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People Ex Rel. Schacht v. Main Insur. Co.

OPINION FILED MARCH 22, 1984.

THE PEOPLE EX REL. JAMES W. SCHACHT, ACTING DIRECTOR OF INSURANCE AS REHABILITATOR FOR MAIN INSURANCE COMPANY, PLAINTIFF-APPELLEE,

v.

MAIN INSURANCE COMPANY ET AL., DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of Cook County; the Hon. Anthony J. Scotillo, Judge, presiding. JUSTICE ROMITI DELIVERED THE OPINION OF THE COURT:

This is an appeal, pursuant to Supreme Court Rule 307(a)(5) (87 Ill.2d R. 307(a)(5)), from an order of the trial court entered August 25, 1983, directing that Main Insurance Company (Main) be liquidated under the provisions of the Illinois Insurance Code (Ill. Rev. Stat. 1981, ch. 73, par. 613 et seq.). Appellants Main and Mainway Financial Corporation (an Illinois corporation owning 100% of Main's stock) contend that the trial court erred in admitting certain documentary and testimonial evidence concerning Main's consumer claims reserve. It is undisputed that this evidence, if properly admitted, established that Main was insolvent and thus subject to liquidation.

We affirm.

This is the second appeal of this cause. The trial court first ordered Main's liquidation in June 1982, but that order was stayed pending Main's appeal to this court. In that first appeal (People ex rel. Schacht v. Main Insurance Co. (1983), 114 Ill. App.3d 334, 448 N.E.2d 950), we found that the trial court had erred in refusing to allow Main to have a sufficient amount of its assets to prepare a transcript of the proceedings for appeal. Because we could not review Main's claims of error without a proper record, we remanded the cause to the trial court with instructions to permit Main to provide the necessary record for review. We also held that the trial court could, if it so desired, reconsider its order of liquidation in light of our determination that a case relied on by the plaintiff (Wilson v. Clark (1981), 84 Ill.2d 186, 417 N.E.2d 1322, cert. denied (1981), 454 U.S. 836, 70 L.Ed.2d 117, 102 S.Ct. 140, in which the court announced a new rule permitting opinion testimony based on facts not in evidence), was not applicable to the initial trial of this cause. On remand the trial court granted Main's motion for reconsideration but then again ordered Main's liquidation based on a finding of insolvency.

As we have noted, Main's contentions on appeal relate to the admission of evidence concerning Main's consumer claims reserve (the amount of money estimated to be needed to pay off all pending policy claims). Accordingly, our summary of the facts will focus primarily on the evidence relating to that reserve.

Main is an Illinois corporation organized under the Illinois Insurance Code (Ill. Rev. Stat. 1983, ch. 73, par. 613 et seq.) to insure property and casualty risks, with insurance policies issued in several States including Illinois, Wisconsin, Florida, Michigan, Georgia, and Alabama. In January 1977 the Director of the Department of Insurance filed a complaint in the circuit court of Cook County seeking the rehabilitation of Main, pursuant to section 188 of the Illinois Insurance Code (Ill. Rev. Stat. 1977, ch. 73, par. 800). Main consented to being placed in statutory rehabilitation and on January 19, 1977, Judge Donald J. O'Brien appointed the Director as the rehabilitator of Main. The order directed him to:

"* * * immediately take possession of the property, business and offices of [Main] * * * and take such action as the nature of the cause and the interests of the policyholders, creditors, stockholders or the public may require subject to further orders of this Court."

In February 1978 William Allen, a certified public accountant, was hired as a special consultant to the Department. Allen testified that he had previously served for one year as Main's comptroller and for two years as its treasurer and executive vice-president, finally leaving the company in 1972. He had been primarily responsible for preparing Main's financial statements. It has also been his job to review the adequacy of Main's claims reserve and to review procedures for establishing reserves on new claims. Allen was asked to take the position with the Department by Main's president, William Reib.

It was Allen's task to determine the financial condition of Main in rehabilitation. He found that the last audited statement for the company was as of December 31, 1974, and the last quarterly statement was dated December 31, 1976. Thus he first had to reconstruct Main's financial records by working backwards to source documents, attempting to find the general ledgers of the company along with supporting registers and other documents. He then prepared work papers in the nature of a financial statement for Main as of July 31, 1978, using Main's figures except for errors found in the course of his reconstruction of the records.

