledge of such in an
          interview.
6.        Accounting/Financial Reporting - Applicant must have a working knowledge of
          accounting principles, actuarial principles, tax issues and financial reporting
          requirements involved with insurance receiverships, and be able to document
          knowledge of such in an interview.
7.        Asset Management - Applicant must have substantial experience in the
          administration of assets.
Experience may, but does not have to have been obtained in connection with insurance
receiverships. For example, reinsurance experience may have been obtained from
working for a solvent insurer. It is also important to note that to satisfy the standards
set out in 4. Above, the applicant must have personally performed all of the above
specified tasks, or must have supervised in a direct and substantial fashion, the
completion of those tasks.

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8.        Have attended approved continuing education (CE) of at least thirty (30) hours
          within the two (2) calendar years basis, preceding the date of the application for
          the CIR designation (a listing of approved courses is attached hereto);
9.        Have at least a bachelor's degree or business experience of at least ten (10)
          years;
10.       Have: (i) satisfactorily completed and submitted the required application, (ii)
          satisfactorily completed a personal interview with representatives of the IAIR
          Accreditation and Ethics Committee, at which interview questions may be asked
          in order to assist in determining whether the various experience requirements as
          set forth above are met;
11.       Have provided all information requested by the IAIR Accreditation and Ethics
          Committee and/or the IAIR Board of Directors. Such information may or may not
          be expressly called for by these standards, but in the judgment of the Committee
          or the Board may be needed to determine whether the above standards are met;
12.       Have been approved by the IAIR Accreditation and Ethics Committee and by the
          IAIR Board of Directors;
13.       Submit an initial non-refundable designation application fee of two hundred
          dollars ($200.00), and
14.       Be a Member in good standing of IAIR.
The CIR designation will only be granted with one of the following three sub-
designations, as requested by the Applicant and supported by the Statement of
Qualifications:
CIR, Life & Health (CIR - L&H). The L&H classification will be granted upon evidence
accompanying the application reflecting either the required experience, or the overall
control and management responsibility on a day to day basis of all facets and parts of
one or more domiciliary, core or main receivership operations or proceedings of a life,
health, accident insurer or health maintenance organization for a cumulative minimum
of three (3) years.
CIR, Property & Casualty (CIR - P&C). The P&C classification will be granted upon
evidence accompanying the application reflecting either the required experience, or the
overall control and management responsibility on a day to day basis of all facets and
parts of one or more domiciliary, core or main receivership operations or proceedings of
a property and casualty insurer for a cumulative minimum of three (3) years.
CIR, Multiple Lines (CIR - ML). The ML classification will be granted upon evidence
accompanying the application, which establishes that the Applicant meets the
qualifications for both the L&H and the P&C designations.

To Maintain a CIR Designation the Applicant must:
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1.        Be a member in good standing of IAIR;
2.        Timely remit to IAIR annual designation maintenance dues (presently at $75 per
          year but subject to periodic adjustment);
3.        Participate in approved continuing education activities of at least thirty hours
          every two years; and
4.        Submit evidence of 3. above on the approved IAIR membership renewal form.
The Applicant is requested to provide the information necessary to establish Applicant's
fulfilling each of the foregoing requirements for certification as a Certified Insurance
Receiver (CIR) in summary form on one or more copies of the IAIR Statement of
Qualifications which should be attached to this Application at the time of submission.
Additional documentation is not to be submitted with this Application.
Standard #1, Membership in IAIR, will be confirmed by the IAIR Executive Director at
the time the Application is submitted. Applicants who are not IAIR members may
submit an Application for IAIR membership simultaneously with the submission of this
Application. IAIR membership Applications may be obtained by contacting IAIR at the
address listed below.
The Accreditation and Ethics Committee and/or the IAIR Board of Directors may, in
their discretion, request additional documentation and information as a part of the
certification process.
The CIR Application with the attached Statement of Qualifications and $200 application
fee should be sent to:
                              International Association of Insurance Receivers
                               174 Grace Blvd. Altamonte Springs, FL 32714
                                Phone: (312) 961-4199; Fax: (773) 395-8786




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Application for Certified Insurance Receiver Designation

Guidelines for Completing Statement of Qualifications
1.        Please provide the information requested on the Statement of Qualifications
          form. Do not submit supporting documentation. In the event the Accreditation
          and Ethics Committee/IAIR Board requires additional supporting documentation
          the committee or board will contact the applicant.
2.        When listing multiple activities in response to any of the qualification standards,
          list in reverse chronological order, the most current first.
3.        If the Statement of Qualifications form does not provide sufficient space for the
          data you are submitting please photocopy or otherwise reproduce the applicable
          page(s) as necessary.
4.        When answering questions, be sure to carefully and completely answer each
          question. Missing information and/or incomplete answers will require follow-up
          and will delay processing of the application.

Guide to Application of the Certification Standards
1.        Provide only that information necessary to establish a particular standard is met.
          It is not necessary to include information exceeding the stated standards.
2.        In providing information concerning the amount of assets for which the applicant
          has been responsible provides a brief description of the method used for
          determining that value, i.e. liquidation value, appraised value, etc.
3.        In providing information concerning reinsurance experience briefly describe the
          commutation activities, amounts sought and amounts realized or settlement
          amounts for ceded/assumed reinsurance. For activities involving the transfer of
          liabilities include information concerning the number of policies, the amounts
          involved, etc.
4.        Each CIR/ML applicant in order to qualify must provide information to indicate
          that the requirements for both CIR - P&C and CIR - L&H are independently
          satisfied, e.g., overall control and management responsibility of (not less than)
          three (3) years in each of the P&C and the L&H categories, qualifying
          reinsurance experience in each of the P & C and the L&H categories, etc.
5.        It is the overall goal of these standards that the designation only is awarded to
          those candidates that currently possess the entire spectrum of skills required to
          manage an entire receivership operation. Accordingly, timeliness of experience
          will be a factor in considering applications.



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                                               - 128 -
                           International Association of Insurance Receivers
                                             Application for
                               Certified Insurance Receiver Designation

I am hereby applying for certification by the International Association of Insurance
Receivers (IAIR) as a Certified Insurance Receiver (CIR) with the following designation:
P&C ___ , L&H ___ or ML ___.
I certify that I have read and understand the requirements to qualify for and maintain
the designation of Certified Insurance Receiver reproduced in the information packet
with this Application and that I intend to meet the requirements to maintain the CIR
designation in an active status. Further, I understand that the requirements to obtain or
maintain the CIR designation may, from time to time, be modified by IAIR in accordance
with its By-Laws, which modification may include, but is not limited to, a requirement
that all seeking or holding a CIR designation may be required to take and pass an
examination. I understand that my application may be denied if any one or more of the
qualifications have not been met or no reasonable basis for an exception is shown by
sufficient evidence or documented adequately in a hearing by the IAIR Accreditation
and Ethics Committee.
Following is my completed Statement of Qualifications for certification. I verify and
affirm that the information contained in the Statement of Qualifications is accurate and
complete and acknowledge that the Accreditation and Ethics Committee and/or IAIR
Board of Directors may, in their discretion, request that I provide such additional
information as they deem appropriate.




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                                                - 129 -
Please enclose $200.00 non-refundable designation application fee.

Name:
Business Name:
Address/Street:
City State/Country Zip+4:
Phone :(          )
Fax:      (      )
Dated this _____ day ________________, 20__


Applicant's Signature
For Internal Use Only
Date Received: ______________                     Fee: ______________
Membership Verified: _________________
                              International Association of Insurance Receivers
                              Application for Insurance Receiver Designations




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                                                  - 130 -
Statement of Qualifications

The following information is submitted in support of my Application for designation as:
[ ] Accredited Insurance Receiver [ ] Certified Insurance Receiver:
[ ] P&C [ ] L&H [ ] ML
1.        Insurance Receivership Office Experience and Responsibility. Standard: Have
          for a cumulative minimum of three (3) years had either: (I) overall control and
          management responsibility on a day to day basis of all facets and parts of one or
          more domiciliary, core or main receivership operations or proceedings, or (ii)
          participation on a day to day basis as a member of the senior level team that
          worked directly with the receiver to assist with such receivership(s).
For each qualifying receivership provide the following, to the extent applicable to the
requested designation:
Beginning & Ending Dates:
Company:
Type of Co. Life [                      ] Health [    ] Accident [       ] HMO [     ] P&C [     ]


Other [ ] (Describe):
Job Title:
City: ______________________________                           State/Country: ____________________
Number of Claims: ______________________
Describe your position and responsibilities, and carefully explain how they satisfy the
standard set forth above.
____________________________________________________________________




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                                                     - 131 -
2.        Management. Standard: Applicant must have substantial experience in the
          general area of management, and also a working knowledge of the data
          management area.
Provide a general description of your general management and data management
experience. Be prepared to provide further information on this topic in the interview.




3.        Reinsurance Experience. Standard: Applicant must have a working knowledge
          of the reinsurance area, which would include experience in such areas as
          commutations and negotiations/transfers of one or more books of business.
If any experience was gained by working for a solvent company, describe such
experience. Describe your experience with commutation activities, including your role
in such activities generally, and specifically with regard to related financial analysis.
Also with regard to commutations provide information concerning amounts sought and
amounts realized or settlement amounts for ceded/assumed reinsurance. Describe
your experience with activities involving the negotiation/transfer of liabilities, including
your specific role, and also information concerning the number of policies, the amounts
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                                               - 132 -
involved, etc. Describe the types of reinsurance contracts with which you have had
experience.




4.        Claims/Guaranty Funds. Standard: Applicant must have a working knowledge
          of the claims function as it exists in an ongoing insurer, as well as the particulars
          involved with insolvencies. Applicant must also have a basic understanding of
          the operation of guaranty funds (or similar organizations that exist in other
          countries), and the interaction between receivers and guaranty funds or similar
          organizations.     If Applicant is claiming experience with receiverships
          administered in the United States, Applicant must have a basic understanding of
          the NAIC Uniform Data Standards, and their application in insolvency
          proceedings.
Describe your claims experience as it relates to ongoing insurers, insolvencies and
guaranty funds with the purpose of explaining the extent of your working knowledge in
each area. Explain whether your experience involves personally handling claims, or the
management of claims, or both, and also the different lines of business you have been
exposed to. Please provide claim counts and reserve totals for claims portfolios you
have been involved with. If applicant is claiming experience with receiverships
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                                               - 133 -
administered in the United States, describe your experience with the NAIC Uniform
Data Standards that would document a working knowledge.




5.        Legal Standard: Applicant must have a working knowledge of the legal principles
          involved with insurance receiverships, and be able to document knowledge of
          such in an interview.
Please give a general description of legal issues that you have dealt with in an
insolvency setting.




6.        Accounting/Financial Reporting. Standard: Applicant must have a working
          knowledge of the accounting principles, actuarial principles, tax issues and
          financial reporting requirements involved with insurance receiverships, and be
          able to document knowledge of such in an interview.
Please describe the different accounting methods you have used in connection with
receiverships, as well as the basis for valuing assets and liabilities, and the different

{B0283421:2}: 99999:1925: 01/27/03: ver. 2.6
                                               - 134 -
types of financial reporting you have been involved with in an insolvency setting. Also
describe your experience with tax issues in an insolvency setting.




