REPORT TO HOME OWNERS, MEMBER BUILDERS,
CREDITORS, AND OTHER INTERESTED PERSONS
This Report is being mailed to current Home Owners, Member Builders, and creditors of Home Warranty Corporation ("HWC"), Home Owners Warranty Corporation ("HOW"), and HOW Insurance Company, A Risk Retention Group ("HOWIC") (any or all of which companies are referred to in this Report as the "Companies"), and to other persons interested in their affairs. It is intended to provide an overview of the receivership and the current wind-down plan in effect for the Companies. The Report should be read in its entirety. A glossary of defined terms is contained in Part 4.
The information contained in this Report is provided for the convenience of its recipients. It is based in substantial part on the books and records of the Companies as they were found by the Deputy Receiver. Nothing contained in this Report constitutes or shall be deemed an admission by the Receiver, the Deputy Receiver or the Special Deputy Receiver of any fact or occurrence, nor shall the inclusion or exclusion of any matter in this Report constitute a waiver of any right, claim or defense of the Receiver, Deputy Receiver or Special Deputy Receiver.
On October 7, 1994, the Circuit Court of the City of Richmond, Virginia, issued a temporary order placing the Companies into receivership. On October 14, 1994, the Court entered its Final Order (the "Receivership Order") appointing the State Corporation Commission of the Commonwealth of Virginia as Permanent Receiver (the "Receiver") of the Companies. The Receivership Order directed the Receiver and its representatives to take control of the Companies. Exclusive title to all of their assets has been placed in the Receiver. The Receivership Order also appointed Steven T. Foster, the Commissioner of Insurance, Bureau of Insurance (the "Bureau"), State Corporation Commission (the "Commission") of the Commonwealth of Virginia, as Deputy Receiver of the Companies. On May 1, 1996, Alfred W. Gross succeeded Steven T. Foster as Commissioner of Insurance of the Bureau and as Deputy Receiver of the Companies. In his separate and distinct legal capacity as Deputy Receiver, Commissioner Gross oversees the affairs of the Companies and supervises the team of professionals and subcontractors to whom he has delegated the function of administering certain aspects of their affairs, all for the benefit of insureds and creditors.
The Circuit Court entered the Receivership Order because, among other things, it found that the Companies were in a financial condition such that any further transaction of their business would have been hazardous to their Home Owners, Member Builders, creditors, and the public. On October 17, 1994, the United States District Court for the Eastern District of Virginia, Richmond Division, entered its Permanent Injunction prohibiting interference with the receivership proceedings. Former management of the Companies consented to the entry of these orders.
A team of experts including asset managers, actuaries, accountants, attorneys, and other consulting firms was engaged by the Deputy Receiver to stabilize the financial and operating condition of the Companies and to implement a plan for their orderly rehabilitation or liquidation. Because it appeared that the Companies were unable to meet all their contractual obligations as and when due, the Deputy Receiver temporarily suspended all claim payments until the Companies' financial condition could be analyzed and a payment plan developed for the fair and equitable treatment of all claimants.
A plan was established by the Deputy Receiver on November 29, 1994, which permits the partial payment of approved "direct claims" until additional recoveries can be made to meet the Companies' obligations. Direct claims are those for the amount of the reasonable cost of repairing defects to a home which are covered by the HOWIC warranty/insurance document (the "HOWIC Warranty"), less any applicable deductible. The payment plan temporarily suspends the payment of other claims until approved direct claims are paid in full. Part 3 of this Report describes the priority scheme for paying claims in receivership and provides an overview of the rules and procedures established by the Deputy Receiver for the adjudication of claims.
It is not necessary to make claims with the Companies before others do. Being "first in time or first in line," as that concept is normally understood, does not entitle a claimant to greater benefits or claims than other similarly situated claimants.
Reasons for Regulatory Action
Certain losses, accounting irregularities, and operating problems at the Companies persuaded the Bureau that intervention by state officials was appropriate to protect the interests of Home Owners, Member Builders, creditors, and the public. According to the Companies' independent auditors, HOWIC had an estimated premium reserve deficiency ranging from $15 million to $43.9 million as of December 31, 1993, which cast serious doubt on its ability to provide for its future claim obligations. In its private offering memorandum(1), HWC indicated that the amount of HOWIC's deficiency at June 30, 1994, might have increased from the range indicated at December 31, 1993. The memorandum also stated that HOW and its non-insurance company affiliates had "a negative net worth of $7.5 million." The Companies' independent auditors issued a statement in their report accompanying HOWIC's financial statements for the years ended December 31, 1993, and 1992, that uncertainties relating to the estimated premium reserve deficiency of HOWIC raised "substantial doubt about the company's ability to continue as a going concern." Moreover, consulting actuaries retained by the Bureau to perform an actuarial analysis of the outstanding reserve liabilities underlying
(1) Shortly before the Companies were placed in receivership, their management commenced an effort to obtain funds from new investors. A "Confidential Private Offering Memorandum" dated September 1, 1994, was compiled and distributed for that purpose. References in this Report to the memorandum are for information purposes only and do not constitute ratification or adoption of the material contained in such document nor an indication that the information therein contained has been determined to be accurate or reliable.
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