Opinion
41294/1986.
Decided January 14, 2008.
On Motion Seq. 67, Attorneys for Superintendent of Insurance of the State of New York as Liquidator of Midland Insurance Company: McCarthy, Leonard, Kaemmerer, Owen, McGovern, Striler Menghini, L.C., By: James C. Owen, Esq. Chesterfield, Missouri.
Attorneys for Everest Reinsurance Company, f/k/a Prudential Reinsurance Company: Budd Larner, P.C., A Professional Corporation, By: Vincent Pronto, Esq., New York, New York, On Motion Seq. 70.
Attorneys For Everest Reinsurance Company, f/k/a Prudential Reinsurance Company: Budd Larner, P.C., A Professional Corporation, By: Vincent Pronto, Esq. New York, New York.
Attorneys for Superintendent of Insurance of the State of New York as Liquidator of Midland Insurance Company: McCarthy, Leonard, Kaemmerer, Owen, McGovern, Striler Menghini, L.C. By: James C. Owen, Esq., Chesterfield, Missouri. and Schillinger Finsterwald, LLP By: Peter Schillinger, Esq. White Plains, New York.
Attorneys for Policyholder Baxter International, Inc., formerly known as Baxter Travenol Laboratories, Inc.: Shapiro, Rodarte Freedman, LLP, By: Cindy F. Forman, Esq., Santa Monica, California.
Attorneys for Superintendent of Insurance of the State of New York as Liquidator of Midland Insurance Company: McCarthy, Leonard, Kaemmerer, Owen, McGovern, Striler Menghini, L.C. By: James C. Owen, Esq., Chesterfield, Missouri.
Attorneys for Everest Reinsurance Company f/k/a Prudential Reinsurance Company: Budd Larner, P.C. A Professional Corporation, By: Vincent Pronto, Esq., New York, New York.
These motions require the Court to reexamine well-established principles, procedures and assumptions of insurance liquidation insofar as they affect contract rights of reinsurers.
In this insurance liquidation proceeding of Midland Insurance Company, a reinsurer moves for an order lifting a permanent injunction barring suits against Midland, its estate or its liquidator. The reinsurer, Everest Reinsurance Company, intends to bring an action against the Superintendent of Insurance, in his capacity as the Liquidator of Midland. Everest alleges that the procedures of the New York Liquidation Bureau in handling, determining, and settling insurance claims violates provisions of reinsurance contracts between Midland and Everest.
By statute, the Superintendent of Insurance serves "as a court-appointed receiver on behalf of distressed insurers." Matter of Dinallo v DiNapoli, 9 NY3d 94 (2007).
In the motion papers before this Court, "Midland" refers to both the insurance company and to the Liquidator. In this decision, "Midland" refers only to the Midland Insurance Company prior to liquidation, and to the estate of the insurance company. Thus, arguments raised on Midland's behalf are raised by the Liquidator.
"The Superintendent enforces orders of rehabilitation and liquidation through the New York Liquidation Bureau, a separate office of the Insurance Department which conducts the day-to-day operations of the distressed insurer." Id. at 98 (citation omitted). In his capacity as Liquidator, the Superintendent is not considered a State officer; neither is the Liquidation Bureau deemed a State agency. Id. at 104.
By an interim decision and order dated November 8, 2006, the Court directed the Liquidator and Everest to submit supplemental briefs, and the Court granted the policyholders and reinsurers of Midland an opportunity to be heard on whether the injunction should be lifted to permit Everest to sue Midland and the Liquidator.
While Everest's motion was pending, Everest brought another motion to vacate the Court's interim decision and order, and sought, among other things, an order precluding policyholders from submitting any settlement agreements that policyholders wished to proffer in responding to Everest's motion. In turn, a policyholder, Baxter International Inc., brought a motion for leave to respond to Everest's motion to vacate the interim decision and order.
The arguments raised in these motions overlap considerably. This decision therefore addresses all three motions: Everest's motion to vacate the Court's interim decision and order (Motion Seq. No. 70) ( see Section II); Baxter's motion for leave to submit papers (Motion Seq. No. 76) ( see Section III); and Everest's motion to lift the injunction (Motion Seq. No. 67) ( see Sections IV-VII).
I. A. Background
The following background information is based on the Liquidator's Report on Status of the Liquidation of Midland Insurance Company, approved by the Court on October 17, 2005.
Midland began as a stock casualty insurer incorporated under the laws of Delaware, with its principal office in New York, New York. Midland was a multi-line carrier that wrote, among other things, a substantial amount of excess coverage for major Fortune 500 companies (hereinafter, Major Policyholders, or MPHs), which were confronted with significant environmental, asbestos, and product liability claims (such as breast implant litigation and HIV-tainted blood factor litigation) starting in the 1980s.
In 1985, the New York State Department of Insurance proceeded to monitor Midland's impaired financial condition. On March 7, 1986, the Department of Insurance directed Midland to eliminate its financial impairment and insolvency, or else the Department of Insurance would seek an order placing Midland into receivership. Midland's board of directors voted unanimously to consent to entry of a liquidation order pursuant to Insurance Law § 7404. By order of liquidation dated April 3, 1986, Justice Thomas Hughes ordered that
"the officers, directors, trustees, policyholders, agents and employees of Midland, and all other persons, including but not limited to claimants, plaintiffs, and petitioners who have claims against Midland are permanently enjoined and restrained from bringing or further prosecuting any action at law, suit in equity, special or other proceeding against the said corporation or its estate, or the Superintendent and his successors in office, as Liquidator thereof, or from making or executing any levy upon the property or estate of said corporation, or from in any way interfering with the Superintendent, or any successor in office, in his possession or in the discharge of his duties as Liquidator thereof, or in the liquidation of the business of said corporation. . . ."
Proto Affirm. (Aug. 10, 2006), Ex B, at 7-8 (emphasis added).
As of the date of liquidation, the bulk of Midland's reported assets consisted of reinsurance recoverables. The Midland estate has two types of reinsurance policies: treaty reinsurance and facultative reinsurance. Under treaty reinsurance, Midland ceded to reinsurers a part of the risk of a class of policies that Midland had issued in exchange for a portion of the premium that policyholders paid to Midland. Under facultative reinsurance certificates, Midland had a contract of indemnity with reinsurers to cover a particular risk on a policy-by-policy basis. As is relevant to the instant motions, Midland entered into reinsurance treaties with Everest from 1974 to 1983, and into facultative reinsurance certificates with Everest from 1972 to 1986 (hereinafter, collectively, reinsurance contracts). The Liquidator determined that reinsurance was Midland's most significant, non-invested asset.
"Reinsurance is the insurance of one insurer (the "reinsured") by another insurer (the "reinsurer") by means of which the reinsured is indemnified for loss under insurance policies issued by the reinsured to the public.'" Matter of Union Indem. Ins. Co. of NY, 89 NY2d 94, 105 (1996) (internal citation and quotation marks omitted).
"Facultative reinsurance is policy-specific, meaning that all or a portion of a reinsured's risk under a specific contract of direct coverage will be indemnified by the reinsurer in the event of loss." Excess Ins. Co. Ltd. v Factory Mut. Ins. Co., 3 NY3d 577, 580 (2004).
As required under Insurance Law § 7434, payments to be distributed from the insolvent estate are made upon the recommendation of the Superintendent, and under the direction of the court, i.e., the New York State Supreme Court Justice assigned to supervise the liquidation. By order dated January 30, 1997, Justice Beverly Cohen approved a procedure for court approval of claims that the Liquidator has allowed. The Liquidator periodically prepares a list of claims recommended for allowance, and serves each claimant with a "Notice of Determination" by first class mail to the claimant's last known address. The Notice of Determination advises the claimant that:
"(i) The claimant's claim has been recommended for an allowance by the Liquidator in the amount set forth therein;
(ii) If the claimant accepts the Liquidator's recommendation, the claimant is not required to take any further action. The Liquidator will submit an ex-parte motion to this Court for an order approving his recommendation for allowance in the amount set forth on the Notice of Determination. The recommendation will be approved by the Court and the claimant will be entitled to share, pro rata, in the distributions of assets, if any, to be made by the Liquidator based on the amount allowed.
(iii) If the claimant disputes the amount recommended for allowance, the claimant may object to the Notice of Determination by serving a written objection to the Liquidator. The written objection must be received by the Liquidator within sixty days of the date of the Notice of Determination.
(iv) The Liquidator will refer each claim for which there is a timely objection to the referee appointed by order entered August 3, 1987 to hear and report on the validity of claimant's objections. . . ."
If no objection is received from the claimant within 60 days, then the Liquidator has 15 days thereafter to submit an ex-parte motion for judicial approval and confirmation of the Liquidator's recommended allowance. The procedure does not require the Liquidator to notify reinsurers or to solicit their involvement.
In 2002, this Court was assigned to supervise Midland's liquidation. By order dated October 17, 2005, this Court approved the Liquidator's report on the status of the Midland liquidation. As of October 2005, the Liquidator believed that the affairs of Midland's estate were in such a condition that a distribution of assets on allowed claims could be made to class 2 creditors. In addition to policyholders who filed claims, Midland's class two creditors include three New York Security Funds and 56 sister-state Guaranty Associations which "stand in the shoes" of Midland and pay many thousands of Midland policyholder claims, up to various statutory monetary caps.
The statutory liquidation scheme creates nine classes of creditors. See Insurance Law § 7434. Class two creditors include policy-related claims, and claims of a security fund, guaranty association or the equivalent, except claims arising under reinsurance contracts.
By a Case Management Stipulation and Order No. 1, so-ordered July 31, 2006 (CMO No. 1), this Court permitted the Liquidator and MPHs whose claims were disallowed, in whole or in part, to address common legal issues that would have been determined piecemeal before the Special Referee appointed to hear policyholders' objections. The Court also permitted the reinsurers to "intervene," i.e., submit briefs on the common legal issues.
B. The Instant Motions
On August 10, 2006, Everest brought this motion to lift the permanent injunction barring actions against Midland to bring an action seeking a judgment declaring that the Liquidator breached Everest's reinsurance contracts with Midland, and for injunctive relief. According to Everest, the Liquidator (standing in the shoes of Midland) did not provide Everest with timely notice of claims that would trigger Everest's reinsurance obligations; denied Everest the opportunity to participate in the defense and settlement of claims; did not provide information about claims as it requested; and did not provide access to Midland's records. Everest seeks a judgment declaring that it is not required to indemnify Midland as result of those alleged breaches, and Everest seeks a permanent injunction restraining the Liquidator from engaging in any settlement negotiations for claims, unless Everest is given an opportunity to have meaningful access to Midland's records and to participate in those settlement negotiations.
Everest focuses specifically on several claims that the Liquidator allegedly mishandled, including: (1) claims from Revlon, Inc. arising from HIV-contaminated blood factor concentrates of Armour Pharmaceutical Company, an indirect subsidiary of Revlon, Inc.; (2) claims from Pfizer, arising from Pfizer heart valves alleged to be defective; and (3) claims from Eli Lilly Co., arising from personal injuries from diethylstilbestrol (DES).