7.        Asset Management. Standard: Applicant must have substantial experience in
          the administration of assets.
Describe the different types of significant assets that you have been responsible for,
and your activities in managing such. Provide general descriptions of assets handled,
including estimated values. Describe any dealings you have had with special deposits.




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                                               - 135 -
8.        Approved Continuing Education.
Provide the following information for the Continuing Education activities, which you
believe, should be approved.
Dates:                                                   Number of Hours:
City:                                                    State/Country:
Title of Article/Program, Etc.:
Sponsor:
Topics:




Dates:                                                   Number of Hours:
City:                                                    State/Country:
Title of Article/Program, Etc.:
Sponsor:
Topics:




Dates:                                                   Number of Hours:
City:                                                    State/Country:
Title of Article/Program, Etc.:
Sponsor:
Topics:




Dates:                                                   Number of Hours:
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                                               - 136 -
City:                                                    State/Country:
Title of Article/Program, Etc.:
Sponsor:
Topics:




Dates:                                                   Number of Hours:
City:                                                    State/Country:
Title of Article/Program, Etc.:
Sponsor:
Topics:




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                                               - 137 -
9.        Normal Education/Business Experience.
The Applicant must hold at least a bachelor's degree or have business experience of at
least ten (10) years. Provide the following information concerning any degrees held or
equivalent business experience.
Degree:                                                  Date Obtained:
Educational Institution:
City:                                                    State/Country:


Degree:                                                  Date Obtained:
Educational Institution:
City:                                                    State/Country:
Describe briefly the qualifying business experience including dates.




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                                               - 138 -
                                                 Appendix C
                                      Functions of An Insurance Receiver

The premise of privatization is that the receivership functions will be performed more
efficiently by such process and receivership proceedings will be completed sooner if
performed by private parties who are compensated under incentive plans. To
understand the potential advantages of privatization of insurance company
receiverships, the functions performed by the receiver must be reviewed and standards
must be established to properly evaluate the quality of the performance of those
functions.

         Administrative Duties

The insurance company receiver must comply with the applicable insolvency statutes,
including procedures for identifying and notifying creditors, and dealing with the proof of
claim process. The receiver must review the insurer's existing database systems and
modify such systems or create new systems for the receivership process, if needed.
The receiver must identify those situations and actions which require court approval,
those which require the receiver to follow the policies or positions of the insurance
commissioner or an oversight board, and those within the receiver's discretionary
authority.

The primary standards for administrative duties should be cost effectiveness, efficiency
and timeliness. The receiver must avoid any self-dealing or conflicts of interest. In rare
situations, if a conflict of interest does develop, the receiver must fully disclose the
conflict to the insurance commissioner, oversight board, or commission of inspection
and, in some cases, the receivership court.

         Reporting and Accounting Functions

The receiver should prepare periodic financial statements to the insolvency court and,
where appropriate, to the insurance commissioner and any oversight committee. The
initial financial report should be the first reevaluation of the insurer's financial condition
and should be issued no later than six weeks after a receiver is appointed. Subsequent
financial reports by the appointed receiver should be made after six months and
periodically thereafter until the estate is closed.

The receiver must be able to engage or employ experts in forensic accounting to
identify hidden assets, excessive liabilities and potential fraud against the insurer. The
receiver should identify and analyze the causes of the insolvency and report the
findings to the insurance regulatory officials. The receiver should be given immunity
from liability arising out of such identification and analysis and in providing such reports.
Potential administrative disciplinary actions should be referred to regulatory agencies.
The receiver must also be able to detect and assist in the prosecution of fraud in civil

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                                                    - 139 -
actions, and where appropriate, refer the fraud to appropriate authorities for criminal
prosecution.

          The reporting and accounting functions must be accurate and timely.
          Reports must be in accordance with statutory accounting principles or,
          where appropriate, generally accepted accounting principles.

         Communications

The receiver must develop effective communications with a diverse group of parties.
Administratively, communications must be established with insurance regulators,
guaranty funds, auditors, court masters and, if appropriate, the oversight board.
Effective communications must also be established with guaranty funds, policyholders,
third party claimants, cedents, reinsurers and other creditors. The receiver must seek
court and/or oversight approval for actions beyond the authority of the receiver. Claims
need to be coordinated with guaranty funds to provide coverage for those claims which
exceed guaranty fund statutory limits. A claims tracing system must be implemented to
tie the guaranty fund claims information into applicable claims and reinsurance
systems. The receiver must develop and maintain a claim log for claimant inquiries and
their resolutions.

The receiver is required to provide excellent consumer service to policyholders and
claimants with timely responses to questions and/or concerns raised during the
receivership process. The receiver must maintain open, direct communication with all
interested persons in order to promote efficient administrative procedures.
Communications must be timely and responsive to all parties and to the receivership
court.

         Maximizing Assets

The major function of an insurance company receiver is to maximize the estate's
assets. In addition to investments, the assets of the insolvent insurer include agents'
and insureds' balances, subrogation and salvage recoveries, reinsurance receivables,
foreclosure of collateral, errors and omission and malpractice claims against former
corporate parents or holding company officers and directors, attorneys, accountants,
actuaries, agents, reinsurance intermediaries and others.

The receiver must be able to identify potential assets which may not be recognized on
the insurer's financial statements. It must be determined whether existing leases and
other contracts should be accepted, rejected or revised.

The receiver must maximize the estate through a cost/benefit analysis of alternatives.
If possible, the receiver should seek to obtain collateral to secure reinsurance
receivables and receivables from insureds for losses and loss sensitive premiums. The
receiver must demonstrate a business approach to all collection activities, keeping time
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                                               - 140 -
considerations in perspective. If the receiver does not move quickly enough, assets
may diminish in value or become uncollectible.

         Investments and Sale of Assets

The receiver must determine the advantages and disadvantages of selling or retaining
particular assets, taking into consideration the current and future use of such assets by
the estate and the present and potential future market value of the assets. In most
cases, there should be a speedy conversion of non-income producing assets which are
not necessary for the run-off of the estate so as to improve the return on investments or
reduce related expenses. However, the receiver should not automatically sell off
unauthorized investments or investments which have suffered severe losses.

The receiver should follow reasonable and prudent business practice standards as an
investment guideline, but must also follow the authority limits established by statute and
by order of the receivership court, the insurance commissioner or the oversight board.
Income should be maximized consistent with investment safety. Noncompliance with
the authorized investment laws may be justified provided there is a program of
disposing of unauthorized assets over a period of time. The receiver should attempt to
match the liquidity of investments with anticipated payout patterns of expenses and
liabilities including early access by guaranty funds.

Different issues facing life insurers and property/casualty insurers should be
recognized.    The former are more likely to have investment problems than
property/casualty insurers which are more likely to have liability problems. Life insurers
are generally rehabilitated while property/casualty insurers are more likely to be
liquidated.

         Determine Liabilities and Distribute Assets

In the case of the liquidation of the insurer, the receiver must distribute the assets of the
estate in accordance with the statutory priorities. Generally, under current statutes, the
priorities of distribution are:

          a.        Administrative expenses
          b.        Employee wage and benefit claims
          c.        Policy claimants and guaranty funds
          d.        Federal obligations
          e.        State obligations
          f.        General unsecured creditors including
                    1)     reinsurers
                    2)     cedents
                    3)     trade creditors
          g.        Guaranty capital holders and
          h.        Stockholders
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                                               - 141 -
States are currently in the process of amending their priority provisions to conform to
the U.S. Supreme Court‟s decision in U.S. Department of Treasury v. Fabe.




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                                               - 142 -
                                          Appendix D
                An Analysis of the Interstate Insurance Receivership Compact

The ultimate direction and success of the existing Interstate Insurance Receivership
Compact (IIRC) will depend on the implementation of the Commission's structure and
the establishment of its rules by its members. Only after the compacting states decide
what they want the compact to be and how its mandates will be implemented will an
accurate analysis of its scope and functions be possible.

The following is a section-by-section analysis of the interstate compact for insurance
receiverships:

Article I. Purposes

The stated purposes of the Compact are, through joint and cooperative action among
the compacting states, “to promote, develop and facilitate orderly, efficient, cost
effective and uniform insurer receivership laws and operations” and “to create the
Interstate Insurance Receivership Commission.”         An additional purpose is “to
coordinate interaction between insurer receivership and guaranty fund operations.

Article II. Definitions

The definitions set forth in the Compact also help to define the scope of its intended
activity and influence. Several of the definitions are key to understanding the operation
of the Compact. The term “Guaranty Association” is limited to insurance guaranty
funds or associations created by statute in a compacting state and not guaranty
associations in non-compacting states.56 A “Member” is the “Commissioner of a
compacting state or his or her designee, who shall be a person officially connected with
the Commissioner and who is wholly or principally employed by said Commissioner.”
“Operating Procedures” is defined broadly to include procedures promulgated by the
Commission implementing a rule of the Commission, an existing law in a compacting
state, or a provision of the Compact.            “Receivership” means any liquidation,
rehabilitation, conservation or ancillary receivership proceeding, and “Receiver” is
similarly defined in a broad fashion. “Rules” are duly promulgated acts of the
Commission which substantially effect “interested parties in addition to the Commission”
and “which shall have the force and effect of law in the compacting states.”




56 The limitation of the defined term “Guaranty Association” to include only such entities in compacting
states should be contrasted with the term “Receiver” which includes receivers in both compacting and
non-compacting states.
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                                                - 143 -
Article III. Establishment of the Commission and Venue

Article III, of the Compact establishes the Commission and appropriate venue for legal
activities. The Commission is a body corporate of each compacting state and is further
defined as a not-for-profit entity, which is separate and distinct from the compacting
states. Venue is in a court of competent jurisdiction where the Commission's principal
office is located, unless venue is otherwise specifically provided by state or federal law.

Article IV. Powers of the Commission

The broad powers afforded to the Commission by the Compact cover all areas of
insurance receiverships.     The Commission is specifically granted authority to
promulgate rules, which are given the force and effect of statutory law and are binding
in the compacting states in accordance with the provisions of Article VII. The
Commission is also given the authority to promulgate operating procedures which shall
be binding in the compacting states.

The Commission is granted authority to oversee, supervise and coordinate the activities
of receivers in compacting states, to act as a receiver in a compacting state, 57 to act as
a deputy receiver in a non-compacting state and to act an ancillary receiver in a
compacting state of an insurer domiciled in a non-compacting state. The Commission
is also given the power to monitor the activities and functions of guaranty funds in
compacting states.

The Commission may delegate its operating authority and functions 58, but it is not
permitted to delegate its rulemaking authority. The Commission is given the power to
issue subpoenas requiring the attendance and testimony of witnesses and the
production of evidence. This grant is much broader than the authority normally granted
to an insurance commissioner acting in his or her role as receiver of an insurer. The
Commission is also given the power to enforce compliance with Commission rules,
operating procedures and by-laws, to provide for dispute resolution among compacting

57 The authority of the Commission to act as a Receiver or a Deputy Receiver may be unusually broad
under the compact. Not only may the Commission serve in such roles for insurers domiciled in a
compacting state, but it may also do so for insurers engaged in, or doing the business of insurance in, a
compacting state. This could be either an intentional grant of authority, or the unintended result of an
inartful reference to the defined term “Domiciliary State.” The latter means “the state in which an insurer is
incorporated or organized; or, in the case of an alien Insurer, its state of entry; or in the case of an
unauthorized Insurer not incorporated, organized, or entered in any state, a state where the insurer is
engaged in or doing business.”

