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Reuters Legal April 29, 2011 New York - A Rhode Island state court has upheld a statute under which insurance companies that want to wind up their operations can buy policies back from policyholders.

The decision by Associate Justice Michael Silverstein of Providence Country Superior Court upheld a law that allows insurance companies based in Rhode Island to pay creditors a lump sum in exchange for full release from their liabilities.

In most states, insurers and reinsurers that want to wind down can stop writing new policies. But, in a process known as run-off, they must continue to pay claims on existing policies for as long as claims are made.

In an effort to stimulate its economy and attract segments of the insurance industry to the state, Rhode Island passed a law in 2002 giving insurance companies an alternate run-off process.

The law came under judicial scrutiny when GTE Reinsurance Company Limited filed a plan to wind down operations. The plan was approved by a majority of the creditors, but affiliates of Odyssey America Reinsurance Corp filed a motion claiming the plan undervalued their claims. They also argued that the Rhode Island law violated the contract and due-process clauses of the United States and Rhode Island Constitutions.

Associate Justice Silverstein disagreed, finding that the rights of the Odyssey affiliates were not impaired. He also ruled that even if their rights had been impaired, it would be justified by the Restructuring Act's "legitimate public purpose" of stimulating the economy and attracting insurance companies to the state.

"The Court is satisfied that the Restructuring Act is a legitimate legislative enactment which addresses the State's economic concerns and protects commercial insurance creditors against the harms of run-off," Silverstein wrote in his decision on Monday.

Gary Lee, an attorney at the law firm Morrison & Foerster LLP, which defended the law on behalf of the Insurance Division of the Rhode Island Department of Business Regulation, said in a statement that the GTE plan "provides a roadmap for future commutation plans under the statue."

Howard Merten, an attorney with Patridge Snow & Hahn who represents Odyssey, did not return a call seeking comment.

The case is In Re: GTE Reinsurance Company Limited, Providence County Superior Court, C.A. No. PB 10-3777.

(Reporting by Andrew Longstreth; Editing by Eddie Evans)

© 2010 Thomson Reuters. Click for Restrictions.

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