MINEOLA, N.Y. (CN) – Annuity beneficiaries say New York State is planning to cut their benefits from decades-old wrongful death and personal injury settlements under a “deceptively unfair and inequitable” plan to liquidate Executive Life Insurance Company of New York.
In objections filed in Nassau County Supreme Court, eight beneficiaries whose annuity payments would be reduced under the liquidation plan claim the state has mismanaged Executive Life (ELNY) for decades, contributing to its financial trouble.
“For more than twenty years the NYLB [New York Liquidation Bureau] mismanaged ELNY and created a deficit of epic proportions never before seen in the context of a life insurance company insolvency,” New York-based attorney Edward Stone said in the supplemental objections. “And now this court is being asked to sweep all of this waste, mismanagement and neglect under the rug by taking away benefits from those most in need: the shortfall payees.”
Stone represents eight annuitants in six states.
He says his clients, who were disabled or lost loved ones in car and work-related accidents, and other beneficiaries whose benefits may be reduced, were excluded from the process of designing the liquidation plan and denied the opportunity to confront the New York Liquidation Bureau.
According to court documents, beneficiaries found out that their payments would be reduced after receiving a “shortfall notice” dated Dec. 7, 2011.
“To suggest that my clients should have divined that their payments were being reduced prior to the receipt of the notice letter in mid-December, which is the only time any shortfall information was given to them, and somehow fashioned an alternative plan for consideration by the court with no access to any source data or reference materials they could have independently assessed is simply absurd,” Stone wrote in his 63-page Objections. “To place this type of burden on shortfall payees located all across the United States after 21 years of silence is equally absurd.”
Stone says the New York Liquidation Bureau uploaded thousands of pages of complicated materials and legal citations related to the restructuring plan to the ELNY website just 2 weeks before a hearing scheduled to begin March 15.
He says shortfall payees found themselves without legal counsel during the 2011-2012 holiday season and did not have the chance to object to the reduced payments.
“Nobody ever came to anyone whose benefits were being cut and said, ‘Hey, do you want to come up with an alternative plan, with a better way to do this?’,” Stone told Courthouse News in an interview this week.
“They were not given the chance to participate.”
Under the proposed liquidation plan, 16 percent of ELNY annuitants would get their benefits reduced. The plan affects about 9,600 people and entities, according to court documents.
The restructuring plan includes a hardship fund supported by certain life insurance companies and provides some benefits to some claimants, but drastically reduces annuity payments for others.
Objections have been filed on behalf of 134 beneficiaries, including seven property casualty insurance companies that objected because the plan may leave them liable if benefits are cut.
The liquidation plan creates a new company, GABC, based in the District of Columbia, to collect and administer payments.
The entity, owned and controlled by the participating state life insurance guaranty funds designed as a safety net for claims against insolvent life insurers, would be supervised by the New York Superintendent of Financial Services.
“To make matters worse, the Superintendent continues to maintain supervision over the process at the expense of the shortfall payees,” Stone claims in court documents. “Isn’t 21 years of supervised rehabilitation enough? There are no assurances that GABC will be able to secure funding from the participating GA’s [guaranty associations], particularly from those issuing unsecured notes. Shortfall payees should not be expected to trust GABC in light of how the ELNY estate has been managed to date and given the obvious conflict of interest of NOLHGA [the National Organization of Life and Health Insurance Guaranty Associations]. The NYLB proposed plan favors GA’s over shortfall payees and the entire restructuring agreement is designed to favor NOLGHA members’ interests at the expense of my clients.”
Stone says the liquidation plan will benefit guaranty associations at the expense of people who were seriously injured.
The objections include personal statements from seven of Stone’s clients, including a man burned over 90 percent of his body in a shipyard welding accident and a woman disabled by a car accident.
“They’re doing it in a way that is so unfair and insensitive and the only reason they do it is to cover up 21 years of mismanagement,” Stone told Courthouse News.
In the early 1990s, ELNY was one of the few AAA-rated insurance companies in the world. Regulators seized it when its parent, Executive Life Insurance Company of California, became insolvent, but ELNY maintained a healthy margin until 2002.
Annuity beneficiaries claim that after the state placed ELNY in rehabilitation in 1992, liabilities continued to grow “at a rate that defies logic.”
They claim they do not have access to critical ELNY records, and that the data they did get is misleading and unreliable.
“I wasn’t able to get an audit; who knows if they were paying people who were already dead?” Stone said.
