FLORIDA’S INSURERS REHABILITATION AND LIQUIDATION ACT: WHAT HAPPENS IN FLORIDA WHEN INSURERS BECOME INSOLVENT

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Current state of affairs

Even before Hurricane Ian made landfall and devastated southwest Florida in September 2022, six property & casualty insurers had voluntarily declared themselves insolvent and allowed the State to assume control. Since then, experts have estimated insurance industry losses associated with Hurricane Ian to be nearly $50 billion, with litigation expenses adding $20 billion to the total. To address this potentially cataclysmic event for Florida insurers, the Florida legislature convened a special legislative session from December 12-16, 2022, which resulted in new legislation affecting the property insurance claims process, reinsurance, and regulation of insurers.  And on March 24, 2023, in what some critics consider “an insurance industry dream come true,” Florida enacted legislation that substantially revamped the state’s tort laws.

There are scores of articles focusing on the so-called tort reform.  However, not much is written on how Florida law governs involuntary insurer insolvencies, an issue that may become more prevalent with the climatic as well as legislative shifts.

The mechanics of an insurance company receivership in Florida

As a preliminary matter, insurers are excluded from liquidation under the Bankruptcy Code.  See 11 U.S.C. § 109(b)(2).  Instead, they are governed by each state’s receivership laws, such as Florida’s Insurers Rehabilitation and Liquidation Act, §§ 631.001-631.401, Florida Statutes (the “Act”).  Nevertheless, the insurer receivership process bears important similarities to traditional bankruptcy proceedings.  See the table below for some similarities and interesting differences between bankruptcy proceedings and insurers receiverships.

Florida’s Act provides, inter alia, a comprehensive scheme for administering insurer receiverships.  In a typical receivership, the receiver marshals the insurer’s assets, adjudicates claims against it, and makes distributions to claimants pursuant to a statutory distribution scheme.  

In Florida, an insurer’s receiver is not the Office of Insurance Regulation.  Instead, it is the Department of Financial Services.  However, the two entities work in tandem.  If the Office of Insurance Regulation examines an insurer and determines that it is insolvent or financially impaired, the director of the Office of Insurance Regulation must notify the Department of Financial Services of its determination and provide it with:

all necessary documentation and evidence. If the director must notify the [Department of Financial Services] of a determination regarding a property insurer, the notification must include an affidavit that identifies the grounds for rehabilitation pursuant to s. 631.051; the date that each insurer was deemed impaired of capital or surplus, as the terms impairment of capital and impairment of surplus are defined in s. 631.011, or insolvent, as the term insolvency is defined in s. 631.011; a concise statement of the circumstances that led to the insurer’s delinquency; and a summary of the actions taken by the insurer and the [Office of Insurance Regulation] to avoid delinquency.

• 631.031(1), Fla. Stat. This puts the matter in the hands of the Department of Financial Services.

Types of insurance company receiverships available

After receiving the Office of Insurance Regulation’s determination and supporting evidence, the Department of Financial Services may commence one of the following types of involuntary “delinquency proceedings” by petitioning the Circuit Court in Leon County, Florida:

• Rehabilitation, which is proper where the insurer, inter alia:
  • Is impaired or insolvent.
  • Has failed to comply with an order of the [Office of Insurance Regulation] to increase its capital or surplus.
  • Is in such condition or is using or has been subject to such methods or practices in the conduct of its business as to render its further transaction of insurance hazardous to its policyholders, creditors, or the public.
  • Has failed—or its parent corporation, subsidiary, or affiliate controlled by the insurer or the parent corporation has failed—to submit its books and records to the [Office of Insurance Regulation] for examination.
  • Has concealed or removed records or assets.
  • Through its board of directors or governing body is deadlocked in the management of its affairs. See § 631.051, Fla. Stat.

• Liquidation, which is proper “upon any of the grounds specified in s. 051, or if the insurer:
• Is or is about to become insolvent.
• Is an insolvent insurer and has commenced or is attempting to commence voluntary liquidation or dissolution except under this code.
• Has not completed its organization and obtained a certificate of authority as an insurer within the time allowed therefor under any applicable law. 631.061, Fla. Stat.
• Conservation, which is proper as to a foreign or alien insurer, upon the grounds specified in sections 051 or 631.061, and:
• where the insurer has failed to comply with an order of the [Office of Insurance Regulation] to make good an impairment of its trusteed funds; or
• where the insurer’s property has been sequestrated in its domiciliary sovereignty or elsewhere. See § 631.071 and 631.081, Fla. Stat.

