92 N.Y.2d 107 (1998)

The New York Property/Casualty Insurance Security Fund is liable for post-liquidation interest on claims against insolvent insurers, and the “limit of liability” in Insurance Law § 7608(c) does not exclude interest and attorney’s fees when a surety bond expressly provides for them.

Summary

Royal Bank sought payment from the New York Property/Casualty Insurance Security Fund for bonds issued by Union Indemnity, an insolvent insurer. The Superintendent of Insurance, as liquidator of Union, argued that Insurance Law § 7434(b) prohibits payment of post-liquidation interest and § 7608(c) bars payment of interest and attorney’s fees that exceed the bond’s face value. The court affirmed the lower courts’ decision, holding that § 7434(b) applies only to claims against the insolvent estate, not the Security Fund, and the bond’s express terms for interest and fees override the statutory limit. The court emphasized the purpose of the Security Fund to protect insureds and the specific language of the bonds.

Facts

In 1983, Union issued bonds to Royal securing promissory notes from investors in Harlan Coal. Harlan defaulted, and Royal demanded payment from Union. In 1985, Union was placed into liquidation. Royal filed claims against the Security Fund for principal, pre- and post-liquidation interest, and attorney’s fees. The Superintendent initially denied indemnification, but the court ordered reconsideration. Justice Gammerman granted partial summary judgment, directing payment of interest and fees, rejecting the Superintendent’s statutory arguments.

Procedural History

Royal Bank filed 55 proofs of claim in Union’s liquidation proceeding in 1986. The Supreme Court initially denied indemnification which was then appealed. Justice Gammerman granted Royal’s motion for partial summary judgment in 1994, directing payment of interest and attorney’s fees. That ruling was affirmed in 1996. After a nonjury trial in October 1995, the Supreme Court determined that the Security Fund should be the source of payment on the bonds. In March 1997, the Supreme Court added the recoverable rate of interest from the Security Fund. The Superintendent appealed after the parties stipulated to the amount of attorney’s fees and the principal amounts and interest due under the bonds.

Issue(s)

1. Whether Insurance Law § 7434(b) prohibits the Security Fund from paying post-liquidation interest on Royal’s claims.
2. Whether Insurance Law § 7608(c) prohibits the Security Fund from paying interest and attorney’s fees when their inclusion would exceed the “limit of liability” of the underlying bonds.

Holding

1. No, because Insurance Law § 7434(b) applies only to claims against the estate of a bankrupt insurer, not to reimbursements sought from the distinct Security Fund.
2. No, because the express language of the underlying bonds provides for payment of interest and attorney’s fees, and those contractual undertakings prevail over a restrictive interpretation of the statutory language.

Court’s Reasoning

Regarding § 7434(b), the court found the Superintendent’s argument that this section applies to the Security Fund through Insurance Law § 7603(a)(1) unpersuasive. The court emphasized that § 7434(b) refers to “dividends,” while distributions from the Security Fund are consistently referred to as “payments.” The court stated, “the inclusion of the term ‘dividends’ and the absence of the term ‘payments’ in section 7434 (b) unravels the too-finely spun argument. Those specifications essentially demonstrate that the limitation in section 7434 (b) does not and should not apply to claims against the Security Fund but, rather, should be confined to claims only against insolvent estates.” The court also noted that the purpose of the Security Fund and an insolvent’s estate are different. Common-law limitations do not apply to the statutory Security Fund, unless the legislature specifies. The court distinguished Matter of Professional Ins. Co. (Jason), stating that case related to “deferred” claims and does not justify a categorical preclusion of post-liquidation interest. The court noted, “postliquidation interest may appropriately constitute an allowed claim.”

Regarding § 7608(c), the court rejected the Superintendent’s argument that “limit of liability” refers only to the bond’s face amount. The court found that as the bonds expressly provided for the payment of interest and attorney’s fees, those terms governed. The court emphasized that financial guaranty bonds at issue expressly provide for the payment of interest and attorney’s fees and stated that denying coverage of Royal’s claims for postliquidation interest, the Superintendent is seeking to garner a retroactive functional effect from the 1989 amendment, even though the statute was intended to provide only a prospective change.