Document Sample
					                                             Fall 2002

     Promoting professionalism and ethics in the administration of insurance receiverships.
Volume 11, Number 3                                                                      Fall 2002

                                      International Association of Insurance Receivers

President’s Message

by Elizabeth A. Lovette, CIR-ML

       As I sat down to pen this column
this time last year, my office had just
placed a very large HMO in rehabilitation,
and I was operating in that “high alert”                                                           I NSURANCE R ECEIVER
state we receivers find ourselves in at
                                                                                                       Volume 11, Number 3
the onset of a particularly prickly                                                                         Fall 2002
insolvency. Ironically, as fate would have          And on a somewhat related note, the
it, I received an order just this morning      2003 Annual Insolvency Workshop has

                                                                                             In this Issue
placing a sizeable MEWA in                     been scheduled for February 5-7, 2003,
rehabilitation. I mention this for a couple    at the Marriott Rancho Las Palmas
of reasons: 1) first and foremost, I have      Resort & Spa in beautiful Rancho Mirage,
a valid reason for keeping this column         California. I say related in that rumor has   Feature Articles. . . . . . . . .
BRIEF!; and 2) as I began digging to find      it that “Special Receiverships” may be
                                                                                             Pages 10 - 14:
the materials on those funky creatures         the focal point of this workshop along        Health Insurance Scams Promoted Through
known as Association Health Plans              with other as yet unnamed topics.             Associations: A Primer
                                                                                             by Mila Kofman, J.D.
and MEWAs provided by Mila Kofman,             Thanks go to Paige Waters with
the Assistant            Professor       at    Sonnenschien Nath & Rosenthal who as          Pages 15 - 18:
                                                                                             Case Study: Lawyer Liability for Failing to
Georgetown’s Institute for Health Care         agreed to chair this event along with the     Prevent Insider Looting of a Corporate Client
Research & Policy who spoke at                 other members of her planning                 by Robert L. Brace, Esq.
IAIR’s recent Roundtable in                    committee. I know this workshop will be       Pages 17 - 18:
Philadelphia, I couldn’t help but think        every bit as scintillating as its             Insurance Exit Strategies
                                                                                             by Robert Loiseau, CIR - P&C
once again how very much I benefit             predecessors, and I encourage the
from and value the resources provided          membership to attend. Look for more           Pages 23 - 27:
                                                                                             London Market Documentation Requirements
by IAIR.                                       information to follow in the months ahead.    for Asbestos Claims: Reinsurance Contract
                                                                                             by Thomas D. Cunningham

   Thank You To The Sponsors of                                                              Departments. . . . . . . . . . . .
                                                                                             Page 2:

   The IAIR Philadelphia Meeting                                                             Message from the President
                                                                                             by Elizabeth Lovette, CIR-ML

                                                                                             Page 4:
                                                                                             View From Washington
    We would like to thank those companies and individuals who have served as                by Charlie Richardson
Patron Sponsors of our quarterly round table and reception held in Philadelphia,
                                                                                             Pages 5:
PA. It is only with the assistance of these firms that we are able to provide quality        Philadelphia NAIC Meeting Recap
educational programs to the insurance insolvency industry. Thank you.                        by Belinda Miller

                                                                                             Page 6 - 8:
Brian J. Shuff, CPA                            Quantum Consulting, Inc.                      Philadelphia IAIR Meeting Recap
Indianapolis, IN                               Brooklyn, NY                                  by Robert Loiseau, CIR - P & C

                                                                                             Page 7:
Colodny, Fass, Talenfeld, Karlinsky & Abate,   Reinsurance Association of America            IAIR Roundtable Schedule
P.A.                                           Washington, D.C.                              Pages 19 - 20:
Ft. Lauderdale, FL                                                                           Receivers’ Achievement Report
                                               Robinson, Curley & Clayton PC                 by Ellen Fickinger
Genovese, Joblove & Battista, P. A.            Chicago, IL                                   Pages 21 - 22:
Miami, FL                                                                                    NAIC Summer National Meeting
                                               Tharp and Associates, Inc.                    by Mary Cannon Veed

Law Offices of Daniel L. Watkins               Phoenix, AZ
Lawrence, KS
                                               AND A VERY SPECIAL THANK YOU TO
Ormond Insurance & Reinsurance                 Miller, Alfano & Raspanti, P.C.
Management Services, Inc.                      Philadelphia. PA
Ormond Beach, FL                               FOR HOSTING THE RECEPTION

                                                     Fall 2002

                                                  Paid Advertisement

English & American Insurance Company Ltd increase Scheme
Payment to 30 per cent
Following consultation with the Creditors’ Committee, the Joint Scheme Administrators of English & American
Insurance Company Limited (“EAIC”), Tony McMahon and Tom Riddell, Partners in the Insurance Solutions
practice of KPMG Corporate Recovery, have increased the Scheme Payment Percentage to creditors from 25
to 30 per cent as at 1 June 2002.

The first distribution at the new rate was paid to creditors with Established Scheme Liabilities on 5 July 2002.
Following this distribution, the total amounts paid to creditors exceed US$51 million.
The Scheme Administrators estimate that the ultimate Scheme Payment Percentage may be in the range of 40
to 44 per cent. However, at this stage EAIC faces continuing uncertainty regarding its exposure to APH claims
and to reinsurance bad debt, and therefore estimates of the final Scheme Payment Percentage cannot be
given with any degree of certainty.

As at 31 March 2002 EAIC had agreed claims of US$325 million, of which US$180 million were Established
Scheme Liabilities. Over the past two years the Scheme Administrators have made substantial progress in
accelerating the agreement of claims and payment of dividends to Scheme creditors. At the same time, the
Scheme Administrators continue to pursue collections from EAIC’s reinsurers and since the inception of the
Scheme have collected over US$174 million in reinsurance recoveries.

Tony McMahon, Joint Scheme Administrator commented:
“The progress on EAIC to date has been very encouraging as evidenced by the amount that has now been
paid out to creditors. We are working hard towards an early closure of the estate within the next five years.”
A meeting of EAIC creditors has been convened for 27 August 2002 at 10:30am at KPMG LLP’s offices at 1-
2 Dorset Rise, London, EC4Y 8AE.

Creditors should call the EAIC helpline on +44 (0)1452 782600 if they have any queries regarding
the Scheme.

                        IAIR Educational Seminars
          IAIR/NCIGF Joint Seminar                                     2003 Insolvency Workshop
            November 7 - 8, 2002                                             February 6 - 7, 2003
                Henderson, NV                                      Marriot Rancho Las Palmas Resort & Spa
           Host Hotel: Hyatt Regency                                        Palm Springs, California
                                                                 Topics will include special receivership topics such as:
     For more information on this program, visit our                        Alternative Risk Transfer Vehicles
website at The agenda and registration                           Unauthorized Health Insurers
brochure will be available on the Events & Schedules                                Federal Alternatives
        page within the next several weeks.                                   Interstate Compact Legislation
                                                                                    2003 Legal Update

          For more information, visit the IAIR website at and go to the Events & Schedules page.

                                    International Association of Insurance Receivers

View From Washington                                                                                           by Charlie Richardson

    We are heading into the mid term         producers. State chartered insurers and
elections, with people playing the ever      producers would continue to be regulated
popular Washington political game of         by state regulators. 2003 may bring more
"what ifs" in connection with control of     hearings on improvements in state
the House and Senate. We probably            regulation and maybe even hearings on
should take stock of a few issues that       optional federal charter legislation.
are going to be front and center in the      Unless there is some cataclysmic event
new Congress.                                casting more significant doubt on the
                                             existing state regulatory system,
Terrorism Insurance                          Congress is likely to take its time in
      We have written about that issue in    making wholesale changes in that
several prior issues of the Receiver. As     system. But you can count on the fact
this article is being written, the Senate    that the House Financial Services
has just passed a bill to protect            Committee will continue to press for            area in 2003.
insurance companies and consumers            incremental improvement.
from future terrorist attacks.                                                               China
Disagreements over limitations on                                                                 Also last May, the National
punitive damages and other "tort reform"
                                             Sen. Sarbanes' bill is similar                  Association          of      Insurance
measures in the earlier House passed         to legislation he introduced in                 Commissioners and the China
bill being pushed by Republicans may         2000                                            Insurance Regulatory Commission
delay final legislation in conference.                                                       signed a memorandum of understanding
Business and even some labor groups,                                                         on the exchange of regulatory
with support from the White House, will      Predatory Lending                               information. Under the agreement, the
try to keep the heat on Congress to               In May, Senator Paul Sarbanes (D-          NAIC will provide technical assistance
resolve their differences, if not in this    MD), Chairman of the Senate Banking,            to Chinese regulators on the
Congress, then in early 2003.                Housing and Urban Affairs Committee,            development of model laws and
                                             introduced the "Predatory Lending               regulations, examination handbooks and
Insurance Regulation                                                                         collection and analysis of data, and may
                                             Consumer Protection Act of 2002" (SB
     On June 4, 11 and 18 a key              2438). Sen. Sarbanes' bill is similar to        exchange personnel to help train
subcommittee of the House Financial          legislation he introduced in 2000,              Chinese officials. There will be a new
Services Committee held hearings on the      although its provisions regarding               working group set up by China and the
future of insurance regulation, generally,   tightening the definition of a "high cost       NAIC to facilitate communications and
and the concepts behind proposals for        mortgage" are more rigorous. The bill           to carry out the agreements made in the
an optional federal charter, specifically.   includes a limitation on single premium         memorandum. All of this is a way of
The Financial Services Coordinating          credit insurance and would prohibit the         saying that the interaction of the United
Council, an association of some of the       up-front payment or financing of credit life,   States and China in the financial services
principal insurance trade groups (ACLI,      credit disability or credit unemployment        sector is going to increase, and
AIA and the ABIA) threw its support          insurance on a single premium basis. It         Congress is going to be watching that
behind one plan for an optional federal      is expected that this will make it more         interaction very closely.
charter. Under the new plan, there would     difficult to package such products in
be a federal insurance authority within      loans. The bill contains no federal
the Treasury Department to regulate          preemption of state laws. Again, look
federally chartered insurers and             for more hearings in the predatory lending

                                                                Fall 2002

Philadelphia NAIC Meeting Recap                                                                                      by Belinda Miller

IAIR Board of Directors Meeting               development. No decisions were made            considered by the committee before the
     The Board met on June 8 at its           on this issue, nor is there any urgency        September meeting. It is anticipated to
regular Saturday morning time and             to make decisions, but in terms of             be ready for the Board and then the
discussed primarily the fact that at the      planning for the future, the group will        general membership of IAIR hopefully by
next Quarterly NAIC meeting, the regular      probably come back with a proposal for         the annual meeting in December. You
times will be pushed back by a day and        a recommended structure for its                will receive more information on this as
a half. After figuring out what that meant    organization.                                  it develops.
in terms of room reservations, the Board           The only other major topic discussed
                                              at the Board meeting was the fact that         The Publications Committee Meeting
also discussed several upcoming
educational seminar opportunities. The        at the December annual meeting, some               The Publications Committee
Joint IAIR/NCIGF Seminar on November          new Board members need to be elected.          continues to need articles and
7 & 8 will be held in Henderson, Nevada,      Dick Darling indicated that anyone             volunteers. It does an excellent job of
and there are several locations under         wishing to serve on the Board should           producing high-quality publications, and
consideration for the 2003 Insolvency         send him an e-mail. Typically, there are       needs the help of IAIR members to keep
Workshop in January 2003. Later in            several candidates for each Board seat,        the material fresh and interesting.
2003, there may be an opportunity to          and it may take more than one try to be
have a joint session with INSOL but           elected to the Board. The qualifications       NAIC Meetings
plans are not final for this yet.             are that Board members are required to              The MARG Committees met and
     The Board considered several             be members of IAIR, and must show up           discussed time. There was a discussion
weighty financial matters. Proposed           for quarterly Board meetings. Desirable        of the need for longer sessions to get
dues for next year were discussed and         traits include significant receivership        through big issues that must be decided
a hand-out was distributed. However, the      experience.                                    before drafts can be finished. The sub-
Board members needed more time to                                                            committees are sending in material and
                                              Accreditation and Ethics Committee
consider all of the relevant information,                                                    beginning to narrow the issues, but there
                                              Meeting                                        are several issues that will need to be
so the topic will be brought up again in
September.                                          The A & E Committee talked about         decided at the Working Group level.
     On the International front, Dorothy      a couple of very heavy topics. Although        There may be some where consensus
Cory Wright standing in for Vivien Tyrell,    IAIR has had a Code of Ethics for a long       is not possible. The subcommittees
discussed the activities of the London        time, we don’t have a formal procedure         continue to plod on, however, and work
IAIR group. She reported that the             for investigating or taking action if anyone   on their assigned pieces of a new Model
International Committee had a                 were to complain of a violation of the         Act. Most are comparing the URL to
successful meeting in March. In fact,         Code of Ethics. If our organization is         the Model Act and coming up with new
the IAIR London group has had several         going to grow and gain prestige among          language that, on some topics,
successful events over the past year or       Commissioners and others, we probably          incorporates some of the URL language.
so, and as a result, has accumulated          need a somewhat formal mechanism for           At the next meeting or two, the
some funds in a checking account.             dealing with complaints against our            subcommittees will produce the rest of
These funds will be included in the           members. The Committee is studying             their drafts, and the issues will gradually
accounting numbers for IAIR. There was        disciplinary procedures from several           move back up to the Working Group
a brief discussion of whether the London      other organizations including the Fraud        where the real shouting can begin. The
group should be an affiliated organization,   Examiners, SOFE, IAIS, and the                 good news is that there are some drafts
a chapter of IAIR, or what form would be      actuaries. We have a first draft of a          that have been completed by the
best to encourage its growth and              disciplinary procedure which will be           subgroups.

