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decided: September 5, 1979.


Original jurisdiction in case of William J. Sheppard, Insurance Commissioner of the Commonwealth of Pennsylvania v. Old Heritage Mutual Insurance Company.


Joseph Kenneth Hegedus, Deputy Attorney General, with him Norman J. Watkins, Deputy Attorney General, Chief, Civil Litigation, and Gerald Gornish, Attorney General, for petitioner.

Malcolm H. Waldron, Jr., for respondent.

President Judge Bowman and Judges Crumlish, Jr., Wilkinson, Jr., Rogers, Blatt, DiSalle and Craig. Judges Mencer and MacPhail did not participate. Opinion by President Judge Bowman.

Author: Bowman

[ 45 Pa. Commw. Page 430]

This original jurisdiction action*fn1 was commenced

[ 45 Pa. Commw. Page 431]

    on August 16, 1977, when petitioner, the then Insurance Commissioner of the Commonwealth of Pennsylvania, filed an application for order to show cause which seeks, as its ultimate relief, the liquidation of the business of Old Heritage Mutual Insurance Company (hereinafter Old Heritage or the Company).*fn2 Old Heritage is an assessable domestic mutual casualty insurance company, organized pursuant to the laws of the Commonwealth, and licensed by the Insurance Commissioner to engage in the business of health and accident insurance.

Pursuant to the requirements of Sections 213, 214 and 216 of The Department Act, 40 P.S. §§ 51, 52, and 54, the Insurance Department between March 24 and April 25, 1977, conducted an examination and inspection of the affairs of Old Heritage, as of December 31, 1976, to ascertain its financial condition and its ability to fulfill its obligations, whether it was complying with provisions of law, and any other facts relating to its business methods and management. On August 3, 1977, the Department delivered its report of examination to Old Heritage. According to the report, Old Heritage was insolvent, as of December 31, 1976, by $161,386. On August 4, 1977, the Insurance Commissioner, pursuant to Section 502 of The Department Act, 40 P.S. § 202, ordered the business of Old Heritage suspended. After hearing, Old Heritage's application

[ 45 Pa. Commw. Page 432]

    for supersedeas of said suspension order was denied by order of this Court dated October 17, 1977. In that same order, pursuant to Section 505 of The Department Act, 40 P.S. § 205, we enjoined and restrained Old Heritage from the transaction of its business and making any disposition or removal of its property or records without the written approval of the Insurance Commissioner.

On November 28, 1977, trial of this matter commenced before the Honorable Fred W. Davis, specially appointed as hearing examiner by this Court. After twenty-three days of testimony, trial was concluded on February 22, 1978.

Proposed findings of fact were submitted by the Department and Old Heritage. On October 11, 1978, Judge Davis filed the Recommended Findings of Fact of the Hearing Examiner, which we hereby adopt, dismissing the exceptions of both petitioner and respondent thereto.

Petitioner has advanced several grounds for the dissolution of Old Heritage, any one of which, standing alone, could require dissolution: that the Company is insolvent; that the Company is in such condition that its further transaction of business will be hazardous to its policyholders, members or creditors, or to the public; that the Company has wilfully violated the insurance laws of the Commonwealth; and that the Company is controlled by persons who are untrustworthy and who have mismanaged its affairs.*fn3 Although

[ 45 Pa. Commw. Page 433]

    evidence was introduced at trial on each of the grounds, and although the briefs direct arguments to each, because we have concluded that Old Heritage was insolvent as of December 31, 1976, we need not address the other grounds alleged.

Prior to enactment of the Act of December 14, 1977, P.L. 280, there was no statutory definition of insolvency in the Pennsylvania insurance laws. Thus, in Insurance Department v. Safeguard Mutual Insurance Co., 18 Pa. Commonwealth Ct. 195, 336 A.2d 674 (1975), aff'd as modified, 478 Pa. 592, 387 A.2d 647 (1978), we were required to arrive at a workable definition of that term before embarking upon an examination of the financial status of the insurance company in question. Our initial task is somewhat easier in this case inasmuch as the legislature has now provided a statutory definition of the term "insolvency."*fn4 Section 503 of The Department Act, 40 P.S. § 221.3 provides, in part:

'Insolvency' means:

[ 45 Pa. Commw. Page 434]

(2) For any other insurer [an insurer not issuing only assessable fire insurance policies] the inability to pay its obligations when they are due, or whose admitted assets do not exceed its liabilities plus the greater of (i) any capital and surplus required by law for its organization or (ii) its authorized and issued capital stock. For any insurer licensed to do business in the Commonwealth as of the effective date of this act which does not meet this standard, the term 'insolvency' shall mean for a period not to exceed three years from the effective date of this act that it is unable to pay its obligations when they are due or that its admitted assets do not exceed its liabilities plus any required capital contribution ordered by the commissioner under provisions of the insurance law. (Emphasis added.)

The term "admitted assets" is defined in Section 503 through a specification of thirteen categories of assets which "shall be considered to be admitted," and five categories which "shall not be considered admitted assets in any determination of the financial condition of an insurer." Given this statutory scheme and the holding of the Supreme Court in Insurance Department v. Safeguard Mutual Insurance Co., supra, 478 Pa. at 600, 387 A.2d at 651, under prior statutory law, we conclude that non-admitted assets, for the purpose of determining the solvency of an insurance company, must be allocated in the first instance a value of zero. In examining those items claimed by Old Heritage as assets, therefore, we must first determine whether the item is admitted or non-admitted. If the item is non-admitted, no valuation of the item is necessary. If the item is an admitted asset, then we must proceed to place a monetary value upon it.

