California Insurance Insolvency Law
California's insurance insolvency law is codified in article 14, chapter 1, part 2, division 1 of the Insurance Code (hereafter article 14). (See generally 1010-1062.)
The policy underlying article 14 is to "ensure the orderly and equitable distribution of the assets of the insolvent insurer." ( In re Title U.S.A. Ins. Corp. (1995) 36 Cal.App.4th 363, 372.)
Upon appointment as conservator, the Commissioner is vested with title to all assets of the insurer, and is authorized to take possession of those assets and to conduct so much of its business as deemed appropriate. ( Commercial Nat.1 Bank v. Superior Court (1993) 14 Cal.App.4th 393, 402.)
Section 1057 provides that when insolvency proceedings commence, the Commissioner is deemed to be a trustee for the benefit of all creditors, policyholders and others interested in the assets of the insolvent insurer, and his duties are in the nature of those of a receiver or trustee. (Anderson v. Great Republic L. Ins. Co. (1940) 41 Cal. App. 2d 181, 188, 106 P.2d 75; Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2001) P 10:8, p. 10-2.)
Section 1057 provides: "In all proceedings under this article, the commissioner shall be deemed to be a trustee for the benefit of all creditors and other persons interested in the estate of the person against whom the proceedings are pending."
However, "In carrying out his responsibility as conservator and/or liquidator, the Commissioner acts not only as a trustee but also as a servant of the state in the exercise of its police power. " (In re Executive Life Ins. Co. (1995) 32 Cal.App.4th 344, 376.)
Long ago, the California Supreme Court observed that because the business of insurance is affected with a public interest, the state has "an important and vital interest" in the liquidation or reorganization of an insolvent insurer and the protection of policyholders and the public generally. (See Carpenter v. Pacific Mut. Life Ins. Co., supra, 10 Cal.2d at p. 329; In re Executive Life Ins. Co., at pp. 375-376; Garris v. Carpenter (1939) 33 Cal. App. 2d 649, 654-655, 92 P.2d 688.)
The public has a "grave and important interest" in rehabilitating the insolvent insurer and thereby preserving its business if that is possible. (Carpenter, at p. 329; In re Executive Life Ins. Co., at p. 376; Commercial Nat. Bank v. Superior Court, supra, 14 Cal.App.4th at p. 398.)
Thus, section 1059 provides that in performing his duties under article 14 the Commissioner is deemed a public officer acting in his official capacity on behalf of the State.
Section 1059 provides: "The commissioner, in the performance of any of his duties under this article, shall be deemed to be a public officer acting in his official capacity on behalf of the State, and the provisions of Government Code section 6100 et seq. shall apply to him."
In exercising the state's police power in administering insurer insolvency proceedings the Commissioner is vested with broad discretion. ( Quackenbush v. Mission Ins. Co. (1996) 46 Cal.App.4th 458, 466.) "The trial court reviews the Commissioner's actions under the abuse of discretion standard : was the action arbitrary, i.e., unsupported by a rational basis, or is it contrary to specific statute, a breach of the fiduciary duty of the conservator as trustee or improperly discriminatory?" (In re Executive Life Ins. Co., at p. 358.)
Section 1037, subdivision (c) authorizes the Commissioner as conservator or liquidator to "compound, compromise or in any other manner negotiate settlements of claims against that person upon such terms and conditions as the commissioner shall deem to be the most advantageous to the estate of the person being administered or liquidated . . . ." Like his other duties under article 14, the Commissioner's settlement powers under section 1037, subdivision (c) are "limited by the requirements of rationality, compliance with statute, and prohibition against improper discrimination," and are reviewed for abuse of discretion. ( In re Executive Life Ins. Co., supra, 32 Cal.App.4th at pp. 370, 376.)
"The settlement must be both in the interest of the conservancy estate and necessary to vindicate the public interest." ( Id. at p. 381.)