On April 21, I participated in a stakeholder teleconference convened by the Resolution Working Group (ReWG) of the International Association of Insurance Supervisors (IAIS). ReWG, chaired by Alex Hart (a deputy in the U.S. Federal Insurance Office), is writing an application paper for use by global regulators in establishing and administering resolution powers in their country. James Kennedy from the Texas Department of Insurance and chairman of the NAIC Receivership and Insolvency Task Force also serves on the working group.
Prior to the meeting, NCIGF and NOLHGA submitted a joint letter that underscored two major points:
Policyholder protection schemes (PPS) are important partners in the insurance resolution process and not merely a source of funding; and
Early involvement in a resolution is a critical element of policyholder protection
We engage in these international processes because the concept of insurance resolution is evolving around the world. NCIGF and NOLHGA have been successful in persuading the IAIS that the protection of policyholders is equal to protecting counterparties when an insurance carrier fails which is not where the discussion started. Having made that case, the next objective is to continue to press the case for the importance of partnership between regulators and guaranty funds.
Bringing the guaranty fund system into the process at the earliest possible point of the liquidation leverages expertise and practices that will result in a seamless experience for the policyholder and support of the insurance promise. These are the same points we are making to our domestic regulators. It’s resulted in our inclusion in the confidential Receivership Financial Analysis Working Group (RFAWG) and has persuaded insurance receivers to consult with us much earlier to help our members to be better coordinated.
There’s also a parallel process underway at the European Insurance and Occupational Pensions Authority (EIOPA) intended to harmonize resolution authority across the European Union.
The EIOPA initiative matters to us because European regulators prefer having significant levels of capital already on hand with which to resolve an insurer failure, while the U.S. system is a post-event model. Our goal with EIOPA is to make the case that there is no one way to pay for an insurance resolution. We want to keep the established and effective U.S. post-funding mechanics intact.
NCIGF has been working closely with the International Forum of Insurance Guarantee Schemes (IFIGS), of which we are a member, to take make this case, most recently at an EIOPA stakeholder meeting in late February.
IFIGS was asked to moderate a session on harmonization for EIOPA officials. While there’s been no final declaration from EIOPA officials, indications are that the U.S. argument in favor of multiple funding mechanisms was favorably received. I will keep you posted.
The NCIGF has filed comments with as Oklahoma court in response to a petition to restructure certain policies of Providence Washington Insurance Company (PWIC) to Yosemite Insurance Company, pursuant to the Oklahoma Insurance Business Transfer statute. Both companies are affiliates of Enstar Group Limited.
Notably, the block of business proposed to be transferred includes workers compensation policies that were originally policies of the now insolvent ROA insurance company. These claims were serviced for some time by the guaranty funds before they were transferred to PWIC.
NCIGF’s comments called for the Court to consider the availability of guaranty association coverage for the transferred claims should Yosemite become insolvent. Further, NCIGF explained its position on the matter; that if there was guaranty fund coverage before the transaction there should be coverage after the transaction. Conversely, if there was not guaranty fund coverage before the transaction, coverage should not be created by the transaction.
The NCIGF also noted that it is not likely that most current state laws would be interpreted to achieve this result. NOLHGA and the Arizona Insurance Department also filed comments in the matter.
The transaction is representative of a trend in several states which have adopted statutes permitting division or transfer of blocks of insurance business to different entities. The relinquishing entity would have no residual liability for the business if assets become insufficient to cover claims. Guaranty fund coverage under current statutes for the transferred business under current guaranty fund law is unclear.
Guaranty funds and receivers have been in conflict for more than 10 years over treatment of large deductible products written by companies that later go into liquidation. In liquidation, confusion can arise about who is responsible for collection of deductible recoveries and how collateral put in place secure collections should be managed. Additionally, there has been some disagreement among insurance company receivers and guaranty associations about how much of the deductible collection and collateral draw down should be returned to the guaranty funds to the extent of their claim payments. More recently, there has been a concerted effort by receiver and guaranty funds to resolve these issues. Two significant developments came about during the Austin NAIC meeting in December:
Regulators approved revisions to the Receivers’ Handbook to clarify best practices on various administrative issues relating to deductibles.
