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Michael Booth

New Jersey Law Journal

12-14-2007

Reinsurance companies will not have to cover potentially billions of dollars in "incurred but not reported" job-related asbestosis claims made to now-defunct Integrity Insurance Co., the New Jersey Supreme Court ruled on Thursday.

The justices held, 3-2, that incurred, unreported claims based on actuarial estimates do not meet the definition of "absolute" under the Rehabilitation and Liquidation Act, N.J.S.A. 17:30C-1 to -31.

Absolute "means precisely that -- absolute -- and ... the clear legislative choice for those claims cognizable in an insurance company's liquidation must be honored," Justice Roberto Rivera-Soto wrote in In the Matter of the Liquidation of Integrity Ins. Co., A-91-06/A-29-07.

Integrity, a property and casualty insurer, was declared insolvent in 1986 and the next year was put into liquidation with the commissioner of the Department of Banking and Insurance as its liquidator. In 1996, the commissioner adopted a plan that allowed the department to accept actuarially estimated claims and to pay all claims and close the liquidation in three to five years.

But most of Integrity's risks were spread among reinsurers and many, such as for asbestosis, were not expected to result in reportable claims until long after the policies were issued. That meant reinsurers could potentially be on the hook for these "long-tail liabilities" for decades.

Reinsurers opposed the plan, arguing that only specific individual claims for known verifiable losses are cognizable in liquidation. A trial judge approved the plan but the Appellate Division reversed.

During oral arguments on appeal to the court, lawyers from both sides estimated the commissioner has already had paid out $598 million in asbestosis claims and has estimated potential future claims of nearly $2.1 billion.

The commissioner's lawyer, David Mazie, of Roseland, N.J.'s Mazie Slater Katz & Freeman, argued that the term "absolute" must "encompass claims that are the product of generally accepted estimating techniques applied in a commercially reasonable manner, so long as those estimating techniques protect the policyholders, the insured and the public."

Donald Kiel, of Kirkpatrick & Lockhart in Newark, N.J. -- representing one of the insureds, American Standard Companies Inc. of Piscataway, N.J. -- said the statute did not preclude the liquidator from establishing plans to deal with long-tail liabilities.

The lawyer for the trade group Reinsurance Association of America, Michael Cole, of Teaneck, N.J.'s DeCotiis, Fitzpatrick, Cole and Wisler, argued that the reinsurers were not seeking to dodge legitimate claims but said the statute clearly limits the commissioner's authority to "absolute" claims.

The majority of the court accepted that view. "At the outset, the Legislature determined that 'no contingent claim shall share in a distribution of the assets of an insurer which has been adjudicated to be insolvent,'" Rivera-Soto wrote, adding that if the Legislature had intended to allow such claims, it should have said so in the statute, which it is free to amend "in the rational exercise of its discretion." Chief Justice Stuart Rabner and Justice John Wallace Jr. agreed.

Dissenting Justices Virginia Long and Barry Albin favored the commissioner's liberal reading of the statute, which they called consistent with the Legislature's aim of affording the broadest protection to the public, claimants and beneficiaries.

Long said the majority leaves the liquidator "with a Hobson's choice: To extinguish millions of dollars of occurrence-based coverage purchased by policyholders or to run out the Estate for years while hemorrhaging administrative costs and delaying payments to claimants with presently documented claims."

Justices Helen Hoens and Jaynee LaVecchia did not participate. Hoens sat on the appellate panel that the majority upheld. LaVecchia is married to Cole.