In a previous article, I presented a case for a Federal insolvency fund for the insurance industry, similar to the Federal Deposit Insurance Corp., based on a current legal dilemma experienced by Universal Maritime Service Corp., a New York corporation.
Universal's problem concerns workmens' compensation indemnity payments that have returned to Universal as a continuing liability as the result of the insolvency of Midland Insurance Company April 1986. Gaps in coverage between laws of the federal government and the states, and/or spurious determinations by state officials to deny defense and indemnification coverage from state insolvency funds, have left Universal with a contingent liability in excess of $5,000,000.This article will focus on unforeseen liabilities, which insureds may be required to bear, as the result of gaps in coverage between the insurance laws of two or more states.
Universal is a stevedoring and marine terminal operator in the port of New York, performing services in the New York City and Port Newark, N.J. In the 1960s and 1970s, Universal entered into contracts of insurance with Midland covering workmens' compensation and other liabilities, including property damage. On Apr. 3, by order of the New York State Supreme Court, Midland was placed into liquidation under the direction of the New York State Insurance Department, Liquidation Bureau.
On Dec. 3, 1977, Universal was loading the vessel Danaos at Universal's Port Newark facility. During the operation, the vessel's heavy lift boom, operated by Universal employees, parted from its pedestal and crashed on the vessel's deck, damaging the boom, the vessel and the cargo being loaded at that time. The plaintiff is seeking from Universal damages amounting to $529,624, which includes interest and attorneys' fees and costs, in Federal court for the Southern District of New York. Trial proceedings before Judge John F. Keenan have concluded, and both sides will shortly submit proposed findings of fact and conclusions of law. A final decision by Judge Keenan is expected in 1987.
Prior to the trial phase of this proceeding, Universal contacted the New York Property/Casualty Insurance Security Fund and the New Jersey Property- Liability Guaranty Association, requesting that each respond and defend the action in the absence of Midland and authorize indemnification to Universal for any liability arising from the action.
Universal was informed by New York officials that the New York P/C Fund only covers liabilities for property damage where the location of such damage is within the state of New York. Since the property damage occurred in the state of New Jersey, Universal was informed that the New York P/C Fund would not defend or indemnify Universal.
The New York P/C Fund maintains this position despite the fact that Universal is a New York corporation and Midland is a New York corporation supervised by the New York Insurance Department.
Universal was informed by New Jersey officials that the New Jersey Guaranty Association will cover liabilities for property damage where:
1. The insured is a "resident" of New Jersey (interpreted by New Jersey officials as a corporation incorporated in New Jersey) at the time of the insured event; or
2. The property from which the claim arises is permanently located in New Jersey; and
3. Where the contract of insurance is not considered to be "ocean marine" insurance.
Universal was informed that the New Jersey Guaranty Association would not defend or indemnify Universal because Universal is a New York corporation, and does not qualify as a "resident,' and because the property damaged (the vessel Danaos) is not permanently located in New Jersey.
Universal also was informed that since the property damage in question was damage to a vessel, the New Jersey Guaranty Association would not cover the liability, because the "ocean marine" insurance exclusion would apply.
New Jersey maintains this position (to this date) despite the fact that: Midland was licensed by the New Jersey Insurance Department to sell insurance in that State; Universal maintains its largest marine terminal facility in New Jersey; and the contract of insurance purchased by Universal from Midland in 1977 was a property damage liability policy.
As a result of the positions espoused by the New York P/C Fund and the New Jersey Guaranty Association, Universal was forced to assume the defense of litigation, which was supervised over the course of seven years by Midland. With the insolvency of Midland, Universal had to assume this litigation shortly prior to the time of trial at great expense in legal fees and the increased exposure of substantial economic detriment in the eventuality of success by the plaintiff.
In addition, attempting to buttress its position with the New Jersey Guaranty Association, Universal spent over $5,000 in obtaining an opinion of counsel that the contract of insurance purchased by Universal from Midland in 1977 was a property damage liability policy, and not an "ocean marine" policy. At the present time, Universal anticipates a legal proceeding against the New York P/C Fund, at further expense, and awaits reconsideration of the request for defense and indemnification from the New Jersey Guaranty Association.
Obviously, the present scheme of state regulation of the insurance industry is not functioning effectively and fairly. A Federal insolvency fund would protect consumers of insurance from an incomplete scheme of regulation which exposes them to financial ruin in the event of the insolvency of their insurance company.