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WILLIAM J. SHEPPARD v. OLD HERITAGE MUTUAL INSURANCE COMPANY (03/20/80)

decided: March 20, 1980.

WILLIAM J. SHEPPARD, INSURANCE COMMISSIONER OF THE COMMONWEALTH OF PENNSYLVANIA, APPELLEE,
v.
OLD HERITAGE MUTUAL INSURANCE COMPANY, APPELLANT. WILLIAM J. SHEPPARD, INSURANCE COMMISSIONER OF THE COMMONWEALTH OF PENNSYLVANIA V. OLD HERITAGE MUTUAL INSURANCE COMPANY, APPELLANT



No. 371 January Term, 1979, Appeal from the Order of the Commonwealth Court, original jurisdiction at No. 1644 C.D. 1977, ordering liquidation of appellant, dated September 5, 1979, No. 380 January Term, 1979, Appeal from the Order of the Commonwealth Court, original jurisdiction at No. 1644 C.D. 1977, denying Appellant's Petition September 5, 1979

COUNSEL

Malcolm H. Waldron, Jr., Philadelphia, for appellant.

Joseph Kenneth Hegedus, Norman J. Watkins, Harrisburg, for appellee.

Eagen, C. J., and O'Brien, Roberts, Nix, Manderino, Larsen and Flaherty, JJ. Manderino, J., did not participate in the decision of this case. Larsen, J., concurred in the result.

Author: Nix

[ 492 Pa. Page 583]

OPINION

Appellant, Old Heritage Mutual Insurance Company, is an assessable mutual casualty insurance company organized pursuant to the insurance laws of this Commonwealth and licensed by the Insurance Commissioner (Commissioner) to engage in the business of health and accident insurance.

[ 492 Pa. Page 584]

After Old Heritage filed its annual financial statement detailing its financial condition as of December 31, 1975, see the Insurance Department Act of 1921, Act of May 17, 1921, P.L. 682, art. III, § 320; as amended, 40 P.S. § 443 (1971), it was subjected to a comprehensive examination by the Commissioner pursuant to sections 213, 214 and 216 of the Insurance Department Act, 40 P.S. §§ 51, 52, and 54.*fn1 This examination revealed that Old Heritage was insolvent by $219,939. Consequently, the Commissioner on June 7, 1976, suspended Old Heritage's right to transact business.*fn2 This suspension was terminated June 17, 1976, after Old Heritage and the Commissioner entered into a rehabilitation agreement designed to infuse Old Heritage with additional funds in order to avoid involuntary dissolution at that time.

In the spring of 1977, after Old Heritage had filed its annual financial statement detailing its position as of December 31, 1976, it was again subjected to a comprehensive examination by the Commissioner. This examination revealed that as of December 31, 1976, Old Heritage was insolvent by $161,386, was in a hazardous financial condition, had violated the laws of this Commonwealth, and suffered from gross mismanagement. The report of this examination was delivered to Old Heritage on August 3, 1977, and the next day the Commissioner suspended the entire business of Old Heritage based on the examination's finding that the company's condition posed a danger to its 7,500 policyholders, its claimants, its creditors and the public generally. On

[ 492 Pa. Page 585]

August 16, 1977, the Commissioner petitioned the Commonwealth Court for an order to liquidate Old Heritage.

On September 21, 1977, the Commonwealth Court heard Old Heritage's application to supersede or terminate the August 4, 1977 suspension order. At that time Old Heritage's management offered to infuse $161,000 into the company to cure its solvency. This proposed infusion was not in cash, but rather to consist of adjustments in accounts between Old Heritage and affiliated agencies owned or controlled by the management of Old Heritage, and would include long-term payments on pre-existing debts between Old Heritage and these agencies.

The Commonwealth Court denied Old Heritage's application for supersedeas and affirmed the suspension order on October 17, 1977. The court rejected management's offer to infuse $161,000 into the company because, "we are of the opinion that as made, it would not materially enhance the financial condition of" Old Heritage, "and does not meet the minimum requirements as suggested by the Court to possibly accomplish such an objective." The Court also enjoined the company from transacting any business or disposing of its property or records without the written approval of the Commissioner.

This last order was violated by the practice of Old Heritage to continue to bill for and collect renewal premiums from its policyholders and by endorsing these premium checks over to the affiliated agencies owned by the same management. The Commonwealth Court, on February 17, 1978, enjoined these activities as violative of the October 17, 1977 order, and further ordered that "[a]s any and all outstanding policies expire by their own terms, they shall not be renewed or extended."*fn3 Because Old Heritage issued only policies of one-year terms or less, all of the company's policies expired by February 18, 1979. Consequently, Old

[ 492 Pa. Page 586]

Heritage is before this Court as an entity comprised solely of its own management.