Taking it a step further, the Receivership Large Deductible Workers’ Compensation (E) Working group exposed a draft guideline on alternative approaches for statutory provisions on large deductibles in receivership. One alternative calls for the deductible recoveries and collateral drawdowns to be treated as general assets of the insolvent estate. The other, the approach endorsed by the NCIGF, calls for the recoveries and drawdowns to be remitted in full to the guaranty funds to the extent of their claim payments.
Both LD results came about due to purposefully more positive interactions based on a commonality of concerns between the parties. NCIGF was seen not as a rival but indeed as the “trusted expert” that we have tried to position ourselves as in all matters of public policy development when we are engaged. Barb Cox had the lead on this issue and received support from Rowe Snider and former FL manager Sandy Robinson. We owe them all a debt of thanks.
At the Austin meeting of the National Association of Insurance Commissioners (NAIC) the NCIGF presented its position on guaranty fund coverage related to claims that might arise from business that is restructured pursuant to statutes in several states. These statutes, which are described as either Insurance Business Transfer (IBT) or Division statutes, permit a company to divest itself of certain blocks of business. The transferring company has no liability should the assuming entity be ordered into liquidation. Further, the statutes permit various lines of business to be transferred including workers compensation and other personal lines.
The NCIGF expressed concern that under current guaranty fund law many claims presented to guaranty funds would not be considered “covered claims” – that is claims eligible for guaranty fund coverage should the assuming entity be liquidated.
To address this matter the NCIGF announced a multi-state effort to revise guaranty fund statute to afford claimants who are entitled to coverage before the restructuring transaction to have such coverage after the transaction. Further, the law adjustments will not permit claims to be covered if the claimant had no guaranty fund coverage before the transaction. This would include products written on a surplus lines basis or written by risk retention groups and the like which are excluded from coverage under current law.
Just prior to the NAIC meeting in Austin, TX was the annual conference of the International Forum of Insurance Guarantee Schemes (IFIGS) in Washington D.C. NOLHGA served as co-hosts. This was my final duty as 2019 chairman of IFIGS. 17 of the 24 IFIGS members attended and we had about 60 people altogether at the conference on December 4. Special thanks to NCIGF board members Keith Bell, Joyce Mellinger, Smitty Harrison and Brad Roeber for their attendance and support.
We covered a number of topics that are important to those who track international resolution matters. The benefit to us of IFIGS participation is a platform to keep our tested public policies and structure in front of the international standard-setters, including our own regulators who participate. This is another example of how NCIGF is expected to carry the water as subject matter experts on insurance liquidation public policies. Some takeaways for your consideration:
Tom Sullivan from the Federal Reserve (and member of Team USA) and David Wilson from the CA Liquidation office also participated in panel discussions. Securing their participation was strategically significant to us as it further builds the credibility of the U.S. guaranty fund system as opinion leaders and solidifies our strategic objective to be the definitive leader on matters concerning insurance liquidation and policyholder protection.
At the business meeting on December 5, the IFIGS membership approved every initiative presented as part of the strategic plan I put forward at the start of the year.
My goal as IFIGS chair was to assure a more stable, dependable and durable organization that would have credibility with supervisors around the world. Having that available will help NCIGF and NOLHGA represent our interests before international standard-setters. Structurally, that mission is well on its way to accomplishment and will be spurred further by the dynamic leader of the Canadian P/C guaranty fund we recruited to succeed me as chair.
The next step is to achieve financial continuity to carry IFIGS into the future.
I appreciate the support of the board for me to serve as chair in 2019 and am glad to pass on those duties. It was a worthwhile exercise and should be helpful in 2020, which is expected to be an active year internationally:
The IAIS Resolution Working Group (ReWG) is preparing to take up an advisory paper on insurance company resolution. We’ve been in close contact with FIO’s Alex Hart who chairs the group and I expect we will have excellent input.
