To provide for the ongoing administration and payment of claims during the conservation period, the Conservator has implemented a claim payment protocol ("Protocol") for Class 2 (i.e., policyholder priority) claims. The Protocol is set up as follows:
Existing claims will continued to be administered in the ordinary course, subject to the Conservator's oversight of claims administration. New claim reports are to be submitted directly to CastlePoint pursuant to the terms of the insurance policies issued by CastlePoint or any of the affiliates of the Tower Group that previously merged into CastlePoint.
Claims administration will be conducted under the supervision of the Conservator to ensure an independent valuation of the claim;
Claims allowed by the Conservator will be satisfied as follows:
(a) If the total amount of the claim is less than the statutory limit (or "cap") applicable to the Insurance Guaranty Association that would handle such claim if CastlePoint were in liquidation, then the claim will be paid in full by CastlePoint; or
(b) If the total amount of the claim is greater than the statutory limit (or "cap") applicable to the Insurance Guaranty Association that would handle such claim if CastlePoint were in liquidation, then the claim will be paid with a combination of cash up to the amount of the applicable Insurance Guaranty Association cap, plus an approved Class 2 priority proof of claim against the CastlePoint estate for the balance of the claim;
With respect to claims satisfied under paragraph 3(b) above, in exchange for the cash payment and allowed proof of claim, the claimant must agree not to resubmit the claim or any portion thereof for payment by the applicable Insurance Guaranty Association after CastlePoint is ordered to be liquidated;
At the time of the final distribution in liquidation, or any interim distribution that may be approved by the Court, claimants holding an allowed Class 2 will receive a distribution on the proof of claim in accordance with the percentage of remaining assets distributed to all Class 2 policy claimants.
Statement of Purpose for Conservation Phase Claims Payment Protocol
The Conservator's fundamental goal in implementing the Conservation Phase claim payment protocol is to protect and advance the interests of all policyholders and creditors adversely affected by the failure of the Tower Group and CastlePoint. The Protocol facilitates the orderly and equitable distribution of CastlePoint's limited remaining assets prior to liquidation and includes a transparent procedure to resolve and pay claims during the conservation phase. The liquidation of the CastlePoint estate is imminent (the Conservator anticipates requesting entry of a liquidation order during the first several months of 2017), and the Protocol provides for the ongoing administration and payment of claims during conservation as they are submitted and adjusted, while ensuring the equitable treatment of pre-liquidation and post-liquidation policy claims and the avoidance of preferences.
Upon entry of an Order of Liquidation for CastlePoint, claims will be paid by applicable guaranty associations (subject to state law) up to the respective states' statutory caps. Under the Protocol, policy claimants will be paid in the ordinary course of claims administration but only up to the amount of the applicable payment cap of their state guaranty association (and only up to applicable policy limits), with any excess being satisfied through the issuance of an allowed proof of claim. While the applicable guaranty association cap varies by state, the Conservator estimates that most policy claims will fall near or below the relevant cap. For any amount above this cap, claimants will be given a proof of claim for the remaining amount of the claim subject to the terms set forth above.
The Conservator's Authority Pursuant to the California Insurance Code and Plan Order
The Conservator is vested with broad discretion in his administration of the CastlePoint estate and implementation of the Plan. That discretion extends to claims handling in conservation, including the adoption of claims administration and payment procedures intended to protect and ensure equal treatment of all policyholders and claimants.
Both the California Insurance Code and the Plan Order expressly grant the Conservator the authority to manage the claims and assets of CastlePoint. Under section 1011 of the Insurance Code, title and possession of CastlePoint's assets become vested in the Conservator, who is authorized to conduct CastlePoint's business on its behalf to ensure the protection of CastlePoint's policyholders, creditors, and the public interest. (§ 1011 [the Commissioner may conduct the business of the conserved person "or so much thereof as to the commissioner may deem appropriate"].) Moreover, under the Plan Order, "The Conservator is expressly authorized to do all things necessary or appropriate to carry out the provisions of the Conservation and Liquidation Plan, Conservation Agreement and Conservation Transaction Agreements." (Plan Order, ¶ 17.) In so implementing the Plan, "The Conservator is authorized to use the assets of CastlePoint to satisfy liabilities of CastlePoint pursuant to the Conservation and Liquidation Plan, in the order of priority established in Insurance Code Section 1033(a)." (Plan Order, ¶ 21.) The Order also affirms the built-in protections available to claimants in the event their claim is rejected, either in whole or in part, by granting recourse to this Court for an order to show cause proceeding as set forth in section 1032. (Plan Order, ¶ 25.)
The broad discretion of the Conservator to conduct CastlePoint's business expressly extends to the Conservator's administration of claims, which includes the Conservator's authority to implement the Protocol. Specifically, section 1037(c) of the Insurance Code grants the Conservator "authority to compound, compromise or in any other manner negotiate settlements of claims against that person upon such terms and conditions as the commissioner shall deem to be most advantageous to the estate of the person being administered or liquidated." Section 1037 further provides that the Conservator's authority under this section extends beyond the powers and actions enumerated in the section and is not a limitation on his authority: "The enumeration, in this article, of the duties, powers and authority of the commissioner in proceedings under this article shall not be construed as a limitation upon the commissioner, nor shall it exclude in any manner his or her right to perform and to do such other acts not herein specifically enumerated, or otherwise provided for, which the commissioner may deem necessary or expedient for the accomplishment or in aid of the purpose of such proceedings."
The Conservator has also established the Protocol to avoid the creation of any preferences while the company is in conservation. If the Conservator pays more than a guaranty association would pay in liquidation, he would potentially be creating a voidable preference under Insurance Code section 1034. The Conservation Order expressly prohibits the payment of such preferences: "Except upon further order of the Court issued after a hearing in which the Conservator has received reasonable notice, all persons are enjoined from obtaining preferences..." (Conservation Order, ¶ 21; see also§ 1020 ["Upon the issuance of an order either under Section 1011 or 1016, or anytime thereafter, the court shall issue such other injunctions or orders as may be deemed necessary to prevent any or all of the following occurrences...(d) The obtaining of preferences, judgments, attachments, or other liens against such person or its assets."].) In the Plan Order, the Court affirmed that "[a]ll prior injunctions and other orders of this Court, except to the extent expressly modified herein, are reaffirmed and remain in full force and effect." (Plan Order, ¶ 16.) With liquidation on the horizon, the Conservator must avoid making payments while in conservation that would not be paid in full in liquidation.
Accordingly, pursuant to the California Insurance Code and the Plan Order, the implementation of the Protocol is within the discretion and authority of the Conservator to manage the assets of CastlePoint, including the handling and payment of its claims. The Protocol has clear and valuable benefits to policy claimants, does not operate to the disadvantage of other claimants, and is a reasonable and prudent exercise of the Conservator's broad discretion to wind up the affairs of an impaired insurer in a manner that is orderly and equitable.
For Further Information
A set of FAQs addressing the administration of claims during the conservation of CastlePoint is available at the Conservation & Liquidation Office website: www.caclo.org. Additional information about CastlePoint can also be found on the Company's website at www.twrgrp.com or by contacting CastlePoint at 877-813-8531.