By an interim decision and order dated November 8, 2006, this Court directed Everest to provide notice of Everest's motion to Midland's policyholders and reinsurers, and the Court afforded them an opportunity to respond to Everest's motion. Some policyholders who learned of Everest's motion had already indicated a desire to submit papers. The Court also directed Everest and the Liquidator to submit supplemental briefs to address statutory and contract interpretation issues raised in their papers, by answering six specific questions.
Everest suggests that notice of the interim decision and order was one-sided, stating, "The Court did not serve the Interim Decision and Order upon all interested parties, but the Court did serve it directly on counsel for the Objecting Policyholders." Proto Opp. Affirm. (May 8, 2007) ¶ 10.
As Everest's own exhibit indicates, the Interim Decision and Order was emailed, as a courtesy, to Everest, the Liquidation Bureau, and Liquidator's outside counsel, with courtesy copies to policyholders that were affected by the interim decision and order, and to counsel serving on committees representing policyholders and reinsurers established by CMO No. 1. See id., Ex B. Any interested parties whose identity was unknown ultimately became aware of the interim decision by virtue of the notice provisions required by the interim decision, provisions which Everest has challenged as unnecessary. Thus, Everest's point is not only misleading, but also disingenuous.
The Court posed six questions for supplemental briefing:
"(1) What obligations are imposed upon Midland and/or the Liquidator by the provisions permitted by Insurance Law § 1308 (a) (3)?
(2) What are Midland's and/or the Liquidator's contractual obligations under the reinsurance agreements?
(3) What is Midland's and/or the Liquidator's current practice of handling claims?
(4) To what extent does the current practice fulfill Midland's and/or the Liquidator's statutory and contractual obligations?
(5) If the current practice does not satisfy these obligations, what changes to the procedure can/must be implemented to achieve compliance?
(6) How can those procedures be implemented while minimizing administrative expenses to the Midland estate?"
See Matter of Midland Ins. Co., Sup Ct, NY County, November 8, 2006, Stallman J., Index No. 41294 (1986) (Motion Seq. No. 67 interim decision).
Everest then brought a motion to vacate the Court's interim decision to the extent that the order permits Midland's policyholders to have a voice in Everest's pending motion to lift the injunction. The motion also seeks to limit the Liquidator's and Midland's policyholders' contentions, by precluding them from introducing evidence of settlements between Midland's policyholders and Everest. Everest also requested discovery in aid of the supplemental briefs, because Everest believed that one of the specific questions raised factual issues warranting discovery.
Baxter International Inc., a Midland policyholder, brought a motion for leave to respond to Everest's motion to vacate the Court's interim decision and order. Baxter assumed that leave of Court would be necessary for Baxter to respond to Everest's motion to vacate the Court's interim decision, because it is not a named party to the liquidation proceeding, and the Court permitted policyholders to address only Everest's motion to lift the injunction. Baxter argues that Everest would not be entitled to seek an order of preclusion against a non-party. Baxter wishes to inform the Court that Everest allegedly agreed to settle HIV-contaminated blood factor claims with its own policyholders on the same allocation principles and methodology that Everest now claims the Liquidator should not have followed in allowing the blood factor claims of Midland's policyholders.
II.
Everest seeks to vacate and stay the part of Court's interim decision granting policyholders and reinsurers an opportunity to be heard on Everest's motion to lift the injunction barring actions against Midland. Everest believes that its motion does not implicate the policyholders' rights. Everest's proposed action against Midland is based on breach of contract, and the policyholders are not parties to the reinsurance contracts at issue. Accordingly, Everest contends that policyholders should not be permitted "to inject themselves" into a contractual dispute.Everest also questions the authority of the Court to grant the policyholders and reinsurers an opportunity to be heard. As some policyholders have announced their intention to show that some of the allegations of breach are belied by Everest's settlements with its own policyholders, the motion to vacate is also a preemptive strike to limit the policyholders' submissions.
As a threshold matter, the branch of Everest's motion to vacate that seeks a stay of the interim decision and order is denied as moot. Everest sought a stay of the interim decision and order pending the determination of Everest's motion to disqualify the Liquidator's counsel, which has been denied. Everest did not seek a temporary restraining order staying the interim decision and order when it brought its motion to vacate. Both Everest and the Liquidator adhered to the briefing schedule as ordered.
Everest did not meet its burden of demonstrating that outside counsel to the Liquidator received specific confidential information substantially related to the present litigation, based on representation of another client. Neither did Everest meet its burden of showing a reasonable probability that outside counsel would disclose Everest's confidences or secrets in Midland's liquidation proceeding. See Matter of Midland, Sup Ct, NY County, Jan. 30, 2007, Stallman J., Index No. 41294/1986 (Motion Seq. No. 68).
It is well-settled that "the reinsurer has no privity with, and is generally not liable to, the original purchaser of the underlying policy." Travelers Indem. Co. v Scor Reinsurance Co., 62 F3d 74, 76 (2d Cir 1995). However, Everest confuses the policyholders' lack of privity and their consequent lack of standing in the proposed action against Midland. Although only Midland is a "party" to the liquidation proceedings, all Midland policyholders who file claims are subject to the jurisdiction of the liquidation court. Corcoran v Hall Co., 149 AD2d 165, 173-174 (1st Dept 1989). The Court's decision on Everest's motion would become law of the case in this liquidation proceeding.
Because the Superintendent holds office as Liquidator to protect the interests of policyholders in the liquidation proceeding ( Corcoran v Ardra Ins. Co., 77 NY2d 225, 232), there is generally no need for the policyholders to speak on their own behalf as a matter of due process. See Ballesteros v New Jeresy Prop. Liability Ins. Guaranty Assn, 530 F Supp 1367 (D NJ 1982), affd without opinion 696 F2d 980 (3rd Cir 1983).
However, in this case, Everest has alleged that the Liquidator has mishandled claims. If proven, this might suggest that the Liquidator acted in a manner contrary to protecting the interest of policyholders. Moreover, assuming Everest's interpretation of its contracts with Midland is correct, the contractual rights cannot be enforced without changing the Liquidator role's in the management of the liquidation proceeding. Everest seeks to become involved in the claims adjustment process in the "pre-allowance stage," i.e., before the Liquidator has determined that a claim should be paid. See Everest Mem. to Vacate, at 6.
Everest's motion to permit the proposed action against Midland raises important questions about the role that reinsurers may play, not only in the liquidation proceeding, but also in the day-to-day affairs of the Liquidator. The contractual rights at issue are standard provisions in a reinsurance contract, permitted by Insurance Law § 1308. Should Everest establish a right of participation in the "pre-allowance stage" of the liquidation, the Liquidator indicates that as many as 400 reinsurers could assert similar rights. This is an esoteric area of law for which case law provides little guidance to the circumstances at hand.
In the exceptional circumstances presented, the Court exercised its discretion to allow the policyholders to speak on their own behalf. If Everest demonstrates that its breach of contract claims against Midland have a likelihood of success on the merits, then modifications to the claims allowance procedures could follow.
Although the impetus for considering changes to the allowance procedures arose from a contractual dispute, changes to the allowance procedures would affect all of Midland's policyholders. All policyholders were granted an opportunity to be heard as a matter of fairness; it does not matter that only some policyholders wanted and took the opportunity.
The Court's decision to solicit the input of the policyholders and reinsurers is in keeping with the purpose of Article 74 of the Insurance Law, which adopted the Uniform Insurers' Liquidation Act (UILA). The Court's power to do so derives from the Court's oversight of the liquidation proceedings in general. "The over-all purpose of the Uniform Act, like liquidation proceedings generally, is not only to preserve available assets for the benefit of creditors, but to protect the interest of persons who purchased insurance policies from a company which has become insolvent." Matter of Transit Cas. Co. (Digirol Superintendent of Ins.), 79 NY2d 13, 20 (1992). By analogy, in the context of corporate liquidation proceedings, "[n]otice shall be given to such other persons interested, and in such manner, as the court may deem proper, of any hearings and of the entry of any orders on such matters as the court shall deem proper." Business Corporation Law § 1008 (b). Thus, Everest's challenge to the Court's power to require notice to the policyholders and reinsurers, and an opportunity to be heard, is denied as meritless.
"So far as is appropriate the proceedings are made analogous to the liquidation of a domestic corporation." Matter of People by Stoddard (City Equitable Fire Ins. Co., Ltd, of London, England), 238 NY 147, 156 (1924).
As the Court indicated in its interim decision and order, Everest bears the cost of notice to policyholders and reinsurers because Everest's motion created the exceptional situation warranting such notice. The cost of the notice would not have been incurred but for Everest's motion. Requiring the Midland estate to bear the cost of notice would be a waste of its assets, and therefore Insurance Law § 7419 (b) affords the Court broad discretion to enter orders that it deems necessary to prevent such waste.
The Court also notes that making Everest bear the cost of notice is in keeping with the tenor of the interposition rights that Everest seeks to enforce in its proposed action against Midland. A reinsurer that elects to interpose a defense to a claim otherwise available to an insolvent insurer bears the cost of interposing the defense; the cost is chargeable to the insolvent estate only if a benefit accrues to the estate, subject to court approval. See Insurance Law § 1308 (a) (3). Everest should therefore bear the cost of all expenses associated with enforcing its interposition rights.
Everest's motion to vacate also seeks discovery of the Liquidation Bureau's claims handling procedures of Midland claims and "immediate and complete access" to the Liquidation Bureau's records of Midland. According to Everest, it is entitled to such discovery because the Court improperly converted its motion to vacate into a motion for summary judgment, when the Court required supplemental briefing on the Liquidation Bureau's claims handling practices.
To the extent that Everest seeks to enforce a right of access granted under its reinsurance contracts with Midland, Everest is improperly seeking on this motion the ultimate relief that it seeks in its proposed action against Midland.
The Court also notes that the Liquidator has agreed to provide Everest with more access to Midland's records. The Court does not opine on whether this satisfies the obligations under the reinsurance contracts between Midland and Everest.
Everest has misunderstood the Court's interim decision and order. As indicated in the interim decision and discussed further in Section IV of this decision, the Court is entitled to evaluate the likelihood of success of Everest's proposed action against Midland, in considering whether the permanent injunction should be lifted. If Everest cannot show a likelihood that its action against Midland would succeed, then the Midland estate should not have to bear the expense of full-blown litigation where the merits are not likely to be proven. Because Everest alleges that the Liquidation Bureau's claims handling in this liquidation was improper, the Court required supplemental briefing on the Liquidation Bureau's practices to understand the context of the alleged flaws in the claims handling procedures.
Everest was already familiar with the Liquidator's allowance procedures in the Midland liquidation. See Proposed Complaint ¶¶ 112-120. Either Everest now has some evidence of the Liquidator's alleged breaches or it does not; Everest is not permitted to engage in speculation or a fishing expedition to meet its burden of demonstrating a likelihood of success on the merits. Thus, Everest clearly misreads the Court's interim decision in arguing that, by considering the likelihood of success of its proposed action, the Court improperly converted its motion into a motion for summary judgment requiring discovery. See Everest Mem. to Vacate, at 13.