                                     International Association of Insurance Receivers

                       Philadelphia IAIR Meeting Recap
                                                   by Robert Loiseau, CIR- P&C
     IAIR’s June 8th Philadelphia                                                            such as obstetrics and gynecology are
Roundtable included a roster of speakers                                                     in a state of crisis because they can’t
and topics that was simply outstanding.                                                      get or can’t afford coverage and up to
The program was hosted by Kristine                                                           one fourth of New Jersey’s obstetricians
Bean of Peterson Consulting who, after                                                       plan to stop delivering babies altogether
opening the meeting, allowed Chris                                                           because of astronomical premiums.
Maesel, CIR-ML to offer some words of                                                        Along with FICO’s failure, New Jersey’s
tribute for our colleague Lenny Minches                                                      Medical Insurance Exchange also hit the
who passed away in May of this year.                                                         skids financially, but through early
Always generous with his time and                                                            intervention by the New Jersey
expertise, Lenny “wrote the book” on          as a tool to shut them down and pay            Department of Insurance, is now
insurance insolvency during his long and      their victims.                                 operating in a solvent runoff mode and
diverse career in the field. A brief               Regardless of what name or acronym        will be succeeded by a new entity. The
memorial appears in this issue.               they utilize, AHPs proliferate in market       new entity will be a reciprocal, doctor-
     The first speaker at the Roundtable      environments (like the present one)            based organization funded by physicians'
was Mila Kofman, an attorney and              where rate hikes for health insurance          contributions, rather than a for-profit
college professor at Georgetown               premiums force small businesses to look        stock company like its predecessor.
University’s Institute for Health Care        for other alternatives to traditional                Commissioner Bakke emphasized
Research & Policy, who spoke about the        healthcare insurance products. With one        the need for a long-term solution but
harm to consumers done by unlicensed,         in three small businesses (fewer than 10       argued that tort reform is too slow and
illegal heath benefit plans. Ms. Kofman       employees) relying on AHPs to provide          too political to stem the current crisis.
became interested in this topic during        health benefits to their employees,            Instead, she advocates such basics as
her tenure with the United States             promoters prey on these businesses by          charging premiums appropriate to the
Department of Labor where she focused         representing AHPs as legitimate ERISA          risk, and offering policies with features
on the regulation of Association Health       health benefit plans wholly exempt from        including high deductibles, risk
Plans (AHPs). In addition to providing        state regulation. Bogus trade or               prevention training and even no interest
historical information, she also sounded      professional associations are often            installment payment plans.
an alarm about legislative changes under      formed as vehicles for marketing an                  Moreover, in New Jersey, the
consideration in Congress that would          AHP's various benefit plans, and using         Department of Health became involved
preempt state regulation, and may have        a broad network of TPAs and agents,            in managing this crisis, viewing it not just
the unintended side effect of causing         they collect substantial contributions but     as an insurance problems, but also a
AHPs to proliferatate. This legislation       ultimately don’t pay enrollees' claims.        public health issue as well: i.e.
also places oversight of AHPs with the        Ms. Kofman reported that at present, the       obstetricians who won't deliver babies.
federal government, which may not have        Department of Labor has seventy civil          Again, using the field of obstetrics to
the resources to regulate them effectively.   investigations and fourteen criminal files     illustrate the origins of the crisis, Ms.
     Prior to ERISA’s enactment in 1974,      open on AHPs.                                  Bakke reported medical claims arising
AHPs were jointly regulated by the                 In addition to traveling from             under growing number of high-risk
Department of Labor and state insurance       Washington to give her Roundtable              pregnancies. These claims, she feels,
regulators . After ERISA, they became         presentation, Ms. Kofman contributed a         arise from circumstances created
federally regulated. Following a spate        feature article on AHP regulation and          outside the health care system, not
of insolvencies, Congress' remedy in          legislation for this edition of The            within it. Among these are drug
1983 was to permit states to regulate         Insurance Receiver; it is thought              addiction leading to more premature
certain self-funded and self-insured          provoking material.                            births, growing numbers of late-in-life
health benefit plans, apparently                   Holly Bakke, New Jersey’s Banking         babies and the problems attendant to
recognizing they were better able to          and Insurance Commissioner, spoke next         expectant mothers' obesity. At its core,
protect consumers than were their             about a medical malpractice insurance          the crisis comes from malpractice
federal counterparts. Evidence of this        crisis in her state. The recent insolvency     litigation reflecting a societal condition
appears        in    State    insurance       of FICO, {sp?} which wrote 40% of New          where "everyone feels entitled to a perfect
commissioners' willingness to issue           Jersey's medical malpractice market,           outcome"; a result that neither the
cease and desist orders against the           made        replacement         coverage       medical profession nor the health care
operators of these bogus plans, and in        unaffordable, and in some places not           delivery system can provide. While a
one recent case, the use of receivership      available at all. High risk specialty fields   complete solution to New Jersey’s

                                                                Fall 2002

problem may not be at hand,                   rampant and venues are so plaintiff-            enforcement of the Pennsylvania
Commissioner Bakke and her                    oriented they are “sucking the life out of      Receivership Court’s stay of litigation
counterparts at the New Jersey                the medical malpractice industry”. Mr.          was rejected by some states.
Department of Health are proactively          Tindall reported that the M-Care Act does       complications from this even spilled over
dealing with an escalating crisis; a crisis   create new Venue Committee whose                to some guaranty association litigation
about which we hope she can report her        charge is to change this circumstance.          where Reliance was a named party in
solutions at future Roundtable.               Efforts are also underway at the                pending suits.
     Jeff Tindall, an attorney with the       statehouse to eliminate joint and several             Logistics aside, the types of
Philadelphia law firm of Davies,              liability in medical malpractice claims in      insurance that Reliance wrote posed
McFarland, Carroll P.C. and a principal       favor of something more closely                 enormous challenges to the Receiver
in Vertical Claims, a medical TPA firm,       approximating comparative negligence.           some policies and features included:
spoke about Pennsylvania’s medical                 The next speaker was Rowe Snider                 • Large deductibles ($250,000 -
liability insurance crisis. Calling his own   of the Lord Bissell and Brook firm who          $1 million) in everything from workers
state the “Afghanistan of medical                                                             compensation to commercial general
malpractice” he said that Pennsylvania                                                        liability policies. These large deductibles
has effectively been forced into self         It took only three weeks be-                    were customarily secured by letters of
insuring many of its hospitals because        fore the Pennsylvania Com-                      credit or cash deposits, but sometimes
they cannot buy medical malpractice           missioner had no choice but                     they only appeared to be secured.
coverage.                                     to put Reliance into liquida-                         • Reliance's use of a vast TPA
     The focus of Mr. Tindall’s remarks       tion.                                           network that allowed its large insureds
was on Pennsylvania’s efforts at tort                                                         to effectively control how the TPA
reform legislation, detailing the “M-Care                                                     handled their claims. Some TPAs had
Act” which imposes more risk                  gave an overview of the unique issues           become little more than captives of large
management responsibilities and greater       arising from the Pennsylvania’s Reliance        insureds, and even gaining access to
reporting requirements upon hospitals         Insurance Company receivership. With            their claims files and data posed an
as well as a small measure of tort reform.    liabilities estimated at $8 billion and         hurdle to the receiver.
In his opinion, Chapter Five of that act is   recoverable assets of between $4 and                  • In some insurance programs,
central to its effectiveness. but described   $5 billion, there is a fairly deep “hole”       Reliance had “first dollar liability” with the
with a trial lawyer’s skepticism certain      that will have to be made up by guaranty        insured later reimbursing it for paid
key provisions and whether they will really   associations and high net worth insureds        losses. These were essentially
change the status quo. Among these            or borne by Reliance's creditors.               programs that resembled self insurance,
provisions are:                                     Mr. Snider gave a brief background        but took a wide variety of forms depending
     • new informed consent rules             of Reliance’s five-month rehabilitation         on the unique circumstances and
relating to a doctor's representation of      effort which ended abruptly on                  bargaining power of the insured.
his qualifications;                           September 11, 2001. Until that day,                   Not surprisingly, these facts made
     • a punitive damages limitation          Reliance’s operations were largely being        the guaranty associations' work much
that is illusory;                             funded by advances from key reinsurers;         harder. Wholly apart from paying covered
     • elimination of the collateral          after September 11th, those sources             claims, guaranty association issues of
source rule to reduce actual damage           dried up, as did the availability of other      first impression arose:
awards;                                       credit facilities. It took only three weeks           • Which party is entitled to the
     •      requirement of itemized jury      before the Pennsylvania Commissioner            deductible recoveries under the above -
verdicts which may have the unintended        had no choice but to put Reliance into          described programs?
effect of actually increasing damage          liquidation.                                          • Which party is authorized to
awards;                                             the reliance case presents                administer the collection of deductibles?
     • structured payouts that cease          liquidation challenges of unprecedented               • Should the guaranty association
if the plaintiff dies;                        scope and complexity. Among the                 even be involved where an insured's net
     • using the present value of future      receiver's first priorities were dealing with   worth might exclude it from guaranty
earnings of an injured plaintiff to compute   the physical challenges of continuing to        fund coverage?
damages;                                      pay workers compensation benefits while               • Who gets the collateral securing
     • stricter expert witness                claims files were being transferred to          the large deductibles; who maintains it?
qualifications;                               guaranty associations and insureds. This              Mr. Snider reported that it took six
     • seven year statute of repose.          formidable task included distributing to        months to negotiate and obtain court
     At the heart of Pennsylvania’s crisis    the proper party more than 90,000 claims        approval of an interim agreement on this
is what the speaker called the                files held by Reliance's 155 TPAs in more       agreement we to give guaranty
“Philadelphia Problem.” In that city and      than 1,000 separate locations.                  associations the benefit of the large
surrounding counties, forum shopping is             If that was not daunting enough,                                  (Continued on page 8)

                                                         Fall 2002

                      In Memorium
     On Sunday June 2, 2002 Leonard
H. “Lenny” Minches passed away
quietly at his home in south Florida. He                                                           IAIR
will be deeply missed.                                                                      Roundtable Schedule
     Lenny was a member of IAIR since                                                 NAIC Meeting - September 7 - 11, 2002
its inception and he gave so much to                                                           New Orleans, NA
                                                                                      Roundtable has been cancelled due to
the association over the years that it                                                       scheduling conflicts.
would take more space than we have
available here to mention all of his                                                  NAIC Meeting - December 7 - 11, 2002
contributions.                                                                                   San Diego, CA
                                                                                                IAIR Roundtable
     He graduated from New York University with a BA in 1952 and from the New             December 8, 1:00 - 4:00 p.m.
York University School of Law in 1955. Lenny was an experienced insolvency
attorney with over 40 years in the insurance industry. Prior to entering private         NAIC Meeting - March 8 - 11, 2003
practice, Lenny spent 20 years with the New York State Insurance Department,                       Atlanta, GA
                                                                                             March 9, 1:00 - 4:00 p.m.
the last four as Special Deputy Superintendent in charge of the Department’s
Liquidations Bureau.
     At Edwards & Angell he was counsel in the Palm Beach and New York
offices. He represented clients in numerous commutation agreements involving
receiverships in the United States and elsewhere. Lenny also represented
insurance and reinsurance companies in regulatory matters.
     He was an avid sports fan with a baseball card collection containing 75,000
                                                                                   INSURANCE RECEIVER
cards. He and his wife, Lorraine, were enthusiastic movie and theatregoers.        is intended to provide readers with information on
                                                                                   and provide a forum for opinion and discussion of
     We mourn the passing of our colleague and friend. IAIR wishes to extend our   insurance insolvency topics. The views expressed
sincerest condolences to his wife, Lorraine, as well as his family.                by the authors in The Insurance Receiver are their
                                                                                   own and not necessarily those of the IAIR Board,
     Goodbye to a dear friend.                                                     Publications Committee or IAIR Executive Director.
                                                                                   No article or other feature should be considered as
                                                                                   legal advice.

                                                                                   The Insurance Receiver is published quarterly by the
    The Leonard H. Minches Scholarship Endowment                                   International Association of Insurance Receivers, 174
                                                                                   Grace Boulevard, Altamonte Springs, FL 32714,
                                                                                   (407) 682-4513, Fax: (407) 682-3175, Email:
     The law firm of Edwards & Angell, LLP is pleased to announce                  Paula Keyes, CPCU, AIR, ARe, CPIW, Executive
 the formation of the Leonard H. Minches scholarship endowment                     Director; Jeanne Lachapelle, Assistant Director;
                                                                                   Jaime Mills, Office Manager; Paula Keyes,
 at the School of Risk Management - St. John’s University (formerly                Administrative Coordinator.
 the College of Insurance) in memory of friend, mentor and partner,                Editorial Board: Tom Clark, Publications
 Lenny Minches, who passed away on Sunday, June 2, 2002.                           Committee Chair; Joe DeVito; Ellen Fickenger; Linda
                                                                                   Lasley; Bob Loiseau, CIR - P&C; Liz Lovette,
                                                                                   CIR - ML, Charlie Richardson; Debra Roberts; Mary
                                                                                   Cannon Veed.
   For more information, see the next issue of The Insurance
 Receiver.                                                                         Officers: Elizabeth Lovette, CIR - President; George
                                                                                   Gutfreund, CIR - 1st Vice President; Daniel Orth -
                                                                                   2nd Vice President; Mark Femal, CPA, CPCU -
                                                                                   Treasurer; James Gordon, CIR - Secretary.

                                                                                   Directors: Kristine J. Bean, CPA: Francesca Bliss;
                                                                                   Richard Darling, CIR; Steve Durish, CIR: Trish
                                                                                   Getty, AIR; Robert Greer, CIR; Robert Loiseau,
                                                                                   CIR; Michael Marchman, CIR, Dale Stephenson,
                                                                                   CPA; & Vivien Tyrell.

                                                                                   Legal Counsel: William Latza and Martin Minkowitz
                                                                                   of Stroock Stroock & Laven LLP.

