Opinion ID: 2064965
Heading Depth: 1
Heading Rank: 1

Heading: effect of the approval of the director of insurance

Text: Section 44-224.05, R.R.S.1943, provides that any domestic insurance company operating other than on the stock plan may cede its business to another licensed insurer by a contract of bulk reinsurance upon compliance with this section. The statute requires that the contract be first filed with and approved by the Director of Insurance and also approved by a majority of the stockholders. It provides that the Director of Insurance shall not approve the plan unless he finds it to be fair and equitable to the policyholders of each insurer . . . (Emphasis supplied.) It further provides that the contract shall make provision for distribution to each policyholder of the ceding company of his equity in the surplus funds, ... as determined under a fair and equitable formula approved by the director. Section 44-224.08, R.R.S.1943, provides that all special meetings of policyholders called pursuant to section 44-224.05, R.R.S. 1943, shall be called upon a printed notice which must contain, among other things, (1) a brief statement of the substance of the bulk reinsurance contract and (2) a brief statement of the plan for distribution of surplus assets. The provisions of the statute, relating to approval by the Director of Insurance of the reinsurance agreement and the distribution of the surplus to policyholders, contain no specific provision for notice to policyholders. The only mention of notice is an indirect one by reference to section 44-2312, R.R.S.1943, which provides that hearings in contested cases under Chapter 44 are governed by the provisions of sections 84-913 to 84-919, R.R.S.1943, which are part of the Administrative Procedures Act. No one here contends that the application to the Director of Insurance and his approval was a contested case. Section 44-224.05, R.R.S.1943, demonstrates a legislative intent to protect policyholders. Before the Director of Insurance approves the plan he must find that it is fair and equitable to policyholders. Nowhere does this statute or the related statutes impliedly or expressly demonstrate an intent to abridge or limit the common law rights of policyholders, who are, in the case of a mutual company, its owners. Rather, the statutes indicate that review and approval by the Director of Insurance is intended to be an initial screening process by means of which obviously inequitable arrangements may be avoided without the necessity of possible expensive and protracted litigation by policyholders. Neither does the language of the statute demonstrate any intention that mere approval by the Director of Insurance absolves (assuming that this is a legislative prerogative) the corporate directors from liability for violation of their fiduciary duties. The statutes in question were first enacted in 1957. The applicable section does not appear to have been intended as a vehicle to determine disputes between corporate directors and policyholders. In Clark v. Lincoln Liberty Life Ins. Co., 139 Neb. 65, 296 N.W. 449, this court observed that under the then existing statutes which gave the department of trade and commerce the broad authority of general supervision, control and regulation of insurance companies, the department had no power to make an initial adjudication to determine legal and equitable controversies between insurance companies and their policyholders. Nothing in the present statute appears to change that principle. The cases upon which the appellants rely are not on point. Ashurst v. Preferred Life Assur. Soc. of Montgomery, 282 Ala. 119, 209 So.2d 403, did not involve a claim of breach of duty by corporate directors. That case involved the conversion of a fraternal company to a stock company. The policyholders at the time of conversion were to be issued stock. The transaction was not the equivalent of a sale as it did not constitute a change of ownership. In that case some policyholders wanted a dividend declared, and the court held there was no statutory right to a distribution of surplus. Kueckelhan v. Federal Old Line Ins. Co., 74 Wash.2d 304, 444 P.2d 667, involved a rehabilitation of an insurance company because its investments failed to comply with statutory requirements. The insurance commissioner in that case was in effect authorized to act as a receiver, and the case is therefore not at all on point. Cotten v. Republic National Bank of Dallas, 395 S.W.2d 930 (Tex.Civ.App., 1965), involved an action by a trustee in bankruptcy to have a loan made by a bank to the insurance company declared void. The issue was whether the bank knew the insurance company was insolvent when the loan was made. The court in that case held the lending bank was entitled to rely upon the presumption that the board of insurance commissioners had carried out its duty of making annual audits unless it had actual knowledge to the contrary. Casey v. Woodruff, Sup., 49 N.Y.S.2d 625, and Otis & Co. v. Pennsylvania R. Co., 61 F.Supp. 905 (E.D. Pa., 1945), are, in fact, squarely contrary to the appellants' position. Trans World Airlines, Inc. v. Summa Corp., 374 A.2d 5 (Del. Ch., 1977), involved federal statutes related to Civil Aeronautics Board approval of corporate transactions which, in effect, preempted state law in certain limited transactions. The case is clearly distinguishable. On the other hand, Rowen v. LeMars Mut. Ins. Co. of Iowa, 230 N.W.2d 905 (Iowa), cited by the appellee, involves a situation and a holding which in principle are like those at hand. It was there argued by the corporate directors that the plaintiff policyholders had not exhausted their administrative remedies before the insurance commissioner. The Iowa Supreme Court held the doctrine of exhaustion of administrative remedies was inapplicable where the cause alleged a series of torts by corporate insiders. The court said, in discussing the effect of the insurance commissioner's approval of the contract: It is true he may disapprove a control transaction when he finds it is unfair or unreasonable to policyholders. Thus, as an incident of his powers he may provide a preventive administrative remedy for the wrongs alleged in this case. However, the statutory power to disapprove a control transaction is a limited power. It is not a legislative delegation to the insurance commissioner of jurisdiction over corporate insider torts, even though the commissioner is granted administrative authority to disapprove control transactions when such wrongs appear. We hold that section 44-224.05, R.R.S. 1943, which authorizes the Director of Insurance of the State of Nebraska to approve or disapprove contracts of bulk reinsurance, by which a domestic insurance company operating on other than the stock plan may cede its business to another licensed insurer, and which statute requires that such contract of bulk reinsurance make a fair and equitable provision for distribution to policyholders of the ceding company of the equity in the surplus funds, does not abrogate the common law duties of corporate directors to policyholders of a mutual insurance company and that approval of the contract by the Director of Insurance does not insulate the directors of the company from liability for violation of their fiduciary duties.