Due to a lack of basic accountability standards, New York’s receivership system has failed Executive Life of New York (ELNY), its policyholders and beneficiaries, as well as the insurance industry and its customers, according to New York attorney Peter Bickford in a new article titled "The Elephant in the Court Room".
Bickford, whose legal specialties include insurance and reinsurance operational, regulatory and solvency issues, has written previously about the "flawed receivership process" in New York that he maintains has resulted in ELNY's liquidation and restructuring. See, for example, "The Trouble with ELNY".
Bickford's newest article expands this critique and provides a valuable summary analysis of the ELNY failed rehabilitation and subsequent liquidation hearing.
Bickford observes that the 1992 ELNY rehabilitation plan, "like the Titanic, was doomed the moment it left port". For reasons never satisfactorily explained, the ELNY rehabilitation plan differentiated between ELNY's traditional life and annuity business and its single premium annuities individual annuities (SPIAs) including all ELNY structured settlement annuities.
Pursuant to its rehabilitation plan, ELNY's traditional business was transferred to Metropolitan Life, along with ELNY's strongest statutory reserve assets, and these policyholders "received an equivilent (sic) policy from Met Life and suffered no material financial consequences." Although administered by Met Life, the structured settlement annuities and other SPIAs were left in ELNY along with its weakest ("junk bond") assets.
Significantly, neither the 1991 ELNY Rehabilitation Order nor the 1992 Order approving the ELNY Rehabilitation Plan declared ELNY to be insolvent. According to annual reports of the New York Liquidation Bureau (NYLB), which Bickford obtained through Freedom of Information Law requests, ELNY's cash flow went negative in 2002 - ten years following court approval of its Rehabilitation Plan and ten years before its Liquidation Order and Restructuring Plan were approved by New York State Supreme Court Judge John Galasso.
Bickford points out that even before ELNY's first external audit in 2006 (resulting in a substantial increase in reserves), the NYLB acknowledged that the reserve standard used in its annual statements “substantially understate[d] reserves when compared to reserves that would be required to satisfy regulatory requirements for a going concern insurance carrier.”
Bickford asks: "why weren’t proper accounting and reserve levels required or maintained, particularly for an entity that was solvent at the time it was taken into rehabilitation to protect it and its policyholders?"
The explanation, according to Bickford, results from fundamental flaws in New York's life insurance receivership process. "Counter intuitively" Bickford states, "when a company is placed in rehabilitation in New York the company ceases to be regulated":
- "The rigorous statutory requirements for filings, reports or certifications imposed on other licensed companies are no longer imposed on estates in rehabilitation;"
- "[T]here are no periodic regulatory reviews, examinations or communications;"
- "[T]here is no regulatory oversight of the operations, assets or finances; and"
- "[T]here is no mechanism for regulatory oversight of financial condition or compliance with the insurance law or regulations."
If ELNY had not been in rehabilitation, Bickford maintains "it is highly unlikely that the regulators would have allowed it to get to the point where the estate is today." Assuming ELNY had become insolvent outside of rehabilitation, Bickford asserts "the company’s officers and directors, its independent auditors, actuaries and other agents, could all potentially — and probably would — have been held accountable for their actions or inactions contributing to its failure."
Although New York Insurance Law, according to Bickford, does not provide immunity for the Superintendent or his agents in his separate, non-regulatory role as receiver, Judge Galasso granted judicial immunity, as requested by the Superintendent, in the ELNY Liquidation Order. In addition, Judge Galasso accepted the totality of the Superintendent's arguments and approved the ELNY Restructuring Agreement as proposed by the Superintendent and NOLHGA.
The result of the ELNY Liquidation Order and Restructuring Plan, even following contributions from state guaranty funds and voluntary life insurance company contributions, is a $900 million shortfall allocated entirely (and arguably inequitably) to approximately 1550 ELNY payees (including all structured settlement payees) out of a total of approximately 9700 current ELNY payees. The remaining, approximately 8150 current ELNY payees expect to receive 100 percent of their promised future payments.
To what extent will defendants and liability insurers supplement the ELNY structured settlement shortfalls? The answer is uncertain and depends, in part, on an issue S2KM addressed in a prior blog post: do qualified assignments extinguish the liability of defendants and/or liability insurers for shortfall payments resulting from the ELNY liquidation?
Bickford's article provides a succinct summary of objections raised by ELNY shortfall victims and their attorneys to the ELNY liquidation proceedings and ELNY restructuring plan:
- "Given the complexity and consequence of the proposed plan, the notice provided to payees was inadequate and untimely;
- "The plan will be administered and overseen by the very people that caused the shortfall — the rehabilitator and his agents;
- "The people most affected by the plan, the shortfall payees, were not consulted in the development of the plan and have not been given any reasonable opportunity to consider and propose an alternative plan;
- "The requested judicial immunity for the rehabilitator and everyone connected with the plan and its implementation is unprecedented and unwarranted given the failed history of the rehabilitation;
- "By placing the full burden of the shortfall on a small percentage of the payees, the plan is neither fair nor equitable, and creates an improper subclass of claimants; and
- "Collectively these objections, including a denial of any right to opt out of the plan, constitute an unconstitutional taking of property without due process." Note: for a summary of the due process issue, see this prior S2KM blog post.
Bickford's article further highlights the following legal issues which he states "could linger in the courts for years":
- "The propriety of the court including the rehabilitator’s request for judicial immunity for himself and his agents in the signed liquidation order;
- "Whether the up front netting of the guaranty funds’ subrogation rights (so that no guaranty fund actually pays its full cap on any claim) contradicts the legislative intent of the caps;
- "Whether the plan results in an improper sub-class of claimants — the shortfall annuitants;
- "The scope of claim-over rights of shortfall annuitants against policy owners, insurance brokers, attorneys or others involved in the original settlements;
- "The role and rights of factors that acquired claim payments from annuitants; and
- "The scope of responsibility of the rehabilitator and his agents as fiduciaries for all ELNY policyholders and payees for the failed rehabilitation."
Bickford's article concludes with a critical observation: although the ELNY Restructuring Plan may solve the immediate ELNY problem (at the expense of the remaining ELNY shortfall victims), it does not address the broader, underlying systemic defects inherent in the New York life insurance receivership system.
ADDENDUM (July 4, 2012): Bickford's article adds one additional observation that should be highlighted. ELNY's liquidation will apparently exhaust the New York life insurance guaranty fund. Without an act of the New York legislature, according to Bickford, "there will be no life insurance guaranty fund coverage in New York" following ELNY. For additional information about the role of state guaranty funds in the life insurer liquidation process, see this prior S2KM blog post.