58 While participation in the compact as a compacting state may seem to give an insurance
commissioner the ability to seek “official” expertise from the Commission to handle an insolvency of an
insurer domiciled in his or her State, the power of the Commission to delegate its operating functions
would, in turn, let the Commission privatize the receivership duties it has undertaken. Some
commissioners have subpoena power in their role as a regulator but many have such authority in their role
as a receiver of an insolvent domestic insurer.
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                                                  - 144 -
states and receivers (not limited by definition to receivers of compacting states) and to
represent and advise compacting states on issues concerning insurers domiciled or
doing business in non-compacting jurisdictions relating to the purpose of the Compact.
The Commission is granted the authority to provide advice and training to receivership
personnel of compacting states and to appoint committees including, but not limited to,
an Industry Advisory Committee and an Executive Committee of Members.

Article V. Organization of the Commission

The organization of the Commission is straightforward. It is composed of a single
commissioner from each compacting state. Each compacting state appoints a single
member of the Commission. The selection remains the discretionary right of the
compacting state. Each member has one vote and a majority of the members have the
power to prescribe by-laws to govern the conduct of the Commission.

The Chairperson and Vice-Chairperson of the Commission are elected annually by a
majority of the members from among the commissioners. The Commission may, by a
vote of the majority of the members, appoint or retain an Executive Director, who shall
serve as the Secretary to the Commission but shall not be a member of the
Commission. The Executive Director has the power to hire and supervise such other
staff as may be authorized by the Commission.

The statute gives the members, officers, executive director and employees of the
Commission a qualified immunity for activities undertaken within the scope of
Commission employment, duties or responsibilities. The qualified immunity excludes
intentional or willful or wanton misconduct and further excludes the Commission when
acting in its role as receiver under the provisions of the compact. The Compact
provides for defense and indemnity of Commissioner members. Their representative
and employee for actual or alleged acts, errors or omissions occurring within the scope
of Commission employment. Where the Commission is acting as receiver of an estate,
any costs and expenses of defense and indemnification are to be paid as administrative
expenses from the assets of that estate unless they are covered by insurance
maintained by the Commission.




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Article VI. Meetings and Acts of the Commission

Action by the Commission may be authorized by an affirmative vote of the majority of
the members. Members are required to vote in person and may not delegate their
votes to another member. They may participate in meetings by telephone or other
means of telecommunication. The Commission is required to meet at least once during
each calendar year and on such other occasions as may be requested by a majority of
the members.

The Commission is required to establish rules concerning the availability of its
information and official records for public inspection and copying and the withholding
from disclosure of information or official records. The Commission may promulgate
additional rules concerning the information which it may make available to law
enforcement agencies which would otherwise be exempt from disclosure.

Meetings of the Commission must be open to the public and public notice is required
The Commission may close a meeting to the public by a two-thirds vote in certain
specified situations. The Commission is required to keep full minutes of its meetings.

Article VII.


The Commission is directed to promulgate rules and operating procedures in order to
effectively and efficiently achieve the purposes of the compact. The specific limitations
are: 1) that the Commission may not promulgate any rules directly relating to guaranty
funds (including rules governing coverage, funding or assessment mechanisms); or 2)
from altering the statutory priorities for distributions of assets out of an estate unless it
does so pursuant to rules promulgated by the Commission as uniform provisions
governing insurer receiverships. Rulemaking is required to substantially conform to the
principles of the Federal Administrative Procedure Act and the Federal Advisory
Committee Act.

After the adoption of rules for the orderly operation of the Commission, the Commission
is specifically directed to develop a uniform receivership law, including “provisions
requiring compacting states to implement, execute, and administer in a fair, just,
effective and efficient manner rules and operating procedures relating to receiverships.”
The Commission has three years from the enactment of the compact by two or more
states to promulgate such provisions through the rulemaking process. The compact
specifically provides that the provisions shall become law in all of the compacting states
upon legislative enactment in a majority of the compacting states.59


59 The situation creates a possible constitutional dilemma in the non-adopting states. The specific issue
is whether the legislatures in such states can delegate their legislative authority to other states by the
mere adoption of the compact. The issue is further complicated by the “opt-out” authorizing a state's
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The opt out provisions for rules and amendments 60 are detailed and convoluted. A rule
or amendment may be expressly rejected by a compacting state at any time within two
full calendar years after its adoption by the commissioner. If a state legislature rejects a
rule or amendment, it will have no further effect in that state. It appears that the
rejection is prospective and will not have retrospective affect. If a rule is rejected by a
majority of the compacting states‟, then the rule will have no further force or effect in
any compacting state.

The Compact also establishes a procedure for the adoption of rules and operating
procedures, which requires notice and opportunity for interested persons to submit
written comment. The Commission is required to provide an opportunity for an informal
hearing. The final rule or operating procedure must be promulgated based upon the
record made. Within 60 days after promulgation of a rule or operating procedure, any
interested person can seek judicial review by a petition filed in a court of competent
jurisdiction where the Commission's principal office is located. The court must hold the
Rule unlawful and set it aside if it finds that the Commission's action is not supported by
substantial evidence in the rulemaking record.61

Article VIII. Oversight and Dispute Resolution by the Commission

The Commission is directed to oversee the administration and operation of
receiverships in compacting states and to monitor receiverships in non-compacting
states which may significantly affect compacting states. The Commission is also
directed to establish operating procedures requiring members to submit written reports
to the Commission whenever there is a finding or other official action in the compacting
state that grounds exist for receivership of an insurer doing business in more than one
state. Thereafter, the Commission is to receive periodic reports as required by the
Commission's operating procedures.

The Commission is specifically entitled to receive notice of compacting states‟
receiverships and will have standing to appear in such proceedings. Receivers in each
compacting states are required to provide all records, data and information required by
the Commission.

legislature may reject a Rule adopted by the Commission if it does so before the end of the second full
calendar year after the rule is promulgated.

60 Note that the term “amendments” is not defined, albeit the intention probably is to have that term relate
to amendments to Rules.

61 As a practical matter, application of such a standard may ultimately bear little resemblance to
traditional concepts of due process. Not only is there the very narrow time window within which a
challenge must be made, but the challenge may be required to be made in a State geographically distant
from the domicile of the challenging party. Indeed, a challenging party may even live within a State which
has not legislatively adopted the objectionable provision.
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The Compact has provisions on confidentiality and non-disclosure requirements for
records, data and information. Except where such information is protected by privilege,
state insurance commissioner in a compacting state must provide the Commission with
confidential information that the Commission requests. Disclosures to the Commission
do not waive or otherwise affect any confidentiality requirement. The Commission
remains subject to the compacting state's laws regarding confidentiality and non-
disclosure.

The Compact provides that the courts and executive agencies of each compacting state
will enforce the Compact. The Commission is specifically entitled to receive process in
any proceeding pertaining to the subject matter of the compact and is further granted
standing to intervene and participate in any such proceeding or receivership for all
purposes.

The Compact grants the Commission the power to analyze and correlate records, data,
information and reports received from receivers and guaranty associations. The
Commission is further given the power to make recommendations to the compacting
states for improving the performance of the receivers.

The Commission is directed to promulgate operating procedures providing for binding
dispute resolution for disputes among receivers. Where disputes or other issues
subject to the Compact arise among compacting states and non-compacting states, the
Commission is directed to attempt. Upon the request of a member, the Commission is
also directed to attempt to resolve disputes among compacting and non-compacting
states resolution for disputes among guaranty associations and receivers.

Article IX. Receivership Functions of the Commission

The Commission has authority to act as receiver of any insurer domiciled, engaged in
or doing business in a compacting state. Upon the request of the Commissioner in
such compacting state. If the Commission acts as receiver, it has all of the powers and
duties granted by the receivership laws of the domiciliary state.

The Commission, as receiver, is directed to maintain financial information on estates
consistent with the accounting practices and procedures set forth in the Commission's
by-laws. It is directed to obtain annual audits of each estate, provided that the estate
has sufficient assets to pay for the audit as an administrative expense. The
Commission is specifically authorized to delegate its receivership duties and functions.

The Compact also establishes a procedure to assure compliance with its rules and
operating procedures. In the event that the member acting as receiver in a compacting
state fails to comply, the Commission notifies the member in writing. If the
noncompliance is not cured within ten days after receipt of notification, the Commission

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may then petition the court for an order to substitute the Commission as receiver of the
estate.

The Commission is precluded from acting as receiver of an estate that appears to lack
sufficient assets to fund the receivership unless the compacting state make provisions
for the payment of the estate's administrative expenses. The Commission is also
granted the power to act as deputy receiver for insurers domiciled or doing business in
non-compacting states. Such activity would be undertaken at the request of the non-
compacting state's insurance commissioner and with the approval of the Commission.
It would proceed in accordance with the laws of the non-compacting state.

Where there are receiverships pending in a compacting state at the time the Compact
is adopted, the Commission may act as receiver upon the request of the compacting
state's member and the approval of the Commission. The Commission will oversee,
monitor and coordinate the activities of all such pending receiverships, regardless of
whether the Commission is acting as receiver in the compacting state.

Article X. Finance

The compact provides a structure for the financial aspects of the Commission. The
Commission is directed to pay or provide for the payment of the reasonable expenses
of its establishment and organization, but, in general, the costs and expenses of each
compacting state are the sole and exclusive responsibility of the respective compacting
state. The Commission is authorized to levy on and collect an annual assessment from
each compacting state and each insurer authorized to do business in a compacting
state and writing “direct insurance.” The assessment is intended to cover the costs of
the internal operations and activities of the Commission and its staff in a total amount
sufficient to cover the Commission's annual budget. There is a formula whereby the
assessment amount is allocated 75% to insurers and 25% to compacting states.

There is a prohibition for use of assessments to pay costs or expenses incurred by the
Commission and its staff acting as receiver. The structure of the compact makes clear
that, in no event, shall the Commission serve as receiver of an estate unless there are
financial provisions in place for reimbursement of the Commission for its expenses with
respect to such services. Until the first annual budget of the Commission is adopted
and related assessments have been made, the initial operations of the Commission are
to be funded by contributions from compacting states and by a one-time assessment on
insurers doing direct insurance business in the compacting states in an amount not to
exceed $450 per insurer.

Article XI. Compacting States, Effective Date and Amendment

The compact provides that any state is eligible to become a compacting state and that
the compact is effective and binding upon legislative enactment of the compact into law
by two compacting states. In subsequent compacting states, the compact shall
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become effective and binding upon enactment of the compact into law by such state.
The Commission may propose amendments to the compact for enactment by the
compacting states, but no amendment shall become effective and binding upon either
the Commission or the compacting states unless and until it is enacted into law by
unanimous consent of the compacting states.

