The first of its kind in the United States, Rhode Island’s Voluntary Restructuring of Solvent Insurers Act, R.I. Gen. Laws § 27-14.5-1, (the “Restructuring Act” or the “Act”) authorizes domestic property and casualty insurers and reinsurers in run-off to extinguish their liabilities to creditors by way of a regulator and court-blessed commutation plan. The Restructuring Act was intended to offer an exit strategy for solvent companies who are no longer actively writing business by allowing them to pay off their creditors early with the present value of estimated future claims.
Rhode Island Procedures for Commuting Run-Off Liabilities
To take advantage of the Restructuring Act, an insurer applicant (“applicant”) must develop a commutation plan. Rhode Island Insurance Regulation 68 dictates what the contents of such a plan must be, which must address, at a minimum, the following topics: explanation of the plan, plan administration, effect on creditors, meeting of creditors, determination of classes of creditors, claims procedure, alternative solutions, financial position, actuarial review, enforcement provisions, determination of liabilities, dispute resolution procedure, payment of claims, effect of insolvency, and termination of the plan.
The commutation plan is subject to a multi-step approval process. Initially, the applicant submits its plan to the Insurance Division of the Rhode Island Department of Business Regulation (the “Department”) for review, together with a processing/administration fee of $10,000. The applicant is also subject to an assessment of the fees of up to 150% of the total salaries and benefits paid to the personnel of the Department engaged in the proceedings and the costs of any independent attorneys, appraisers, or other professionals retained to assist the Department with respect to the application.
After, the applicant has addressed any concerns of the Department and received its approval, the applicant must file a petition with the Business Calendar of the Providence County Superior Court (the “Court”) for an order 1) establishing the classes of creditors for the purpose of a meeting of the creditors and 2) calling for a meeting of the creditors to vote on the approval of the plan.
Creditor approval means that 50% of each class of creditors, representing at least 75% in value of the liabilities owed to each class of creditors, consent to the terms and conditions of the proposed plan.
If and when the applicant company obtains the requisite majority approval, the applicant must again petition the Court, this time for an order confirming the commutation plan. The Court is charged with conducting an independent evaluation of the plan and must find that the plan “would not materially adversely affect either the interests of the objecting creditors or the interests of assumption policyholders.” RI Gen. Laws § 27-14.5-4(c)(1). If this standard is met, then the Court is to issue an implementation order, which, among other things, orders the applicant to carry out the terms of the commutation plan and releases the applicant of all obligations to its creditors upon payment of the amounts specified in the plan.
During the period of implementation, the applicant must provide quarterly status reports to both the Court and the Department. After the commutation plan is completed, and upon further application to the Court, the Court may issue an order that either discharges the applicant from the proceeding without further liability or dissolves the applicant.
Rhode Island’s First Commutation Under the Restructuring Act
Although enacted in 2002 with the design of attracting more insurance business to Rhode Island and for the express purpose of generating economic growth for the State, the Restructuring Act has not been utilized as frequently as its drafters may have anticipated. In fact, the Act was not utilized until it was first invoked by a commercial run-off insurer in 2010 when GTE Reinsurance Company Limited (“GTE Re”), which had been in run-off for twenty years, re-domesticated from Vermont to Rhode Island and applied to the Department for approval of a proposed commutation plan (“GTE Re Plan” or the “Plan”).
The Department examined multiple iterations of the GTE Re Plan for reasonableness and fairness to GTE Re’s creditors, ultimately concluding that the Plan did not materially adversely affect those creditors. The Department approved the GTE Re Plan contingent upon GTE Re’s incorporation of a number of substantial changes requested by the Department.
Following the Department’s approval and in accordance with the procedural protocol dictated by the Act and Insurance Regulation 68, GTE Re petitioned the Superior Court for implementation of the Plan. The Court determined that a single class of creditors was appropriate and granted GTE Re leave to hold a meeting of the creditors. The Court scheduled a hearing on confirmation of the GTE Re Plan contingent upon GTE Re obtaining the prerequisite percentage of creditor votes in favor of the GTE Re Plan.
At the creditors meeting, the GTE Re Plan was approved by a statutory minimum percentage of creditors, representing in excess of the minimum percentage of owed liabilities. A small percentage of creditors objected to the Plan, including Clearwater Insurance Company and Hudson Insurance Company, managed by Odyssey America Reinsurance Corporation, (“Odyssey Insureds”), certain risks of which were reinsured by GTE Re between 1980 and 1986. The Odyssey Insureds contended that their claims could not be properly reduced to a lump sum payment and termination of GTE Re’s indemnity obligations. Alternatively, they also objected that their claim had been undervalued by the proposed plan by $300,000. The Chairman of the meeting, i.e. the plan administrator, did not agree with the higher value ascribed by the Odyssey Insureds and affirmed the lower valuation set forth in the commutation plan.
Superior Court Litigation
Following the creditors meeting, GTE Re filed a motion with the Court to confirm the creditors’ vote and implement the GTE Re Plan. The Odyssey Insureds filed an objection to the vote and the creditor-approved plan. In addition, they challenged the constitutionality of the Act on the grounds that it violated the Contract Clause of the U.S. Constitution (Article 1, §10, Clause 1) because: 1) the Odyssey Insureds’ right to indemnification from GTE Re on covered claims, right to arbitration before a three member panel, and right to the application of New York law as set forth in the reinsurance contracts would be “substantially impaired” by the GTE Re Plan; 2) the GTE Re plan had the effect of transforming the Odyssey reinsurance contracts from bilateral to multilateral agreements; and 3) such impairments or alterations of the reinsurance contracts were neither reasonable nor necessary to carry out the purpose of the Act. The Odyssey Insureds also asserted that the Act violated the Due Process Clause of the U.S. and Rhode Island Constitutions on the grounds that the Act constituted an impermissible retroactive legislation for which there was no rational basis or legitimate public purpose and that the procedures proscribed by the Act were fundamentally unfair.
