February 26, 2005

Reliance: $85 MM Settlement with Directors

Settlement was announced in the civil action by the State of Pennsylvania against former directors of Reliance Insurance Company who were charged with responsibility for the company's failure in 2001. The State of Pennsylvania took control of Reliance in that year, beginning a sequence of precedent-setting legal proceedings involving the largest insurance company insolvency in history. In the process, the activities contributing to Reliance's troubles became part of the public record and a valuable source of study for insurance regulatory law and practice professionals.

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At the time the state's Insurance Commissioner stepped in, Reliance wrote a large volume of workers compensation, general liability, commercial auto and personal auto insurance all over the U.S. Much of its business had been written through Managing General Agents (MGAs) and many of its claims were being handled by Third Party Administrators (TPAs).

Efforts to rehabilitate Reliance were frustrated by negative surplus of $1 billion and the events of September 11, 2001, following which the state declared Reliance insolvent and ordered it liquidated. That order triggered statutory obligations of insurance guaranty funds all over the United States. Due to the widespread "outsourcing" of the claim handling to multiple TPAs, the transition to guaranty fund management was challenging as files were retrieved from multiple sites and reviewed by guaranty fund claim units.

It was found at the time that a great deal of Reliance's commercial business was written on a "large deductible" basis, with insured companies bearing up to $250,000 (and sometimes more) of each individual loss. Under a large deductible program for workers compensation, the insurer pays the claim within the deductible then gets reimbursed from the insured employer. To secure that right, a well-advised insurance company gets financial security in the form of cash, letters of credit or surety bonds. For a portfolio of commercial policies, the insurance company can hold hundreds of millions of dollars of financial security for those deductible reimbursement obligations. Reliance was in just such a circumstance.

A controversy arose between the insurance liquidator and the guaranty funds over which was entitled to the benefit of those security deposits, and when. The dispute was resolved and details are in the Commissioner's Petition to Approve Agreement between Pennsylvania Ins. Commissioner and various state guaranty funds regarding large deductible programs of Reliance Ins. Co. (April 2002)

The Commissioner filed a civil action in June 2002 against various officers and directors of Reliance, alleging breach of fiduciary duties, professional negligence and the recovery of preferential transfers. The settlement announced last week resolves that action.

The Commissioner's press release reported that this settlement brings to approximately $100 million the amount recovered for policyholders of Reliance Insurance Company as a result of regulatory action in the case. Another $31 million goes to benefit the creditors of the parent corporation of Reliance Insurance.

A copy of the full text of the Settlement Agreement and the Petition to Approve Settlement Agreement (162 pages in PDF) are now online and together detail the case and controversy and the financial terms of its resolution.

Other materials regarding the Reliance case are available at the Reliance Documents website maintained by the State of Pennsylvania Insurance Commissioner. The legal challenges of large deductible programs have been a subject of study and private reports by the NAIC and other insurance industry organizations.

Thanks to Insurance Journal's online newsletter for the source of this information: Pa. Officials Reach $85 Million Settlement with Former Reliance Insurance Directors


Posted by dougsimpson at February 26, 2005 10:38 AM
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