Perhaps the most critical interaction at the IFIGS meeting was with Dimitris Zaferis, lead staff person for EIOPA. His organization is in the process of establishing “harmonisation” standards for resolution schemes in Europe (some of which have yet to be created). It’s important that major aspects of U.S. public policy (post-funding, primacy of policyholder protection, for example) be recognized as viable policies by EIOPA and the other international regulatory standard setters. Working both as the U.S. and as part of IFIGS, we should be well-positioned to effectively make our case.
On November 1, Amanda Barbera officially became the Executive Director for the Oklahoma Property & Casualty Insurance Guaranty Association. Notably, Ms. Barbera was the past Executive Director, serving in Oklahoma from 2015 to 2018. Now based out of Indianapolis, she has been the Executive Director for the Indiana Insurance Guaranty Association since 2018. “It is incredibly rewarding for me because I can continue in my capacity in Indiana but also have the opportunity to work with Oklahoma, a state where I still have several ties and a strong appreciation for the work they do after serving there for so many years,” Ms. Barbera said in a statement to NCIGF.
The decision was made in Oklahoma after the association’s board met in September to review a proposal from Barbera outlining the contractual relationship where she would liaise with them, oversee the office operations and help lead and fulfill the mission of the Oklahoma organization, including insolvency management. “My role will be to represent both states’ interests when necessary. For instance, if I’m on a coordinating committee where both Indiana and Oklahoma have claims, I will be on the committee on behalf of each entity.” (Contractually, any conflict of interest would be raised to the board level.)
One key to Amanda’s success is the quick turnaround with her onboarding process. Since the work of guaranty funds is specialized, the utilization of Ms. Barbera’s expertise ensures that there will be no lulls in service for the Oklahoma Property & Casualty Insurance Guaranty Association, as she already understands the employees as well as the relationship with the receivership office.
Ms. Barbera will remain based out of Indianapolis but plans to return to Oklahoma regularly to manage as well as meet and coordinate with the Oklahoma association board.
On October 10, 2019, the 9th Circuit Court of Appeals issued a landmark decision holding that the California Insurance Guaranty Association (CIGA) was not a primary plan under the Medicare Secondary Payer Act (MSP) (CIGA v. Azar, 2019 WL 5076945 (9th Cir., Oct. 10, 2019) (link to 9th Cir. Opinion)). The court’s ruling alleviates CIGA’s responsibility to reimburse the Center for Medicare and Medicaid Services (CMS) for conditional payments made on behalf of workers’ compensation claimants and may also obviate its need to adhere to Medicare Set-Asides for claim settlements.
The ruling stems from a lawsuit filed by CIGA seeking to curtail conditional payment reimbursement requests from CMS that were unrelated to covered claims. CIGA asked the court for a declaratory judgment holding that 1) CIGA is not a primary plan under the MSP, 2) that CMS must adhere to the claims bar date, and 3) that CMS’s all-or-nothing billing practice is improper and must not continue. The district court found in favor of CMS on the first two issues but agreed that CMS should only seek reimbursement for conditional payments from CIGA where the diagnostic code related to a covered claim. The parties cross-appealed.
The 9th Circuit focused exclusively on the preeminent issue; whether CIGA was a primary plan under the MSP. Like the district court, the 9th Circuit examined the issue in terms of federal preemption. The court began by reviewing the MSP to determine whether CIGA could be deemed a primary plan. While MSP does not define “primary plan”, it provides examples, such as state workers’ compensation acts. The court found that CIGA shares little with state workers’ compensation laws. While it may pay workers’ compensation claims, CIGA is triggered by an insolvency, not a work-related injury. Further, the California insurance laws specifically define CIGA’s as insolvency insurance. The court cited numerous examples of CIGA being deemed an “insurer of last resort”; a term antithetical to being a primary plan.
