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PHILADELPHIA -- Pennsylvania's Supreme Court will determine whether the state's former top insurance regulator conducted proper public hearings before approving CIGNA Corp.'s liability-based restructuring.

The July 27 order is a victory for CIGNA and the Pennsylvania Insurance Department over a group of policyholders and rival insurers that oppose the reorganization.

"Our position that no additional hearing is needed will prevail on appeal," predicted a spokes-man for CIGNA.

The court agreed to review a 1997 Pennsylvania Commonwealth Court ruling that vacated the department's approval of the reorganization and ordered regulators to conduct trial-like hearings (BI, March 10, 1997). CIGNA and the department had appealed the Commonwealth Court's finding.

In another setback for opponents of the reorganization, the state Supreme Court declined to hear their cross-appeals. That means the court will focus only on the adequacy of the Insurance Department's original hearings and not opponents' other arguments that the reorganization violated federal and state constitutional law and insurance regulations. Those claims were not addressed by the Commonwealth Court.

The Pennsylvania Supreme Court's latest order marks not only a victory for CIGNA and regulators, but also a reversal of fortune for their opponents in recent weeks.

In June, opponents celebrated a series of high court orders denying all appeals of the Pennsylvania Commonwealth Court ruling. As a result, the restructuring dispute was returned to the Insurance Department for a new trial-like hearing (BI, June 15). But, the court vacated those orders two weeks later, saying only that it had made an "administrative error" (BI, June 29).

Ironically, the court's third series of orders in the case within the past two months follows a 14-month period of silence after the Commonwealth Court's ruling was appealed. At the time of its erroneous orders in June, the court had taken twice as long to rule in the matter as called for under its self-imposed guidelines.

CIGNA policyholder attorney John N. Ellison said the latest order was "better than sitting in suspense forever."

But, he said he "is a little bit disappointed" the high court took so long to act. "I expect now we'll hear the argument from CIGNA that it can't undo the restructuring because the case has taken this long," said Mr. Ellison, a partner with Anderson, Kill & Olick P.C. in Philadelphia.

"If they win on the merits, they win. But, it's not fair that we had to wait around so long for a decision," he said.

A CIGNA spokesman said that potentially reversing the restructuring is a "hypothetical situation" and that the insurer expects the Supreme Court will rule that no additional hearings are necessary, making the issue moot.

Noting that CIGNA's appeal raised questions relating only to procedural issues surrounding the department's public hearings, the spokesman said: "We're pleased that the Supreme Court found the questions we raised about the appellate order were important enough to warrant a review by the full court. . . .We believe the Commonwealth Court opinion was wrong."

After the Commonwealth Court vacated the reorganization approval order, opponents of the plan argued that CIGNA had no regulatory authorization to keep its new structure in place.

CIGNA said, however, that the Commonwealth Court did not order the insurer to revert to its prior organization.

"Nothing has changed the fundamental nature of the restructuring," said the CIGNA spokesman.

Attorneys for CIGNA's opponents said the high court's refusal to hear their cross-appeals was not surprising, considering that the Commonwealth Court did not rule on those issues.

Attorneys for the opponents contend the high court's decision to review the case does not automatically spell trouble for them.

"At least as many cases that go up to the Supreme Court are affirmed as are reversed," Mr. Ellison said.

The protracted legal battle stems from CIGNA's reorganization to recognize its long-tail liabilities and maintain its A- rating from A.M. Best Co. for its active operation. Attaining that rating was crucial for the operation's financial future; without it, the company would not have been able to retain and attract quality risks, CIGNA officials have said.

Some observers have said, though, that improvements in CIGNA's reserves and lower estimates of the insurance industry's long-tail liabilities mean the reorganization may not be necessary today to earn a high rating.

The reorganization allowed CIGNA to fence off most of its liabilities -- including 80% of its environmental and asbestos liabilities -- in a separately capitalized runoff operation.

CIGNA executed that strategy by using a unique Pennsylvania corporate division law to split its Insurance Company of North America subsidiary in two. CIGNA allocated most of INA's liabilities to one segment and then merged it and some other small units to form a new company. CIGNA next merged that company into an existing licensed company in the runoff operation.

The other segment, which retained INA's name, handles the active business.

CIGNA officials have said that under the reorganization the insurer has fully funded its long-tail liabilities three times over. CIGNA officials estimated that the runoff facility would have more than $7 billion of assets, including investment income over the life of the runoff, to pay claims.

The CIGNA spokesman said the facility has exceeded expectations. As of year-end 1997, the facility had $4.6 billion of statutory assets and $3.9 billion of invested assets, he said.

In February 1996, then-Insurance Commissioner Linda S. Kaiser approved the restructuring, first proposed in 1995.

In the preceding months, Ms. Kaiser had held three public hearings on the reorganization. She allowed only 15 minutes of prepared testimony from each witness, and she did not permit either side to cross-examine witnesses.

Opponents of the plan argued that this structure meant they were unable to ask CIGNA officials and actuaries questions about the strength of the runoff facility's reserves. That adequacy is a concern, critics say, because CIGNA contends its active operation would not be responsible for financially bailing out the runoff facility if its liabilities were to deplete all of its assets.

The Supreme Court's decision to review the case prevents any additional policyholders from joining the approximately three dozen current opponents of the reorganization. Some additional policyholders are interested in joining, though, if the court eventually orders the case back to the Insurance Department for a new round of hearings, said Mr. Ellison and John Osborne, a partner with Zevnik Horton Guibord McGovern Palmer & Fognani L.L.P. in Washington. Each attorney represents about a dozen policyholders now.

CIGNA contends that the security of the runoff facility is not the key issue for its critics, but that they have ulterior motives for fighting the reorganization.

The policyholders are using the litigation in an attempt to leverage their positions in ongoing coverage disputes with CIGNA, its spokesman said.

Most of the policyholders either currently have or once had claims against CIGNA. Many of those claims resulted in litigated coverage disputes, of which many are ongoing.

The policyholders' attorneys deny CIGNA's assertion. Several have said they would not object to the reorganization if CIGNA produced proof that policyholders are better protected under the insurer's new organization.

"We know what they've told us," Mr. Osborne said.

"Our clients took steps to protect their rights under existing contracts," he said, referring to CIGNA moving the policyholders' coverage to the runoff facility without their prior approval. CIGNA contends this was unnecessary.

The five rival insurers opposing the reorganization do not want CIGNA to develop into a stronger competitor, the CIGNA spokesman said.

Those insurers have reinsured and been reinsured by CIGNA, have co-insured risks with CIGNA and are CIGNA creditors, according to attorney Lawrence T. Hoyle Jr. of Hoyle, Morris & Kerr of Philadelphia. Mr. Hoyle represents three CIGNA policyholders and four of the rival insurers.

The Commonwealth Court had ruled that insurers that only reinsured CIGNA lack standing in the case. Its 1997 ruling had ordered the Insurance Department to sort out the insurers' business relationships with CIGNA and ultimately determine which insurers could remain in the case.

Given the schedule for filing briefs to the Supreme Court, the court is not expected to hear oral arguments until at least next February.