[ 45 Pa. Commw. Page 435]


A. Cash

Section 503 of The Department Act first specified as an admitted asset: "(i) cash in the possession of the insurer, or in transit under its control, and including the true balance of any deposit in a solvent bank or trust company. . . ." There appears to be no dispute between the parties or as found by the hearing examiner, that, as of December 31, 1976, the value of cash as an admitted asset of Old Heritage is $12,597.

B. Bonds

The Insurance Company Law of 1921 (The Company Law), Act of May 17, 1921, P.L. 682, as amended, 40 P.S. § 341 et seq., regulates investment of assets by domestic mutual insurance companies. Section 802(1) of The Company Law, 40 P.S. § 912(1), applicable to Old Heritage, provides:

(1) A domestic mutual insurance company other than a mutual life insurance company, that writes assessable policies, shall invest its assets only in accordance with the laws of this Commonwealth relating to the investment of the capital of domestic stock insurance companies authorized to transact the same class or classes of insurance.

Section 602 of The Company Law, 40 P.S. § 722, which relates to the investment of capital of domestic stock casualty insurance companies, does not include public utility bonds among the authorized areas of investments. Nor does Section 503 of The Department Act expressly include public utility bonds as an item to be valued as an admitted asset.

As of December 31, 1976, as reflected in its annual statement for 1976, Old Heritage claimed the amount of $146,123 as an asset consisting of bonds. This claimed asset in bonds included four public utility

[ 45 Pa. Commw. Page 436]

    bonds acquired by the Company in 1976. The public utility bonds were acquired as a contribution to the company's surplus. The circumstances relating to the acquisition of these bonds need not be recounted in great detail here, but it appears that this acquisition was part of a rehabilitation agreement between the Company and the Insurance Department in June, 1976, the purpose of which was to infuse Old Heritage with additional funds in order to avoid involuntary dissolution at that time.*fn5 The Insurance Department takes the position that, although such acquisition was "permitted" by it with the understanding that the bonds "would be liquidated within a reasonable time to provide additional surplus,"*fn6 "[n]o waiver or estoppel concerning the relevant statutory investment provisions may be inferred." The Company argues that the actions of the Department in permitting acquisition of the public utility bonds constitute an agreement that Old Heritage "could carry the bonds as an admitted asset provided that they were disposed of in accordance with the agreement."

We believe that sub-clause (xiii) of subsection (3) under the insolvency provision of Section 503 of The Department Act is applicable to the public utility

[ 45 Pa. Commw. Page 437]

    bonds acquired by Old Heritage. Sub-clause (xiii) provides that the following shall constitute admitted assets: "other assets, not inconsistent with the provisions of this section, deemed by the commissioner to be available for the payment of losses and claims, at values to be determined by him." It is inconceivable to us that an asset item expressly permitted as part of the rehabilitation agreement by the Department would not fall within this provision. In the Department's own report of examination, the value of bonds as an asset of Old Heritage, as of December 31, 1976, was listed at $133,468. This figure was calculated by assigning a zero value to the two utility bonds still held by the Company on that date. Given the fact that these two bonds were not disposed of by Old Heritage by March 31, 1977, thus violating the terms of the agreement, see note 6, supra, we believe the Department acted properly in excluding them from inclusion as of December 31, 1976.

Therefore, under the circumstances present here, the public utility bonds held by Old Heritage in accordance with the rehabilitation agreement constituted admitted assets and the value of bonds, as of December 31, 1976, is $133,468.

C. Collateral Loans

The item of collateral loans listed as an asset by Old Heritage as of December 31, 1976, is unique in this case in the same manner as the item of public utility bonds is unique because the collateral loan mechanics was also one of the components of the rehabilitation agreement of June, 1976. The hearing examiner found that included as a term of the rehabilitation agreement was that Pennsylvania Health Insurance Agency, Inc. (Pa. Health)*fn7 would give a $125,000 collateral loan

[ 45 Pa. Commw. Page 438]

    note to Old Heritage, said note to be secured by the stock of Pa. Health and Gibralter Life Insurance Company (Gibralter).*fn8 An additional term of the rehabilitation agreement was that the capital stock certificates of Pa. Health and of Gibralter would be placed in a safe deposit box of Old Heritage, under Insurance Department control, as collateral for the obligation of Pa. Health. The obligor, or debtor, of the collateral loan transaction was Pa. Health; the creditor, or secured party, was Old Heritage; the principal amount was $125,000; interest was six per cent (6%) of the unpaid balance; and first payment of principal was due in September, 1976.

On its 1976 second quarterly statement, as of June 30, 1976, Old Heritage reports the acquisition of a collateral loan on June 18, 1976, said loan having terms as described above. The Company reported $125,000 as the asset value of this loan. Old Heritage's 1976 annual statement, as of December 31, 1976, similarly reports the acquisition of the collateral loan on June 18, 1976, and ascribes $105,000 as the asset value of the loan at year's end. The records of Pa. Health indicate ...

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