Insolvencies: What Happens If an Insurer Fails?

Lawyers tend to take insurance companies for granted. They are there to pay defense costs and handle any judgments for plaintiffs. But what happens if an insurer fails?

In order to protect ourselves and our clients, it is necessary to understand the insurance liquidation process and know about the safety net provided by the Tennessee Insurance Guaranty Association (TIGA). If insurance companies did not exist, lawyers would have to invent them. Who else would collect money to be paid out to defense attorneys and plaintiff attorneys alike to satisfy judgments? Unfortunately, that well may unexpectedly run dry.

While insurance companies may be commonly referred to as “broke” or in bankruptcy, they are excluded from the Federal Bankruptcy Act.[1] Instead, they are liquidated under a complex and often conflicting set of laws that are unique to each state, but share some similar features and are often referred to in model legislation from the National Association of Insurance Commissioners as the Insurer Receivership Model Act.

Liquidations can be long, drawn out procedures, lasting 10 years or more without any payout to claimants. Fortunately, TIGA and guaranty funds in other states step in immediately upon the insolvency of an insurer, but there are certain things an attorney must be aware of to protect herself and her clients.

Background

TIGA was created by the Tennessee legislature in 1971,[2] along with actions by many other states over concerns as to federal regulation and financial problems with GEICO. Like the FDIC, TIGA provides protection but, in cases other than workers’ compensation, only up to statutory caps, much like the FDIC’s $250,000 maximum. Since creation, TIGA has paid out $162 million on over 44 insolvencies. Nationally, the system has paid out $35 billion in claims resulting from 600 insolvencies. TIGA is an independent, unincorporated association of insurers that write covered property and casualty business in Tennessee. Members are assessed based on market share.

Like firefighters, TIGA maintains a core staff to deal with ongoing insolvencies, but does not spring into action until it is triggered by a court order of both liquidation and insolvency.[3] This is an important distinction because many insurers are found to be insolvent, but can be placed into rehabilitation or into a long-term “run off” during which time they will not pay claims and are protected from legal action or collection efforts by a state court-imposed stay order. When an order of liquidation and insolvency is entered, it is important to see if it involves an insurer that is covered by TIGA. It must be an insurer that is “authorized to transact insurance” in Tennessee.[4] This does not include self-insureds, captives, risk retention groups, county mutuals, nonprofit service corporations or surplus lines companies.

Even though an insurer may be a member company, not all lines written are covered.[5] There are 11 excluded lines such as mortgage guaranty, fidelity and surety, credit insurance, warranties and service contracts, title insurance, government programs, and assessable policies. Life and health insurance is not covered by TIGA, but it has its own guaranty association, created in 1988.[6]

Coverage

First, the good news. If your client is an injured worker, TIGA picks up coverage for them without limitation other than the WC Act and underlying policy.[7] Look first to the state of residence of
the worker.[8] TIGA will provide statutory benefits, both indemnity and medical, as if the insurer had not become insolvent.

Remember the FDIC? Good news for most depositors, but for those with more than $250,000 in the bank, there will be some pain. TIGA also has caps, and generally limits payments for other than workers’ compensation to that amount in excess of $100 and less than $100,000.[9] This means that a total fire loss to a $200,000 home would only get half its insured value, and other losses might come up short.

The claims that cause the most concern involve death or bodily injury. In those cases, TIGA is only obligated for “reasonable expenses incurred for necessary medical, surgical, X-ray and dental services, including prosthetic devices and necessary ambulance, hospital, professional nursing and funeral services, and any amounts actually lost by reason of claimant’s inability to work and earn wages or salary or their equivalent that would otherwise have been earned in the normal course of the injured claimant's employment.”[10] This means no pain and suffering, loss of enjoyment of life, loss of consortium, or future medical.[11]

Work Arounds

There are several ways to stretch available resources. For motor vehicle accidents, uninsured/underinsured coverage becomes primary.[12] In all cases involving permanent physical impairment, the TIGA board may make discretionary payments up to the caps or policy limits.[13]
Because all state laws contain exhaustive language directing a claimant to the state of residence of the insured, it may be possible to tap into another state’s fund. This would mean that the state of residence of a tortfeasor would pay its higher limits. Generally speaking, most states have a $300,000 cap and no sublimits on death or bodily injury.

