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Commercial auto insurer takes unusual step in filing bankruptcy petition

An insurance underwriter is among the various affiliates of a long-haul and regional freight services company that filed for Chapter 11 bankruptcy protection, despite provisions of federal law that cast doubt on its ability to do so.

Transportation Insurance Services Risk Retention Group Inc., a company regulated by the South Carolina Department of Insurance, is among the various affiliates and subsidiaries of Celadon Group Inc. that filed petitions in the U.S. Bankruptcy Court for the District of Delaware. Celadon cited liquidity constraints resulting from industrywide headwinds across the freight services business in seeking protection from its creditors. It is seeking to engage in the orderly wind-down of its operations through the bankruptcy process.

Since the inception of Transportation Insurance Services in July 2015, the company has insured certain commercial auto liability risks of its parent. Court filings through Dec. 11 provided a brief description of Transportation Insurance Services' business, but offered no additional information about the insurer or its specific financial circumstances. Messages seeking comment from Celadon's bankruptcy counsel and CEO Paul Svindland were not returned.

The unusual nature of the Transportation Insurance Services filing outweighs its strategic significance. Not only did the company write just $311,000 in direct business in 2018, offering $2 million of motor carrier liability coverage in excess of a $1.5 million deductible, it only conducted business on behalf of Celadon-related parties. The trucking company ceased all operations upon filing its Chapter 11 petition.

Federal bankruptcy law specifically precludes domestic insurance companies, banks and thrifts, among certain other types of entities, from becoming Chapter 7 debtors. The code further states that only those entities that can be a debtor under Chapter 7, subject to certain exceptions, may become a debtor under Chapter 11.

There have been multiple circumstances where insurance companies' parents, but not the insurer itself, have filed Chapter 11 petitions. Included in those scenarios are examples of holding companies that sought and obtained bankruptcy court approvals for divestitures of their non-debtor insurance company subsidiaries.

Direct and indirect holding companies for the Delaware-domiciled Scottish Re (U.S.) Inc. filed Chapter 11 petitions in the same bankruptcy court that is hearing the Celadon proceedings; those Scottish Re (U.S.)-affiliated companies were ultimately unsuccessful in their attempts to divest their stakes in the life reinsurer.

Another situation that was somewhat similar to the Celadon case involved a petition filed by vehicle service contract company First Assured Warranty Corp. Hawaii's insurance commissioner had obtained a liquidation order for First Assured's affiliated risk-retention group PrimeGuard Insurance Co. Inc. a RRG in December 2005, and a dispute arose between the commissioner and the warranty company regarding the former's ability to seize certain property of the latter. First Assured Warranty filed a bankruptcy petition in June 2006.

A subsequent order by U.S. Bankruptcy Judge Michael Romero denied a motion filed by the Hawaii regulator to dismiss the First Assured bankruptcy as he concluded that the debtor itself was not an insurance company. The judge's order explained that courts had typically used three tests to analyze whether a filing entity constituted a domestic insurance company under the scope of federal bankruptcy laws.

The first test, Romero wrote, relies on federal law to determine whether the petitioner is an excluded entity based on the legislative history and previous court interpretations of the relevant section of the bankruptcy code. The second involves an examination of a specific entity's status under the law of its state of incorporation, potentially including a review as to whether it is heavily regulated by that state and/or whether the state's statute establishes procedures for the rehabilitation and liquidation of such an entity. The third test seeks to weigh whether federal bankruptcy relief would represent a satisfactory alternative to the applicable state procedure.

Romero noted, however, that the 10th Circuit U.S. Court of Appeals "has not specifically addressed which of the three applicable tests affords the most appropriate eligibility analysis."

South Carolina insurance law defines a domestic insurer as one that has been "formed under the laws of this state." It further includes risk-retention groups among the various kinds of entities classified as captive insurance companies and, in turn, classifies captives among the various kinds of entities to which the definition of "insurer" applies.

South Carolina Insurance Commissioner Raymond Farmer in September 2017 obtained a liquidation order for medical professional liability company Oceanus Insurance Co. a RRG. In petitioning for that order, the regulator claimed jurisdiction over the risk-retention group under several state statutes.

The department in a statement said it is aware of Celadon's circumstances.

"We are monitoring the situation closely and will take whatever steps necessary to fulfill our responsibilities as solvency regulators," it said.