When an insurer becomes insolvent and is placed in rehabilitation or liquidation, state insurance laws are very clear that reinsurance proceeds owed by the insolvent insurer’s various reinsurers may not be denied or reduced as a result of the insolvency. The insurer’s policyholders, however, may only look to the estate of the insurer for payment of claims. But, what happens in a situation where the insolvent insurer never took on any risk but merely acted as a fronting carrier for the reinsurer?

This issue was addressed by the Commonwealth Court of Pennsylvania in a case which resulted from the insolvency of Reliance Insurance Company. Reliance had acted as a fronting company for Swiss Reinsurance America Corporation (Swiss Re) on a loss portfolio transfer (LPT) of self-insured workers’ compensation risks for the Tribune Company. Swiss Re had, under a claims service agreement, been directly responsible for the payment of claims. On the insolvency of Reliance, Swiss Re refused to continue paying claims directly to Tribune unless the Pennsylvania Insurance Commissioner, as Liquidator, consented. The Liquidator refused to give his consent, and an appointed Referee found that Reliance had not borne any risk and thus Swiss Re, as the true insurer of these risks, should bear direct responsibility for payment of claims to Tribune.

The Commonwealth Court, in reviewing the findings and conclusions of the Referee, determined that the evidence established that Reliance was only acting as a fronting company that was used to pass through Tribune’s self-insured obligations to the “true obligor.” Since Reliance retained no risk and the claims service agreement with a third party administrator provided for Swiss Re’s direct funding of a claim account, Tribune, as the insured, should be permitted direct access to the funds owed by Swiss Re under the reinsurance agreement.