In a case involving Lumbermens Mutual Casualty Company, the Appellate Court of Illinois issued its decision supporting the California Insurance Guarantee Association’s (CIGA) position that Lumbermens California workers’ compensation deposits may not be used to reimburse overhead and administrative expenses incurred in connection with the company’s liquidation, which began in 2013.
Lumbermens was a multi-state property and casualty insurance company organized under the laws of Illinois. Among other things, it provided workers’ compensation insurance services to California employers. California insurance law required Lumbermens to “deposit cash instruments;’ or “interest bearing securities” at a California bank , which would be held in trust for the benefit of “workers in [that] state” as a condition to Lumbermens writing workers’ compensation insurance in California.
For many years, Lumbermens was successful and earned profits from its insurance operations and, by year-end 2000, it ranked among the top 20 largest property and casualty insurance companies and the top 5 largest workers’ compensation insurers in the United States with $2. 7 billion in net premiums and more than $2 billion in surplus.
Beginning in 2003, however, Lumbermens began suffering from certain financial difficulties and, in July 2003, the company agreed to operate under a runoff plan subject to “corrective orders” issued by the Director of the Illinois Department of Insurance,. During this time, the Director issued over 500 corrective orders and Lumbermens’ liability was reduced from nearly $7 billion to just under $1 billion. By March 8, 2013, the Director filed a complaint for liquidation with a finding of insolvency. The liquidation order triggered the statutory obligations of state guaranty associations, such as CIGA, to pay the covered claims of Lumbermens’ insureds located within their respective states.
The The California Department of Insurance issued an administrative order directing that the funds held in Lumbermens’ special deposit be immediately transferred to CIGA and held in a segregated account.
The Director of the Illinois Department of Insurance claimed that the amount distributed to a guaranty association for administrative expenses would be reduced by the amount that the guaranty association has received, or can receive, from a special deposit. In other words, guaranty associations such as CIGA would be required to exhaust the funds held in their state’s special deposit before they could receive disbursements for administrative expenses from the general assets of the Lumbermens estate. The Director sought to prevent guaranty associations from receiving a preference by virtue of having access to a special deposit.
CIGA and the California Department of Insurance argued that the California Insurance Code plainly states special deposit proceeds must be used solely for the payment of compensable workers’ compensation claims. The department contended that general administrative expenses are not related to the payment of a specific workers’ compensation claims, so it is improper for Lumbermens to require CIGA to pay general administrative expenses such as rent, postage, telephone, lighting, cleaning, heating and electricity with funds held in a special deposit.
The appellate court agreed in the case of In re Liquidation of Lumbermans Mutual Casualty Company, and determined the special California workers’ compensation deposit is security for the payment of workers’ compensation claims in California and must be used exclusively to protect policyholders from insolvent insurers by providing an asset from which to pay compensable workers’ compensation claims.