Ohio Insurance Dept. Appeals Court Ruling on Failed Companies

Ohio Department of Insurance (ODI) filed an appeal with the Ohio Supreme Court requesting a hearing on the department’s appeal of the Tenth District Ohio Court of Appeals’ ruling on the distribution of assets of failed insurance companies.

The court of appeals decision placed claims by other insurance companies under reinsurance treaties in the same priority status as direct insurance policyholders claims. The ODI said the ruling substantially dilutes the funds available to pay claims of direct insurance policyholders.

The department asserted that if the appeals court decision is permitted to stand, Ohio’s individual insurance customers could find themselves competing for the financial remnants of failed insurance companies with large, sophisticated insurance companies if an Ohio appeals court decision is permitted to stand.

When the assets of failed insurance companies are distributed, under Ohio law, creditors file claims and are assigned one of 9 “classes” by the state insurance liquidator. That class assignment determines the priority in which the liquidated company’s assets are distributed. Class 1 claims, which are paid first, are those expenses incurred by the liquidator while investigating and pursuing assets of the liquidation estate. Class 2 claims are those filed by the company’s policyholders.

In most liquidation estates, sufficient assets are collected to make substantial claims payments to direct insurance policyholders — often covering 100 percent of the individual policyholders’ claims.

Insurance companies spread their financial liability by purchasing additional insurance from other insurance companies. This is known as “reinsurance” and the contracts between the insurance companies passing this insurance risk are generally referred to as “reinsurance treaties.”

The Department asserted that, in a Sept. 6 ruling the Court of Appeals “misinterpreted and misapplied” Ohio Revised Code section 3903.42, which prescribes the distribution of claims from liquidated insurance estates. The appeals court ruling assigns claims by other insurance companies under reinsurance treaties to Class 2 priority status as “claims under policies for losses incurred” rather than to lower Class 5 priority status as “claims of general creditors.”

“I am deeply concerned that this ruling could significantly decrease the money available to pay individual Ohioans for the coverage they expected to have when they purchased their insurance policies,” Director of Insurance Lee Covington said. “There simply is no comparison between the interests of individual policyholders and those of large, sophisticated insurance companies. The clear intent of the legislature is to protect the interests of individual policyholders first.”

In reversing a trial court decision, the court of appeals found the definition of “policy” in the statute governing the distribution of insurance claims to include reinsurance treaty claims.

The ODI claims that the Appeals Court undermined the intent of the General Assembly and ignored well-established precedents from other jurisdictions, which have protected the interests of individual insurance policyholders over those of sophisticated insurance companies.

The department maintains that this ruling violates the established public policy of providing the greatest protection to ordinary insurance consumers and could place claims of direct insurance policyholders in jeopardy, affecting thousands of innocent consumers with policies and claims against liquidated insurance companies in Ohio.

The National Association of Insurance Commissioners (NAIC), the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), and the National Conference of Insurance Guaranty Funds (NCIGF) each filed “Friend of the Court” briefs in support of the ODI.

The NAIC brief argued that a contract of reinsurance is properly termed a “treaty” and the use of the term “policy” demonstrates the legislature’s desire to exclude treaties of reinsurance.

NOLHGA argued that in insurance company liquidations, the Ohio Revised Code intended to give priority to direct policyholders, not reinsurance claimants.

According to NOLHGA, “the Court of Appeals decision will allow reinsurance commercial contract claimants to receive assets that would otherwise be paid to direct policy holder claimants. The result is contrary to the public policy underlying insurance company liquidation priority statutes and undermines their very purpose.”

NOLGHA asserted, as did the ODI, that direct policyholders of Ohio insurance companies will suffer financially because of this decision and that the Ohio Supreme Court should grant jurisdiction and hear the department’s appeal.

The case in question is J. Lee Covington, II, Superintendent of Insurance, State of Ohio v. The Ohio General Insurance Company (U.M.C.-U.M.C. Ltd.), No. 01AP-213, Ohio App., 10th Distr. The 10th appellate district covers all of Franklin County, and is the jurisdiction in which all such similar cases are filed.

Topics Carriers Legislation Claims Ohio Reinsurance