Insights

Lumbermens Placed into Rehabilitation, Insurance Policyholder Advocate

After nearly a decade of supervision by the Illinois Department of Insurance, Lumbermens Mutual Casualty Company and its sister company, American Manufacturers Mutual Insurance Company (collectively, "Lumbermens"), have been placed in rehabilitation by order of the Cook County Illinois Chancery Court ("Order") on motion of the State of Illinois Director of Insurance. See Lumbermens order of rehabilitation 7-2-12 . Rehabilitation is the first step to what will soon be the complete liquidation of the insurers.

Since 2003, Lumbermens and American Manufacturers have been operating under the supervision of the Director of Insurance through a series of corrective orders and run-off plans. Throughout that time, the insurers have been reporting to the Director of Insurance and the Lumbermens' Working Groups of the National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Guaranty Funds (NCIGF).

Given Lumbermens' limited and steadily declining cash reserves, the Director of Insurance, as the Rehabilitator of the insurers, will assume possession and control of all of the property of the insurers with the intent to marshal and liquidate their assets, business, and affairs. The Order directs the Rehabilitator to wind down and terminate the business and affairs of the insurers.

During the wind down and termination process, the Rehabilitator has the authority to act to resolve direct and reinsurance claims on behalf of the insurers. The Order specifically precludes reinsurers from resolving claims directly with insureds without the consent of the Rehabilitator except where the reinsurance agreement expressly provides for payment to or on behalf of an insured on behalf of Lumbermens or American Manufacturers.

What does this mean? For the very near future, claims will continue to be handled by the third party administrator that has been handling claims. However, since the ultimate plan is to liquidate the insurers, those claims will soon be shifted to the various state insurance guaranty funds. Whether and to what degree a guaranty fund will pay such claims will depend on the rules governing those particular funds. Policyholders will be directed to the guaranty fund of the state in which the policyholder resides. The rules governing the operations of the state insurance guaranty funds vary from state to state and limit the amount of recovery available to insureds. The guaranty funds generally cap the amount of any claims that the fund must pay (Alabama, for example, limits claims to $150,000), and many limit the ability of high net worth insureds to access the fund.

Policyholders who have unresolved coverage claims with Lumbermens or who have historic Lumbermens insurance should consider consulting coverage counsel for advice and guidance as they work their way through this process. Once claims are transferred to the guaranty associations, policyholders should take prompt action to ensure that all claim formalities and deadlines are met. Guaranty associations invariably impose a deadline on when a claim can be filed. Also, because claims not covered by the guaranty associations may be eligible for reimbursement from the estates of the insurers, policyholders should take appropriate actions to preserve those claims through the estate liquidation process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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