In sum, Everest's motion to vacate the Court's interim decision and order is denied in all respects.
III.
As Baxter indicates, the Court did not grant any policyholders the right to respond to Everest's motion to vacate and to preclude the policyholders' submissions. However, it would be illogical that the Court would grant policyholders and reinsurers an opportunity to be heard on Everest's main motion, while not permitting them to respond to an ancillary motion challenging their right to be heard. The Court did not anticipate that Everest would seek to muzzle policyholders by bringing a preemptive motion limiting their submissions.
Some policyholders and reinsurers have submitted their papers as "confidential" submissions, pursuant to Section II.A of CMO No. 1, which established a procedure for handling documents containing confidential, privileged, or trade secret information. See Appendix A [Schedule of Confidential Submissions]. Policyholders offered to submit to the Court coverage-in-place agreements and settlement agreements among Everest and policyholders regarding claims arising from HIV-tainted blood factor concentrates, to rebut Everest's contention that the Liquidator mishandled these claims allowances. According to the policyholders, the agreements would show that Everest, as a direct insurer of claims, agreed to the very methodology that the Liquidator has used to evaluate blood factor claims, which Everest now challenges as flawed. See Foster Aff. (Sep. 14, 2006), Ex A. Bayer maintains that Everest, as a direct insurer, agreed to reimburse Bayer for losses under policies that insured Bayer at the same layer of coverage and spanning the same policy years as Bayer's policies with Midland. Yet, as a reinsurer, Everest has objected to the Liquidator's allowance of the same losses. Rosenbaum Affirm. (Feb. 14, 2007) ¶¶ C-D. Thus, policyholders contend that Everest would deny claims in bad faith if the Court adopted Everest's view that the reinsurance contracts permitted Everest to participate in (i.e., effectively take over) the Liquidator's adjustment of claims.
Pursuant to Section II.A of CMO No. 1, these documents are segregated from the other papers on these motions, and will be returned to counsel for the each upon determination of this motion. As per CMO No. 1, counsel must preserve the documents pending any appellate review.
By letter dated August 4, 2006 to the Liquidation Bureau, Everest contended that Midland should have challenged a modified version of allocating losses from contaminated blood-factor claims because Midland was not a party to negotiated settlements of coverage litigation. However, Armour/Revlon claims that, under the terms of its "coverage in place agreement" with Everest and 32 other signatory insurers regarding the blood-factor concentrate claims of Armour/Revlon, the signatories allegedly agreed that insolvent insurers would be treated as if they had signed the coverage-in-place agreement. Revised Herman Aff. ¶ 6 (c).
Everest claims that the settlements were based on other considerations not present in this liquidation proceeding. Everest also contends that the policyholders' submissions are governed by confidentiality provisions. To appease Everest, policyholders, including Baxter, designated their submissions as "confidential" pursuant to CMO No. 1, though they disagreed with Everest's position. Everest also took the aggressive position that disclosure to the Court itself would violate the confidentiality provisions of those agreements, which resulted in sealed submissions from two firms representing policyholders, which would not be opened unless the Court ordered or otherwise determined that the submissions should be unsealed and read.
For those policyholders who submitted "confidential" material, Everest relies on CPLR 4547 as a ground to bar the consideration of the coverage in place and settlement agreements with its own policyholders. Everest's reliance on CPLR 4547 is misplaced. CPLR 4547 bars the use, as evidence of liability, of offers or discussion of settlement in the same action. Indeed, CPLR 4547 specifically permits the "admissibility of such evidence when it is offered for another purpose." The subject settlement agreements resolved other disputes and are not being used for the purpose of establishing Everest's liability. CPLR 4547 does not apply.
Everest characterizes the settlement agreements as being used to establish the value of claims. However, the settlement agreements are not being used to establish a particular dollar value of claim. They are being offered to refute Everest's allegations that the allocation principles and methodologies that the Liquidator has used are improper. Evidence that Everest allegedly agreed to use the very allocation principles and methodologies in approving the blood-factor claims of its own policyholders would belie its recent contentions that those principles and methodologies are flawed.
Therefore, Baxter's motion for leave to submit papers in response to Everest's pending motions is granted, and its papers are accepted.
As to the "sealed" submissions, the Court's interim decision and order did not pass on whether a policyholder or reinsurer may disclose, in their submissions, material governed by a confidentiality provision, which may itself be found in the sealed submission. That determination would require an analysis of the applicable confidentiality provision. Given Everest's threat of litigating any breach of a confidentiality provision, and given that the firms which submitted the sealed submissions did not include a separate discussion of the confidentiality provisions purportedly in dispute, it would be imprudent to consider the submissions and leave the policyholders to deal with the repercussions.
Therefore, the Court declines to consider the sealed submissions. It is the Court's view that the evidence proffered would not have appreciably affected the outcome of Everest's motion to lift the permanent injunction. The analysis of Everest's motion to lift the permanent injunction is predominantly legal rather than factual. The analysis is not driven by any specific facts of a policyholder's claim, though the handling of specific claims prompted Everest to bring its motion to lift the permanent injunction. Evidence that would contradict Everest's allegation that the Liquidator mishandled a specific claim speaks, if at all, only to the issue of whether the alleged mishandling in that instance actually injured Everest. Even if the Liquidation Bureau properly processed and allowed a claim, that is not to say that the Liquidation Bureau did not mishandle other claims, as Everest's fellow reinsurers have alleged; neither does such evidence speak to the larger issues of whether the Liquidator's procedures and protocols for handling claims violate the reinsurance contracts.
IV.
The injunction barring actions against an insolvent insurer is intended to preserve the assets for the benefit of creditors, and to protect policyholders, which is the overall purpose of Article 74 of the Insurance Law. See Beecher v Lewis Press Co., 238 AD2d 927, 927 (4th Dept 1997) (Supreme Court erred in failing to give full faith and credit to an injunction against an insolvent insurer issued by Rhode Island court); Curiale v AIG Multi-Line Syndicate, 204 AD2d 237, 238 (1st Dept 1994); Matter of Transit Cas. Co. (Digirol Superintendent of Ins.), 79 NY2d at 20. The injunction against suits protects policyholders and creditors and preserves assets by preventing the expenses of the defense of actions that otherwise would be brought against the insolvent insurer. See Beecher, 238 AD2d at 927. Moreover, "[t]he New York State policy is to resolve all claims against an insolvent insurer in a single liquidation proceeding." Reinsurance Co. of N. Am. v Superintendent of Ins. of State of NY, 183 AD2d 626, 626 (1st Dept 1992). The injunction obliges those asserting causes of action against the estate to come eventually before the liquidation court. In balancing the equities, this Court must therefore consider "the enormous public interests involved." Seitzman v Hudson Riv. Assoc., 126 AD2d 211, 214 (1st Dept 1987).
In general, the standards to vacate or modify an injunction are identical to those applicable to the initial determination to award provisional relief, i.e., a likelihood of success on the merits, irreparable harm absent the relief or absent an adequate remedy at law, and the balancing of the equities in the movant's favor. Weinstein-Korn-Miller, NY Civ Prac ¶ 6314.02 (2d ed); W.T. Grant Co. v Srogi, 52 NY2d 496 (1981). The Court has "the unquestioned right to modify or vacate the injunction [barring actions against an insolvent insurer] in the interests of justice to individuals who had claims distinct from those already stated." Matter of Bean v Stoddard, 207 App Div 276, 280 (4th Dept 1923). "A motion to vacate or modify a preliminary injunction is addressed to the sound discretion of the court . . . [and that] [o]ne claiming error in its exercise has to show an abuse of such discretionary power.'" Matter of United Community Ins. Co., 226 AD2d 948, 950 (3rd Dept 1996) (citation omitted).
Everest's likelihood of success on the merits against Midland is a both a factual and legal inquiry. Everest must demonstrate the right to assume the extensive role in the liquidation proceeding that it assumes it has. Everest's, the reinsurers' and the Liquidator's papers address this question, which is a matter of interpreting the reinsurance contracts between Everest and Midland, within the context of the liquidation scheme set forth in Article 74 of the Insurance Law. Many of the policyholders who submitted papers do not take a position on this question. Instead, they dispute Everest's contentions that the Liquidator mishandled or was grossly incompetent in adjusting their own claims. However, whether the manner in which the Liquidator handled claims constituted a breach of the reinsurance contracts will depend, in part, on an interpretation of the contractual rights at issue. Assuming for purposes of argument that Everest's interpretation of the reinsurance contracts is correct, Everest must demonstrate by a preponderance of the evidence that the facts show a likelihood that its reinsurance contracts were breached and that it suffered actual injury. See e.g. Icy Splash Food Beverage, Inc. v Henckel, 14 AD3d 595 , 596 (2nd Dept 2005); New York ex rel Spitzer v Cain, 418 F Supp 2d 457 (SD NY 2006).
Everest's papers do not address its proposed allegation that Midland has repeatedly violated Insurance Law § 2601. See Proposed Complaint ¶ 47. The Court notes that "the law of this State does not currently recognize a private cause of action under Insurance Law § 2601." Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603, 614 (1994).
The following reinsurers submitted papers: (1) Certain Underwrites at Lloyd's London (Lloyd's); (2) Swiss Reinsurance Corporation (Swiss Re); (3) Employers Ins. of Wausau, Nationwide Mutual Ins. Co., and National Casualty; (4) Riunione Adriatica di Sicurta (RAS), Clearwater Ins. Co. and Metropolitan Reinsurance. Co.
The following policyholders submitted papers: (1) Armour Pharmaceutical Company; (2) The Babcock Wilcox Company Asbestos Personal Injury Settlement Trust, National Service Industries, CertainTeed Corp., Dow Corning Corp. and Quigley Co.; (3) CBS Corporation; (4) Baxter International Inc.; (5) Foster Wheeler LLC, Uniroyal Holding, Inc., G.D. Searle Co., and Eli Lilly Co.; (6) Bayer Corporation.
V.
Everest claims that the Liquidator breached the following provisions in Midland's reinsurance treaties:
" Article XVIII
In the event of the insolvency of the reinsured Company [Midland], this reinsurance will be payable directly to the Company, or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator . . . has failed to pay all or a portion of any claim. It is agreed however, that the liquidator. . . . shall give written notice to the Reinsurer of the pendency of a claim against the Company indicated the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the . . . liquidation proceeding . . ., and that during the pendency of a such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that it may deem available to the Company or their liquidator. . . . The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court against the Company as part of the expense o[f] conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer."
Liquidator Mem., at 15. The facultative reinsurance provisions at issue state, in pertinent part:
Everest and the Liquidator did not submit copies of the facultative reinsurance contracts and reinsurance treaties. The Liquidator quoted the provisions more extensively than Everest; Everest does not contend that the Liquidator misquoted the relevant provisions.
The reinsurance treaties and facultative reinsurance certificates also contain other provisions governing notice to Everest, which Everest contends imposes additional notice obligations. To the extent that these notice provisions requires the Liquidator to provide notice at a different point in time, the specific provision of notice in the event of Midland's insolvency would control. Muzak Corp. v Hotel Taft Corp., 1 NY2d 42, 46 (1956); Bank of Tokyo-Mitsubishi, Ltd., New York Branch v Kvaerner a.s., 243 AD2d 1, 8 (1st Dept 1998).