Finding that CIGA could not be deemed a primary plan under the MSP, the court turned its attention to whether Congress intended the MSP to preempt state laws governing insurer solvency. Congressional intent is derived from the statutory language and surrounding framework. Nothing in the MSP expressly related to insurer solvency. The closest indication the court could find was that the MSP supersedes state law with respect to Medicare Advantage plans under Part C and prescription drug plans under Part D, but that Congress clarified that those provisions did not apply to state laws relating to plan solvency. Thus, the 9th Circuit reversed.
What happens next is still an open question. CMS has until November 24, 2019 to seek an en banc appeal (review by the full 9th Circuit panel of judges) and until January 8, 2020 to file a writ of certiorari to the U.S. Supreme Court. It also has the option of amending the MSP to expressly apply to guaranty funds. Until then, this ruling is good law in the 9th Circuit and persuasive elsewhere. The application of the ruling to other guaranty funds requires a state-by-state analysis, though there is benefit to be gained from coordination. The NCIGF Legal Committee will be working with members to ensure the most effective response.
If you have any questions or comments, please reach out to John Blatt (firstname.lastname@example.org).
Restructuring statutes, which take the form of either company division statutes or insurance business transfers (IBTs), 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.
At its October 2019 meeting, the NCIGF Board of Directors adopted a policy position on restructuring mechanisms. While the NCIGF takes no position on this or any other company business practice, it is concerned with the continued protection of covered policyholders and claimants in the event of insolvency. NCIGF public policy is focused on preserving guaranty fund (GF) coverage for policies and claimants where there has been a division or an IBT:
Where there was guaranty fund coverage before the division or IBT, state regulators should ensure that there is coverage after the division or IBT. A division or IBT should not reduce, eliminate or in any way impact GF coverage.
Where there was no coverage before the division or IBT, there should be no coverage after the transactions are completed. A division or IBT should not create, expand, or in any way impact GF coverage.
Guaranty fund representatives are a good resource for any guaranty fund coverage issues that arise in evaluating these transactions.
NCIGF’s complete position statement can be viewed here. Roger Schmelzer, NCIGF’s President and CEO states “our organization is focused on protecting the policyholders the guaranty fund system is intended to protect. Our position on restructuring mechanisms reflects this primary concern. Some state guaranty funds may have varying views on these statutes. In any case, we hope that regulators considering these transactions will keep the guaranty funds informed and make use of their expertise in the area of insurance insolvency.”
Background and recent developments. 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 transfer 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. (See VT ST T. 8 § 7111 et seq.)
Arizona also has a business transfer law. (See AZ ST § 20-736)
Most recently, a number of division statutes have been proposed and adopted in the following states, including the following:
Connecticut: Division statute enacted in 2017
Georgia: Division statute enacted in 2018.
Illinois: Division statute enacted in 2018.
Iowa: Division statute enacted in 2019.
Oklahoma: IBT statute enacted in 2018.
Michigan: Division statute enacted in 2018
Nebraska: Proposal introduced in 2019. Did not progress.
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 assuming entity is also an issue of concern.
(Originally published in the Summer 2019 issue of The Insurance Receiver and is reprinted with the permission of IAIR)
A highly charged topic among insurance resolution practitioners is the obvious fact that insurance company failures are at an all-time low. As a result, inevitable questions are raised about the resources—human and financial– committed to maintaining readiness for whatever insolvency activity may come along.
These conversations are not exclusive to the United States. NCIGF Vice Chair Chad Anderson of Western Guaranty Fund Services (WGFS) and I recently returned from a meeting in Taiwan with other resolution professionals from around the world. The resounding trend of these presentations? There is a lack of insurance company failures everywhere leading to some interesting outcomes for established guarantee mechanisms. For example:
Taiwan is spending their time changing their mission to become a risk management “think tank.”
Our neighbors in Canada do a series of research papers on why companies fail and are actively counseling regulators on ways to avoid liquidations.
