Insurance receivers have the unenviable job of liquidating failed insurance companies: collecting the insolvent insurers’ assets and paying claims against the failed insurers in accordance with a statutory claim priority regimen.  Given what they see in their line of work, receivers often come to presume that every owner of a failed insurance company has been guilty of some sort of ethical or legal misconduct.  Influenced by that preconception—and by the conviction that they are the guardians of “what’s right”—receivers sometimes take misguided positions.  It happened in three recent Florida cases that were the subject of a combined order:  In Re: The Receivership of Southeastern Casualty and Indemnity Insurance Company, etc., Case Nos. 1989-CA-002856, 1991-CA-004746, 1992-CA-002583 (Fla. 2d Jud. Cir., August 27, 2014).

The insurers in these cases were put in liquidation in the late 1980s and early 1990s.  The owners didn’t contest; they acceded.  At that time, Florida law provided (as it still does) that all the rights in the liquidation estates, including those of the owners, became “fixed as of the date on which the order directing the liquidation of the insurer is filed.”  That is, the claims against the estate vested under the terms of the laws that were in force when the liquidation orders were entered.

Under Florida law, the Department of Financial Services (which now includes the Department of Insurance) serves as receiver for Florida insurers, and the receiver’s duties are performed by the Department’s Division of Rehabilitation & Liquidation or its contractual delegates.  The receivers for Southeastern Casualty, Great Oaks Casualty Insurance Company and Trans-Florida Casualty Insurance Company were required to address claims in 9 different classes, including guaranty association claims for expenses, loss claims under the insurers’ policies, employees’ claims for wages, claims for unearned premiums or refunds and claims of general creditors.  The owner’s claims—”Class 9 claims”—came last.

Fast forward to 2012.  After all claimants with priority above the owners had been paid, millions of dollars remained in these liquidation estates.  Upon learning of that fact, the owners laid claim to the remaining assets. They should have been distributed to the owners without ballyhoo.  Alas, that was not to be.

The Division of Rehabilitation persuaded the Florida Legislature to amend Florida’s insolvent insurer claim priority statute in 2012.  The amended law created a new asset distribution class, with priority above owners: interest on earlier payments made to claimants in higher-priority classes.

In the liquidation proceedings, the receiver contended that the new statute should be applied retroactively, and that the remaining assets should be used to pay interest to earlier, higher-priority claimants—a result that would divest the former owners of the distribution rights they were granted under the statute that had been in place at the time the liquidation was ordered.  The receiver argued that this result was nevertheless “equitable,” because the owners had “contributed to the insolvencies” in some way, and therefore didn’t deserve a distribution.

But the court wasn’t buying it:  The court found it unconstitutional to apply the amended law retroactively to these estates, in which distribution rights were fixed under prior law.  It also observed that, in any event, there was no actual evidence the owners had contributed to the insolvencies in any way.

Undeterred, the receiver also contended that the owners’ claims should be rejected, because they were “late filed” and, as such, would interfere with orderly liquidation.  The court, however, found it “doubtful, as a matter of constitutional law, that these [owner] claims could be denied on the basis that they were late-filed,” because the receiver had not given the owners notice of a claim-filing deadline.  Moreover, the court held that denying the owners’ claims because of late filing, when all higher priority claims had been paid, “lacks a reasonable and substantial relation to a legitimate governmental objective,” and is therefore unconstitutional.

Still unwilling to concede defeat, the receiver contended that the owners’ claims should be denied, because there might be offsets for debts that the owners possibly owed to the insolvent insurers.  The owners countered that there was no basis for applying the claim offset statute, since (1) there were no lower-priority claims to be protected by the offset statute, and (2) there was no evidence of such alleged debts.  The result:  The court ordered the receiver to pay the owners’ claims.

Final score: Constitution – 3; misguided agency zealotry – 0.  Sometimes justice is slow in coming.  But with tenacity, it wins out.