                                                                                   Accountant: Stephen Phillips, CPA, FLMI, AIR of
                                                                                   Cunningham, Porter & Phillips

                                                                                   Copyright  2002 by the International Association
                                                                                   of Insurance Receivers.

                                     International Association of Insurance Receivers

          Health Insurance Scams Promoted Through
                    Associations: A Primer
                                                        by Mila Kofman, J.D.
     Mila Kofman is Assistant Research                                                      has evolved in the last twenty-eight years.
Professor at the Georgetown University                                                      Part III concludes by looking at one fed-
Institute for Health Care Research and                                                      eral proposal that has recently garnered
Policy. Before joining the faculty at                                                       support from the Administration. It ex-
Georgetown University, Ms. Kofman was                                                       amines its potential effect on current ef-
a federal regulator at the U.S.                                                             forts by state and federal regulators to
Department of Labor, where she worked                                                       stop health coverage scams perpetuated
on federal legislation affecting                                                            through associations.
association health plans in addition to
regulating such arrangements. Prior to                                                      PART I: BACKGROUND
joining the U.S. Department of Labor,         ance arrangement according to regula-
Ms. Kofman was Counsel for Health             tors. State and federal regulators shut       Association Health Plans
Policy and Regulation at the Institute for    this company down when they discov-                Millions of working Americans — one
Health Policy Solutions, a non-profit, non-   ered claims were not being paid. A fed-       out of every three businesses with fewer
partisan firm, where she assisted small       eral judge determined that the manage-        than ten employees5 — rely on group
businesses in establishing health             ment of Employers Mutual depleted its         purchasing arrangements such as pro-
insurance purchasing coalitions. She          assets by paying itself excessive fees        fessional and trade associations, mul-
also worked at the National Association       and diverting funds to personal ac-           tiple employer welfare arrangements6
of Insurance Commissioners, where she         counts.2 Although court documents in-         (MEWAs), multiple employer trusts
researched state regulation of Multiple       dicate that many of the 22,000 individu-      (METs), employer coalitions, and alli-
Employer Welfare Arrangements. Mila           als were left with over $6.5 million in un-   ances for their health insurance cover-
Kofman holds a law degree from the            paid medical bills, the extent of unpaid      age. These arrangements combine re-
Georgetown University Law Center and          medical bills will not be known until all     sources to “self-insure or self-fund” (pay
a Bachelor of Arts in Government and          claims are filed with the independent re-     into a fund that pays medical claims) or
Politics from the University of Maryland,     ceiver appointed by the federal court.3       to “fully insure” (buy insurance from a
College Park.                                      Unfortunately, Christine’s experi-       licensed insurance company). Some ar-
     According to ABC News, Christine         ence is not an isolated case. According       rangements, including professional and
Sinclair has a rare and inoperable cancer.    to the U.S. General Accounting Office         trade associations, e.g., the local cham-
Chemotherapy each week costs $2,000.          (GAO) and federal and state regulators,       ber of commerce, provide health cover-
Her treating physician has informed her       in the past two decades health insurance      age as one of many benefits to their
that the insurance company owes him           scams sold through both legitimate and        members. Other arrangements, e.g.,
more than $30,000 in unpaid bills and         phony associations have defrauded thou-       Health Insurance Purchasing Coalitions
that he is not a “bank” for his patients.     sands of small businesses and self-em-        (HIPCs), exist solely for the purpose of
Christine is embarrassed and concerned        ployed individuals. 4 In the last six         providing or buying health coverage or
that he will stop her treatment. She also     months, over 50,000 working Americans         other types of insurance-related services
worries about mortgaging her home to          and their families have lost their health     for participating employers. Because fed-
cover over $50,000 in outstanding             insurance coverage, and many of these         eral law generally does not distinguish
medical bills.1                               victims are now faced with millions of        among different types of group purchas-
     Christine was not uninsured when         dollars in unpaid medical bills that should   ing arrangements, this paper uses the
she incurred these bills. As a member         have been paid by association health          terms “MEWAs,””association health
of a professional association, she was        plans.                                        plans,” and “group purchasing arrange-
enrolled in the association’s health plan,         This primer focuses on health cov-       ments” interchangeably to describe an
which was through a company called            erage scams promoted through real and         entity through which two or more em-
Employers Mutual LLC (Employers Mu-           phony professional and trade associa-         ployers and self-employed individuals
tual). Christine believed that she had in-    tions. Part I provides background infor-      obtain health insurance coverage.
surance to cover her cancer treatment.        mation focusing on recently discovered             Although many group purchasing
     Christine is one of 22,000 Americans     scams. Part II discusses how the regu-        arrangements have helped employ-
who paid nearly $15 million in premiums       lation of association health plans and        ers finance health benefits for their
to Employers Mutual, an illegal insur-        other group purchasing arrangements           employees, such arrangements have

                                                               Fall 2002

also presented opportunities for un-         Operators of Employers Mutual enrolled         ing new business and to continue receiv-
scrupulous individuals to defraud em-        22,000 people in fifty states by allegedly     ing premiums from existing clients, they
ployers and their workers. Millions          selling coverage through sixteen asso-         pay small claims while delaying paying
of American workers and their fami-          ciations they established and through          large ones. Ameri-Med collected $1.6
lies have been left without health in-       existing associations.16                       million in premiums and paid only
surance and with millions of dollars              Small businesses and self-em-             $360,000 in claims, its operator diverted
in unpaid medical bills. 7                   ployed individuals buy association cov-        more than $900,000 for personal use.20
                                             erage because it is less expensive than             Operators of scams often are repeat
2001 - the beginning of a real crisis        health insurance available in the com-         offenders. Recently the Florida Insurance
     State and federal regulators believe    mercial market.17 For example, Employ-         Department shutdown an entity linked
that in the last two years, the number       ers Mutual charged a 50 year-old woman         with an individual who, according to the
and magnitude of association health plan     a monthly premium of $285 compared             state, two years ago “pleaded guilty to
scams have grown and that such “illegal      to $425 for comparable benefits from a         healthcare fraud in connection with the
operations are rapidly growing and           licensed insurance company offered             embezzlement of some $8 million”
spreading around the country.”8 In the       through the same association.18                through a phony union plan and a phony
last year, the Texas Insurance Depart-            Promoters claim that premiums are         employer association.21
ment shut down three illegal association     low because they have purchasing power
health plans that had defrauded more         when employers ban together to negoti-         Double-digit cost increases and de-
than 20,000 Texans.9 Since last year,        ate with insurance companies. Addition-        mand for alternatives
Florida’s Insurance Department has shut      ally, they claim that they offer “ERISA             Health insurance coverage scams
down six arrangements covering nearly        plans” or union plans exempt from state        exist because there is an unmet demand
30,000 Floridians, leaving many without      insurance laws and that their low premi-       for affordable health insurance. Criminals
health insurance and with unpaid medi-       ums result from this exemption. In real-       take advantage of small employers and
cal bills.10 Oklahoma’s Insurance Depart-                                                   self-employed individuals looking for af-
ment has 60 open investigations.11 In                                                       fordable alternatives to traditional cover-
response to rapidly growing scams,           Operators of scams collect                     age.
Louisiana’s Insurance Department re-         premiums without intending                          Historically, MEWA fraud increased
cently created a MEWA Task Force re-         to make good on their prom-                    when premiums for health insurance in-
sponsible only for handling such             ise to provide health cover-                   creased substantially. For example, in
scams.12 In January 2002, the U.S. De-       age!                                           1988 employers faced double digit in-
partment of Labor reported having 76 civil                                                  creases in premiums averaging 12.0%.22
and 14 criminal investigations open.13                                                      According to the General Accounting
                                             ity, these claims are false.                   Office, MEWA problems increased be-
How does a health insurance cover-                 Operators of scams collect premi-        tween 1988 and 1991 — MEWAs left
age scam work?                               ums without intending to make good on          thousands of people without health in-
     Typically, promoters of scams tar-      their promise to provide health coverage.      surance and nearly 400,000 patients with
get small business owners and self-em-       For example, Phillip Harmon was sen-           medical bills exceeding $123 million.23
ployed individuals. As a way to attract a    tenced to eight years in prison as a re-            In 2001, businesses with three to
large volume of business quickly, they       sult of massive fraud “inducing” employ-       nine workers paid an average of 16.5%
market health insurance scams through        ers to pay millions of dollars into a trust    more than in 2000.24 In 2002, it is esti-
well-established trade and professional      for “nonexistent” health insurance (cov-       mated that premiums increased by
associations. They also establish their      ering 6500 individuals, primarily minis-       15.6%.25 In 2003, some analysts pre-
own associations. For example, opera-        ters of various churches and their fami-       dict an additional 20% increase.26 As
tors of American Benefit Plans, an unli-     lies) nationwide. According to the U.S.        employers face double-digit premium
censed entity according to court docu-       Department of Labor’s Report to Con-           increases, they will continue seeking
ments, sold their health plan through at     gress, “No insurance was purchased;            alternatives to traditional coverage and
least seven existing associations and        rather, the money went to benefit              are at risk of being conned by scams.
four associations they created — Na-         Harmon and others…. The total amount
tional Association for Working Ameri-        collected by Harmon through the                Victims are financially liable for un-
cans, National Association of Working        schemes (which also included an invest-        paid medical bills
Americans, the United Employer Volun-        ment scheme) was approximately $40                 Small businesses and their workers
tary Employee Beneficiary Association,       million.”19                                    defrauded by association health plan
and the United Employee Voluntary                  Many operators establish scams           fraud have few legal options. In some
Employee Beneficiary Association (em-        collecting millions of dollars in premiums     cases court appointed receivers find
phasis added).14 They enrolled over          until state or federal regulators find them.   some assets. In addition to prison sen-
32,000 people in forty-eight states.15       While undetected, to continue attract-
                                                                                                                 (Continued on page 12)

                                     International Association of Insurance Receivers

Health Insurance Scams                                                                                        (Continued from page 11)

tences, courts can order restitution to       vide benefits. The federal statute required   ments. States may require fully insured
be paid to the victims.27 However, typi-      ERISA health plans to comply only with        arrangements to obtain a license and
cally there are not enough assets to pay      fiduciary standards and reporting and         insurers selling coverage through such
fully all outstanding medical bills. Ac-                                                    arrangements must comply with state
cording to the GAO, only $9.6 million in                                                    insurance laws. States may require a
assets were recovered, but over $123.6        States regulate both fully in-                self-insured arrangement to be licensed
million was owed for medical bills be-        sured and self-insured group                  as an insurer35 or in states with MEWA-
tween 1988 and 1991.28 State guaranty         purchasing arrangements                       specific laws, to be licensed as
funds, designed to protect consumers                                                        MEWAs.36
when a licensed insurance company                                                                State-based standards applicable to
becomes insolvent, do not protect indi-       disclosure requirements, but did not re-      group purchasing arrangements are more
viduals covered through unlicensed as-        quire such plans to be licensed or to         comprehensive than federal standards.
sociation health plans.29 Ultimately, pa-     meet any solvency requirements.31             State insurance laws including licensing,
tients are responsible for paying their            Broad preemption of state law had        solvency, benefit requirements, external
doctors, hospitals, and other providers       unintended consequences. When states          appeal laws, and other consumer pro-
for services and procedures the patient       tried to regulate group purchasing ar-        tections apply to group purchasing ar-
received.                                     rangements that were not subject to           rangements. Federal standards are gen-
     The states and the federal govern-       ERISA, its operators successfully             erally limited to fiduciary obligations, dis-
ment have tried to address the problem        claimed ERISA exemption from state            closure and notice requirements, and
of health coverage scams. The next sec-       law.32 However, the U.S. Department of        more recently a requirement to register
tion discusses how the regulation of as-      Labor claimed not to have authority over      with the U.S. Department of Labor.37
sociation health plans has evolved in the     such arrangements because most were           ERISA does not require MEWAs to be
last twenty-eight years.                      not ERISA plans.33 Ambiguity about            licensed and there are no federal sol-
                                              whether states had authority to regulate      vency, external review, or other consumer
PART II: SHARED REGULATION                    group purchasing arrangements, minimal        protections similar to those found in state
    Both states and the federal govern-       federal standards in ERISA, and limited       insurance law.
ment regulate association health plans,       oversight by the U.S. Department of La-            In addition to a broad range of state
although this was not always the case.        bor created opportunities for widespread      laws applicable to MEWAs, state insur-
                                              fraud.                                        ance departments have enforcement
EVOLUTION OF FEDERAL AND                           In response, in 1982 (effective in       tools not available to the U.S. Depart-
STATE REGULATION                              1983) Congress amended ERISA to limit         ment of Labor. For example, state insur-
     When Congress federalized regula-        its preemptive effect on state law. As a      ance departments can shut down insur-
tion of employee benefits by enacting the     result of these amendments, states can        ance scams using administrative cease
Employee Retirement Income Security           generally regulate group purchasing ar-       and desist authority without going to
Act of 1974 (ERISA), it severely restricted   rangements. More specifically, with al-       court. Cease and desist orders may be
state authority to regulate group purchas-    most no limitations, ERISA allows states      issued in an ex parte fashion in an emer-
ing arrangements. Under the 1974 stat-        to regulate MEWAs34 – defined broadly         gency.38 This authority allows insurance
ute, states could not regulate group pur-     to include all types of arrangements of-      commissioners expeditiously to shut
chasing arrangements that were consid-        fering health coverage to two or more         down a scam without having to go to
ered to be “employee welfare benefit          employers or self-employed individuals.       court.
plans,” an ERISA plan.30 The U.S. De-                                                            The U.S. Department of Labor must
                                              Current regulation                            seek a temporary restraining order (TRO)
partment of Labor became responsible
for regulating such arrangements. To               As a result of the 1983 amendments       and a preliminary injunction (PI) from a
determine if an arrangement was an            to ERISA, both state insurance depart-        federal court to shut down a scam. A TRO
ERISA plan, a state (and in many cases        ments and the U.S. Department of La-          and PI by a federal court require the fed-
a court) had to apply a very technical        bor regulate MEWAs. Most consumer             eral government to offer sufficient evi-
and complex federal standard requiring        protections are state-based, not federal-     dence at a pre-trial hearing to prove that
a fact intensive inquiry.                     based. Also, state insurance depart-          a violation of ERISA has occurred and to
     ERISA replaced state-based stan-         ments have enforcement tools that the         demonstrate that the government will
dards with minimal federal standards to       U.S. Department of Labor does not have,       probably prevail on the merits once the
encourage employers to provide medi-          which affect its ability to regulate effec-   case is fully litigated. Unlike states shut-
cal benefits to their workers. Some ar-       tively.                                       ting down illegal arrangements based on
gued that fewer regulatory requirements            States regulate both fully insured and   a failure to be licensed, the federal gov-
make it less costly for employers to pro-     self-insured group purchasing arrange-        ernment must prove a violation of a fidu-

