Effective October 1, Connecticut will allow domestic insurers to divide into two or more insurers. Public Act 17-2, An Act Authorizing Domestic Insurers to Divide, was signed by the governor on May 16. The act is modeled after Pennsylvania and Arizona statutes;[1] however, those are corporate statutes, whereas the new Connecticut law is dedicated to insurance. The act establishes an entirely new procedure, effectively a de-merger, which creates multiple distinct legal successors to the originating insurer.

In order to divide, an insurer must first create a plan of division that must be approved by the Connecticut Insurance Commissioner. The plan must designate, among other information, how liabilities (including insurance policies) will be divided between the resulting insurers; how the dividing insurer's assets, including real property, will be distributed; and how each of the new insurers will be governed. The plan must also provide for the manner of distributing ownership interests in the dividing insurer and the resulting insurers. Holders of ownership interests in the original insurer may lose their interest following the division, subject to appraisal rights, if applicable. The plan may be amended or abandoned until it is effective. All documents submitted to the commissioner, apart from the plan of division and incorporating documents, must be kept confidential.

The dividing insurer must approve the plan of division in accordance with its governance documents. If the insurer has specified a certain procedure for mergers, that process must also be followed for a division. Creditors that have lent money to the dividing insurer prior to October 1, 2017, and have the right to approve a merger must approve the division.

The commissioner may not disapprove a plan unless the commissioner finds the division will not protect policyholders and interest holders or it constitutes a fraudulent transfer. Once the plan is approved by the commissioner, a certificate of division describing the effect of the transaction is filed with the Connecticut's Secretary of State.

Following the division, each of the resulting insurers is individually liable only for the policies and liabilities that are allocated to that insurer, but the resulting insurers are jointly and severally liable for every policy and liability not allocated by the plan of division. This provision encourages well-planned divisions.

Challenges to new legislation are always possible. For example, a policyholder may object because some of the assets formerly available to pay claims are beyond the policyholder's reach. A policyholder might seek relief under the due process,[2] takings[3] or contracts clauses[4] of the United States Constitution; however, similar challenges have been turned away in what may be analogous situations.[5]

Summer Associate Nathaniel Nichols-Fleming contributed to this advisory.