In Re the Liquidation of Integrity Insurance

Justice LONG,

dissenting.

In deciding that the Rehabilitation and Liquidation Act, N.J.S.A. 17:30C-1 to -31, prohibits the Commissioner of Banking and Insurance, as Liquidator of the Estate of Integrity Insurance Company, from estimating incurred-but-not-yet-reported (IBNR) claims, the majority leaves the Commissioner with a Hobson’s choice: to extinguish millions of dollars of occurrence-based coverage purchased by policyholders or to run out the Estate for years while hemorrhaging administrative costs and delaying payments to claimants with presently documented claims.

Because I do not view those draconian options as clearly compelled by the statute, and because the Commissioner’s plan to rely on estimations of IBNR claims is consistent with the aims underlying the Liquidation Act, I respectfully dissent.

I

The case arises out of the collapse of Integrity Insurance Company (“Integrity”), a New Jersey Property and Casualty insurer that wrote policies in every jurisdiction. Between 1977 and 1986, Integrity issued over 25,000 commercial umbrella and excess liability insurance policies to cover extraordinary hazards *99capable of generating long-tail losses that sometimes take decades to mature.1

Integrity’s policyholders include large manufacturing companies such as American Standard, GAF Corporation, W.R. Grace, R.J. Reynolds, Union Carbide, Dow Chemical Company, and Foster Wheeler that have been the subject of mass product liability and environmental tort lawsuits. Some of those companies have been found liable for injuries that occurred as many as forty years ago, but that manifested only recently.

Asbestos claims are a good example of that liability. Various tort plaintiffs have sued policyholders based on allegations regarding the manufacture, sale, or distribution of asbestos-containing products. Unlike some other bodily injury claims, asbestos-related diseases are progressive in nature, meaning that the injury commences upon inhalation of asbestos fibers and continues while those fibers are present in the lungs ultimately manifesting as an asbestos-related disease. Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 454, 650 A.2d 974 (1994). Because that progressive injury continues over many years, all insurance policies in place from exposure to manifestation are triggered. Id. at 478-79, 650 A.2d 974.

The fact that policyholders may have sustained losses of which they are not yet aware, as a result of occurrences during their coverage periods, has complicated the winding down of the Integrity Estate. Closing the Estate by paying all presently reported claims would effect a forfeiture by cutting off a large number of *100long-tail claims that have yet to emerge but with respect to which insurance was purchased. Leaving the Estate open to pay long-tail claims as they mature would increase administrative expenses by millions of dollars a year and delay final payment to parties with presently documented claims.

The Commissioner, in her role as the Estate’s Liquidator, rejected both of those options. Instead, she formulated a Fourth Amended Final Dividend Plan (“FDP”) that authorized her to accept actuarially estimated IBNR claims, and to pay all claims and close the Integrity Estate within three to five years. The Commissioner chose that option because it would “(1) protect the interests of claimants with contingent claims, (2) abbreviate the delay in making final payment to claimants, (3) maximize the assets of the Estate, (4) reduce administrative expenses, and (5) lighten the burden of Integrity’s insolvency on ... the insurance-consuming public.” In re Liquidation of Integrity Ins. Co., 299 N.J.Super. 677, 681, 691 A.2d 898 (Ch.Div.1996).

Under the FDP, actuarial estimation would follow well-established and commercially reasonable valuation practices that are standard in the insurance industry. See generally Fin. Accounting Standards Bd., Statement of Financial Accounting Standards Board No. 60 8-9 (1982). Insurers regularly engage in actuarial estimation in transactions ranging from the setting of reserves to takeovers, commutations, and mergers. Rebecca C. Meriwether, The Contingent Liability Abyss: Tensions for Insurers and Rein-surers, 22 T. Marshall L.Rev. 1, 1-2 (1996). In the present context, estimation involves analysis of large historical databases that reveal, among other things, the number of persons exposed to a particular toxic product, the percentage of illnesses that manifest, the percentage of claims filed, and the value of those claims. From that data, experts can estimate IBNR claims and discount the estimate to present value with some degree of precision.

Integrity’s reinsurers opposed the Commissioner’s plan for estimation as unauthorized under the Act. They argued that only specific individual claims for known verifiable losses are cognizable *101in liquidation. After a hearing, Judge Meehan, who had overseen the liquidation since its inception, approved the FDP “[b]ased on the provisions of N.J.S.A. 17:30C, public policy concerns, pre-Act case law, the Federal Bankruptcy Code and case law applying its provisions, as well as the generally broad equitable authority granted to both a Liquidator and a supervising court.” In re Liquidation of Integrity Ins. Co., supra, 299 N.J.Super. at 687, 691 A.2d 898.

