J. Ario, Insurance Commissioner v. Swiss Reinsurance America Corp., et al. (Single Judge Opinion)

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IN THE COMMONWEALTH COURT OF PENNSYLVANIA Joel S. Ario, Insurance Commissioner of the Commonwealth of Pennsylvania, Petitioner v. : : : : : : No. 860 M.D. 2003 : Swiss Reinsurance America Corporation : and Tribune Company, : Respondents : In Re: Swiss Reinsurance America Corporation and Tribune Company Objections to the decision of Referee Nigro ORDER AND NOW, this 28th day of December 2007, the opinion filed December 21, 2007, in the above-captioned matter shall be designated Opinion rather than Memorandum Opinion, and it shall be reported. JAMES GARDNER COLINS, Judge IN THE COMMONWEALTH COURT OF PENNSYLVANIA Joel S. Ario, Insurance Commissioner of the Commonwealth of Pennsylvania, Petitioner : : : : : v. : No. 860 M.D. 2003 : Swiss Reinsurance America Corporation : and Tribune Company, : Respondents : In Re: Swiss Reinsurance America Corporation and Tribune Company Objections to the decision of Referee Nigro OPINION and ORDER Before this Court are the objections of Joel S. Ario, Commissioner, Pennsylvania Department of Insurance, acting in his capacity as Liquidator Reliance Insurance Company (Liquidator)1 to the decision of Referee Russell M. 1 In May 2001, M. Diane Koken, Insurance Commissioner for the Commonwealth of Pennsylvania, presented the Court with a petition to rehabilitate Reliance Insurance Company (Reliance Estate). By order of this Court dated May 29, 2001, the Commissioner was appointed Rehabilitator of the Reliance Estate pursuant to Article V of the Pennsylvania Insurance Department Act, 40 P.S. §§221.1-231. By the terms of that order, all assets of the Reliance Estate were placed under the control of the Commissioner acting as Rehabilitator and the Commonwealth Court. Subsequently, the Liquidator advised the Court that with an Estate value nearing, if not in excess of $200 million, and potential claims numbering in the hundreds of thousands, the insolvency of the Reliance Estate was more profound than initially presented, and it was in need of immediate and constant attention. Upon further petition dated October 3, 2001, the Commissioner advised this Court that she consented to the entry of an order terminating the rehabilitation of the Reliance Estate, placing the Reliance Estate into liquidation, and appointing Nigro granting summary judgment in favor of Tribune Company with respect to the loss portfolio transfers (LPT), and granting summary judgment in favor of the Liquidator with respect to the guaranteed cost program (GCP). The Liquidator asserts error in the grant of summary judgment on the basis that material issues were in dispute. I find the objections lack merit. Accordingly, I accept Referee Nigro s findings of fact and conclusions of law; further, his decision is sustained. Overview Pursuant to Article 5, Section 530(B) of the Act, 40 P.S. §221.30(b), the Liquidator initiated this adversary proceeding in Commonwealth Court against Defendants Swiss Reinsurance America Corporation (Swiss Re) and Tribune Company (Tribune) asking the Court to declare that Tribune was not entitled to direct access to certain amounts payable under a series of agreements between Swiss Reinsurance and Reliance Insurance Company (Reliance). The agreements are designated as the Loss Portfolio Transfer (LPT) and the Guaranteed Cost Program (GCP). The parties filed cross-motions for summary judgment, with the Liquidator arguing that consistent with Koken v. Legion Insurance Company, 878 A.2d 51 (Pa. 2005), Tribune is not entitled to direct access to Swiss Re s obligations under the LPT and GCP agreements,2 and Tribune arguing the contrary position. For purposes of the motions, all parties had to assert that material issues were not in dispute. The matter was assigned3 to Referee Nigro. Referee Nigro the Commissioner as Liquidator, pursuant to Article V. This Court granted the petition, and Reliance was placed into liquidation. 2 Alternatively, the Liquidator argued that there are facts in dispute and that summary judgment is not available. This argument the Liquidator has waived, as argument in the alternative is not available in this instance. Summary judgment is based upon the assertion that facts are not in dispute. If the Liquidator had doubts about this position, then no motion should have been filed. 