In all subsequent financial statements Allen also carried forward Main's figures until the accuracy of those figures was proved or disproved. He prepared subsequent statements for Main as of September 30, 1978, and September 30, 1979. After resolving several financial issues not at issue in this appeal, the remaining matter to be resolved was the adequacy of Main's claims reserve. At Allen's direction Tony Mesin and other personnel from the Department's Bureau of Liquidation inventoried all of Main's claims files to determine what the proper reserve should be. After performing this review in October and November of 1979 Mesin calculated the necessary reserve to be $3.2 million. This figure, if accurate, would have established Main's insolvency, as Main had set its own reserve at $1.4 million.

Allen met with Department personnel, telling them he believed Mesin's figures were probably too high but Main's were probably too low. It was then determined that there should be an independent audit of the claims files. Kevin Martin, a partner in the Chicago law firm of Wildman, Harrold, Allen, and Dixon, was chosen because he was acceptable to the Department and to Main's president, William Reib.

Martin testified that prior to becoming an attorney he had worked for over two years as an insurance company claims adjuster, conducting investigations and negotiating claims. He had also spent two years as an insurance company supervisor. One of his duties in that position was to make estimates of reserves on individual cases. In his legal career Martin had handled thousands of personal injury cases. Since 1973 he and his firm had represented Main in most of its personal injury litigation. In 1975 he assumed primary responsibility for representing Main.

In December 1979, when Martin began his independent review of Main's consumer claims files, he started with a representative group of 86 files selected by Allen. Fifty of the files involved claims reserves previously estimated to be over $3,000 and the other 36 had reserves estimated to be under $3,000. Martin was given about $325,000 with instructions to attempt to settle these claims in order to determine if the estimates were accurate. After settling a substantial portion of the claims he found that he was generally successful in settling the claims over $3,000 for amounts under the estimated reserves but that for those under $3,000 there was a substantial discrepancy: the previous estimates were too low. On balance he found that the reserves previously set were higher than his estimates and higher than what he actually paid out. However, upon a review of these results, and also based upon an independent clerical review, William Allen projected that Main's total reserve was understated by $1 million. Because Main disputed this projection Martin was instructed to review all of Main's claims files and to prepare his own claims reserves for them.

Martin testified that these files contained such matters as notices of loss, investigators' reports, photographs, correspondence from attorneys, depositions, transcripts, evaluations of the case and evaluations of witnesses. In determining a reserve amount for each file he took into consideration the fact that nobody had received payment in four years, so that a discounted offer would probably be accepted. Thus in working with the original 86 cases he had discounted the amounts of any consent judgments by 10%. This had worked so well that he increased that discount to 25%. The average time Martin spent on each of the approximately 500 files he reviewed was one hour. He testified that his estimates were recorded by his secretary at his direction as he reviewed each file. These figures were placed by her in working papers admitted into evidence as plaintiff's exhibit No. 3 with the express consent of Main's attorney (but only as to Martin's estimates, not the estimates of Main and Tony Mesin which were also recorded in that exhibit). Martin testified that his estimates as recorded in that exhibit corresponded to estimates attributed to him in another listing of file by file estimates which was admitted into evidence, over Main's objections, as plaintiff's exhibit No. 2. This latter document, which also listed the estimates of Mesin and Main, was prepared by a Main employee. Martin testified that the estimates attributed to him did constitute his opinion of what was the lowest reasonable reserve for Main on each file.

Kevin Martin completed his review, as reflected in exhibit No. 2, around Easter of 1980. According to William Allen exhibit No. 2 included all but about 40 of Main's claims files. By June of 1980 those missing files had been located and half of them were reviewed by Martin. For the remaining files, except those that were settled by the Department, Allen relied on Main's estimates. Martin had never totaled his file by files estimates. Utilizing Martin's estimates in exhibit No. 2 Allen prepared a clerical reconciliation of the figures and a work paper summarizing Martin's figures. Those documents were admitted into evidence, over Main's objections, as plaintiff's exhibits Nos. 8 and 10. Allen then prepared an unaudited financial statement for Main as of June 30, 1980, in order to finally determine whether Main was solvent. The statement was admitted into evidence, over Main's objections, as plaintiff's exhibit No. 1. Included in that statement was a calculation of Main's claims reserve, based primarily on Kevin Martin's calculations. This final reserve figure was $1,837,539.36 and resulted in a determination, contained in exhibit No. 1, that Main was insolvent with a deficit surplus of $1,095,497. In his testimony Allen stated that exhibit No. 1 did reflect Main's financial condition as of June 30, 1980. In oral argument before this court Main has indicated that it disputes only the claims reserve figure in that ...


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