Legal Memorandum: Effect of an Insurer's Bankruptcy

Issue: What effect, if any, does the bankruptcy of a New York insurer have on an individual’s bankruptcy?

The effect of a debtor’s insurance company’s bankruptcy is governed by the Bankruptcy Code and the statutes and administrative rules of the state under which the insurer was formed.  See United States Dep’t of Treasury v. Fabe, 508 U.S. 491 (1993) (state law has priority to the extent it protects policyholders, regardless of conflict with federal rule that requires first priority be given to the United States for obligations of the debtor). 

Article 74 of New York’s insurance law addresses the rehabilitation and liquidation of insurers.  The law requires a finding of insolvency to be made by the insurance superintendent.  The law then provides authority for a court to grant an order finding the insurer to be insolvent.  N.Y. Ins. Law § 7432(a) (2000).  Following the judicial finding, the laws then provide a mechanism for dealing with claims against the insurer.  Under the statutes,

all persons who may have claims against such insurer shall present the same to the liquidator, rehabilitator or conservator at a place specified by him within four months from the date of the entry of such order, or, if the superintendent shall certify that it is necessary, within such longer time as the court shall prescribe.  The superintendent shall notify all persons who may have claims against such insurer as disclosed by its books and records, to present the same to him within the time as fixed.  The last day for the filing of proofs of claim shall be […]

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