Another source of recovery is to file a claim in the liquidation. While, on average, payouts are pennies on the dollar, in some cases like Reliance, the distribution will reach almost 100 percent for policyholder claims. All of this is, of course, academic if the defendant has deep pockets and can satisfy any judgment.

Pitfalls

Attorneys who are not familiar with solvency law and TIGA may find themselves personally in trouble, as well as their clients. Do not let an ailing insurer get behind in payments if you are defense counsel, since your fees are not covered by TIGA but are unsecured claims as a general creditor. And, under no circumstances should you disburse settlement proceeds (as one attorney did) prior to the checks clearing. The first thing a receiver does is to stop payment on all checks.

Be sure to advise your client and watch your practice because TIGA’s duty to defend ceases upon payment, by settlement releasing the insured or on judgment, of an amount equal to the lesser of TIGA’s covered claim limit or policy limits.[14] Large insureds should know that, if their net worth exceeds $25 million, TIGA has a right of recovery for its payments made on workers compensation and third-party claims.[15] If their net worth exceeds $10 million, there is no coverage at all on first-party claims.[16]

Receivers will commonly set a deadline for the filing of claims, sometimes referred to as a bar date and often a year, but check the court order for specific dates as well as for claims forms. TIGA has a statutory bar date as well, the earlier of 18 months after the date of the order of liquidation or the final date set by the court for the filing of claims against the liquidator.[17] Do not let that run on your client.

Case Law

Tennessee case law involving guaranty fund coverage is sparse, and most issues have been litigated over time in other jurisdictions. However, many of these cases reached a result based upon unique statutory provisions, and outcomes may vary state to state. It is safe to say that precedent can be found for various positions depending upon the state, the particular facts, and the statutory wording. Some of the representative cases are cited below, but be advised that the outcome of an actual case and controversy in Tennessee could be different.
Alabama has an exhaustion requirement similar to that of Tenn. Code Ann. 56-12-111. It was determined that a claimant did not need to exhaust or take credit for payments made by a health insurer because health is not a covered line under the act.[18]

Insurance companies operating as surplus lines writers are considered to be non-admitted insurers. Because they are not “member insurers,” their claims are not covered.[19]

What about a settlement reached immediately prior to insolvency, but not funded? A guaranty fund is obligated to pay only those amounts that represent covered claims.[20]

Companies sinking into insolvency may not have the assets to properly settle claims. Tenn. Code Ann. 56-12-104(7)(B)(i) excludes punitive or exemplary damages. Courts have held that “bad faith” claims are not covered.[21]

There is a split over whether post-judgment interest is included in a covered claim. Courts have found the date of insolvency, return of verdict, and even date of suspension of the insurer's license relevant. A Pennsylvania court allowed interest, but only for a limited period.[22] Others have denied interest.[23]

Attorney fees incurred prior to insolvency are not covered claims and are treated as general creditor claims arising out of a separate contract.[24]

Tenn. Code Ann. 56-12-107(a)(l)(A) is clear that TIGA’s obligation is only for “that amount of each covered claim that is … less than $100,000,” subject to policy limits of the insolvent insurer. Courts have reached different conclusions, but in Commercial Union Ins. Co. v. Sepco Corp, et al., 87 F.2d 1395 (11th Cir. 1991), the court held each asbestosis claim was a separate claim and had to be covered subject to policy limits. A different result was reached for multiple car accident plaintiffs in a single collision; the claims together had a single covered claim.[25]

While Tenn. Code Ann. 56-12-107(a)(2) states that TIGA is deemed the insurer to the extent of its obligation on the covered claims, we have seen that there is not complete identity of TIGA and the insolvent insurer. TIGA and its board, employees and agents enjoy statutory immunity.[26] Courts have held that not every obligation, such as the negligence of an agent, is the liability of the association.[27] 

Plaintiffs looking to add to the case law may be disappointed to know that a guaranty association is a citizen of every state in which a member resides. Therefore, suits in federal court based upon diversity of citizenship have been dismissed.[28] Moreover, Tenn. Code Ann. 56-12-107(c)(2) provides that exclusive venue in any action brought against the association is in the Circuit or Chancery Court of Davidson County. The association may waive such venue, but there is a stay on actions the association must defend for six months from the date of the insolvency under Tenn. Code Ann. 56-12-117(a), and part (b) prevents default judgments on insureds.

The two most significant Tennessee Cases are cited above. The above discussion is intended to identify some of the myriad issues rather than predict any outcome in Tennessee courts.