Article XII. Withdrawal

The compact provides for withdrawal of a compacting state by the enactment of a
statute specifically repealing the statute which enacted the compact into law. The
compact contains provisions specifying the obligations of the withdrawing state which
terminate with withdrawal and those which will continue thereafter. The compact
specifically provides that the repeal of the compact by a withdrawing state shall not
apply to any receiverships for which the Commission is acting as receiver and which are
pending on the date of the repeal except by the mutual agreement of the Commission
and the withdrawing state.

Where the Commission determines that a compacting state has defaulted in the
performance of its obligations and responsibilities under the compact the defaulting
state may be suspended. If the defaulting state does not cure the default, a majority of
the compacting states may affirmatively vote to terminate the defaulting state from the
compact.

Article XIII. Severability and Construction

The compact contains a broad severability clause and provides for liberal construction
to effectuate its purposes.

Article XIV. Binding Effect of Compact and Other Laws

A potential source of future confusion lies within the compact's provisions concerning its
impact upon other laws. The compact specifically notes that nothing prevents the
enforcement of any other law of a compacting state that is consistent with the compact
and that all compacting states' laws conflicting with this compact are superseded to the
extent of the conflict. The compact also notes that all lawful acts of the Commission,
including all rules and operating procedures promulgated by the Commission, are
binding upon the compacting states. Upon the request of a party to a conflict over the
meaning or interpretation of “Commission actions” and upon majority vote of the
compacting states, the Commission is authorized to issue advisory opinions regarding
such meanings or interpretations.

In an effort to deal with potential constitutional limitations of the various compacting
states, the compact particularly provides that any delegations of obligations, duties,
powers or jurisdiction to the Commission which exceed the constitutional limits imposed
on the legislature of any compacting state shall be ineffective. The compact provides
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that such obligations, duties, powers or jurisdiction shall remain in the compacting state
in accordance with that state's law in effect at the time the compact became effective. 62




62 These attempts to cure excessive grants of authority in the compact promise to spawn litigation in the
future. For instance, assume that the priorities of distribution for insolvency estates are changed in a
material manner through rules adopted by the Commission. Where a compacting state, which is the
domicile of a receivership, has neither legislatively adopted the revised priorities nor opted-out, the
disappointed creditors who would have recovered under the compacting state‟s original priorities are
almost certain to follow the road map provided in the compact and mount a judicial challenge.
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                                                Appendix E

    History of Excluding Insurance Companies From Federal Bankruptcy Laws63

Prior to enactment of the modern Bankruptcy Code in 1978, “insurance corporations”
were excluded from the federal bankruptcy scheme by a 1910 amendment to the
Bankruptcy Act of 1898 (the “Former Act”). The legislative history states “The reason
for exempting the quasi-public corporations will be apparent. Banks are exempted from
the operation of the law at present.           Other business entities having similar
responsibilities to the public are now also excepted. ”H.R. Rep. No 511, 61st Cong., ed
Sess.5 (1910).64

The exclusion of insurance corporations is further explained by a 1932 amendment
which added building and loan associations to the list of excluded entities. The House
Report observed that “[e]very reason which obtains for exempting [insurance
corporations] obtains ins so far as building and loan associations are concerned,” and
noted:

                    [I]t has been suggested that by reason of the fact that in two States
                    in the Union no law exists controlling building and loan associations
                    from the operation of the bankruptcy law. It will be remembered
                    that if the bankruptcy law is not invoked in connection with building
                    and loan associations that this in no way interferes with the State


63 This document was prepared by Stephen C. Strong of LeBoeuf, Lamb, Greene & MacRae located in
Salt Lake City, Utah.

64 These views are reminiscent of arguments which were made, without success, originally to exclude
insurance companies from the Former Act:

This bill is the first one of its kind to include corporations at all. It may be that there is a certain class of
corporations that are as appropriately made subject to its provisions as are natural persons. I refer to
those engaged in mining, manufacturing, merchandising, trading, and the buying and selling of property of
any kind, and, in fine, engage in any business of the same kind as that usually carried on by individuals.
But this bill goes much further than this. It embraces insurance companies . . .; it embraces building and
loan associations, trust companies, savings banks, and all other State Banks.

Now, in nearly every State in the Union there are chapters on chapters of the statutes regulating to the
smallest minutia the proceedings in case of the insolvency of any of those classes of corporations. It is
made the duty of designated officials to make critical and periodical examination of their affairs, to proceed
against them when insolvent, and to take charge of their property, including the securities deposited for
the protection of the beneficiaries . . . and, in fine, to do and perform all the duties of a trustee in
bankruptcy.

Under this bill a trustee in bankruptcy becomes the insurance commissioner, the railroad commissioner,
the bank examiner and commissioner, and the building and loan commissioner of the several States . . . .

31 Cong. Rec. 1939 (1898).
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                    equity laws, and whether a State has supervisory control over
                    building and loan associations or not those interested may at all
                    times take advantage of State insolvency laws. Building and loan
                    associations are of a peculiar nature, associations functioning
                    almost exclusively in local communities. The deposits received are
                    from local depositors and the securities taken are local securities.
                    Therefore, it seems the part of wisdom to leave the administration
                    of these matters in the local courts.

H.R. Rep. No. 98, 72nd Cong., 1st Sess. 1 (1932).65

Similarly, in the floor debates, one member of Congress remarked that building and
loan associations “are entirely under the management of state law. Nearly all of the,
have state inspectors to check up on their books and securities. They are subject to
the State law respecting voluntary assignments and receiverships, and there is every
reason why they should be taken out from under the Federal Bankruptcy law and be
allowed the usual course taken under State management and state law.” 75 Cong.
Rec., 3041 (1932).

Notwithstanding these explanations, battle lines over federal or state control of insolvent
insurance companies were redrawn during the evolution of the present Bankruptcy
Code. The exclusion of insurance companies under the Former Act had been
questioned, at least since 1957. Michael I. Sovern, Section 4 of the Bankruptcy Act:
The Excluded Corporations, 42 Mlrm L. Rev. 171, 209-219 (1957). In 1974 the
National Conference of Bankruptcy Judges introduced legislation which deleted the
exclusion. Sections 4-201 and 4-204, H.R. 32 and S.236, 94th Cong., 1st Sess. (1974)
Proponents of this bill criticized the exclusion because local proceedings, in their view,
did not have jurisdiction sufficient to marshal assets and resolve claims on a multi-state
basis. See , e.g., testimony of Judge Joe Lee, Hearings on H.R. 31 and H.R. 32 Before
the Subcomm. On Civil and Constitutional Rights of the House Comm. On the
Judiciary, 94th Cong., 1st Sess., Ser. No. 27, pt. I, at 625-626 (1975); testimony of
Judge Joe Lee, Hearings on S. 235 and S. 236 Before the Subcomm. on Improvements
in Judicial Machinery of the Senate Comm. On the Judiciary, 94th Cong., 1st Sess., II,
at 354-355 (1975).

The Commission on the Bankruptcy Laws of the United States (the “Commission:), a
committee established by Congress in 1970 to study and recommend changes to the
bankruptcy Judges. The report of the Commission (the “Commission Report”)
acknowledged the defects in state insolvency proceedings for insurance companies,
Commission Report, H. Doc. No. 93-137, pt. I, at 183-184 (1973), but nevertheless
“concluded that the present exceptions from the amenability to bankruptcy for financial

65 One commentator opined, however, that the “locality” rationale did not apply to insurance companies.
See Michael I. Sovern, Section 4 of the Bankruptcy Act: The Excluded Corporations, 42 Minn. L. Rev. 171,
177-81 (1957).
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and insurance institutions should be continued because the laws regulating them
provide competent, specialized dissolution and reorganization processes.” Id. at 72.
The Commission bill therefore retained the exclusion. Sections 4-201 and 4-204, H.R.
31 and S. 235, 94th Cong., 1st Sess. (1974). 66 Sponsors emphasized the entirely
adequate statutory schemes for administering the affairs of insolvent . . . insurance
corporations. . . . The scheme of bankruptcy administration contemplated by the
Bankruptcy Act is not well adapted to the settlement of the affairs of a debtor like . . . an
insurance corporation with its thousands of policyholders as well as other creditors. . . .
The specialized state legislation that has evolved for the protection of policyholders
among the several states, including the establishment of reserves and the development
of anticipatory remedies to prevent deterioration of the financial condition of insurance
companies well before insolvency or inability to meet its obligations can occur, should
not be jeopardized or superseded by the Bankruptcy Act.

Testimony of Frank Kennedy, Hearings on H.R. 31 and H.R. 32, supra, pt. I, at 161-
162, 179.

Others observed that retention of the exclusion would be “consistent with the broad
congressional policies underlying the McCarran Act.” Letter from National Association
of Insurance Commissioners to Senator Quentin N. Burdick, dated February 4, 1976,
Hearings on S. 235 and S. 236, supra, pt. II, at 628-30.67
After congressional hearings, the legislation was redrafted. Both the House and Senate
determined to retain the exclusion. Section 109 (b) (2), H.R. 8200, 95th Cong., 1st
Sess. (1977); Section 109 (b) (2), S. 2266, 95th Cong., 2d Sess. l(1978). Accordingly,
the current version of Section 109(b) (2) of the Bankruptcy Code provides:

                    A person may be a debtor under chapter 7 of this title only if such
                    person is not –

66 The Commission‟s views resulted from a paper by professor Spencer L. Kimball, “Director of
Research of the American Bar Foundation, an international authority on insurance law and the draftsman
of the Wisconsin law governing liquidation of insurance companies, generally recognized as the most
sophisticated law dealing with the subject on the books of any state.” Testimony of Frank Kennedy,
Hearings on H.R. 31 and H.R. 32, supra, pt. I, at 162. His advice dissuaded the Commission from
deleting the insurance company exclusion. Id.; Commission Report, supra, pr. I, at 183-184. 223 n.12.

67 Others who testified concerning the Judge‟s and Commission‟s proposals, such as the National
Bankruptcy Conference and the Commercial Law League, while expressing no view on the merits of the
controversy, nevertheless believed that if insurance companies were to be made eligible for bankruptcy,
this should be accomplished only after further study, and not through dropping the exclusion, but by
creation of a subchapter – like those dealing with stockbrokers, commodity brokers, and railroads –
tailored to the needs of the insurance industry. See, e.g., testimony of George Treister, Hearings on H.R.
31 and H.R. 32, supra, pt. I, at 626-627; testimony of Bernard Shapiro, id., pt. II, at 975; testimony of
Lawrence King and Charles Seligson, Hearings on S.235 and S. 236, supra, pt. II, at 387-388; Report of
the Bankruptcy Committee of the Commercial Law League of America on Proposed Revisions of the
Bankruptcy Conference, Report on Insurance Companies of the Special Committee on Insurance
Companies and Foreign Banks 28 (1975) (referred to in Frank Kennedy, Commencement of a Case
Under the New Bankruptcy Code, 36 Wash. & Lee L. Rev. 977, 988 n.61 (1979)).
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                    (1)        a railroad;

                    (2)        a domestic insurance company, bank, savings bank,
                               cooperative bank, savings and loan association, building and
                               loan association, homestead association, a small business
                               investment company licensed by the Small Business
                               Investment Act of 1958, credit union, or industrial bank or
                               similar institution which is an insured bank as defined in
                               section 3(h) of the Federal Deposit Insurance Act; or

                    (3)        a foreign insurance company, bank, savings bank,
                               cooperative bank, savings and loan association, building and
                               loan association, homestead association, or credit union,
                               engaged in such business in the United States.

