New York/Providence – (April 28, 2011) – In a decision that has significant implications for every commercial lines insurer or reinsurer with a U.S. run-off portfolio, the Providence County Superior Court on April 25th upheld the constitutionality of a Rhode Island statute that authorizes an insurance company to extinguish its liabilities for past and future claims without going into an insolvency proceeding. The statute is the first of its kind in the United States. Although enacted in 2002, the constitutionality of the statute had not been addressed until now, in the In Re GTE REinsurance Company Limited case.
GTE REinsurance Company Limited (“GTE RE”), a solvent reinsurer based in Providence, R.I., sought the Court’s approval of GTE RE’s Commutation Plan that will pay its policyholders the value of the policies now and extinguish any future claims. Although a super-majority of policyholders voted to approve the Plan, two policyholders raised constitutional objections to the Rhode Island statute that authorized the court to approve such a Commutation Plan. On Monday, April 25, the Superior Court issued an opinion finding that the Rhode Island statute was constitutional under both the United States and Rhode Island Constitutions.
The Insurance Division of Rhode Island’s Department of Business Regulation (DBR) is responsible for prescreening Commutation Plans before they are submitted to the Superior Court and overseeing a Plan while it is being implemented. The DBR also participated in the defense of the statute’s constitutionality. “The Court recognized that the exhaustive review and analysis of the Plan by the DBR provides important safeguards to protect the interests of all policyholders,” said Joseph Torti III, Deputy Director and Superintendent of Insurance for the R.I. Department of Business Regulation. “We are pleased that the Court sustained the constitutionality of this innovative law and are committed to exercising a meaningful role in overseeing this and future commutations.”
Rhode Island’s Insurance Statutes and Regulations (Title 27 Chapter 14.5 and Insurance Regulation 68) set forth the procedure by which commercial insurers and reinsurers in run-off, or no longer writing new business, may honor creditors’ claims, liquidate future exposure to those claims and terminate operations. The statute applies to any commercial insurance company that is domiciled in Rhode Island, including companies that redomesticate to Rhode Island.
“Rhode Island is the only state in the U.S. that allows a solvent insurer to liquidate its obligations in run-off,” said Gary S. Lee, co-chair of the Bankruptcy & Restructuring practice of Morrison & Foerster in New York, who is advising the DBR. “Morrison & Foerster is gratified that the court endorsed the Department’s comprehensive review of the GTE RE commutation, which provides a roadmap for future commutation plans under the statute. We are proud to counsel the DBR as it helps guide interested parties through this unique process available under Rhode Island law,” Lee said.
“The court upheld the constitutionality of the statute because the statute furthers the interests of the State of Rhode Island in attracting business to the State and in protecting policyholders from the problems presented by unsupervised run-offs of solvent companies without adversely affecting the interests of the policyholders,” said Deanne M. Maynard, chair of Appellate Practice Group of Morrison & Foerster LLP in Washington DC, who argued the case for the DBR.