Louisiana Now Twelfth State to Amend Large Deductible Liquidation Act

On June 4 Louisiana adopted legislation to define how large deductible policies are handled in an insurance liquidation. The new law tracks closely to model language adopted by NCIGF and reflects the NCIGF position that deductible collections and other recoveries are to be remitted at 100% to the guaranty funds to the extent of their claim payments.

In the context of this legislation “large deductible” policies are:

  • Workers compensation policies in which the insurer agrees to pay the claims from dollar one.
  • However, through policy endorsement, the policyholder is obligated to reimburse the insurance company up to a certain specified amount – usually upwards of $100,000. (Sometimes through special arrangement with the insurance company the policyholder pays the deductible amount in the first instance – however the insurance company always has the ultimate responsibility to pay the claim.)
  • These mechanisms allow the policyholder to save on premium and at the same time protect the injured worker.
  • Any collection issues are addressed between the policyholder and the insurance company, but the worker gets needed benefits on a timely basis. Typically, the policyholder obligation to repay is secured by collateral furnished by that policyholder.

Confusion often ensues if the insurance company goes into liquidation and an insurance guaranty fund assumes the obligations of the insolvent insurer for workers compensation cases. Statutes such as the new Louisiana law settle various issues such as 1) who is responsible for collection of the large deductible recoveries, 2) how collateral put in place to secure these obligations should be administered post-liquidation, and 3) does the recovery become a general asset of the now insolvent estate or is it remitted to the guaranty fund paying the claim to the extent of that claim payment?

According to Roger Schmelzer, NCIGF President and CEO, “these issues are important to the guaranty funds for several reasons:  1)  Any confusion about the status of the various parties, such as the policyholder, the claimant, the receiver and the guaranty fund, can result in collection delays and litigation – both of which diminish available funds to reimburse the deductibles; 2) guaranty funds are a limited safety net – ultimately the cost of the guaranty fund payments is passed on to the public by various recoupment methods – having the structure in place to reimburse guaranty funds quickly on deductible payments reduces the cost to the public, and, importantly, bolsters the ability of the guaranty funds to provide seamless protection to injured workers.”

The new Louisiana law addresses all these issues and will do much to eliminate confusion and delay in future Louisiana insurance insolvencies. It’s essential elements are:

  • It calls for the receiver to assume collection efforts.
  • The receiver administers the collateral, draws down on the collateral should the policyholder fail to pay within a certain time frame, and eventually returns any excess collateral to the policyholder.
  • Guaranty funds receive reimbursement in full for their claim payments out of the deductible collections or collateral draw downs. (More information on this rather complex statutory scheme, and other similar laws, can be obtained by review of the new law available https://www.ncigf.org/industry/public-policy-and-legislation/.)

The other states that have adopted similar statutory changes are California, Pennsylvania, Illinois, Indiana, Michigan, Texas, New Jersey, Utah, Florida, Missouri, and West Virginia. Most follow some version of the template of the NCIGF model which has been revised over the years to reflect experience in dealing with these products in an insolvency context. The first state to enact the bill was Pennsylvania during the aftermath of the Reliance insolvency. Reliance was liquidated in 2001 and the legislation was added in 2004.

Company Division Statutes Gain Steam in the States

Company Division Statutes, also known as restructuring statutes or business transfer mechanisms, are gaining steam in the state legislatures. These are statutes that permit an ongoing insurance company to divest itself of certain liabilities, along with a calculated amount of assets, and relinquish any ongoing responsibility for this business. The business divested would be put into an existing or newly created insurance company.   The statutes proposed typically call for a plan to be filed with and approved by the state’s commissioner of insurance.  Sometimes review and approval by the court is also required.  Requirements for notice to policyholders vary from state to state.  The most current proposals do not limit lines of business that can be subject to divisions.  Hence, types of insurance such as personal lines, workers compensation and long- term care could be involved.

This concept began to take shape many years ago when Rhode Island adopted Chapter 14.5 of its insurance code known as “Voluntary Restructuring of Solvent Insurers.”  The mechanism was narrowly crafted and applies to “insuring of any line(s) of business other than life, workers’ compensation, and personal lines insurance.”  (See RI Statute s. 27-14.5-1(6)).

Pennsylvania also had a related law (PA Bus Corp. Law § 1951 (repealed)) that provided for division of a solvent company. The statute was used most notably in 1996 by Cigna to divide the business of its Insurance Company of North America (“INA”) unit.  The newly formed entity, known as Brandywine, assumed certain run‐off blocks of business while INA continued to write new business. The law has since been repealed and replaced with the more generalized Associations Transaction Act (15 Pa.C.S.A. § 361) though its application to insurance policyholders is unclear.

In 2014, Vermont passed its Legacy Insurance Management Act (LIMA). According to the RunOff Re.Solve website (runoffresolve.com), LIMA allows a non-admitted insurer to transfer its discontinued commercial business to a third‐party company.  Such a division would require approval from the Vermont regulator, but the law does not mandate court approval. Personal lines coverages are excluded and policyholders can opt out of the transfer process.

Most recently, a litany of division statutes have been proposed in the following states and have progressed in the 2017 and 2018 sessions.  The current status of the proposals in these states is as follows:

Connecticut:  Division statute enacted in 2017

Georgia: Passed both houses and recently vetoed by the governor.

Illinois:  Division statute enacted in 2018.

Iowa: “Study” bill floated in 2018.

Oklahoma:  Division statute enacted May 2018.

Michigan:  Enacted in late 2018

Nebraska:  Proposal introduced in 2019

Again, these most recent proposals are not limited to certain lines of business nor is policyholder approval required. Whether there is guaranty fund coverage for the divided entity is also an issue of concern.  The NCIGF will be monitoring the issue closely and providing updates as things develop.

For additional details on division statutes please go to https://www.ncigf.org/library/ and search for “division.”