The Complete ELNY Saga

21 Years of Mismanagement, Corruption, Broken Promises and Shattered Lives

by Bill Coffin, Elizabeth Festa, Warren S. Hersch, Michael Stanley, and Shawn Moynihan

For more than two decades, the Executive Life Insurance Company of New York (ELNY) has been bled for billions of dollars while languishing in a state-imposed purgatory. Soon, due to years of mismanagement by the very institution charged with saving it, ELNY will begin denying hundreds of innocent victims the compensatory payments they depend upon to survive.

ELNY entered rehabilitation in 1991 as a solvent insurance company incorrectly treated as if it were insolvent: It fell under the aegis of the New York Liquidation Bureau—a rogue agency known for its codes of secrecy and characterized by many who spoke for this story as ineffective and mismanaged at best, and a snake pit of corruption at worst.

Now, ELNY is being liquidated, and some 1,500 insureds who have been receiving lifetime streams of sustaining payments are going to see those checks cut by as much as 60%. Many of these accounts are families who will face crippling financial hardship—including bankruptcy, foreclosure and missed medical procedures—as a result.

ELNY’s road to ruin is a cautionary tale for anyone who buys or sells insurance, and especially any carrier that might one day also come under scrutiny by its home state. For the industry at large, ELNY’s destruction will have a far-reaching legacy: a host of policyholders and their loved ones left deeply bitter about their treatment— violating the foundation of trust upon which the insurance business stands.

What follows is the story of how the guardians appointed to save ELNY failed miserably, a slow-motion disaster of gross mismanagement that has played out for 21 years—and how some of the recipients in most dire need of the payments they were promised will be the ones who ultimately pay the price.

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I. The Hunter

Every morning, Diane Dziak gets up at 7:30 and reads the newspaper for a few minutes while waiting for her husband, Jim, to stir. For almost as long as they have been married, Jim has been paralyzed from the chest down, and depends on his wife Diane to help him dress, eat, move about the house, transfer from bed to recliner to wheelchair and do just about anything else.

In her limited downtime, Diane manages the house. She does this until 11:30 in the evening, when she and Jim go to bed. Then it all starts again the following morning.

It has been like this for the last 27 years.

The last time she and Jim were out for a nice evening together was in 1990, on their 10th wedding anniversary. Now, on any given evening, they do very little at all. “I’m 53 years old and we just sit at home, listening to the clock tick,” Jim says. “We have no life.”

Jim and Diane were married in 1980, at the age of 23. Five years later, they bought a house in Lorain, Ohio, a fixer-upper where they intended to raise their family.

January 12, 1985. Six months after moving in, Jim went out on a Saturday morning to hunt rabbit with some work buddies. He kissed Diane good-bye as she lay in bed, fighting off a cold. Their preschool-age kids were munching cereal as their dad left the house on his own for the last time.

The trip did not last long. One of the friends in the group was Mark Brletic, a first-time hunter who had only just passed his hunter’s safety course. As the hunting party crossed the snowy fields in search for quarry, they came to a picket fence and climbed over it, one by one. Mark went after Jim, and tried to climb the fence with shotgun in hand. He slipped on some ice, squeezed the trigger and blasted Jim at point blank range.

Jim’s body had been riddled with #6 buckshot. Pellets narrowly missed his heart, but his lungs and kidneys were badly perforated.

Diane came to the hospital and stayed by Jim’s side until he woke up the next day and learned that he would never walk again. Jim had also suffered extensive spinal damage from the blast, which paralyzed him from the chest down.

Numerous buckshot pellets were too deeply embedded in Jim’s kidneys and back muscles to be extracted and would cause him chronic pain for the rest of his life. He had also suffered extensive nerve damage that made it difficult for him to regulate his bathroom activities.

Another side effect of the nerve damage was profuse sweating. Several times a night, Diane would have to roll Jim over and place a beach towel underneath him, which he would soak through in about two hours. That spring, they finally went to the Mayo clinic to see if there was anything they could do for him. Not really. They prescribed Robinul to stop the sweating, but more than anything, they wanted to know who worked on him back in Ohio. They had never seen such a hack job.

Jim’s working days as a customer service rep for ChemLawn were done. Diane, a nurse who worked with geriatric patients, was now also out of a job because she was needed to take care of Jim all day, every day.

The Dziaks would have faced certain financial ruin were it not for a legal settlement offered to them pre-emp-tively by Mark Brletic’s homeowner’s insurance company, American Select. The offer was simple: in exchange for not suing Mark for negligence, Jim would receive a structured payment in which he received $1,550 a month for life, with lump sum payments every five years for varying amounts. The next one, in 2015, is for $100,000. A $400,000 payment is due in 2020. If Jim dies before turning 50, the payments would still continue until his 50th birthday, with Diane as the recipient.

This arrangement is known as a structured settlement annuity, and it is a common payment structure for lawsuits in which the injured party can be set up with a dependable income stream. The Dziaks were advised by their county prosecutor to accept the settlement offer—which they did.

They were told, as is the case with structured settlement annuitant payees, that their payments were guaranteed and would never stop as long as Jim was alive. If Jim dies before turning 50, the payments would still continue until his 50th birthday, with Diane as the recipient.

While a man with Jim’s injuries has a further life expectancy of 10 years, Jim has lived for another 27. He is 53 years old today, but neither he nor Diane feels particularly thankful. He routinely suffers from bedsores from his lack of movement. The pellets in his body require a cocktail of pain medications that have made him gain so much weight he avoids having his picture taken. To cut down on the frequent infections his catheterizations cause, Jim uses disposable, sterile catheters that his health insurance company routinely resists paying for.

“Ninety percent of spinal injuries end in divorce. But Diane stuck with me,” Jim says with a mixture of gratitude and regret. He knows as well as she does that she has had virtually no life of her own since the accident, either.

Still, there are glimmers of hope. When getting MRIs, he jokes with the technicians that he hopes the buckshot in his body won’t suck him through the big magnetic tube. And there are his grandchildren, which he loves dearly. “If not for them,” Diane says, “I don’t think he’d have the will to live.”

On December 7, 2011—Pearl Harbor Day—the Dziaks received a letter that looked suspiciously like junk mail, but Diane noticed the mailing address and opened it up. She almost wishes she hadn’t.

The letter informed her that Executive Life Insurance Company of New York (or ELNY), the life insurance company that was funding the payments on Jim’s settlement, was broke. His structured settlement payments, among some 1,500 others across the country, would be reduced in value as ELNY underwent restructuring and liquidation. His payments would go down by 52%, to about $744 a month. His lump sum payments will be likewise reduced.

The Dziaks know this will cause severe financial problems for them. Jim's medical prescriptions alone cost some $400 a month; his catheters cost about $1,300 a month out of pocket. Their house is in need of renovation, and still does not yet have the numerous disability modifications they have long needed.

News of the financial cut caused Jim’s blood pressure to spike to dangerous levels, and he has since fallen into a deep depression. Some days, death looks better.

“I’d never harm myself. I’m not a coward,” he says in between long, slow breaths. But he has obtained a do-not-resuscitate order on himself. “If something happens, it happens. I’m not supposed to be around this long already.”

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How did things get like this for the Dziaks? Why is a family that has already suffered so much being made to endure even more hardship? And why are some 1,500 other families being thrust into similar financial straits, with a sudden cut to the financial lifeline that has sustained them for the last 20 years or more?

It begins with First Executive Corporation (FEC). FEC owned the Executive Life Insurance Company of California, or ELIC. ELIC, in turn, owned the Executive Life Insurance Company of New York, or ELNY.

FEC was a financial mess in the 1970s, but under the leadership of CEO Fred Carr, it transformed itself by offering new life insurance and annuity products through ELIC and ELNY that outpriced competitors and offered benefits good enough to lure business away from other insurers. It recruited top career agents who were falling away from other companies and going independent for the first time. But most of all, it invested heavily in high-yield bonds sold by none other than junk bond poster boy Michael Milken. In return, Milken provided FEC with a limitless outlet for selling its own stock. By the mid 1980s, FEC had become an apex predator of the life insurance industry.

In 1986, the value of junk bonds collapsed right as FEC was the world’s largest holder of them. The Tax Reform Act of 1986 allowed ELIC policyholders to bail out from signature products such as single-person deferred annuities and whole life insurance, and as the negative publicity about FEC’s investments in junk bonds intensified, ELIC policyholders began to surrender their policies in large numbers. This created the insurance equivalent of a run on the bank. Since no insurance company ever has on hand all of the money it would need to cover all of the insurance it has in force, ELIC had to raise capital to fund its surrenders, and that meant a fire sale of its junk bonds. This only further wrought havoc among the junk bond market, putting ELIC into a financial tailspin. It sought huge loans it could not repay, it tried unsuccessfully to sell off its subsidiary ELNY and by 1990, FEC stock had become worthless. On April 11, 1991, California Insurance Commissioner John Garamendi got a court order to seize control of ELIC. FEC filed for bankruptcy soon thereafter.