“The main question the court has to address is: Is this company insolvent? NYLB admitted that their data is not accurate and is unreliable, and they based all the data on information from only one source, which, by his own admission, is not credible, and was never verified by any third party.”
Stone wrote in his lengthy Objection: “ELNY may well be insolvent, and if so, the insolvency occurred under the NYLB’s watch. ‘The data produced by the NYLB to date is inconsistent, inaccurate and completely and wholly lacking in transparency. To push through an inequitable plan of liquidation and approve the restructuring agreement before the court, without giving the shortfall payees a meaningful opportunity to be heard flies in the face of the most basic notions of fairness and due process.'”
The document adds: “Based on the way twenty years of ‘rehabilitation’ have unfolded, my clients have no way of knowing the true financial condition of ELNY and there has been no transparency, no credibility and no integrity in the financial reporting that took place in the past. In fact, as noted by prominent New York insurance attorney Peter Bickford in his recent article about the failed rehabilitation of ELNY: ‘ELNY’s cash flow went negative in 2002, ten years after the plan of rehabilitation and six years before the economic downturn of 2008.’
“A chart taken from Mr. Bickford’s article is copied below and shows that ELNY’s liabilities increased steadily under the NYLB’s watch from an estimated $1.6 billion in 1994 to just shy of $2.5 billion in 2010. After 20 years of payments with no new contracts being issued, this increase in liabilities simply defies logic. Equally troubling, ELNY’s own numbers show a negative surplus, or deficit, going back as far as 2002!” (Citation to Bickford’s Feb. 20, 2012 article in Insurance Advocate omitted.)
In reply, the New York attorney general claims that “[i]t cannot be reasonably disputed that ELNY is insolvent and cannot continue in rehabilitation … and, it cannot be reasonably disputed that, under the circumstances, the proposed order of liquidation and related restructuring agreement … would use ELNY’s remaining assets in a fair and equitable manner.” (Ellipses in document.)
But the shortfall payees say that though the state has squandered ELNY’s assets for two decades, the company has enough money to continue making structured settlement payments for many years.
ELNY assets had a market value of $957 million as of Dec. 31, 2011, according to the Objection.
In an affidavit filed with the court on March 1, NYLB Special Deputy Superintendent Jonathan Bing acknowledges that ELNY’s assets increased by nearly $50 million from 2010 to 2011.
Stone says he hired experts to come up with an alternative plan that would pay all beneficiaries 100 cents on the dollar.
“Without requiring any additional contributions from the GA’s, we could structure an alternative plan that would have an independent entity take over, let them pursue legal action on behalf of everyone, let them supervise, and take all the contributions from the GA’s and pay off those benefits, and offer people alternatives. If they want to convert annuities into a different product, as a choice, they could do it now, as opposed to just leave them on a hook forever,” Stone said.
“But to really propose a new plan, I would have to understand what the liabilities are, to really figure out what we have to do, we need the same information the other side has had for 3 years. We never got it.”
Stone says an independent liquidation trust should be created to avoid conflicts of interest and preferential treatment for guaranty associations.
“A fair and equitable plan of liquidation would base future payments on the percentage of the original settlement that has been received by al payees and apply the percentage that remains outstanding to ELNY’s assets, such that all 9,600 remaining ELNY payees receive as close to the same percentage of promised benefits as is possible,” according to the Objection. “A fair and equitable plan would also consider the impact of payment reductions and consider rescheduling future payments to allow for an upfront benefit to ease the transition for those payees whose payments are ultimately reduced. The proposed liquidation plan does not address this.”
The shortfall payees say the superintendent must not be granted judicial immunity, to protect him from answering for the mismanagement of ELNY.
“The most vile part is asking the judge to grant them judicial immunity,” Stone said. “I suspect from the data we had that something is not right. They made a $1 billion dollar adjustment to their reserve in 2006, based on a change in assumptions that they could have made in 1992.”
In an affidavit, Special Deputy Superintendent Bing claims that the state worked with representatives of interested parties “to reach a consensus on a plan of liquidation that is in the best interests of ELNY policyholders and creditors, avoids disruption of annuity payments, and increases the amount of funds available for ELNY policyholders and creditors.”
But Stone claims that Bing, who became deputy superintendent in July 2011, “has absolutely no knowledge of anything that actually happened that led up to the deficit.”
Bing did not return requests for comment.