11 U.S.C. § 109(b). This exclusion from eligibility to file a petition under Chapter 7 of
the Bankruptcy Code extends also to Chapter 11 cases by virtue of Section 109(d),
which provides: “Only a person that may be a debtor under chapter 7 of this title,
except a stockbroker or a commodity broker, and a railroad may be a debtor under
chapter 11 of this title.” 11 U.S.C. § 109(d). The House Report noted that these
exclusions were found in “current law,” and that “insurance companies are excluded
from liquidation under the bankruptcy laws because they are bodies for which alternate
provisions is made for their liquidation under various regulatory laws. ”H.R. Rep. No.
595, 95th Cong., 1st Sess. 318 (1977). The Senate Report echoed those views. Sen.
Rep. No. 989, 95th Cong., 2d Sess. 31 (1978).

This history overview presents the rationale for the insurance company exclusion in the
present Bankruptcy Code. A primary reason was that insurance companies were
deemed to be public or quasi-public businesses, vested with a public interest. That
public interest included the protection of policyholders who, like depositors at banks,
might be particularly vulnerable to the risks of insolvency because, unlike ordinary
creditors, they might be unable to spread their losses through dealings with others.68
This might explain the priority policyholders generally receive in state insolvency


68 See In re Union Guarantee & Mortgage Co., 75 F.2d 984, 984 (2d, Cir. 1935) (the excluded entities
“are companies for profit whose businesses are now generally regarded as „affected with a public interest;‟
that is to say, as touching enough persons who must deal with them at some economic disadvantage, to
require public supervision and control”); Sims v. Fidelity Assnr. Ass’n, 129 F.2d 442, 448-449 (4th Cir.
1942) (“purpose of the exclusion . . . may be surmised to lie in the public or quasi public nature of the
business, involving other interests than those of creditors . . . [and] to protect the millions of persons who
deal with them on the faith of the protection afforded by direct governmental supervision and control”); In
re Portland Metro Health, Inc., 15 Bankr. 102, 104 (Bankr. D. Ore. 1981) (same). But sec Michael I.
Sovern, Section 4 of the Bankruptcy Act: The Excluded Corporations, 42 Minn. L. Rev. 171, 181 (1957)
(public interest test “too vague to be helpful in the resolution of a close case”).

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proceedings, a priority inimical to one of the principal goals of bankruptcy--equality of
distribution among creditors.69

Another rationale for the exclusion is the belief that when an insurance company is on
the verge of insolvency, policyholders might be skittish about paying premiums and
local authorities might preserve confidence by avoiding the “taint” of bankruptcy. 70
Presumably, the regulation occurs before and during insolvency, is conducted by
experts, and is tailored to the needs of insureds and insurers. 71 As noted above, the

69 See In the Matter of Israel-British Bank (London) Ltd., 401 F.Supp. 1159, 1173 (S.D.N.Y. 1975) (“in the
case of each type of excluded corporation, Congress might well have determined, first that social and
economic interests deserved greater consideration than the interest of equality of distribution among
creditors that the Bankruptcy Act in general seeks to achieve”), rev’d, Israel-British Bank (London) Ltd. v.
Fed. Dep. Ins. Corp., 536 F.2d 509 (2d Cir. 1976).

70 For example, the House Judiciary Committee, in approving the amendment which added building and
loan associations to the list of excluded entities, remarked:

          Building and loan associations are of a peculiar nature, associations functioning almost
          exclusively in local communities. The deposits received are from local depositors and the
          securities taken are local securities. Therefore, it seems the part of wisdom to leave the
          administration of these matters in the local courts. . . . As the law now is, it is possible for
          a disgruntled stockholder in a building and loan association under certain conditions to file
          a petition against the association involving the bankruptcy law. While the courts have
          been considerate in protecting the interest of these associations, yet in times of
          uncertainty the filing of a petition virtually ruins the associations and destroys the savings
          and off times seriously impairs the securities of the association.

H.R. Rep. No. 98, 72d Cong., 1st Sess, 1-2 (1932) (quoted in Security Building & Loan Ass’n v. Spurlock,
65 F.2d 768, 771 (9th Cir. 1933)).

71 The virtues of local, experienced regulation during insolvency proceedings for insurance companies
have been extolled by certain commentators. Professor Clark, for example, has stated:

          The theory behind special insolvency proceedings for financial intermediaries appear not
          to have received careful and sustained attention. A [guaranty fund‟s] interest in
          minimizing its losses might be thought to justify putting its agents in charge of the
          proceeding, as is often done. It is simply too inefficient always to meet the insurance
          obligation by direct payments to public suppliers of capital. Other techniques, such as
          arranging an acquisition of the failed institution by a strong one, may reduce losses but
          require the [guaranty fund] to be in control of the situation. Moreover, there is a felt need
          for ensuring that conservators, receivers, and liquidators with a special expertise in
          esoteric financial matters will be appointed. And certainly it will facilitate either
          reorganization or liquidation if regulators, who are familiar with the institution‟s assets,
          liabilities, and problems during the final days are put in charge of the post mortem and
          the disposition of the estate. The procedure may also reflect an appreciation of the need
          for speed in reorganization or liquidation of a financial intermediary, so that situations like
          a failure of confidence on the part of public suppliers or a failure to continue premium
          payments will not force numerous liquidation sales at distress prices. Another possibility
          is that official regulators of financial intermediaries, or persons appointed by them as
          conservators or receivers, will be better able to discover the insider misconduct that
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                                                     - 156 -
legislative history of the current Bankruptcy Code explains only that banking institutions
and insurance companies are excluded from bankruptcy laws because alternate
provision is made for their liquidation under various regulatory laws. H.R. Rep. No. 989,
95th Cong., 1st Sess. 318 (1977).72




          contributed to the failure. Regardless of whether special insolvency proceedings always
          produce positive benefits that ordinary federal bankruptcy proceedings do not, it is quite
          definitely probable that they are less costly and less cumbersome.

R. Clark, The Soundness of Financial Intermediaries, 86 Yale L.J. 1, 99-100 (1976). Professors Seligson
and King agree:

          Those corporations that are totally excluded from the operation of the Act are of such a
          nature that they are otherwise regulated. All are public or quasi public entities which exist
          and are controlled under state or federal statutes having separate provisions for
          liquidation. In the event such liquidation is required, many members of the public may be
          affected because of the service rendered and an expert in the particular sphere of activity
          is in the best position to supervise the salvation or dissolution of the enterprise. Thus an
          insurance company is usually under the close scrutiny of a state insurance department
          and the Superintendent of Insurance is better qualified to regulate the operations of the
          company than a court of bankruptcy. . . . It was obviously felt by Congress that all other
          types of corporations do not need special handling and may be competently administered
          in the bankruptcy courts, especially without adversely affecting the rights or convenience
          of the general public.

Seligson and King, Jurisdiction and Venue in Bankruptcy, 36 J. Nat‟l Ass‟n Ref. Bankr. 36, 38 (1962).

72 The alternate regulation theory for the exclusion also has been questioned. See, e.g., Samuels,
Unregulated Foreign Banks in Bankruptcy: Section 4 of the Bankruptcy Acts, 23 N.Y.L. Sch. L. Rev. 47
(1977): Michael I. Sovern, Section 4 of the Bankruptcy Act: The Excluded Corporations, 42 Minn. L. Rev.
171, 181 (1957).
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Construing the Term “Insurance Company " for Purposes of the Bankruptcy
Exclusion

The term “insurance company,” as used in the exclusionary provision, is not defined in
the Bankruptcy Code, but courts have developed two principal lines of cases construing
the term. The first group of cases views the definition of insurance company as a
question of federal law, independent of state classifications. The second group
emphasizes state classifications, which may occur by legislative enactment, judicial
opinions, or administrative regulations. Where classification is ambiguous, however,
courts have examined the actual activities, instead of de jure powers, of a debtor to
determine whether its conduct is that of an “insurance” business.

The tests are not consistently applied in the bankruptcy cases and, in any event, courts
assign varying weight to the various factors. The two tests are summarized in a leading
bankruptcy treatise as follows:

                    There appear to be no clear rules for determining whether a
                    particular corporation falls within the [exclusion]. . . . Two available
                    approaches to the problems have been suggested and used at
                    times by the court: (1) a classification based upon the law of the
                    state of incorporation; and (2) an independent classification by the
                    bankruptcy courts based upon their own definition of the words of
                    the Bankruptcy Code. Although the first mentioned of these
                    approaches, commonly called the “state classification test,” is more
                    favored by the courts, this does not mean that state law is followed
                    literally without regard for the real activities of the corporation,
                    particularly where the corporation has failed to use the powers
                    conferred on it by its charter or has developed into a different type
                    of corporation. Nor does the fact that a state may have provided
                    for state supervision and liquidation of a kind of corporation by itself
                    bring such a business into the excepted class.

2 Collier on Bankruptcy § 109.03[3][b], at 109-16 to -17 (15th rev. ed. 1996).

The issue of whether an entity is an “insurance company” and thus ineligible for
bankruptcy protection has arisen most frequently in connection with bankruptcy
petitions filed by health maintenance organizations (“HMOs”0. HMOs have several
indicia of insurance companies, and some courts have concluded that an HMO is an
insurance company for purposes of the bankruptcy exclusion. 73 Other courts have
reached the opposite conclusion.74

73 For instance, in Matter of Estate of Medcare HMO, 998 F.2d 436 (7th Cir. 1993), the Seventh Circuit
held that an Illinois HMO was not eligible to file a petition for relief under the Bankruptcy Code. The court
combined elements of the two traditional tests described above and stated that “absent express
classification under section 109 . . . the classification of an entry should generally follow the law of the
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state of its incorporation, so long as that classification does not frustrate the purposes of the [Bankruptcy]
Code.” Medcare, 998 F.2d at 442. See also In re Portland Metro Health Inc., 15 B.R. 102 (Bankr. D. Ore.
1981) (HMO ineligible for bankruptcy); In re Beacon Health Inc., 105 B.R. 178 (Bankr. D.N.H. 1989)
(same).