Guarantee structures in some countries have never had an insolvency and others have only had a few. And with an emphasis on recovery of a troubled company in most of the rest of the world, it’s doubtful there will ever be a global spike in insurance insolvencies. In the United States, the decline in insurer failures requiring guaranty fund involvement can be traced to implementation of Risk Based Capital standards and the clearer picture this measurement to regulators of a company’s potential for peril.
That insurance insolvency is not a growth business is a win-win-win proposition. Regulators have sharpened tools like RBC to give consumers security in their insurance choices; the reputation of the competitive industry remains intact and carriers pay less in assessments allowing them to grow their business through investment and product development.
These are indisputably good outcomes but beg the question about the infrastructure in place to manage a dwindling volume of insurance insolvencies. Here are a few thoughts I’ve shared with the NCIGF board and our membership:
Keep things in perspective. The property/casualty guaranty fund system is a bargain to stakeholders at around $70 million annually to operate. This is the cost of doing business to assure an effective safety net for insurance consumers. It’s not just my opinion; I often hear this point made by industry thought leaders. Besides, with 29 P/C guaranty associations already part of cost-sharing arrangements in their states, real efficiencies are already in place.
Guaranty funds have plenty to do, even without new insolvencies. Claims are being managed every single day in guaranty fund offices across the country. Many these claims are worker compensation claims that are paid out at 100 percent over the claimant’s lifetime. Professional claims managers are actively involved in in assuring that those claimants are fully served, often making the difference in the life of that person and their family. Litigation Management, Data Security and other important tasks make for a busy daily existence in support of the insurance promise and policyholders.
That there is a “resolution system” should remain the mantra of guaranty associations and insurance receivers. U.S. insurance regulation is seen as even more viable because there is a practiced and stable resolution mechanism. It’s also often forgotten that Title II of the Dodd-Frank Act expressly singles out the state-based insurance liquidation system as the designated forum for resolving an insurer failure of any size. We have no choice but to be ready.
Maintaining a strong NCIGF is imperative. While not expressly statutory, NCIGF is mentioned over 40 times in the NAIC Handbook used by insurance receivers. An effective national coordinating entity is essential for numerous reasons, all vital but none more important than driving data management and security, now the highest priority in contemporary insurance resolutions. NCIGF also does the heavy lifting in relationships with industry, regulators (both nationally and internationally) and consumers. We provide trusted expertise to public policymakers who are not that familiar with how the safety net works.
Recognition of the value the insurance industry derives from a statutory insurance resolution system is especially worthwhile when activity is subdued. Oddly, it’s the participants in the resolution mechanism itself that could do a better job acknowledging this linkage. And it’s not a tough sell. By protecting insurance policyholders, guaranty funds and insurance receivers uphold the insurance promise and provide a safety net that encourages the commercial enterprise of selling and buying insurance. The statutory resolution construct fills inevitable gaps in the larger insurance food supply chain. The system is built to work exactly this way. As a result, the insurance industry fully supports the GA system, even at times when we aren’t needed in great numbers on the front lines (like now).
NCIGF is always focused on providing operational support to our members and the entire resolution mechanism when the time comes. By looking at the big picture and addressing the right things in the right ways now, we can continue to present the P/C system as a dependable, flexible and durable consumer-protection mechanism fully capable of supporting the insurance promise as originally contemplated by policymakers and industry.
That’s why an impactful level of value-added non-insolvency engagement is not only warranted but necessary, regardless of the number of claims in the system. At NCIGF we call this “uncoupling claims from costs” and our Canadian colleague makes a presentation titled “In Times of Peace Prepare for War.” Taking a serious look at existing processes and challenging conventional wisdom is a wise and thoughtful course of action. To move these sentiments into pervasive thought will require candid, open discussions within NCIGF, regulators and the insurance industry. We are regularly having those conversations.