3 The Court adopted the Referee appointment program to facilitate the prompt disposition of all filings in the Court. The adoption of this program is reflective of the size of the Reliance Estate, 2 granted, in part, the Liquidator s motion for summary judgment finding that under the GCP Tribune was not entitled to direct access to reinsurance proceeds. Referee Nigro granted Tribune s motion for summary judgment finding that under the LPT, Tribune was entitled to direct access to reinsurance proceeds. Both the Liquidator and the Tribune have filed Objections to the decision of the Referee. The Liquidator raises two objections. Initially, the Liquidator argues that summary judgment was improper as material issues are in dispute. This argument is without merit and if it stood alone, it could be viewed as vexatious as the argument is frivolous. The predicate upon which a motion for summary judgment is filed is the affirmative assertion that no material issues are in dispute. Agreement regarding material facts is the fundamental concept of the motion therefore, upon filing a motion for summary judgment, the moving party cannot, as the Liquidator has done here, avail himself of the practice of arguing in the alternative. If material issues are in dispute, then the filing of a motion for summary judgment is frivolous. I find no merit to the Liquidator s assertion that material issues are in dispute, and conclude that the argument is specious but not vexatious. Because there are no material issues in dispute, the findings of fact and and is consistent with Section 541(b) of the Act, 40 P.S. §221.41(b), and Section 323 of the Judicial Code, 42 Pa. C.S. §323, and has occurred with the consent of the Liquidator. The Court employed this method to complement the overall purpose of the Act which purpose is to protect the interests of insureds, creditors, and the public generally. 40 P.S. §§221.1(c). The Act seeks to improve methods for rehabilitating insurers, and to enhance efficiency and economy, by minimizing legal uncertainty and litigation. Id. While the referee appointment program was employed to resolve claim disputes, 40 P.S. §221.41(b) of the Act directs that disputed claims shall be heard by Commonwealth Court or by a court-appointed referee who shall submit to Commonwealth Court findings of fact along with a recommendation), it is also used to assist in the resolution of certain discreet litigation which is in the form of actions initiated by the Liquidator. 3 conclusions of law issued by Referee Nigro, and appended to this decision identified as Referee Nigro Decision, are accepted, and adopted in toto. The Liquidator next asserts that the Referee erred as a matter of law in denying his motion for summary judgment regarding the LPT and granting Tribune direct access to the reinsurance proceeds. Similarly, Tribune argues that the Referee erred as a matter of law in denying its motion for summary judgment regarding the GCP and not allowing it direct access to the reinsurance proceeds. The grant of summary judgment occurs only where there is no genuine issue of any material fact as to a necessary element of the cause of action or defense which could be established by additional discovery or expert report, or, if after the completion of discovery relevant to the motion, an adverse party who will bear the burden of proof at trial has failed to produce evidenced of facts essential to the cause of action or defense. Pa. R.C.P. No. 1035.2. To defeat a summary judgment motion, the adverse party must come forth with evidence showing the existence of the facts essential to the cause of action or defense. Not to Rule 1035.2. A fact is material if it directly affects the disposition of the case. Allen v. Coulatti, 417 A.2d 1303 (Pa. Cmwlth. 1980). The court must accept as true all well-pleaded facts in the non-moving party s pleadings, as well as admissions on file, giving them the benefit of all reasonable inferences to be drawn therefrom. Hankin v. Mintz, 419 A.2d 588 (Pa. Super. 1980). The entire record is to be examined in the light most favorable to the party opposing the motion, and all doubts concerning the existence of a genuine issue of fact must be resolved in that party s favor. See Bowman v. Sears Roebuck & Company, 369 A.2d 754 (Pa. Super. 1976). Herein, the issue to resolve was whether the LPT and GCP agreements are assets of the Reliance Estate or whether the Tribune should be 4 permitted direct access to the reinsurance proceeds. Because there is no doubt as to a triable issue, specifically whether the conduct of the parties allows for a cutthrough to reinsurance monies, I find that the Liquidator was not entitled to a judgment as a matter of law with regard to the LPT, and Tribune was not entitled to a judgment as a matter of law with regard to the GCP. Gross Compensation Program (GCP) The Referee correctly granted the Liquidator s motion for summary judgment denying Tribune direct access to Swiss Re s GCP obligations. In granting the Liquidator s motion for summary judgment, Referee Nigro reviewed the pleadings, depositions, and documentary evidence. Initially, it should be noted that Tribune is the successor-in-interest to Times Mirror. When the initial transactions occurred, the entities involved were Swiss Reinsurance (Swiss Re) and Times Mirror; Swiss Re involved Reliance. As the successor-ininterest to Times Mirror, Tribune defended this action brought by Reliance in Liquidation. I accept the Referee s finding that in late 1997 and early 1998 Times Mirror s insurance broker, J&H Marsh and McLennan (Marsh), made two recommendations to Times Mirror. Marsh recommended that Times Mirror consider transferring its known and existing self-insured workers compensation liabilities