RECIPROCAL OF AMERICA AND
THE RECIPROCAL GROUP
  In Receivership for Liquidation  

 

Historical and Current Developments

How to Use This Section:

The following is a summary description of some of the significant events regarding the receivership proceedings of Reciprocal of America and The Reciprocal Group. Many of the documents referenced in this summary are available in the Documents section of this web site or by clicking on the underlined full title of the document within this summary. Many of the events referenced in this summary are described in more detail in the Frequently Asked Questions section of this web site. NOTHING HEREIN CONSTITUTES A BINDING LEGAL STATEMENT BY THE RECEIVER, THE DEPUTY RECEIVER, OR THEIR REPRESENTATIVES. NOR ARE THE STATEMENTS CONTAINED HEREIN INTENDED AS COMPLETE LEGAL DESCRIPTIONS OF THE EVENTS OR MATTERS TO WHICH THEY RELATE. THE MATERIAL PROVIDED HEREIN IS OFFERED ONLY FOR THE PURPOSE OF GENERAL INFORMATION. FOR FULL LEGAL INFORMATION, INTERESTED PARTIES SHOULD REVIEW THE SOURCE DOCUMENTS AND APPLICABLE LEGAL AUTHORITIES.

Summary of Certain Events:

On January 29, 2003, the Circuit Court of the City of Richmond, issued its Final Order Appointing Receiver for Rehabilitation or Liquidation (the "Receivership Order"), which placed Reciprocal of America ("ROA") and its attorney-in-fact, The Reciprocal Group ("TRG") (ROA and TRG, together, the "Companies"), into receivership. The Receivership Order came pursuant to an examination by the Bureau of Insurance (the "Bureau") of the State Corporation Commission of the Commonwealth of Virginia (the "Commission"), which determined that ROA and TRG were in a hazardous financial condition. The Receivership Order appointed the Commission as Receiver, Alfred W. Gross, the Commissioner of the Bureau, as Deputy Receiver, and Melvin J. Dillon as Special Deputy Receiver of the Companies, in accordance with Title 38.2, Chapters 12 and 15 of the Virginia Code. Following the Receivership Order, the Companies’ licenses to conduct insurance business were suspended or revoked in various state jurisdictions in which the Companies had been authorized to conduct insurance business.

Melvin J. Dillon served as Special Deputy Receiver of the Companies from the date of the Receivership Order until January 14, 2005. On that date, the day-to-day management of the Companies’ receivership operations transferred to Michael R. Parker, formerly Director of Reinsurance and Accounting, as Receivership Operations Manager. Effective June 1, 2005, Michael R. Parker was appointed as Special Deputy Receiver of the Companies by the Seventh Directive of the Deputy Receiver Appointing Special Deputy Receiver.

The Receivership Order and Virginia law vest title to all of the Companies’ assets, books, records, and all other property of any kind or nature in the Receiver, and give the Receiver, Deputy Receiver and Special Deputy Receiver (collectively, the “Receiver”) the sole right to conduct the business of the Companies and their subsidiaries. The Receivership Order also enjoins and restrains all persons, from among other things: transacting any business of the Companies; disposing of any of their property; interfering with the Receiver’s action or possession of the property; obtaining preferences, judgments, foreclosures, or attachments against the property; and commencing, maintaining, or further prosecuting, any new or pending lawsuits, arbitration, or other proceedings (collectively, the “Litigation Proceedings”) against any of the Companies, except that this restriction on Litigation Proceedings will not apply to claims arising from ROA’s insurance contracts or policies of insurance.

On January 29, 2003, in accordance with authority granted in the Receivership Order, the Deputy Receiver issued three directives. In his First Directive Continuing Insurance Policy Payments and Imposing Suspension and Moratorium on Other Claim Payments (the “First Directive”), the Deputy Receiver ordered a continuation of all payments to policyholders, subscribers, and third-party claimants whose claims arose under insurance policies issued by ROA (each an “Insurance Policy” and collectively “Insurance Policies”), and the continued payment of all administrative expenses and secured claims (to the extent of the security) owed by the Companies. However, the First Directive ordered a suspension and moratorium on the payment of all other claims of any nature against the Companies, including the payment of all creditor claims, which are subordinate to Insurance Policy claims.

