Pa. Court Upholds Legion Insureds’ Direct Access to Reinsurers’ Funds

July 24, 2005

Without hearing arguments, the Pennsylvania Supreme Court has upheld a lower court ruling that permits four corporations to bypass the state regulator’s liquidation procedures involving failed carrier Legion Insurance Co. and obtain their settlement monies directly from Legion’s reinsurers.

The high court affirmed a 2003 Commonwealth Court decision allowing American Airlines Inc., Pulte Homes Inc., Rural/Metro Corporation and the Psychiatrists’ Purchasing Group to negotiate settlements directly from Legion’s reinsurers. This would exempt those proceeds from the state’s liquidation system for distribution to all policyholders.

The insureds had argued, and the court agreed, that Legion and its affiliate, Villanova Insurance Co., had been fronting companies and were not their direct insurers.

As fronting companies, Legion and Villanova retained very little underwriting risk and made money by charging insureds fees, often to satisfy state licensing requirements. The risk was largely borne by the insureds and reinsurers.

The finding is a departure from tradition. In the past, all proceeds gained following a liquidation order have gone into the state liquidation fund to benefit all policyholders.

The Pennsylvania Insurance Department appealed the lower court ruling, arguing that state law did not support the third party rights of these four large policyholders. Pennsylvania Insurance Commissioner Diane Koken warned that allowing these four insureds to seek remedy from reinsurers would raising their interests over the interests of the “tens of thousands of Legion’s other policyholders, creditors, claimants and the public, thereby creating an improper subclass of preferred policyholders.”

The liquidation of Legion and Villanova has been in effect since July 28, 2003.

Legion Insurance Company and Villanova Insurance Company were both headquartered in Philadelphia and ultimately owned by Mutual Risk Management Ltd., a publicly held company organized in Bermuda. The Legion insurance group also included an Illinois surplus lines insurer, Legion Indemnity, which was liquidated in April 2003.

Legion and Villanova transacted insurance business in all 50 states. The companies wrote mainly commercial insurance products, including workers’ compensation, medical malpractice, general liability, group accident and health, and property coverages.

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