In a case challenging the "final dividend plan" proposed by the New Jersey Insurance Commissioner to complete the receivership of Integrity Insurance Company (Integrity), the New Jersey Supreme Court rejected the plan because it improperly sought to account for incurred but not reported (IBNR) claims. The Court held that IBNR claims are not "absolute," as is required by New Jersey statute and therefore they could not be resolved now as contingent claims, allowing for the administration of the liquidation estate to be ended. In re Liquidation of Integrity Insurance Co., (A-91-06/ A-29-07) (Dec. 13, 2007).
Along with its direct application to insurer insolvencies, this ruling may be of interest in connection with issues arising under section 524 of the Bankruptcy Code where the rights of unknown future claimants also are addressed. Additionally, this ruling could be of interest in bankruptcy contexts whenever the potential liability of insurers is estimated or determined, as it has been in connection with a number of proposed plans in pre-packaged chapter 11 bankruptcy filings for entities seeking bankruptcy protection due to their asbestos exposures.
Here, Integrity was a property and casualty insurer believed to have in excess of $1 billion in long-tail IBNR claims. In 1986, Integrity had been placed in receivership and has been administered since then by New Jersey's Insurance Commissioner. In order to complete the receivership and end the Commissioner's administration of Integrity, there must be an approved "final dividend plan." Complicating the task of creating a final dividend plan, a New Jersey statute specifies that the Commissioner cannot create a plan calling for the payment of "contingent claims" unless those claims are "absolute." See N.J.S.A. § 17:30C-9. Because of this restriction, the Liquidator believed it had three options: (1) create and implement a plan accounting only for present claims and cut-off any continuing liability for IBNR claims; (2) continue to administer the estate until most or all IBNR claims have come to fruition; or (3) create a plan that accounted for IBNR claims by rendering them "absolute" through actuarial estimations reduced to present value. The Liquidator chose the last of these options, reasoning that the other options either would be unfair to policyholders and claimants alike or would require the continued administration of the estate for many years at high cost.
Integrity had been estimated to have in excess of $1 billion in long-tail IBNR claims, with a present value in excess of $800 million. In choosing to include the IBNR claims in the plan, the Commissioner sought to "collect any reinsurance that may be due on" those claims for use in the final distribution. Accordingly, the case addressed the potential for estimating and accelerating very substantial reinsurer payments.
The decision to include IBNR claims in the plan, and whether this is permitted under the applicable New Jersey statute requiring contingent claims to be "absolute," was at issue. Although the plan was advocated by the Commissioner and amici representing significant policyholders, it was challenged by the Reinsurance Association of America. The plan was initially approved by a trial court (the Chancery division), but the New Jersey Appellate Division rejected the plan because of the inclusion of IBNR claims, reasoning that "[t]hey are nothing more than an estimate of the value of a potential actual loss that accounts both for the possibility that the loss will not occur and for the possibility that the extent of the loss will differ from the actuarial estimate. Accordingly, IBNR claims are not absolute and are prohibited."
In its review, the New Jersey Supreme Court stated that IBNR claims are "those [claims] that may, by virtue of historical experience, be expected to be filed, although the claimants, the nature of the claim, the responsibility for the claim and the amount of the claims are all unknown." The Court considered various definitions of "absolute" and stated that it "is synonymous with unconditional or non-contingent" and further reasoned that it "means something considered to be independent of and unrelated to anything else." (internal quotation marks and modifications omitted). The Court reasoned that an IBNR claim is not "absolute" because, as an actuarial estimate based on other claims and past experience, it fails to "stand on its own."
There were two dissenters. They contended that the Commissioner is imbued with broad authority to establish the most equitable plan and were critical of the limitations imposed by the majority. The dissenters complained that the majority would either force the Commissioner to close Integrity's estate without IBNR claims and thereby "effect a forfeiture by cutting off a large number of long-tail claims," or force the continued administration of the estate at a cost of "millions of a dollars a year and delay [of] final payment to parties with presently document claims." The dissenters argued that the statute was not drafted with IBNR claims in mind and should be construed broadly to include them. In closing, they hoped "that this case will prompt the Legislature to address the specific difficulties that IBNR claims present in liquidation."