By: Pedro I. Vidal Cordero | September 2024
Attorney Pedro I. Vidal Cordero is a Capital Member at the Vidal, Nieves & Bauzá LLC law firm and he has significant experience in insurance regulatory, transactional and compliance matters. Pedro is also a Board Member at the Puerto Rico International Insurers Association (PRIIA).
The success Puerto Rico and its “International Insurers and Reinsurers Center” (“CIS”, by its acronym in Spanish) has had, in attracting investors and insurance companies to Puerto Rico, may to a great extent, be attributed to its best-in-class regulatory framework. The CIS´legal structure incorporates many of the best practices and norms found in both, U.S. and international captive insurance domiciles.
Under the regulatory oversight of a jurisdiction accredited by the National Association of Insurance Commissioners or “NAIC”, the CIS in Puerto Rico offers the possibility of operating within a U.S. territory considered an attractive gateway to insurance markets in the United States, Latin America, and other regions.
An important component of the CIS´ framework is centered on the legal provisions which will be applied in the event of a possible insolvency scenario faced by protected cells or segregated asset plans organized and operating within a licensed international insurer. Chapter 61 of the Insurance Code of Puerto Rico, which governs the CIS, allows insurers authorized to operate as protected cell or “segregated asset plan” (SAP) companies to organize protected cells or SAP´s, and confers upon each such SAP, its respective assets and liabilities, all of the legal attributes of an independent and separate legal entity. Therefore, pursuant to this legal framework, assets attributed to a particular SAP will only be liable for the insurance risks assumed and the business conducted by such SAP.
What follows is a summary of some of the legal provisions that will apply to a scenario in which an SAP operating under the CIS is declared insolvent by the insurance regulator, and ordered to be liquidated.
The legal and regulatory framework governing the insolvency of the segregated asset plans operating within an international insurer in Puerto Rico
In general, the insolvency of an international insurer operating as a segregated assets plan company is subject to the powers of the Commissioner of Insurance of Puerto Rico as the liquidator appointed by law of the international insurer.
THE NAIC ACCREDITATION ENSURES THAT PUERTO RICO’S REGULATORY OVERSIGHT ALIGNS WITH THE HIGHEST STANDARDS IN THE INSURANCE INDUSTRY, ENHANCING ITS APPEAL AS A JURISDICTION FOR INTERNATIONAL INSURERS
Regarding the insolvency and liquidation of the international insurer, Article 61.160, paragraph (6) of the Insurance Code recognizes, once again, the legal separation of the assets that are part of the general account of the international insurer, as opposed to those that the insurer has attributed to a segregated asset plan it organizes. It does so by stating that in case of the liquidation or rehabilitation of an insolvent international insurer, “the segregated assets plan shall not be available for the payment of the general obligations of the insurer.” (Our emphasis).
Therefore, the insolvency and liquidation of an international insurer that operates as a segregated asset plan company does not presuppose the insolvency and liquidation of any of its SAP´s. In particular, Article 61.140(8) of the Insurance Code contemplates the possibility of a separate and independent insolvency, on the one hand, of the international insurance company itself and, on the other hand, the possible insolvency of any of its segregated asset plans. The legal procedure that should be followed in the case of the insolvency of a SAP will be the same procedure that an international insurer would follow if it were declared insolvent.
The liquidation of an insolvent international insurer or any of its SAP´s will be governed by the the provisions of the Insurance Code in Puerto Rico that apply to the rehabilitation and liquidation of general domestic insurers operating in Puerto Rico and subject to the supervision of the Commissioner of Insurance of Puerto Rico.
However, neither international insurers, nor their SAPs are required to join or contribute to any of the guaranty associations operating in Puerto Rico for the benefit the policyholders of an insolvent domestic insurer.
Moreover, Chapter 61 of the Insurance governing international insurers and their SAPs specifically provides that for purposes of the insolvency proceedings followed in respect to an international insurer or an SAP that is declared insolvent, the definition for “assets” which will be followed will be that of Chapter 61 of the Insurance Code, --which offers a broader category of assets which may be owned and held by an international insurer or a SAP in comparison to the assets that a domestic insurer offering insurance in Puerto Rico may own and hold--, and not the definition contained in Chapter 40 governing insurance insolvencies generally.
