Valuing an insured's "net worth" for determining eligibility for benefits under the Hawai`i Insurance Guaranty Association Act was before the court in C. Brewer and Company, Ltd. v. Hawaii Insurance Guaranty Assoc., 2010 Haw. App. LEXIS 200 (Haw. Ct. App. April 28, 2010).
C. Brewer bought excess workers' compensation insurance coverage from The Home Insurance Company. In 2003, Home was declared insolvent by a New Hampshire court. By December 31, 2004, C. Brewer had paid out $322,000 in excess workers' compensation claims, which would have been covered under the Home policy. C. Brewer applied for reimbursement from Hawai`i Insurance Guaranty Association (HIGA).
The Hawai`i Insurance Guaranty Association Act created HIGA to provide claims coverage to insureds if their insurers became insolvent. An insured was eligible for reimbursement from HIGA if its net worth was less than $25 million. To prove its net worth as of December 31, 2002, C. Brewer submitted statements for fiscal years ending June 30, 2002 and 2003. Although these statements indicated that C. Brewer's total equity interest on December 31, 2002 was approximately $16 million, HIGA treated a $116 million debt owed C. Brewer as an asset and concluded that C. Brewer's "new worth" exceeded $25 million.
The parties disagreed on the meaning and method of valuing "net worth." C. Brewer argued that "net worth" referred to a company's shareholder's equity and was "book" or "balance sheet" net worth, as indicated on financial statements prepared in accordance with generally accepted accounting principles (GAAP). HIGA, on the other hand, argued that "net worth" should be calculated according to a common sense and universally accepted definition, which would mean C. Brewer's net worth exceeded the $25 million threshold. Therefore, the disagreement was not whether "net worth" was assets minus liabilities, but on the "assets" part of the equation, i.e., what value to assign a company's assets and whether an amount of money owed to a company should be considered an asset.
The trial court held that GAAP should be used to determine net worth and awarded damages to C. Brewer in the amount of $106,150. The ICA affirmed. For purposes of the statute, "net worth" was "book" or "balance sheet" net worth as governed by GAAP. This interpretation was consistent with the purpose of the Act, i.e., "to avoid excessive delay in payment and to minimize financial loss to claimants or policyholders because of the insolvency of an insurer." HRS 431:16-105.
Thanks to my Damon Key colleague and fellow blogger, Mark Murakami, (http://www.hawaiioceanlaw.com) for circulating this recent decision.
