Receiver Can’t Stop Litigation Against Defunct Insurer’s Insureds
Much to the surprise of lay people insurers go broke with some regularity and have done so annually for the last century. As a result New York adopted the Uniform Insurance Liquidation Act (UILA) in 1940 to deal with the liquidation of insurers. Most states have similarly enacted a version of the UILA currently.
In Veronica Hala, et al. v. Orange Regional Medical Center, Barbara Spreitzer, FNP, et al., Terry H. Winter, et al., 2018-05465, 2019 NY Slip Op 07387, Supreme Court of the State of New York Appellate Division, Second Judicial Department (October 16, 2019) Barbara Spreitzer, FNP, and Horizon Medical Group, P.C., appealed to recover damages for medical malpractice, from an order of the trial court. The order, insofar as appealed from, denied the motion of the defendants Barbara Spreitzer, FNP, and Horizon Medical Group, P.C., to grant full faith and credit to an order of the South Carolina Court of Common Pleas, Fifth Judicial Circuit which, purports to permanently stay this and other actions pending in the courts of New York State.
The South Carolina order purports to permanently stay this and other actions by New York plaintiffs against defendants who are policyholders of insurance liability coverage provided by the Oceanus Insurance Company, RPG (hereinafter Oceanus). Oceanus is a risk retention group created pursuant to the federal Liability Risk Retention Act (hereinafter LRRA) and organized and licensed in South Carolina. Both New York and South Carolina have adopted versions of the UILA.
Veronica Hala and her husband Keith Hala (hereinafter the plaintiffs) sued in the trial court against the appellants and the defendants Orange Regional Medical Center (hereinafter Orange) and Joseph L. Racanelli (hereinafter collectively the defendants), seeking damages for injuries the plaintiffs allege arose from medical malpractice committed by the defendants in failing to timely diagnose the plaintiff’s breast cancer.
The Trial court denied that branch of the motion of Racanelli and Orange which was for summary judgment dismissing the cause of action alleging medical malpractice insofar as asserted against them with respect to interpreting the plaintiff’s January 9, 2012, ultrasound, and denied those branches of the appellants’ motion which were for summary judgment dismissing the cause of action alleging that they failed to refer the plaintiff to a breast surgeon.
Shortly after the pretrial conference, in connection with a liquidation proceeding in South Carolina against Oceanus the appellants moved before the Trial court to permanently stay this action based on the South Carolina order issued by the South Carolina court in that liquidation proceeding. The Trial court denied the motion.
The Oceanus Cases in New York
Oceanus is the risk retention group that provided insurance coverage to Spreitzer, Horizon, and Racanelli. Currently, there are 15 other actions pending against certain policyholders of Oceanus liability insurance coverage in the Ninth Judicial District of New York. The parties acknowledge that the South Carolina order purports to affect not only this case but also those 15 other pending cases.
The Uniform Insurance Liquidation Act
New York adopted the UILA in 1940 with the main purpose in mind of providing a uniform system for the orderly and equitable administration of the assets and liabilities of defunct multistate insurers. A sister state that has likewise adopted the UILA is referred to as a “reciprocal state,” and the state in which an insolvent insurer is incorporated or organized is referred to as the insolvent insurer’s “domiciliary state. The UILA recognizes the authority of the domiciliary state and its receiver over all of the insolvent insurer’s assets, including those located in New York.
The UILA mandates recognition of orders issued by liquidation courts in reciprocal states. Likewise, the Full Faith and Credit Clause of the United States Constitution requires each State to recognize and give effect to valid judgments rendered by the courts of its sister States.
Pursuant to the Full Faith and Credit Clause, the court of one state may not disregard the judgment of a sister state because it disagrees with the reasoning underlying the judgment or deems it to be wrong on the merits.
South Carolina has no Jurisdiction Over New York Plaintiffs
A state is not required to afford full faith and credit to a judgment rendered by a court that did not have jurisdiction over the subject matter or the relevant parties. An inquiry into jurisdiction includes considerations of due process. The lack of personal jurisdiction of the South Carolina court over the plaintiffs is undisputed and is dispositive to this Court’s determination herein.
The components of personal jurisdiction are the service of process, which implicates due process requirements of notice and opportunity to be heard, and the power, or reach, of a court over a party, so as to enforce judicial decrees. A court has no power to grant relief against an entity not named as a party and not properly summoned before the court. At a minimum, to satisfy the jurisdictional basis of a court’s power over a party, independent of service of process, there must be a constitutionally adequate connection between the defendant, the State and the action.
Here, Oceanus is not a party to this action or to the 15 other actions pending in the Ninth Judicial District. More importantly, the plaintiffs here and the plaintiffs in those other pending actions were not and likely could not be named as parties in the South Carolina liquidation proceeding, were given no notice of those proceedings, and were given no opportunity to be heard regarding the injunction which purports to permanently enjoin them from litigating their case in New York. To hold that the South Carolina order can extend to the plaintiffs’ claims would violate their right to due process and place on them an undue burden. They would face having to either litigate their medical malpractice causes of action within the context of a liquidation proceeding in South Carolina or be forever barred from seeking redress for the alleged wrongs committed by the defendants.
The lack of personal jurisdiction of the South Carolina court over the plaintiffs is also the reason to deny recognition of the South Carolina order on the basis of interstate comity. Comity does not, of its own, compel a particular course of action. Rather, it is an expression of one State’s entirely voluntary decision to defer to the policy of another.
Affording comity to the South Carolina order would deprive the plaintiffs of their ability to seek redress in courts in New York, despite the fact that they had no say in the selection of Oceanus as the defendants’ insurer and simply because the defendants chose a South Carolina risk retention group as their insurer.
Where an insurer such as Oceanus fails, the risks and consequences of that failed coverage are more properly borne by the defendants who chose such insurer, rather than the plaintiffs who had no say in that choice.
RRG’s have no Guarantee Fund protections for those they insure. They are a creation of federal law and when they fail they are subject to liquidation in the state where the business is sited. In this case South Carolina took over the RRG and issued an order – properly – stopping suits against the RRG. However, the South Carolina Court exceeded its jurisdiction by trying to stop litigation against those insured by the RRG in New York and other states. The appellate court correctly allowed the malpractice actions to go forward. If the plaintiffs win the plaintiffs can collect a judgment from the assets of the doctors and hospitals they are suing not the RRG. Having insurance with an insolvent insurer is as valuable as a judgment against a homeless person with no assets.
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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