The reinsurers appealed and the Appellate Division reversed, declaring estimation as unauthorized by the statute. This appeal ensued.

II

When a court interprets a statute, abiding by the Legislature’s intent is the most significant goal and generally “the best indicator of that intent is the statutory language.” DiProspero v. Penn, 183 N.J. 477, 492, 874 A.2d 1039 (2005). A court therefore gives “statutory words their ordinary meaning and significance and read[s] them in context with related provisions so as to give sense to the legislation as a whole.” Ibid, (citations omitted).

However, where the meaning of a statute is susceptible to “ ‘different interpretations, the court [must] consider[ ] extrinsic factors, such as the statute’s purpose ... and [the] statutory context to ascertain the legislature’s intent.’ ” Aponte-Correa v. Allstate Ins. Co., 162 N.J. 318, 323, 744 A.2d 175 (2000) (quoting Twp. of Pennsauken v. Schad, 160 N.J. 156, 170, 733 A.2d 1159 (1999)); see also N. Singer, Sutherland Statutory Construction § 46.07 (5th ed. 1992) (finding “where different interpretations are urged, a court must look to reasons for the enactment of the statute and the purposes to be gained by it and construe the statute in the manner which is consistent with such purpose”). Simply stated, the charge is to examine N.J.S.A 17:30C-28 to ensure that our reading advances the goals underlying the Act.

*102III

The purpose of liquidation is “to wind up the [failed] company’s affairs in the most comprehensive and efficient manner” possible. 26 Appleman on Insurance 2d § 162.1 (2007). “Liquidation is not just for the benefit of the insolvent insurer,” but is designed “to protect creditors, policyholders, and the general public by providing comprehensive and efficient means for collecting [an] insolvent’s assets and equitably paying claims of creditors.” Ibid. (citations omitted). In furtherance of that goal, our Legislature has enacted the Rehabilitation and Liquidation Act, the scheme at issue here.

At the heart of the Act is a single mandate: “[T]hat the broadest protection be afforded to the public and the various claimants and beneficiaries.” In re Liquidation of Integrity Ins. Co., 240 N.J.Super. 480, 491, 573 A.2d 928 (App.Div.1990) (emphasis added) (citations omitted). The Commissioner, who is the Liquidator mandated by the statute, N.J.S.A. 17:30C-15(a), is vested with wide discretion and sole responsibility for the liquidation under the court’s supervision. Id. at 490-91, 573 A.2d 928. Pursuant to N.J.S.A. 17:30C-4 and -5, she is authorized to apply to the court for such orders as the best interests of the policyholders, claimants and the public require, and, as may be necessary, to prevent waste of the insurer’s assets. Her charge is to “fashion any relief which ‘may’ be necessary” to protect the interests of the creditors and policyholders “as well as that of ‘the public.’ ” Id. at 490, 573 A.2d 928.

“The statutory function of the Commissioner and/or the deputy liquidator is to weigh all the interests and to perform an efficient and fair liquidation of Integrity.” In re Liquidation of Integrity Ins. Co., 231 N.J.Super. 152, 157, 555 A.2d 50 (Ch.Div.1988); see also Smith v. Hunterdon County Mut. Fire Ins. Co., 41 N.J.Eq. 473, 477, 4 A. 652 (Ch.1886) (finding all policyholders, past and present, should share in distribution of dissolved insurance company); In re Citizens Title Ins. and Mortgage Co., 127 N.J.Eq. 551, 554, 15 A.2d 57 (Ch.1940) (noting “[i]t would, however, be clearly *103unjust and improper to indefinitely tie up the statutory deposit while waiting for such claims to mature. The rule of practicality and convenience requires that in eases such as this, the claims be disposed of once and for all”).

In the field of insurance, the Commissioner’s expertise is to be afforded great weight. In re Assignment of Exposures to Aetna Cas. & Sur. Co., 248 N.J.Super. 367, 376, 591 A.2d 631 (App.Div.), certif. denied, 126 N.J. 385, 599 A.2d 162 (1991), cert. denied sub nom. Allstate Ins. Co. v. Fortunato, 502 U.S. 1121, 112 S.Ct. 1244, 117 L.Ed.2d 476 (1992). That deference is equally applicable to an insurance liquidation.