ELIC underwent a fairly orderly liquidation over the next three years, but ELNY experienced a much different fate, though there are conflicting accounts of what happened next.

Speaking on background, the general counsel of one of the industry’s largest life insurance companies said that ELNY, like ELIC, was overly invested in junk bonds, and the run on the bank that tanked ELIC in California was starting to happen in New York, as well. To stop the bleeding, New York insurance commissioner Salvatore Curiale stepped in and got a court order to take ELNY into receivership.

According to New York insurance law, when an insurance company falls into state hands, the superintendent of insurance can name an agent to manage the estate’s financial rehabilitation. If the source of the company’s financial distress cannot be removed and the company returned to financial solvency within a reasonable amount of time, the company must be liquidated. Then its assets and viable books of business are sold off so there is as much money on hand to pay what remaining claims there may be.

ELNY was the first big life insurance insolvency in New York in 45 years, and at the time, it was an unusually large company to go into receivership. ELNY’s administration was delegated to the New York Liquidation Bureau, which consists of a team of administrators who contract with outside insurance companies, actuarial firms, accountants, legal teams and other professionals to get companies’ affairs in order.

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"How could ELNY have been in receivership for so long and no real plans be made to make sure that these funds would be there for us when we needed them the most?”

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ELNY’s immediate rehab plan, once it fell under NYLB control, was to continue paying all claims to policyholders and annuitants, and to declare a moratorium on cash surrenders (to stop the ”run on the bank”) unless the policyholders could show they were doing so because of genuine financial hardship. Meanwhile, actuarial firm Milliman & Robertson and asset manager Credit Suisse (then First Boston) were called in to come up with an asset management plan. They determined that if they sold off ELNY’s devalued junk bonds, the returns would be so low it would leave ELNY unable to pay out on its various policyholder obligations. If that happened, the only way to make ELNY whole would have been to apply a reduction in what ELNY owed all of its policyholders and payees by about 34%.

This was considered “crystallizing” the loss from the junk bond sale, and nobody was eager to do that, so they went to plan B: to sell off two of ELNY’s three books of business and use the proceeds to fund the remaining book. Meanwhile, the bond portfolio would be sold off gradually and ELNY’s asset blend changed to 30 percent equities (common stock) and 70 percent highgrade bonds. The NYLB and its outside experts collectively concluded that the plan had a 90 percent probability to meet all of its obligations to its remaining annuity payees over time.

The trick was selling off ELNY’s $300 million portfolio of whole life insurance and its $1.2 billion book of single-premium deferred annuities. The NYLB solicited nearly two dozen companies, but industry giant MetLife emerged as the perfect candidate. MetLife was financially strong, and its insurance policies used language that was very similar to that used by ELNY. It had experience with taking over blocks of business from failed insurance companies. And most of all, it was willing to pay ELNY policyholders 100 cents on the dollar as well as deliver all of ELNY’s payment checks for a fee (about $1 million a year). A court-approved plan to sell the books of business and to retain MetLife for payment distribution was approved in 1992, leaving ELNY with only one book left: a $3 billion portfolio of structured settlement annuities.

At the time, annuities were not the enormous business that they are today. At present, nearly half of all life and health insurance income comes from the sale of annuities. Only about a quarter comes from the sale of actual life insurance. The rest comes from health and disability insurance.

Structured settlement annuities are a small subset of the annuity business, wherein the plaintiff of a sizeable legal dispute is offered a settlement. Only instead of being given a lump sum, the defendant (whose legal liability is usually paid for by property and casualty insurance) buys an annuity from a life insurance company with the plaintiff as the payee. This arrangement is used most commonly in cases where the plaintiff is under 18 years of age and cannot legally take possession of the money, and where the settlement is intended to fund a secure income.

Structured settlement annuities are different from regular annuities because they are not the property of the payee and have no cash surrender value. This means that they are locked in for the lifetime of their payees and present about the longest kind of liability that the life insurance world has to offer.

ELNY sold a lot of structured settlement annuities, and it was this book of business that the sale of ELNY’s whole life and single-premium deferred annuities went to fund. Over the next 10 years, the plan proceeded as intended. ELNY worked out its junk bond portfolio and deployed its excess cash into equities. But then two problems emerged. First, the rehabilitation plan was predicated on 30-year U.S. government treasuries holding at an average of nearly nine-and-a-half percent interest. Interest rates began sliding below that mark almost immediately after ELNY went into receivership and never came back again. They are currently around the two percent mark.

The second problem was that the plan never imagined bonds outperforming equities, which has since come to pass. So while the bonds portfolio was losing ELNY, the equities portfolio was losing even more. Almost as soon as ELNY went into rehabilitation, it became unable to cover its own costs. If uncorrected, the company would eventually become truly insolvent.

Which it did.

II. The Accountant

It is August 11, 1983, and after a long car ride home from a fishing trip near Baltimore, Maryland, with her father and uncle, 11-year-old Jeanice Dolan really needs to pee.

Jeanice had been sitting in the back seat of her uncle’s white Honda, but once she had to go, her father pulled her up to the front so she could sit on his lap. The plan was that they would cross an upcoming bridge, then pull over so Jeanice could run into the woods on the side of the road. Before they got that far, an oncoming drunk driver crossed the centerline and smashed into their car head-on.

The impact pinned Jeanice between the dashboard and her father, shattering the upper shaft and ball of her right femur, and driving a large shard of glass into her right thigh. Moments before, she had been sitting in the center of the back seat without a seat belt on; had she not moved up to the front, she probably would have been ejected from the car and killed instantly.

Within the hour, Jeanice was delivered to the shock trauma unit at Johns Hopkins. The wound on her thigh severed some nerves and would cause her serious chronic pain for the rest of her life. She underwent seven hours of emergency surgery to reconstruct her femur, spent the next week in the hospital in excruciating pain, and the next two and a half months in a halfbody cast.

During her recovery, the shattered part of her femur became necrotic, which normally would have required hip replacement surgery to fix. Jeanice was too young to qualify for the procedure, however, so all she could do was live with increasing levels of pain and immobility. She began walking with a severe limp. She could not rotate her leg externally, and she could not bend at the waist by more than 30 degrees. She began wearing a three-inch shoe lift on her right foot. At the all-girls school she attended, classmates referred to her as “Peg-Leg.”

Over the next three summers, Jeanice underwent additional bone shaving and pin installment surgeries every summer to correct the debilitating bone spurs that were developing on her femur. When she finally got her first hip replacement at the age of 21, Jeanice felt like a new person, but she still could not run, do squats or play tennis. What she could do, however, was skydive. And so she did. Despite her doctor’s misgivings, Jeanice hit the silk and her first jump was a perfect tiptoe landing. She was hooked, and soon skydiving was her main hobby. For her whole life to that point she could never do anything athletic, and now she was going to make up for that.

By trade, Jeanice had become an accountant for Deloitte & Touche, but through skydiving, she met her husband, and together they opened their own business—Ocean City Skydiving, in Ocean City, Maryland. Her husband is the chief jump instructor. She handles the back office.

Jeanice’s skydiving days ended when, at 32, her replacement hip wore out, right on schedule. Her second hip replacement surgery was, as expected, much harder to recover from. Today, she is 39 and walks as she once did, with a pronounced limp and a shoe lift. She lives in chronic pain, has limited flexibility, and her leg and hip are webbed with scar tissue. She can carry about 10 lbs. for 30 feet before she loses her strength. Driving a car for more than an hour, or sitting still for a few hours is very uncomfortable.

Jeanice expects that by the time she is 50, she will be confined to a wheelchair, and that she will require at least one more hip replacement, if not two. Most of her additional health care costs have been covered by a structured settlement annuity her parents set up when they sued the drunk driver who injured her. Jeanice was only 14 at the time, and two annuities were set up for her. The first currently pays her $3,124.39 a month with a four percent annual cost of living increase. The payments are for life or until 2026 if she dies before then. There was a lump sum payment up front to cover initial medical and legal costs. One more lump sum payment, for $100,000, was paid in June 2012. A separate annuity pays her $2,000 a year until 2037.

