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N.Y. Appellate Court in ideal mutual cases defines separate regulator and liquidator roles of superintendent.

In two separate cases relating to the defunct Ideal Mutual Insurance Company, New York Appellate Division, First Department, panels have drawn a distinct line of demarcation between the New York Insurance Superintendent as a regulator and as the court-appointed liquidator of insolvent companies.

Both of the suits were brought by Superintendent James Corcoran in his role as liquidator of the Ideal Mutual. One was against the former management officials of the company, charging breach of their fiduciary duties and for alleged mismanagement which led to the insolvency of the company. The second suit is against National Union Fire Insurance Company and relates to a Directors and Officers Liability and Corporation Reimbursement Policy issued for a three-year period from April 9, 1982, to April 9, 1985, on a claims-made basis. The issue in this case relates to the cancellation or failure to renew the policy.

The decisions were published in the New York Law Journal on September 12 and 13. Two of the judges, interestingly, served as members of the unanimous, five-judge panels in both cases. [A news report on the other case appears on this page--ed.]

Generally, in both cases the defendants sought to implicate the Superintendent for failure to regulate properly the affairs of Ideal Mutual, thus contributing to its demise. While in both instances the court clearly drew the line between the Superintendent as regulator and the Superintendent as liquidator and plaintiff in the lawsuits, it did not entirely dismiss the nexus of the defendants' efforts, as part of their defenses, to relate the two roles.

Ideal Mutual, organized in 1944, wrote a substantial volume of business in New York and the rest of the U.S., but in 1984, during its regular triennial examination, the New York Insurance Department found an alleged insolvency estimated to exceed $166 million. Using its statutory authority, the Department sought to place the company in rehabilitation, an action not opposed by management. The rehabilitation status was granted by the New York Supreme Court on December 26, 1984. The Superintendent was named "rehabilitator." The attempt at rehabilitation considered futile, Ideal was subsequently ordered liquidated and the Superintendent was named "liquidator." That date was February 7, 1985.

The Superintendent, also in accordance with his statutory rights, brought this suit against 21 individuals who were either officers or directors of the company. In his suit, the Superintendent charged that the defendant officers or directors knew, or should have known, that Ideal was insolvent, but failed to say so when filing the financial statement and continued to write business.

Secondly, the Superintendent said, the defendants failed to maintain appropriate financial records and controls; thirdly, they failed to control the insurer's managing general agents. In his fourth allegation in the complaint, the Superintendent said that the defendants procured reinsurance from "non-admitted" companies without proper security. Lastly, he accused them of allegedly releasing the company's interest in Intercontinental Insurance Managers, Inc., "for wholly inadequate consideration."

The Superintendent is seeking to recover compensatory damages from me 21 defendants amounting to at least $200 million, and is asking the court to require that the defendants account for their "waste of corporate funds."

Among the defenses raised by the former officers and directors was the allegation that the Superintendent's own "culpable conduct" was involved in the insolvency of the Ideal. The defendants said that the "negligence" of the Superintendent constituted an independent intervening and superseding cause of the very losses he was complaining about, and that this should totally relieve them of liability for negligence. Alternatively, they argued, such culpable conduct by the Superintendent, would at least reduce the amount of their liability on the basis of comparative negligence.

To overcome these defenses as well as a demand for discovery rights by the defendants, the Superintendent argued that their arguments were all "irrelevant" because they related to his role as regulator, whereas he was bringing the suit as liquidator. He said that as regulator he owed no duty to the defendants or to Ideal.

In their answering papers, the defendants spelled out their contentions, asserting that the actions of the Superintendent were indeed relevant. For example, they asserted that the Superintendent and his employees created the "insolvency" for which Ideal's management was being blamed, and that the Superintendent and his employees prevented the management from curing that "insolvency," thereby breaking the chain of causation linking their alleged acts to the damages suffered.

