24th Mar 2012

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In general

California has a strong public policy interest in conserving the assets of insolvent insurance companies. Either the business must be rehabilitated, if possible, or the company should be liquidated, its assets distributed to its creditors. [Carpenter v. Pacific Mut. (1937) 10 Cal.2d 307, 329-330] Public policy favors rehabilitating the insurance company if possible, with liquidation as a last resort. [State of California v. Altus Finance (2005) 36 Cal.4th 1284, 1295] The insurance code authorizes the insurance commissioner to manage an insolvent insurer’s affairs or to liquidate it if the insurance company no longer can operate profitably. [Quackenbush v. Mission Ins. (1996) 46 Cal.App.4th 458, 462]

Fiduciary duty of insurance commissioner

The insurance commissioner is a trustee for the benefit of all creditors, policy holders and others interested in the assets of the insolvent insurer. [Insurance Code § 1057] Insurance Code § 1057 imposes a fiduciary duty on the Commissioner, as a trustee to insure that policy holders and claimants are treated fairly and that they share ratably with other claimants of the same class. [Commercial National Bank v. Superior Court (1993) 14 Cal.App.4th 393, 399; Jones v. Golden Eagle (2011) 201 Cal.App.4th 139, 146]

Duration of Conservatorship

Conservatorship proceedings contemplate a conservation of the assets and business of the insurance company over the period of insolvency. After this period, the Commissioner gives up control to the regular officers of the company. [Caminetti v. Superior Court (1940) 16 Cal.2d 838, 843]

Liquidation order

If the insurance commissioner decides it would be futile to proceed as conservator, the commissioner may apply to the Superior Court for an order authorizing liquidation of the business of the insurance company. [Insurance Code § 1016; Garamendi v. Golden Eagle (2005) 128 Cal.App.4th 452, 464]

Between the period of time of appointment by the Superior Court and the liquidation order, the commissioner is vested with title to all assets of the insurer, and is authorized to take possession thereof and to conduct so much of its business as deemed appropriate. As conservator, the commissioner has the same powers and duties of a receiver. [Anderson v. Great Republic Life (1940) 41 Cal.2d 181] See § L46 LIQUIDATOR

When the insurance commissioner pursues liquidation, his or her role terminates after executing a court-approved plan for disbursing the insurer’s assets among its creditors. [Insurance Code § 1035.5]

Automatic stay

An illegal action against an insolvent insurer or which it is obligated to defend is automatically stayed for 60 days after a liquidation order or receivership ordered by a court. The stay may be extended to permit proper defense or conduct of all pending causes of action by CIGA [see § C2 CALIFORNIA INSURANCE GUARANTEE ASSOCIATION [§ C2:7.1 – 7.5] or the insurance commissioner. See Insurance Code § 1063.6.

Claims to be made when liquidation is ordered by the commissioner

If a court approves the insurance commissioner’s decision to liquidate the insurance company’s assets the commissioner must cause notice to be published to the insured’s creditors, shareholders, policy holders and all other persons interested in its assets. [Insurance Code § 1021(a)] The notice is to be published in a newspaper of general circulation in the county of which the proceeding is pending and in the counties of Alameda, Los Angeles, Sacramento, San Diego, San Francisco and Santa Clara. [Insurance Code § 1022] See § C2 CALIFORNIA INSURANCE GUARANTEE ASSOCIATION [§ C2:8 Notice to claimants].

The insurance commissioner must also mail notice of the commissioner’s appointment as liquidator to the insolvent insurer’s policy holders and to last known address in California. These notices must specify the deadline for submission of claims. [Insurance Code § 1063.7]

Who may file a claim

Persons having causes of action covered by an insurance policy issued by an insolvent insurer may file a claim in the conservatorship proceeding even if the claim is undetermined or unliquidated. [Insurance Code § 1026] Such claims may be allowed by the liquidator without requiring such claim to be reduced to judgment provided it can be reasonably inferred from the proof presented that the claimant would be able to obtain a judgment upon his cause of action against the insured and that such judgment would represent a liability of the person in liquidation under the policy of insurance upon which such claim is founded. [Insurance Code § 1027]

Third party liability claimant

The Insurance Code does not require third party claimants to participate in conservancy proceedings. [Jones v. Golden Eagle (2011) 201 Cal.App.4th 139, 146, fn. 5] Third party claimants are those who are in addition to those having a direct relationship with the insurer (e.g. its creditors and policy holders). Third party claimants are those having a cause of action against an insured of the insolvent insurer. These claims may not be determined or liquidated. [Insurance Code § 1026]

Preferences

Any system of law dealing with insolvencies must necessarily make some provision for “preferences”, that is, money paid to creditors on the eve of a bankruptcy (or, in the case of insurers, of an insolvency petition) which puts those creditors in a better position than they would be in if the money happened to have been paid and they had to take their chances in the bankruptcy or liquidation along with all of the other creditors. [Low v. Lan (2002) 96 Cal.App.4th 1371, 1378]

Transfer within four months

A transfer occurs when payment is made even if made in satisfaction of an obligation incurred earlier. [Low v. Lan (2002) 96 Cal.App.4th 1371, 1384 (claimant settled her lawsuit with the insurance company on April 3; did not receive payment until April 8; a petition to appoint a conservator was filed August 5; the April 8 payment was a voidable preference)]

A transfer made within four months before the liquidation petition was filed is a voidable preference. [Insurance Code § 1034(c)]

Federal bankruptcy compared

Insurance companies are not eligible to be debtors under Federal bankruptcy laws. 11 USC § 109(b). When an insurer becomes insolvent it becomes subject to orderly liquidation under state law. Congress made a policy decision that the primary regulation of the business of insurance be in the state, not in the national government. [Garamendi v. Executive Life (1993) 17 Cal.App.4th 504, 514]

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