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People ex rel Shapo v. Agora Syndicate

June 22, 2001

THE PEOPLE, EX REL. NATHANIEL S. SHAPO, DIRECTOR OF INSURANCE, PLAINTIFF-APPELLEE,
v.
AGORA SYNDICATE, INC., AN ILLINOIS CORPORATION AND SYNDICATE ON THE INEX INSURANCE EXCHANGE, DEFENDANT-APPELLANT
v.
INEX INSURANCE EXCHANGE, A NONPROFIT CORPORATION; INEX INSURANCE EXCHANGE GUARANTY FUND, INC., AN ILLINOIS NONPROFIT CORPORATION; AND INEX INSURANCE EXCHANGE IMMEDIATE ACCESS SECURITY ASSOCIATION, AN ILLINOIS NONPROFIT CORPORATION, INTERVENOR.



Appeal from the Circuit Court of Cook County. 00 CH 13471 The Honorable Stephen A. Schiller, Judge Presiding.

The opinion of the court was delivered by: Justice Greiman

Not Released For Publication

THE PEOPLE, EX REL. NATHANIEL S. SHAPO, DIRECTOR OF INSURANCE, PLAINTIFF-APPELLEE,
v.
AGORA SYNDICATE, INC., AN ILLINOIS CORPORATION AND SYNDICATE ON THE INEX INSURANCE EXCHANGE, DEFENDANT-APPELLANT
v.
INEX INSURANCE EXCHANGE, A NONPROFIT CORPORATION; INEX INSURANCE EXCHANGE GUARANTY FUND, INC., AN ILLINOIS NONPROFIT CORPORATION; AND INEX INSURANCE EXCHANGE IMMEDIATE ACCESS SECURITY ASSOCIATION, AN ILLINOIS NONPROFIT CORPORATION, INTERVENOR.

Appeal from the Circuit Court of Cook County. 00 CH 13471 The Honorable Stephen A. Schiller, Judge Presiding.

The opinion of the court was delivered by: Justice Greiman

Agora Syndicate, Inc., the defendant, was an insurance syndicate member of the INEX Insurance Exchange, formerly known as the Illinois Insurance Exchange. Section 107.02 of the Illinois Insurance Code authorizes the incorporation of an exchange for the reinsurance and insurance of risks. 215 ILCS 5/107.02 (West 2000). In essence, the focal point of an insurance exchange is a trading area or floor that is:

 "[O]ccupied by underwriters authorized by the exchange to bind risks on behalf of insurance or reinsurance entities commonly referred to as syndicates. These syndicates are capitalized in accordance with the requirements of the exchange's governing rules. Once approved to operate on the exchange, syndicates may accept risks for their own accounts and not jointly with other syndicates. In other words, although syndicates may participate on the same risk, the liability is several, not joint, and is limited to the percentage of participation agreed to by each underwriter accepting the risk." Bickford, Regulation of Insurance Exchanges, 21 Tort & Ins. L.J. 255, 256 (1986).

A unifying force among each of the insurance exchanges operating in the United States is the requirement of a security fund. "These funds are intended to provide additional protection to insureds of exchange syndicates in the event of their insolvency." Bickford, Regulation of Insurance Exchanges, 21 Tort & Ins. L.J. 255, 256-57 (1986). In Illinois, a syndicate's security fund is commonly referred to as the "Illinois Insurance Exchange Immediate Access Security Account" and differs from a guaranty fund in that "it contains a finite sum and has certain realistic limitations." This fund provides a syndicate with additional security, but is not to be treated as "a blank check." Bickford, Regulation of Insurance Exchanges, 21 Tort & Ins. L.J. 255, 266 (1986).

In August 2000, defendant reported having $1.58 million in capital and surplus as of June 30, 2000. Pursuant to the Illinois Insurance Code, defendant was required to have at least $1.5 million in capital and surplus. Also, in August of 2000, defendant devised a plan whereby it intended to settle all of its 170 outstanding claims with substantial savings against the reserves defendant was carrying for those 170 claims.

In September of 2000, KPMG Peat Marwick, LLP (KPMG), an accounting firm, issued an actuarial report for defendant as of June 30, 2001, which by its low-range projection, showed defendant had only $1.437 million in capital and surplus. KPMG's mid-range projection indicated a negative capital and surplus of -$5,954,110.

KPMG projected -$7,472,571 as defendant's mid-range reserve deficiency based on defendant's direct policy claim obligations (defendant's direct claims) and defendant's reinsurance obligation to Clarendon America Insurance Company under 100% quota share reinsurance agreement (Clarendon claims):

a. Agora Direct Claims: -$2,684,000

b. Clarendon Claims: -$4,789,000

Total: -$7,473,000

On September 8, 2000, defendant presented plaintiff with a plan (workout plan) under which it would eliminate its entire projected reserve deficiency and would provide payment of all its existing and future obligations as they came due from defendant's remaining assets. The workout plan was later revised to include the order of conservation that was entered by the trial court on September 14, 2000. The goal of the workout plan was to keep defendant from becoming insolvent and to wind down defendant's assets in an orderly fashion.

Under the terms of the workout plan, defendant had 90 days to prove the viability of the plan. Only if defendant could show that it had sufficient assets to pay all of its existing and future insurance obligations would plaintiff permit the release of the approximately $4.2 million that defendant held in two separate custodial accounts.

In late September 2000, the projected -$4,789,000 Clarendon claims deficiency was eliminated when Clarendon agreed to commute all of defendant's obligation to Clarendon under the 100% quota share reinsurance agreement. Thus, under the workout plan, all that remained was providing for the payment of all of defendant's present and future direct claims.

As of September 7, 2000, defendant's assets totaled $7.315 million. Under the workout plan, defendant planned to pay a total of $3.716 million in loss payments to close the remaining open direct claims. In an effort to close these claims, defendant also expected to pay $700,000 in loss adjustment expenses. As of October 15, 2000, defendant's unearned premium obligation was $248,000. Lastly, defendant intended to keep $960,000 in reserves for future claims, also known as incurred but not reported claims. ...


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