74 Under the case name In re Family Health Services, Inc., the bankruptcy court for the Central District of
California jointly administered a series of bankruptcy cases involving 48 affiliated HMO debtors commonly
and collectively known as “Maxicare.” The court applied the state classification and independent
classification tests and concluded that the Maxicare HMOs in Texas, Arizona and Louisiana could not be
characterized as insurance companies under their respective state laws, and that Congress had not
intended to classify HMOs as insurance companies. In re Family Health Services, Inc., 101 B.R. 618
(Bankr. C.D. Cal. 1989) (Texas); In re Family Health Services, Inc., 101 B.R. 636 (Bankr. C.D. Cal. 1989)
(Louisiana). Later, the bankruptcy court reached the same result as to an Illinois HMO that also did
business in Indiana and Ohio, and a Wisconsin HMO – although the district court on appeal reversed as to
the Wisconsin HMO, holding that under Wisconsin law an HMO was an insurance company. In re Family
Health Services, Inc., 104 B.R. 268 (Bankr. C.D. Cal. 1989) (Illinois, Indiana and Ohio): In re Family
Health Services, Inc., 104 B.R. 279 (Bankr. C.D. Cal. 1989) (Wisconsin), rev’d, 143 B.R. 232 (C.D. Cal.
1992). See also, Matter of Michigan Master Health Plan Inc., 90 B.R. 274 (E.D. Mich. 1985) (Michigan
HMO eligible for bankruptcy relief based on Michigan Attorney General‟s opinion that HMO was not an
insurance company under Michigan law); In re Grouphealth Partnership Inc., 137 B.R. 593, 599 (Bankr.
E.D. Pa. 1992) (Pennsylvania HMO eligible for bankruptcy based on position of Pennsylvania Insurance
Department‟s position that, “for practical reasons . . . its participation in the liquidation of the debtor would
not represent a prudent use of its resources”).
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                                               Appendix F

                 Model Legislation to Improve State Insurance Receiverships

A.        Authorization of Special Masters

The following is a proposed amendment to the NAIC Model Liquidation Act, which
should be adopted into the state insurance liquidation laws.

Within six months, or at the end of the calendar year if it is not more than six
months, following the receiver’s appointment, and thereafter at regular annual
year-end intervals, following the appointment of a Receiver, the Receivership
Court shall appoint a qualified special master to determine if the Receiver and his
deputies are handling the estate as required by statute and in the most efficient
and cost-effective manner consistent with the best interests of policyholders,
creditors and the public.

In making this determination, the special master will conduct a thorough
evaluation, which shall include but not be limited to the following activities of the
Receiver:

          a.        Marshaling of assets;
          b.        Use of outside legal counsel and other experts;
          c.        Determination of liabilities and payment of claims;
          d.        Working relationships with regulators, other receivers, guaranty
                    funds and creditors.

B.        Authorization of Privatization of Insurance Receiverships

                                       Amended Section 3;
                                     Amended Section 9; and
                                      Proposed New Section
                                                Of
                     The NAIC Insurers Rehabilitation and Liquidation Model Act

I.        Amended Section 3 (Definitions)
          New Subsection “A”:

          A. “Receivership Oversight Panel” means any panel constituted pursuant to
          Section   hereof.
II.       Amended Section 9 (Immunity and Indemnification)
          New Subsection 9 A.(3)



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          9 A.(3) All persons who serve on any Receivership Oversight Panel
                constituted pursuant to Section        hereof. For purposes of this
                Section 9, such persons shall be accorded the same protections as
                are provided herein to any receiver or any employee of a receiver.

III.      Proposed Section                     (New)

          Section            Receivership Oversight Panel (New)

          A.     For each insurer insolvency, a Receivership Oversight Panel shall be
          formed, in accordance with the provisions of Subsection C, in the insolvent
          insurer‟s state of domicile within      days following the declaration of insolvency
          and issuance of the final order of liquidation.

          B.     The primary purposes of the Receivership Oversight Panel shall be the
          following:

                    1.         Recommend to the receivership court a person or entity,
                               based on their qualifications and expertise, to act as deputy
                               receiver for the insolvent insurer‟s estate.

                    2.         Recommend to the receivership court the (a) terms and
                               conditions of employment of any person proposed to serve
                               as deputy receiver; and (b) terms and conditions of
                               termination of employment of any person who has served in
                               such capacity.

                    3.         Undertake a periodic review, not less frequently than annual,
                               of the administration of the estate, including a financial
                               report, and report its findings to the receivership court and
                               the commissioner in writing. The first such report for each
                               estate shall be submitted to the commissioner no later than
                               days following the declaration of insolvency and final
                               liquidation order. The commissioner or the receivership
                               court may request that the Receivership Oversight Panel
                               review and report on specific matters.

                    4.         Monitor the development and implementation of any
                               distribution plans proposed for use by the special deputy
                               receiver, including but not limited to:
                               (a)     early access plans;
                               (b)     interim distribution plans;
                               (c)     claims estimation plans; and
                               (d)     early closing plans

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                    5.         Provide the receivership court, commissioner, deputy
                               receiver, creditors, participating reinsurers, and participating
                               guaranty funds with a centralized resource facility for the
                               development of recommended solutions for resolving
                               disputes associated with the administration and termination
                               of the insolvent insurer‟s estate.

                    6.         Undertake any other activity approved by the receivership
                               court which is consistent with orderly and efficient
                               administration of the insolvent insurer‟s estate.

          C.        Membership on any Receivership Oversight Panel shall consist of three
                    persons who are representatives of the following:

                    1.         The insurance commissioner of the insolvent insurer‟s state
                               of domicile;

                    2.         The state guaranty funds affected by the insolvency, other
                               than the state of domicile; and

                    3.         The Special Master appointed by the receivership court.

          D.        The period of panel membership for each member shall be for a minimum
                    of three years.

          E.        Each panel member shall be subject to the approval of the receivership
                    court. Any vacancy in memberships shall be filled by a replacement
                    appointment no later than  days following creation of the vacancy.

          F.        Once appointed, a panel member may be removed only upon a showing
                    of good cause and with the approval of the receivership court.

          G.        With the exception of the Special Master, the members of the
                    Receivership Oversight Panel shall serve without compensation.
                    However, their reasonable expenses shall be reimbursed out of general
                    assets of the estate upon presentation of appropriate documentation to,
                    and the approval of, the receivership court.

          H.        The Receivership Oversight Panel shall have standing to participate and
                    be heard in connection with an aspect or proceeding associated with the
                    administration or termination of the insolvent insurer‟s estate. However,
                    such standing shall have no effect upon any separate right of any other
                    party to participate or be heard.


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                                                   Chapter 8
                                                   The Plan

                                                   Subchapter I
                                        Filing and Court Approval of Plan

§ 801 Who May File a Plan

          A.        Except as otherwise provided in this section, only the receiver may file a
                    plan within one year after the earlier of the date of the order of
                    rehabilitation or liquidation under this Act.

          B.        Any party in interest may file a plan if and only if:

                    (1)        the receiver has not filed a plan within one year after the
                               earlier of the date of the order of rehabilitation or liquidation
                               under this Act; or

                    (2)        the receiver has not filed a plan that has been approved by
                               the receivership court, within eighteen months after the
                               earlier of the date of the order of rehabilitation or liquidation
                               under this Act.

          C.        On request of a party in interest made within the respective periods
                    specified in subsections B(1) and B(2) of this section and after such notice
                    as the receivership court deems appropriate, the receivership court may
                    for cause reduce or increase the time periods of either subsection.

          D.        Once a plan has been filed, any party in interest may object to the plan or
                    propose modifications to it.

§ 802 Contents of a Plan75

          A.        A plan shall:

                    (1)        except as provided at subsection E of this section, provide
                               the same treatment for each claim or interest of a particular
                               class, unless the holder of a particular claim or interest
                               agrees to a less favorable treatment of such particular claim
                               or interest;

                    (2)        provide adequate means for the plan‟s implementation; and


75 Source: Mich. Comp. Laws §500.8114, Powers of the rehabilitator, subsection (4).
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                    (3)        contain adequate information concerning the financial
                               condition of the insurer and the operation and effect of the
                               plan, in sufficient detail as far as is reasonably practicable in
                               light of the nature and history of the insurer, the condition of
                               the insurer‟s books and records and the nature of the plan.
                               Alternatively, the plan itself may identify the sources of such
                               information as contained in the document depository
                               established pursuant to section 511 of this Act.

                    (4)        Provide for the transfer of books, records, documents and
                               other information relevant to the duties and obligations
                               covered by the plan;

                    (5)        Provide for the notice to parties in interest of the provisions
                               of the plan and an opportunity to be heard; and

                    (6)        Provide for the termination of the receivership proceedings
                               and discharge of the receiver, if appropriate.

          B.        A plan may include any other provisions not inconsistent with the
                    provisions of this Act, including, but not limited to:

                    (1)        payment of a dividend pursuant to section 805;

                    (2)        assumption or reinsurance of all or a portion of the insurer‟s
                               remaining liabilities by, and transfer of assets to, a licensed
                               insurer or other entity;

                    (3)        to the extent appropriate, provide for application of
                               insurance company regulatory market conduct standards to
                               any entity administering claims on behalf of the receiver or
                               assuming direct liabilities of the insurer;

                    (4)        contracting with a state guaranty association or any other
                               qualified entity to perform the administration of claims
                               covered and/or not covered by guaranty associations; and

                    (5)        a provision for annual independent financial and
                               performance audits of any entity administering claims on
                               behalf of the receiver which is not otherwise subject to
                               examination pursuant to state insurance law;

                    (6)        termination of the insurer‟s liabilities as of a date certain.


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          C.        If the receivership court has entered an order of liquidation pursuant to
                    this Act, any plan may include provisions which:

                    (1)        establish a Liquidating Trust pursuant to section 806;

                    (2)        establish one or more Reinsurance Recoverable Trusts
                               pursuant to sections 807 and 809; or

                    (3)        require mandatory negotiation and arbitration procedures
                               pursuant to section 809.

          D.        If the insurer has provided life or health insurance products or annuities,
                    the plan may modify and restructure policies and insurance contracts or
                    provide substitute policies or contracts of insurance.

          E.        As to claims which are classified under subsections B, D or E of section
                    713, a plan may designate and separately treat one or more separate
                    sub-classes consisting only of those claims within such classes that are
                    for or reduced to de minimis amounts. A de minimis amount shall be any
                    amount equal to or less than a maximum de minimis amount approved by
                    the receivership court as being reasonable and necessary for
                    administrative convenience.76

§ 803 Receivership Court Approval of Plan77

          A.        After notice and a hearing, the receivership court shall approve a plan
                    only if it finds that:

                    (1)        the plan complies with the applicable provisions of this Act;
                               and

                    (2)        with respect to each class of claims, each claimant of such
                               class will receive or retain under the plan on account of
                               such claim property of a value, as of the effective date of the
                               plan, that is not less than the amount that such claimant
                               would receiver or retain if the insurer were liquidated within a
                               time period that is reasonable.


76    This subsection is a departure from the current Michigan/Model Act provisions which prohibit
subclassification within a class. The function of the provision is to enable a receiver to dispose of those claims
that are small enough that it is more economical to pay them $X to resolve them, $X being something other
than the treatment proposed for the general population of the class.

77 Mich. Comp. Laws §500.8114, Powers of the rehabilitator, subsection (4).
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                                                    - 165 -
          B.        Notwithstanding any other provision of this chapter, if the plan proposes to
                    restructure or substitute policies or contracts of life or health insurance or
                    annuity contracts, the receivership court may not approve the plan unless
                    each guaranty association whose obligations are affected in any way by
                    such modification or restructuring or substitution has given its written
                    consent thereto.

§ 804 Effect of Receivership Court Approval of Plan

          A.        Upon its entry, the provisions of a plan and the order approving it bind the
                    insurer, any entity acquiring property under the plan, all policyholders,
                    creditors and equity holders of the insurer.