Like many ELNY structured settlement payees, when she received her letter on December 7 informing her that ELNY was undergoing liquidation and that her payments would be cut, she nearly threw the letter out without opening it. To her, it looked like junk mail, arriving at a time when her mailbox was full of it. But she noticed “ELNY RESTRUCTURING SUPPORT CENTER” in the return address and opened it up. The payments on her big annuity will be cut by 47 percent. If she lives to 75, she calculates, she will have lost some $1.5 million in payments.

Jeanice’s payments were earmarked with her increasingly expensive health care costs in mind. She and her husband bought a lot on December 20, 2010 to build a new house for themselves that would be designed around her limited mobility. They broke ground on September 7, 2011. When the letter came three months later, in December 2011, the construction stopped immediately. Jeanice expects she will have to sell the partially constructed home at a loss when the reduced payments kick in at an as-yet-undecided point in early 2013.

“I’ve talked to lots of people with injuries far worse than mine. Their stories are just heart-wrenching,” Jeanice says. “So to some extent, I feel fortunate. I feel like I’m being a little selfish, but at the same time, I still have my own injuries.”

More than anything, Jeanice’s cuts offend her accountant’s sensibilities, because she would like to know how a solvent insurance company managed to self-destruct while under direct government supervision, and why she never heard a single update as to ELNY’s financial health until now, when the company had passed the point of no return.

“I know the rehabilitation was in 1991,” Jeanice says. “But to know that it’s taken them this long to understand that the money is not there, I think that leads people such as myself—and even other shortfall payees who don’t have an expert background in reading financial statements—to think that things were mismanaged. How could ELNY have been in receivership for so long and no real plans be made to make sure that these funds would be there for us when we needed them the most?”

Jeanice says that at the settlement table, her father was told explicitly that her payments would be guaranteed, that ELNY was triple-A rated and that it had no chance of going out of business. There are guaranty funds in each state to provide some financial backstop for insurance customers when an insurer goes under, much like the FDIC does for bank accounts. But in Maryland, the state guaranty association will only cover the value of her annuity up to $250,000. The annuity itself, however, is worth several times that.

Jeanice notes that if ELNY’s assets had been liquidated back in 1991 and distributed so that all payees received a 34 percent cut across the board, then she would prefer to take her money, plus whatever her guaranty association pays her, investing it on her own, and paying herself monthly distributions. To see her payments get cut and continue to be administered by the same people who mismanaged them the first time is asking her to assume too much risk. She feels she has received one liquidation letter too many already. There is no guarantee she will not receive a second at some time in the future when she is even less able to take a further reduction in her payments.

“There are more than 1,500 of us affected by this, and we had to pay somebody to look out for our interests,” Jeanice says. “From my insurance commissioner to the Maryland guaranty association, there is not one agency looking out for us. Not one.”

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Ronald Kehrli, the president of ELNY at the time it went into receivership, contests the conventional explanation for ELNY’s downfall. ELNY should never have been entered into receivership, he says, and its insolvency is more a matter of incompetent accounting than an actual shortfall of funds. Plus, he contends that the NYLB has managed ELNY in a way that calls for investigation.

It is impossible to tell exactly how ELNY began to perform once it was in rehabilitation because the NYLB is not bound by the same rules that regular insurance companies must abide by. Specifically, it did not have to file financial statements, and as a result, there are no financial reports whatsoever for ELNY for the years 1990, 1991 and 1992, the most critical years for which there ought to have been statements.

ELNY was taken into receivership in April 1991, right before it published its 1990 annual report. After the takeover, that report was never published and has since disappeared. The NYLB filed no reporting of any kind on ELNY in 1991 and 1992, creating a blind spot in the company’s financials when the need for transparency was arguably at its greatest. In 1993, state law required NYLB to provide annual financial statements for all companies in receivership, and the NYLB complied with single-sheet overviews to each company that provided less detail than what any small business owner would provide to their accountant. The first reports gave only grand totals for assets and liabilities, breaking down neither in even the broadest sense. If the company was being mismanaged or plundered, there was no way to tell from the NYLB’s minimalist reporting.

It is impossible to tell exactly how ELNY began to perform once it was in rehabilitation because the NYLB is not bound by the same rules that regular insurance companies must abide by.

But ELNY had other problems. Within a few years, the rate of return on its bonds was not performing as it needed to, so Credit Suisse dedicated more of ELNY’s wealth to be invested in common stock. The amount fluctuated from year to year, but for several years, as much as 40% of ELNY’s total assets were invested in stocks. In insurance terms, this is the equivalent of putting one paycheck a month into lottery tickets in the hope that enough will win to pay the mortgage. Insurance companies in New York (and across the country) are prohibited from investing so heavily in common stock because it exposes them to excessive financial risk. The average ceiling is 20%, but ELNY doubled that more than once, When the dot-com bubble burst in 2000, ELNY lost more than $100M in that downturn alone.

And then there were underwriting and accounting irregularities. Between 1999 and 2000, auditing firm Milliman & Robertson increased ELNY’s gross liabilities by $500 million. This came at the request of the NYLB itself, Kehrli says, and was not pursuant to any independent review or analysis by Milliman. For years after ELNY went into receivership, Kehrli maintained a management team intent on buying ELNY from the NYLB. He believed the company still had what he calls “significant embedded value,” and that both MetLife and Milliman were reporting unreliable information on ELNY’s financial deterioration. In short, Kehrli did not think ELNY was nearly as bad off as the NYLB was saying it was. That all changed with the increase in ELNY’s liabilities, which turned the company from a solvent entity deserving to exit rehabilitation into one that deserved to remain under the NYLB’s control.

Some $300 million of the liabilities increase, Kehrli explains, was assigned to period-certain policies, which offer a fixed number of payments at a fixed amount and are not subject to cost-of-living increases, so to increase liabilities for business such as that was highly unusual.

“Moreover, the increase was not done pursuant to any due diligence on behalf of the Bureau, MetLife or M&R,” Kehrli said. “The manager of the warehouse where all the ELNY case files are stored told me no one has ever reviewed any underlying ELNY case files after they were originally stored in the warehouse.”

Kehrli recalls that years after ELNY went into receivership, he obtained permission to review the company’s policyholder files, and he found even further evidence of outright accounting errors. “One woman was to receive $100,000 a year for 10 years, and at the time, it was her eighth year. She had already received $700,000 and she had the eighth, ninth and tenth years to go. Well whoever was handling the reserving were reserving for the full million dollars. Seven years had already been paid. Why were they not reserving for $300,000 instead of $1 million? That is what accounted for the shortfall.”

Milliman & Robertson also applied a 120-year life expectancy to all ELNY policyholders when re-calculating the company’s gross liabilities. A 120-year life expectancy is not unheard of in life insurance accounting, but it is an extremely conservative figure, considering that, according to the U.S. Census Bureau, the average life span in the U.S. was 75.5 in 1991 and by 2010 had only risen to 78.3. It is even more conservative when considering that most of ELNY’s structured settlement payees are living with substantial bodily injuries. Even though some, like Jim Dziak, have lived far longer than the expected, Kehrli notes that his own mortality studies of ELNY’s structured settlement annuitants shows that if the average American is living to 78 years old these days, the average ELNY annuitant is living to around 50.

There were also reporting discrepancies as to the number of active policyholders. For example, in the NYLB’s 2002 report on ELNY, there were 13,124 active policyholders, more than 9,400 of whom received payments. According to MetLife’s own accounts, however, ELNY only had 9,144 active policyholders and paid out benefits to only 5,778 individuals. Neither the NYLB nor MetLife ever explained the discrepancy.

Further irregularities call into question the manner in which ELNY’s gross liabilities were calculated. Kehrli’s team reviewed the birth dates of ELNY policies used by Milliman & Robertson in their actuarial analysis, and discovered that some 6,000 contracts involved policyholders born between 1992 and 1994. But ELNY went into receivership in 1991, and was unable to write any further business after that. So how did as-yet unborn policyholders enter the rolls after ELNY became the ward of the state?

“ELNY isn’t insolvent,” Curiale told the Times on April 17, 1991, “and has ample cash on hand to pay life insurance death benefits and meet annuity payments.”

For Kehrli, it all points to the suspect way in which the NYLB operates. He recalls how, in 1991, he spoke with New York insurance superintendent Salvatore Curiale, who insisted that New York only needed to take ELNY into receivership because if it did not, California insurance commissioner John Garamendi would seize all of ELNY’s assets to try to balance out ELIC, the parent company. Curiale said as much when he spoke to the Los Angeles Times on April 17, 1991. “ELNY isn’t insolvent,” Curiale told the Times, “and has ample cash on hand to pay life insurance death benefits and meet annuity payments.”

