Resolving Insolvency

Hold the press! XYZ Property and Casualty Insurance Company (XYZ) has been put into liquidation! What happens next? What advice should insurance brokers give to policyholders? What is PACICC’s role as the guarantee fund for Canadian insurance consumers?

WINDING UP

To put it simply, the moment after a winding-up order has been issued, XYZ Insurance Company still exists. The regulator responsible for XYZ has found the company to be insolvent and the winding-up order reflects their concern about XYZ’s inability to carry on future business. Yet the insolvent insurance company still has assets, policies are still in force and claims continue to be reported. Company operations must continue, but in reality everything has changed.

XYZ is no longer run by its former management. Instead, the courts have appointed a liquidator. That liquidator has to report to a judge on a regular basis, informing the court of what is happening, asking for approval of work done and for guidance on problems and future plans. The judge will appoint inspectors to assist the liquidator in winding up the insolvent insurance company; one of those inspectors would be the Property and Casualty Insurance Compensation Corporation (PACICC).

THE LIQUIDATOR

The liquidator is responsible for collecting and protecting the assets of XYZ. In the process, all creditors must be treated fairly. The Winding-up and Restructuring Act sets out the order in which each group of creditors must be paid. Taxes and employee back-wages rank first, indemnity claims from policyholders rank second and policyholder premiums paid in advance rank third. After that, other creditors are paid if sufficient assets remain.

The judge typically rules that all policies remaining in force must be cancelled within 45 days from the date of the winding-up order. This allows policyholders and brokers adequate time to replace coverage. The liquidator issues a letter to all policyholders advising them of the time period they have to replace their coverage and urging them to do so as quickly as possible. Any legitimate claim that occurs during this notice period will be accepted by the liquidator.

There’s only one problem with this picture: although the liquidator can accept claims and negotiate settlements, policyholders cannot be paid. No cheques can be issued. The reason is that the liquidator does not know, until several years have passed, what the total assets and liabilities of the insolvent insurer actually are. The liquidator cannot determine if there will be enough money in the estate to pay all claims at 100 cents on the dollar. Claims cannot even be paid partially until a dividend is declared.

PACICC STEPS IN

This is where PACICC steps in. PACICC is a not-for-profit corporation established and funded by the property and casualty insurance industry. It exists to protect policyholders and offers no protection to other insurers or brokers. PACICC provides funds to pay claims settlements accepted by the liquidator of a member company, up to a limit of $250,000. It also refunds unearned premiums up to a maximum of $700 (70% of $1,000). With a few exceptions, all P&C insurers licensed in Canada to underwrite lines of business covered by PACICC are required to be members of the corporation and to pay assessments as required to fund settlements. PACICC covers more than 90% of the P&C insurance purchased in Canada.

SETTLING CLAIMS

During its 16-year history, PACICC has worked with the liquidators of 12 insolvent P&C insurers to help ensure policyholders have had their indemnity claims paid promptly and with minimum disruption. In fact, PACICC has helped more than 21,000 claimants – for both indemnity claims and unearned premium claims – and is responsible for payments of up to $152 million.

Payment of unearned premium refunds should be straightforward. As part of the duties to establish the total liabilities for the estate, the liquidator will have calculated all unearned premium refunds and PACICC will supply the funds to make payment up to its limits. If there are any disputes about a refund, these must be dealt with by the liquidator. PACICC has no access to XYZ’s records and will accept the liquidator’s figures. Refunds are made only to the policyholder unless he or she has directed the liquidator to do otherwise. A broker who has funded payment of the premium or the replacement policy must ensure that the liquidator has an assignment for the refund, directing where and to whom the refund is to be paid.

What should a broker do with money in its trust fund that is due to be paid to XYZ Insurance Co? This money should still be paid to XYZ Insurance Co. in liquidation. Trust fund money must not be used for financing replacement coverage. Brokers should be aware the liquidator will consider unearned commissions on cancelled policies payable to the estate.

The liquidator is the only person authorized by the court to settle claims. Letters will be sent to insureds, adjusters and lawyers involved with existing claims, advising them of the procedures to be followed. This can be a frustrating time for claimants – particularly if a settlement had been reached prior to the wind-up, but had not yet been paid. Insureds and brokers have questions and the liquidator requires time to assess various needs, including staff required for settling claims. A complete review of claims – including those where settlement had already been reached, but not yet paid – must be carried out. Procedures have to be established and PACICC’s role as an inspector set out. Although the liquidator has the authority to settle claims, PACICC needs to be certain that the settlement is eligible and reasonable, before industry funds are spent. PACICC has had an excellent working relationship with the liquidators responsible for winding up 12 insolvent insurers requiring PACICC funding. We try to ensure there is no delay issuing settlement funds. In fact, authority to make a payment on behalf of PACICC is usually given the same day it is requested.

NEGOTIATING THE DETAILS

If XYZ wrote Ontario auto business, what happens to the Statutory Accident Benefits claims? In the cases of both Maplex General and Markham General, a system was put in place for the Facility Association to be responsible for payment of claims, but this was a temporary arrangement. If an Ontario insured winds up an accident benefits claim against an insurer today, the claim is automatically assigned to the Motor Vehicle Accident Claims Fund.

Let’s say that XYZ had substantial reinsurance on its business. What happens to the reinsurance recoveries? Courts have established that these funds are paid to the insurer in liquidation. They cannot be claimed by any individual insured.

Let’s also assume XYZ had many claims in which it was in the process of pursuing subrogation against a negligent third party. What happens to those recoveries? XYZ had subrogation rights because of its payment of a claim. Those rights pass to the liquidator and become part of the assets of the estate. If a claim in excess of PACICC’s limits has not yet been settled and there is a possible subrogation action, an insured might consider withdrawing their claim and pursuing their own subrogation. However, serious thought must be given to the costs of such action – the length of time it will take, and the unpredictability of the outcome – compared to receiving an immediate payment from PACICC of up to $250,000.

To conclude, if and when a P&C insurance company becomes insolvent, there is a well-established, consistent process in place. The process has been tested many times and it works well. The financial needs of policyholders with legitimate claims are taken care of without significant delay. Most important, PACICC is ready to continue to play its key funding role in this well-established process designed to protect insurance consumers.