"3.Prompt notice shall by given by the Company to [Everest] of any occurrence or accidence which, without regard to liability, appears likely to involve this reinsurance and while [Everest] does not undertake to investigate or defend claims or suits it shall nevertheless have the right and be given the opportunity to associate with [Midland] and its representative at [Everest's] own expense and in the defense and control of any claim, suit or proceeding which may involve this reinsurance with the full cooperation of the Company.
* * *
9.In the event of the insolvency of the Company [Midland], reinsurance under this Certificate shall be payable by [Everest] on the basis of the liability of the Company without diminution because of such insolvency, directly to the Company or its liquidator . . ., except as otherwise provided by law. [Everest] shall be given written notice of the pendency of each claim which may involve the reinsurance afforded by this Certificate within a reasonable time after such claim is filed in the insolvency proceeding. It shall have the right to investigate each such claim and interpose, at its own expense, in the proceeding is to be adjudicated, any defense which it may deem available to the Company or its liquidator. . . . The expense thus incurred by [Everest] shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by [Everest]."
Liquidator Mem., at 16-17. The rights contained in Everest's reinsurance contracts with Midland are fairly common provisions found in reinsurance contracts. In particular, the part of Article XVIII of the reinsurance treaties and Paragraph 9 of the reinsurance certificates, which requires the reinsurer to pay the full amount of the claim without discount in the event of insolvency (the "insolvency clause"), is required by law in California, Illinois, Louisiana, Massachusetts, New York, Tennessee, Utah, and Washington. See CA Ins. Code § 922.2 (2); 215 ILCS 5/193 (8); LA Rev. Statutes § 22:941 (G) (2); NY Ins. Law § 1308 (a) (2); TN Code Ann. § 56-13-122 (a) (2); Utah Code § 31A-27a-512 (4); RCW § 48.12.162 (1) (b).
Article XVIII and Paragraph 9 are very similar with respect to Everest's rights in the event of Midland's insolvency. The rights that the Liquidator allegedly breached in these lengthy provisions are: (1) notice of a claim to Everest; (2) an opportunity to associate with Midland and to cooperate in the defense and control of any claim which may involve Everest's reinsurance; (3) access to Midland's books and records; (4) a right to investigate; and (5) a right to interpose defenses in the Midland liquidation (interposition rights).
A. Notice
As cited above, Everest's reinsurance contracts with Midland allegedly require the Liquidator to give written notice to Everest of the pendency of a filed claim that may involve Everest's liability, "within a reasonable time." According to Everest, the Liquidator waited more than 15 years after MPH claims for coverage were filed before advising Everest of losses. See Proposed Complaint ¶ 42. Everest claims to have lost retrocessional recoveries that would have been available had Everest received timely notice of claims. See id. ¶ 48. Everest alleges that lack of timely notice deprived Everest of the ability to properly post reserves for the claims in question, and effectively deprived Everest of its right to participate in the evaluation and defense of claims. Ibid. Everest maintains that the timing of notice also affects the other contractual rights at issue: the longer the Liquidator waits to send notice to Everest, the less time that Everest has to investigate a claim.
Swiss Re and other reinsurers claim that, like Everest, the Liquidation Bureau has not provided them with timely notice of claims, and that the allegedly scant information that they have received raises doubts in their mind as to whether the claims are covered.
"When the reinsurer in turn transfers this risk [the risk ceded by the insured to the reinsurer], the transaction is known as a retrocessional agreement. The transferring reinsurer is known as the retrocedent; the assuming reinsurer is known as the retrocessionaire." Moore v Aegon Reins. Co. of Am., 196 AD2d 250, 253 (1st Dept 1994).
The Liquidator disputes that notice of claims was untimely. It contends that the timeliness of notice to Everest is measured not from the time a claim is filed in the liquidation proceeding, but rather when there is an indication that the filed claim would involve Everest's possible liability. The Liquidator states that, in 2004, it hired consultants to prepare "Captioned Reports" that were sent to the reinsurers shortly after the reports were completed. Midland Opp. Mem., at 12. In all but one case, Everest and other reinsurers had almost two years or more to provide any input. Ibid. In 2005, the Liquidator began notifying by mail those reinsurers who may be affected by an allowed claim (i.e., that a reinsurance contract may cover the insurance policy that insured the loss). Id. at 13. When the Liquidation Bureau allows a claim to be paid, the Liquidator allegedly notifies reinsurers 30 to 45 days prior to the Liquidator's allowance, in the form of a "Claim Alert." Ibid. A single lawsuit is not the appropriate vehicle to determine whether the Liquidator sent timely notice to Everest for all filed claims that Everest reinsured. The duty to provide notice to a reinsurer is triggered when the insurer is able to glean, with a "reasonable possibility," that a claim will involve reinsurance. Christiania General Ins. Corp. of New York v. Great American Ins. Co., 979 F2d 268, 276 (2nd Cir 1992).
According to the Liquidator, reinsurers receive an "Initial Captioned Report" and "Supplemental Captioned Report." The "Initial Captioned Report" purportedly summarizes available information about a claim, provides a preliminary coverage analysis and claim evaluation, and outlines the steps required to bring the claim to conclusion; the "Supplemental Captioned Report" is prepared due to developments, and changes in the coverage or claim evaluation. Midland Suppl. Mem., at 24; Bazemore Aff. (Dec. 6, 2006), Ex 1, at 1. A final "Supplemental Captioned Report Recommended Allowance/Disallowance" is prepared when the claim evaluation is completed. Ibid.
According to the Liquidation Bureau, a "Claim Alert" sets forth the recommended allowance range for a claim, is accompanied by the reinsurance cession, and may include audit and allocation reports. See Bazemore Aff. (Dec. 6, 2006), Ex 1, at 2.
"While the duty to provide notice therefore does not begin on the basis of mere speculation, rumor, or remote contingencies far removed from the particular policy in question, when an insured complying with its duty to use due diligence in investigating potential claims against it would believe from the information available that its policy would be involved, the notice obligation arises."
Ibid. Determining when the Liquidator's duty to provide notice to Everest was triggered therefore would require a fact-specific analysis, particular to each separate claim, not amenable to resolution in a single lawsuit. Midland's coverage of some risks was one of many layers of insurance spanning several years; it is doubtful that Midland insured all its risks at the same layer of coverage. "Setting reserves is merely one factor in assessing when the obligation to give notice arises." Id. at 275. More importantly, "the reinsurer must demonstrate how [late notice] was prejudicial and may not rely on the presumption of prejudice that applies in the late notice disputes." Unigard Sec. Ins. Co., Inc. v North Riv. Ins. Co., 79 NY2d 576, 584 (1992).
Everest does not dispute that the Liquidator provided Everest with Captioned Reports in 2004 with respect to all claims except in one case. Moreover, as the policyholders indicate, Everest was aware of some MPH claims because it was a direct insurer of claims that were also filed in the Midland liquidation. See Herman Revised Aff. ¶ 6(a). Everest did not have to wait for the Liquidation Bureau to inform Everest that a claim was filed before asserting its rights. Although Everest argues that it should have been provided with more information than it received, Everest has not met its burden of demonstrating a likelihood that it suffered prejudice with respect to all claims for which notice was allegedly untimely, so as to justify adjudicating them in a single action against Midland.
Everest's contractual rights of access, assistance and cooperation, investigation of a claim and interposition of defenses are neither limited by, nor measured from, the timing of notice to Everest. If Everest complains of not having sufficient time to review records and investigate claims due to late notice, the solution would be for the Liquidator to permit Everest additional time for review and investigation rather than submitting allowed claims for Court approval.
The Court acknowledges that "there [may be] cases in which the reinsurer's right to associate may be impaired by late notice from the reinsured." Unigard Sec. Ins. Co., 79 NY2d at 584. See Section V.C, infra.
B. Access to Records
According to Everest, Midland's contracts with Everest provide that Everest shall have "free access to the books and records of the Company at all reasonable times for the purpose of obtaining information concerning this Agreement or the subject matter thereof." Everest claims that the Liquidator placed "unreasonable and unwarranted restrictions" on Everest's access to Midland's books and records, such as allegedly requiring a guarantee from Everest to pay all billings on the claims subject to Everest's review, and asking a third-party contractor to leave after copying six files.
The Liquidator does not dispute that Everest, like all reinsurers, has the right to audit Midland's files. See Stuehrk Aff. (Dec. 5, 2006) ¶ 5. However, the Liquidator contends that Everest was not seeking access to Midland's books and records at reasonable times, or on reasonable terms. According to the Liquidator, Everest sought not only to review the files, but to retain the files of 170 insureds, and some of the files were the subject of document production in pending litigation in California. See Stuehrk Aff. (Aug. 31, 2006) ¶ 6. The Liquidator asserts that Everest was afforded access to scan documents for three weeks, which was extended for three more days. Everest insisted on 15 uninterrupted weeks to scan all the files, but the Liquidation Bureau told Everest to reschedule its audit beginning in September, given that other reinsurers of Midland would require access to the same files. The Liquidation Bureau denies telling Everest to "pack up and leave." Stuehrk Aff. (Aug. 31, 2006) ¶ 14.
The Liquidator is offering to electronically "image" many of the files, if Everest would agree to a cost-sharing arrangement; Everest's Claims Manager states no such offer was conveyed to Everest. See Proto Reply Aff., Ex B [Wendover Aff. ¶ 10]. The Liquidation Bureau and Everest agreed to audit dates in December 2006 and January 2007, and the Liquidator is prepared to make more dates available. See Banks Aff. (Dec. 5, 2006) ¶ 6.
Everest has not demonstrated a likelihood of success of proving that the Liquidator has denied Everest access at reasonable times to Midland's books and records. Even assuming, for purposes of argument, that the Liquidator has denied Everest reasonable access, it is not clear that the time during which Everest lacked access resulted in any discernible injury to Everest, given the Liquidator's willingness to accommodate Everest's requests. With respect to the Revlon/Armour claim involving HIV-tainted blood factor concentrates, Revlon/Armour asserts that Everest had the right to conduct audits of individual case files supporting the Revlon/Armour claim since 1996, pursuant to a "coverage-in-place agreement" among Everest, Armour, and 32 other signatory insurers. See Herman Revised Aff. ¶ 6(b).
C. Association and Cooperation
According to Everest, the facultative reinsurance certificates between Everest and Midland state that Everest "shall . . . have the right and be given the opportunity to associate with the Company [Midland] and its representatives . . . in the defense and control of any claim, suit or proceeding which may involve this reinsurance with the full cooperation of the company."