          B.        Except as provided in the plan or in the order approving the plan, after
                    court approval of a plan, the property dealt with by the plan shall be free
                    and clear of all claims and interests of creditors and equity holders of the
                    insurer.

§ 805 Partial and Final Distributions or Dividends

          A.        Pursuant to a plan, a receiver may declare and pay a partial or final
                    distribution or dividend to claimants whose claims have been allowed as
                    provided in Chapter 7, or fixed as provided in subsection C of this section.

          B.        In determining the percentage of distributions or dividends to be paid on
                    such claims, the receiver may consider the estimated value of the
                    insurer‟s assets (including estimated reinsurance recoverables in
                    connection with the insurer‟s estimated liabilities reinsurance recoverables
                    in connection with the insurer‟s estimated liabilities for unpaid losses and
                    loss expenses and for incurred but not reported losses and loss
                    expenses) and the estimated value of the insurer‟s liabilities (including
                    estimated liabilities for unpaid losses and loss expenses and for incurred
                    but not reported losses and loss expenses).

          C.        The estimation authorized pursuant to this section may be used for
                    purposes of fixing a creditor‟s claim in the estate and for determining the
                    percentage of a partial or final distribution or dividend.

          D.        Nothing in this section or any other section of this Act, shall be construed
                    as authorizing the receiver, or any other entity, to compel payment from a
                    reinsurer on the basis of estimated incurred but not reported losses or
                    loss expenses, or, except with respect to claims allowed pursuant to
                    section 705, case reserves for unpaid losses and loss expenses. The
                    obligation of reinsurers to make payments to the insurer shall be

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                    determined on the basis of reported claims that have been allowed
                    pursuant to chapter 7 of this Act.

§ 806 Transfer of Assets and Liabilities to Liquidating Trust

          If there has been an order of liquidation entered in the receivership proceeding
          then pursuant to a plan, a receiver may establish one or more liquidating trusts.
          In the case of a liquidating trust established in connection with a plan for a
          property and casualty insurer:

          A.        Some or all of the insurer‟s assets and liabilities may be transferred to
                    such trust.

          B.        For purposes of this section:

                    (1)        A “Future Claim” under this section is one which is incurred
                               but not reported to the insurer as of the date the Liquidating
                               Trust is established pursuant to this section.

                    (2)        A “Future Claimant” under this section is a person who has,
                               or may have, a future claim against the insurer.

          C.        The receiver may declare and pay distributions or dividends as provided in
                    section 805 while reserving for the benefit of Future Claimants a similar
                    percentage dividend to be paid on Future Claims in accordance with
                    subsection D of this section.

          D.        Future Claimants may share in the proceeds of the Liquidating Trust only
                    when and to the extent, that any Future Claim is allowed pursuant to
                    chapter 7 of this Act.

          E.        The receiver may petition the court for the appointment of a Future Claim
                    Representative who shall have the power to represent the interests of
                    those who may assert Future Claims against the insurer. Notwithstanding
                    this subsection, a Future Claimant may elect to represent his, her or its
                    own interests and may opt out of being represented by the Future Claims
                    Representative.

          F.        The liquidator may terminate liquidation proceedings and/or dispose of
                    property free and clear of the obligation to Future Claimants or any other
                    individual or entity as long as such property was disposed of in
                    accordance with this section and other applicable provisions of a
                    Liquidation Plan authorized by section 802.

§ 807 Collateralization of Case Reserves and Incurred But Not Reported Losses
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          A.        Upon the entry of a receivership order, and continuing thereafter,
                    reinsurers that are required to collateralize their obligations to the insurer
                    pursuant to contract or section [cite state credit for reinsurance law] shall
                    be required to maintain such collateralization in accordance with the terms
                    of the applicable law or contract.

          B.        Any dispute concerning the appropriate amount of collateral shall be
                    determined in accordance with the procedure established in section 809B.

§ 808 Commutations

          A.        The receiver may, in his or her discretion, enter into a voluntary
                    commutation and release of all obligations arising from reinsurance
                    agreements entered into by the insurer, subject to the approval of the
                    court.

          B.        Nothing in this section, or any other provision of this Act, shall be
                    construed to override or impair any provision in a reinsurance agreement
                    which establishes a commercially reasonable and actuarially sound
                    method for valuing and commuting the obligations of the parties to the
                    reinsurance agreement; provided, however, that such commutation
                    provision shall not be effective if it is demonstrated to the court that at the
                    time such provision was entered into, the parties had reasonable cause to
                    believe that the insurer was insolvent or was about to become insolvent.
                    Any such contractual commutation provision entered into within one year
                    of the liquidation order of the insurer shall be rebuttably presumed to have
                    been entered into with reasonable cause to believe that the insurer was
                    insolvent or about to become insolvent.

§ 809 Mandatory Negotiation and Arbitration

          A.(1) The receiver may apply to the court, with notice to the other party to
                the reinsurance agreement, for an order requiring the parties to
                submit to a mandatory negotiation and arbitration procedure in
                accordance with subsection B of this section, if:

                    (a)        The ratio of the insurer‟s actuarially estimated
                               casualty losses to he sum of (i) reported claims on
                               casualty losses allowed by the receivership court and
                               (ii) actuarially estimated casualty losses is 25% or
                               less; or



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                    (b)        The reinsurer‟s total adjusted capital is at or below
                               200% of its authorized control level for risk-based
                               capital purposes.

              (2)              For purposes of this subsection

                    (a)        “Casualty losses” means the insurer‟s aggregate
                               losses arising out of insurance contracts in the
                               following lines: Farm owners Multiperil, Homeowners
                               Multiperil, Commercial Multiperil, Medical Malpractice,
                               Workers‟ Compensation, Other Liability, Products
                               Liability, Auto Liability, Aircraft (all peril) and
                               International (of the foregoing lines).

                    (b)        “Actuarially estimated casualty losses” means
                               actuarially estimated incurred but not reported
                               casualty losses and estimated case reserves for
                               claims not yet allowed by the court.

          B.(1) Within ninety days of the court‟s order pursuant to subsection A of
                this section, or from the date that either party to a reinsurance
                agreement demands arbitration pursuant to section 807B, each
                party shall provide the other party with an estimate of the liabilities
                between the parties and all relevant documents and other
                information supporting the estimate, including but not limited to:
                underlying premium, commission and loss data; estimated incurred
                but not reported losses; projected ultimate payout; net present
                value and the discount factor proposed.

            (2)     If the parties are unable to reach agreement within ninety days
                    following the submission of materials required in paragraph (1) of
                    this subsection, either party may initiate the arbitration procedure
                    set forth in paragraph (3) of this subsection by providing the other
                    party with a demand for arbitration. A copy of the demand shall be
                    promptly provided to the court by the liquidator.

            (3)     Venue for the arbitration shall be within the district of the court‟s
                    jurisdiction or such other location as may be agreed to by the
                    parties.

                    (a)        Within thirty days of the responding party‟s receipt of
                               the arbitration demand, each party shall appoint an
                               arbitrator who is a disinterested active or inactive
                               officer, executive or other professional with no less
                               than ten years‟ experience in or serving the insurance
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                               or reinsurance industry. The two arbitrators shall
                               appoint an independent, impartial, disinterested
                               umpire who is an active or inactive officer or
                               executive of an insurance or reinsurance company. If
                               the arbitrators are unable to agree on an umpire,
                               each arbitrator shall provide the other with the names
                               of three qualified individuals, each arbitrator shall
                               strike two names from the other‟s list and the umpire
                               shall be chosen by drawing lots from the two
                               remaining individuals.

                    (b)        Within sixty days following the appointment of the
                               umpire, the parties shall, unless otherwise ordered by
                               the panel, submit to the arbitration panel their
                               estimates of the liabilities between the parties and
                               other documents and information relevant to the
                               determination of the parties‟ rights and obligations
                               under the reinsurance agreements, including but not
                               limited to: underlying premium, commission and loss
                               data; estimated incurred but not reported losses;
                               projected ultimate payout; net present value and the
                               discount factor proposed.

                    (c)        The arbitration panel shall issue an award with
                               respect to the parties‟ obligations and the court shall
                               confirm such award absent proof of statutory grounds
                               for vacating or modifying arbitration awards under the
                               Federal Arbitration Act.

                    (d)    The time periods set forth in this subsection may be
                           extended upon mutual agreement of the parties.
          C.        Within 30 days of the issuance of the award pursuant to a receiver‟s
                    application under subsection A(1) of this section in an arbitration
                    commenced pursuant to section 807B over the appropriate amount of
                    collateral, either the reinsurer shall post additional collateral or the insurer
                    shall release collateral, as necessary to bring the actual amount of the
                    collateral to the amount provided for in the arbitration panel‟s award.

          D.        Within thirty days of issuance of the award entered pursuant to a
                    receiver‟s application under subsection A(1) of this section, the reinsurer
                    shall give notice to the receiver that it

                    (1)        opts to voluntarily commute its liabilities to the insurer for the
                               amount of the award in return for a full and complete release

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                               of all liabilities between the parties, whether past, present or
                               future, or

                    (2)        opts not to commute its liabilities to the insurer, in which
                               case the reinsurer shall establish a Reinsurance
                               Recoverable Trust in the amount of 102 percent of the
                               award. The trust shall be established and maintained in
                               accordance with section 810A. The reinsurer shall pay the
                               costs and fees associated with establishing and maintaining
                               the trust.

          E.        If the reinsurer notifies the receiver that it opts to commute its liabilities
                    pursuant to subsection D(1) of this section, the receiver shall have thirty
                    days to

                    (1)        accept the reinsurer‟s offer and tender to the reinsurer a
                               proposed commutation and release agreement providing for
                               a full and complete release of all liabilities between the
                               parties, whether past, present or future; or

                    (2)        reject the reinsurer‟s offer in exchange for the reinsurer‟s
                               establishment of a Reinsurance Recoverable Trust. If the
                               reinsurer‟s offer to commute is rejected by the receiver in
                               accordance with this paragraph, the insurer shall share
                               equally in the costs and fees associated with establishing
                               and maintaining the trust and the receiver shall not initiate
                               procedures pursuant to this section for a period of five years
                               from the date of the receiver‟s notification pursuant to this
                               subsection, provided that the receiver and reinsurer may still
                               initiate procedures pursuant to section 810E.

§ 810 Reinsurance Recoverable Trust Provisions

          A.        As used in this section:

                    (1)        “Beneficiary” means the domiciliary insurance commissioner,
                               as receiver of the insurer for whose sole benefit a
                               Reinsurance Recoverable Trust is established.

                    (2)        “Grantor” means the reinsurer who has established a
                               Reinsurance Recoverable Trust for the sole benefit of the
                               beneficiary.

                    (3)        A “qualified U.S. financial institution” means an institution
                               that:
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                               (a)       is organized, or in the case of a U.S. branch or
                                         agency office of a foreign banking
                                         organization, licensed under the laws of the
                                         United States or any state thereof and has
                                         been granted authority to operate with fiduciary
                                         powers; and

                               (b)       is regulated, supervised and examined by
                                         federal or state authorities having regulatory
                                         authority over banks and trust companies.

