The treatment of derivatives, or “qualified financial contracts”, under state insurance insolvency laws has received increased attention since the financial crisis. Four states passed laws in 2010 that allow for the exercise of certain netting collateral and termination provisions in an insurance insolvency without regard to the automatic stay mechanism and similar laws are anticipated in other states in 2011. Federal laws provide a level of certainty with respect to the treatment of certain swap agreement provisions in a general corporate bankruptcy. The U.S.

As we first covered here, Ambac Financial Group Inc., the parent of the ailing Wisconsin-domiciled bond insurer Ambac Assurance Corp., filed for Chapter 11 bankruptcy relief with United States Bankruptcy Court for the Southern District of New York on November 8, 2010.

On September 14, 2010, a New York state court entered an Order of Rehabilitation for Atlantic Mutual Insurance Company and Centennial Insurance Company (collectively, "Atlantic") to try to resolve Atlantic's insolvency and return it to the marketplace. The court appointed the New York Superintendent of Insurance as the "Rehabilitator" and directed the Rehabilitator to, among other things, take possession and control of Atlantic's property, conduct Atlantic 's business, and remove the causes and conditions that made this rehabilitation proceeding necessary.

In the case of banking institutions dealing with the unique world of insurance insolvency, the results may not be as dramatic as in other cultural clashes, but they can be equally confused. This is because insurance insolvency operates in its own separate world, where the usual rules of bankruptcy do not apply and where, without appropriate safeguards, having a secured claim may not guarantee repayment. For banks and other secured creditors, lending to insurance companies is governed by a separate set of rules to which careful attention must be paid.

The Catholic Bishop of Northern Alaska (CBNA) has been directed to arbitrate an insurance dispute. The CBNA filed for chapter 11 bankruptcy relief as a result of sexual abuse lawsuits against it. In the course of its bankruptcy proceeding, it sought a declaratory judgment as against its insurer, Catholic Mutual Relief Society of America, concerning the scope of coverage for the abuse claims.

What you need to know

The Massachusetts Supreme Judicial Court recently ruled that where a medical malpractice claim is transferred from an insolvent insurer to the Massachusetts Insurers Insolvency Fund, the Fund is liable for the statutory cap of $299,999 for each of the multiple claims arising from one overall medical incident, subject to the policy’s aggregate limits.

What you need to do

On 18 January 2011, the Federal Deposit Insurance Corporation (“FDIC”) issued an interim final rule (the “Rule”) with request for comments regarding certain provisions of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd- Frank Act”). Title II creates the Orderly Liquidation Authority (“OLA”), which is a mechanism under which “covered financial companies” can be liquidated in a uniform fashion rather than under inconsistent insolvency regimes.

Granite Reinsurance Company won an award for unpaid premiums from Acceptance Insurance Company (in rehabilitation) in a bankruptcy adversary proceeding. The unpaid premiums amounted to $9 million on a $15 million dollar policy that was purchased to cover Acceptance for five years. The parties had agreed to a $3 million per year premium payment schedule, due at the beginning of each of the five years covered under the reinsurance agreement. However, a dispute arose as to the calculation of pre-judgment interest on the award.

A New York appeals court recently dismissed one of two lawsuits filed against MBIA Inc. (“MBIA”) by more than a dozen major financial institutions concerning the bond insurer’s financial restructuring. The plaintiffs – owners of insurance policies issued by MBIA for structured finance products, including residential mortgage-backed securities – claimed that the bond insurer’s split into two units was intended to defraud policyholders.

On January 18, 2011, the Federal Deposit Insurance Corporation (“FDIC”) approved an interim final rule (“Interim Rule”), with request for comments, to implement certain provisions of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).