The Liquidator agrees that this clause should permit reinsurers to provide the Liquidator with potential defenses to the claim (Midland Suppl. Reply Brief, at 3). The Liquidation Bureau states that very few contracts between Everest and Midland have a "cooperation clause." See Stuehrk Aff. (Dec. 20, 2006) ¶¶ 6-7. According to the Liquidator, the word "control" appears in only a limited number of facultative reinsurance certificates, in a notice provision, and not in any of the reinsurance treaties. Owen Opp. Aff. (Sep. 1, 2006), at 4 n 2. The Liquidator also takes the position that the cooperation clauses in these contracts are inapplicable once Midland is placed into liquidation; rather the "insolvency clause" controls. Midland Suppl. Reply Brief, at 24.
As the Court of Appeals noted, "reinsurers seldom have occasion to exercise their right to associate." Unigard Sec. Ins. Co., 79 NY2d at 584.
"A reinsurer is not responsible for providing a defense, for investigating the claim or for attempting to get control of the claim in order to effect an early settlement. Unlike a primary insurer, it may not be held liable to the insured for a breach of these duties." Unigard Sec. Ins. Co., 79 NY2d at 583. "The right to associate' involves the right to consult with and advise the reinsured in its handling of a claim." Id. at 584.
Contrary to the Liquidator's argument, the insolvency clause does not govern to the exclusion of a reinsurer's right to associate. The rights granted under the insolvency clause — the right to investigate and to interpose defenses to a claim on behalf of the insurer — and the right to associate are not mutually exclusive. Even during an insolvency, the reinsurer has the right to consult and advise the reinsured without having to exercise its interposition rights.
Everest claims that it sent a letter to the Liquidation Bureau on August 4, 2006, advising the Liquidation Bureau that Midland has failed to assert certain coverage defenses to claims filed by Revlon. See Foster Aff. (Sep. 14, 2006), Ex A. According to Everest, the Liquidation Bureau never responded to the letter. Id. ¶ 4. Insofar as the Liquidation's lack of response could be viewed as a failure to honor Everest's right to consult and advise Midland, it is unclear that the Revlon claims are governed by a reinsurance agreement that contains a cooperation clause. To the extent that Everest argues that the Liquidation Bureau's alleged lack of timely notice adversely affected its right to associate, the reinsurer "bears the burden of showing that it suffered tangible economic injury" by the insurer's failure to give timely notice; the loss of a contractual right is not, in itself, prejudicial. Unigard Sec. Ins. Co. v North River Ins. Co., 4 F3d 1049, 1068 (2nd Cir 1993). Everest has not met its burden of demonstrating a likelihood that the Liquidator breached Everest's contractual right to associate.
Everest notes that the Court of Appeals did not consider whether a reinsurer's loss of the right to associate in the context of an insolvency might warrant a presumption of prejudice. Everest Reply Mem., at 5 n1. This Court sees no reason to depart from the rule in Unigard Sec. Ins. Co. that a reinsurer's loss of a contractual right without tangible economic injury does not, in itself, constitute prejudice, even in insurance liquidations.
D. Investigation and Interposition rights
The reinsurance contracts between Everest and Midland contain language identical, or substantially similar to, the following:
"The Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or their liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.
When two or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of the reinsurance agreement as though such expense had been incurred by the Company."
These provisions grant Everest a right to investigate a claim, and a right to interpose defenses to the claim in the liquidation proceeding, at its own expense.
As discussed above, this Court does not find that the Liquidator denied Everest access to records at reasonable times, or that a period where access was unavailable prejudiced Everest. Therefore, Everest has not met its burden of showing that the Liquidator interfered with Everest's right of investigation. To the extent that Everest argues that its right to investigate claims entitles it to participate in claims handling, that argument is addressed in Section V.D.2 of this decision.
Everest admits that, after the Liquidator has allowed a claim, it receives a letter from the Liquidator's third-party consultant, stating, "Pursuant to your reinsurance contract(s) with Midland, you have a right to intervene in this matter and assert any arguments or defense you may believe may apply." Everest Reply Mem., at 9; see Bazemore Aff. (Dec. 6, 2006), Ex A. The Liquidation Bureau allowed Everest 30 days to intervene and assert any arguments of defenses, which Everest claims is not enough time.
The Liquidator has agreed to accommodate any reinsurer's interposition rights by extending the current time period for reinsurers' review of potential allowances in "Claim Alerts" from 30 to 60 days. This concession does not resolve the dispute; Everest wants more. Everest wants the Liquidator to place it in a position where it can make a reasoned determination whether to investigate a claim or interpose a defense. Everest Suppl. Mem. at 4. Everest wants to participate in the handling and settlement of claims submitted to Midland, and to raise and resolve coverage defenses that may exist. Everest Mem., at 20. Everest believes that it is entitled to be involved in the Liquidator's decision-making process of whether to allow or disallow a claim, and to participate in the Liquidator's settlement negotiations with policyholders. Everest Reply Mem., at 7.
The Liquidator has admittedly not permitted Everest to participate in its decision-making process. The Liquidator rejects Everest's expansive interpretation of its interposition rights as contrary to the "follow the settlements" provision in the reinsurance contracts, and as contrary to the statutory scheme of Article 74 of the Insurance Law.
Representatives from 43 Guaranty Associations, some of whom have over 30 years of experience with their guaranty associations, aver that, aside from Everest, they are not aware of any reinsurer that has asserted a right to take over the defense of claims against an insolvent insurer's estate. See generally Guaranty Associations Affs., Exs 1-43; see also Martindale Aff. (Feb. 16, 2007) ¶ 15.
1.
All of Everest reinsurance contracts with Midland contain "follow the settlements" provisions. "The purpose of the follow the fortunes' or follow the settlements' doctrine in reinsurance law is to prevent the reinsurer from second-guessing' the settlement decisions of the ceding company." Granite State Ins. Co. v ACE Am. Reins. Co., 2007 NY Slip Op 10464 (1st Dept, Dec. 27, 2007). Under a "follow the settlements" clause, "reinsurers will be bound by the settlement or compromise agreed to by the cedent unless they can show impropriety in arriving at the settlement." Excess Ins. Co. Ltd., 3 NY3d at 583 (citation omitted). Thus, "the reinsurance relationship is often characterized as one of utmost good faith.'" Unigard Sec. Ins. Co., 4 F3d at 1054. A reinsurer bound to follow the settlements or fortunes of its ceding insurer may raise, as a defense to payment, only fraud, bad faith, or payments "clearly beyond the scope of the original policy" or "in excess of [the reinsurer's] agreed-to exposure." North River Ins. Co. v. Ace American Reinsurance Co., 361 F3d 134, 140 (2nd Cir 2004). "A reinsurer who seeks to avoid application of follow-the-fortunes by claiming bad faith, however, must make an "extraordinary showing of a disingenuous or dishonest failure." Travelers Cas. Sur. Co. v Gerling Global Reins. Corp. of America, 419 F3d 181, 191 (2nd Cir 2005) (citation omitted). "The [bad faith] standard is not mere negligence, but gross negligence or recklessness." North River Ins. Co. v CIGNA Reins. Co., 52 F3d 1194, 1216 (3rd Cir 1995).
In support of its motion, Everest alleges that the Liquidator did not conduct a coverage analysis of MPH claims (including possible available defenses) before soliciting settlement demands from MPHs, did not conduct an "independent investigation" of claims, did not conduct claim audits of MPHs, and used "outdated" information as support for allowance recommendations, including analyses prepared for another insolvent insurer. See Proposed Complaint ¶¶ 81-89.
Everest accuses the Liquidator of conducting inadequate investigations of claims, especially as to the claims involving the Pfizer heart valve, committing similar errors that the Federal District Court criticized in Suter v General Accident Ins. Co. (2006 US Dist LEXIS 48209 [D NJ 2006]). See Proposed Complaint ¶¶ 96-99. In Suter, the Superintendent of New Jersey, as liquidator of Integrity Insurance Company (Integrity), brought an action against General Accident Insurance Company (General Accident), a reinsurer of Integrity. Pursuant to Integrity's excess policies issued to Pfizer, Integrity paid Pfizer for claims arising from allegedly defective Pfizer heart valves. Transit Casualty Company (Transit), another insurance company in liquidation, also issued policies to Pfizer, which attached below and above the limits of the Integrity policies.
The claims involved heart valves that had failed, causing injury; claims of anxiety from people who had heart valves implanted and feared their failure; and claims from people who underwent operations to replace their heart valves. Suter, 2006 US Dist LEXIS 48209, *34.
It is no coincidence that Everest claims that the Liquidator has mishandled Midland's Pfizer heart valve claims similar to Integrity in Suter — counsel to Everest represented General Accident in Suter, whereas Midland's outside counsel had represented Transit.
The District Court found that Integrity's Senior Claims Examiner had not conducted a reasonable or businesslike investigation of Pfizer's claims, relying on Pfizer's position and the opinions of Transit's counsel. Suter, 2006 US Dist LEXIS 48209, *84. Given the lack of a reasonable or businesslike investigation, the District Court found that General Accident was not obligated to follow the fortunes or settlements of Integrity. Ibid.
The Federal District Court found that the legal opinion that Transit's counsel gave to Integrity was "misleading," in that it incorrectly described the California Superior Court's decision, and mischaracterized the decision in another case against Pfizer. Suter, 2006 US Dist LEXIS 48209, *58.
The Senior Claims Examiner for Integrity allowed coverage for the heart valve claims, accepting that coverage was triggered as of the date the heart valves were implanted, a theory adapted from breast implant and asbestos exposure lawsuits. Suter, 2006 US Dist LEXIS 48209, *38-39. However, a California Superior Court had rejected the "date of implant trigger" theory in litigation involving heart valves. The New Jersey Federal District Court faulted the Senior Claims Examiner for putting heart valve claims in the same category as breast implants, based on a theory of injury that had no credible medical evidence to support the three kinds of claims. Id. at *77. Among other things, the Senior Claims Examiner admittedly did not discuss the California case with an attorney, and had not retained any expert medical advice. Thus, the Federal District Court found that Integrity should have obtained its own coverage counsel instead of relying on the opinion of Transit's counsel. Id. at *85.
The Liquidator maintains that allegations of late notice, bad analyses, and poor investigation of claims are all the types of complaints that reinsurers routinely assert in the defense of a reinsurance collection action by the ceding insurer, such as in Suter. The Liquidator contends that permitting Everest to raise defenses to claims in the liquidation proceeding would permit Everest to second-guess the Liquidator's good faith decisions to allow or settle claims, which renders the "follow the fortunes" or "follow the settlements" provision in the reinsurance contracts useless. The Liquidator contends that Everest should not, under the guise of asserting interposition rights, get the upper hand by questioning claims during the claims handling process before the Liquidator tenders approved claims to Everest for reinsurance coverage.
The Liquidator argues that the relationship of utmost faith between a reinsurer and its cedent is undermined if a reinsurer asserts, by rote, interposition rights to investigate and to defend any or every claim of its cedent. The reinsurer would effectively have no faith in its cedent's adjustment of claims. "Reinsurance works only if the sums of reinsurance premiums are less than the original insurance premium. Otherwise, the ceding insurers will not reinsure. For the reinsurance premiums to be less, reinsurers cannot duplicate the costly but necessary efforts of the primary insurer in evaluating risks and handling claims." Unigard Sec. Ins. Co., 4 F3d at 1054.
