The Pennsylvania Supreme Court recently determined that an insolvent insurer’s obligations to its insureds terminate no later than 30 days after it enters liquidation regardless of whether the policies were cancelled prior to the liquidation date. The issue arose in the context of claims for service contract reimbursement insurance policies. In Warrantech Consumer Products Services, Inc. v. Reliance Ins. Co. in Liquidation, the plaintiff sought to hold the liquidated insurer liable for reimbursement for various proofs of claim.
By way of background, Warrantech Consumer Products Services, Inc. (“Warrantech”) was insured under various insurance policies issued by Reliance Insurance Company (“Reliance”). The insurance policies also provided that Reliance would indemnify Warrantech for claims during the policy periods even after the cancellation of the Reliance policies. Reliance cancelled coverage in 2000, but was still responsible for any of Warrantech’s claims occurring in 1999 and 2000. Accordingly, pursuant to the policies and indemnification agreements, Warrantech submitted various claims to Reliance seeking reimbursements, which Reliance agreed to pay. Reliance, however, was placed in liquidation on October 3, 2001 and, subsequently, November 2, 2001 was set as the statutory cancellation of coverage date pursuant to 40 P.S. § 221.21 of the Insurance Department Act. As a result, Reliance ceased making reimbursements to Warrantech after this date, giving rise to the litigation.
The Commonwealth Court held that § 221.21 operated to relieve Reliance of all liability to indemnify Warrantech for claims arising after November 2, 2011. Further, the Commonwealth Court noted that the plain language of § 221.21 states that coverage under all insurance policies with “risks in effect” at the time of liquidation only remains for a period of thirty days after the entry of liquidation. Lastly, the Commonwealth Court valued Warrantech’s claims against Reliance at zero. Accordingly, Warrantech appealed.
On appeal, Warrantech’s primary argument, among others, was that the Commonwealth Court misapplied § 221.21 because it only applies to insurance policies “in effect” at the time of liquidation. Warrantech urged the Court to interpret this term to apply only to those policies with active policy periods. It reasoned that because Reliance’s policies were cancelled in 2000, they should be exempt.
In order make sense of the meaning and purpose of § 221.21, the Supreme Court read § 221.21 and § 221.20(d), Liquidation Orders, together. The Supreme Court found the best reading of § 221.21 to be that “all insurance in effect” means any insurance policy that continues to provide coverage to its policyholders as of the date of the liquidation order. The Supreme Court noted that the purpose of the thirty day period is to allow all of the insureds of the liquidated insurer to obtain replacement insurance. On this basis, the Supreme Court affirmed the Commonwealth Court’s holding and relieved Reliance of all liability to indemnify Warrantech notwithstanding Reliance’s agreement in the insurance policy to extend coverage for claims arising out of the 1999-2000 policy period.
Thanks to Erin Connolly for her contribution.