In December 2005, after a four-and-a-half year process, the National Association of Insurance Commissioners (NAIC) formally adopted a new Model Act entitled the Insurer Receivership Model Act (IRMA). According to the NAIC, the Model Act is an important step in the NAIC’s modernization efforts and is intended to comprehensively address the administration of an impaired or insolvent insurer from conservation and rehabilitation to the liquidation and winding up of a receivership estate.

The NAIC received input from a variety of industry sources in drafting the IRMA, including guaranty associations, trade groups, insurers, and receivers. Many participants in the process, while favoring at least some of the changes, criticized some of the changes and the NAIC’s failure to adopt other changes.

IRMA effects a large number of substantial changes to the previous Model Act, including the following:

A notice and hearing process intended to increase efficiency and economy of receivership proceedings, which puts the burden on an objecting party to show why the court should not authorize the receiver’s proposed action (§107)

Expanded immunity provisions covering the receiver, employees, and contractors, and expanded indemnity provisions covering the receiver and employees (§115)

Increased receiver financial reporting requirements (§117)

Provisions dealing with executory contracts (§114)

Provisions allowing the sale of the insurer’s corporate entity and its licenses (§503)

New provisions addressing conservation, which provide broad powers to a conservator similar to the powers of a rehabilitator (Article III)

Provisions granting a receiver expanded powers to recover assets, including:
  • Provisions lengthening the period for which transfers may be challenged as voidable preferences or fraudulent transfers (§§604, 605)
  • Provisions expanding a receiver’s ability to recover transfers to affiliates (§602)

A provision intended to allow a receiver to pay, as a Class 1 administrative claim, lower priority claims if they are deemed to assist in the collection of assets (§801)

A number of provisions addressing guaranty association matters, including:
  • Provisions dealing with a guaranty association’s right of intervention (IRMA provides states with three options) (§105)
  • A new Class 2 priority of distribution for guaranty association expenses (with an option to put claims defense costs in Class 3, the general policyholders class) (§801)
  • Provisions regarding early access payments to guaranty associations (§803)
  • Provision for greater coordination between receivers and guaranty associations (§§303 and 405)
  • Guaranty associations’ access to information and records (§118)
  • A provision making clear that the receivership court may not resolve coverage disputes between guaranty associations and claimants, absent the guaranty association’s consent (§105)

Provisions requiring the payment of the receiver’s attorneys’ fees and costs by those that make objections that are found to be frivolous or filed merely for delay or for other improper purpose (§107), or where a party challenging a receiver’s recovery efforts loses in part (§607D)

Several provisions dealing with reinsurers, including
  • Provisions requiring in some circumstances a commutation of a reinsurer’s liabilities (§§611, 614, 615)
  • Separate provisions dealing with the continuation of life and health reinsurance (§612)
  • A provision preserving a reinsurer’s contractual right to arbitration (§ 105)
  • A provision stating that the right to set off shall be a secured claim (§104.BB)
  • All assumed reinsurance contracts are terminated upon liquidation (§502)

The insurer’s agents may be required by the liquidator to give notice to holders of policies issued through the agent (§506)

Provisions allowing IRMA (at a state’s option) to apply to insolvencies commencing prior to IRMA’s adoption by the state (§111)

A provision that, in the event of any conflict between IRMA and any other law, IRMA will prevail (§102)

The various other groups involved in the IRMA drafting process — guaranty funds, insurers, and trade groups — have strongly criticized a number of these provisions. Among other things, the commentators argued that many of these provisions unduly favored receivers and did not fairly balance the interests of all the constituent groups involved in an insurer’s liquidation. For example, these commentators criticized the imposition of the burden on those objecting to the receiver’s proposals, the broad immunity provisions, and the possible imposition of attorneys’ fees on those opposing the receiver.

Further, while addressing a large number of issues, IRMA fails to address several issues desired by industry groups. In particular, IRMA does not address

The treatment of large deductible business. Industry groups sought a provision requiring reimbursements collected from insureds to be paid to the guaranty fund to the extent the fund paid claims which the insured had agreed to reimburse within its deductible.

Provisions requiring more transparency in the receivership process — e.g., a requirement that receivers file a plan or road map to wind up the estate.

A provision requiring a standard of care to be met by the receivers.

Efforts to enact IRMA as law will now shift to each of the respective state’s legislatures. The groups that criticized various provisions or omissions of IRMA may be expected to seek to achieve revisions in the legislative process or to oppose the adoption of IRMA altogether. It is worth noting that, due to opposition to the NAIC’s prior Model Act on receivership (the Insurers Rehabilitation and Liquidation Model Act of 1995), that Model Act was not adopted in many states. To put pressure on the states to adopt IRMA, the NAIC has undertaken a process to determine which parts of IRMA must be adopted in order for a state to remain accredited by the NAIC. It will be years before we know how the efforts of the NAIC, the insurance departments, and other groups will fare in the various state legislative bodies in connection with the actual adoption of IRMA.

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