That is the backdrop on which the statutory language should be interpreted.

IV

The critical statutory text reads as follows:

[n]o contingent claim shall share in a distribution of the assets of an insurer which has been adjudicated to be insolvent by an order made pursuant to [N.J.S.A. 17:300-30], except that such claims shall be considered, if properly presented, and may be allowed to share where
(1) Such claim becomes absolute against the insurer on or before the last day fixed for filing of proofs of claim against the assets of such insurer.
[N.J.S.A 17:30C-28(a).]

My colleagues in the majority characterize that language as “clear.” Focusing on the word “absolute,” which, based on the dictionary, they declare to be synonymous with “unconditional” or “non-contingent,” they conclude that allowing estimation of IBNR claims is not permitted. If the statute clearly barred such a procedure, I would agree. I do not agree, however, that the statute is clear on that point. Certainly, it “does not provide much guidance concerning which claims should be allowed in liquidation, nor does it define the amount of any claim that may be filed due to the premature termination of an insurance policy.” In re Liquidation of Integrity Ins. Co., 147 N.J. 128, 135, 685 A.2d 1286 (1996). Further, the text of N.J.S.A. 17:30C-28(a) does not define “contingent” or “absolute as to the insurer,” and the legislative *104history is silent as to the meaning and scope of those terms. See L. 1975, c. 118, § 28.

Compounding that lack of guidance is that scholars do not even agree regarding the meaning of the term “contingent claim.” Compare Ralph E. Clark, Contingent and Immature Claims in Receivership Proceedings, 29 Yale L.J. 481 n.3 (1920) (“A simple example of a contingent claim is that of the holder of a fire insurance policy before a fire has occurred.”), with Nat’l Ass’n of Ins. Comm’rs Insurer Receivership Model Act § 705(a)(1) (2007) (“A claim is contingent if the accident, casualty, disaster, loss, event, or occurrence insured ... against occurred on or before the date fixed [by the Liquidator], but the act or event triggering the company’s obligation to pay has not occurred as of that date.”). See also Mary Cannon Veed, Cutting the Gordian Knot: Long-Tail Claims in Insurance Insolvencies, 34 Tort & Ins. L.J. 167, 169-70 (1998) (noting in context of IBNR claims “the liability of the insurer like the liability of the insured is unliquidated but not contingent from the date the events giving rise to liability occur”) (emphasis added). Under some of those definitions, IBNR claims are not even contingent.

More importantly, it is evident that the Legislature never even considered IBNR claims when it enacted the Liquidation Act in 1975. As scholars have recognized, estimation of IBNR claims is “[a] new and significant issue” with respect to reinsurance in liquidation. 14 Appleman on Insurance 2d § 106.9 (2007). In 1975, insurance company insolvencies were infrequent and toxic tort claims had not yet pervaded the legal landscape. Indeed, the parade of insurance failures, including the insolvencies of well-known companies such as Mission, Integrity, Pine Top, Ideal, Mutual, Union Indemnity, Holland-America, and Transit, did not even occur until the mid-1980s. Veed, supra, 34 Tort & Ins. L.J. at 167-69. Likewise, toxic tort litigation with its focus on the progressive harms caused by exposure to toxic substances did not emerge full-blown in courts around the country until the 1980s and 1990s. See Kenneth S. Abraham, The Maze of Mega-Coverage *105Litigation, 97 Colum. L.Rev. 2102, 2102-03 (1997); see also Theer v. Philip Carey Co., 133 N.J. 610, 628 A.2d 724 (1993); Mauro v. Raymark Indus., Inc., 116 N.J. 126, 561 A.2d 257 (1989); Ayers v. Jackson Twp., 106 N.J. 557, 525 A.2d 287 (1987). It is almost certain therefore that the treatment of long-tail IBNR claims was not in the legislative cross-hairs when the Rehabilitation and Liquidation Act was passed. That is likely the reason why such claims do not fit comfortably within the contingent claim framework.

