Kemper has been on the brink of insolvency for years. It may have finally reached the end of its runway. Last week, Kemper disclosed its most recent financials, which show that very little cash is left in its two major member companies, raising the specter that it may finally be placed into a liquidation proceeding. Policyholders should be aware of the ramifications of a Kemper liquidation and take steps, if possible, to mitigate the impact a Kemper liquidation could have on their businesses.

An Illinois circuit court entered an order for the liquidation of Reinsurance Company of America based upon a finding of insolvency. The court appointed Michael T. McRaith, Illinois Director of Insurance, as liquidator, vesting him with broad powers to take action as required to serve the interests of RCA, its policyholders, beneficiaries, creditors, and the public. RCA’s sole stockholder consented to the entry of the order.

When is an insurance commissioner not a governmental authority? A federal district judge reminds us that a state insurance commissioner, when acting as receiver of an insolvent insurer, acts in a different capacity to his governmental role. This principle can cause an insurance commissioner to fall outside a contractual definition of “governmental authority” even where the definition contains inclusive language on multiple capacities.

Yesterday, the Department of Insurance, Financial Institutions & Professional Regulation of the Missouri Division of Finance closed Champion Bank, headquartered in Creve Coeur, Missouri, and appointed the FDIC receiver.

In response to an imminent Order of Liquidation against the Kemper Insurance Companies, we have prepared the following “frequently asked questions” guide summarizing issues related to: (i) the financial regulation of insurance companies; (ii) the liquidation and proof of claim process in Illinois; (iii) potential recovery by policyholders of the amount of “covered” workers’ compensation claims from state guaranty associations; (iv) policyholder collateral; and (v) planning a response to the Kemper liquidation.1

I. FINANCIAL REGULATION OF INSURANCE COMPANIES

Late the night of Nov. 25, LandAmerica Financial Group, Inc. and its subsidiary, LandAmerica 1031 Exchange Services, Inc., filed a Chapter 11 petition in the U.S. Bankruptcy Court for the Eastern District of Virginia ("Bankruptcy Court"), seeking bankruptcy protection for both entities. The action does not cover Commonwealth Land Title Insurance Company or Lawyers Title Insurance Company, two LandAmerica subsidiaries that are each domiciled in the State of Nebraska.

Thus far in 2011, six additional states have enacted the provisions from the National Association of Insurance Commissioners’ Insurer Receivership Model Act (“IRMA”) that govern the treatment of “qualified financial contracts” and “netting agreements.”

The IRMA provisions, which are modelled on the U.S. Bankruptcy Code, allow a party that has entered into a swap transaction with an insurer to exercise certain netting, collateral realization and termination rights without being precluded by the automatic stay that is imposed if the insurer becomes insolvent.