Readiness for the nosier times is not negotiable. Being unprepared will draw attention and someone who knows much less about the purpose of the U.S. resolution mechanism will seek changes based on limited exposure to the realities of insurance resolution. Experienced insolvency practitioners will almost certainly be unhappy with that outcome. And anyway, if insolvency pros aren’t trying to do things better, then why are we here?
“This is the Essence of What the Guaranty Funds Exist to Do…” – Brad Roeber
One of the highlights of the 2019 Fall Workshop was a panel entitled, Disaster Sight: Listening to History for Creative Problem Solving. Among the panelists was Brad Roeber, Executive Director of the California Insurance Guarantee Association (CIGA). Mr. Roeber gave a brief overview regarding a creative solution he employed in late 2018 when it came to the liquidation of Merced Property & Casualty Company, a small California Central Valley insurer impacted by the California wildfires. This is a closer look at that situation as well as a challenge from Mr. Roeber to all Guaranty Funds to secure the future of the system by leveraging creativity as well as compassion.
Robin Webb, NCIGF Communications & Member Support Manager: Brad, you’re the current Executive Director over at CIGA, tell me about stepping into that role as a former Industry representative.
Brad Roeber, Executive Director, CIGA: I served on the NCIGF Board as an industry member for a number of years so I have a fairly unique point of view, especially given that I ended up choosing to work with the guaranty funds for a living, now being the CIGA executive director. I believe in the mission very much and I thought that, at this time in our history, there was an opportunity to lead in a different way. We exist solely to serve consumers who have no place else to go. Everything that I’m doing and everything I’m encouraging my employees to do is to think about the people that are sitting there with nothing…whether it’s an injured worker in the comp world or it’s a claimant of a non-standard auto insured who has gone down or the folks up in Paradise, California who, in one day, lost everything and then a few weeks later, lost their insurance too.
Robin: And you’d only been in your role a short time when the California wildfires tore through this heavily wooded area in the Butte County? Tell me about getting creative when it came to helping those claimants from Merced who lost their homes.
Brad: Yes. Whether you call it creative solutions or just finding answers where maybe there are no obvious ones, to me that’s what we need to do. I’m not the first person who’s hired existing staff to handle an insolvency, but it goes beyond that. Now we’re leveraging those people [from Merced] who did a great job for us to do more work and keep them on the payroll longer, so there is an economic value to how we handled it. And, talking about Merced specifically, we are going to handle that estate with an administrative expense load that’s exceptionally low. And that is because we didn’t have to pay southern California salaries to those folks, and we didn’t have to pay the overhead of southern California. We paid the overhead in a little farm town in the middle of the agricultural part of the state. There are all kind of little savings like that just from being open to new possibilities. And like I’ve said, utilizing existing staff is not a new idea, but I think the way we leveraged it in this particular case was a little different.
Robin: Take us back to the very beginning. What happened with Merced?
Brad: The story of Merced is a pretty simple one. I had gotten here at the end of September 2018 and on November 8th, the fire starts. We got a call saying that there was this little central valley carrier that was a hundred years old and it was likely to go under. Most of their book of business was property and so it was pretty clear that something was going to go down. As it turns out, some of their employees knew within a week that they were done because the company had about $30 million in assets and the exposure was within the $100million range. So, we knew…it’s going to go.
Robin: In your time in the insurance world, had you ever experienced a disaster like this?
Brad: One of the things that was interesting here, and it’s a good lesson for the future of the guaranty funds, was I was among just a few people at CIGA that had ever actually been involved in a property disaster and had adjusted property claims. My experience, a lot of which was in the Midwest, was with tornadoes and things of that nature. I had been on site in multiple places where a tornado had ripped through and the houses were completely gone. There was one that happened a little east of Peoria a few years back where people were sitting at home on a Sunday morning eating breakfast and the next thing they know, the alarm is going off, they are running to the basement and the house is just gone. So, I had some pretty unique experience around those types of situations and adjusting those property claims.
Robin: When you heard about Merced, what was your first step?
