Regulation • Guaranty Association • Liquidation • Priority Levels

Illinois Ins. Fund v Reliance Ins. Co., PICS Case No. 14-0456 (Pa. Commw. March 21, 2014) Leadbetter, J. (10 pages).

The guaranty associations from Illinois, Delaware and Pennsylvania object to the liquidator’s NODs assigning a priority level (e) and a valuation of $0 to each of the GAs claims for expenses related to investment of guaranty fund assets. Objections overruled. NODs sustained.

Prior to 2005, in the course of liquidating insurance companies, the insurance commissioner routinely reimbursed GAs for investment expenses and other expenses deemed to be costs of administering GA funds. In that year, Reliance (in liquidation) issued guidelines for GA reimbursement that specifically excluded GA payments for investment management services. In 2007, the Pennsylvania insurance department announced a policy with similar guidelines, particularly including the non-reimbursement at priority level (a) for investment services.

The GAs argued that for priority purposes, their investment management costs should be treated no differently than other reimbursed expenses such as bank fees and overhead costs in the form of rent, utilities, salaries and equipment. They also argued that insofar as the liquidator does, they step into the shoes of the insolvent company for the purposes of at least partially covering certain claims and they should be reimbursed for investment services in the same way as the liquidator. The GAs contended that since their sole purpose is to pay covered claims, every administrative and operational activity is essentially related to handling claims, and thus, those costs should be assigned a priority level (a).

The liquidator argued that the phrase “costs and expenses of administration” used in the act was not meant to be applied to the liquidator and GA on an equal basis. Additionally, the GA’s expense in obtaining investment advice does not relate to claims handling and does not benefit the estate. Rather, to the extent that such advice produces investment income, it benefits the member insurers since it may lead to a reduction in their assessments.

The referee examined the statutory language and decided that the companies should pay for the investment advice. The court agreed with the referee and concluded that any benefit of GA investment income accrues not to the insolvent insurer’s estate but to each GA’s member insurers who may have a lower assessment when investment yields an increase in the funds available to pay claims. The statute is clear that priority(a) is accorded to the administrative expenses of the liquidator generally, but only to the GA’s expenses in handling claims.

Investment advice has no bearing on the claims handling responsibilities of the GAs and the GAs must handle claims and pay those that qualify regardless of whether or not their funds are favorably invested.