                                                              Fall 2002

ciary duty, which is financial in nature     and clarify current state and federal regu-   ate Labor and Human Resources Com-
requiring evidence that assets have been     latory authority. Further research is         mittee, “While MEWAs may offer
misused. To gather enough evidence for       needed to evaluate the efficacy of state      economy of scale advantages, their op-
a successful hearing in federal court,       and federal regulation. Identifying differ-   eration is often marred by entrepreneurs
Labor’s investigations may take several      ences among state enforcement and the         who market and operate them as Ponzi
years. While being investigated, opera-      federal government’s approach will help       schemes. These operators unscrupu-
tors of scams continue collecting pre-       inform public policy about most effective     lously promise health benefits, collect
miums.                                       strategies to address fraud. Generally,       premiums from the employers for health
     Although both states and the fed-       new enforcement tools, stronger civil and     coverage and then default on their obli-
eral government regulate group purchas-      criminal sanctions, and additional re-        gations, leaving participants with thou-
ing arrangements, health coverage            sources would help improve oversight.         sands of dollars in unpaid claims.”47
scams continue. Operators of scams           At a crucial time when incidents of fraud           H.R. 2563 would federalize the regu-
continue to use ERISA preemption as a        are on the rise, declining state and fed-     lation of association health plans by
shield to avoid state enforcement actions,   eral budgets and new priorities reflect-      eliminating state authority and state-
challenging state authority by removing                                                    based consumer protections from apply-
cases to federal court.39                                                                  ing to such plans.48 Additionally, the bill’s
     Additionally, preemption ambiguities                                                  preemption provisions create new ambi-
under ERISA continue to be exploited.        The recent influx in health                   guity under ERISA. For example, the bill
For example, ERISA prohibits states from     insurance scams sold                          would preempt state laws that “may pre-
regulating union plans. Ambiguity over       through associations pre-                     clude” or merely have the “effect of pre-
what a union plan is has resulted in         sents significant challenges                  cluding” entities from selling to a feder-
health insurance scams promoted              for policymakers to address                   ally licensed association.49 Under this
through phony unions.40 According to the                                                   vague standard, it is difficult to determine
U.S. Department of Labor in one case,                                                      which state laws are preempted. As dis-
a MEWA called the International Profes-      ing domestic security concerns may re-        cussed earlier, ERISA ambiguities help
sional, Craft and Maintenance Associa-       sult in fewer enforcement actions.44          criminals avoid state regulation, result-
tion Trust claimed exemption from state           Instead of addressing the current cri-   ing in small businesses and their work-
regulation as a Taft-Hartley plan. This      sis, some members of the U.S. Con-            ers being defrauded.
phony union left 3000 workers with $2.3      gress are considering federalizing the              The bill does not provide the U.S.
million in medical bills and worker com-     regulation of association plans by elimi-     Department of Labor with new enforce-
pensation claims.41 The U.S. Depart-         nating state authority to regulate such       ment tools to strengthen its regulatory
ment of Labor found another sham union       arrangements. A bill, which was added         authority. To enforce the standards in the
called the International Workers’ Guild      to the House-passed Patients Bill of          bill, the U.S. Department of Labor has
(IWG), which left 3600 people in 32          Rights (H.R. 2563), would preempt state       to go to federal court.50 And as discussed
states with approximately $25 million in     regulation of association health plans.       earlier, it is difficult to shut down a scam
claims.42 State regulators believe that      President George W. Bush has actively         expeditiously when going to federal court.
major impediments to effective state         promoted proposals to federalize asso-              Furthermore, it is unclear whether
regulation include operators of scams        ciation health plans.45                       Congress will appropriate necessary
using ERISA as shield to avoid state              Similar bills have been introduced       additional resources to enable the U.S.
regulation and exploiting preemption         over the past twelve years but have been      Department of Labor to enforce the new
ambiguities under ERISA.43                   strongly opposed by prior administra-         standards. In 1997, in evaluating a simi-
     The next section discusses impli-       tions. David Ball, Assistant Secretary of     lar federal bill, the Assistant Secretary
cations for policymakers and examines        Labor appointed by President George           of Labor Olena Berg told Congress that
one federal proposal recently endorsed       Bush, told the U.S. Senate in 1990, “In       given its resources and the scope of its
by President Bush.                           concept, MEWAs would appear to fill an        regulatory responsibilities, the Depart-
                                             important void in health-care availability.   ment could review each health plan un-
PART III: POLICY IMPLICATIONS                In practice, they may be subject to           der its jurisdiction once in 300 years. She
     The recent influx in health insurance   abuse. This is because they may have          said, “An infrastructure adequate to
scams sold through associations pre-         inadequate reserves, and therefore, be        handle the new responsibilities (under a
sents significant challenges for             unable to pay claims. In the worse situ-      similar bill), replicating the functions of
policymakers to address. One way to          ation they may be run by individuals who      50 state insurance commissioners, sim-
eliminate fraud is to provide universal      bleed them dry through extraordinarily        ply does not exist.”51 Recently, the GAO
access to affordable health coverage and     high fees and outright embezzlement.”46       criticized the Department’s ability to
thus eliminate the demand.                   Seven years later, Olena Berg, Assis-         regulate stating, “The operational weak-
     Absent comprehensive reforms,           tant Secretary of Labor appointed by          nesses and broader management issues
policymakers should improve oversight        President Bill Clinton, told the U.S. Sen-
                                                                                                                 (Continued on page 14)

                                                         International Association of Insurance Receivers

Health Insurance Scams                                                                                                                                                   (Continued from page 13)

... could affect its ability to effectively and                            With limited federal oversight, more                              nesses and leave thousands of working
efficiently carry out its responsibilities for                        fraud may occur. Instead of replacing                                  Americans without health insurance and
enforcing ERISA’s employee benefit plan                               comprehensive state-based laws with a                                  with millions of dollars in medical bills.
provisions.”52 Yet some policymakers                                  weak federal law, Congress should look
believe that the U.S. Department of La-                               for ways to address the current crisis of
bor will effectively regulate association                             health insurance scams sold through
health plans.                                                         associations, which defraud small busi-
  Judy Muller, Insecure Insurance: Unmonitored MEWA Plans Stick Patients with Unpaid Bills, ABC World News Tonight, Mar. 6, 2002, available at ABC
  Chao v. Graf, et al, CV-N-01-0698-DWH-RAM, at 6, 15-17 (D. Nev. Feb. 1, 2002) (court issued a preliminary injunction) (hereinafter Federal Court Order Employers Mutual). See also Complaint for
ERISA Violations, U.S. Department of Labor, Chao v. Graf, Employers Mutual LLC, et al, CV-N-01-0698-DWH-RAM, at 8 (D. Nev. Dec. 13, 2001) (hereinafter Complaint Employers Mutual).
  Federal Court Order Employers Mutual at 6; Complaint Employers Mutual at 4. Official sources indicate that outstanding medical bills may be in the $20 million range.
  See Congressional testimony on MEWA fraud by Gregory McDonald, Associate Director, Income Security Issues, U.S. General Accounting Office, Testimony before the Subcommittee on Retirement
Income and Employment, Select Committee on Aging, House of Representatives, Sep. 17, 1991 (hereinafter GAO Testimony); Testimony of Olena Berg, Assistant Secretary of Labor, Pension and Welfare
Benefits Administration before the Senate Labor and Human Resources Committee, Oct. 1, 1997, at 9-11 (hereinafter Berg Testimony).
  Stephen Long and Susan Marquis, Pooled Purchasing: Who Are the Players?, HEALTH AFFAIRS, Jul./Aug. 1999, at 105, 107.
  A federal law called the Employee Retirement Income Security Act of 1974 (ERISA) defines MEWAs broadly to include employer purchasing coalitions, trade associations, or other group purchasing
arrangements offering health coverage to two or more employers or self-employed individuals. ERISA § 3(40), 29 U.S.C. § 1002. Individuals who operate such arrangements no longer use the “MEWA”
label because of the large number of MEWA insolvencies and fraud since ERISA was enacted.
  Berg Testimony at 9-11. For a discussion of civil and criminal MEWA fraud cases handled by the U.S. Department of Labor, see U.S. DEPARTMENT OF LABOR , PENSION AND WELFARE BENEFITS ADMINISTRATION,
EMPLOYEE RETIREMENT INCOME SECURITY ACT REPORT T O CONGRESS for years 1994 - 1999 (hereinafter U.S. Department of Labor Reports to Congress).
  Telephone discussion with Fred Nepple, General Counsel for the Wisconsin Insurance Department, Chairperson of the NAIC ERISA Working Group (and a leading expert on association health plans and
MEWAs) (Apr. 24, 2002).
  Aissatou Sidime, Health Insurance Rip-offs Rising, SAN ANTONIO EXPRESS-NEWS, Mar. 19, 2002, at 3E.
   Gallagher Wins on Appeal Against Phony Insurer, Florida Department of Insurance, Press Release, May 8, 2002; Gallagher Orders Sixth Unlicensed Health Insurer To Stop Operations in Florida, Florida
Insurance Department, Press Release, May 14, 2002 (hereinafter Florida May 14, 2002 Press Release).
   One state regulator reported referring 12 cases for administrative action within one week. The same regulator indicated that she has never seen as many health coverage scams as she is seeing currently.
Telephone discussion with Dalora Schafer, Director Life, Accident and Health Division, Oklahoma Insurance Department (Apr. 22, 2002).
   Telephone discussion with Ron Musser, Assistant Commissioner, Office of Financial Solvency, Louisiana Insurance Department (Apr. 5, 2002).
   Telephone discussion with Gloria Della, Public Information Officer, U.S. Department of Labor, Pension and Welfare Benefits Administration (Apr. 2002).
   Texas Petition for Temporary Restraining Order at 5, Texas v. American Benefit Plans et al., Cause No. GV200903 (Tx. D. Travis County Mar. 6, 2002) (hereinafter ABP Petition). ABP also allegedly sold
coverage through the American Association of Agriculture, Forestry, and Fishing Workers; the American Association of Transportation, Communication, Electrical, Gas, and Sanitary Workers; the American
Association of Wholesale Trade Workers; the American Asasociation of Manufacturer Workers; the American Association of Service Workers; the American Association of Construction Workers; and
American Association of Professional Workers. Id. at 6-7.
   Telephone discussion with Jon Nogarede, Assistant to Robert Loiseau, court appointed Special Deputy Receiver of American Benefit Plans (Apr. 4, 2002); Discussion with Dorien M. Rawlinson, Health
Policy and Research Analyst, Colorado Division of Insurance (Apr. 5, 2002).
   Federal Court Order Employers Mutual at 2-3. Its operators even sold coverage to the National Writers Union whose membership includes freelance journalists.
   Operators of Employers Mutual charged below market rates. Complaint Employers Mutual at 8.
   Telephone discussion with Stephanie Goldberg, consumer covered by Employers Mutual LLC (Mar. 6, 2002).
   A federal court sentenced Paul Pereira, its operator, to two years imprisonment for health care fraud and embezzlement. U.S. D EPARTMENT OF LABOR, P ENSION AND WELFARE B ENEFITS ADMINISTRATION, EMPLOYEE
   Florida May 14, 2002 Press Release.
   U.S. GENERAL A CCOUNTING O FFICE, Employee Benefits: States Need Labor’s Help Regulating Multiple Employer Welfare Arrangements, GAO/HRD-92-40, at 2-3 (Mar. 10, 1992) (hereinafter 1992 GAO
   Kaiser Survey at 16.
   Projected by Hewitt Health Value Initiative, HEWITT ASSOCIATES , Annual Health Care Cost Increases National Averages (2001).
   California’s public employees benefits program estimates a premium increase of between 20% and 25% next year. CalPERS, 2003 Health Plan and Premium Changes, available at
(Apr. 17, 2002). A UCLA study estimates private premiums to increase by 20% in 2003. Health Insurance: Premiums Expected to Rise 20% in 2003, AMERICAN HEALTH LINE (Jun. 18, 2002).
   Operators of the International Forum of Florida Health Benefit Trust defrauded 43,000 individuals and left $29 million in unpaid medical bills. They pleaded guilty to embezzlements, kickbacks, and money
laundering. In the plea agreement they agreed to pay $34.5 million in restitution to the victims. Peter Kerr, 3 Pleaded Guilty in Insurance Fraud Case, NEW YORK T IMES, Dec. 30, 1992, at D3.
   1992 GAO Report 22.
   David Randall, Deputy Director, Ohio Department of Insurance, Testimony of the State and Federal Health Insurance Legislative Policy (B) Task Force of the National Association of Insurance
Commissioners Before the Committee on Labor and Human Resources of the United States Senate, July 25, 1995, at 9 (hereinafter NAIC Testimony).
   ERISA § 514(a), 29 U.S.C. §1144.
   ERISA § 101-110, 404-413, 29 U.S.C. § 1021-1030, 1104-1113.
(1992) (hereinafter U.S. Department of Labor MEWA Guide).
   Although there were no changes to Labor’s jurisdictional authority, it now believes that it has broad authority to go after arrangements that are not ERISA covered plans when they handle ERISA plan assets,
which occurs when employers covered by ERISA participate in the arrangement. U.S. Department of Labor MEWA Guide at 5.
   ERISA § 3(40), 29 U.S.C. § 1002.
   U.S. DEPARTMENT OF LABOR , PENSION AND WELFARE BENEFITS ADMINISTRATION , AO 90-18A (1990) (letter to J.Scott Kyle, Texas State Board of Insurance).
   NAIC Testimony at 9.
   The registration requirement was enacted in 1996. Six years earlier, Labor Secretary Elizabeth Dole asked Congress for authority to require MEWAs to register with the Department. See 1992 GAO
Report; David Horowitz, Uncovered: Health Plan Fraud Leaves Workers in Lurch, ST . LOUIS P OST - Dispatch, Aug. 21, 1990, at 6D (hereinafter Horowitz Article). In addition to these requirements, federal
HIPAA portability and access rules amended ERISA and therefore apply to MEWAs.
   For example, Colorado’s Insurance Department issued an ex parte emergency order against American Benefit Plans, ordering its operators “to cease and desist the unauthorized and unlawful transaction of
the business of insurance in the state of Colorado.” Case File No. 130120, Order No. 0-02-144 (Feb. 13, 2002).
   Operators of American Benefit Plans challenged Texas Insurance Department’s authority by removing the case to federal court. See Texas v. Robert David Neal, et al., Case No. A–02-CA-220-SS, at 4-5
(W.D. Tx. May 22, 2002) (remanded to state court); Texas v. American Benefit Plans et al., Cause No. GV200903, at 7 (Tx. D. Travis County May 28, 2002) (ordered permanent injunction).
   In 1991, the GAO told Congress that the U.S. Department of Labor needs to issue regulations clarifying union status. 1992 GAO Report at 9. To this date, there are no final regulations although the
Department issued proposed regulations in 2000.
   Multiple Employer Welfare Officials Sued for Siphoning $2.3 Million in Plan Funds, U.S. Department of Labor, Pension and Welfare Benefits Administration, Press Release, Aug. 5, 1996.
   1998 Report to Congress at 8. See also Court Grants Preliminary Injunction, Continuing Freeze of Assets of Trustees and Administrator of New York-based Health Program, U.S. Department of Labor, Pension
and Welfare Benefits Administration, Press Release, Dec. 29, 1998.
   GAO Testimony 3-4.
   For a discussion of state budgets and priorities see John Engler, Michigan Governor, Testimony of the National Governors Association before the Senate Appropriations Committee on Homeland Security
Funding, Apr.10, 2002. The Congressional Budget Office underestimated revenues for 2002 by $80 billion. CBO, MONTHLY BUDGET R EVIEW (Jun. 14, 2002). President Bush described the FY2003 budget
submitted to Congress as placing “highest priority on war against terrorism overseas and at home.” OFFICE OF MANAGEMENT AND BUDGET, BUDGET HIGHLIGHTS (Feb. 4, 2002).
   WHITE HOUSE PRESS OFFICE, Transcript: Bush Remarks on Health Care Reform, Feb. 11, 2002; Elisabeth Bumiller, Bush Proposes Insurance Plan to Businesswomen, NEW YORK TIMES, Mar. 20, 2002, at A20;
NEW YORK T IMES, The 2000 Campaign; 2nd Presidential Debate Between Gov. Bush and Vice President Gore, Oct. 12, 2000, at A22.
   Horowitz Article (Assistant Secretary of Labor’s Testimony before the U.S. Senate Subcommittee on Investigations).
   Berg Testimony at 10.
   H.R. 2563 § 421(b) amends ERISA § 514.
   H.R. 2563 § 424(b).
   Berg Testimony at 6.
   U.S. G ENERAL ACCOUNTING OFFICE , Pension and Welfare Benefits Administration: Opportunities Exist for Improving Management of the Enforcement Program, GAO-02-232, at 3 (Mar. 15, 2002).

