On November 25, LandAmerica Financial Group, Inc. (“LandAmerica”) filed a Chapter 11 petition in Virginia, seeking bankruptcy protection. By separate agreement (the “Stock Purchase Agreement”), LandAmerica agreed to sell Commonwealth Land Title Insurance Company (“Commonwealth”) to Chicago Title Insurance Company (“Chicago Title”) and Lawyers Title Insurance Company (“Lawyers”) and United Capital Title Insurance Company (“United”) to Fidelity National Title Insurance Company (“Fidelity”). The proposed sales will require approval of the Bankruptcy Court and various state insurance regulators. LandAmerica filed a first day motion seeking expedited approval of the sales, which could occur as early as late December. LandAmerica sought a hearing no later than December 11, but several parties -- including some of LandAmerica’s secured lenders -- appeared and objected to the expedited schedule. Based in part on those objections, the bankruptcy court tentatively set December 16 as the hearing date for approval of the sale.
Rehabilitation Under Nebraska Law
Neither Commonwealth nor Lawyers is a debtor in the Virginia bankruptcy proceeding because the Bankruptcy Code does not permit insurers to file for bankruptcy protection. Furthermore, a bankruptcy filing by a non-insurance holding company parent of insurance company subsidiaries does not in and of itself trigger insolvency proceedings against the insurance company subsidiaries. Rather, each state has a regulatory agency which is responsible for monitoring the financial health of insurance companies authorized to do business in the state. When state regulators determine that an insurance company is in financial trouble, they are generally empowered by state law to take appropriate steps to protect the policyholders and claimants of the company.
In Nebraska, these steps may include an Order of Supervision, an Order of Rehabilitation or an Order of Liquidation. In relevant part, pursuant to the financial regulation provisions of the Nebraska Insurance Code (§ 44-4801, et seq.) the Director may apply by petition to the district court of Lancaster County (the “Court”) for an order authorizing the Director to rehabilitate an insurer domiciled in Nebraska where the insurer is in such condition that the further transaction of business would be hazardous financially to its insureds or creditors or the public. Such Orders of Rehabilitation were issued against Commonwealth and Lawyers on November 26, 2008. In summary, an Order of Rehabilitation allows a company to continue its existence, but the Director is appointed as the Rehabilitator and given the power to manage the company until the identified problems are corrected. If the problems cannot be corrected, the company may still be placed into liquidation by a subsequent Order of Liquidation.
The goal of a rehabilitation is to return the financially troubled insurer to strength and make it an active and profitable company, while at the same time protecting policyholders, creditors and the public. The Rehabilitator is given broad powers in both the Court order and in the statute, as well as a great deal of discretion to take actions to correct the conditions that caused the financial problems and prepare a plan to save the company. Furthermore, all powers of the Company’s directors, officers and managers are suspended during the rehabilitation process and must be delegated to the Rehabilitator until the rehabilitation is terminated. If the Rehabilitator determines that reorganization, consolidation, conversion, reinsurance, merger, or other transformation of the insurer is appropriate, the Rehabilitator prepares a plan (which must be approved by the Court) to effect such changes. Following an Order of Rehabilitation, a ninety day stay is imposed on all pending actions or proceedings in any state court in which the financially impaired insurer is a party or is obligated to defend a party.
Under Nebraska insurance law, the protection of the interests of insureds, claimants, and the public requires the timely performance of all insurance policy obligations. Accordingly, normal payment of claims should continue during the rehabilitation process. However, it is within the Director’s authority to suspend the payment of policy obligations for a period of up to six months without: (i) petitioning the Court for approval; or (ii) petitioning the Court for an Order of Liquidation. Otherwise, a financially impaired insurer will be released from rehabilitation when the Rehabilitator petitions the Court, and the court agrees, that the goals of the rehabilitation have been accomplished and that grounds for the rehabilitation no longer exist.
If the Director does not believe a company’s financial problems can be corrected or that continued operation of the company would be harmful to the company’s policyholders, creditors, or the public, then the Director can seek an Order of Liquidation from the appropriate state court. Under an Order of Liquidation, the Director is appointed as Liquidator of the company. The Liquidator will then appoint a Receiver to manage the actual liquidation process. Unlike a conservation or rehabilitation proceeding, normal payment of claims does not continue during this process of liquidation. If sufficient assets remain following the liquidation proceeding, the Liquidator will seek court approval to make a distribution of the insolvent insurer’s remaining assets. A distribution of assets may occur only after all of the insurer’s liabilities have been finalized. Furthermore, a distribution to policyholders may generally occur only after distributions have been made to satisfy other higher priority obligations such as administration costs, secured claims, and debts due employees. In summary, distributions of the remaining assets of the estate are made by priority level and are made on a pro-rata basis, meaning that each allowed creditor at the same priority level receives payment at the same percentage of its claim.