In fact, Kehrli says, ELNY had $2 billion in cash equivalents and $4 billion in securities in 1991, and could have withstood any potential run on the bank. It made $69 million in 1990 on its investments, and it was making 11% on its high-yield bonds, which Kehrli insists were not junk. The bonds ELNY had were either obtained or renegotiated after New York passed legislation in 1987 prohibiting insurers from investing in excessive high-yield risk. ELNY’s bonds might have looked like ELIC’s bonds at a passing glance, but they were in accordance with New York’s statutory risk tolerances. Because of negative publicity surrounding ELIC, he says that ELNY did experience a higher rate of policy surrenders than usual, but he said it was not at a crisis level. The NYLB thought differently and proceeded with selling off all but the structured settlement business and keeping only ELNY’s bond portfolio. By constraining revenue in this way, Kehrli says, the NYLB created the precise kind of financial instability it was supposed to prevent.

In the years that followed, Kehrli tried in vain to buy ELNY from the NYLB, which typically fell apart as soon as he began asking for financial information on ELNY after it entered rehabilitation. “One time we wanted some information and they told us that they needed $50,000 to make sure that we were an interested party. The Bureau wanted this as good faith. We were just looking for runs of the policies. We paid close to $50,000 for information that we already had.”

At one point, Kehrli had an investment group from London ready to put down $3 billion for ELNY, but he was foiled in his attempt to square the data MetLife had on ELNY and what the NYLB had on ELNY. He could not even get access to speak with Credit Suisse on how they were investing ELNY’s money. An NYLB staffer noted that they never met with Credit Suisse to discuss investments; Credit Suisse had full discretionary authority to invest ELNY’s money without any kind of oversight.

Eventually, Kehrli’s investors lost interest and he gave up on ELNY altogether. The entire episode has left him bitter and disillusioned over how the company was handled, especially since its 170 employees were eventually let go once the NYLB no longer had any use for them.

“I have since seen Sal Curiale at functions and he has said they were wrong for taking the company,” Kehrli says. “That’s after the fact, of course. Now, it means nothing.”

III. The Pawn

It is I969, and one-year-old Eric Rabinowitz has just had eye surgery to correct congenital cataracts in his right eye, but something has gone horribly wrong.

Eric’s surgeon, Dr. Herbert Katzin of the Manhattan Eye, Ear and Throat Hospital, accidentally left some lens material in Eric’s eye. He failed to check up on it, and as a result, Eric’s eye soon went totally blind. For the next four years, no New York doctor would agree to work on Eric’s left eye after seeing what had happened to the right one, so Eric’s parents took him to Philadelphia for surgery. His left cataract was successfully removed, but the surgery provided only relative improvement to Eric’s vision. He was still essentially blind in his left eye, which with eyeglasses nearly three quarters of an inch thick, could correct Eric’s vision to 20/70.

Eric is now 44 and can only see a few feet in front of him. He cannot pick somebody out of a crowd. His left eye is especially sensitive to sunlight and his right eye is milky white. He has never read a book from cover to cover, as reading more than a few pages at a time leaves him exhausted and with a splitting headache.

In 1983, when Eric was 15, a family doctor identified Eric’s eye condition as the result of malpractice, and the Rabinowitzs sued Katzin, securing a $2.25 million settlement. The judge in the case brokered the settlement and convinced the Rabinowitzs to accept a structured settlement annuity so Eric could have an income stream for life that would help defray the extra vision care costs he would face, as well as the burden of living in a big city, such as New York, where he could rely on mass transit. (Eric’s vision is so bad he cannot possibly drive a car.) The judge sold the notion of a structured settlement annuity as a very low-risk proposition, which is true under normal circumstances. The only way the money could ever be in danger is if the state of New York itself went out of business, Eric recalls the judge saying.

When Eric reached adulthood, he began collecting his monthly payments, which became his sole source of income. (He declined to say exactly how much his monthly payments are currently.) While Eric pursued a music career, he had no idea that ELNY had gone into receivership or that the company’s finances were upside down by 2002. So it came as a surprise to him in 2007 when he got a call from Governor Eliot Spitzer’s office asking if he would like to be present at a press conference announcing that the state of New York had fixed ELNY’s financial problems.

ELNY? Financial problems? These things were off Eric’s radar entirely, but Spitzer had a Town Car pick up Eric anyway. At the press conference, Spitzer, insurance superintendent Eric Dinallo and NYLB head Mark Peters jointly announced that ELNY had run into a $600 million shortfall, and that thanks to the NYLB’s timely intervention, structured settlement payees like Eric would continue to receive their payments in full and on time. Then Eric was given the podium. He said he didn’t know that ELNY was in trouble, but he expressed his gratitude to Spitzer and company for addressing the problem. “Spitzer was happy to help us and we were happy to thank him,” Eric says.

After the press conference, Eric was dropped off at his apartment, and he never heard from the Governor or the NYLB again until last December, when he got his liquidation letter and learned that his payments would be cut by 55%. Eric has been livid over the cuts ever since.

“We were promised in front of a live audience that this was being done and then it wasn’t,” Eric says. “Nobody ever said, ‘˜Hey, remember that guarantee we made? It couldn’t happen, so you better start saving your money for Doomsday.’ But they were happy to have me come down and sing the praises of their whoremaster governor.”

Compared to other shortfall payees, Eric is not in particularly dire straits. He says that he will have to live much more frugally, but he is not facing eviction or bankruptcy. In fact, his overall exposure makes him a curious choice to have been invited to the 2007 press conference, considering how many other shortfall payees within ELNY’s SSA portfolio who were living in New York City at the time, and with much more serious conditions.

Eric contends that the NYLB intentionally sent his liquidation letter in a fashion and at a time when it would likely be overlooked. Likewise, he feels that the timing of the letter and the short amount of time given to file an objection was also intentional to prevent him from filing an objection.

“They knew this thing was in trouble since 2007, when the investments that were promised weren’t made,” Eric says. “They could have let me know in 2008. But no, they waited until the very last second so I wouldn’t have a chance to lawyer up and go to war.”

If so—and his accusations were echoed by every other shortfall payee interviewed for this article—then it would be consistent with a pattern of behavior from the NYLB that lives up to its reputation as a rogue agency known for a culture of secrecy, corruption and mismanagement. When Spitzer held the 2007 press conference, it was as much to announce the reformation of the NYLB itself as to announce the rescue of ELNY. But neither problem would be fixed so easily, and in the case of the NYLB itself, it remains a problem that somehow seems to resist every effort made to solve it.

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In New York State, the superintendent of insurance has two roles. The first is as the chief regulator of all insurance matters. The second, and less commonly known, is to act as the sole receiver of any insurance companies that become insolvent. Technically, when ELNY went into state custody, it went into the custody of the superintendent of insurance. But since the superintendent has other things to do, he or she can name agents to administer the affairs of the estate of any insurance company in receivership. If an insurance company went insolvent tomorrow, the insurance superintendent could, if he wanted to, name David Letterman as his agent to figure out whether the company can be saved.

What really happens, however, is companies in receivership are sent to the New York Liquidation Bureau, an obscure, quasi-official entity first created in 1910 and which has dwelled in the shadows of the state regulatory apparatus ever since. It was not even mentioned in state insurance department annual reports until the 1950s. The NYLB is not officially part of the Department of Financial Services, and it is funded by the insolvent companies it oversees, by way of charging those estates for administration services rendered, not unlike how a lawyer or accountant charges by the hour for the work that they do.

The NYLB currently manages close to $4 billion in assets; ELNY is its largest rehabilitation (and has been so ever since it entered receivership). The next biggest estate is half the size of ELNY.

The number of employees at the NYLB ebbs and flows with the number of companies under receivership. Typically, employees of companies that go under NYLB control are gradually dismissed as the company is wound down and its staffing needs diminish. Not always so with ELNY, however. While most ELNY staffers were eventually let go, over the course of its 21-year receivership, the NYLB’s ranks at one point swelled to nearly 500, and the ELNY estate itself always maintained a staff of dozens of administrators. For what exactly, however, remains a question to the NYLB’s critics. ELNY’s claims are handled by MetLife. Milliman & Robertson handles accounting. Credit Suisse handles asset management. What is there left for the NYLB to do, exactly?

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The NYLB is well known among those in the New York insurance community as an organization mired in its own bureaucracy and beholden to an internally enforced code of silence that dovetails with the agency’s traditional resistance to provide more than cursory details on the finances of the ELNY estate. As one staffer put it, “it was a mish-mash, a black hole of information.” Every single head of the NYLB from 1991 until now either declined interview requests or would only speak off the record.