Resources

Liquidation orders, claims forms, bar dates and other important information can be accessed on liquidation websites and sites maintained by state regulators. TIGA maintains its own website with contact information and links to insolvencies.[29] The NAIC has a site, and offers model laws and other helpful information.[30]

One of the most comprehensive sites is maintained by the trade association for guaranty funds, the National Conference of Insurance Guaranty Funds (NCIGF).[31] It has news of insolvencies, summaries of state laws, a guide to the liquidation, and contact information. This is a good starting point because most insolvencies involve out-of-state insurers and courts so local information may not exist.


DAVID BROEMEL is an insurance regulatory attorney in Baker Donelson's Nashville office. He has vast experience advocating on behalf of various insurance trade associations and insurance companies, and has drafted and helped pass major insurance legislation in Tennessee. He also defends his insurance clients in disputes and litigation, and helps oversee their acquisitions, regulatory issues, and insolvency matters. Broemel serves as the executive secretary of the Tennessee Insurance Guaranty Association, a position he has had since 1986. He serves on the legislative committees for the Tennessee and Nashville bar associations. A former U.S. Marine, he received his law degree from the University of Tennessee. 
The author would like to acknowledge the foresight of JOE LANCASTER, former CEO of Tennessee Farmers Mutual, who initiated the TIGA legislation; JERRY MAYO, who ably served as the chair of TIGA's board of directors for many years; and WILLIAM D. LEADER JR., the attorney who has represented TIGA so well for more than 30 years.

Notes

1. 11 U.S.C. § 109 (b)(2), (b)(3)(A), and (d).
2. Tenn. Code Ann. 56-12-101.
3. Tenn. Code Ann. 56-12-104(8).
4. Tenn. Code Ann. 56-12-104(8) and (9)(A).
5. Tenn. Code Ann. 56-12-103.
6. Tenn. Code Ann. 56-12-201.
7. Tenn. Code Ann. 56-12-107(1)(B).
8. Tenn. Code Ann. 56-12-111(b).
9. Tenn. Code Ann. 56-12-107(1)(A).
10. Tenn. Code Ann. 56-12-107(1)(B).
11. Terminix Int’l Co Ltd. Partnership v. Tennessee Ins. Guaranty Ass’n, 845 SW2d 772, 1992 Tenn. App. LEXIS 741 (Tenn. Ct. App. 1992).
12. Hogins v. Ross, 988 SW2d 685, 1998 Tenn. App. LEXIS 853 (Tenn. Ct. App. 1998).
13. Tenn. Code Ann. 56-12-107(1)(B).
14. Tenn. Code Ann. 56-12-107(1)(C)(i).
15. Tenn. Code Ann. 56-12-110(b)(1).
16. Tenn. Code Ann. 56-12-104(7)(A)(iv).
17. Tenn. Code Ann. 56-12-121.
18. Alabama Ins. Guaranty Ass’n v. Stephenson, 514 So.2d 1000 (Ala. 1987).
19. Ferari v. Toto, 9 Mass. App. Ct. 483, 402 N.E.2d 107 (1980).
20. Zachary v. Champion Insurance Company, 635 So.2d 323 (La. App. 3d Cir. 1994).
21. Vaughn v. Vaughn, 597 P.2d 932 (Wash. 1994).
22. Russell v. Pennsylvania Ins. Guar. Ass’n, 339 Pa. Super 458, 489 A.2d 251 (1985).
23. Hankins Constr. Co. v. Missouri Ins. Guar. Ass’n, 724 S.W.2d 583 (Mo. Ct. App. 1986).
24. Ohio Ins. Guar. Ass’n v. Simpson, 1 Ohio App.3d 112, 439 N.E.2d 1257 (1981).
25. Alvey v. Mo. Ins. Guar. Assn, 922 S.W.2d 804 (Mo. Ct. App. 1996).
26. Tenn. Code Ann. 56-12-116.
27. Williams v. Fla. Ins. Guar. Assoc., 549 So.2d 253 (Fla. Ct. App. 1989).
28. Iowa Ins. Guar. Ass’n v. New England Ins. Co., 707 F. Supp. 177 (S.D. Iowa 1988); Rhulon Agency Inc. v. Alabama Guar. Ass’n, 715 F. Supp. 94 (S.D.N.Y. 1989).
29. www.tiga.net.
30. www.naic.org.
31. www.ncigf.org.
 

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