ADMINISTRATIVE CLAIMS PROCESS
Prioritization of Claims
Because the Companies have been placed in receivership, claims asserted against them, even if approved, are not all entitled to payment at the same time. The law applicable to insurers in receivership compels that claims be separated by category, with certain categories being paid first. In addition, directives and policies adopted during the receivership may cause a moratorium on the payment of certain claims.
In general, the conduct of the receivership proceedings for the Companies is governed by Section 38.2-1500, et. seq., of the Virginia Code. Section 38.2-1509 of the Virginia Code, as that section existed at the time the Companies were placed in receivership, provided the following order of priorities or creditor classes for the payment of liabilities:
Class 1 ------ Wages entitled to priority as provided by statute.
Class 2 ------ Claims of secured creditors with a perfected security interest to the extent of the value of the security.
Class 3 ------ Taxes owed to the United States and other debts owed to any person, including the United States,
who by the laws of the United States are entitled to priority.
Class 4 ------ Claims of guaranty associations and policyholders.
Class 5 ------ Other creditors.
Because HOWIC Policies are not backed by any state insurance guaranty associations, it is anticipated that no claims will be paid or submitted by these associations. All Class 4 claims will, therefore, consist of the claims of Member Builders and Home Owners arising under the two principal coverages of the HOWIC Warranty, which were described in the "Insurance Program of the Companies" section of Part 1 of this Report.
By traditional usage, claims in Class 5 are generally referred to as general creditor claims. In the case of the Companies, they would include, among others, the claims of vendors, trade creditors, and Member Builders (other than those claims arising under the HOWIC Warranty). Class 5 claims include Member Builders' claims for litigation costs and attorneys' fees arising from actual or threatened litigation claims brought against them by Home Owners or other persons for the cost of repairing defects covered under the Major Structural Defect coverage of the HOWIC Warranty. The treatment of Member Builders' claims for legal defense is discussed in greater detail in the "Defense of Third Party Actions" section in this Part 3. The law also permits, under certain circumstances, the recognition of a class of subordinated creditors, typically owners or equity holders. Claims falling into that category would include claims of Member Builders for the return of capital contributions they paid to HWC.
The determination that a claim falls within Class 5 does not mean that it will not be paid by the Deputy Receiver. It simply means that it will not be paid until all approved claims in higher classes have been paid. Thus, all approved Class 1 claims must be paid before Class 2 claims, all approved Class 2 claims must be paid before Class 3 claims, all approved Class 3 claims must be paid before Class 4 claims, all approved Class 4 claims must be paid before Class 5 claims, and all approved Class 5 claims must be paid before the claims of owners or equity holders of the Companies.
Deputy Receiver's Directives
As noted previously, HOWIC does not have sufficient assets to meet all its contractual obligations. On November 29, 1994, the Deputy Receiver issued his First Directive authorizing iniveal payments of 40% on approved direct claims for costs of repairing covered defects and imposing a moratorium on the payment of "indirect claims" arising under the HOWIC Warranty. Indirect claims under the HOWIC Warranty are those claims approved for other components of a Class 4 claim, including but not limited to claims for extra contractual obligations, non-economic damages, consequential damages, and litigation costs and attorneys' fees. By this Directive, the Deputy Receiver has suspended payment on all indirect claims until direct claims have been paid in full.
This directive was the result of an actuarial and accounting determination of the maximum percentage that HOWIC can reasonably pay on claims as they are presented with sufficient assurance that HOWIC will be able to pay the same or no lower percentage on comparable claims presented during the ensuing years of the existing policies. For example, HOWIC could not pay 100% of today's Home Owner claims if HOWIC reasonably anticipated that as a result of doing so it would only be able to pay a lower percentage of other Home Owners' claims in the future. This directive was made necessary, in part, because it is generally unlawful to give preference to certain creditors of an insolvent insurer over other similarly situated creditors. Persons who have not been previously notified of, and who are affected by, this Directive may present objections to the Deputy Receiver's suspension of payments on indirect claims by filing an Application for Hearing with the Commission for the presentation of such objection within ten days of the date of this Report. All Applications for Hearing shall be considered filed with the Commission upon receipt of the original by the Clerk of the Commission at the following address:
William J. Bridge, Clerk
State Corporation Commission
P.O. Box 2118
Richmond, Virginia 23218
REPORT TO HOME OWNERS - Page 6