Decade-Old Reliance Lawsuit Could Still Spark Additional Cases

After 10 years, the liquidation of Reliance Insurance Co. is continuing to wind its way through the legal system, including a recent Pennsylvania court decision that could lead to additional cases in other states.

In the case, Reliance Insurance Company in Liquidation v. Aramark Corp., Reliance sought to recoup $8 million that Aramark, a hospitality and food services company that had been insured by Reliance, had received through various states' guaranty funds.

According to the case, Aramark, worried about Reliance's solvency, purchased a $25 million contingent liability policy from Inter-Ocean Reinsurance Co. Reliance backed the policy with $25 million in collateral. Aramark had purchased workers' compensation, general liability and automobile liability policies from Reliance.

Under the contingent liability policy, if Reliance was unable to pay Aramark's claims, the Inter-Ocean policy would cover them.

In 2001, after Reliance was ordered into liquidation in 2001, Aramark sought to use Inter-Ocean to pay claims it had filed with Reliance. Inter-Ocean and Aramark disputed over the claims, a lawsuit resulted, and Aramark ended up settling with Inter-Ocean for a total of $20.7 million in a commutation.

Meanwhile, Aramark also filed claims with various states' guaranty funds, and received $8 million from the funds.

Reliance had filed the lawsuit seeking to recoup that $8 million that the guaranty funds had paid, and was joined in a lawsuit by a number of guaranty funds.

However, in a Dec. 9, 2011 decision by Judge Renee Cohn Jubelirer, the court found that Reliance lacked standing in the case, and with the exception of the Pennsylvania workers' compensation guaranty fund, the other state guaranty funds would have to pursue the case in their own state courts.

Also, Reliance believes Aramark isn't entitled to any additional claims until it exceeds the $25 million originally promised by Inter-Ocean, the same amount that Reliance put up to back that policy.

After a company is placed in liquidation, the states' guaranty funds are triggered to pay claims. The funds pay claims, and then seek reimbursement from the estate of the defunct company.

At the end of 2010, Reliance had estimated liabilities of $9 billion. Assets stood at $5 billion, with roughly $3 billion coming from reinsurance proceeds -- a key recovery area in receiverships that can grow contentious and quickly chew up time and resources. About $2 billion has been paid out to guaranty association funds for reimbursement of covered claims (Best's Review, August 2011). There also have been 160,073 proofs-of-claim filed against the Reliance estate.

(By Meg Green, senior associate editor, BestWeek: [email protected])