to an insurance company and recommended a retrospective program (LPT) which will be discussed infra. Marsh also recommended that Times Mirror fully insure its workers compensation obligations on a going forward basis rather 5 than continuing to self-insure obligations for workers compensation, and he recommended a prospective program in the form of a GCP. Ultimately, Swiss Re agreed to assume Times Mirror s liabilities but it could only do so with the participation of a fronting insurance company.4 Reliance was chosen as the front carrier, and by March of 1998 Reliance had agreed to an aggregate cover for the GCP and Reliance issued a binder of insurance covering the GCP. The GCP Binder provided $8,500,000 in limits for three years of coverage based upon three annual premium payments. The first payment was for $7,093,750, based upon an estimated pro-rata payroll of $637,554,920, and the second and third premium payments were each $8,125,000 based upon an estimated pro-rata payroll of $850,000,000. Under the GCP Binder, Reliance insured Times Mirror s going forward business for 1998, 1999, and 2000. Contemporaneous with the issuance of the GCP Binder, Reliance sent Swiss Re a deal memo confirming in writing Swiss Re s participation in the transaction. Subsequently, the deal was memorialized in three separate agreements, one for each year, and each titled Workers Compensation and Employer s Liability Quota Share Reinsurance Agreement (GCP Agreement). As provided for in the GCP Agreement, Reliance had $7,125,000 in overall limits for the first year; $9,500,000 in overall limits for the second year, and $8,5000,000 in overall limits for the third year. Reliance paid Swiss Re $4,650,000 and all second injury fund recoveries for the truncated 1998 period, and $6,200,000 and all second injury fund recoveries for both 1999 and 2000. In return 4 Fronting is an arrangement whereby one licensed insurer issues a policy on a risk for and at the request of one or more other unlicensed insurers with the intent of passing the entire risk by way of reinsurance to the other insurer(s). (Strain, Robert W. Reinsurance, Revised Edition, 1997.) 6 Swiss Re assumed 100% of Times Mirror s workers compensation liabilities in those years, subject to interim and aggregate limits. While Reliance requested excess liability coverage for the GCP, Swiss Re failed to provide the excess liability coverage for the GCP claims, leaving Reliance exposed for Swiss Re s responsibilities exceeding the overall caps. Reliance entered into a Claims Service Agreement (CSA) with a third party administrator (TPA). The CSA placed Reliance into the role of guarantor and shifted all of its claim obligations to Swiss Re. The undisputed evidence is that Swiss Re was directly responsible for the payment of the GCP claims. When Reliance was placed into liquidation, Swiss Re refused to continue to pay Tribune s workers compensation obligations unless the Liquidator consented, and the Liquidator refused to give consent. As a result, Swiss Re stopped paying Times Mirror s outstanding workers compensation obligations, and Tribune had to reassume and pay the obligations that were subject to the GCP. The arrangement is not a true reinsurance arrangement, but rather, more akin to traditional insurance; therefore, under the test set forth in Legion, Tribune was not entitled to direct access to the GCP. Reinsurance is one of the major assets of the estate of an insolvent insurance company. Thus, the general rule is that the liability of the reinsurer is intended to run to the estate of the insolvent insurer for the eventual benefit of the insureds, and not directly to the policyholders of the insurer. Eastern Engineering v. American Reinsurance Co., 455 A.2d 1235, 1237 (Pa. Super. 1983). Where, however, an insolvent insurance company acts as a mere pass-through and does not act as a true insurer, direct access to reinsurance may be allowed. Section 534 of the Act relating to reinsurer liability, directs that 7 The amount recoverable by the liquidator from reinsurers shall not be reduced as a result of delinquency proceedings, regardless of any provision in the reinsurance contract or other agreement. Payment made directly to an insured or other creditor shall not diminish the reinsurer s obligation to the insurer s estate except when the reinsurance contract provided for direct coverage of an individual named insured and the payment was made in discharge of that obligation. 