On November 28, 1977, trial commenced before a hearing examiner specially appointed by the Commonwealth Court. After 23 days of testimony, the proceeding ended on February 22, 1978. On October 11, 1978, the hearing examiner filed his recommended findings of fact to which both parties filed exceptions. The Commonwealth Court en banc heard argument concerning these proposed findings and the exceptions thereto on February 6, 1979. While this case was under consideration by the Commonwealth Court, Old Heritage filed a "Motion for Judicial Notice," seeking to have that court take judicial notice of Old Heritage's 1978 annual financial statement as proof that the company was not insolvent or in a financially hazardous condition.

On September 5, 1979, President Judge Bowman, writing for a unanimous court adopted all of the hearing examiner's recommended findings of fact, dismissed both parties' exceptions thereto, held Old Heritage to be insolvent as of December 31, 1976, by the sum of $159,068, granted the Commissioner's application to liquidate the business of Old Heritage, and appointed the Commissioner liquidator with directions to take possession of Old Heritage's assets. Sheppard v. Old Heritage Mutual Insurance Co., 45 Pa. Commw. 428, 405 A.2d 1325 (1979). The Commonwealth Court did not rule on appellant's motion for judicial notice. The above facts and claims constitute the basis of Old Heritage's appeal at No. 371 January Term, 1979, filed September 6, 1979.

Old Heritage's appeal at No. 380 January Term, 1979, concerns the failure of the Commonwealth Court to grant the company's petition seeking an order from that court to compel the Commissioner to authorize the company to expend funds toward the purchase of postage, and the payment of taxes and the outstanding claims of policyholders. The company contends that the granting of this petition would have demonstrated that Old Heritage was solvent. This petition was filed with the court on July 5, 1979, while the court was considering the disposition of the case. On

[ 492 Pa. Page 587]

September 5, 1979, the same date as its decision ordering the liquidation of Old Heritage, the Commonwealth Court through a separate order by President Judge Bowman denied the company's authorization petition on the basis that, "we have concluded that [Old Heritage] is insolvent as of December 31, 1976, and have directed the Insurance Commission to liquidate" the company. Appellant contends that the Commonwealth Court erred when it denied the petition without a hearing. On September 11, 1979, Old Heritage appealed from the denial of this petition.

Also on September 11, 1979, Old Heritage applied to the Commonwealth Court for a supersedeas of its September 5, 1979 Final Order of Liquidation. The requested supersedeas was denied by the Commonwealth Court on September 20, 1979. Old Heritage applied to the Supreme Court for supersedeas of the liquidation order on September 24, 1979. On September 26, 1979, we granted Old Heritage a stay of liquidation and advanced oral argument to our October Session. We have jurisdiction over these appeals pursuant to 42 Pa.C.S.A. § 723(a) (1979 Pamphlet).

For the reasons that follow, we agree with the decisions reached by the Commonwealth Court and, therefore, affirm the orders of that court docketed at Nos. 371 and 380 January Term, 1979.

1. No. 371 January Term, 1979

Old Heritage's first contention is that the Commonwealth Court failed to employ the correct legal test of insolvency in determining the company's financial condition. Prior to the December 1977 amendments to the Insurance Department Act of 1921, there was no statutory definition of insolvency. Under these circumstances, this Court created its own definition of insolvency. See, e. g., Commonwealth v. Minister's Protective Society, 294 Pa. 6, 11, 143 A. 232 (1928). In the Act of December 14, 1977, P.L. 280, No. 92, §§ 1 et seq., 40 P.S. §§ 221.1 et seq. (Supp.1979-80), the legislature defined insolvency, § 2, 40 P.S. § 221.3, and made it and the other provisions of the act retroactive in effect.

[ 492 Pa. Page 588]

§ 2, 40 P.S. § 221.9. Accordingly, the Commonwealth Court correctly employed the statutory definition rather than our prior judicial definitions of insolvency. Appellant contends that the Commonwealth Court employed the wrong portion of this new statutory definition in gauging the company's solvency. This definition is set forth below. The Commonwealth Court and the Commissioner employed that portion of the definition italicized, while Old Heritage contends that the correct test is indicated by the portion underlined:

§ 221.3 Definitions.

"Insolvency" means:

(2) For any other insurer [i. e., one 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 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 is unable to pay its obligations when they are due or that its admitted assets do not exceed its liabilities plus any required capital contributions ordered by the commissioner under provisions of the insurance law. Act of December 14, 1977, supra, § 2, 40 P.S. § 221.3 (emphasis added).

The crucial difference is that under the second sentence of this definition -- i. e., that relied upon by Old Heritage -- the Commissioner would be forced to wait until the target company had been insolvent for three years before it could seek the dissolution and liquidation of that company. The Commonwealth Court did not address this controversy. We believe that the interpretation of this ...


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