In his Second Directive Imposing Moratorium on New Business (the "Second Directive"), the Deputy Receiver also ordered a moratorium upon the solicitation or issuance of new insurance policies of ROA on or after the date of receivership (January 29, 2003). New insurance policies were allowed and issued by ROA if the contract or policy was legally bound by ROA before January 29, 2003. Insurance policies which expired on or after January 29, 2003, were not renewed by ROA. All premium payments for insurance policies were to be paid to the Companies in the normal course of business. In his Fourth Directive of the Deputy Receiver Terminating Agents and Agent Compensation (the "Fourth Directive"), consistent with the terms of the Second Directive, the Deputy Receiver terminated all agents, brokers, and marketing representatives ("Agents") of the Companies effective February 23, 2003. The Fourth Directive also terminated all commission or other payments to Agents as of February 23, 2003, and directed that Agent compensation would not accrue after that date. Agent compensation accrued prior to February 23, 2003, is a general creditor claim of the Companies and subject to the terms of the moratorium on the payment of such claims established by the First Directive.

In his Third Directive of Deputy Receiver Adopting Receivership Appeal Procedure (the "Third Directive") issued January 29, 2003, the Deputy Receiver adopted a receivership appeal procedure for appeals or challenges of any decision made by the Deputy Receiver or Special Deputy Receiver with respect to all claims against the Companies other than claims arising under contracts of insurance or insurance policies issued or assumed by ROA. The Deputy Receiver later determined that the receivership appeal procedure should be amended to apply to claims arising under policies or contracts of insurance issued or assumed by ROA. As such, on November 10, 2004, the Deputy Receiver issued the Sixth Directive of Deputy Receiver Adopting Amended Receivership Appeal Procedure (the "Sixth Directive"). All appeals will be conducted under the sole jurisdiction of the Commission. The approval, rejection, or determination of claims against the Companies will continue as, and when, such determinations can reasonably be made by the Deputy Receiver or the Special Deputy Receiver.

On January 31, 2003, the Commissioner of Insurance of the State of Tennessee, Paula Flowers, petitioned the Chancery Court of the State of Tennessee, Twentieth Judicial District, Davidson County, for an order to place Doctors Insurance Reciprocal ("DIR"), American National Lawyers Insurance Reciprocal ("ANLIR"), and The Reciprocal Alliance ("TRA"), each a Tennessee risk retention group (collectively, the "RRGs"), into receivership. On that same date, the court placed the RRGs into receivership and appointed Commissioner Flowers as rehabilitator of the RRGs. ROA had acted as a reinsurer for the RRGs. On April 25, 2003, the Special Deputy Receivers of the RRGs (the "SDRs"), filed a Joint Petition for Expedited Review of Claims and Deputy Receiver’s Determination of Appeal and Brief in Support of Joint Petition (as amended, the "Joint Petition") with the Commission which sought, among other things, an injunction against the continued payment of ROA’s insurance policy claims and a determination that ROA should pay the claims arising under insurance policies issued by the RRGs, and reinsured by ROA, on the same priority level as claims of ROA’s policyholders. The Joint Petition also stated the SDRs’ position that the approximately $57 million formerly held in a trust account by First Virginia Reinsurance, Ltd. and withdrawn by the Deputy Receiver (as will be discussed below) should be used to pay only the claims of the RRGs’ policyholders.

