As discussed in our post last month, it was a long road for Arrowood Indemnity to be placed into liquidation in Delaware. On November 8, 2023, it finally happened [see Liquidation Order]. What happens now?
State Guaranty Funds
For many policyholders, it means falling into the guaranty association safety net. By statute, states have created guaranty associations (or in New York, security funds administered by the Liquidation Bureau) to pay covered claims owed by the insolvent insurance company. The National Conference of Insurance Guaranty Funds has a handy compilation of those statutes. But there are a few things you need to know.
First, recovery may be possible from multiple guaranty associations. Because each state sets its own requirements, more than one guaranty association may be applicable to any particular loss, including (1) the state where the policyholder was a resident at the time of the insured event; (2) the state where the “claimant” was a resident at the time of the insured event; and (3) the permanent location of property from which the claim arises. There may be numerous insureds, and numerous claimants, and numerous properties, depending on the situation.
Second, many states have “per claim” or “per claimant” limits, most typically in the amount of $300,000. The limits in California and New York, notably, are higher. In one case from the federal Third Circuit Court of Appeals, the court held that each of the individual claims of 100,000 asbestos claimants was separately subject to the statutory limit of $300,000. Likewise, the Connecticut Supreme Court held that each of the claims being made against Union Carbide as a result of the chemical disaster in Bhopal, India was a separate claim. Of course, the insurance policy itself may contain its own limits of liability, but the “per claim” limits imposed by the guaranty association may not impose a further significant limitation in many circumstances.
Third, while many states have provisions that may limit or prevent recovery for policyholders with a net worth of more than $10 million, $25 million, or $50 million, almost half of the guaranty associations have no net worth limitations.
Even if the guaranty association safety net is not the solution for everyone, the liquidation process in Delaware exists to distribute whatever assets remain in Arrowood. The Order of Liquidation requires the Receiver to publish a proof of claim form, with instructions, on the Delaware Department of Insurance website. The Order of Liquidation sets a proof of claim deadline of January 15, 2025, providing over a year for policyholders, claimants, and other creditors to seek a share of the estate assets. It is unlikely that there will be distributions from the estate until those proofs of claim are all received and analyzed.
In addition, the Order of Liquidation stays litigation against Arrowood, as well as cases being defended by Arrowood, which appear to include many sexual abuse and opioid claims according to its quarterly and annual regulatory reports.
The liquidation of an insurance company can complicate a host of issues related to accessing excess or umbrella insurance that sits above the insurance provided by the insolvent insurance company. In rare instances, it is possible to recover directly from reinsurance, particularly if the reinsurance was purchased with the knowledge and participation of the policyholder.
For most policyholders and claimants, the liquidation of Arrowood is a positive development. It opens up the guaranty association protections for policyholders and claimants who had been suffering through Arrowood’s demise.