Pa. Reinsurance Ruling Sets Precedent For Insolvency Cases

In an April 11, 2018, memorandum and order, Pennsylvania’s Commonwealth Court:

  • Confirmed an arbitration award in favor of the Pennsylvania Insurance Commissioner, as liquidator of Westmoreland Casualty Company, and against General Reinsurance Corporation. The award compelled the reinsurer to reimburse the liquidator for the reinsurer’s proportionate share of determined amounts agreed between the liquidator and its creditors, several state guaranty associations; and
  • Denied General Re’s motion to seal the award, notwithstanding the confidentiality order in the underlying arbitration.

Why the Rulings Break New Ground
The court’s memorandum and order demonstrates:

  • The liquidator’s latitude to accelerate payment to the creditors, the state guaranty associations, in order to manage insolvent insurance companies efficiently;
  • Reinsurers’ obligations to indemnify liquidators for the sanctioned accelerated payments; and
  • The public’s right of access to decisions from private arbitrations, which directly affect the public’s interests.

In 2016, the liquidator for Westmoreland Casualty, an insolvent Pennsylvania-domiciled insurance company, gained court approval for the crystallization of Westmoreland’s obligations to its remaining creditors (the relevant guaranty associations), paving the way for accelerated closure. On Jan. 20, 2016, the liquidator filed her application with the Pennsylvania Commonwealth Court for approval of the final determined amounts as “Westmoreland’s full and final obligation to each relevant guaranty association” and in which she detailed:

  • the history of the Westmoreland insolvency;
  • the steps taken to agree determined values with the guaranty associations for Class A (administrative expense) and Class B (loss and loss adjustment expense) amounts; and
  • the power and authority provided to the liquidator by the Insurance Department Act of 1921 to manage the affairs of an insurer in liquidation.

The Commonwealth Court granted the application by memorandum and order dated May 13, 2016. Thereafter, the liquidator sought recovery from Westmoreland’s remaining reinsurers for their proportionate share of the determined Class B amounts. The liquidator’s arbitration proceeding against General Re followed.

Challenge Overruled
In its Jan. 22, 2018, unanimous panel ruling on summary judgment and final award, the appointed panel detailed the positions of the parties:

Westmoreland contended that General Re is bound by the May 13, 2016, order accepting the determined amounts as “Westmoreland’s full and final obligation to each relevant guaranty association” and that settled loses of $4,889,115.43 are due from Gen Re to Westmoreland under the terms of the reinsurance treaty.

Gen Re opposed Westmoreland’s motion claiming that, under the treaty, the compromise of open claims with the guaranty associations was not a settlement of claims or losses paid by Westmoreland under the treaty. As described by the panel, Gen Re contended that the treaty required that the guaranty associations actually had to pay the underlying workers’ compensation claims to the insureds before the payment amounts were properly due and owing from the reinsurer.

The panel disagreed with Gen Re’s position ruling that “[p]ayment to the insured is not required to trigger the reinsurer’s obligation.” Citing the insolvency clause of the treaty, the panel ruled that the May 13, 2016, order “fully and finally resolved the liability of the company (Westmoreland) for these claims” and that “there is no doubt that the approval of the settlement by the Commonwealth Court determined Westmoreland’s liability for these claims for all time.”

Following receipt of the panel’s award, and prior to satisfaction of that award by Gen Re, the liquidator moved to confirm the award in the Commonwealth Court, but did not attach the award to its motion to confirm in consideration of the confidentiality order entered in the arbitration and pending the Commonwealth Court’s consideration of the right to publicize the award.

Gen Re, as reflected in the Commonwealth Court’s memorandum, did not oppose confirmation of the panel’s award but moved to seal the award claiming that disclosure would put Gen Re “at a competitive disadvantage when seeking to resolve similar disputes in the future.” Gen Re argued that “keeping the award under seal is consistent with the parties’ expectations under the Confidentiality Agreement” and that “this matter involves unusual facts and a legal dispute that is not an issue of public concern.”

In its April 11, 2018, memorandum and order, the Commonwealth Court disagreed with Gen Re, citing that “the public has a common law right of access to judicial records” and, moreover, reasoning and concluding that “the arbitration award does not reveal secretive or confidential business information that could put Gen Re’s competitors or “counterparties” at a competitive advantage, the award sets forth the arbitration panel’s legal conclusion regarding Gen Re’s payment obligation following an Order of this Court [the May 13, 2016 Order].” Citing the relevance of the Insolvency Act to the present dispute and the need for transparency for matters related to the administration of insolvent estates, the court concluded that “Gen Re’s interest in secrecy does not overcome the public’s right to access the award.”

A New Era for Legacy?
Reinsurers have long maintained that the acceleration of payment obligations by a cedent has no bearing on their own payment obligations. In rejecting this assumption, the Westmoreland reinsurance decision has major ramifications, not only in relation to insolvency cases but also all legacy portfolios where finality and accelerated closure are being sought. Moreover, the Commonwealth Court’s denial of Gen Re’s motion to seal makes clear that, while the allegations and facts set forth in pleadings relevant to an arbitration may remain confidential absent some compelling public interest, the public — and the industry — have a right to know and be guided by the outcome, particularly in matters involving insolvent estates.

Andrew Rothseid is a principal at RunOff Re.Solve LLC.
Joseph M. Donley is a member at Clark Hill PLC.

Disclosure: RunOff Re.Solve is the firm that conceived, designed, negotiated and executed the settlement strategy on behalf of the Pennsylvania Insurance Department. Clark Hill represented the liquidator in the arbitration and confirmation proceedings.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or Portfolio Media, Inc., or any of its or their respective affiliates. This article is for general informational purposes and is not intended to be and should not be taken as legal advice.

 

 

A copy of the Court’s April 11, 2018 Order Confirming the Arbitration Award and Denying the Motion to Seal is available here.

A copy of the Liquidator’s April 16, 2018 Amended Petition to Confirm the Arbitration Award is available here.