40 P.S. §221.34. Recognizing that the relationship between the contractual parties extends beyond the written contract, the Legion court concluded that it was necessary to analyze the specific facts of each case to determine whether direct access to reinsurance proceeds should be permitted. Where there is a fronting reinsurance arrangement equity suggests that direct access be permitted. A front arrangement is not traditional insurance, as it places the front insurer in the position that it may collect a fee or premium without exposing itself to liability. Exposure is the essential feature that distinguishes insurance and reinsurance. Insurance is the transfer of risk from the insured to the insurer. It is a contractual relationship wherein one party indemnifies another against loss, damage, or liability arising from unknown or contingent events. (Black s Law Dictionary, 6th Ed. 1990.) The amount of the loss is the insured s exposure. Where there is reinsurance, the insured s exposure, in full or in part, is insured by the reinsurer. To determine whether to allow direct access to reinsurance the factors considered are: 1) did the insurer take on any underwriting risk or act as a front; 8 2) did the insurer enter into the transaction in order to generate fees, and not premium; 3) did the reinsurer function as a direct insurer for the policyholder and was the claims handling process and the funding of claims the responsibility of the reinsurer; 4) did the policyholder facilitate the reinsurer s involvement; 5) did the equities favor the policyholder s claim to direct access. Legion, 831 A.2d at 1234-1238. Sub judice, pursuant to a contractual arrangement in which Reliance would receive a certain sum of money for fronting business for Swiss Re, Reliance agreed to act as an intermediary between Swiss Re and Tribune. The premium or fee that Reliance was to receive for this business transaction was based on prospective insurance policies and the underlying policies were for unknown claims. In addition, the GCP transaction was not structured as an up-front arrangement as Reliance retained underwriting risk, i.e., was exposed to liability, since Swiss Re failed to insure Reliance s liability over the aggregate limits. Finally, the state guaranty associations are paying claims under the GPC and submitting those claims to the Reliance Estate. Here, Tribune is not entitled to direct access. Tribune argues that the both the facts and the equities compel a different conclusion. Tribune argues that while there are features of the arrangement that suggest a traditional insurance policy, in fact, Reliance had no underwriting risk which fact is evidenced by Reliance accounting for the GCP as fees rather than as liabilities. I cannot agree with Tribune s argument. The mere fact that Reliance did not properly account for liabilities does not limit Reliance s potential exposure. 9 The evidence is that Reliance anticipated that Swiss Re would shield it from exposure. While the transaction may have been designed so that Reliance would assume no insurance risk, the design fell short, and Reliance was exposed to liability. Moreover, equity does not dictate direct access. With the exception of the Connecticut Insurance Guaranty Association, other state guaranty associations are paying claims under the guaranteed cost policies and submitting those claims to the Reliance Estate. Thus, Tribune has some guaranty fund protection with respect to the GCP claims, and direct access to the reinsurance proceeds is not available. Loss Portfolio Transfer (LPT) The Referee correctly granted the Tribune s motion for summary judgment allowing Tribune direct access to Swiss Re s LPT obligations. As previously stated, Marsh recommended that Times Mirror consider transferring its known and existing self-insured workers compensation liabilities to an insurance company and recommended a retrospective program (LPT). Under the LPT, those self-insured workers compensation obligations that had already accrued, and that were fully reserved by Times Mirror, would be transferred to and fully assumed and discharged by a third party insurance company. This program required Times Mirror s payment of an actuarially determined net present value of the workers compensation obligations being transferred to and assumed by the insurer. Times Mirror engaged Swiss Reinsurance (Swiss Re) for the transaction, and Swiss Re chose Reliance to serve as the fronting carrier. In March 1998, Reliance issued the LPT Binder, which was the binder of insurance covering the LPT. 10 The LPT Binder provided that for the gross premium of $42,826,250, Reliance would provide workers compensation/employers liability coverage, including other states coverage, loss portfolio transfer for all previously selfinsured claims wherever Times Mirror Company and Subsidiaries were a qualified self insurer, for each year of the contract. The $42,826,250 reflected the net present value of the estimated ultimate claim payments and expenses to be insured in the investigation, settlement, and payment of claims. Times Mirror pre-paid the full value of its known losses prior to the inception of the LPT. There were delays in transferring the liabilities, and following an account reconciliation, in April 1998 a credit of $5,356,110 was given to Times Mirror for claims it paid that were otherwise covered by the LPT, and Times Mirror was invoiced $37,470,140 net for the LPT. Contemporaneous with the issuance of the LPT Binder, Swiss Re was sent a memo confirming Swiss Re s participation in the transaction. The memo explained that Reliance would transfer approximately 84% of Times Mirror s upfront payment to Swiss Re in exchange for Swiss