An insurer may contest a delinquency petition, just as a debtor may contest an involuntary bankruptcy petition.  Often, the resulting litigation between the insurer and Department of Financial Services turns on whether the insurer’s “assets” and “liabilities,” as defined by Florida law, warrant a finding of insolvency or impairment of capital or surplus, as defined below:

• Impairment of capital: when the minimum surplus required to be maintained in s. 408has been dissipated and the insurer is not possessed of assets at least equal to all its liabilities together with its total issued and outstanding capital stock, if a stock insurer, or the minimum surplus or net trust fund required by s. 624.407, if a mutual, reciprocal, or business trust insurer.   § 631.011(12), Fla. Stat.
• Impairment of surplus: when the surplus of a stock insurer, the additional surplus of a mutual or reciprocal insurer, or the additional net trust fund of a business trust insurer does not comply with the requirements of s. 408. § 631.011(13), Fla. Stat.
• Insolvency: when all the assets of the insurer, if made immediately available, would not be sufficient to discharge all its liabilities or that the insurer is unable to pay its debts as they become due in the usual course of business. 631.011(14), Fla. Stat.

The receiver: friend to some, foe to others

Once the Department of Financial Services becomes an insurer’s receiver, it undertakes the crucial role of marshalling the assets of the insurer’s estate wherever they may be found—a role analogous to a bankruptcy trustee. To do so, it negotiates and litigates on behalf of the insurer, and “may pursue any actions for damages or other recoveries on behalf of the insurer’s estate and the insurer’s policyholders, creditors, and other claimants.”  § 631.3915, Fla. Stat.  This may involve pursuing breach of fiduciary duty claims against the insurer’s directors and officers, professional malpractice claims against the insurer’s actuaries and accountants, breach of contract claims, preferential or fraudulent transfers against insiders, and other causes of action against third parties.  The litigation is invariably complex, especially if it involves testimony from other “players” in Florida’s insurance industry, such as:

• Citizens Property Insurance Company, the state-created property insurer of last resort, who also manages the Depopulation Program (whereby Citizens matches policyholders with insurers interested in removing their policy from Citizens and providing private-market coverage for their policy). See 627.3511, Fla. Stat.
• Florida Insurance Guaranty Association, who handles the claims of insolvent property and casualty insurers. See 631.55, Fla. Stat.
• AM Best and Demotech, the credit rating agencies whose ratings of Florida property insurers are widely considered.

Examples of litigation pursued by Florida’s receiver

The following are some notable examples of litigation pursued by the Department of Financial Services as receiver in furtherance of maximizing the “recovery of assets for the benefit of the insurer’s estate.”  § 631.001(3)(h), Fla. Stat.

• Action by receiver to direct insurer’s former law firm to deliver to it certain documents and files belonging to the insurer, over which the firm had asserted an attorney’s retaining lien. Noting that the Act vests the receiver by operation of law with “title to all of the property, contracts, and rights of action, and all of the books and records, of the insurer, wherever located,” § 631.141(2), Fla. Stat., the court directed the firm to deliver the documents to the receiver.  See In re Receivership of Syndicate Two, Inc., 538 So. 2d 945 (Fla. 1^st DCA 1989).
• Proceeding by receiver against bank to preserve certificates of deposit (CDs) pledged by insurers to bank as collateral for loans the bank had made to the insurers’ affiliates and principals, pending determination of whether the CDs were estate assets. The issue in controversy was whether the bank could claim the insurers’ CDs as an offset vis-à-vis the loans, which were then in default.  See Fla. Dep’t of Fin. Services, as Receiver of First Com. Ins. Co. et al. v. Branch Banking and Trust Co., 40 So. 3d 829 (Fla. 1^st DCA 2010).
• Malpractice action against homeowner insurers’ independent accountant for failing to detect that insurers were rendered insolvent at the conclusion of an active storm season, thereby preventing the Department of Financial Services from commencing receivership prior to start of another active storm season, which worsened the insolvency. An issue in controversy was whether the accountant should have detected that the insurers prematurely “closed” certain insurance claims after paying modest sums on them and thus improve their surplus on their annual statements.  See Fla. Dep’t of Fin. Services, as Receiver of Southern Family Ins. Co. et al. v. Deloitte & Touche, LLP, Case No. 2010 CA 003201 (Fla. 2^nd Ct.).
• Breach of fiduciary duty action against officers and directors of insurer for, inter alia, inflating the amount of reinsurance that the insurer could claim. Generally, for a ceding insurer to receive credit for reinsurance, its reinsurer must satisfy the various financial and other criteria identified in § 624.610, Fla. Stat.  Otherwise, the insurer may reduce its liability by ceding risk to an unaccredited reinsurer only in the amount of funds held by the ceding insurer under a reinsurance contract with the reinsurer as security for the payment of obligations thereunder “if the security is held in the United States subject to withdrawal solely by, and under the exclusive control of, the ceding insurer[.]” § 624.610(5), Fla. Stat.  As the “security” is usually cash in U.S. dollars, the ceding insurer must hold cash collateral from its unaccredited reinsurer to reduce its liability. § 624.610(5)(a), Fla. Stat.  An issue in controversy was whether the insurer’s officers and directors misrepresented the amount of cash collateral provided by the insurer’s unaccredited reinsurers. See Fla. Dep’t of Fin. Services, as Receiver of Guarantee Ins. Co. v. Mariano et al., Case No. 2017 CA 2421D (Fla. 2^nd Ct.)

