Battle Looms Over Reliance High-DeductiblePolicies Philadelphia has been a venue for many epicstruggles, from the American Revolution to Rocky I. But the battlesspawned by the Reliance liquidation promise to be among the mostmemorable in the insurance world, and the lengthiest.

Guaranty funds of 25 states have filed a lawsuit againstPennsylvania Insurance Commissioner Diane Koken in her capacity asliquidator of the Reliance estate, claiming that the funds areentitled to reimbursement of amounts that Reliance could havecollected from policyholders that purchased high-deductiblepolicies.

On the same day, the commissioner sued eight guaranty funds,contending that the deductible money should be distributed as anyother asset of the Reliance estate. The Pennsylvania InsuranceDepartment asserts that the date-stamp on its pleading proves thatit preceded the funds through the courthouse door.

The reason for the discrepancy in the number of guaranty fundsinvolved in the two lawsuits is unclear at this point. Thecommissioner's pleadings call the eight funds “representative,” andindicate that more may be added.

“The guaranty funds stepped into the shoes of Reliance and aretherefore entitled to what Reliance could have collected underthese high-deductible policies,” said Michael Browne, a partnerwith Reed Smith LLP in Philadelphia and attorney for the 25funds.

Mr. Browne is also a former Pennsylvania insurance commissioner,having served in that post during the relatively tranquil years of1980 to 1983.

“Reliance had about 1,400 of these high-deductible policies,”Mr. Browne noted, “under which the first $100,000, or $500,000, orwhatever the deductible happened to be, was the obligation of thepolicyholder.” The policyholder would either absorb the deductibleamount or reimburse Reliance for the deductible if Reliance paidit, Mr. Browne added.

According to Commissioner Koken's pleadings, most of thehigh-deductible policies were for workers' compensation, althoughthere were some for general liability and automobile liability aswell.

“The insurance commissioner is saying you [the guaranty funds]pay the claims, and we'll keep the deductibles,” Mr. Brownecontinued. This did not sit well with the funds, given that“potentially hundreds of millions of dollars” are at stake, asnoted in pleadings filed in the case by the funds.

Mr. Browne stressed that the guaranty funds will need everydollar they can muster, considering they have already paid $875million in connection with the Reliance liquidation and may becalled upon to pay about $1 billion more. According to the funds'pleadings, Reliance holds about $1.4 billion in collateral for thehigh-deductible policies.

Commissioner Koken's side of the story is that, as liquidator,she has a duty to use the Reliance assets for the benefit of allpolicyholders, and not only those whose claims are covered byguaranty funds.

“Current estimates show that there could be up to $2 billion ofclaims not picked up by the guaranty funds,” noted PennsylvaniaInsurance Department spokesperson Melissa Fox.

“That's about 50 to 70 percent of the Reliance policyholderclaims,” Ms. Fox added. “That would leave 30 to 50 percent withoutaccess to anything but the assets of the Reliance estate, whichexplains our continuing efforts to marshal assets to paypolicyholder claims.”

Policyholders without guaranty fund access include those inineligible coverage lines such as ocean marine, fidelity andsurety, mortgage guaranty, and title insurance, according to Ms.Fox. “In addition, policyholders in 'overcap' situations–withcatastrophic claims that exceed the amount that guaranty funds areallowed by law to pay–need to be protected.”

She also pointed out that policyholders with coverage placedthrough Reliance's non-admitted carrier would not have their claimspaid by the guaranty funds.

These arguments did not seem to faze Mr. Browne, who accused thecommissioner of attempting to “rewrite the laws” governing guarantyfunds.

“The policyholders that the commissioner seeks to protect arefor the most part large corporations with over $25 million in networth,” Mr. Browne said. “Guaranty funds were set up to be safetynets. They were not intended to subsidize ineligiblepolicyholders.”

Reproduced from National Underwriter Edition, July 14, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.