Oregon Supreme Court holds that a retrocessionaire is a statutory reinsurer, and pierces corporate veil between insurers in pooling agreement
November, 2007
Yesterday, the Oregon Supreme Court issued its opinion in a case involving a battle over a deposit of an insurance company that was the retrocessionaire to workers' compensation insurance liabilities of a company to which it was related in a pooling agreement. The Court upheld piercing the corporate veil between commonly controlled carriers where impropriety on behalf of the carriers led to a dramatic shortfall in monies available to pay claims when the carriers became insolvent.
In Oregon Insurance Guaranty Assoc. v. Superior National Insurance Co. (SC S54315): http://www.publications.ojd.state.or.us/S54315.htm, a group of California insurance companies under the common control of a parent holding company reorganized in such a fashion that their respective required statutory deposits with the Oregon Department of Consumer and Business Services ("DCBS") no longer accurately reflected their obligations for workers' compensation policies each of those companies had written in Oregon. After several of the companies involved in the pooling arrangement became insolvent and were placed into conservatorship by the California Department of Insurance, Oregon insurance regulators learned of the inaccuracy of the companies' previous regulatory filings. Essentially, one of the companies, Superior National Insurance Co., ("SNIC") had in previous years deposited over $10.6 million with the Oregon DCBS but, as a result of restructuring, was no longer writing as much workers' compensation coverage in Oregon, but its pooling partner, Commercial Compensation Casualty Company ("CCCC") had dramatically increased the workers' compensation coverage it was writing in Oregon, without making required statutory deposits.
Under the pooling agreement, SNIC, CCCC, and two other companies under the common control of a single holding company (Superior Group) ceded all of their respective liabilities for Oregon workers' compensation coverage to a single reinsurer, CalComp (which was also a member of the Superior Group of companies). CalComp then retroceded a percentage of the collective workers' compensation liability back to the original ceding companies. In other words, SNIC was a retrocessionaire of CCCC through an intermediate reinsurer, CalComp.
The Oregon Supreme Court construed the definition of "reinsurer" under the Oregon statutes to include a retrocessionaire (i.e., a reinsurer of a reinsurer). Under that analysis, however, the Oregon regulators would have been able to recover only the specific percentage of CCCC's workers' compensation liabilities that had been retroceded to SNIC under the terms of the pooling agreement. However, the Oregon Supreme Court upheld the trial court's piercing of the corporate veil between the various companies and held that all of SNIC's $10.6 million deposit was available to cover the liabilities of CCCC.
Under Oregon law, a plaintiff seeking to pierce the corporate veil must prove "that another entity actually controlled (or was under common control with) the corporation; that the other entity used its control over the corporation to engage in improper conduct; and that, as a result of the improper conduct, the plaintiff was harmed." Id., citing Amfac Foods v. Int'l Systems, 294 Or 94, 108-09, 654 P2d 1092 (1982). In the instant case, the Oregon Supreme Court held that all of the requirements for corporate veil piercing were met where SNIC and CCCC were under the common control of Superior Group and "that CCCC and SNIC, and the individuals who controlled both of those companies, took...actions to evade government regulation and deceive DCBS." Id. at 15. Finally, the Oregon Supreme Court held that the improper joint conduct of SNIC and CCCC did cause harm to the Oregon Insurance Guaranty Association because the Oregon regulators permitted CCCC to continue to write millions of dollars of additional workers' compensation insurance in Oregon due to SNIC and CCCC's failure to make required filings that would have made the inadequacy of CCCC's then-existing statutory deposits readily apparent to Oregon regulators. In piercing the corporate veil, the Oregon Supreme Court held that 100% of SNIC's existing regulatory deposits were made available to cover the insurance liabilities of the insolvent CCCC.