More specifically, according to the decision written for the unanimous court by Judge Betty Weinberg Ellerin, the defendants contended that earlier in 1984, and before the rehabilitation and liquidation, employees of the Insurance Department interjected themselves into the affairs of Ideal and prevented it from implementing plans to save itself. The defendants alleged in their defense, as the decision relates it, that the Superintendent's meddling sabotaged a commitment for the injection of new capital, frustrated Ideal's ability to disengage itself from the harmful managing general agent relationships, and prevented Ideal's procurement of security from reinsurers, undercutting its prior reinsurance arrangements. These points were the specific allegations in the Superintendent's complaint as the causes of die insolvency.


The defendants also contended that it was the Insurance Department which dictated the course of Ideal's business, in effect taking de facto control and bringing about its demise. Judge Ellerin stated in the decision that the defendants, in conclusion, but "without precise specification," charged that after the Superintendent took over as liquidator, he had continued to take steps harmful to Ideal.

The trial court had decided to hold the Superintendent's actions with respect to Ideal as relevant to the legal action, pointing out that striking the defenses' postures would do more harm to them than would their retention aggrieve the Superintendent.

But the Appellate Division opinion agreed with the Superintendent with respect to the question of comparative negligence and dismissed that aspect of the defense position. However, Judge Ellerin said in the opinion that a different situation prevailed with respect to the defense of "intervening and superseding cause" based on the thesis that a subsequent act of "a third party may interrupt the causal nexus between the defendant's initial negligence and the plaintiff's injury and thereby relieve the defendant of liability" (emphasis by the judge).

Judge Ellerin said in the decision that, to the extent that it was relevant, the Superintendent drew a distinction between his role as regulator and liquidator that was "well-taken." The decision states that when acting as statutory liquidator of an insolvent insurer, the Superintendent is essentially a court-appointed private trustee who, for all practical purposes, takes the place of the insolvent insurer and stands in its shoes and that by virtue of the power derived from the statute and court order appointing him, the Superintendent as Liquidator acquires all property and rights of action of the liquidated company.

The precise capacity or status of the Superintendent in this lawsuit, Judge Ellerin said, "is critically important with respect to the defense of contributory negligence" because it relates to the negligent conduct of a "party "to the action, in this case the Superintendent. She said that the allegedly negligent acts of the Superintendent which the defendants relied on for their defense of contributory negligence were committed by his exercising the regulatory function prior to the time he became the liquidator. Consequently, Judge Ellerin said, they could not be charged against him as the plaintiff liquidator of Ideal.

On the other hand, in connection with the defense of "intervening and superseding cause," the judge said that the defendants had set forth with detail sufficient for the case, allegations of conduct by the Superintendent, in his regulatory role, "which occurred subsequent to the acts of misconduct charged against the defendants in the complaint. It was the contention of the defendants that the subsequent acts "intervened and superseded any negligence on their own part so as to relieve them of liability for Ideal's demise."

In rejecting the Superintendent's position and sustaining the ruling of Judge David Edwards in the lower court that the question of intervening acts constituting "superseding cause" be left to the trier of facts, Judge Ellerin said, "Defendants are essentially asserting that their own conduct, even if negligent, cannot be held to be the responsible causative factor of the ultimate injury suffered by Ideal because the misconducts of a third party (i.e., the Superintendent's office as regulator) intervened to become a superseding cause which broke the causal nexus between defendants" conduct and Ideal's demise."

Also rejecting the Superintendent's position that as regulator he owed no duty either to the defendants or to Ideal, Judge Ellerin said that the existence or non-existence of a duty from the third party to either the defendants or Ideal "is irrelevant."

"While the existence of a duty would he critical if defendants were seeking to affirmatively charge the Superintendent, as regulator, with some liability," she wrote, "here defendants are merely seeking to insulate themselves from liability and have not asserted, by way of counterclaim or otherwise, any claim seeking contribution or other damages from the intervening actor."

The Appellate Division decision also preserved defendants' right of discovery with respect to all information material and relevant to the action, whether the Superintendent was acting as regulator or liquidator.
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Title Annotation:LOOKING BACK ... Insurance Advocate, 25 years ago
Publication:Insurance Advocate
Date:Oct 27, 2013
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