2003 -- S 1123 AS AMENDED

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LC03372

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STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2003

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A N A C T

RELATING TO INSURERS' REHABILITATION AND LIQUIDATION ACT

     Introduced By: Senator William A. Walaska

     Date Introduced: June 05, 2003

     Referred To: Senate Financial, Technology, Regulatory

It is enacted by the General Assembly as follows:

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     SECTION 1. Sections 27-14.3-39, 27-14.3-40 and 27-14.3-46 of the General Laws in

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Chapter 27-14.3 entitled "Insurers' Rehabilitation and Liquidation Act" are hereby amended to

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read as follows:

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     27-14.3-39. Filing of claims. -- (a) Proof of all claims shall be filed with the liquidator in

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the form required by section 27-14.3-40 on or before the last day for filing specified in the notice

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required under section 27-14.3-26, except that proof of claims for cash surrender values or other

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investment values in life insurance and annuities need not be filed unless the liquidator expressly

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so requires this. Provided, however, only upon the application of the liquidator, the court may

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allow alternative procedures and requirements for the filing of proofs of claim or for allowing or

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proving claims. Upon the application, if the court dispenses with the requirements of filing a

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proof of claim by a person, class, or group of persons, a proof of claim for those such persons

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shall be deemed as having been filed for all purposes, including the application of guaranty

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association or foreign guaranty association laws.

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      (b) The liquidator may permit a claimant making a late filing to share in distributions,

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whether past or future, as if he or she the claimant were not late, to the extent that any the

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payment will not prejudice the orderly administration of the liquidation, under the following

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circumstances:

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      (1) The existence of the claim was not known to the claimant and that he or she filed his

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or her the claimant filed the claim as promptly after this thereafter as reasonably possible after

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learning of it;

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      (2) A transfer to a creditor was avoided under sections 27-14.3-30 -- 27-14.3-32, or was

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voluntarily surrendered under section 27-14.3-33, and that the filing satisfies the conditions of

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section 27-14.3-33; and

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      (3) That The valuation under section 27-14.3-45 of security held by a secured creditor

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shows a deficiency, which is filed within thirty (30) days after the valuation.

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      (c) The liquidator shall permit late filed claims to share in distributions, whether past or

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future, as if they were not late, if the claims are claims of a guaranty association or foreign

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guaranty association for reimbursement of covered claims paid or expenses incurred, or both,

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subsequent to the last day for filing where the payments were made and expenses incurred as

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provided by law.

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      (d)(c) The liquidator may consider any claim filed late which is not covered by

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subsection (b) of this section, and permit the claimant it to receive distributions which are

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subsequently declared on any claims of the same or lower priority if the payment does not

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prejudice the orderly administration of the liquidation. The late filing claimant shall receive, at

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each distribution, the same percentage of the amount allowed on his or her the claim as is then

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being paid to claimants of any lower priority. This shall continue until his or her the claim has

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been paid in full.

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     27-14.3-40. Proof of claim. -- (a) Proof of claim shall consist of a statement signed by

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the claimant that includes all of the following that are applicable:

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      (1) The particulars of the claim including the consideration given for it;

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      (2) The identity and amount of the security on the claim;

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      (3) The payments made on the debt, if any;

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      (4) That the sum claimed is justly owing and that there is no setoff, counterclaim, or

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defense to the claim;

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      (5) Any right of priority of payment or other specific right asserted by the claimants;

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      (6) A copy of the written instrument which is the foundation of the claim; and

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      (7) The name and address of the claimant and the attorney who represents him or her the

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claimant, if any. ; and

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     (8) The social security or federal employer identification number of the claimant.

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      (b) No claim needs to be considered or allowed if it does not contain all of the

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information in subsection (a) of this section which may be applicable. The liquidator may require

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that a prescribed form be used, and may require that other information and documents be

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included.

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      (c) At any time the liquidator may request the claimant to present information or

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evidence supplementary to that required under subsection (a) of this section and may take

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testimony under oath, require production of affidavits or depositions, or otherwise obtain

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additional information or evidence.

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      (d) No judgment or order against an insured or the insurer entered after the date of filing

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of a successful petition for liquidation, and no judgment or order against an insured or the insurer

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entered at any time by default or by collusion need collusion, needs to be considered as evidence

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of liability or of quantum of damages. No judgment or order against an insured or the insurer

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entered within four (4) months before the filing of the petition needs to be considered as evidence

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of liability or of the quantum of damages.

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      (e) All claims of a guaranty association or foreign A guaranty association shall be in the

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form and contain the substantiation as may be agreed to by permitted to file a single omnibus

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proof of claim for all claims of the association in connection with payment of claims of the

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insolvent insurer. The omnibus proof of claim may be periodically updated by the association,

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and the association may be required to submit a reasonable amount of documentation in support

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of the claim. and the liquidator.

