the insurance business written by HOWIC, estimated that HOWIC may have been insolvent by as much as $47.4 million as of June 30, 1994, based on data provided by the Bureau, HOWIC, and HOWIC's own consulting actuaries. For these and other reasons, the Bureau's experts determined that if regulatory action were not taken against the Companies, they would probably exhaust all their assets to the detriment of Home Owners, Member Builders, and creditors. The Deputy Receiver has since determined that HOWIC was insolvent by more than $116 million as of December 31, 1994.
Background of HOWIC
HOW Insurance Company of Delaware was formed in 1981 under the laws of the State of Delaware and authorized in that year to transact the business of insurance as a risk retention group. In 1988, HOW Insurance Company of Delaware redomesticated to the Commonwealth of Virginia via Articles of Merger filed with the Commission and merged with HOW Insurance Company, A Risk Retention Group ("HOWIC") which was the surviving entity. HOW Insurance Company of Delaware no longer exists.
As a result of HOW Insurance Company of Delaware's merger into HOWIC, HOWIC is treated as having operated as a risk retention group under the Liability Risk Retention Act, 15 U.S.C. Section 3901 et. seq. (formerly the Product Liability Risk Retention Act) (the "Act"), since 1981. HOWIC received a license from the Bureau in 1988 authorizing it to transact business as an insurance company in the Commonwealth of Virginia. At the time of receivership, HOWIC was authorized to transact business in the District of Columbia and in all states other than Alaska.
The Act, which was passed by Congress to address the unavailability and unaffordability of product liability insurance, permits companies with similar liability exposure, such as manufacturers, to form an insurance company to insure all or part of their liability exposure. The Act allows similarly situated members to insure themselves by forming an insurance company in one state and thereafter to sell coverage to members in any state without having to qualify specifically and be licensed as an insurance company in each state in which covered members reside.
There are a number of restrictions imposed upon risk retention groups. For example, the primary activity of the group must consist of assuming and spreading all or a portion of the liability exposure of its members. Similarly, the risk retention group may only insure members, who are also the owners of the company, and the type of member risk insured must be similar. As a risk retention group, HOWIC was and still is subject to the full spectrum of regulatory controls exercised by the Commonwealth of Virginia, its chartering jurisdiction. The regulatory controls of other jurisdictions, however, are limited by the provisions of the Act. (2)
Insurance Program of the Companies
HWC, a for-profit mutual corporation, was the parent company which owned all the shares of stock in its operating subsidiaries, HOW and HOWIC. As a mutual corporation, HWC was owned exclusively by its members, who were home builders.
HOW was the management company which managed the insurance operations of HOWIC. HOWIC issued insurance policies and certificates, received insurance premiums, and paid the claims that were covered by its contracts of insurance.
The business activities of the Companies are referred to in this Report as the "HOW Program." A builder who desired to participate in the HOW Program was required to file an application and to undergo an underwriting procedure administered by HOW. Once approved as a member of HWC, the builder entered into a builder agreement with HWC and HOW which governed the terms of its participation in the HOW Program. Under the terms of the agreement, the Member Builders were required to make capital contributions to HWC for a certain period of time defined in the agreement for each home enrolled by the Member Builder in the HOW Program. Once a home was enrolled by the Member Builder in the HOW Program, a HOWIC certificate was issued to the Home Owner to evidence the coverages provided by the HOWIC Warranty. The Home Owner was thus provided a direct right to seek certain specified benefits from HOWIC.
The HOWIC Warranty provides two principal coverages. Under the first coverage, a Member Builder provides to purchasers of its newly built homes a two-year limited warranty covering various aspects of the performance of the home and its components. The warranty obligation of the Member Builder pursuant to the warranty is insured by HOWIC through the "Builder Default Coverage" provisions of the HOWIC Warranty. It provides that if the Member Builder defaults on its warranty obligations, HOWIC will cover the cost of repairs to the home for the warranty claim. HOW's agreement with the Member Builder provides for reimbursement to HOWIC for the costs incurred in fulfilling the Member Builder's warranty obligations.
Under the second coverage of the HOWIC Warranty, the participating Member Builder receives insurance from HOWIC against any covered claims that a purchaser of a new home may make during years three through ten after the home's construction for the repair of "Major Structural Defects." Generally, the HOWIC Warranty defines a "Major Structural Defect" as actual physical damage to designated load-bearing portions of the home caused by a failure of such load-bearing portions which makes the home become unsafe, unsanitary or otherwise unlivable. The HOWIC Warranty explains the terms and conditions of coverage and lists the load-bearing portions of a home covered by the policy (i.e., foundation systems and footings, beams, girders, lintels, columns, walls and partitions, floor systems and roof framing systems). Damage to non-load bearing portions of a home, such as the roof, exterior siding or a separately built concrete floor, generally do not constitute Major Structural Defects.
Under the second coverage, the Member Builder gives no express warranty to the purchaser for such repairs. The HOWIC Warranty provides that HOWIC, not the Member Builder, will pay for the cost to repair Major Structural Defect damage on behalf of the purchaser during years three through ten after the home's construction. HOWIC will pay for the cost to repair actual physical damage to the home resulting directly from the Major Structural Defect. For example, certain foundation failures should typically be expected to result directly in physical damage to sheetrock and other finishes.
(2) The status of HOW and HOWIC under the Act has given rise to litigation. See i.e., Home Warranty Corp. v. Caldwell, 777 F.2d 1455 (11th Cir. 1985).
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