Other than the Orders of Rehabilitation, very little information has been made publicly available by the Nebraska Department of Insurance at this time. We will continue to monitor the proceedings and any actions taken by the appointed Rehabilitator.
Availability of Reinsurance
On November 26, Fidelity executed a reinsurance agreement with respect to Lawyers, Chicago Title issued a reinsurance agreement with respect to Commonwealth and United, and Chicago Title executed a reinsurance agreement with respect to LandAmerica NJ Title Insurance Company. These reinsurance agreements are each effective as of November 26 and continue until terminated or canceled pursuant to their terms.
Highlights of Each Reinsurance Agreement:
- The agreement only reinsures title binders, commitments and policies issued during the effective term of the reinsurance agreement. By its terms, the agreement would not provide reinsurance for any such obligations issued prior to November 26. It is unclear if an endorsement bringing the date of a policy forward would be covered by the reinsurance agreement.
- If the amount of a title policy will exceed $10 million, then for the reinsurance to be effective, the reinsurer must provide express consent to the issuance of the policy.
- Certain types of insurance under a title policy will require prior consent by the reinsurer (e.g., title insurance on air rights, lien priority based on a subordination agreement). Similarly, certain endorsements will require the reinsurer’s prior consent (e.g., usury, creditors’ rights, mechanics’ lien coverage on insured amounts greater than $5 million if construction has commenced prior to policy issuance).
- Any party has a right to terminate the agreement upon 15 days prior written notice.
- Any party also has certain rights to cancel the agreement immediately in the event of an insolvency proceeding, a material violation of the agreement, or the enactment of any law prohibiting reinsurance.
- If a cancellation of the agreement occurs, then the reinsurer will honor binders, commitments or policies validly issued during the agreement term prior to cancellation. It is unclear if this agreement by the reinsurer also extends to a termination of the agreement.
What does this mean for you?
- By their terms, the reinsurance agreements do not provide reinsurance for any binders, commitments or policies issued prior to November 26, 2008.
- Given the need for prior written consent from the reinsurer in many instances, the short window during which any party may terminate, and the uncertainty regarding reinsurer liability in the event of a voluntary termination, we recommend that any buyer of title insurance from a LandAmerica title insurance subsidiary during the term of the reinsurance agreement obtain an affirmative reinsurance certificate and an insured closing letter from the reinsurer at closing. As a practical matter, the ability of Fidelity or CTIC to respond to a large volume of such requests in a timely manner may be limited.
- The reinsurance agreements do not address funds held by Commonwealth or Lawyers. Even if reinsurance is available to you on your title policy, we recommend that you obtain an acceptable insured closing letter from the reinsurer to cover handling of funds.
- Because the proposed sales are structured as stock purchases rather than mergers, neither CTIC and Fidelity, as buyers, nor Fidelity National Financial, Inc. (“FNF”) will assume any obligations of Commonwealth and Lawyers, respectively, unless they enter into express agreements to assume those obligations. At this early stage of the bankruptcy case, information has not been made available by LandAmerica sufficient for us to evaluate what agreements, if any, may now exist or may be entered into on or prior to closing of the stock sale by the buyers or FNF which may provide for the assumption or re-insurance of some or all of the obligations under existing title policies issued by Commonwealth or Lawyers. We anticipate that LandAmerica will provide additional information about the transactions as part of its disclosure obligations in the bankruptcy case and the insurance regulatory proceedings. We will be monitoring the case and will evaluate such disclosure as it becomes available.
- We recommend that you evaluate the availability of any reinsurance on a case-by-case basis.
- Based on the information that has been made publicly available at this time, it appears that the availability of any reinsurance, absent receipt of an express agreement from the reinsurer, is limited.
Please be aware that the general overview of the Nebraska regulatory framework should not be viewed as a statement on the necessity of the actions that have been taken, the financial status of Commonwealth or Lawyers, or the probable outcome of the rehabilitation proceedings. We do not have sufficient information at this time to provide a specific analysis of the current proceedings. The information we have provided is based on publicly available information at this time.