On April 30, 2003, the Deputy Receiver filed an Application for Orders Setting Hearing on Liquidation of Reciprocal of America and The Reciprocal Group, Establishing Response Dates, Ordering Liquidation, Approving Claims Bar Dates, and Related Matters (the "Application") with the Commission in the case styled Commonwealth of Virginia, ex rel. State Corporation Commission v. Reciprocal of America and The Reciprocal Group, Case No. INS-2003-00024. On May 2, 2003, the Commission entered an Order Setting Hearing on Liquidation of Reciprocal of America and The Reciprocal Group, Establishing Response Date, and Related Matters that set a "Liquidation" hearing for June 19, 2003, and an "Other Matters" hearing for September 17, 2003.

In his Fifth Directive Regarding a Discontinuance of Policy Payments and Discontinuance of Other Claim Payments (the "Fifth Directive") issued on April 30, 2003, the Deputy Receiver ordered the discontinuance of payment on all claims against the Companies, with certain exceptions. The Fifth Directive ordered the discontinuance of payments to policyholders, subscribers, and third-party claimants for claims under contracts of insurance and insurance policies of ROA (i.e., Insurance Policy claims). It also discontinued payment of all other claims of the Companies of any nature, including the payment of creditor claims, which are subordinate to Insurance Policy claims. Due to the essential nature of medical and disability payments which arise under workers’ compensation policies, the Deputy Receiver ordered that such payments continue uninterrupted until such time as the payments could be made by insurance guaranty associations ("GAs") in various states, or in accordance with the Commission’s orders. However, as will be discussed further below, many of the GAs have denied responsibility for claims that were assumed by ROA from self-insured trusts ("SITs") or group self-insurance associations ("GSIAs"). The Fifth Directive further ordered the continued payment of all proper administrative expenses and secured claims against the Companies (to the extent of the security).  The Fifth Directive was modified by a subsequent directive (as will be discussed below).

On May 1, 2003, First Virginia Reinsurance, Ltd. ("FVR"), a Bermuda company, submitted claims related to the Deputy Receiver’s withdrawal of funds in the amount of approximately $57 million from a trust account (the "Trust Account") that had been established under a trust agreement (the "Trust Agreement") dated January 1, 2000, between FVR, ROA, and Wachovia Bank, N.A. ("Wachovia"). FVR argued that the withdrawal was a breach of the Trust Agreement. FVR requested the restoration of the Trust Account plus interest from the date of the withdrawal. The Deputy Receiver denied the claims and the appeal, in a Determination of Appeal ("DOA") dated August 29, 2003. FVR filed a petition contesting that DOA on September 26, 2003. On October 29, 2003, ROA was served with FVR’s verified petition to commence ancillary proceedings and a motion for injunctive relief pursuant Section 304 of the Bankruptcy Code, filed in the United States Bankruptcy Court for the Eastern District of Virginia, Richmond Division. The verified petition and preliminary injunction sought, among other things, an injunction against the Deputy Receiver’s use of the funds removed from the Trust Account, and an order to turn over such funds to the Joint Provisional Liquidators appointed in Bermuda for the liquidation of FVR. A hearing on this matter was convened on October 30, 2003, and a trial date was thereafter established in April 2004 for FVR’s claims. On February 6, 2004, a tolling agreement was entered into by the parties to toll the trial date in bankruptcy court. The tolling agreement remains in place at this time.

On June 20, 2003, after considering the merits of the Deputy Receiver’s Application, the Commission entered an Order of Liquidation with a Finding of Insolvency and Directing the Cancellation of Direct Insurance Policies (the "Liquidation Order") for the Companies. The Liquidation Order declared that the Companies are insolvent and should be liquidated in accordance with Title 38.2, Chapter 15 of the Virginia Code. The Commission ordered the cancellation of all direct insurance policies and contracts of insurance issued by ROA on or before the date on which claims arising thereunder ceased to be covered by the applicable GAs. As such, ROA’s insurance policies were canceled in each state as described below, unless an individual policy was canceled sooner, was replaced by the insured, or expired by its own terms before the applicable cancellation date. Active ROA policies issued in states other than Rhode Island, New Jersey, and Virginia, terminated as of 12:01 a.m., Eastern Time, on July 21, 2003. All active ROA insurance policies issued in Rhode Island terminated as of 12:01 a.m., Eastern Time, on August 20, 2003. All active ROA insurance policies issued in New Jersey terminated as of 12:01 a.m., Eastern Time, on September 19, 2003. All active ROA insurance policies issued in Virginia terminated as of 12:01 a.m., Eastern Time, on September 20, 2003. There is no ROA insurance policy coverage for new claims that occur after the applicable policy cancellation date. Pending further orders from the Commission, the Deputy Receiver was authorized to continue making medical and disability payments under workers’ compensation insurance policies until the applicable GAs could make the payments.