Peter Bickford, an insurance attorney that specialized in insolvencies, has represented several different groups of investors interested in buying ELNY. Much like Kehrli before him, Bickford also ran into difficulty getting the NYLB to provide even basic financial information on ELNY. Requests would go unanswered or face unexplained delays in what Bickford feels was a systemic effort to drag on the process until investors lost patience and walked away. Meanwhile, the NYLB achieved its goal of keeping the financial records under wraps.

It has been this way since 1991, Bickford says. The signs of the NYLB’s culture of secrecy were easy to spot. One example Bickford pointed out was a disclaimer on the footer of the financial reports it filed on ELNY, stating that the numbers on the sheets were, in essence, reliable only for the NYLB, and that any conclusions drawn by anyone else looking at them would be “materially misleading.”

A more serious matter was the persistent body of rumors that corruption was rampant at the NYLB, and that its staffers routinely dipped into the estate coffers of companies like ELNY for their own personal use. Sometimes, the money was seen as a kind of unofficial loan, taken with a sincere intent to repay. Sometimes, it wasn’t. National Underwriter has corroborated these allegations with multiple sources with ties to the NYLB, all of whom asked not to be identified.

By 2003, the problem at the NYLB had gotten to the point that 67 NYLB employees had been sent to take Ethics Commission training. But things did not come to a head until three years later, in 2006, when NYLB superintendent Jody Hall was implicated in corruption charges that resulted in her dismissal.

Hall, who declined repeated interview requests, was indicted for two offenses. The first was charging $3,761 in babysitter and travel expenses from a family vacation to Orlando, Florida back to the Bureau. The greater offense, however involved her husband, Jim, an interior architect. Together, the Halls steered a contract for an interior design job at the NYLB to MB Shapes & Forms, an interior design firm Jim was affiliated with. The contract had four open bids, but Jody instructed that the job go to MB Shapes and Forms, which had agreed to pay Jim 60% of the contract amount, after costs.

Accounts from long-time NYLB staffers, who spoke on background out of fear of retribution, noted that what Hall had done was neither unusual for the Bureau, nor was it egregious in comparison to misconduct by other staffers. Hall and her husband both pled out on the charges, avoiding what could have ultimately been a seven-year sentence for forgery, if convicted. Instead, Jody and Jim had to repay the $8,000 they got from the contract and the $3,761 they billed to the Bureau. Jim was sentenced to three years probation. Jody was sentenced to five, and is in her final year now. Hall was reportedly upset that National Underwriter tried to speak with her. “She is still afraid of what ‘˜they’ would do to her,” a source said.

Exactly why Hall was tagged remains a point of speculation. One insider noted that Hall could be a brusque manager, and that she had fired a staffer, who took revenge by blowing the whistle on Halls’ own misconduct. Another source confided that Hall’s charges and dismissal coincidentally took place at a time when Hall was making persistent efforts to examine the elusive financial records on ELNY.

The Hall fiasco gave the Spitzer administration all the reason it needed to clean house, and it sent in Mark Peters, a fraud prosecutor from the state attorney general’s office, to head the NYLB. Peters fired large numbers of staffers and brought in colleagues to replace them who knew little about insurance or insolvency matters. But their priority was to reform the NYLB and to get ELNY fixed. The NYLB’s 2007 annual report gave a damning description of the Bureau, publicly saying for the first time what many had known for years: that the office has “little viable management structure or professional culture at the most senior level,” and that as it rebuilt the NYLB’s core management team, it would need to address untimely payment of claims, poor employee evaluation methods, gross financial mismanagement in the case of ELNY, and a complete lack of auditing.

Jim was sentenced to three years probation. Jody was sentenced to five, and is in her final year now. Hall was reportedly upset that National Underwriter tried to speak with her. “She is still afraid of what ‘˜they’ would do to her,” a source said.

Intent on creating a new atmosphere of transparency and accountability, Peters immediately ordered his own audit of the NYLB, and as of 2009, state insurance law required the NYLB to submit audited financial statements to the Department of Financial Services and to the state legislature for all estates in rehabilitation and liquidation.

Today, the NYLB is considered to be more open and transparent than it used to be, thanks in large part to the reforms instituted under Spitzer/Dinallo/Peters regime, with the push for transparent or external financial audits. The ELNY estate got its own website in 2011, attempts were made to reach out to all parties and audits started appearing online even before new legislation required it.

While payees like Eric Rabinowitz would say that the reforms were too little, too late, the Peters regime was an unhappy time for many in the NYLB. “There was a massacre of longtime employees when Peters was there,” said one Bureau veteran who spoke on background. “Peters fired the head of claims, who had been there for 30 years and replaced her with a colleague from the AG’s office, as he did other positions, and they all came in at assistant directorship or directorship levels, alienating long-term employees. I have never seen a place dismantled like that. It was a horrible, horrible time.”

Peters used to swing a comically over-sized baseball bat around in meetings, one person recalled. “You could feel it go by, behind you—it was disconcerting.”

Peters left in 2009, and his replacement, Dennis Hayes, brought more of the same. In an effort to cut down the number of personnel serving the Bureau’s estates, Hayes spearheaded a voluntary separation program and early retirement program. However, he also offered some departing employees a $15,000 bonus if they signed a non-disclosure agreement to not talk about any nonpublic information at the Bureau. This is a standard practice at the state government, and at the Bureau, it reduced payroll payments by $2.4 million between 2010 and 2011. But it also revived old concerns about a culture of secrecy when it became clear that people leaving the NYLB were being paid well to not talk about it. Second, the money for these payments was coming out of estates under management. ELNY was being made to pay those that administrated it to not talk about how they administrated it.

Still, the reduction in head count worked, and the NYLB shrunk from 451 employees in 2000 to only 253 employees today, and the team working on ELNY is the smallest it has been since 1991.

ELNY remained an unresolved issue. Back in 2007, Peters had spent six months in one-on-one meetings with various life and P&C insurers, pressuring them to commit enough money to make ELNY’s books balance. Eventually, Peters declared that the industry had reached an “agreement in principle” and held the press conference at which Eric Rabinowitz was help up as the exemplar of ELNY payees being rescued. At the press conference, Peters, Dinallo and Spitzer announced that ELNY had been fixed. Only it hadn’t.

Peter Bickford, who represented some of the companies involved in that agreement, says that there was never more than a loose oral agreement that no insurer ever put a single dime to. Soon thereafter, Spitzer resigned from office due to his implication in a nationally reported prostitution scandal. Shortly after Spitzer stepped down, Peters left the Bureau, and ELNY’s financial deterioration resumed.

The current efforts to fix ELNY stem from the appointments of Department of Financial Services (DFS) head Benjamin Lawsky and NYLB superintendent Jonathan Bing who took office in 2011. Lawsky meets frequently with Bing and his staff, and the NYLB under Bing has, by all accounts, been leaner, more efficient and more transparent than ever before. It has developed an estate closing project to clear out the backlog of estates. It has checked addresses of payees to make sure they were accurate. If a letter bounced back, the Bureau tried again. It also opened a call center. Progress on that is checked regularly by the DFS.

Fixing ELNY has been a top priority under the Lawsky/Bing regime, which felt that to let the company languish any further would only create further problems for those customers likely to get less than 100 cents on the dollar. Work began immediately on creating a restructuring and liquidation plan that mirrored the 2007 plan: get the industry to contribute enough funds to make ELNY whole. Only this time, the industry would not agree to a full bailout. Many New York insurers never regarded ELNY as a particularly reputable insurer, and those that competed with it had resented ELNY’s aggressive pricing, the way it poached other companies’ agents and the poor manner in which it reportedly treated customers.

Lawsky went to a fall back plan that only required insurers to partially bail out ELNY, which would involve at least some of ELNY’s payees taking a substantial “haircut” in their payments. But better to have some get cut than for everyone to get nothing, so went the logic, and in September 2011, a restructuring plan was officially put forth.

Letters were sent to all ELNY payees in December 2011, with a formal liquidation hearing set for March 15, 2012. Anybody who had an objection to the plan needed to file it by January 15, 2011. It all seemed simple enough. What could possibly go wrong?

IV. The Lawyer

For Daniel Malin, the ELNY liquidation is as much a matter of legal principle as it is one of financial obligation. When Malin was two and a half years old, living in Buffalo, he was run over by a parked car that rolled back on him. Malin suffered various injuries from this brush with death, but the most significant among them was to his eyes. The weight of the car caused a spike in his blood pressure too great for the blood vessels behind his eyes to handle. The vessels burst, and as they healed, they left scarring on his eyes that created an effect like macular degeneration.