As an NAIC-accredited jurisdiction, Puerto Rico has adopted the NAIC´s insurance rehabilitation and insolvency framework, which is found in the several NAIC model laws governing this area. In Puerto Rico, the NAIC insolvency framework was included in Chapter 40 of the Insurance Code, which gives the Insurance Commissioner broad powers as the court-appointed liquidator and provides a blueprint for the procedures that need to be followed when an insurer is declared insolvent.
The purpose behind these insolvency norms and provisions is to protect the interests of policyholders, claimants, creditors and the general public once an insurer is determined to be insolvent.
The Insurance Code confers exclusive jurisdiction to the Commissioner of Insurance to determine the insolvency of an insurer and, with the intervention of the courts in Puerto Rico, order its liquidation. Once a final order of liquidation is issued by a court of law in Puerto Rico at the request of the Commissioner of Insurance, the latter will be appointed as the liquidator and take immediate possession of the property and assets of the insurer to manage the same with the supervision of the court of justice.
The Commissioner of Insurance will only be accountable to the court that oversees the liquidation of the insurer in managing and disposing of the assts of the insolvent insurer or SAP. As a general rule, the final order declaring the insolvency and receivership of an insurer has the effect of staying all legal claims and actions against the insurer, its property and other assets. From that moment forward, such actions or complaints will be subject to the liquidation proceedings that will be conducted by the Commissioner of Insurance under the supervision of the court pursuant to Chapter 40 of the Insurance Code.
PUERTO RICO’S BEST-IN-CLASS REGULATORY FRAMEWORK, WHICH OFFERS A ROBUST LEGAL STRUCTURE INCORPORATING BEST PRACTICES FROM U.S. AND INTERNATIONAL CAPTIVE INSURANCE DOMICILES, POSITIONS THE ISLAND AS A STRATEGIC GATEWAY TO INSURANCE MARKETS
Among the powers that the law gives the Commissioner of Insurance as liquidator of an insolvent insurer subject to liquidation procedures, are the power to effect sales of the property of the insurer, collect debts and marshal all of the assets of the insolvent insurer, including the power to take the necessary measures to preserve its assets, borrow money and agree to contracts in general, file actions, hire employees for the insurer and hold public hearings among other important powers of the Insurance Commissioner as liquidator.
As most of the laws that create a egal framework and a procedure for carrying out the liquidation of an insolvent commercial business, Chapter 40 of the Insurance Code establishes an order of priority of payments to be followed in relation to the claims that may exist on the assets of the insolvent insurer. In general, the payment order is divided into eight classes or types of claims. Essentially, first, are claims for the administrative expenses of the liquidator and of any guaranty association, claims related to debts with employees, claims under insurance policies, claims for unearned premiums, claims of the Federal Government of the United States or the Government of Puerto Rico and its dependencies, late claims or other individual claims, unsecured loans and, finally, claims of the shareholders and owners of the insolvent insurer.
Finally, with respect to insurers other than Chapter 61 international insurers or their SAP´s, the provisions of Chapter 40 of the Insurance Code are complemented by other provisions of law set forth in Chapters 38 and 39 of the Insurance Code. These two Insurance Code chapters recognized the creation of the Guaranty Association of Miscellaneous Insurance of Puerto Rico and the Association of Guaranty of Life and Disability Insurance of Puerto Rico.
In summary, the possible insolvency
of a segregated asset plan created by an international insurer under the CIS will not, as a matter of law, result in the insolvency of the international insurer or any of the other SAP´s it may have created. Pursuant to the legal framework governing such segregated asset plans, insolvent segregated asset plans will need to be declared as such by the Commissioner of Insurance, and their liquidation will be governed by the court-supervised provisions briefly discussed above which are located in Chapter 40 of the Insurance Code and apply to insurance company insolvencies, in general.
Pedro Vidal-Cordero is a licensed attorney in Puerto Rico and in the District of Columbia, with over 30 years of professional experience. His practice covers corporate, regulatory, contractual and transactional matters related with the operation of insurance companies, captives, and reinsurers in Puerto Rico, as well as other business entities established in Puerto Rico. For more information about this article feel free to contact Pedro I. Vidal-Cordero, Esq. at
Vidal, Nieves & Bauzá is located at
Suite 110 T-Mobile Center
Guaynabo, Puerto Rico.
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