Concluding remarks

With property insurance rates soaring, and catastrophic weather patterns battering Florida, insurers are expected to face not only greater risks, but greater scrutiny from the State.  The insurance industry should be prepared for greater use of receiverships.

Similarities and differences between bankruptcy and insurer receiverships

Topic	Insurer Receivership	Bankruptcy Proceeding
Venue for receivership or bankruptcy.	Exclusively Leon County. § 631.021(2), Fla. Stat.	Usually, the district where the domicile, residence, principal place of business, or principal assets of the debtor have been located for the 180 days preceding the filing. 28 U.S.C. §1408(1)
Who initiates an involuntary receivership / bankruptcy.	The OIR makes a recommendation to the DFS, and the DFS commences an action in court. See § 631.031(1), Fla. Stat.	Three or more entities, each of which is either a holder of a claim against the debtor that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $10,000 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims. 11 USC 303(b)(1). See also 11 USC 303(b)(2), (3), and (4).
How the involuntary receivership / bankruptcy case is commenced	The OIR’s Director notifies the DFS’s Director, identifying, inter alia, the grounds for the initiation of delinquency proceedings. See § 631.031(1), Fla. Stat. Then, the DFS commences a proceeding (for conservation, rehabilitation, or liquidation) by applying to the court for an order directing the insurer to show cause why the DFS should not have the relief prayed for.	By filing a petition under chapter 7 or 11 of the Bankruptcy Code with the bankruptcy court. 11 USC 303(b)(1).
Response deadlines after commencement of an involuntary receivership / bankruptcy.	On the return of an order to show cause, and after a full hearing, the court shall deny or grant the DFS’s application, together with such other relief as the interests of the policyholders, creditors, stockholders, members, subscribers, or public may require. An insurer subject to an order to show cause … must file its written response to the order, together with any defenses it may have to the DFS’s allegations, no later than 20 days after service of the order to show cause. § 631.031(3)	“The debtor … may file an answer to a petition under this section.” 11 USC 303(d). “Defenses and objections to the petition shall be presented in the manner prescribed by Rule 12 F.R.Civ.P. and shall be filed and served within 21 days after service of the summons, except that if service is made by publication on a party or partner not residing or found within the state in which the court sits, the court shall prescribe the time for filing and serving the response.” Bankruptcy Rule of Procedure 1011(b)
Automatic Stay against creditors?	Yes. See § 631.041(1), Fla. Stat.	Yes. See 11 U.S.C. § 632(a)(l) – (f)
Sanctions for violating the Stay?	Yes. § 631.041(1), Fla. Stat.	Yes. See 11 U.S.C. § 362(k) (“actual damages, including costs and attorneys’ fees, and, in appropriate circumstances … punitive damages.”)
Insolvency, defined	All the assets of the insurer, if made immediately available, would not be sufficient to discharge all its liabilities or that the insurer is unable to pay its debts as they become due in the usual course of business.	“The sum of an entity’s debts is greater than all of its property, at a fair valuation, exclusive of— (1) property transferred, concealed, or removed with intent to hinder, delay, or defraud the entity’s creditors; and (ii) property that may be exempted from property of the estate under section 522 of this title.” 11 USC § 101(32)(A)
	ADVERSARY PROCEEDINGS
Tolling of statute of limitations to file action on behalf of the insurer / debtor estate?	Yes: “The running of any unexpired statute of limitations … [is] tolled for a period of 4 years from the date the court enters an order placing the insurer in receivership.” § 631.042(2), Fla. Stat.	No. But see In re International Admin. Services, Inc., 48 F.3d 689 (11th Cir. 2005) (“§ 546 is … subject to waiver, equitable tolling, and equitable estoppel.”).
Voidance of preferential transfers, lookback period	4 months prior to commencement of delinquency proceeding (for non-insiders). § 631.261(1)(a), Fla. Stat. Between 4 months and 1 year prior to commencement of delinquency proceeding (for insiders). § 631.261(1)(b), Fla. Stat.	90 days (for non-insiders). 11 U.S.C. § 547 1 year (for insiders) 11 U.S.C. § 547
Voidance of fraudulent transfers, lookback period and presumption.	1 year prior to commencement of delinquency proceeding. If 6 months prior to commencement, the transfer is presumed void and fraudulent. § 631.262(1), Fla. Stat.	Yes. See 11 U.S.C. § 632(a)(l) – (f)
Exemplary damages available.	An officer, director, agent, or employee of any person engaged in the business of insurance who willfully obtains or uses any funds, assets, or property of an insurer such that it jeopardized “the safety and soundness of an insurer or was a significant cause of the insurer being placed in receivership,” the personal shall be liable for triple the full amount of any funds, assets, or property obtained or used. § 631.157(1), Fla. Stat.	As allowed by general law. See, e.g., § 768.72, Fla. Stat. (punitive damages).