Before long, Malin could only see through a narrow ring of peripheral vision. He has no memory of a time when his eyes worked properly. He has great difficulty recognizing other people’s faces and does not have a clear idea of what his wife looks like. For him to make what feels like eye contact with another person, he must look over their head. To strangers, it seems like Malin is perpetually indifferent or aloof. It has been an issue for him on job interviews.

He can read with difficulty, but only if he wears extremely thick glasses or uses some other kind of magnification technology. He can never drive, and even crossing the street is a challenge since he cannot read street signs or spot oncoming cars. Instead, he relies on when other people cross, and he goes along with them. Like Eric Rabinowitz, Malin must live in a city with good mass transit, which is why he currently lives in Manhattan. He would rather live almost anywhere else.

Malin went to law school and is now an attorney who drafts and negotiates media licensing contracts for a major professional sports league. When he was still a child, his parents sued the owner of the car that crushed him, obtaining a multi-million-dollar structured settlement that deferred payments until he was 18. Malin currently receives a monthly payment from it that covers his high cost of living in Manhattan.

Even though he has legal expertise, Malin’s wife had to read the ELNY liquidation letter to him three times before he could understand what was happening. But once it sunk in, he became outraged. How could the state simply waive so many long-standing financial contracts that had been approved in a court of law? How could ELNY have bled so much money and nobody ever noticed? Why were some people being cut while others weren’t? It seemed to him that the ELNY structured settlement payees with the biggest payments were being cut the deepest. This made no sense to him; these people had already suffered the worst; this is why their payments were so large. And now they were getting hit the hardest?

Like other payees, Malin also bristled at the way in which the NYLB notified him about the restructuring. His letter looked like trash, was nearly thrown away, and arrived amid a holiday season of junk mail. He considers himself lucky to have opened it, and he wonders how many other payees got letters and never even read them. And why did the NYLB just send that one letter, in unfamiliar packaging? Malin, like other payees, received a check each month from MetLife, which had been processing ELNY’s payment checks for the last two decades. The restructuring plan had been set in September 2011. Couldn’t the NYLB have included liquidation notices with his monthly checks for October, November and December? The additional costs to the ELNY estate would have been marginal compared to how much money the NYLB had already allowed to leak out of the estate, and at least it would give payees ample opportunity to learn of the liquidation and to prepare an objection, if they had one. Instead, there was just a single letter sent at a time and in a manner easily overlooked by those it affected.

The letter instructed him to refer to Schedule 1.15, a massive ledger that detailed the finances of every structured settlement annuity ELNY still had. Malin looked up his annuity ID# and noticed that nowhere on the Schedule was any information that enabled him to contact other payees. There were some 1,500 people across the country being hit by this, and in a way, all had been isolated from each other, forced to deal with the NYLB on their own.

Malin’s payments would be cut by 60%, reducing his monthly payments to $3,600 for a yearly total of $43,200.

“I know there are people who due to their injuries are completely unable to work. They are in a worse position than I am. And I am very sympathetic to their position,” Malin says. “But a lot of my life decisions have been made around there being this monthly income coming in. Before, I was planning for retirement and purchasing a house. Now, this has completely changed the trajectory of my financial future. Am I going to end up in the street like some people very well might? No. But I don’t need to litigate this case again. I suffered a serious injury that affects me every day.”

“No one could have seen what I saw and had any confidence in the system. You felt like there was this army of high-priced legal assassins there to bury the bodies. It was a joke.”

He wanted to object to the proposed restructuring plan, but he had less than a month in which to do it. Objections were due on Monday, January 16, 2012, the day before Martin Luther King, Jr. day—which in New York is a stateobserved holiday. He scrambled over the Christmas and New Year’s holidays to find a legal team to represent him; thanks to his legal expertise, he knew to contact the firm of Kobre & Kim, which had expertise in such matters and which could take his case. He managed to file an objection by the deadline, but he was only one of a handful of payees to do so.

Most other objections were handled by an attorney named Ed Stone, who Malin has since retained to represent him regarding ELNY.

Malin wanted to make sure that his objection was read by Judge William Galasso, who would preside over the liquidation hearing, but when he contacted one of Galasso’s clerks, he was told that all objections had been filed in a locked cabinet, and as of two days before the hearing, nobody had even looked at them, let alone read them and considered their merits.

Malin testified at the liquidation hearings, a 10-day ordeal that raised a number of red flags, the first of which was where the hearings took place—in the Nassau County Courthouse in Mineola, Long Island. ELNY had been headquartered in Nassau, but the NYLB was itself headquartered in Manhattan. Both Malin and Stone feel that the hearing was set in Nassau County because the court there has no experience handling multi-billion dollar insurance insolvencies. The courts in lower Manhattan, however, do, and may have given greater credence to the objections of payees such as Malin.

Nassau was also difficult to get to, and for Malin, it required several hours of pre-dawn train rides in order to get there by the time the hearings started each morning. He openly questions whether somebody living out of town could have easily made it to the hearings; again, Manhattan would have been much easier to reach.

Malin noticed that the hearings themselves were populated by an army of industry lawyers there to represent property & casualty companies that were still liable for structured settlement annuities bought through ELNY. They were objecting not because of the cuts inflicted on payees, but because if this plan went through, they would be on the hook to pay the rest of their policyholder’s payments, essentially paying the same legal settlement twice. There was likewise a large body of lawyers representing the NYLB, the Department of Financial Services, and NOLGHA, a trade group of state guaranty associations, the failsafes that would be one of the groups paying to cover ELNY’s obligations.

For objecting payees, there was only Ed Stone and several other people like Malin who felt that they were being cut unfairly. Malin feels that one reason why so few payees turned out to the hearings was that they were not told until the day before the hearings began that any witnesses would be called. Given that some payees lived as far away as Alaska, this would not give them all adequate time to get to the hearing, if even they knew there was a hearing going on.

None of the other payees at the hearing had any legal background. Most were deeply confused over how any of this could even be happening. And all of them, Malin says, were roundly ignored by Judge Galasso. At one point, Malin requested that he be given a copy of all other objections filed, so he could compare experiences. Galasso’s answer was to call an immediate recess and go to chambers. When he emerged, Galasso stated that he had sealed the objections because they contained sensitive personal and financial information in them. Malin and Stone both noted that this was not a big problem and was routinely handled either by restricting access to representing attorneys who would face sanctions if they shared any privileged information. No good. Galasso refused to give anyone other than NOLGHA access to the objections. They remain sealed at the time of this writing, and Malin, Stone and numerous other shortfall payees National Underwriter interviewed suspected this was a sop to the NYLB to shield it from a possible class action lawsuit.

Malin describes Galasso as incompetent, out of his depth and uninterested in the proceedings. “The whole hearing had the feeling that it had been orchestrated by the superintendent of insurance and by the liquidation bureau just to get this rubber stamped,” Malin says. “No one could have seen what I saw and had any confidence in the system. You felt like there was this army of high-priced legal assassins there to bury the bodies. It was a joke.”

Malin was especially frustrated by the testimony of NYLB head Jonathan Bing, who Malin described as being annoyed at his cross-examination. In his testimony, Bing admitted that he did not even know that MetLife had been servicing ELNY for more than 20 years. Bing’s defense was that the NYLB has many estates and that he could not be expected to know the details of all of them. Malin counters that ELNY was special, with a billiondollar shortfall and a 21-year history with the Bureau. “You’d think he’d know the basic facts.” (Bing later told National Underwriter that he had, in fact, been aware that MetLife serviced the ELNY estate.)

Malin wonders why no alarm bells went off at the NYLB after the first year ELNY showed a loss. Why not liquidate the estate then? The payees would still receive haircuts, but they would be less drastic. All the successive heads of the NYLB did, he says, is kick the can on taking responsibility for the estate for some 20 years in an abject failure of the Bureau’s self-described fiduciary responsibility to its estates and to the public.

“The idea of a company being in rehabilitation for more than 20 years is deeply aberrant,” Malin says. “Even to an untrained eye, it’s clear where the company’s starting position was and how it inexorably slid toward insolvency. At any point along the way, had they realized what was happening, we would all have been better off.”

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Despite the objections of Malin and other shortfall payees, Galasso approved the liquidation plan, which details how the company’s finances and its remaining structured settlement payments are to be restructured. It is a combination of money ELNY still has on hand, money kicked in by various state guaranty associations (who are collectively represented in this matter by their association, NOLHGA), and money volunteered by the life insurance industry itself. Even then, it will not be enough to cover fully 15% of ELNY’s structured settlement payees. These are the nearly 1,500 payees who count among their ranks Jim Dziak, Jeanice Dolan, Eric Rabinowitz and Dan Malin.