Be that as it may, the reinsurance contracts contain both interposition rights and "follow the settlements" provisions. The Court must give meaning to both. Travelers Cas. Sur. Co. v Certain Underwriters at Lloyd's of London, 96 NY2d 583 (2001). The contractual rights at issue are neither inherently inconsistent with nor contradictory to the "follow the settlements" provision. Hypothetically speaking, Everest could decline to associate itself in the defense of a claim, or decline to investigate or interpose defenses. Following court approval of the claim, Everest would apparently be bound to follow the settlements and fortunes of Midland.
As the Liquidator aptly indicates, Everest may assert any defenses to a claim allowed by the Liquidator by denying reinsurance payments on the claims, and then raise defenses to payment of the allowed claims when Midland brings a reinsurance collection action against Everest. Midland Opp. Mem. to Vacate, at 16. Everest may also argue that the Liquidator paid the claim in bad faith, if it has a sufficient basis for so arguing. The Liquidator maintains that the defenses available to a reinsurer in a reinsurance collection action protect Everest's interests in denying payment on claims.
Whatever the validity of the Liquidator's arguments, they are not dispositive. A right to raise defenses in a reinsurance collection action exists in addition to the contractual interposition rights, and the contractual rights clearly permit Everest to interpose the defenses "in the liquidation proceeding" itself. Insurance Law § 1308 (a) (3).
Contrary to Everest's and the reinsurers' arguments, Everest's contractual rights — a right to notice, to inspect books and records, to associate and cooperate in the defense, and to investigate a claim and to interpose defenses in the liquidation proceeding — are discrete rights that neither give rise to, nor should be confused with, an all-encompassing right to be involved in the Liquidator's internal process of adjusting claims. Everest itself points out that it has no privity with Midland's policyholders, so the reinsurance contract should not be interpreted in a manner as to permit Everest effectively to stand in the shoes of Midland or the Liquidator.
Nevertheless, it would be a good idea for the Liquidator to be open to consulting voluntarily with reinsurers during the Liquidator's settlement negotiations with policyholders whose claims are reinsured.
2.
The Liquidator emphasizes that the provisions of Article 74 of the Insurance Law "are exclusive in their operation and furnish a complete procedure for the protection of the rights of all parties interested." Matter of Lawyers Tit. Guar. Co., 254 App Div 491, 494 (1st Dept 1938). Because Article 74 of the Insurance Law mentions only the Liquidator's management of the liquidation, the Liquidator concludes that reinsurers are not allowed to participate in handling claims. As the Liquidator indicates, in enacting the predecessor to Article 74 of the Insurance Law, the Legislature
"did vest exclusive jurisdiction over all claims against an insolvent insurer in one body.
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Experience has demonstrated that in order to secure an economical, efficient, and orderly liquidation and distribution of the assets of an insolvent corporation for the benefit of all creditors and stockholders, it is essential that the title, custody, and control of the assets be intrusted to a single management under the supervision of one court. . . . '"
Matter of Knickerbocker Agency (Holz), 4 AD2d 71, 73 (1st Dept 1957), affd 4 NY2d 245 (1958) (emphasis added; internal citation omitted). The Liquidator argues that the Court's emphasis in Matter of Knickerbocker Agency on "exclusive jurisdiction" and "single management" of the insolvent estate does not permit others, including reinsurers, to be involved in the Liquidator's decision-making process.
The Liquidator argues that a reinsurer's contractual right to interpose defenses to insurance claims during their pendency means nothing more than the right of a reinsurer to suggest defenses to the Liquidator; any other interpretation would otherwise interfere with the Liquidator's exclusive management of the liquidation proceeding. The Liquidator acknowledges that Everest may seek to intervene and interpose defenses before the Court when a claimant contests a disallowed claim.
The predecessor to Article 74 of the Insurance Law was held to have provided "the complete procedure for the protection of the rights of all parties interested" ( Matter of Lawyers Title Guaranty Co. 254 App Div at 429). That does not necessarily hold true for Article 74. For example, Article 74 does not mention the Liquidation Bureau or reinsurers. New York adopted UILA as Article 74 of the Insurance Law in 1940, two years after Matter of Lawyers Title Guaranty Company was decided. See G. C. Murphy Co. v Reserve Ins. Co., 54 NY2d 69, 77 (1981); L1940, ch 631. As the Court of Appeals has explained, "[on] many other aspects of the liquidation process the UILA is silent because it was not intended as a comprehensive scheme displacing all State laws, substantive and procedural, relating to liquidation of insolvent insurance companies." Matter of Levin v National Colonial Ins. Co., 1 NY3d 350 , 359 (2004), quoting Matter of Transit Cas. Co. (Digirol Superintendent of Ins.), 79 NY2d at 20.
Matter of Knickerbocker Agency, which the Liquidator cites, must be understood in its context. There, the Court of Appeals held that a broad arbitration clause in an insurance agent's agreement with an insurance company could not be enforced due to the insolvency of the insurance company, reasoning that permitting arbitration would frustrate "the single management [of the estate] under the supervision of one court." Id., 4 NY2d at 252. As Everest and the reinsurers contend, Matter of Knickerbocker Agency stands for the more limited proposition that an arbitration clause in an insolvent insurer's contract is unenforceable not because arbitration would interfere with the Liquidator's single management of the insolvent estate, but rather because arbitration would interfere with the court's supervision of the liquidation. Indeed, the Court of Appeals spoke of the "exclusive jurisdiction" of the Supreme Court, "with agency of the Superintendent of Insurance." Id. at 250.
The Liquidator finds some support in Matter of Knickerbocker Agency for the proposition that "exclusivity of jurisdiction" would trump not only a contractual right of arbitration, but any other contractual right as well to preserve the Liquidator's single management of the estate. The Court of Appeals acknowledged that, because "it is true that the Superintendent of Insurance, as statutory liquidator, for all practical purposes takes the place of the insolvent insurer,'" the Liquidator "would thus seem to be subject to the contractual provision requiring arbitration subject to the contractual provision." Id. at 607. Nevertheless, the Court of Appeals ruled the arbitration provision unenforceable. Given that the arbitration provision would have been otherwise enforceable but for the liquidation proceeding, the Court of Appeals in Matter of Knickerbocker Agency effectively put the Liquidator in a better position than the insurer prior to the liquidation.
However, the Court of Appeals more recently held, "[L]iquidation cannot place the liquidator in a better position than the insolvent company he takes over, authorizing him to demand that which the company would not have been entitled to prior to liquidation. . . . Those rights were not altered merely because a liquidation order was entered." Matter of Midland Ins. Co., 79 NY2d 253, 265 (1992). There, the Court of Appeals rejected the Superintendent's argument that a reinsurer's contractual right of set-off, which existed prior to Midland's insolvency, was destroyed due to Midland's insolvency. Therefore, the Court cannot adopt the Liquidator's broad reading of Matter of Knickerbocker Agency, which would conflict with the Court of Appeals's more recent decision in Midland Insurance Company.
Matter of Knickerbocker Agency is also distinguishable, in that the contractual interposition rights at issue here are based on a statute, Insurance Law § 1308 (a) (3), enacted in 1939. L1939, ch 882 § 77. The public interest in the "single management" of an insurance liquidation existed long before Insurance Law § 1308 was enacted. It is illogical that the Legislature would permit reinsurers a contractual right to interpose defenses to claims in an insurance liquidation proceeding and yet intend that right to be defeated by virtue of the public interest in the Liquidator's "single management" of an insurance liquidation. Thus, the Court rejects the argument of the Guaranty Associations that Article 74 of the Insurance Law trumps Insurance Law § 1308.
Insurance Law § 1308 (a) (3) states, "Such reinsurance agreement may provide that the liquidator . . . of an insolvent ceding insurer shall give written notice of the pendency of the claim . . . and that during the pendency of such claim any assuming insurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defenses which it deems available to the ceding company, its liquidator, receiver or statutory successor."
Insurance Law § 1308 must be read in pari materia with Article 74 of the Insurance Law. See Matter of Midland Ins. Co., 79 NY2d 253, supra (construing Insurance Law § 1308 [a] [2] [A] with Insurance Law § 7427). "[S]tatutes which relate to the same or to cognate subjects are in pari materia and to be construed together unless a contrary intent is clearly expressed by the Legislature." Matter of Plato's Cave Corp. v State Liq. Auth., 68 NY2d 791, 793 (1986); Matter of Lower Manhattan Loft Tenants v New York City Loft Bd., 66 NY2d 298, 304 (1985). Thus, the Court has the "obligation to harmonize the various provisions of related statutes and to construe them in a way that renders them internally compatible." Matter of Aaron J., 80 NY2d 402, 407 (1992).
The Liquidator argues that Article 74 of the Insurance Law contains specific provisions, which govern to the exclusion of Insurance Law § 1308 (a) (3), which he views as a general provision. This argument overlooks the fact that Insurance Law § 1308 (a) (3) speaks about the insolvency proceeding.
The Court disagrees with the Liquidator's interpretation that a reinsurer's contractual right to interpose defenses to insurance claims during their pendency means nothing more than a right to suggest defenses to the Liquidator. The adjudication of claims implies that the Court will rule on the merits of any interposed defenses; the Court does not render advisory opinions on "suggested" defenses. To interpose a defense therefore means that the defense may be raised and adjudicated, even if the Liquidator does not accept the defense in deciding whether or not to allow a claim.
Thus, a reinsurer's interposition of, and adjudication of objections or defenses to a claim, within a liquidation proceeding, will inevitably raise claim preclusion (res judicata) and issue preclusion (collateral estoppel) issues in a later reinsurance collection action that the Liquidator might bring as to that claim, and would most likely bar relitigation of the same objection or defense. Given the time, expense and complexity of such litigation, and the scarcity of judicial and Liquidation Bureau resources, reinsurers' defenses should be litigated once as expeditiously as possible, in a hearing on each claim objected to.
The little legislative history that exists to guide this Court as to the Legislature's intent in enacting Insurance Law § 1308 concerns Insurance § 1308 (a) (2) (A), not Insurance Law § 1308 (a) (3), which is at issue here.
"Insurance Law § 1308 (a) (2) (A) was enacted in response to the Supreme Court's decision in Fidelity Deposit Co. v Pink ( 302 US 224). That case held, based on the language of the reinsurance contract and consistent with the indemnity nature of reinsurance contracts in general, that a reinsurer need only reimburse the liquidator of the insolvent ceding company for losses actually paid by the ceding company or the liquidator to the insureds on the underlying policies ( see, Fidelity Deposit Co. v Pink, supra). Section 1308 was intended to overcome that decision by altering the indemnity nature of a reinsurance contract when the ceding company becomes insolvent (see, Mem of Superintendent Pink dated Feb. 26, 1940, Bill Jacket, L 1940, ch 87)."
Matter of Midland Ins. Co., 79 NY2d at 263. Everest posits that Section 1308 (a) (3) is the quid pro quo for Section 1308 (a) (2): the former permits a reinsurance contract to include a right to investigate and interpose defenses in the liquidation proceeding in exchange for the latter's change in the nature of the reinsurance contract due to insolvency of the insurer. Given the lack of legislative history on Section 1308 (a) (3), Everest only speculates as to the Legislature's intent.