                    (4)        “Reinsurance Recoverable Trust” means a trust established
                               pursuant to section 809 of this Act.

          C.        The trust agreement governing a Reinsurance Recoverable Trust shall:

                    (1)        be entered into between the beneficiary, the grantor and a
                               trustee, which shall be a qualified United States financial
                               institution;

                    (2)        create a trust account into which assets shall be deposited
                               in accordance with section 809 of this Act. All assets in the
                               trust account shall be held by the trustee at the trustee‟s
                               office in the United States;

                    (3)        provide that the beneficiary shall have the right to withdraw
                               assets from the trust, only:

                               (a)       if the claim was a reported claim allowed by
                                         the court pursuant to chapter 7; and

                               (b)       where the beneficiary has notified the grantor,
                                         in writing, of the court‟s allowance of the claim;
                                         and

                               (c)       if and to the extent that the amount to be
                                         withdrawn exceeds any setoff, permitted by
                                         section 611, due to the grantor; and

                               (d)       where sixty days has expired during which the
                                         grantor has failed to either pay the claim or file
                                         notice of a written dispute with respect to the
                                         claim in accordance with the terms of the
                                         reinsurance agreement; or
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                               (e)       if the beneficiary has complied with any
                                         different or other terms and conditions mutually
                                         agreed to by the beneficiary and the grantor in
                                         the trust agreement.

                    (4)        require the trustee to:

                               (a)       receive assets and hold all assets in a safe
                                         place;

                               (b)       determine that all assets are in such form that
                                         the beneficiary, or the trustee upon direction by
                                         the beneficiary, may whenever necessary
                                         negotiate any such assets, without consent or
                                         signature from the grantor or any other person
                                         or entity;

                               (c)       furnish to the grantor and the beneficiary a
                                         statement of all assets in the trust account
                                         upon its inception and at intervals no less
                                         frequent than the end of each calendar
                                         quarter;

                               (d)       notify the grantor and the beneficiary within ten
                                         days, of any deposits to or withdrawals from
                                         the trust account;

                    (5)        be made subject to and governed by the laws of this state;

                    (6)        prohibit the invasion of the trust corpus for the purpose of
                               paying compensation to, or reimbursing the expenses of the
                               trustee;

                    (7)        provide that the trustee shall be liable for its negligence,
                               willful misconduct or lack of good faith;

                    (8)        provide that the trustee may resign upon delivery of a written
                               notice of resignation, effective not less than ninety days after
                               the beneficiary and grantor receive the notice and that the
                               trustee may be removed by the grantor by delivery to the
                               trustee and the beneficiary or a written notice of removal,
                               effective not less than ninety days after the trustee and the
                               beneficiary receive the notice, provided that no such
                               resignation or removal shall be effective until a successor
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                               trustee has been duly appointed and approved by the
                               beneficiary and the grantor and all assets in the trust have
                               been duly transferred to the new trustee;

                    (9)        provide that the grantor shall have the full and unqualified
                               right to vote any shares of stock in the trust account.
                               Subject to other provisions of this section, any interest or
                               dividends paid on shares of stock or other obligations in the
                               trust account, shall remain in the trust;

                    (10)       specify categories of investments reasonably acceptable to
                               the beneficiary and authorize the trustee to invest funds and
                               to accept substitutions, by the grantor, that the trustee
                               determines are at least equal in market value to the assets
                               withdrawn provided that no investment or substitution shall
                               be made without prior approval from the beneficiary, which
                               shall not be unreasonably or arbitrarily withheld;

                    (11)       provide that the beneficiary may at any time designate a
                               party to which all or part of the trust assets are to be
                               transferred. Transfer may be conditioned upon the trustee
                               receiving, prior to or simultaneously, other specified assets;

                    (12)       specify the types of assets that may be included in the trust
                               account which shall consist only of cash in United States
                               dollars, certificates of deposit issued by a United States
                               bank and payable in United States dollars, and investments
                               permitted by this State‟s Insurance Act or any combination
                               of the above, provided investments in or issued by any entity
                               controlling, controlled by or under common control with
                               either the grantor or the beneficiary of the trust shall not
                               exceed five percent of total investments. Assets deposited
                               in the trust account shall be valued according to their current
                               fair market value;

                    (13)       give the grantor the right to seek approval from the
                               beneficiary which shall not be unreasonably or arbitrarily
                               withheld, to withdraw from the trust account all or any part of
                               the trust assets and transfer those assets to the grantor,
                               provided that

                               (a)       the grantor shall, at the time of withdrawal,
                                         replace the withdrawn assets with other
                                         qualified assets so as to maintain at all times
                                         the deposit in the required amount; or
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                               (b)       after withdrawal and transfer, the market value
                                         of the trust account is no less than 102 percent
                                         of the award made pursuant to section
                                         809B(2)(c).

                    (14)       provide for the return of any amount withdrawn in excess of
                               the actual amounts required for payment of reported allowed
                               claims under paragraph (3) of this subsection, and for
                               interest payments at a rate not in excess of the prime rate of
                               interest on the excess amounts withdrawn;

                    (15)       provide for termination of the Reinsurance Recoverable
                               Trust in accordance with subsection F.

          D.        Nothing in this subsection shall be construed as altering the rights or
                    obligations of the parties pursuant to contractual and statutory provisions
                    providing for notice and the determination of claims.

          E.        The grantor shall, prior to depositing assets with the trustee, execute
                    assignments or endorsements in blank, or transfer legal title to the trustee
                    of all shares, obligations or any other assets requiring assignments, in
                    order that the beneficiary, or the trustee upon the direction of the
                    beneficiary, may whenever necessary negotiate these assets without
                    consent or signature from the grantor or any other entity.

          F.        Either party may request that an arbitration panel review the amount held
                    in a Reinsurance Recoverable Trust. The receivership court may order
                    such review upon a demonstration that the amount in trust is either twenty
                    five percent or more deficient or twenty five percent or more in excess of
                    the reinsurer‟s liabilities to the insurer. Upon such a demonstration,
                    parties shall reinitiate the procedures established in section 809B.

          G.        A Reinsurance Recoverable Trust shall terminate upon the earlier of

                    (1)        the court approval of a voluntary commutation between the
                               grantor and the beneficiary pursuant to section 808;

                    (2)        the mutual agreement of the grantor and the beneficiary; or

                    (3)        a finding by the court that the grantor has discharged its
                               liabilities to the beneficiary.



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                    Upon termination of the trust account, all assets not previously withdrawn
                    by the beneficiary, pursuant to paragraph B(3), shall, with written approval
                    of the beneficiary, be delivered over to the grantor.

§ 811 Liquidating Trust Provisions

          A.        As used in this section:

                    (1)        “Beneficiary” means the creditors of the insurer for whose
                               sole benefit the Liquidating Trust is established.

                    (2)        “Grantor” means the domiciliary insurance commissioner, as
                               receiver of the insurer, or his or her designee

                    (3)        A “qualified U.S. financial institution” shall have the same
                               meaning as that term has in section 810.

                    (4)        “Liquidating Trust” means a trust established pursuant to
                               section 806 of this Act.

          B.        A Liquidating Trust shall be established by the grantor for the benefit of
                    the beneficiaries, subject to approval of the court.

          C.        A trust agreement governing a Liquidating Trust shall be entered into
                    between the grantor and the trustee, which shall be a qualified United
                    States financial institution.

          D.        Assets and liabilities of the insurer may be transferred to the Liquidating
                    Trust in accordance with section 806 and shall be held by the trustee at
                    the trustee‟s office in the United States.

          E.        The trust agreement entered into pursuant to subsection B shall:

                    (1)        identify the beneficiaries of the trust;

                    (2)        enumerate the authority and duties of the trust;

                    (3)        specify the types of assets and categories of investments
                               that may be held in the trust account;

                    (4)        provide that the trustee shall be liable for its negligence,
                               willful misconduct or lack of good faith;

                    (5)        be made subject to and governed by the laws of this state;

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                    (6)        provide for the compensation of the trustee and the expense
                               of establishing and maintaining the trust account;

                    (7)        provide for the distribution of trust assets to beneficiaries of
                               the trust; and

                    (8)        provide for termination of the trust and distribution of any
                               remaining assets in the trust account

                               (a)       after payments have been made to all
                                         beneficiaries,

                               (b)       when insufficient assets exist to warrant
                                         maintaining the trust, or

                               (c)       when the amount of assets in the trust to be
                                         distributed make it impractical or uneconomic
                                         to distribute to beneficiaries.

          F.        The trustee shall furnish to the grantor a statement of all assets in the rust
                    account upon its inception and at intervals no less frequent than the end
                    of each calendar quarter.




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                                                       Chapter 9
                                               Post Plan-Approval Matters

§ 901 Unclaimed and Undistributed Funds78

          A.        Distributions or dividends remaining unclaimed or unpaid in the receiver‟s
                    possession for six months after the final order of distribution shall be
                    handled as other unclaimed funds and shall be paid by the custodian
                    thereof without interest to the person entitled thereto or his or her legal
                    representative or shall be presumed abandoned and handled pursuant to
                    the provisions of the Uniform Disposition of Unclaimed Property Act.

          B.        Subject to the approval of the receivership court, after the completion of
                    all post closure activities for which moneys were reserved, any remaining
                    reserved assets as well as any other assets in the hands of the receiver,
                    that may not be practicably or economically distributed to claimants shall
                    be deposited into a segregated account to be known as the closed estates
                    fund trust account. The commissioner may use moneys held in this
                    account for paying the administrative expenses of insurers subject to this
                    Act that lack sufficient assets to allow the commissioner to perform his or
                    her duties and obligations under this Act. An annual audit of the closed
                    estate fund trust account shall be performed in accordance with section
                    512 regardless of its balance.

§ 902 Termination of Receivership Proceedings and Discharge of Receiver79

          A.        When all assets justifying the expense of collection and distribution have
                    been marshaled and distributed under this Act, the receiver shall petition
                    the receivership court to terminate the liquidation proceedings and to
                    close the estate. The receivership court may grant such other relief as
                    may be appropriate, including a full discharge of all liability and
                    responsibility of the receiver, a reservation of assets for administrative
                    expenses incurred in the closing of the estate. The receiver may
                    recommend to the court and the court shall direct which records should be
                    retained for what periods of time and which should be destroyed. 80

          B.        If the dissolution of the insurer‟s corporate existence has not previously
                    been ordered, it shall be effected by operation of law upon the discharge

78 Source: 215 ILCS. 5/210, Distribution of Assets; Priorities; Unpaid Dividends and 211.1, Termination of
Proceedings.

79 Source: Mich. Comp. Laws §500.8146, Discharge of liquidator; application to court.

80 Source: Mich. Comp. Laws §500.8148, Destruction of insurer’s records.
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                    of the receiver, absent a contrary provision in the plan approved by the
                    receivership court.

§ 903 Petition to Reopen Proceedings81

          The commissioner or other party in interest may petition the receivership court at
          any time to reopen the proceedings for good cause, including the discovery of
          additional assets. If the receivership court is satisfied that there is good cause
          for reopening, it shall so order.




81 Source: Mich. Comp. Laws §500.8147, Petition to reopen proceedings.
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