Peter Gallanis, who joined the National Organization of Life & Health Insurance Guaranty Associations as its president in 1999, helped design the restructuring and liquidation plan, especially the aspects that entail the 42 different state guaranty funds that will be paying ELNY’s payees a portion of what they are losing.

Gallanis said NOLHGA was first informed of the developing problems at ELNY at the end of 2005 and beginning of 2006. Before that, ELNY had not been front and center on NOLGHA’s radar, but he credits NYLB for bringing up the problem—and how the guaranty associations could help resolve it—when it did. Gallanis’ priority was making sure nobody would completely fall through the cracks.

To that end, the restructuring plan is designed like a layer cake, with the first layer being the money ELNY has on hand to fund all obligations. This, all have agreed, is currently about $1 billion less than what it needs to be.

The second layer is the commitments by guaranty associations from 42 different states to pay their maximum limits for ELNY payees. Each state guaranty association provides up to a certain amount to backstop each and every policyholder of a failed insurer living in that state. Most states only offer $100,000. A few offer as much as $250,000. New York offers the most, at $500,000. Gallanis notes that no guaranty association has ever failed to make good on its commitments to policyholders, but some payees are considered “orphans” and are not eligible for guaranty money.

Orphans are payees who agreed to a structured settlement while living in a state where ELNY was not licensed to do business (such as Florida, Georgia and eight others), or they might have moved to such a state at the time of the restructuring. These people would be out of luck, were it not for a consortium of 19 life insurance companies that has committed to putting up $40 million to provide “hypothetical” guaranty association coverage up to $100,000 for all orphaned ELNY policyholders and/or payees who are not otherwise covered by a state guaranty association. That is the third layer.

The fourth layer is a top-up feature wherein the life industry will contribute enough cash so that no structured settlement payee that has an annuity worth $250,000 or more will get less than $250,000.

The fifth layer is a separate $100 million hardship fund (plus another $4-5 million to cover administrative costs) committed by the same consortium of insurers behind the orphan fund. The hardship fund is a discretionary pool of money overseen by the JAMS—an arbitration, mediation and alternative dispute resolution firm comprised of attorneys and former judges. Payees who will face acute financial hardship because of their payment cuts (such as being unable to pay for medical care) can apply to this fund for additional money. How much is dispensed will depend on how many payees apply and how deserving they are deemed to be.

This subjective judging rankles many payees who feel that they are being judged a second time on their original lawsuits. As one payee put it, what happens when two injured payees with the same medical hardship apply to the fund, but one has chosen to go to school and become successful with his annuity money while the other did nothing to better himself?

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All objections had been filed in a locked cabinet, and as of two days before the hearing, nobody had even looked at them, let alone read them and considered their merits.

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The layer cake will provide full funding for about 85% of ELNY’s approximately 10,000 remaining contracts. The other 15% will face some kind of benefit reduction. Of those 1,500 payees looking at a reduction, a little less than half are payees of buy-and-hold structured settlement annuities. The way structured settlements work, remember, is that a liability insurance company is usually involved; they are the “deep pockets” being sued in many structured settlement cases. These insurers use the settlement money to buy an annuity from a life company (such as ELNY). But because of how the transaction is structured, the liability insurance company is technically still responsible for the payments even if the life insurance company goes insolvent. In the case of ELNY, there are several prominent property & casualty insurers, including Transamerica and Fireman’s Fund that bought lots of buy-and-hold annuities from ELNY when settling liability claims. These insurers know they are still liable for the payments, so they are proactively contacting their payees to arrange for payments to continue without a hitch. Some insurers, however, are not.

The risk of paying the same claim twice is why liability companies no longer purchase buy-and-hold annuities. Instead, they prefer to buy guaranteed assignment annuities, which is the kind of annuity the rest of ELNY’s shortfall payees receive payments from. In this arrangement, the liability company uses a third party, sometimes a subsidiary or a special-purpose vehicle to be the holder of the annuity and to make payments. In this arrangement, that intermediary is no longer liable to make payments if the life insurer conks out. With ELNY, some 800 of its shortfall payees are in this kind of arrangement, and these are the ones who will have to go through the layer cake to get as much money as they can to get as close as possible to their former payment level.

ELNY’s remaining assets will be liquidated and transferred to a new company called GABC, a not-for-profit captive insurer domiciled in Washington, D.C. and formed by the participating guaranty associations (or PGAs) that are in the layer cake. This means that NOLGHA would essentially become the administrator of the ELNY estate (which may explain why Judge Galasso allowed NOHLGA to retain a copy of the sealed objections and no one else). GABC was domiciled in Washington because New York does not allow the formation of annuity captives.

Not everybody is happy to see ELNY’s assets go into GABC, however. If GABC fails, critics contend, ELNY’s assets will be outside of the State of New York and a bankruptcy proceeding would likely take place under the laws of the District of Columbia, further penalizing the shortfall payees.

These same critics contend that while the layer cake goes a long way to fixing ELNY’s problems there might be a simpler and more effective fix. ELNY was infamous for building generous (sometimes as high as six percent) annual COLA, or cost-of-living adjustments, into its structured settlement annuities. After all, ELNY was selling these annuities, not giving them away, and it priced them aggressively, with equally aggressive benefits to entice customers. The compounded costs of these COLA was a big factor in determining ELNY’s future liabilities.

Since ELNY still has enough operating capital for another 14 years, cutting future COLA instead of future payments would give payees a much smoother transition into their lowered payments. And while this would not entirely fix ELNY’s shortfall, it would go a long way towards it. As far as any of the payees know, this was never even considered.

Another solution is to find alternative sources of funding to top off ELNY. In May 2012, the Department of Financial Services (DFS), under Ben Lawsky’s leadership, made headlines when it fined Standard Chartered Bank $330 million for laundering money on behalf of Iran. When asked where the money was going, the DFS noted that the funds were going into New York State’s general treasury. Again, this money would not have fixed ELNY, but combined with COLA cutbacks, it would go a long way. The DFS has no authority to determine where fine revenue goes. But state legislators do.

For those who will ultimately find themselves with reduced payments, there is no legal recourse other than appealing the restructuring and liquidation plan. (Which Ed Stone is currently doing, on behalf of a growing body of shortfall payees.) One of the most pernicious elements of the restructuring plan is a provision that the NYLB demanded it be granted complete legal immunity for how it handled the ELNY estate. When Galasso approved the restructuring and liquidation plan, he approved that also. Anybody who wants to sue the NYLB or any of its agents over ELNY would first have to sue to have this immunity revoked before proceeding with the initial lawsuit.

V. The Mariner

On February 12, 1983, the SS Marine Electric, a 605-foot, WWII-era bulk carrier, left Norfolk, Virginia in bad weather to run a shipment of coal to Somerset, Massachusetts, assisted a fishing ship in distress, and then continued up the coast. As a fierce storm arose, crashing waves knocked off one of the Marine Electric’s hatch covers, allowing water to flood the hold. This caused the vessel to capsize. 34 men went into the water that night. Only three lived to tell about it.

One of the men who died was Richard Roberts, who was licensed as a Second Mate, but signed on as a Third Mate because the trip was a last-minute run that he figured he could make some easy money on. The Marine Electric, however, was decrepit, with large holes in its deck plating and hatch covers. Despite this, the Marine Electric was repeatedly certified as seaworthy thanks to a mixture of forged paperwork and lax inspection standards.

The disaster spurred a massive overhaul in shipping safety standards, including the requirement that all commercial vessels carry swimmer suits when traveling in the North Atlantic. The sinking also led to the creation of the Coast Guard rescue swimmer program.

None of these things would help Richard’s 27-year-old widow, Mary Jayne, who learned of her husband’s death when news of the Marine Electric’s sinking was broadcast in the radio. She and Richard had only been married for eight months at the time, and had been planning on starting a family.

Grief-stricken, she joined a lawsuit filed by two of the Marine Electric’s survivors against Marine Transport Lines, the shipping company that owned the doomed vessel. The lawsuit took two years, during which Mary Jayne sought grief counseling and leaned heavily on the support of her friends and family to cope with her loss.

Finally, MTL offered Mary Jayne a structured settlement, which she took at the suggestion of her lawyer and father. The settlement would pay her $26,000 a year for life, with an annually compounded COLA of 5%. The payments would continue for life.

The first payment came in 1986, which enabled Mary Jayne to go back to school. She trained to become a hospice counselor and entered that line of work despite its low pay, knowing that her structured payments could make up the difference while she pursued a career she felt would help other people, just as she had been helped in her time of need.

Mary Jayne remarried and had two children. She shifted to working parttime, again made possible by her annuity payments, while she raised them. When they went to school, she returned to full time until March 6, 2010, when her son, Joseph, died in an underwater diving accident.

