Argued February 12, 2014.
Appealed from No.: Claim Nos. 2008ILXXINV01A, 2008DEXXINV01A and 2008PAPCINV01A. State Agency: Insurance Department.
Steven B. Davis and Karl S. Myers, Philadelphia, for plaintiff Michael F. Consedine, Insurance Commissioner of Pennsylvania.
Steven T. Witmer, Chicago, IL, for objectors.
BEFORE: HONORABLE DAN PELLEGRINI, President Judge, HONORABLE BONNIE BRIGANCE LEADBETTER, Judge, HONORABLE RENÉ E COHN JUBELIRER, Judge, HONORABLE ROBERT SIMPSON, Judge, HONORABLE MARY HANNAH LEAVITT, Judge, HONORABLE PATRICIA A. McCULLOUGH, Judge, HONORABLE ANNE E. COVEY, Judge. OPINION BY JUDGE LEADBETTER.
Objection to Notice of Determination
The Guaranty Associations (GAs) from Illinois, Delaware and Pennsylvania each object to the Liquidator's notices of determination (NODs) assigning a priority level (e) and a valuation of $0 to each of the GA's claims for expenses related to investment of guaranty fund assets. A referee assigned to hear the consolidated cases recommended affirmance of the Liquidator's determinations. After the GAs each took exception to the recommendation, the court directed argument to consider whether the investment-related expenses should be assigned priority level (a) as costs and expenses of administration under Section 544 of The Insurance Department Act of 1921 (Act), 40 P.S. § 221.44.
The three GAs are entities created and regulated by their state's statute; nevertheless, they share the same purpose and general operational framework. As entities created to provide some payment under certain insurance policies after the issuing insurance company is declared insolvent, the GAs protect the most vulnerable policyholders and claimants from incurring total loss or excessive delay in payment. The GAs obtain funds for this purpose through assessments imposed on insurance companies authorized to write policies in each GA's respective state, as well as subrogation reimbursement from the estates of insolvent insurers and investment income. If the assessments together with other assets of the GA are inadequate in any given year to meet obligations, the funds available are prorated among the obligations and the unpaid portions of the obligations are paid as soon thereafter as funds become available. See, e.g., Section 1808(e) of the Insurance Company Law of 1921 (Law), 40 P.S. § 991.1808(e).
The financial stability and operation of the GAs are overseen by the commissioner of the respective state insurance department. See Section 1805, 40 P.S. § 991.1805. In the event the assets of the GAs at the end of a calendar year exceed estimated liabilities for the coming year, the GAs may, but are not required to, issue a refund to member insurers in proportion to the contribution of each. See Section 1809, 40 P.S. § 991.1809. Premiums on policies issued by member insurers reflect assessments paid less any amounts returned to the insurer. See Section 1810, 40 P.S. § 991.1810.
When an insolvent insurance company receives claims under a policy it had issued, a list of such claims is submitted to the GAs by the liquidator. After a GA pays on covered claims, it submits to the liquidator a report of the covered claims that have been paid and the GA then has the right to recover from the insolvent insurer's estate. See Section 1816(a), 40 P.S. § 991.1816(a). A person who has been paid by a GA is deemed to have assigned his rights under the policy to the GA. Id. In turn, the GA is reimbursed from the estate of the insolvent insurer at priority level (b) pursuant to the priority order of distribution established ...