Friday, April 3, 2015

Risks and Priorities

In re Ambassador Insurance Co., Inc (National Indemnity Co., Appellant), 2015 VT 4

By Elizabeth Kruska

Think of Ambassador Insurance Company as James Dean. Handsome, daring, a little bit of a bad boy, and unfortunately, deceased. Think of National Indemnity Company (NICO) as the responsible sibling who has to step in and clean up afterward.

Ambassador was a Vermont insurance company (domiciled in New Jersey, and I am really resisting making New Jersey jokes right now). Ambassador specialized in surplus-line insurance, and insured high risk entities and others that couldn’t otherwise get insurance. They apparently insured asbestos companies. I can only imagine the business meeting for that one:

Ambassador Bad Boy 1: I have one word for you.

Ambassador Bad Boy 2: Plastics?

Ambassador Bad Boy 1: No, not plastics. Asbestos! Let’s insure asbestos companies.*

Ambassador Bad Boy 2: Doesn’t asbestos cause cancer?

Ambassador Bad Boy 1: We’re rebels. We take risks. We’ll insure asbestos companies.

Somehow also in my mind this meeting takes place on motorcycles.

Anyway, Ambassador went paws-up because it had grossly underfunded its liability reserves and couldn’t stay in business. This was back in 1983. The company went into receivership and was ordered to be liquidated. Ambassador made the first of its four trips to the Vermont Supreme Court over that. Many lawyers in Vermont don’t make 4 trips to SCOV in their whole careers.

The issue then became liquidation, and the priority the various creditors took in the liquidation process. The Court set a deadline for creditors to make claims so long as the claims were supported by proofs of loss. The Court also allowed creditors to file if they thought they might have claims in the future, even if they didn’t have proof of claim at the time.

So, liquidation goes on, and the receiver recovered a whole lot of dough. Then there was a malpractice lawsuit against Ambassador’s auditor, which recovered even more, and allowed the liquidator to pay out around $347 million in claims. That’s a lotta clams in claims. Now I’m wondering if there are 347 million clams in the ocean. That seems like a lot of clams, but then again, the ocean is big. And there are multiple oceans.

Bivalves aside, the problem now is how to figure out which claims to pay and in which order. There are still some fourth priority claims to be paid, and then some fifth priority claims. Some of the fourth priority claims have specific amounts assigned, while others have protection for future claims. Some fifth priority claims have amounts assigned, but can’t be paid until all the fourth priority claims are paid first. There are only so many clams for all these claims.

Let’s back up, because why not? This is confusing, and chances are good if you understand insurance at all, you’re not reading my summary of this big mess.

Ambassador insured A.P. Green, an asbestos company, for two years back in the early '80s, but wasn’t the primary insurance. The deal was that Ambassador was A.P. Green’s fourth layer of insurance; if there was a claim filed that exhausted the first three levels of insurance, only then would Ambassador pay out. People with asbestos-related injuries started suing A.P. Green, but not until the 1990s. This makes perfect sense, because asbestos injuries sometimes take a long time to become apparent. A.P. Green was subject to a huge onslaught of claims, which forced them into Chapter 11 bankruptcy. Although they’d settled lots of suits, there were still more to be resolved, and all the money available to pay those out went into different trusts. It became apparent that Ambassador’s level-four coverage may become implicated in all this. Because NICO is the assignee for Ambassador, and has now stepped in to clean up this mess, NICO is on the hook for whatever Ambassador’s part is in paying for these remaining asbestos claims.

NICO sought payment from Ambassador in order to make good on its obligation to the A.P. Green bankruptcy insurance trust fiasco. The issue here was what level priority NICO’s claim against Ambassador is in its liquidation process, and whether they can get paid. The Court decided NICO is level-four.

The Court ordered in November 2012 that all claims against Ambassador had to be made by December 31, 2013. At that point, the company would have been in receivership for about 30 years. Notice was published and made well-known over the course of that 13 months. The Court felt this was fine to do because the liquidation statute gives the court some power to do various tasks in overseeing the process. The Court also felt that a 13 month deadline would be enough time. Policyholders could take that time to figure out exactly their claim amounts. It would also give time for possible claims to ripen. It would also give enough time for parties who objected to appeal. Also, since A.P. Green was still involved in litigation, giving a longer period of time would be inappropriate since it was well known that they had a claim.

NICO appealed.

SCOV points out that this case is unique. Although a court can fix a final claim date, that can be reviewed, and is reviewed for abuse of discretion.

SCOV recognizes this mess has been going on for thirty or so years. While a final date would be nice, a date also has to be consistent with the goals of the liquidation order. The general public and policyholders also have to be protected. If the company is insolvent and can’t pay, that’s one thing. But if they do have money to pay out, the court should not cut off the ability to pay out those claims.

Here, since what’s on the table is asbestos-related, which doesn’t make itself known for many years, it may be that there are claims that just aren’t known and can’t be known before the expiration of the date. And the court has to look out for all the policyholders, not just the ones who might make a claim.

When Ambassador wrote the policy for A.P. Green, it included coverage for long-tail claims. That’s exactly the kinds of claims that pop up with asbestos cases. If Ambassador was an ongoing business, they’d be required to have enough in reserves to pay out these claims as they come up. Since they’re long-tail claims, and everyone knew that was the deal when the policy was written that those were the kinds of claims to be covered by Ambassador’s policy, that Ambassador has to be able to honor the claims. The time is stretched out even more since Ambassador was an excess insurer. Even though it’s possible the claims won’t even make it to Ambassador’s layer of coverage, they have to work their way through the other layers of coverage first.

At this point, the liquidator had quite a bit in the way of assets on behalf of Ambassador to be able to pay out claims. They’d be able to pay out the fourth priority claims and some of the fifth priority claims with no issue. Since there’s enough to go around, and since there might be some additional yet-unknown asbestos-related priority four claims from A.P. Green, SCOV determines that the trial court should not have set that final claim date.

SCOV recognizes that keeping the claim date open to allow those fourth priority claims to be made might cut off some legitimate, and currently-known fifth priority claims. SCOV says it isn’t its intent to keep this open forever, either. SCOV says the liquidator is welcome to make another trip back to the Superior Court when it looks like an end date might be reasonably known, based on whatever information develops.

NICO makes another argument that the liquidator should have been allowed to use actuarial estimation for unliquidated claims and that the court should have used a 1991 statute.

SCOV says no. This 1991 statute wasn’t in place when Ambassador started winding down. Also, the liquidation order doesn’t say anything about using an actuarial estimation. Even though to do that makes sense in some situations, it wasn’t what was ordered here. Furthermore, that would change the playing field for Ambassador’s reinsurers, who didn’t come to this party three decades ago only to be told later claims are going to be calculated differently. Because of this and the fact that the liquidator hadn’t yet distributed all the assets it could, that the trial court’s claim end date was premature.

To make a very long story short: James Dean, a bucket of clams, and more claims might be made so it’s too soon to cut them off.

*I realize I am referring to two different, excellent classic movies in the same post. James Dean, of course, tore it up in Rebel Without a Cause, and Dustin Hoffman was Benjamin in The Graduate.

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