Dream the Impossible Dream: Avoid Delay Caused by an Insurer’s Rehabilitation/Liquidation

By October 20, 2015March 8th, 2019Litigation Support


I recently helped trial counsel avoid what has been a routinely granted stay in litigation when a defendant’s insurer is in rehabilitation/liquidation. In other words, even though the defending insurer was not a party in the litigation, trial courts would typically stay the litigation for six-months at a time (and longer) to accommodate resolution of the non-party insurer’s financial difficulties.

While this result might or might not raise a few eyebrows, this story isn’t much of a story without some background information. In this particular case, the Delaware Court of Chancery originally issued a rehabilitation order staying legal proceedings. The Delaware Court later issued a liquidation order after the insurer’s founder/president was indicted for making false statements to an insurance regulator. In its liquidation order, the Delaware Court explicitly restrained any legal action in which the insurer was obligated to defend an insured party. The defendants, who had received an earlier stay based on the rehabilitation order, moved for another stay pursuant to the liquidation order.

In their motion the defendants argued, almost by rote, that the Texas Insurance Code required trial courts to give full faith and credit to the Delaware liquidation order. They also argued that the principles of comity demanded the same.

The reasons trial courts grant these motions are not a mystery. The lack of similar precedent, or any helpful legal analysis, leaves them with little guidance in deciding whether to stay litigation. The Texas Supreme Court has decided that these orders require enforcement when the insurer is a defendant. See Bard v. Charles R. Myers Ins. Agency, Inc., 839 S.W.2d 791, 794-97 (Tex. 1992). It has not addressed whether the orders require enforcement when the insurer is not a party. In what seems notable at first blush, an intermediate appellate court has stayed a case when the insurer had a duty to defend a party. The court did so, though, without fully analyzing the issue. In the absence of a clear roadmap, it is easy to see why trial courts stay litigation involving insolvent defending insurers.

In our case, however, a comprehensive legal analysis demonstrated that the trial court should not delay litigation based on a non-party insurer’s financial situation. Plaintiffs, therefore, should consider opposing similar motions instead of resigning themselves to six-month-plus delays in deciding a case’s merits.

Image courtesy of Flickr by evan p. cordes.

Join the discussion 2 Comments

  • Linda says:

    You may have overlooked an important distinction between an insurer in rehabilitation and one in liquidation. With an out-of-state order of rehabilitation, full faith and credit is indeed the basis for enforcing the court’s stay, and as one who practices full time in the field of insurance insolvency, I would argue it’s a pretty good basis. However, once an insurer enters liquidation, assuming it is also designated as an impaired insurer by the Texas Commissioner of Insurance (as was that recent Delaware insurer), Texas law expressly provides for an automatic six-month stay of any case in which an impaired insurer is obligated to defend an insured. Tex.Ins.Code sec. 462.309.

    • Maitreya Tomlinson says:

      Thanks for taking the time to read my post and respond. I apologize for not replying earlier. Without pulling back the curtain too much, I can tell you that there is a fair amount of case law supporting constitutional arguments against providing full faith and credit in these situations. You are correct that the Texas Insurance Code provides for a stay (under sec. 462.309) for impaired insurers. But, as you alluded to, certain requirements must be met to rely upon sec. 462.309.