                                                          Fall 2002

Case Study: Lawyer Liability for Failing to Prevent
      Insider Looting of a Corporate Client
                                                  by Robert L. Brace, Esq.
      We just finished trying a                                                      insolvent corporation are engaged in
professional negligence action                                                       fraud or other wrongdoing and (ii) that
against the outside legal counsel of                                                 the wrongdoing will create significant
a defunct insurance company known                                                    harm to the corporation (whether
as Meadowlark Insurance Company                                                      through liability to third parties or
(“Meadowlark”) which owed over $4                                                    otherwise), the same duty to preserve
million in unpaid insurance claims.                                                  the client’s assets by disclosing the
The lawyer worked full time for                                                      wrongdoing to the appropriate
Meadowlark for five years, earning                                                   governmental authorities attaches to
approximately $1 million in fees. An       made no legitimate business senses;       the attorney for the organizational
issue worth sharing was the lack of        (vi) the lawyer had the obligation to     client as to an attorney representing
precedent directly on point as to the      the corporation to try to prevent         an incompetent ward who discovers
obligation of an outside corporate         further losses; and (vii) one avenue      that the ward’s guardian is engaged
lawyer to report to regulators the         of recourse which would have worked       in illegal conduct to the detriment of
criminal activity of insiders of a         for the lawyer was to report the          the ward. Harris Article, at 637-638.
corporation when it should have been       information he knew to insurance                The legal basis for the analogy
abundantly clear to the lawyer that:       regulators who would have                 is sound. It is beyond debate that an
(i) the criminal activity was for the      immediately shut Meadowlark down.         attorney may be liable for failing to
advantage and gain of the insiders              To support our theory of an          make the necessary protective
to the detriment of Meadowlark, and        attorney’s malpractice liability to his   disclosures when his client is the
(ii) there were no corporate fiduciaries   insolvent corporate client for failure    injured ward. Harris Article, at n. 156.
in place at Meadowlark to report the       to make loyal disclosure of               In addition, even where the guardian
observed criminal activity to – in other   wrongdoing to regulators, we cited a      is the attorney’s client, it has been
words, the corporation was being           1998 law review article on ethics by      held that an attorney has a duty to
used by the insiders solely as a           Professor George C. Harris entitled       the ward to prevent foreseeable harm
vehicle to commit fraud with no gain       Taking the Entity Theory Seriously;       from the guardian and may be liable
going to the corporation.                  Lawyer Liability for Failure to Prevent   for failing to do so. Id., citing Fickett
      The plaintiff’s liability argument   Harm to Organizational Clients            v. Superior Court of Pima County,
against the lawyer was that given the      Through Disclosure of Constituent         558 P.2d 988 (Ariz. Ct., App. 1976)
facts as known by the lawyer, a            Wrongdoing (herein also (“Harris          (holding that attorney for guardian
reasonably prudent practitioner            Article”), 11 Geo. J. Legal Ethics 597    was negligent to failing to discover
would have concluded that: (i) the         (1998). Professor Harris’ article has     and disclose that guardian had
constituents were looting the              been cited by the American Law            embarked         on     scheme        of
premiums paid to Meadowlark: (ii) the      Institute’s Restatement of the Law        misappropriation, conversion, and
assets of Meadowlark set aside to          Third, The Law Governing Lawyers          improper investment); see also
pay claims of policyholders and third      (“Restatement”). See Restatement          Charleson v. Hardesty, 839 P.2d
parties were bogus; (iii) the longer       of the Law Third, The Law Governing       1303, 1306-07 (Nev. 1992) (“When
Meadowlark stayed in business, the         Lawyers 96,’s Note, com. F, at 43-44      an attorney represents a trustee in
more premiums would be looted by           (ALI 2001) (disclosure outside the        his or her capacity as trustee, that
the insiders and the deeper                organization appropriate where the        attorney assumes a duty of care and
Meadowlark’s insolvency would              wrongdoing is clear, the injury to the    fiduciary duties toward the
ultimately be; (iv) there were no          client organization is substantial, and   beneficiaries as a matter of law.”); In
fiduciaries in place at Meadowlark for     the disclosure would clearly be in the    re Fraser, 523 P.2d 921, 928 (Wash.
the lawyer to report the news of the       interest of the entity client).           1974) (holding that because
existence of the defalcating                    Professor Harris concluded that      “attorney owed a duty to the ward,
constituents to; (v) Meadowlark’s          once an attorney knows or should          as well as to the guardian,” attorney
continued operation as an insurer          have know (i) that constituents of an                         (Continued on page 16)

                                   International Association of Insurance Receivers

                                                                                                         (Continued from page 15)

was justified in not turning assets over   imposed in those instances when the        trial court went on to conclude,
to a guardian who “manifested a            corporation benefits from the              however, that before the attorney
greater interest in obtaining money        criminality committed by its               must report criminal activity to an
for herself than in serving the interest   constituents. This is so because the       outside agency, there must be proof
of the ward”) (overruled on separate       knowledge of the agent’s wrongdoing        that the attorney had actual
issue, 1999); Ronald C. Link,              is imputed to the corporate client         knowledge that the constituents were
Developments Regarding the                 eliminating any argument that the          operating the business as a criminal
Professional Responsibility of the         corporation relied to its detriment on     enterprise, and that their operation
Estate Administration Lawyer; The          the bad advice of counsel or his           would likely result in Meadowlark’s
Effect of the Model Rules of               failure to intervene on the                destruction. The court awarded the
Professional Conduct, 26 Real Prop.        corporation’s behalf.                      disgorgement of close to $1 million
Prob. & Tr. J. 1, 78 (1991) (“In               Professional malpractice liability     in fees, but did not impose liability on
representing a dishonest fiduciary,                                                   the lawyer for the $4 million in
the attorney not only must maintain                                                   Meadowlark’s unpaid insurance
loyalty to the beneficiaries but also      In the vast majority of in-                claims. We have filed a motion to
must be truthful to the probate court      stances, lawyers will resign               amend the judgment and will file an
regarding the fiduciary’s actions…         from representation when                   appeal on the legal issue of the
The correct response of the attorney       confronted with criminal ac-               required competency of the lawyer.
is usually disclosure when the             tivity                                     It is plaintiff’s contention that proof of
fiduciary’s action is fraudulent or                                                   facts showing that the lawyer knew
criminal”).                                                                           or should have known that the
     In our case, full disclosure by the   for failing to disclose criminal conduct   constituents were operating a
lawyer to state insurance regulators       of the constituents of a corporation       criminal enterprise was sufficient.
about Meadowlark’s failure to comply       can only occur when the constituents       Requiring proof of actual knowledge
with legal requirements and the clear      are clearly using the corporation as       only rewards severely incompetent or
indications of the insiders’ deceptive     a tool to commit fraud for their own       crooked lawyers.
and illegal activities would plainly       benefit thereby eliminating any
have been in the best interests of         agency relationships and arguments             Robert Brace is a partner at
Meadowlark. As shown by our                about business judgment. In those          Hollister & Brace, a law firm located
expert’s testimony, such disclosure        rare instances, the lawyer who             at 1126 Santa Barbara Street, P.O.
would have been followed by the            represents the corporation should be       Box 630, Santa Barbara, California
institution of a court-supervised          liable when he acquiesces in the           93102. For over nine years Mr.
receivership, the only effective way       constituents’ wrongdoing and the           Brace has been actively involved in
to stop the insiders’ looting and          wrongdoing injures the corporation.        contingency fee representation of
mitigate Meadowlark’s damages.                  In our case, the trial court          policyholders and liquidators of failed
     Liability under the above rule will   concluded that: (i) the lawyer knew        insurance companies. To date his
rarely be imposed because the              that Meadowlark’s insiders were            firm as collected over $25,000,000 in
requisite factual scenario will seldom     attempting to deceive state insurance      settlements from various insurance
occur. In the vast majority of             regulators, (ii) lawyers knew that         producers, brokerage houses,
instances, lawyers will resign from        Meadowlark’s financial statements          banks, attorneys and accountants to
representation when confronted with        regarding assets available to pay          pay, on a pro rata basis, the unpaid
criminal activity or, they will be able    claims were false, and (iii) that the      claims owed by the insolvent insurers.
to give notice of the nefarious activity   lawyer had sufficient cause to believe     Documents and pleadings relevant to
to higher-ups at the corporation who       that the insiders “were operating          the above article are available upon
will respond to protect the                Meadowlark in their own interests and      request at (805) 963-6711 or by e-
corporation.              Professional     not those of Meadowlark or its             mail at
malpractice liability will also not be     policyholders and third parties.” The