The decision to allow, to disallow, or to settle a claim must rest exclusively with the Superintendent of Insurance, in the capacity as Liquidator of the insolvent insurer.
"The Superintendent may not be compelled to surrender his trust created by statute. The responsibility for the liquidation is that of the Superintendent of Insurance. He may ask the help of the court in solving the problems which arise from time to time but all propositions for the liquidation of the corporation must be approved by him."
Matter of Lawyers Tit. Guar. Co., 254 AD at 494 (emphasis supplied). These principles remain good law. "[T]he Legislature, by statutory enactment, bestowed upon the Superintendent broad fiduciary powers to manage the affairs of distressed domestic insurers and to marshal and disburse their assets." Matter of Dinallo, 9 NY3d at 97. Permitting a reinsurer to allow, to disallow, or to settle claims under the guise of exercising interposition rights wrests away from the Superintendent his clear, exclusive fiduciary powers over handling claims. Whether Everest would have pursued the defense of a claim more aggressively than the Liquidator is speculative; it is hardly a basis to disturb the Liquidator's exclusive control and management over the allowance, disallowance, and settlement of claims.
As the Guaranty Associations point out, the Liquidator is a fiduciary; the reinsurers such as Everest which seek to manage the insolvent estate are not. Everest asserts that the Liquidator has an incentive to settle claims of "dubious value." The Liquidator's fiduciary duty tempers that alleged incentive. Unlike the Liquidator, reinsurers would have no corresponding fiduciary duty tempering any incentive to deny or delay payment of claims. Allowing reinsurers to adjust claims in lieu of the Liquidator might create an incentive for reinsurers to adjust claims in a manner so as to reduce their liability as reinsurers. The amount that a reinsurer must indemnify Midland is a function of the amount allowed for a claim, and the claims against the Midland estate are quite sizeable.
It does not necessarily follow that the right to interpose defenses entitles Everest, or any other reinsurer, the right to control the claims handling process or to be involved with the settlement of claims, given that Article 74 of the Insurance Law vests the Liquidator with exclusive management of the liquidation. A reinsurer's right to interpose a defense does not imply a right to negotiate or settle claims with policyholders. Bayer correctly points out that Insurance Law § 1308 (a) (3) and the contractual provisions require defenses to be interposed " in the [liquidation] proceeding where such claim is to be adjudicated" (emphasis added), i.e., before the Court (or a court-appointed referee), not during settlement negotiations with the Liquidator. Settlement discussions occur while the liquidation proceeding is pending, but claims are not adjudicated during settlement discussions.
Lloyd's contends that a reinsurer's contractual right to investigate a claim or to interpose defenses would be "impaired" or "not meaningful" if no right to negotiate and settle claims is not implied. Lloyd's Mem., at 8-10. Be that as it may, to interpret the words "may interpose . . . any defense" to mean "to settle and negotiate claims" is not a reasonable construction of unambiguous words.
To harmonize Article 74 of the Insurance Law with the interposition rights permitted under Insurance Law § 1308 (a) (3), this Court must fix the point during the liquidation proceeding when a reinsurer may interpose defenses to a claim, and when those defenses would be adjudicated. If a reinsurer interposes a defense while the Liquidator is adjusting a claim, adjudicating the defense would interfere with and interrupt the Liquidator's process of allowing, disallowing, or settling claims. The Liquidator would have to devote significant time, personnel, and expense evaluating the defenses that the reinsurer seeks to interpose. In a situation where a claim involves several reinsurers, each interposing different defenses, the Liquidator would find himself in the unmanageable position of either having to assert the defenses interposed by every reinsurer, or having to choose defenses over a reinsurer's protest. If a reinsurer interposes a defense after the Court approves the Liquidator's recommendation to allow or disallow a claim, then there would be no finality to litigation over a claim. It often takes years for liquidation proceedings of insurers to come to a close Midland was placed into liquidation more than 20 years ago.
As the Liquidator indicates, one reinsurer might insist on defenses that would adversely affect the interests of another reinsurer. See Liquidator Suppl. Brief, at 21-22.
For example, suppose the Liquidator must choose between allocating claims to one year, or over several years, and the law is unsettled. Environmental claims involve such allocation issues. See Consolidated Edison Co. of New York v Allstate Ins. Co., 98 NY2d 208 (2002). As Suter illustrated (2006 US Dist LEXIS 48209, supra), heart valve claims raised similar questions regarding application of a "date of implant trigger" or a "continuous trigger."
Suppose Reinsurer A insists that the Liquidator allocates claims to a single year. Under that approach, the claims are considered a very large loss that would not occur in a year covered under a policy reinsured by Reinsurer A. Instead, the loss would occur and be covered under a high-layer policy reinsured by Reinsurer B. Meanwhile, Reinsurer B insists that the Liquidator allocates the same loss over several years, which will spread the loss so that other policies and reinsurance would be involved, such as Reinsurer A. Under this approach, Reinsurer B argues that the loss would not reach the high layer policy that it reinsured, because the lower layers of insurance have not been exhausted. See Travelers Cas. Sur. Co. v Gerling Global Reins. Corp. of America, 419 F3d at 191 (reinsurer contended that insurer acted in bad faith by allocating certain claims to a single occurrence, when insurer should have multiple-occurrence allocation method).
The Liquidator would therefore face a dilemma: regardless of which allocation method the Liquidator adopts, the other Reinsurer will accuse the Liquidator of acting in bad faith.
Thus, the only logical approach is to permit Everest and other reinsurers to exercise their contractual interposition rights after the Liquidator has allowed a claim, but prior to the Court's approval of a claim. This approach strikes a balance between the contractual, permissive right of a reinsurer granted under Insurance Law § 1308 (a) (3) with the intent of Article 74 of the Insurance Law to provide a uniform, efficient approach to liquidation proceedings, with finality to policyholders and creditors. This approach also ensures that the expense of interposing a defense is initially borne only by the reinsurer asserting it, as set forth in the insolvency clause. The Liquidator would not be placed into a position of having to decide which defenses to interpose if several reinsurers interpose different defenses. In adjudicating an interposed defense, the Court would have occasion to approve any application from a reinsurer to charge the expenses of the interposing a defense to the insolvent estate, which is also permitted under the insolvency clause. Interposition rights to a claim are extinguished once the Court has approved (and consequently adjudicated) a claim, notwithstanding the fact that the liquidation proceeding is ongoing. Insurance Law § 1308 (a) (3) and the reinsurance treaties both state that interposition rights are exercised "during the pendency of a claim."
The Liquidator points out that it cannot disallow a claim of the three New York security funds, even if a reinsurer insists that the Liquidator raise a defense to that claim, because a claim paid by these funds is automatically valid as a matter of law. See Insurance Law § 7609.
Given the Court's interpretation of the investigation and interposition rights under Everest's reinsurance contracts with Midland, Everest has not shown a likelihood of success that the Liquidator breached these provisions by refusing to allow Everest to participate in the allowance, disallowance, and settlement of claims.
VI.
It is important to keep in mind that Everest's proposed action is limited to those "claims that Midland has informed Everest Re and other reinsurers that [the Liquidator] intends to allow in the near feature but seeks comments from reinsurers prior to formally allowing claims." Everest Reply Mem. at 7. As to those claims not yet allowed by the Liquidator, or those claims not yet approved by the Court for payment, the reinsurers' contractual rights can be adequately secured by an appropriately promulgated protocol to be followed in the liquidation proceeding. Any defenses that the reinsurers interpose can be referred for a hearing before the Referee who is currently appointed to hear and report on a policyholder's objections to disallowed claims, or before a different referee or referees, should the hearings be too numerous or time-consuming. Thus, any potential injury to Everest with respect to the potentially allowed claims may be prevented.
In addition, the proposed action against the Liquidator and Midland seeks declaratory relief, not compensatory damages. Like that other reinsurers, Everest's "only obligation is to indemnify the primary insurer." Matter of Midland Ins. Co., 79 NY2d at 258. Everest need not incur any out-of-pocket loss with respect to a claim until Everest is called upon to pay out on claims that the Liquidator allows and that the Court has approved. The Liquidator's violations of the reinsurance contracts concerning a claim does not cause Everest any injury if, hypothetically speaking, the Liquidator does not actually call upon Everest to pay for the claim. Assuming for purposes of argument, as Everest contends, it could prove that the Liquidator allowed claims in bad faith, Everest would not be required to follow the settlements or fortunes of Midland. Thus, Everest's damages are at best inchoate; at worst, Everest is speculating as to its injury.
Moreover, Everest has not demonstrated that a balance of the equities lies in favor of lifting the injunction against lawsuits against Midland. As discussed above, "[t]he New York State policy is to resolve all claims against an insolvent insurer in a single liquidation proceeding." Reinsurance Co. of N. Am., 183 AD2d at 626. The rationale for resolving all claims in a single proceeding was cogently set forth in Matter of People by Beha (Second Russian Ins. Co.) ( 219 App Div 46 [1st Dept 1920]). The United States branch of the Second Russian Insurance Company, organized under the laws of the Russian Empire, was placed in the hands of the Superintendent for liquidation. In 1918-1919, the new Soviet regime decreed insurance a state monopoly, expropriated the assets of all Russian insurance companies, and required their liquidation, except as to obligations to workmen and laborers. In August 1922, a German insurance company and German nationals brought two actions in Supreme Court, New York County, for claims alleged to have arisen prior to the Soviet decrees. A liquidation order entered on May 22, 1925 restrained the prosecution of any actions against the Russian insurance company. The Supreme Court granted an order modifying the injunction to permit the suits by the German insurance company and German nationals. The Appellate Division, First Department, reversed, reasoning:
"If the procedure authorized by this order is to be approved, there is no reason why every foreign national should not be authorized to proceed with his action against the corporation in the courts of this state, and to put the superintendent of insurance to the expense of defending the suits out of the trust funds in his hands, thus defeating one of the purposes for which the liquidation was ordered, which was to enjoin the prosecution of all litigation against the company and have its affairs settled up with the least possible expense, and at the same time reviving the life of litigation whose existence had been one of the reasons for the forcing of the company into liquidation."
Matter of People by Beha (Second Russian Ins. Co.), 219 App Div at 46.
The rationale applies just as forcefully today. If the Court were to permit Everest to sue Midland, there is no reason why every other similarly situated reinsurer — such as Lloyd's, Swiss Re, Employers Ins. of Wausau, Nationwide Mutual Ins. Co., National Casualty, RAS, Clearwater Ins. Co. and Metropolitan Reinsurance — would not be permitted to sue Midland. The costs of having to defend against such suits would not only drain the estate and the judicial resources of the liquidation court, but the case management of the suits themselves would also interfere with the Liquidation Bureau's orderly liquidation of the estate.