After that, Mary Jayne could no longer focus on her work at the hospice, and shifted to working as an arts counselor for a non-profit. She retired in March 2011 at the age of 57 so she could spend time with her husband and their 21-year-old daughter, Shannon. Then in December, she got the letter telling her that her payments would be cut by 50%. She lives in Arizona, and will no longer have the money to visit her family back East, nor help Shannon with law school payments, as originally planned. She expects that both she and her husband (a retired computer technician) will have to seek new jobs to make ends meet, but Mary Jayne is not optimistic about their chances.

The ELNY liquidation has reopened old wounds for Mary Jayne, who now dwells on the drowning deaths of both her first husband and her son. She cannot talk about it without breaking down into tears, but she insists that she can’t succumb to what she calls “the victim thing.” She had to move on, and did so by trying to figure out what her options were with ELNY.

She read every article she could about the stricken company and through a blog by structured settlement expert Patrick Hindert located other shortfall payees and Ed Stone. She began corresponding with other payees in a part of an informal support group.

“When I read these stories, I get so upset at some of these situations,” she says. “There are 1,500 of us out there. My cut is one of the worst ones that I saw in that schedule, and I’m not even sure why that is. Why is it 50% for me and 10% for somebody else? It feels arbitrary. I’m feeling it’s because I got it when I was young, I have a long life expectancy.”

The ELNY liquidation has reopened old wounds for Mary Jayne, who now dwells on the drowning deaths of both her first husband and her son. She cannot talk about it without breaking down into tears, but she insists that she can’t succumb to what she calls “the victim thing.”

Mary Jayne is not alone in that; many payees, especially those who were injured as children, had their annuities deferred until they were old enough to legally receive the payments. This concentrated the value of the annuities themselves, and made the cuts that much worse; had the payments begun right away, such payees would not be cut so deeply.

What bothers Mary Jayne the most is that those with the most to cut are the ones with the biggest settlements, and who have suffered the greatest losses. Indeed, a look at some of the shortfall payees reveals a catalogue of human suffering.

A manual laborer who nearly died when he fell seven stories from an unsecured rooftop worksite, who has been gripped by an uncontrollable rage ever since, and who fears he will be sent to jail because he can no longer afford his child support payments.

A young woman who was sexually assaulted because her apartment building manager kept a security door propped open so he could enter and exit without using a key.

A widow of a U.S. Navy seaman who died trying to rescue a civilian contractor trapped by a Freon leak on board the U.S.S. Bainbridge.

A motorcyclist who was cut off in traffic and sent flying into a telephone pole, pulverizing his arm and pelvis, and who later contracted hepatitis C from a blood transfusion in the hospital.

A shipyard welder who was burned over 90% of his body when the torch he was using ignited a leaking gas tank and covered him with flames.

A woman who had all of the skin and muscle torn from her leg when she pushed her four-year-old child out of the way of an oncoming cement truck, and was in turn run over herself.

A young boy who waited at the airport to greet his parents as they returned home from a trip, only to see them burned alive when their plane crash-landed and burst into flame.

To Mary Jayne, for any of these people to have gone through additional hardship seems inhumane. Her husband, she says, was more than just a row on a spreadsheet, and so is every other person who was injured and now receives payments from ELNY.

“There are 30 other families going through what I went through,” she says of the Marine Electric disaster. “I’m not saying you should put a price on somebody’s life, because you can’t. But if somebody did something wrong, they should pay for it.”

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Would the structured settlement annuitants have been better off if ELNY had been liquidated in 1992? Is there something different the rehabilitator could have done over the last 20 years that would have made things better than they are now? Perhaps, but nobody will ever know for sure.

Jim Schacht is a former threeterm director of the Illinois Department of Insurance, a long time insurance receiver and now heads the Schacht Group, a consulting firm that specializes in run-offs and restructurings, regulatory consultation, public policy issues, expert testimony, and other consulting activities for the insurance industry and its regulators. Schacht also chaired the working group overseeing Executive Life of California, and he remains convinced that there were sufficient assets to pay the policies that could be surrendered at both ELIC and ELNY in the near term.

Of course, he says, for the longer term, a corrective plan was needed. He says California did not allow ELIC CEO Fred Carr sufficient time to develop that plan and put the California company in conservation proceedings. With no solution in California, New York had no choice but to place ELNY in rehabilitation. Schacht says he thinks the takeover of ELNY was a reactionary decision.

Rather than focus on what cannot be undone, Schacht points to what he sees is a way forward.

“What’s going on in New York is of question, but that question exists across the country and it needs to be fixed,” he says. “Give the creditors and/or the debtors to come up with a plan in a certain period of time and find a way, if the company cannot be turned around—a quick way, instead of allowing the government 25 to 30 years to fool around with it.”

Schacht recently spent a year working with the Association of Insurance and Reinsurance RunOff Companies (AIRROC) to create the Uniform Insurer’s Run-Off and Resolution Law (UIRRL), an alternative method of insolvency resolution that shares some of the attributes of the U.S. bankruptcy system. This would see to the needs of all creditors, instead of pitting them against each other, as is what happened with ELNY’s payees, their insurers, and their state regulators.

Schacht is not saying that the way to prevent another ELNY debacle is to replicate the UIRRL for the insurance industry, but he does say that there needs to be a way to give creditors a seat at the table during the insolvency process. The guaranty funds take care of policyholders, but all other parties have to sit and wait for a resolution that is usually a long time coming.

“Something needs to be done about the receivership system across the country because we need to have a better system that is more responsive to the needs of policyholders,” Schacht said. “It took 25 years to resolve the receivership of Mission Insurance Company in California. ELNY is not unique—it is a systemic problem across the country. The receiverships take too long and they cost too much. The real parties of interests are the policyholders and other creditors and they are not involved in the process of how this process is going to be resolved. They are kept in the dark.”

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In risk management, the definition of a disaster is when three or more things go wrong independently of each other at the same time. In that context, the ELNY rehabilitation, restructuring and liquidation have been nothing short of disastrous. Not only did regulators fail to protect a company from being dis- mantled by its insolvent parent, it failed to adequately manage the company from Day One. It failed its self-appointed fiduciary duty to serve ELNY’s payees. It failed to act with integrity, and it failed to uphold the social compact between insurers and their customers that if the money needs to be there, it will be there. Always. Without fail. Without exception.

Insurance cannot work if the public cannot believe in insurance companies and the agencies established to regulate them. At every single turn with ELNY, there was failure after failure to uphold the public’s trust. The state of New York, and especially the New York Liquidation Bureau, so badly disrupted the leap of faith between insurer and insured that the ripples will be felt for years to come, as every one of ELNY’s shortfall payees tells anyone who will listen that insurance and annuities are not worth it. That the money will not be there when it is needed, that the government will not protect the public. That all one will have to show for it, the logic goes, is a legacy of disappointment and despair.

The chances of another ELNY occurring are very low, since insurance regulations have tightened in the last 20 years to prevent such a failure from happening again. But ELNY was not supposed to fail the first time; that was why it sold as many structured settlement annuities as it did. That is why any life insurer sells as much as it does: because life insurers don’t fail. Such is the mantra of the industry and of those who buy from it. Except that ELNY proves it wrong and the way ELNY was handled only makes that reality more impossible to ignore.

That is the lasting message ELNY sends: that anyone who buys insurance of any kind should think twice before actually relying on it. That is what 21 years of missed opportunities and delegated responsibilities have wrought. But the final chapter has not closed on ELNY, and there still is time to fix the problem without causing so much collateral damage.

Ed Stone’s appeal remains an open legal matter, and if the restructuring and liquidation agreement is overturned, then perhaps a new plan can be devised that restore’s ELNY’s solvency without coming at the cost of hurting the very policyholders such a plan is meant to protect. An overturn, at this point, seems unlikely.

The New York state government can always step in and dedicate funds to restoring ELNY, whether they come from taxpayer revenue, or whether they come from monies extracted from other wrongdoing, as in the case of Standard Chartered. All that is required in such a case is the kind of political will that has not shown itself for the last 21 years.

And finally, the insurance industry itself could choose to save ELNY. It has the means to do so, collectively. The top 10 life insurers operating in New York State alone have many times more resources than would be needed to backstop the rest of ELNY’s obligations. All that is required is the will to do so, if not to save the ghost of a once-reviled competitor, then to uphold the larger trust of the public, without which there can never be any kind of insurance business.

What happens to ELNY remains to be seen. But if the last 21 years are any guide, what lies before it, barring a sudden reversal of fortune, is little more than an extended financial purgatory as the ELNY estate slowly waits for its payees, one by one, to stop needing their payments for life.

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