Brad: I decided to go up there and see the people (and this was before the liquidation order). I went up to the Merced offices and talked with the claims staff and told them that it appeared that the company is in trouble but that the guaranty funds are the backstop for it and at CIGA I didn’t have anybody that knows how to adjust claims on property…so, would you be willing to work with us? We tried to be creative about engaging them and we set up a ‘stay bonus’ system to reward them if they stayed until the end of the insolvency.
We had our people lined up to handle everything and then it started. We went to work and began adjusting the claims. The fire had started on November 8th and right after Thanksgiving the fire finally got put out, so it burned fully for about three weeks. Then, on December 3rd the company was declared insolvent. Because of the pre-planning we had done and the fact that there was not a huge number of claims, we actually started issuing checks on that Friday, December 7th. The next week, in earnest, we were producing more checks for those folks, allowing the coverage gap to be minimal, almost nonexistent.
Robin: You mentioned specifically some creative solutions in regard to claim caps, tell me more about that.
Brad: The CIGA statute says that we could pay a maximum of $500,000 per claim for non-workers compensation claims. We talked in advance with our counsel and discussed the option of looking at the caps differently. Instead of one homeowner’s claim, we look at the homeowner’s policy in multiple parts where there are four basic coverages – dwelling, structures, contents and additional living expenses. We developed the option of treating this as four claims as opposed to one single claim.
Robin: Why was this solution so important to you?
Brad: This is the lens I was looking through: If we don’t find a creative way to deal with this part of it, then we will not represent the insurance industry as a safety net. Because of this four-coverage approach, we were able to cover the entirety of people’s claims with the exception of just a few (maybe 30-40 whose domicile exceeded the $500,000 cap). It created a productive solution out of a situation that was really awful for these people. It allowed them to move on with their lives.
Robin: And there was another area, the contents portion of the coverage, that you dealt with pretty swiftly as well, right?
Brad: Yes. When you adjust a property claim and there is contents damage, typically it’s handled by the consumer providing an inventory and the adjuster going through the list of all of the homeowner’s items and coming up with a cash value for all of those items. Then, when the consumer actually goes out and purchases those items, they provide proof, and only then can they be paid the difference. Obviously, it’s a pretty arduous process. Well, we decided to offer to pay eighty percent of whatever the contents coverage amount was, without an inventory. No questions asked. Again, that piece of it, that type of solution had been done before but not very often and not so efficiently or at such a high percentage amount. And with the exception of just a handful of claimants, we have had no complaints.
Robin: Where did the Merced employees end up?
Brad: We’ve given them additional work to do. We have other work that had been done by third-party administrators and I’m starting to feed them additional files to adjust. It saves us money and also keeps them employed. We wanted to reward them for being loyal to us and seeing this insolvency through to the end.
Robin: Thank you for sharing that story. It’s incredibly compelling.
Brad: It’s important to remember that this is not a tale of woe. This is not a story about a bunch of greedy insurance companies who try to do the wrong thing. This is a group of really well-intentioned people who have gotten educated and want to do a better job for the policyholders. The guaranty funds were there. We served these people who literally had no place else to go.
Robin: How do you balance the idea of going above and beyond to some who maybe have the mindset of not being a charity organization or taking up the mantle that their job is, in fact, to minimize the claims they pay?
Brad: I’m compelled because I’ve been on a disaster site before. The first time I went to a disaster site and looked into the eyes of one of my customers who had lost everything, that was a seminal moment for me almost fifteen years ago. At the time, I had forgotten why I’d gotten into the business – I had gotten caught up in making money and driving combined ratio and cutting claims cost and all of those things. I realized then that it wasn’t about any of that. It was about doing the right thing and taking care of these people. That was the promise. When you think about NCIGF, it’s about the promise. The promise isn’t that we make a lot of money…if it happens, then that’s great. But the promise is that we take care of people when they’ve lost everything and have no place else to go. It is a noble business.