Assuming, for the sake of argument, that Everest could demonstrate a likelihood of success on the merits and an inadequate remedy at law if the proposed action were not permitted, Everest has not overcome the strong public interest and well-established policy that the injunction barring lawsuits against insolvent insurers is designed to protect. See Section IV, supra. If Everest and the other reinsurers were permitted to litigate as Everest wishes, the Midland estate and the Liquidator — and with them the public interest — would be irreparably harmed.
Even though Everest may not be permitted to bring a pre-emptive declaratory action against Midland, Everest is free to take the position (as it has already) that the Liquidator's alleged breaches of the reinsurance contracts excuse Everest from its obligation to reinsure Midland.
As to those claims that the Liquidator has allowed and that the Court has approved, Everest states that these claims are not part of its proposed action. Everest's nonpayment of the reinsurance may prompt the Liquidator to commence an action against Everest, and Everest may raise at that time any alleged breaches of the reinsurance contracts as a defense, among other defenses. Or, the Liquidator might determine that, in the best interests of the estate and for its orderly liquidation, the Liquidator should forgo such a suit against Everest. Without the protection of the injunction, the Liquidator would not have that choice. In effect, the injunction barring actions against an insolvent insurer permits the Liquidator to choose the appropriate time and setting in which claims against the insolvent insurer could be resolved.
Accordingly, Everest has not demonstrated entitlement to lifting the permanent injunction.
VII.
Justice Cohen's order of claims allowance procedures for court approval has not been reexamined for more than 10 years. Even on these motions, Everest agreed with the Liquidator that the Court does not need to modify or amend Justice Cohen's order at this time. Everest Suppl. Mem., at 22; Midland Suppl. Brief, at 3.
Yet the time has come for the Court to revisit Justice Cohen's order on claims allowance procedures for court approval. As the Liquidator reported in October 2005, reinsurance is Midland's most significant, non-invested asset. This asset would be jeopardized if it is determined that the Liquidator's claims handling protocols have violated reinsurance contracts between Midland and its reinsurers, which the reinsurers might assert as a defense to their reinsurance obligations.
The current claims allowance procedure conflicts with this Court's determination of the reinsurer's role in the liquidation when interposition rights are exercised, and the circumstances in which those rights are exercised. Justice Cohen's order does not provide for any notice to reinsurers of an opportunity to exercise their interposition rights, and does not provide for a procedure to adjudicate any interposed defenses.
As Everest indicates, Justice Cohen's order directs the Liquidator to submit allowed claims for court approval ex parte. However, ex parte submission runs the risk that an allowed claim may be approved by the Court before a reinsurer has the opportunity to interpose a defense to the claim in the liquidation proceeding. Once the 60-day period in which the policyholder may object to the allowance has run, the order directs the Liquidator to move ex parte for an order approving an allowed claim within 15 days.
To give effect to the contractual interposition rights of Everest (and of other similarly situated reinsurers), this Court is constrained to modify the procedures for judicial approval of allowed claims, to permit reinsurers to assert defenses available to Midland or to the Liquidator to any claim allowed by the Liquidator which is either partially or wholly reinsured, and to establish a process in which those defenses can be adjudicated as part of the judicial approval process, involving a hearing before a referee equivalent to that provided where an objection is filed to the Liquidator's disallowance of a claim. Otherwise, the Liquidator is placed in a position where compliance with Justice Cohen's order could result in a violation of Midland's reinsurance contracts, jeopardizing reinsurance recovery.
Thus, pursuant to its supervisory powers under Insurance Law § 7419 (b), the Court directs the Liquidator to review the claims allowance procedures and to formulate changes to the claims allowance procedures and protocols of the Liquidation Bureau. The Liquidator shall report to the Court within 120 days with proposed changes.
Insurance Law § 7419 (b) states, "Such court or justice may at any time during a proceeding under this article issue such other injunctions or orders as it deems necessary to prevent interference with the superintendent or the proceeding, or waste of the assets of the insurer, or the commencement or prosecution of any actions, the obtaining of preferences, judgments, attachments or other liens, or the making of any levy against the insurer, its assets or any part thereof."
If 120 days does not yield sufficient time for the task, the Liquidator may seek an extension upon a detailed report without need of a further motion.
Justice Cohen's order on the claims allowance procedure does not specifically take into account a reinsurer's contractual right to notice, a right to associate and cooperate with the Liquidator, or a right to investigate claims. The Liquidator has already agreed to accommodate any reinsurer's interposition rights by extending the current time period for reinsurers' review of potential allowances in "Claim Alerts" from thirty to sixty days, which might not always be sufficient. However, more changes are needed, and should be embodied in published protocols available to all concerned, consistent with the Court's concerns expressed in this opinion.
As CBS Corp. indicates, this Court has already permitted reinsurers to be involved in the liquidation proceeding, by virtue of CMO No. 1. Strasser Affirm. ¶ 11. However, CMO No. 1 is limited in scope. CMO No. 1 involves the claims of MPHs whose claims were disallowed, in whole or in part. See CMO No. 1, Section III.A. Most of the MPHs who signed onto CMO No. 1 had disallowed claims arising from bodily injury due to asbestos exposure, which make up for more than half, but not all, of Midland's liabilities. CMO No. 1 addresses, as intended, specific common legal issues, and does not permit reinsurers to assert defenses to a claim available to the Liquidator or Midland. Everest brought its motion to lift the permanent injunction after CMO No. 1 was finalized.
Counsel for three major policyholders advocates the adoption of strict time frames within which reinsurers may interpose defenses. Gallozzi Affirm ¶ 5. This suggestion is well-taken. Setting a time frame would be equivalent to the current procedure which sets time frames during which a policyholder may object to the Liquidator's allowance or disallowance of a claim. However, given the need to examine what may be a large number of documents, a longer time frame may be needed. Imposing a time frame addresses the policyholders' concern that a reinsurer may exercise interposition rights as a delay tactic to force policyholders into settling their claims for less than the allowed value. See Strasser Affirm. ¶¶ 10-19.
CBS urges the Court to require Everest (and other reinsurers), as a condition of exercising its contractual rights: (1) to pay all outstanding reinsurance sums owed to the Midland estate; (2) to disclose its positions on payments it has made as a direct insurer on the claims that are being evaluated; and (3) to assume liability to policyholders if it engages in bad faith claims handling. Strasser Affirm. ¶ 26. Similarly, Bayer urges that reinsurers must disclose their retrocessionaires, waive the defense of lack of privity with an insured, and post security for allowed claims which a reinsurer contests. However, CBS and Bayer advocated these conditions if a reinsurer were allowed, in effect, to step into the Liquidator's shoes to adjust claims, under the guise of exercising its contractual rights. Given that the Court has rejected Everest's interpretation of the contractual rights at issue, these proposed conditions appear unnecessary.
The Liquidator should solicit input from reinsurers, major policy holders, and the guaranty associations and any other interested parties about proposed changes. Everest offers as a template the Insurance Receivership Model Act of the National Association of Insurance Commissioners (IRMA). This Court also calls upon the Legislature to consider whether amendment of the UILA is advisable, to harmonize and modernize the insurance liquidation scheme as it relates to the rights of reinsurers.
IRMA states, in pertinent part:
"The Liquidator shall give written notice, in accordance with the terms of the contract to each reinsurer obligated in relation to the claim of the pendency of a claim against the reinsured company. Failure of the receiver to give notice of a pending claim pursuant to a provision in the reinsurance contract shall not excuse the obligation of the reinsurer unless it is prejudiced thereby, and if it is prejudiced, its obligations shall be reduced only to the extent of the prejudice. The reinsurer may interpose, at its own expense, in the proceeding in which the claim is to be adjudicated, any defense or defenses that it may deem available to the reinsured company or its receiver."
See Proto Suppl. Reply Affirm. (Dec. 20, 2006), Ex A § 611 (E).
Until changes to Justice Cohen's order are implemented, this Court shall hold in abeyance approval of all allowed claims in the Midland liquidation proceeding that the Liquidator may submit to the Court ex parte, which are partially or wholly reinsured, unless the Liquidator avers, under oath or affirmation, that he has given notice to any reinsurer of the claim, and that the claim has been submitted for approval, and that no reinsurer has voiced an objection to its approval. The Liquidation Bureau should not construe the interim stay on the approval of allowed claims as a direction to cease processing, adjusting, settling, and otherwise working on claims in the Midland liquidation submitted to the Liquidation Bureau.
The Court has considered Everest's other arguments and requests for relief; they lack merit and are accordingly denied.
CONCLUSION
As discussed above, the current procedure for allowances of claims has not taken into account the contractual rights in agreements between Midland and its reinsurers, like Everest. Nevertheless, Everest has not met its burden of demonstrating that the permanent injunction should be lifted to permit it to sue Midland or the Liquidator. Although the Liquidation Bureau has implemented and modified some procedures to honor those agreements without seeking any judicial modification of the procedures, further modification is required by both the Liquidator and the Court.
Although Everest alleges that the Liquidator mishandled claims, it remains to be determined whether Everest has a viable defense to payment of reinsurance claims based on the alleged mishandling. As to an approved claim, Everest must raise such defenses and its allegations of past violations in a plenary action to be brought by the Liquidator for payment of the claim on the reinsurance policies. As to any claim not yet judicially approved, Everest and any other affected reinsurers shall be accorded the opportunity to litigate its defenses during the court approval process in a hearing before a referee. Such determinations should obviate the assertions of any defenses in a later action by the Liquidator on the reinsurance contracts.
See footnote 31, supra.
Meanwhile, as the court supervising this liquidation, this Court has exercised its powers under Article 74 of the Insurance Law to direct changes in the Liquidator's procedures for the allowance of claims and in the procedure for court approval of allowed claims, where existing procedures could be viewed as conflicting with rights in reinsurance contracts between Midland and its reinsurers.
Accordingly, it is hereby
ORDERED that the motion by Baxter International Inc. for leave to file a response (Motion Seq. No. 76) is granted to the extent that Baxter International Inc.'s proffered papers are deemed submitted and read in opposition to Everest's motion to lift the injunction barring lawsuits against Midland Insurance Company; and it is further
ORDERED that the motion by Everest Reinsurance Company to vacate this Court's decision dated November 8, 2006 (Motion Seq. No. 70) is denied; and it is further
ORDERED that the motion by Everest Reinsurance Company to lift the injunction by order dated April 3, 1986, to permit it bring an action against Midland Insurance Company (Motion Seq. No. 67) is denied; and it is further
ORDERED that, within 120 days, the Liquidator is directed to settle, on notice to all affected reinsurers, and all those to whom notice was to be given under this Court's interim order of November 8, 2006, an order modifying Justice Cohen's order on claims allowance procedures dated January 30, 1997. Notice may be given by e-mail or by posting on a website of either the Liquidation Bureau or the Superintendent of Insurance. Similar notice shall be given of any application to the Court for an extension of the 120-day deadline; and it is further
The Liquidator would be well advised to consult counsel for the affected reinsurers and other interested parties in the formulation of protocols for promulgation and a proposed court order.
ORDERED that counsel who submitted confidential exhibits/sealed exhibits are directed to contact the Clerk of IAS Part 7 at (646) 386-3746 to arrange to retrieve their exhibits within 30 days.