Re s assumption and payment of Times Mirror s pre-existing workers compensation liabilities on a dollar-fordollar basis. Upon consummation of the Times Mirror/Reliance LPT deal, Reliance and Swiss Re entered into a Quota Share Reinsurance Agreement whereby the terms set forth in the memo above were memorialized, thereby, creating a document that evidenced the pass through of nearly all the monies paid by Times Mirror for assumption of its LPT liabilities and the transfer of the liabilities to Swiss Re at a first dollar level, subject to certain caps. Pursuant to the Reliance/Swiss Re LPT, Reliance was to pay Swiss Re $31,050,169 of the $37,470,140 Reliance received from Times Mirror, and 11 Reliance identified the monies as a fee rather than a premium. In exchange for the $31,050,169, Swiss Re agreed to directly fund up to $42,525,000 of the Times Mirror liabilities, subject to interim and overall aggregate caps of $1,000,000 per occurrence. Reliance s exposure was for the monies in excess of $1,000,000. However, Reliance s exposure was limited, because Times Mirror had traditional excess insurance that applied to workers compensation claims covered by the LPT where the liability exceeded the $1,000,000 per occurrence. Nonetheless, to ensure that Swiss Re and not Reliance would be responsible for the assumption of Times Mirror s workers compensation obligations, Reliance entered into a CSA with a TPA. Under the CSA, Reliance was the guarantor and it shifted all its claims obligations to Swiss Re. Consistent with the CSA and Swiss Re s assumption of Times Mirror s liabilities from approximately 1998 to October 2001, Swiss Re paid Times Mirror s workers compensation claims under the LPT, and Swiss Re directly funded a paid loss account with the TPA through which the Times Mirror LPT claims were paid. The evidence of record established that while Swiss Re paid the TPA approximately $27 million on LPT workers compensation claims, there is no evidence that Reliance ever paid a Times Mirror LPT claim. Once Reliance was found to be insolvent and placed into liquidation, Tribune, which had now become Times Mirror s successor-in-interest, sought to have Swiss Re continue to perform its obligations under the various agreements. Swiss Re refused, unless the Liquidator consented. The Liquidator refused to consent, and Swiss Re stopped paying Times Mirror s outstanding LPT workers compensation obligations. Tribune then reassumed and paid the workers compensation liabilities and associated expenses that had been assumed by Swiss 12 Re. The state guaranty associations have refused to cover the LPT losses on the basis that the LPT was not insurance and therefore there is no guaranty fund protection. Tribune seeks direct access to the reinsurance proceeds held by Swiss Re. Referee Nigro concluded that under Legion direct access was permissible in this instance as the evidence establishes that Reliance was a fronting company that was used to pass through Times Mirror s pre-existing self-insured workers compensation liabilities to the true obligor, Swiss Re. He further found that due to fronting arrangement and the excess insurance, Reliance retained no liability, and finally, the CSA expressly provided for Swiss Re s direct funding of the TPA s LPT claim account. Finally, the Referee concluded that the equities favor permitting Tribune direct access to the LPT claims. I must agree. Succinctly put, the evidence is that Reliance and Swiss Re entered into an agreement by which Swiss Re would pay Reliance an agreed upon sum of money in return for which Reliance, a Pennsylvania-licensed insurance company, would allow Swiss Re to use its license to operate in Pennsylvania. The arrangement worked until Reliance was declared insolvent and the insurance commissioner refused to consent to allow Swiss Re to continue to perform under the contractual arrangement. There is simply no evidence of record to establish that Reliance had any exposure under the LPT or that Reliance received any funds. Since all monies simply passed through Reliance it could be nothing more than a fronting company. Therefore, under Legion, the LPT is not an asset of the Estate, as the evidence establishes that Reliance acted as a fronting agent, was not exposed to liability, and all funds were paid directly to the reinsurer. Accordingly, the Court enters the following 13 ORDER AND NOW this 21st day of December, 2007, the Liquidator s Objections to the decision of Referee Nigro with respect to the LPT is OVERRULED; Tribune s Objection to the decision of Referee Nigro with respect to the GCP is OVERRULED; the decision of Referee Nigro is SUSTAINED. Further, the Liquidator is directed to forthwith serve a copy of this Memorandum Opinion and Order on all parties of record, and also, to serve all on the Master Service List associated with the case filed at No. 269 M.D. 2001. An affidavit that service has been effectuated shall be filed with this Court. ___________________________________________ JAMES GARDNER COLINS, Judge 14

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