                                                                Fall 2002

                                   Insurance Exit Strategies
                                                   by Robert Loiseau, CIR – P&C
    Editor’s Note: IAIR Member Bob            its liquidation under regulatory auspices.     Outside consulting firms offer experience
Loiseau recently attended a Business          The third theme involved a running debate      and skills which are significantly different
Forum on Solutions for Discontinued           about who can best perform the services        from the operation of an on-going
Insurance Operations Including                that a runoff or exit strategy requires: in-   business, making them attractive to
Reinsurance, Sale, Runoff and Solvent         house workout departments or outside           clients who lack well - developed internal
Schemes presented by the American             consultants. Finally, there was                capabilities. In some instances, a
Conference Institute in New York City.        consensus among all speakers that the          consultant may be engaged to devise a
The Publications Committee asked him          runoff industry is here to stay, and its       workout plan which the client company’s
to report on this meeting, given its          practitioners provide highly specialized       existing staff then executes. Another exit
topicality for IAIR’s members.                services that a wide variety of                path involves actions by regulators. In
                                              constituents require.                          the UK, schemes of arrangement,
Introduction                                                                                 whether solvent or insolvent, are favored,
     As an insurance receiver attending       Why Exit Strategies are Pursued                while in the United States, supervision,
a conference populated by industry and              A variety of factors motivate            conservation and receivership are the
regulator representatives, it was             companies to seek exit strategies. Long        weapons of choice for regulators once
interesting, (eye-opening, in fact) to hear   term liabilities asuch as asbestos and         they have identified a problem company
so many non-receivership perspectives         workers compensation are risks that            that needs to be nudged (or bludgeoned)
on dealing with long term problems            companies want to escape. Other                into action.
presented by a distressed market              motivations include a corporation’s                 Any exit strategy necessarily
segment or book of business. The faculty      desire to free up capital that is otherwise    involves regulatory input or approval. But
included regulators Greg Serio,               committed until the last claim is paid.        it also involves difficult decisions by
Superintendent of the New York State          Similarly, entities like holding companies     senior management of the company
Insurance Department, Betty Patterson,        sometimes find that through merger,            which in turn can trigger shareholder
Senior Associate Commissioner of the          acquisition or change in business              repercussions. The mere announcement
Texas Department of Insurance and Doug        strategy, they no longer have an appetite      of an exit strategy or run-off plan can
Hertlein, Chief Deputy Liquidator of the      for involvement in the insurance industry      make ratings agencies nervous about a
Ohio Insurance Liquidation Office.            or in a particular segment of it. With         company’s financial standing and even
Industry representatives included             respect to large insurance companies,          lead to ratings downgrades with all the
executives from Berkshire Hathaway,           some have redefined their target markets       negatives they entail. Even announcing
Swiss Re and CAN, and consulting firms        and find that certain lines of business        a sound business decision to exit a
such as Chiltington International, Inc.       are no longer a good fit with their current    geographic area or market segment or
and TAWA Associates. Professionals            business plan.                                 to run-off a line of business triggers
from Tillinghast, KPMG, Grant Thornton              Once a decision to exit has been         heightened scrutiny and a measure of
and Standard & Poors also made                made, finding the way to the door often        risk to the company making the
presentations. IAIR members included          leads through a labyrinth of difficult         disclosure.
Jonathan Bank and Andrew Maneval who          decisions.
co-chaired the event, with Ipe Jacob,                                                        Which Way to the Exit?
Doug Hertlein, James Veach and Karl           The Best Way Out                                    After making the agonizing decision
Rubinstein among the faculty.                      Needless to say, there are a myriad       to embark on a run-off plan or exit
                                              of exit choices available: runoff              strategy, the next difficult decision a
The Burgeoning Run-off Industry               reinsurance, novation of policies by a         company faces is whether an
     Several common themes emerged            different carrier, policy buy-backs,           outsourcing or do-it-yourself approach
about which the speakers were                 outright sale of the company and               should be adopted. Since the attendees
unanimous in their views. First is the        dissolution or liquidation are but a few of    at this conference were primarily industry
enormity of the runoff industry globally.     them. Each of these approaches has             executives and consultants seeking
The dollar volume of runoff portfolios        advantages and disadvantages which             business opportunities, it was not
presently exceeds $300 billion, making        share a common denominator:                    surprising to see sharp differences of
runoffs perhaps the fastest growing area      Someone has to design and implement            opinion on which approach is favored. An
of the insurance industry as a whole. The     the strategy. Many major carriers created      entire article could be written on the pros
second principal theme is the quest for       entire departments or subsidiaries whose       and cons of each approach, so the
finality which is hard to achieve absent      sole function is to deal with the parents’     benefits articulated by each group are
outright sale of a troubled company or        “problem children” in terms of risks.
                                                                                                                   (Continued on page 18)

                                        International Association of Insurance Receivers

                                                                                                                  (Continued from page 17)
highlighted rather than detailed below.          gained in other similar matters.             to redomesticate to Rhode Island for
                                                 6. Possible gains in leverage with other     regulatory purposes, and like its British
Internal Management of Run-Off                   run-offs.                                    counterpart, involves court approval of the
BENEFITS:                                        7. “Run-off economies of scale”.             insurers’ restructuring plan that is binding
1. Best protection of corporate/industry         8. Possible enhanced negotiating             on objecting parties (so long as they are
relationships.                                   positions for settling inward liabilities.   in the minority) and applies only to
2. Greatest knowledge as to how                  DANGERS:                                     commercial lines of business.
contracts worked, business practices,            1. Lessened control over day-to-day          Interestingly, estimation of claims is
etc.                                             activities.                                  specifically authorized by statute but is
3. Maximum leverages obtained from               2. Higher costs.                             not binding on reinsurers. According to
other useful relationships:                      3. New systems and data entry                the sponsors of this legislation, it was
• Ceded and assumed balances                     requirements.                                motivated partly because of the
• Dealings with brokers/intermediaries           4. Loss of valuable in-house staff.          perceived inefficiency of the United
• Actual or potential ongoing relationships      5. Possible impediment to resolving          States liquidation system in comparison
with affiliated companies                        disputes.                                    to its UK counterpart. It is also intended
• Offsets and cash management                    6. Issues of conflicts and priority          to stimulate economic development
• Knowledge and experience regarding             problems with other clients.                 within Rhode Island by requiring
leverage points                                  7. Harm to reputation/relationships          redomestication and the hiring of that
4. Confidentiality                               through “outsourcing”.                       state’s residents and professionals to
5. Preserving access, in-house, to                                                            implement the restructuring plans.
historical information and documents             The British are Coming!                      Receivers might be well served by
6. Ability to retain quality staff for future         Schemes of arrangement, which our       following the success and effectiveness
operations                                       UK colleagues have long advocated as         of this statute, because if it produces
7. Better utilize opportunities for asset-       being superior to the American practice      the desired results, the logical extension
liability matching in investment decisions       of receivership proceedings, are             would be to enact similar legislation for
8. More effective expense management,            analogous to Chapter 11 reorganizations      insolvent restructuring plans which could
less expensive                                   under the United States Bankruptcy           dramatically alter the receivership
9. Record management                             Code. They require majority approval by      industry.
DANGERS:                                         creditors because they alter contractual
1. Work performed with a “preserve your          benefits affecting those creditors; they     Conclusion
job” mentality.                                  also facilitate earlier payments of               The rapid growth and considerable
2. Distractions from attention to                dividends to them. They achieve certainty    size of run-off portfolios throughout the
company’s ongoing operations.                    and finality in terms of an exit, and they   world make this industry noteworthy.
3. Biased perspective on subject                 can apply to both solvent or insolvent       Regulators clearly favor any viable
business.                                        carriers. By using claims estimation         alternative to receivership, and only a few
4. Insufficient in-house expertise.              (commonly called a cut-off scheme) all       of the many alternatives available could
5. Vulnerability to unpredictable loss of        policyholders’ rights are determined and     be touched upon within this report. The
staff.                                           paid-fully or partially - depending on       caliber and diversity of the faculty and
6. Difficulties of investing in infrastructure   whether a solvent or insolvent scheme        their written materials made this seminar
for run-off operations.                          is utilized. Other common elements are       worth the price of admission, and the
7. Staff “morale” issues.                        the establishment of classes of creditors,   heavy turnout prompted its sponsor,
8. Danger of antagonisms from “old               the need for court approval and meetings     American Conference Institute
years” adversely affecting ongoing               of creditors to vote on approval of the, to
business.                                        scheme, followed by implementation of        consider presenting a related program
                                                 the scheme under court supervision.          in New York City this November. Those
External Management of Run-off                        So what does this have to do with       of you who attended this one, or who
BENEFITS:                                        the British? They have established a         might attend the November program, will
1. Ability to obtain the right expertise for     beachhead in Rhode Island of all places!     probably agree there is great value in
the purposes needed.                             Through that state’s Voluntary               learning about the tools utilized by parties
2. Freeing up management and staff for           Restructuring of Solvent Insurers Act,       wanting to solve major insurance
ongoing operations.                              Rhode Island seeks to attract insurers       problems in a manner that obviates the
3. Avoid complications of run-off activities     who want to engage in an “Americanized”      need for receiverships. Finally, the writer
impacting         ongoing        business        scheme of arrangement. Rhode Island’s        gratefully acknowledges the sponsor’s
relationships.                                   statute only addresses solvent runoffs       many courtesies including permission to
4. Fully motivated staff.                        and is modeled closely on UK schemes         draw from the written course materials
5. Valuable knowledge and experience             of arrangement. It requires a company        in preparing this article.

                                                              Fall 2002

Receivers’ Achievement Report                                                                 by Ellen Fickinger

Northeastern Zone - J. David Leslie (MA); W. Franklin Martin, Jr. (PA);
Midwestern Zone - Ellen Fickinger (IL); Brian Shuff (IN)
Southeastern Zone - James Guillot (LA);
Mid-Atlantic Zone - Joe Holloway (NC)
Western Zone - Mark Tharp, CIR (AZ); Bob Loiseau, CIR (TX)
International - Jane Dishman (England); John Milligan-Whyte (Bermuda)

Our achievement news received from reporters for the third quarter of 2001 is as follows:

     Mark Tharp (AZ) reported that on       the Arizona Life and Disability Insurance
August 30, 2001 following a bench trial,    Guaranty Fund (ALDIGF) will receive a           Ancillary Receiver has marshaled assets
the Arizona Superior Court, Maricopa        one hundred percent distribution on their       held in the form of statutory deposits for
County, assessed liability again the        total claim of $106,091,479 and                 the benefit of Arizona policyholders and
former actuaries of AMS Life Insurance      policyholders with excess claims totaling       claimants in the approximate amount of
Company in the principal amount of          $13,537,443 not covered by the ALDIGF           $23,030,500. The Ancillary Receiver is
$17.5 million dollars plus sanctions,       will receive a pro-rata distribution on their   working closely with the State
costs and pre-judgment interest of          claims of approximately 80%.                    Compensation Fund to coordinate
$1,537,450 for a total judgment of                Proof of Claim recommendations on         payment of Arizona workers
$19,037,450.                                Premier Healthcare of Arizona were filed        compensation claimants affected by the
     Further, the Receiver closed on the    with the Court in September 2001                Receivership.
sale of Farm and Home Life Insurance        totaling $56.9 million. A formal objection          The Receiver for Diamond Benefits
Company’s holdings in a complex failed      process is in effect wherein claimants          Life Insurance Company finalized the
real estate development realizing net       were afforded the opportunity to object         sale of its holdings in the Heritage Ranch
proceeds of $7,516,031. As a result of      to the proof of claim recommendations.          properties consisting of approximately
litigation settlements recoveries from      The Court will hear and consider these          5,000 acres located in San Luis Obispo,
former officers, directors and              objections the latter part of 2002.             California on April 3, 2002, resulting in
professionals approaching $94 million,            Subsequent to the entry of the            proceeds of approximately $6 million for
as well as the sale of estate assets        Receivership Order on March 14, 2002            future distribution to creditors of the
including the property referenced above,    for Reliance Insurance Company, the             estate.                (Continued on page 20)

                                   International Association of Insurance Receivers

Receivers’ Achievement Reports By State                                                                      (Continued from page 19)

Arizona (Mark Tharp, State Contact Person)

New Estates                           Date of Order             Type of Order             Primary Line of
Opened                                                                                    Business
Reliance Ins. Co.                     3/14/2002                 Liquidation - Ancillary   Property & Casualty
                                                                                          Workers Comp.
Distributions                         Estate                    Amount                    Type of Distribution
Guaranty Funds                        AMS Life Ins. Co.         6,000,137.00              Early Access

Illinois (Mike Rauwolf, State Contact Person)

New Estates                           Date of Order             Type of Order             Primary Line of
Opened                                                                                    Business
Gallent Ins. Co.                      2/25/2002                 Conservation              P&C
Valor Ins. Co.                        2/25/2002                 Conservation              P&C


Estate                                Loss and Loss             Early Access              Return                 Reinsurance
                                      Adjustment Expense        Distribution              Premium                Payments
Alliance General Ins. Co              456                       0                         0                      0
AMRECO                                0                         0                         0                      6,921,136
American Healthcare                   0                         1,158,433                 0                      0
Coronet                               30                        0                         0                      0
Illinois Earth Care Workers Comp      3,911                     0                         0                      0
Illinois Environmental Services       810                       0                         0                      0
Illinois Insurance Co.                4,875                     0                         0                      0
Inland American Ins. Co.              170                       0                         0                      0
InterAmerican Ins. Co.                10,245,186                2,907,561                 0                      0
Merit Casualty Co.                    8,240                     0                         0                      0

Signifigant Recoveries

Estate                                Amount of Recovery        Type of Recovery

Alliance General Ins. Co.             17                        Reinsurance
American Mutual Reinsurance Co.       1,623,072                 Reinsurance
Centaur Insurance Co.                 71,677                    Reinsurance
Delta Casualty Co.                    5,115                     Reinsurance
Equity General Ins. Co.               20,000                    Reinsurance
First Oakbrook Corp. Syndicate        1,385,866                 Reinsurance
InterAmerican Ins. Co. of IL          170,271                   Reinsurance
Pine Top Insurance Company            2,253,810                 Reinsurance
United Capitol Ins. Co.               552,045                   Reinsurance

Texas (State Conact Person?)

