In a matter of first impression under New Jersey law that potentially impacts both the reinsurance and insurance industry and policyholders of insolvent insurance companies, the New Jersey Supreme Court affirmed the appellate division's ruling that the Fourth Amended Final Dividend Plan (the "FDP") proposed by the Liquidator for Integrity Insurance Company ("Integrity") should not be approved because it unlawfully allowed incurred but not reported (“IBNR”) claims to share in the insolvent insurer's estate. See In the Matter of the Liquidation of Integrity Ins. Co., A-29-07 (N.J. Dec. 13, 2007).

Integrity has been in liquidation since 1987. Pursuant to New Jersey’s Insurer Liquidation Act, N.J.S.A. 17:30C-1 to –31 (the "Act"), the Liquidator established a bar date of March 25, 1988, by which time all claims against Integrity, including claims of policyholders based on losses covered under the insurance policies, had to be filed. The order establishing the bar date permitted claimants who had not yet been presented with a specific loss to file "policyholder protection claims." The filing of such a claim would permit a specific claim to be filed when the particulars became known, even if that occurred after the bar date. Approximately 26,000 claims, including thousands of "policyholder protection claims," were filed against Integrity by the March 25, 1988 bar date. The Liquidator estimated the potential liability on "policyholder protection claims," i.e., unknown, theoretical losses (such as IBNR), at more than two billion, a significant portion of which would likely be billed to Integrity’s reinsurers.

In 2004, the Chancery Division approved the FDP submitted by the Liquidator, which included provisions permitting the Liquidator to allow policyholders to file IBNR claims and to treat those claims as if they were actual losses covered under Integrity's insurance policies. The Reinsurance Association of America ("RAA"), which had opposed the FDP in the Chancery Division, appealed to the New Jersey Appellate Division arguing that IBNR losses do not constitute "claims" within the provisions of the Act, specifically Section 17:30C-28, which prohibits approval of a claim unless it becomes "absolute." The RAA contended that since IBNR losses are derived from estimation techniques that are never "absolute," they could not be estimated in a reasonable manner sufficient to justify payment under the Act. The Appellate Division agreed and rejected the Liquidator's position that IBNR losses constituted claims within the statutory requirements for participation in the estate.

The New Jersey Supreme Court affirmed the Appellate Division's ruling, holding that the "language [of Section 17:30C-28 of the Act] does not permit the substitution of estimated claims for 'absolute' ones, even when those estimated claims result from the application of sophisticated actuarial methodologies." In re Liquidation of Integrity, at 2. Relying on the plain language of the statute, the court found that its "overarching legislative intent" is to bar any contingent claims from participation in Integrity's estate, including IBNR claims. Id. at 12. As a result of the court's decision, Integrity's reinsurers will not be responsible for IBNR claims, thus potentially reducing the liability of those reinsurers by millions.

Click here to review a copy of the court's decision.