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     27-14.3-46. Priority of distribution. -- The priority of distribution of claims from the

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insurer's estate shall be in accordance with the order in which each class of claims is set forth in

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this section. Every claim in each class shall be paid in full or adequate funds retained for such the

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payment before the members of the next class receive any payment. No subclasses shall be

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established within any class. Once such funds are retained by the liquidator and approved by the

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court, the insurer’s estate shall have no further liability to members of that class except to the

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extent of the retained funds and any other undistributed funds. No subclasses shall be established

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within any class except as provided in section 27-14.3-25(12). No claim by a shareholder,

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policyholder, or other creditor shall be permitted to circumvent the priority classes through the

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use of equitable remedies. The order of distribution of claims shall be:

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      (1) Class 1. - The costs and expenses of administration during rehabilitation and

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liquidation, including, but not limited to, the following: expressly approved by the receiver,

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including, but not limited to, the following:

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      (i) The actual and necessary costs of preserving or recovering the assets of the insurer;

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      (ii) Compensation for all authorized services rendered in the conservation rehabilitation

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and or liquidation;

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      (iii) Any necessary filing fees;

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      (iv) The fees and mileage payable to witnesses; and

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      (v) Authorized reasonable attorney's fees and other professional services rendered in the

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conservation rehabilitation and or liquidation; and .

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      (vi) The reasonable expenses of a guaranty association or foreign guaranty association

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for administrative costs and unallocated loss adjustment expenses;

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      (2) Class 2. - Reasonable compensation to employees for services performed to the

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extent that they do not exceed two (2) months of monetary compensation and represent payment

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for services performed within one year before the filing of the petition for liquidation or, if

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rehabilitation preceded liquidation, within one year before the filing of the petition for

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rehabilitation. Principal officers and directors shall not be entitled to the benefit of this priority

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except as approved by the liquidator and the court. This priority shall be in lieu of any other

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similar priority that may be authorized by law as to wages or compensation of employees; The

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administrative expenses of guaranty associations. For purposes of this section these expenses

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shall be the reasonable expenses incurred by guaranty associations where the expenses are not

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payments or expenses which are required to be incurred as direct policy benefits in fulfillment of

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the terms of the insurance contract or policy, and that are of the type and nature that, but for the

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activities of the guaranty association otherwise would have been incurred by the receiver,

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including, but not limited to, evaluations of policy coverage, activities involved in the adjustment

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and settlement of claims under policies, including those of in-house or outside adjusters, and the

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reasonable expenses incurred in connection with the arrangements for ongoing coverage through

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transfer to other insurers, policy exchanges or maintaining policies in force. The receiver may in

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his or her sole discretion approve as an administrative expense under this section any other

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reasonable expenses of the guaranty association if the receiver finds:

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     (i) The expenses are not expenses required to be paid or incurred as direct policy benefits

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by the terms of the policy; and

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     (ii) The expenses were incurred in furtherance of activities that provided a material

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economic benefit to the estate as a whole, irrespective of whether the activities resulted in

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additional benefits to covered claimants. The court shall approve such expenses unless it finds the

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receiver abused his or her discretion in approving the expenses.

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     If the receiver determines that the assets of the estate will be sufficient to pay all Class I

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claims in full, Class 2 claims shall be paid currently, provided that the liquidator shall secure from

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each of the associations receiving disbursements pursuant to this section and agreement to return

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to the liquidator such disbursements, together with investment income actually earned on such

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disbursements, as may be required to pay Class 1 claims. No bond shall be required of any such

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association.

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      (3) Class 3. - All claims arising from and within the coverage of under policies including

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the claims of the federal or any state or local government for losses incurred, (“loss claims”)

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including third party claims, claims for unearned premiums, and all claims of guaranty

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association or foreign guaranty association including its unearned premium claims for reasonable

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expenses other than those included in Class 2. All claims under life insurance, and health

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insurance and annuity policies, and funding agreements, whether for death proceeds, health

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benefits, annuity proceeds, or investment values shall be treated as loss claims. That portion of

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any loss, indemnification for which is provided by other benefits or advantages recovered by the

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claimant, shall not be included in this class, other than benefits or advantages recovered or

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recoverable in discharge of familial obligation of support or by way of succession at death or as

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proceeds of life insurance, or as gratuities. No payment by an employer to his or her employee

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shall be treated as a gratuity;

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     Notwithstanding the foregoing, the following claims shall be excluded from Class 3

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priority:

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     (i) Obligations of the insolvent insurer arising out of reinsurance contracts;

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     (ii) Obligations incurred after the expiration date of the insurance policy or after the

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policy has been replaced by the insured or canceled at the insured’s request or after the policy has

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been canceled as provided in this act;

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     (iii) Obligations to insurers, insurance pools or underwriting associations and their claims

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for contribution, indemnity or subrogation, equitable or otherwise;

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     (iv) Any claim which is in excess of any applicable limits provided in the insurance

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policy issued by the insolvent insurer;

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     (v) Any amount accrued as punitive or exemplary damages unless expressly covered

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under the terms of the policy; and

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     (vi) Tort claims of any kind against the insurer, and claims against the insurer for bad

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faith or wrongful settlement practices.