New Estates                           Date of Order             Type of Order             Primary Line of
Opened                                                                                    Business
American Benefit Plans,        3/6/2002                  Receivership              Healthcare



                                                               Fall 2002

                        NAIC Summer National Meeting
                                 June, 2002
                                              by Mary Cannon Veed and Jessica Kovrov
     The NAIC Summer meeting in                                                            care operations, or specified exceptions.
Philadelphia suffered from hot and sticky                                                  Among the concerns in June were
weather but benefitted from a great                                                        distinguishing those activities from
location. As a few people may have                                                         marketing activities that trigger privacy
noticed, I didn’t attend Philadelphia. Most                                                rules. HHS has proposed various
of the following comes from my                                                             modifications to the Final HIPAA Privacy
colleague, Jessica Tovrov, and I greatly                                                   Regulation (which applies to electronic,
appreciate her help. She reports that it                                                   paper and oral communications). One
really was possible to find an excellent                                                   change redefines “marketing” as a
Philly steak sandwich there, and that the                                                  “communication about a product on
Liberty Bell looks just like its picture.           The higher than anticipated degree     service with the intent to encourage its
The intemperate comments in the               of opt-out from privacy disclosures has      purchase or use”. The proposal
following, are, as usual, all mine!           been the cause of some concern. One          eliminates the always-problematic word
                                              approach to combating consumer               “intent”. As a practical matter, it may still
Gramm-Leach-Bliley, Privacy, and              indifference is a “plain language” privacy   be easier to say what marketing is not
Modernization                                 notice. The Privacy Notice Subgroup is       than what it is. “Marketing,” as the NAIC
     The intertwined subjects of GLB,         charged with working with interested         sees it, does not include identifying or
privacy and regulatory modernization          parties in drafting such language. Along     describing providers or a network or
continued to fascinate the meeting.           the same lines is an effort to cut down      available services, providing information
There has been significant progress in        on redundant notices. The idea is that if    as part of a treatment plan, even if the
efforts to modernize the business of rate     consumers receive fewer notices, they        information recommends particular name
and form filings and agent licensing. At      will be more likely to read the ones they    brands, sending reminder notices for
last report, 44 states were using SERFF.      do receive. As things currently stand, a     appointments and providing information
Now, all states, and the District of          consumer who doesn’t opt out, might          like advising a smoker about smoking
Columbia are doing so, as are 509             receive several privacy notices regarding    cessation workshops, or a pregnant
companies. In addition, all states have       the same transaction, all of which remain    woman about a birth class, whether or
implemented rate and form filing              unread. With the thought of reducing         not the provider itself participates in the
checklists and review standards. These        notice-overload, the Privacy Issues          workshop or birth class.
can be conveniently accessed via the          Working Group has approved language               Even in marketing, authorization for
NAIC Website. Forty-four states have          that would, in many instances, eliminate     the use of PHI is not required by the
adopted laws that satisfy GLB                 the need for an agent to provide a notice    HIPAA draft when the marketing 1)
reciprocity licensing mandates, and           if the targeted consumer will receive the    occurs face to face; 2) concerns
forty-nine have adopted privacy               same notice from the principal. From a       products of only nominal value, or 3)
protections that meet GLB standards.          legal perspective, the issue is - when       concerns services or products of the
     The privacy issues that followed on      does an agent cease being an agent.          covered entity or a third party, the
GLB’s wake remain on the front burner.        For example, when the policy is up, and      covered entity or third party and its
The Privacy Issues Working Group, which       the agent shops around on behalf of the      remuneration are identified, and the
recently celebrated its second birthday,      consumer, the consumer is the client of      individual is allowed to opt-out. The period
is charged with addressing issues that        the agent, and therefore, the agent will     to submit written comments ended June
arise as states enact and enforce privacy     again have notice requirements.              30, and the working group planned to
protections, and with working toward                In the HIPAA realm, the Privacy        thrash out the results by conference call.
uniformity, or at least consistency,          Regulation drafting is drawing to a close.
among the states. At this point, with all     Under the final regulation, covered          Another Interstate Compact?
states having laws on the books, the          entities must obtain authorization from         Undeterred by the snags
Working Group is increasingly focused         the individual for the use and disclosure    encountered by the Receivership
on uniformity.                                of PHI, (personal health information)        Compact, the NAIC held public hearings
                                              except for treatment, payment, health

                                     International Association of Insurance Receivers

on the concept of using a compact model       A New Model Law                               presence at the June meeting as privacy
to handle rate and form filings, especially         One of the interesting interfaces       did. The sense of urgency surrounding
for life insurance products. 22 states are    between insurance and ERISA has been          terrorism exclusions probably will not
already participating in CARFRA, which        fermenting in the area of “discretionary”     abate until/unless Congress acts.
amounts to an opt-out approach to the         health insurance clauses. ERISA               Because, 9 months after September
same target and suggests that a               provides, in a provision meant to offer       11th, Congress has still not passed a
statutory protocol would work well.           lawsuit protection to employer trustees,      bill that adequately addresses insurers’
Unfortunately, there is a great gulf          that the benefit determinations of a plan     concerns on this issue, the NAIC agreed
between a day-to-day willingness to use       that gave discretionary authority to the      to recommend states’ granting
centralized procedures most of the time,      trustee are darned near untouchable. But      conditional approval of terrorism
and selling the Legislature that the          if the plan trustee provides benefits by      exclusion for commercial lines
state’s sovereignty in this area should       buying insurance, then the insurer’s          endorsements. Such exclusions would
be abandoned. Practitioners know that         coverage determinations can be                be automatically withdrawn 15 business
much of that “sovereignty” is an illusion;    challenged to the same extent as usual.       days after the enactment of a federal law
if an approach is working in 49 other         Taking the obvious next step, health          addressing terrorism.
states, you need a darned good reason         insurers who were serving as fiduciaries            The NAIC and ISO (Insurance
to be the holdout. But that fact hasn’t       anyway have been writing discretionary        Service office) have worked out a
kept the other Compact moving ahead…          authority into their policies so they got     mutually agreeable wording. P&C
      For some reason, the life insurance     the same protection as a self-funded          insurers will be allowed to exclude
industry is vastly more supportive of this    employer did. Unfortunately, that looks,      terrorism losses on commercial lines
thing (and more offended by the               to the NAIC, suspiciously like illusory       that exceed $25 million in the aggregate
nuttiness of 50-state filing) than are the    insurance – insurance that pays when          within a 72 hour period. The exclusion
P/C and health industries. The usual          the insurer feels like it and not otherwise   may not be applied, however, to personal
mantra is that life insurance is more         – and they’re right. A new Model Act has      lines. The Limit will not apply if the
standardized, but the truth is that           just been approved rejecting such             terrorist act is made by a nuclear
contention is circular: life insurance        clauses in insurance products. Which          reaction, or biological or chemical
products are parallel because the             leaves behind the question – why is it        warfare; these tend to be limited already
industry wants them to be that way. But       OK for employers to offer benefits            by existing language. ISO has indicated
why don’t the other guys? Anyway, the         programs that pay when the employer           that it will permit any insurer, whether or
question is where to slot in Long Term        feels like it, and did Congress really mean   not it is a licensee of ISO policy funds,
Care insurance, which is sold by both         to say that? (A significant amount of         to use its copyright exclusion language.
sorts of companies. The life industry         litigation has arisen in this area, driven          Insolvency Task Force
proposed including LTC in the Compact;        by claimants who thought it didn’t. So              The Insolvency Task Force’s
consumers, or at least the official           far the courts are saying that Congress       Receivership Model Act Revision
consumer representatives, being deeply        apparently meant what it said. Any            Working Group reported that its
suspicious of anything that makes life        further statement from Capitol Hill is        subgroups were making progress, and
easier for an insurance company and           stuck in the whole Health Care Bill of        may have a consolidated draft by New
apparently uninterested in the cost           Rights morass. In the meantime, have          Orleans. One recurrent issue remains
savings and competitiveness issues,           we just created a competitive                 the priority of distribution of guaranty
don’t like the Compact in the first place     disadvantage for insurers vs. self-funded     funds’ administrative expenses. No doubt
and really don’t want it to apply to LTC.     programs?                                     a few more will surface!
Given that the real problem is getting                                                            In New Orleans we will at least enjoy
something put together that will take         Terrorism Exclusions                          the unique sensation of meeting on
care of the easy cases, this may be an                                                      company time instead of the weekend.
                                                  Terrorism had almost as strong a
unfortunate diversion of attention.                                                         See you there!

                                                              Fall 2002

  London Market Documentation Requirements for
      Asbestos Claims: Reinsurance Contract
                                                    by Thomas D. Cunningham
     Beset by the rising tide of asbestos                                                 containing product of the underlying
bodily injury claims, Equitas Ltd. and                                                    insured. As with the Direct Insurance
certain unidentified London insurers                                                      Requirements, the Reinsurance
(collectively, the “London Market”)                                                       Requirements apply to the actual claims
promulgated new documentation and                                                         paid, as well as to each claim asserted
claim procedure requirements for                                                          to exhaust underlying limits, retentions,
asbestos bodily injury claims from                                                        and deductibles. In addition, insurers
policyholders (the “Direct Insurance                                                      ceding asbestos bodily injury losses
Requirements”), effective June 1, 2001.                                                   must supply a list setting forth minimum
A copy of the Direct Insurance                                                            information for each individual asbestos
Requirements can be found at Section         Brace, head of asbestos, pollution and       claim (including claimant’s name,
D of Mealey’s Litigation Reports:            health hazard claims at Equitas.”            jurisdiction, exposure dates, and amount
Reinsurance, Vol. 12, No. 1 (May 10,              The Direct Insurance Requirements       of indemnity and expense paid), along
2001).                                       suggest a sea change in the London           with a certification that the cession and
     Purporting to track the standard tort   Market’s approach to asbestos claims.        the supporting documentation meet the
elements of injury and causation, the        One press report stated that “[w]hen         Reinsurance Requirements.
Direct Insurance Requirements establish      asked why Equitas had not imposed                 Whether the Direct Insurance
stringent requirements which must be         such requirements before, Mr. Scott          Requirements are an appropriate
met before the London Market will            Moser, claims director at Equitas, said      response to the asbestos problem is a
reimburse asbestos-related bodily injury     that there previously was a belief that if   subject worthy of debate. This article,
claims. For instance, the Direct             asbestos claims were settled with ‘swift     however, addresses the reinsurance
Insurance Requirements call for a            small payment’ the problem would             contract issues implications of the
specific medical diagnosis that the          disappear and costly court battles could     Reinsurance Requirements. More
claimant suffers from a disease “caused      be avoided. But because of the               specifically, if London Market reinsurers
in substantial part by exposure to           significant increase in the number of        deny an asbestos loss cession from a
asbestos” and sufficient evidence            claims in the past few years, that theory    U.S. cedent based on an alleged failure
(including a sworn or verified statement)    has been abandoned.”                         to comply with the Reinsurance
that the claimant was exposed to an               Following introduction of the Direct    Requirements and the cedent brings an
asbestos-containing product of the           Insurance Requirements, the London           action to recover, who will prevail?
insured. In addition, all asbestos bodily    Market announced that it would also               Any actual dispute would turn on the
injury      claims     submitted       for   promulgate requirements to apply to          particular reinsurance contract language
reimbursement (or to exhaust underlying      reinsurance loss cessions resulting from     at issue, precisely how the cedent
coverages) must be accompanied by a          payment of asbestos bodily injury            allegedly failed to meet the Reinsurance
certification under oath that the claims     claims. These requirements (the              Requirements, and how the parties had
meet the Direct Insurance Requirements.      “Reinsurance Requirements”) took effect      operated under the contract over the
     One obvious target of the Direct        on November 1, 2001, and essentially         years. This article addresses the subject
Insurance Requirements is the practice       mirror the Direct Insurance                  in more general terms, highlighting the
of bulk or “inventory” settlement of         Requirements. Thus, the London Market        contractual and legal issues that are
asbestos claims, where individual            has announced that insurers ceding           likely to arise in such a dispute.
claimant information is rarely obtained:     asbestos bodily injury losses must show
“[i]nventory settlements -- accounting for   that they have “sufficient” documentation    Typical Reinsurance Contract Provi-
the majority of asbestos-related losses      showing that the underlying claimant         sions Implicated
paid by the London market to date -- have    suffered from a disease caused in                Enforcement of the Reinsurance
created abuses in which people               substantial part by exposure to asbestos     Requirements would implicate several
reportedly exposed to asbestos but with      and “sufficient” evidence (including a       standard reinsurance contract provisions.
no actual injury are being paid along with   sworn or verified statement) that the
legitimate claimants, according to Glenn     claimant was exposed to an asbestos-                             (Continued on page 24)

                                     International Association of Insurance Receivers

London Market Documentation Requirements                                                                      (Continued from page 23)