On July 11, 2003, the Deputy Receiver filed his Application for Order Authorizing the Continuation of Workers’ Compensation Disability Payments by Reciprocal of America and The Reciprocal Group for Workers’ Compensation Claims Denied Coverage by State Guaranty Associations. Therein, the Deputy Receiver sought a Commission order authorizing continued payment of medical and disability payments for workers’ compensation claims that were assumed by ROA from SITs or GSIAs and denied, or would likely be denied, coverage by the applicable GAs. On November 12, 2003, the Commission entered its Order (reinstated by Order on Reconsideration issued January 8, 2004) authorizing the Deputy Receiver to continue to provide the indemnity and wage replacement payments for the assumed workers’ compensation claims while the matter was reviewed more thoroughly. On August 24, 2005, the Commission issued its Final Order which approved the Deputy Receiver’s application subject to certain modifications. The Commission determined that the workers’ compensation and liability claims assumed from certain SITs and the workers’ compensation claims assumed from certain GSIAs (collectively, the "Assumed Claims") constitute "claims of other policyholders arising out of insurance contracts" pursuant to the Virginia Code such that they should be paid by the Deputy Receiver. The Commission also ordered that the Assumed Claims should be paid at the same percentage as the claims of ROA direct policyholders and insureds. The Commission has issued an order which approved the seventeen percent (17%) payment percentage requested by the Deputy Receiver (as will be discussed further below).

On September 17, 2003, the Commission held the Other Matters hearing to consider the plan of liquidation for the Companies proposed in the Application. Pursuant to this hearing and the Order Setting Final Bar Date and Granting Deputy Receiver Continuing Authority to Liquidate Companies issued October 28, 2003, the Commission approved the Plan of Liquidation, the Proof of Claim Instructions, and the Proof of Claim Form proposed by the Deputy Receiver. The Commission also established a "Final Bar Date" of September 30, 2004. The Final Bar Date is the date on or before which all parties wishing to assert claims against the Companies, whether actual or contingent and whether or not liquidated, should have filed their claims. Claims subject to, and not filed by, the Final Bar Date are precluded from sharing in the assets of the Companies in any manner until the timely-filed claims of all other creditors have been paid in full. The Commission in the future will establish a "Claims Liquidation Date." The Claims Liquidation Date is the date by which all claims must be liquidated and made non-contingent.

On October 10, 2003, the Deputy Receiver and the SDRs entered into an Agreement to Stay Proceedings and Tolling Agreement until September 30, 2004 (such term automatically extendable in six-month increments), for the proceedings initiated by the Joint Petition. The tolling agreement permitted payment of the claims of ROA direct policyholders and insureds. The payments permitted were in an amount calculated not to create a preference in the event that the SDRs receive favorable rulings as to their claim to the approximately $57 million from the FVR trust account, and as to their claim to ROA-policyholder level priority on the distribution of ROA and TRG assets. In the event that these matters are ultimately resolved favorably to the Deputy Receiver, he can increase payments above the amount contemplated in this agreement. The tolling agreement has been approved by order of the Commission and remains in effect at this time (as will be discussed further below).

