Lumbermens Mutual Casualty Co., American Manufacturers Mutual Insurance Co. and American Motorists Insurance Co. (formerly known as the Kemper companies, not to be confused with the company now operating under that name) entered liquidation proceedings on May 12, 2013, after several years in runoff and rehabilitation. Policyholders that have loss sensitive insurance programs or captive reinsurance programs with these insurers should be wary about their posted collateral and their ongoing obligations under these programs.
Although Illinois has a well-developed set of rules for these transactions in liquidation proceedings, liquidation can still have undesirable results. Policyholders that use third party administrators or adjust their claims themselves may lose control over claims either to guaranty associations or to the liquidator. In some circumstances, the liquidator will administer collateral and assume the obligation to bill the insured for losses and expenses. Where collateral has been provided for multiple obligations, such as policy reimbursement or obligations of a captive, the liquidator is given the power to allocate the collateral among the various obligations. Some of those obligations may result in a portion of the collateral passing to the estate. Moreover, the liquidator is entitled to surcharge the collateral for his costs of administration. All disputes concerning the administration of the collateral and the program are heard in the Cook County Circuit Court where the liquidation proceeding is pending.
Even with a well codified set of rules, the interplay among the insured, claimants, the liquidator and a guaranty association can be extremely complicated. Policyholders that have been administering their claims and collateral for the several year period of run-off may find themselves in an entirely new landscape as a result of the liquidation.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Horwich-Harold
This article was originally published by Bingham McCutchen LLP.