In a written decision issued on April 25, 2011, the Court rejected the Odyssey Insureds’ arguments and upheld the constitutionality of the Act. The Court characterized the essential purpose of the insurance contract simply as “the right to receive, and the obligation to make, a monetary payment when a claim arises.” Based upon this, the Court held that the fact that the actuarial-based estimated payout of the Odyssey Insureds’ present and future claims could be less than what they would actually receive had the contracts remained in force did not constitute an impairment that was “substantial.” The Court acknowledged but did not directly address the impact of the Plan on what the Odyssey Insureds contended was the true objective of the insurance contract -- the shifting risk from one party to the other -- and whether the reallocation of the risk from GTE Re back to the Odyssey Insureds constituted an impermissible impairment.
Further, the Court held that the commutation plan’s specification of a single arbitrator and application of Rhode Island law to disputes did not impermissibly impair the existing tri-partite arbitration and New York choice of law provisions in the reinsurance contracts because such provisions were not a “central undertaking or substantial inducement” to the parties to the reinsurance contracts. Moreover, the Court pointed out, the GTE Re Plan afforded the Odyssey Insureds with the right to appeal the arbitrator’s decision to the Rhode Island Superior Court and the choice of law dictated by the GTE Re Plan only affected disputes arising under the Plan, not the interpretation of the underlying contracts themselves. Finally, the Court held that the creditor vote to approve the Plan did not transform the Odyssey reinsurance contracts from bilateral to multilateral agreements as “the procedure for determining, collecting, and disputing claims is neither subject to, nor contingent upon, the other creditors.”
The Court also held that, even assuming arguendo that the GTE Re Plan did substantially impair the Odyssey Insureds’ contractual rights, such impairment was reasonably foreseeable by the Odyssey Insureds. The Court held that the contractual modifications authorized by the Act and the GTE Re Plan should have been within the Odyssey Insureds reasonable expectations given the commercial insurance industry’s highly regulated nature and the fact that GTE Re was domiciled in Bermuda, a jurisdiction authorizing commutation arrangements like that permitted by the Act, at the time the Odyssey Insureds entered into the reinsurance contracts with GTE Re. In addition, the Court found that the Act was justified by a legitimate public purpose: stimulation of Rhode Island’s economy and protection of commercial insurance creditors against the harms of run-off. In light of these circumstances, the Court held that the Act was reasonable and the creditors’ rights and interests were sufficiently protected through the multi-step commutation plan approval process. For the same reasons, the Court held that the Act did not violate substantive or procedural due process requirements of the U.S. and Rhode Island Constitutions.
Partial Vacatur of the GTE Re Decision
On May 2, 2011, the Odyssey Insureds filed an appeal of the Superior Court’s decision with the Rhode Island Supreme Court. While that appeal was pending, Clearwater and Hudson agreed to a settlement with GTE Re on the condition that the Superior Court’s decision would not preclude Clearwater from being able to contest the constitutionality of the Restructuring Act, and object to any commutation plans arising from that Act, in the future. Accordingly, Clearwater moved the Superior Court to partially vacate its decision as to Clearwater and to substitute in the written decision “Hudson” alone for the “Odyssey Insureds.” On January 12, 2012, the Superior Court granted the requested partial vacatur. Although procedurally unusual and objected to by the Department, the Court reasoned that it had the discretion under R.I. Super. Ct. R. Civ. P. 60(b)(6) to vacate its decision in such a manner where doing so would “facilitate settlement,” allow “completion of the commutation process,” and “would avoid the time and expense” of the appeal.
Future of Commuting Run-Off Liabilities Under Rhode Island’s Restructuring Act
The Restructuring Act has been characterized as the “best domestic resolution process yet devised for solvent ‘run-offs.’” John J. Partridge, Rhode Island’s Solvent Run-Off Statute, Found. of Reg. Couns. J. 15:3, art. 6, at 2. Any insurer or reinsurer contemplating a commutation under Rhode Island’s Restructuring Act now has the benefit of a written interpretation of the Act by the Rhode Island Superior Court -- the body charged with the Act’s implementation -- and that Court’s affirmation of the Act’s constitutionality. The Court’s partial vacatur of its April 25, 2011 decision and the fact that the decision was not tested on appeal, however, suggests that future applications to the Court may be vulnerable to constitutional challenge like the ones made with respect to the GTE Re Plan Recall that the Superior Court’s deemed that the principal purpose of insurance was the right to receive payment (as opposed to the actual transfer of risk). At least one commentator has suggested that the Superior Court in GTE RE missed the risk-shifting essential purpose of insurance – and for that reason – made a mistake in concluding that the Restructuring Act (at least when applied to a nonconsenting reinsurer) does not violate the Contracts Clause. See J.H. Oliverio, The Great Instrument of Chicanery: An Appeal for Greater Judicial Scrutiny of Solvent Insurers’ Schemes of Arrangement, 17 Roger Williams U. L. Rev. 439, 440-443, 469-470, 478-79 (Spring 2012)). Consequently, it remains to be seen whether the Court’s decision will be followed in other cases and whether the Restructuring Act will withstand future challenge.