On November 12, 2003, the Deputy Receiver filed an asset recovery action styled Alfred W. Gross, Deputy Receiver of Reciprocal of America and The Reciprocal Group, in Receivership, v. General Reinsurance Corporation, a Delaware corporation, et al., Case No. 3:03CV955, in the United States District Court for the Eastern District of Virginia, Richmond Division. Among other things, the complaint alleged that 19 defendants conspired to cover up various schemes and secret financial deals, which, if known, would have alerted regulators and customers to ROA’s dire financial condition. On April 8, 2004, Gross was transferred to the United States District Court for the Western District of Tennessee for inclusion in the coordinated or consolidated pretrial proceedings occurring there in a multi-district proceeding designated MDL Docket No. 1551. For more information, you may want to see the District Court’s web site at http://www.tnwb.uscourts.gov .

On December 15, 2003, the Virginia Property and Casualty Insurance Guaranty Association ("VPCIGA") filed an Application for Disbursement of Assets (of the Companies) with the Commission. Other GAs are participating in this matter as well. After the Deputy Receiver circulated a draft Early Assess Plan and Agreement for comment among the interested parties on March 8, 2004, he filed a revised Proposed Early Access Plan and Agreement with the Commission on April 19, 2004. VPCIGA and several other GAs filed objections to the proposed plan. Other parties also filed comments. On April 29, 2004, the Hearing Examiner assigned to the matter by the Commission convened a hearing to consider the proposed plan and any objections or competing agreements. During that hearing, the Hearing Examiner made several rulings from the bench. However, he did not plan to formally issue these rulings until the parties worked out a mutually agreeable plan for early access distributions, or until the early access plan matter was brought back before him. The Deputy Receiver has attempted to work with the GAs to develop an early access plan and agreement that would be acceptable to all parties, but so far, no such plan has resulted. On April 25, 2005, the Deputy Receiver filed a Proposed Early Access Plan and Agreement revised to reflect the Hearing Examiner’s April 29, 2004, bench rulings and certain comments by the GAs. Again, VPCIGA and other GAs filed objections and comments to the Deputy Receiver’s proposed plan. The Deputy Receiver has responded to the objections and comments filed by all parties. A hearing has been requested and the matter remains pending.

On July 20, 2004, the Deputy Receiver’s Application for Approval of Agreement to Stay Proceedings and Tolling Agreement was filed with the Commission. Therein, the Deputy Receiver sought the Commission’s approval of the tolling agreement for the proceedings initiated by the Joint Petition filed April 25, 2003, and permission to make partial payment of claims of ROA direct policyholders and insureds (including approved claims of the state insurance guaranty associations) ("ROA Claims") at a payment percentage of 17%. On December 13, 2005, the Commission issued its Final Order which authorized the payment of ROA Claims at 17% in an aggregate amount not to exceed $77,511,000. The Final Order also authorized the Deputy Receiver to modify the Fifth Directive so that he could proceed with the partial payments. Effective January 13, 2006, the Deputy Receiver issued his Eighth Directive Regarding Claim Payments which directed ROA to make the payments approved by the Commission’s December 13, 2005, Final Order.

From very early in the pendency of the receivership, there has been a criminal investigation conducted by the Office of the U.S. Attorney and the Federal Bureau of Investigation. On January 26, 2005, Kenneth R. Patterson, a former President and Chief Executive Officer of the Companies, plead guilty to conspiracy to commit insurance fraud and two counts of mail fraud. Carolyn B. Hudgins, former Executive Vice President of the Companies, plead guilty to conspiracy to commit insurance fraud. On or about May 11, 2005, the Office of the U.S. Attorney sent a letter to former policyholders of ROA and the RRGs. This letter advised those parties that they have certain victims’ rights and could appear at the sentencing. At the sentencing hearing on June 28, 2005, Kenneth R. Patterson was sentenced to 12.5 years for his admitted offenses and Carolyn B. Hudgins was sentenced to 5 years for her admitted offense. These sentences may be reduced depending on the defendants’ cooperation with authorities in a continuing investigation.

While there are many other matters that have occurred and are continuing in this receivership, this report details some of the more significant developments. Additional matters may be posted in the future.