The Battle For Reliance Assets Heats Up
The fight for Reliance Insurance Company’s (RIC’s) assets between the Pennsylvania Department of Insurance (PDI), which took over the failed insurer last June, and the creditors and investors of its parent company, Reliance Group Holdings (RGH), which has filed for bankruptcy protection, continues unabated. (See IJ June 25, 2001)
PDI spokesperson Rosanne Placey confirmed that “we are proceeding with the aggressive marshalling of all Reliance assets.” As yet there are no final figures for the outstanding claims, nor the amount of assets available to pay them; her previous estimate that the investigation would take “at least six months” remains unchanged.
Placey did indicate, however, that recent reports that RIC owes $8.7 billion were misleading. “Numbers like that include the payment demands in every lawsuit in which anyone insured by Reliance is named, whether or not there’s been a judgement, or even a trial, as well as all the claims by policyholders.” When all the litigation has been settled, the actual amount owed on Reliance’s policies may be substantial, but no where near some of the amounts quoted.
The PDI is in fact still optimistic about its chances of rehabilitating the insurer, and gathering sufficient assets to meet its liabilities without dipping into state guarantee funds. Concurrently with obtaining the rehabilitation order, It filed suit to recover $95 million it claims was wrongfully transferred from RIC to RGH. Subsequently it asked the bankruptcy court in New York to disallow RGH’s bankruptcy petition on the grounds that it was filed in “bad faith” both as a means of transferring funds to corporate creditors and large investors at the expense of policyholders, and to shield officers and directors from potential damage actions for breaches of fiduciary duties in regard to RIC.
In other moves, aimed at maximizing the amounts available to pay claims, the PDI reduced the severance payments to laid off RIC workers, and has put its headquarters building up for sale.
Two recent court rulings have also brightened the picture. While most of the 15,000 lawsuits involving RIC will be allowed to proceed after the expiration of a two month stay, for the most part they involve workers compensation, automobile injuries, construction coverage and other types of personal injury claims. They do not impend huge adverse judgments.
A number of higher profile cases, however, have been stayed for an additional six months by Pennsylvania Judge James Gardner Colins, whose order stated that, “this Court specifically finds that it is in the best interests of the estate of Reliance Insurance Company, as well as the policyholders as a whole, the creditors and other interested parties, that proceedings and actions, including but not limited to discovery in each of the cases identified in Exhibit “A” hereto should be stayed for a period of 180 days, such period to commence on the date of this order {August 2nd}.”
The cases include securities fraud complaints against RIC clients, Bank One, Bank of America, Cendant Corp. and others, and could result in verdicts exceeding $5 million. While Judge Colins’ order is only binding on Pennsylvania Courts, he specifically requested that other jurisdictions, including the Federal Courts, defer to his ruling on principles of comity, and in deference to the fact that his court is charged with supervising RIC’s rehabilitation.
He also granted the PDI authority to seek the repatriation of an estimated $334 million in deposit funds held by other states’ insurance departments. The California Department of Insurance holds the biggest amount, in excess of $110 million, and state officials haven’t yet indicated whether they will comply with any such request, or seek to oppose it through the courts.
The PDI is also contemplating legal action against RCI’s and RGH’s officers and directors, including its flamboyant ex-CEO Saul Steinberg. Placey confirmed that “Pennsylvania’s chief counsel is meeting with private attorneys for the Department, and they’re looking at all potential third party claims, She indicated that a decision could be forthcoming by early September.
RGH, the parent company of Reliance Insurance Company (RIC), which traces its roots back to 1817, filed for bankruptcy protection in the Southern District of New York June 12. The petition listed total assets of $12.598 billion and total liabilities of $12.877 billion.
Financier Saul Steinberg and his family controlled RGH, which owns 100 percent of Reliance Financial Services Corp. (RFS). It in turn owns RIC and nine other insurance subsidiaries.
All of them were included the bankruptcy proceedings, but only RIC and its related companies fell under administration by the Pennsylvania Insurance Department, which obtained an “Order Rehabilitation” for RIC from the Commonwealth Court on May 29.
Steinberg resigned in May. He acquired a controlling stake in RGH in 1968 through a leveraged buyout. For years the high-profile corporate raider used it as the base of a financial empire that anchored his takeover attempts of Chemical Bank in 1969, and his raids on Walt Disney, Quaker Oats and other companies in the 1980s. Unfortunately the indiscriminate issuance of debt instruments and the mounting losses at RIC finally caught up with him.
The first signs of real trouble emerged with the collapse of the Unicover pool 1999. Reliance was heavily involved in issuing workers’ compensation policies extremely low rates, and when the pool was overwhelmed by huge losses, RIC’s reserves began to vanish.
As recently as 1998, the company was still profitable, earning $326 million on gross revenues of $3.4 billion.
Steinberg’s aggressive acquisition strategy and quest for ever higher dividend payments, however, left RIC vulnerable the cutthroat competition for market share, which led to deterioration in underwriting standards that eventually resulted in the unsustainable losses.
A.M. Best began to downgrade RIC’s claims paying ability from “A-” in June to “C” by August. It effectively stopped writing new or renewal business in all its lines last June, and began looking for ways to downsize.
- NC High Court Allows Liquidation of Lindberg Insurers; He Owes $524M in Fed Case
- Audit Finds Some Florida Citizens’ Policies Over Limit, Small Use of Clearinghouse
- Atlantic Hurricane Season Could Intensify in Coming Weeks, Meteorologists Say
- Lyft is a Motor Carrier and State Farm Can Be Sued Directly, Georgia Court Says