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      (4) Class 4. - Claims under nonassessable policies for unearned premium or other

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premium refunds; of the federal government other than those claims included in Class 3.

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      (5) Class 5. - Claims of the federal or any state or local government except those under

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Class 3 in subdivision (3) of this section. Claims, including those of any governmental body for a

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penalty or forfeiture, shall be allowed in this class only to the extent of the pecuniary loss

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sustained from the act, transaction, or proceeding out of which the penalty or forfeiture arose,

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with reasonable and actual costs occasioned by it. The remainder of those claims shall be

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postponed to the class of claims under subdivision (8) of this section.

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     Debts due to employees for services, benefits, contractual or otherwise due arising out of

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such reasonable compensation to employees for services performed to the extent that they do not

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exceed two (2) months of monetary compensation and represent payment for services performed

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within six (6) months before the filing of the petition for liquidation or, if rehabilitation preceded

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liquidation within one year before the filing of the petition for rehabilitation. Principal officers

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and directors shall not be entitled to the benefit of this priority except as otherwise approved by

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the liquidator and the court. This priority shall be in lieu of any other similar priority which may

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be authorized by law as to wages or compensation of employees.

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      (6) Class 6. - Claims filed late or any other claims other than claims under subdivisions

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(7) and (8) of this section; of any person, including claims of state or local governments, except

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those specifically classified elsewhere in this section. Claims of attorneys for fees and expenses

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owed them by a person for services rendered in opposing a formal delinquency proceeding. In

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order to prove the claim, the claimant must show that the insurer which is the subject of the

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delinquency proceeding incurred such fees and expenses based on its best knowledge,

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information and belief, formed after reasonable inquiry indicating opposition was in the best

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interests of the person, was well grounded in fact and was warranted by existing law or a good

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faith argument for the extension, modification or reversal of existing law, and that opposition was

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not pursued for any improper purpose, such as to harass or to cause unnecessary delay or needless

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increase in the cost of the litigation.

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      (7) Class 7. - Surplus or contribution notes, or similar obligations, premium refunds on

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assessable policies, claims of general creditors, including claims or insurance pools and

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associations, claims arising out of reinsurance agreements, including premium claims, claims of

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other insurers for subrogation, and claims of insurers for payments and settlements under

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uninsured and underinsured motorist coverage. Payments to members of domestic mutual

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insurance companies shall be limited in accordance with law; and claims of any state or local

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government for a penalty or forfeiture, but only to the extent of the pecuniary loss sustained from

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the act, transaction or proceeding out of which the penalty or forfeiture arose with reasonable and

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actual costs occasioned thereby. The remainder of such claims shall be postponed to the class of

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claims under subdivision 8.

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      (8) Class 8. - The claims of shareholders or other owners in their capacity as

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shareholders. Surplus or contribution notes or similar obligations, premium refunds on assessable

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policies, interest on claims of Classes 1 through 7 and any other claims specifically subordinated

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to this class.

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     (9) Class 9. Claims of shareholders or other owners arising out of their capacity as

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shareholders or other owners, or any other capacity except as they may be qualified in Class 3 or

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6 above.

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     If any claimant of this state, another state or foreign country shall be entitled to or shall

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receive a dividend upon his or her claim out of a statutory deposit or the proceeds of any bond or

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other asset located in another state or foreign country, unless such deposit or proceeds shall have

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been delivered to the domiciliary liquidator, then the claimants shall not be entitled to any further

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dividend from the receiver until and unless all other claimants of the same class, irrespective of

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residence or place of the acts or contracts upon which their claims are based, shall have received

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an equal dividend upon their claims, and after such equalization, such claimants shall be entitled

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to share in the distribution of further dividends by the receiver, along with and like all other

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creditors of the same class, wheresoever residing.

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     Upon the declaration of a dividend, the receiver shall apply the amount of the dividend

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against any indebtedness owed to the insurer by the person entitled to the dividend. There shall be

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no claim allowed for any deductible charged by a guaranty association or entity performing a

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similar function.

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     SECTION 2. This act shall take effect upon passage.

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LC03372

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EXPLANATION

BY THE LEGISLATIVE COUNCIL

OF

A N A C T

RELATING TO INSURERS' REHABILITATION AND LIQUIDATION ACT

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     This act would bring three sections of the insurers’ rehabilitation and liquidation act into

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compliance with the most recent Model Act of the National Association of Insurance

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Commissioners. Present section 46 was found to be unconstitutional in the case of United States

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v. Fabe, F.3d (1st Cir. 2003).

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     This act would take effect upon passage.

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LC03372

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