“It is frequently difficult for a draftsman of legislation to anticipate all situations and to measure his words against them. Hence cases inevitably arise in which a literal application of the language used would lead to results incompatible with the legislative design.” New Capitol Bar & Chill Corp. v. Div. of Employment Sec., 25 N.J. 155, 160, 135 A.2d 465 (1957). As Chief Justice Weintraub noted, in such instances

[i]t is the proper function, indeed the obligation, of the judiciary to give effect to the obvious purpose of the legislature, and to that end “words used may be expanded or limited according to the manifest reason and obvious purpose of the law. The spirit of the legislative direction prevails over the literal sense of the terms.”
[Ibid. (quoting Alexander v. N.J. Power & Light Co., 21 N.J. 373, 378, 122 A.2d 339 (1956)); see also Smith v. Fireworks by Girone, Inc., 180 N.J. 199, 216, 850 A.2d 456 (2004).]

That is exactly why the Commissioner and the liquidation court refused to read the Act literally, which would have left only the options that have been approved by the majority. Neither the forfeiture of millions of dollars of purchased coverage, nor the bleeding of the Estate until all claims become certain will effectuate the goals underlying the Rehabilitation and Liquidation Act: protection of the policyholders and the public at large. Only the Commissioner’s interpretation permits the broadest class of potential claimants to participate in the liquidation proceeding; husbands the assets of the Estate so that the greatest amount will be available for payment; and provides the insolvent insurer’s policyholders and the public an expedient, efficient, and equitable mechanism to share in the Estate.

*106Because the statute is unclear insofar as IBNR claims are concerned, the Commissioner’s interpretation should be deferred to in light of her broad discretion in insurance matters and more particularly, because of her wide ranging power “to fashion any remedy that is necessary” to protect the public and the policyholders in a liquidation.

To be sure, the Commissioner’s plan is not a perfect fit with the words of the statute. However, because the statute was not drafted with IBNR claims in mind, her nuanced and creative solution was properly approved by the liquidation court as the only hope for an end to these proceedings that will best serve the interests of the policyholders and the public.2

V

I am hopeful that this case will prompt the Legislature to address the specific difficulties that IBNR claims present in liquidation. Jurisdictions that have more recently examined the issue have produced statutes that offer explicit direction to both the Liquidator and the courts regarding the role that estimated claims should play in the process. For instance, Missouri has adopted the following language:

If the fixing or liquidation of any claim or claims would unduly delay the administration of the liquidation or if the administrative expense of processing and adjudication of a claim or group of claims of a similar type would be unduly excessive when compared with the moneys which are estimated to be available for distribution with respect to such claim or group of claims, the determination and allowance of such claim or claims may be made by an estimate. Any such estimate shall be based upon an actuarial evaluation made with reasonable actuarial certainty or upon another accepted method of valuing claims with reasonable certainty. [Mo. Ann. Stat. § 375.1220.2 (LexisNexis 2007); see also 215 Ill. Comp. Stat. Ann. 5/209(7) (LexisNexis 2007) (noting “[c]ontingent or unliquidated general creditors’ and ceding insurers’ claims that are not made absolute and liquidated by the last day fixed by the court ... may be determined and allowed by estimation”).]

*107Both state statutes also provide details regarding how the estimation process can be effectuated where reinsurance is involved. See 215 Ill. Comp. Stat. Ann. 5/209(7)(b) (LexisNexis 2007); Mo. Ann. Stat. § 375.1212 (LexisNexis 2007). Certainly some revision of the statute to specifically address IBNR claims is worthy of legislative consideration.

VI

For the foregoing reasons, I would reverse the judgment of the Appellate Division and reinstate the order of the liquidation court approving the Commissioner’s FDP.

Justice ALBIN joins in this opinion. For affirmance in part/vacation/remandment — Chief Justice RABNER and Justices WALLACE and RIVERA-SOTO — 3. For reversal — Justices LONG and ALBIN — 2.

Prior to liquidation, Integrity obtained reinsurance on most of its risks. Reinsurance is a "secondary level of insurance of risks" in which the reinsurer agrees to indemnify the reinsured or "cedent” against all or part of a loss that the cedent may suffer under a policy it issued. George J. Kenney & Frank A. Lattal, New Jersey Insurance Law § 17-2 at 559 (2d ed. 2000) (citation omitted). In turn, many of Integrity's reinsurers retroceded portions of their risks to other reinsurers known as retrocessionaires. See id. § 17-5 at 561 (noting retrocessio-naires represent a third level of insurance of risks). Most of Integrity's reinsurance contracts provided for the payment of reinsurance to the Liquidator in the case of insolvency.

Although the only issue before us is the validity of the Commissioner's FDP, I note that estimation of IBNR claims solely for the purpose of earmarking funds pursuant to which future absolute claims can be satisfied would not violate N.J.S.A. 17:30C-28(a).