Pawtucket Mutual Cancellations in Effect in New York

October 6, 2004

The New York Supreme Court recently affirmed the position of Rhode Island regulators that decisions on policy cancellations involving a rehabilitating insurer must be handled within their state rehabilitation court and not by the New York Department of Insurance or New York courts.

The result is that mid-term cancellations of policies of Pawtucket Mutual Insurance Co. in New York will go into effect.

On June 16, the Rhode Island Rehabilitation Court authorized mid-term cancellations of all Pawtucket Mutual Insurance Co. policies, including policies effective in New York. Pawtucket Mutual Insurance Co. (PMIC) is been under the state’s control. Marilyn Shannon McConaghy, director of the Rhode Island Department of Business Regulation and court-appointed rehabilitator of PMIC, determined that the mid-term cancellation were necessary due to the prohibitive expense and the unavailability of adequate reinsurance to protect PMIC’s existence while she continued efforts to find a buyer for the troubled company. All policyholders were notified in advance of the cancellation, which was set for no later than August 15, 2004.

New York insurance officials argued that only the Superintendent of the New York Department – and not the rehabilitation court – could authorize mid-term cancellations of PMIC’s New York policies. In furtherance of its position, the New York department obtained a temporary restraining order from the New York Supreme Court on August 9, 2004, delaying the effective date of the cancellations, as reported in the Insurance Journal on August 18, 2004.

On August 23, 2004, the New York Insurance Department and the rehabilitator appeared in New York Supreme Court on the issue of whether the New York court should entertain jurisdiction over the New York’s challenge to the rehabilitation court’s order of mid-term cancellation. Relying primarily on the underlying premise of the Uniform Insurers Liquidation Act – to avoid inconsistent orders from courts of different states within the rehabilitation proceedings of one insurer – and on Underwriters National Assurance Co. v. North Carolina Life & Accident & Health Guaranty Ass’n., 455 U.S. 691 (1982), the New York Court agreed with the rehabilitator and directed the New York department to apply for relief in the rehabilitation court or have the temporary restraining order expire one week after the hearings.

The New York Department did not challenge the New York court’s ruling nor did it seek review in the rehabilitation court. As a result, the mid-term cancellations became final when the temporary restraining order expired on August 30.

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