| An insurer is subject to much regulation in order to protect its insureds and creditors in situations in which the insurer suffers financial difficulties. Such regulation provides several methods of attempting to correct the insurer's problems. Rehabilitating the insurer is one such method. Rehabilitation is an attempt to salvage the insurer.
Basis for rehabilitation
Rehabilitation proceedings are a type of "delinquency proceedings." The other type of delinquency proceedings are liquidation proceedings. Delinquency proceedings are permitted by state statutes, a majority of which are based on the Insurers Supervision, Rehabilitation and Liquidation Act (NAIC Model Act) promulgated by the National Association of Insurance Commissioners.
Timing of rehabilitation
An insurance commissioner generally does not institute formal rehabilitation proceedings until after certain "summary actions" are taken. Such actions include supervision of an insurer and seizure of the insurer's property. If the summary actions are unsuccessful, rehabilitation proceedings may become necessary.
Grounds for rehabilitation
The ground upon which rehabilitation is most commonly based is that an insurer's further transaction of business would be financially hazardous to its insureds, its creditors, or the public. Financially hazardous conditions include adverse findings in the insurer's financial reports, recent operating losses, a dwindling surplus, and the imminence of insolvency.
Effect of rehabilitation order
If an insurance commissioner seeks and obtains a court-ordered rehabilitation order, he is appointed as the insurer's rehabilitator. The rehabilitator's function is to determine the financial status of the insurer and then to conduct its business according to a plan to remove the underlying problems that were the grounds for the rehabilitation. In order to do so, the rehabilitator is vested with title to the insurer's assets and the powers of the insurer's directors and management. The rehabilitator may also avoid certain fraudulent transfers made by the insurer.
A rehabilitation order may also have the effect of preventing enforcement of any prior judgment against the insurer, staying any pending lawsuit against the insurer, or enjoining the institution of suit against the insurer.
Termination of rehabilitation
Rehabilitation may end in either of two ways. The rehabilitator or the insurer's officers or directors may petition the court for termination of the rehabilitation upon a showing that the purposes of the rehabilitation have been met. If the court agrees, it may restore to the insurer possession of its property and control of its business. However, rehabilitation may also come to an end if the rehabilitator petitions for liquidation of the insurer due to the futility of the rehabilitation process. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |