Rehabilitation Plan Denied for Unfavorable Treatment of Surety Claims

In Re Rehabilitation of Frontier Ins. Co.
N.Y. Sup. Ct., Albany County, May 23, 2012

A proposed plan of rehabilitation for Frontier Insurance Co., was denied by the New York Courts finding that certain surety claims are entitled to class two priority in liquidation and that the proposed rehabilitation plan will provide less favorable treatment for the surety claimants than proceeding with liquidation.

The Superintendent of Financial Services, as Rehabilitator filed a proposed plan of continued rehabilitation that consists of an ongoing run-off of FrontieraEUR(TM)s liabilities and additional protection for aEURoeclaims under policies.aEUR? The plan defines aEURoeclaims under policiesaEUR? to exclude claims under surety bonds, fidelity bonds, contract bonds, performance bonds, indemnity bonds and similar instruments.

In response to the proposed plan several interested parties asserted objections claiming that 1) A plan that calls for a long-term runoff of liabilities and marshaling of assets is not a aEURoerehabilitation;aEUR? 2) the plan does not comply with Supreme Court decisional authority requiring a plan to provide claimants with no less favorable treatment than they would receive in liquidation; 3) the plans treatment of surety claims is inconsistent with NY Ins. Law Section 7434(a)(1) setting a hierarchy of priority classes; 4) continued rehabilitation likely will not benefit claimants and creditors; and 5) access to additional information is necessary to evaluate the plan.

In reaching its decision on the surety claims, the court joined the New Jersey courts in rejecting Grode and finding that surety claims are entitled to class two priority in liquidation. The court found that under the plan surety claims would receive less favorable treatment than they would through liquidation. The court stated that although rehabilitation plans are accorded deferential review, a plan will not be approved where it is inconsistent with law. Because New York Insurance Law Section 7434 expressly excludes aEURoeclaims arising under reinsurance contractsaEUR? from class two priority, it cannot be said that the Legislature also meant to exclude surety claims, but failed to expressly say so.

The court ordered the Rehabilitator to develop and submit a revised plan with 60 days or to apply for an order of liquidation.

For a copy of this decision, click here.

Daniel W. Gerber and Fallyn B. Reichert

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