In the Matter of Liquidation of the Union Indemnity Insurance Co. of New York, 1998 N.Y. Int. 0075 (June 11, 1998).

INSURANCE LAW - SECURITY FUND PAYMENT

ISSUE & DISPOSITION

Issue

Whether under New York Insurance Law the Property/Casualty Insurance Security Fund's Administrator must (1) pay post liquidation interest on bond holders' claims and (2) pay interest and attorney's fees in excess of the instruments' liability limit?

Disposition

Yes. The Security Fund Administrator must pay both post liquidation interest and attorney's fees even though the total payment may exceed the insuring instruments' limit of liability. Statutory interpretation, legislative history, and case law indicate that the applicable statutory provisions do not preclude a claimant from receiving post liquidation payments or attorney's fees from the Security Fund.

SUMMARY

In 1983, Respondent Royal Bank and Trust Company received bonds from Union Indemnity securing payment through Harlan Coal Processors. Subsequently, Union was placed into liquidation and Royal filed for indemnification from the New York State Insurance Security Fund. Following protracted litigation, the fund's superintendent appealed an order of the Appellate Division which awarded Royal payment of post liquidation interest and attorney's fees in excess of the limit of liability of the bonds.

Contrary to the superintendent's urging, the court held that this is a case of "pure statutory reading and analysis" resting on legislative intent. Therefore, the rationality or reasonableness of the superintendent's interpretation is not at issue. Upon review of the legislative history of the Insurance Law and a discussion of its relevance to the financial guaranty surety bonds at issue, the Court concluded that the legislature intended the Security Fund's mandate to include the payments of post liquidation interest and attorney's fees.

The court held, contrary to the superintendent's assertion, that the prohibition of post liquidation interest payments under Insurance Law § 7434(b) only applies to claims against insolvent estates and not the Security Fund. The superintendent's public policy argument that payment of interest in this case might severely harm the Security Fund was also rejected.

The court also declined to adopt the superintendent's alternative argument that Insurance Law § 7608(c) prohibited payments of interest and attorney's fees that exceed the limit of liability on the surety bonds. That interpretation is incorrect because: (1) there is no statutory distinction between payment of pre- and post-liquidation interest; (2) on their face the bonds expressly provide for payment of interest and attorney's fees; and (3) such an interpretation would defeat the "core purpose" of the Insurance Law's 1984 recodification.

In dissent Judge Levine asserts that the majority decision is a sharp departure from the usual deference awarded the superintendent in similar Insurance Law interpretations. Judge Levine believes that the superintendent "is in the best position to fully appreciate the practical and foreseeable legal effects on his duties" of the complex statutory framework.

Prepared by the liibulletin-ny Editorial Board.