Exactly what a cedent must provide            provisions, which minimize the proof of        decision and acted in good faith, the
when presenting a loss cession to the         loss obligation and vest the cedent with       reinsurer is precluded from challenging
reinsurer is a proof of loss issue. A         control over underlying claims decisions,      (“second-guessing”) that decision. See,
reinsurer’s claim that a cedent did not       cannot be squared with any new                 e.g., Travelers Casualty and Sur. Co. v.
have “sufficient” documentation to pay        requirement to provide a list of particulars   Certain Underwriters, 760 N.E.2d 319
an asbestos loss under its policy to the      respecting every individual asbestos           (N.Y. 2001); American Bankers Ins. Co.
insured raises a follow the settlements       claim comprising a settlement, much            v. Northwestern Nat’l Ins. Co., 198 F.3d
issue. The very concept of a reinsurer        less a sworn certification. As for proof of    1332 (11th Cir. 1999); North River Ins.
explaining to the cedent how underlying       injury and causation, Paragraphs 1 and         Co. v. CIGNA Reinsurance Co., 52 F.3d
asbestos claims should be handled calls       2 grant the cedent the right to make such      1194 (3d Cir. 1995); International Surplus
to mind claims association or control         determinations, with the reinsurer bound       Lines Ins. Co. v. Certain Underwriters,
provisions. Typical reinsurance contract      to follow. The Reinsurance Requirements        868 F. Supp. 917, 920-21 (S.D. Ohio
language on these subjects follows:           would turn these provisions on their           1994). The doctrine applies even to a
                                              head: the reinsurer decrees what is            cedent’s good faith decision to waive
1. Proof of Loss/Follow the Settle-           appropriate in the direct claims context,      potential defenses against its
ments                                         and the cedent is bound to follow.             policyholder. Christiania Gen. Ins. Corp.
      The Reinsurer agrees to abide by the         If the reinsurance contract contains      v. Great Am. Ins. Co., 979 F.2d 268, 280
loss settlements of the Company, such         a claims association right, perhaps the        (2d Cir. 1992). A cedent has a reasonable
settlements to be considered as               Reinsurance Requirements qualify as an         basis for its settlement decision if the
satisfactory proof of loss, and amounts       exercise thereof. At least under               cedent’s payment to its insured was “at
falling to the share of the Reinsurer shall   Paragraph 3 above, however, the                least arguably within the scope of the
be immediately payable to the Company         reinsurer’s option under the clause is to      insurance coverage that was reinsured.”
upon reasonable evidence of the amount        become involved in the handling of an          Mentor Ins. Co. (U.K.) Ltd. v.
paid by the Company being presented.          underlying claim, suit or proceeding. The      Brannkasse, 996 F.2d 506, 517 (2d Cir.
                                              Reinsurance Requirements do not                1993) (emp. added). Bad faith “requires
2. “Sole Judge” of Loss and Amount            contemplate such direct involvement.           an extraordinary showing of a
of Payment                                    Rather, they impose burdens on the             disingenuous or dishonest failure to carry
     The Company shall be the sole judge      cedent respecting its claims decisions.        out a contract.” North River, 52 F.3d at
as to what constitutes a claim for loss            In fact, the Reinsurance                  1216.
covered under its policies and the kind       Requirements substitute the judgment                This formulation of the follow the
or type of loss thereon and the               of the reinsurer for that of the ceding        settlements doctrine would not support
Company’s liability thereunder, and as        company with respect to coverage and           enforcement of the Reinsurance
to the amount or amounts which it shall       settlement of asbestos bodily injury           Requirements, which can be likened to
be proper for the Company to pay              claims. A reinsurer pursuing that              obvious second-guessing of liability and
thereunder. The Reinsurer shall be bound      proposition should look for something          damage determinations that are
by the judgment of the Company as to          more muscular than a claims association        historically well within the cedent’s
the liability and obligations of the          right. A claims control or consent to settle   purview. See, e.g., Ins. Co. of State of
Company under its policies.                   clause is needed. Such clauses,                New York v. Associated Manufacturers’
                                              however, are atypical; and reinsurers          Mut. Fire Ins. Co. of New York, 74 N.Y.S.
3. Claims Association                         who invoke them assume a risk of               1038, 1039 (N.Y. App. Div. 1902) (“In the
                                              incurring direct liability to the              absence, therefore, of fraud or bad faith
     When so requested, the Company
                                              policyholder. To support enforcement of        on the part of the plaintiff [cedent], the
will afford the Reinsurer an opportunity
                                              the Reinsurance Requirements, the              defendant [reinsurer], by the terms of its
to be associated with the Company, at
                                              London Market will likely need to venture      policy, as well as by the construction
the expense of the Reinsurer, in the
                                              beyond the reinsurance contract and into       placed upon it by the admission, is in
defense of any claim, suit or proceeding
                                              reinsurance case law and commentary.           no position to object to the mode of
involving this reinsurance, and the
                                                                                             adjustment as made by the plaintiff”).
Company and the Reinsurer shall               Case Law and Commentary                        Some formulations of the follow the
cooperate in every respect in the defense
                                                  Over the past 15 years, U.S. court         settlements doctrine, however, arguably
of such claim, suit or proceeding.
                                              have granted ceding companies a wide           refer to the quality of the cedent’s claims
     If the reinsurance contract at issue
                                              berth when making coverage and                 investigation; this may be the basis for
included Paragraphs 1 and 2 above, a
                                              settlement decisions. Generally                the London Market’s defense of the
reinsurer would face an uphill battle in
                                              speaking, as long as the cedent had a          Reinsurance Requirements.
denying a cession for failing to meet the
                                              reasonable basis for its settlement                 For example, that a cedent
Reinsurance Requirements. These

                                                               Fall 2002

investigate underlying claims in a            a proper and businesslike manner.’” Id.      liability as a prerequisite to obtaining
“reasonable and businesslike” manner          at *3. Without purporting to adopt that      insurance coverage. For example, in
before the follow the settlements doctrine    standard, the court held that under          Uniroyal v. Home Insurance Company,
applies is a concept that originates in       contract language similar to the clauses     707 F. Supp. 1368 (E.D.N.Y. 1988),
English case law and has been imported        listed above, it “can not [sic] conclude     Uniroyal, a manufacturer of the “Agent
into certain U.S. decisions. See, e.g.,       that there is any possible issue of fact     Orange” defoliant, sought insurance
Hartford Acc. & Indem. Co. v. Columbia        on any of these questions without            coverage for its share of a $180 million
Casualty Co., 98 F. Supp. 2d 251, 258         running afoul of the ‘follow the fortunes’   global settlement with a class of 2.5
(D. Conn. 2000): “Consequently, ‘subject      doctrine….The court does not believe that    million Vietnam veterans allegedly
to the requirements of good faith and a       the businesslike handling standard may       injured by Agent Orange. Home
reasonable, businesslike investigation,       be used as an excuse for a full blown        Insurance Company denied coverage for
the ceding company may bind the               review of the ceding companies’              the claim on the grounds that, inter alia,
reinsurer to follow its settlement fortunes   settlement decision. If it were, there       Uniroyal had failed to prove that “actual
when it concedes that a particular claim      would be no reason for the ‘follow the       injury” took place. Id. at 1378. In words
falls within the scope of coverage            fortunes’ doctrine, since every case         that ring with equal truth here, the Court
provided by the ceding company’s              would be open to second guessing after       declared that:
policy’”; see also American Marine Ins.       the decision to acknowledge coverage               Home's contention would place
Group v. Neputunia Ins. Co., 775 F. Supp.     and to settle.” Id. at *3-*4 (emp. added).   settling defendants in the hopelessly
703, 708 (S.D.N.Y. 1991); Curiale v. DR            Moreover, regardless of how different   untenable position of having to refute
Ins. Co., 593 N.Y.S. 2d 157, 165 (N.Y.                                                     liability in the underlying action until the
Sup. Ct. 1992). These cases all cite                                                       moment of settlement, and then of
English authority on this point.              Often the evidence needed to                 turning about face to prove liability in the
     Conceivably, the London Market           prove actual injury--such as                 insurance action. Often the evidence
may argue that the Reinsurance                the tort plaintiffs' medical                 needed to prove actual injury--such as
Requirements merely set forth what            histories--would be unavail-                 the tort plaintiffs' medical histories--would
constitutes a “reasonable, businesslike       able to the insured                          be unavailable to the insured. Such a
investigation” with respect to asbestos                                                    regime would markedly reduce the
bodily injury claims. But does the                                                         advantages to the insured of settling:
“reasonable, businesslike investigation”                                                   faced with the choice of defending the
formulation mean that the most minute         courts formulate the follow the              tort action vigorously or settling it without
details of a cedent’s claim practices,        settlements standard, specific               hope of insurance reimbursement,
such as what proof to require before          reinsurance contract language should         insureds would tend to choose the
satisfying an underlying claim, are           control in any given case. The ‘sole         former. Settlements expressly
always open to challenge?                     judge’ language previously quoted            disavowing tort liability…would be
     The limited authority available          powerfully refutes the notion that           discouraged lest the express disavowal
suggests that the “reasonable,                reinsurers can decree appropriate            operate as a waiver of insurance
businesslike investigation” standard          underlying claims practices – the            coverage claims….In times of severe
cannot subvert the policy that grants         contract grants that right to the cedent.    pressure on courts overwhelmed with
significant deference to cedents’             Thus, there appears to be little support     litigation, and undersupplied with
settlement decisions. If it could, every      for the argument that the “reasonable and    resources, a rule forcing more cases to
cedent’s settlement of a coverage             businesslike investigation” standard         trial would be a self-inflicted wound of
dispute would be a mere prelude to a          permits the London Market to dictate         suicidal import.
new dispute wherein the reinsurer             asbestos claims practices to its cedents           Id.; see also Luria Brothers & Co.,
challenges the cedent’s claims-handling       via the Reinsurance Requirements.            Inc. v. Alliance Assurance Co., Ltd., 780
as not “reasonable and businesslike.”               A related argument, that the           F.2d 1082, 1091 (2d Cir. 1986) (“In order
The point is well illustrated in a case       “reasonable and businesslike                 to recover the amount of the settlement
which involved certain London Market          investigation” standard mandates proof       from the insurer, the insured need not
reinsurers, Aetna Casualty & Sur. Co. v.      of causation and injury before a cedent      establish actual liability to the party with
Certain Underwriters, Index No. 118676/       may properly settle a claim, is equally      whom it has settled ‘so long as ... a
95 (N.Y. Sup. Ct. June 9, 1997),              unfounded and contrary to U.S. case law.     potential liability on the facts known to
published in Mealey’s Litigation Reports:     The issue of proof of causation and injury   the [insured is] shown to exist,
Reinsurance, Vol. 8, No. 4 (June 25,          for coverage of mass tort settlements        culminating in an amount reasonable in
1997) (“Aetna”). In Aetna, certain London     has been extensively litigated in direct     view of the size of possible recovery and
Market reinsurers argued that their           insurance cases. Those cases have            degree of probability of claimant's
cedent’s settlement “may not have been        consistently held that a settling
‘reasonable, in good faith, and made in       policyholder need not prove actual
                                                                                                                 (Continued on page 26)

                                    International Association of Insurance Receivers

London Market Documentation Requirements                                                                     (Continued from page 25)

success against the [insured]’”)             token, for any given claim, the               compute which insurance companies
(citations omitted) (ellipses and brackets   subscribing producer may have been            would pay and how much they would pay
as original).                                chiefly liable but ended up paying a          for each claim.” 4 F.3d at 1064. The
      United States courts have also         smaller share, benefiting from the billings   Second Circuit also held that North River
recognized that cedents act reasonably       to other subscribing producers based on       had a duty to notify Unigard before
in reaching compromise settlements of        the producer allocation formula, which        entering into the Wellington Agreement,
asbestos claims, even if those               was a proxy for actual liability based on     and that it had breached that duty.
compromises, like the compromises            averages derived from past payments.          Nevertheless, the Second Circuit held
inherent in the Wellington Agreement, do     762 F. Supp. at 589; 4 F.3d at 1066.          that Unigard was bound to follow North
not require cedents to prove causation                                                     River’s fortunes:
and injury. For example, the decisions                                                           [B]y changing the coverage rules
in Unigard Sec. Ins. Co. v. North River      United States courts have                     pursuant to the insurance-allocation
Ins. Co., 762 F. Supp. 566 (S.D.N.Y.         also recognized that cedents                  formula, the [Wellington] Agreement
1991), aff’d in part and rev’d in part, 4    act reasonably in reaching                    altered North River’s liabilities, including
F.3d 1049 (2d Cir. 1993), although well      compromise settlements of                     requiring it to pay some claims and
known for their treatment of the late                                                      administrative costs for which it was not
notice issue, also concerned challenges
                                             asbestos claims                               liable under the original policies.
to the sufficiency of proof of causation                                                   Nonetheless, because the reinsurer’s
and injury for asbestos loss cessions              North River Insurance Company           and ceding insurer’s interests are
paid in accordance with the Wellington       (“North River”) was a party to the            essentially the same as to liability, good
Agreement.                                   Wellington Agreement, as was its              faith coverage decisions generally do not
      The Wellington Agreement was titled    insured, Owens Corning Fiberglas              constitute prejudice. This is so even in
the 1985 Agreement Concerning                Corporation (“OCF”). After North River        the radical case of the Wellington
Asbestos-Related Claims. Nevertheless,       had paid asbestos losses to or on behalf      Agreement, which used automatic
it is commonly known as the Wellington       of OCF, it sought to recover from its         formulae to replace individualized
Agreement for its chief mediator, Dean       reinsurer Unigard Security Insurance          determinations as to the liability of
Harry Wellington of the Yale Law School.     Company (“Unigard”). Unigard denied           insureds and their insurers. Coverage and
The Wellington Agreement was a global        liability based on a number of arguments,     liability would be altered but the changes
compromise of numerous complex               including North River’s failure to notify     might offset each other and the total
issues between and among certain             Unigard of its entry into the Wellington      payouts by particular insurers might
producers of asbestos and asbestos-          Agreement. Unigard claimed that the           remain roughly the same.
containing products (“subscribing            Wellington Agreement had significantly              4 F.3d at 1068. Although the Second
producers”) and their liability insurers.    altered the risk reinsured by adoption of     Circuit’s decision in Unigard ultimately
762 F. Supp. at 575. The Wellington          the producer allocation formula and other     concerned late notice and prejudice, the
Agreement established the Asbestos           mechanisms. 762 F. Supp. at 588-89.           court’s discussion of the Wellington
Claim Facility (“Facility”) to handle all    The district court rejected the argument,     Agreement in Unigard is instructive
asbestos-related claims against the          finding as a matter of fact that OCF’s        because it upholds the cedent’s
subscribing producers. Id. at 573, 576.      eventual withdrawal from the Facility         fundamental ability to compromise
Once the Facility settled a claim, the       meant that the claims North River ceded       underlying claims, so long as it acts
settlement amount and the defense            to Unigard had not been paid pursuant         reasonably and in good faith under the
costs were allocated among the               to the producer allocation formula and        circumstances, even if the compromise
subscribing producers according to a         holding that Unigard was bound to follow      calls for the cedent to pay some claims
producer allocation formula. 4 F.3d at       the fortunes of North River, which had        for which it is not legally liable. The
1056. Under the producer allocation          compromised its liability to OCF in a         London Market should have considerable
formula, the different asbestos              reasonable, good faith manner. 762 F.         difficulty reconciling that principle with
subscribing producers were assigned          Supp. at 587.                                 enforcement of the Reinsurance
shares based on the relative amount                On appeal, the Second Circuit           Requirements.
each producer had previously paid on         reversed the district court’s factual
asbestos claims. Id. Thus, for any given     finding respecting the impact of the          Course of Performance
claim settled by the Facility and billed     producer allocation formula: “[T]he                In addition to the pertinent contract
to a subscribing producer, it was not        Wellington Agreement did affect the           language and the case law, a dispute
necessarily the case that that               claims paid by North River to Owens-          over enforcement of the Reinsurance
subscribing producer was legally liable      Corning....The coverage principles of the     Requirements would also concern the
to the underlying claimant. By the same      Wellington Agreement were used to             parties’ course of performance under the

International Association of Insurance Receivers