Insurance Regulatory Implications of the Federal Orderly Liquidation Authority and Systemic Risk Determinations

The Orderly Liquidation Authority of the Dodd-Frank Act authorizes the FDIC to act as receiver and liquidator for failing financial companies, including insurance companies and their affiliates in certain circumstances, that pose a systematic risk to the financial stability of the United States.
Section 113(a)(1) of the Dodd-Frank Act[1] authorizes the federal Financial Stability Oversight Council (‘FSOC’) to assume supervision of any ‘nonbank financial company’ if it determines that the financial stability of the United States could be threatened by ‘material financial distress’ at the company, or by the ‘nature, scope, size, scale, concentration, interconnectedness or mix of activities’ at the company.

Under the Dodd-Frank Act, federal regulators can assume supervision of certain financial companies, including insurance companies, that are determined to pose a 'systemic risk' to the financial stability of the U.S.
The term nonbank financial company is defined broadly enough under the Dodd-Frank Act to encompass companies that are engaged in activities including ‘[i]nsuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing’ in the United States.[2]

In other words, the FSOC is authorized under the Dodd-Frank Act to directly regulate specific insurance companies, as well as financial holding company systems involving insurance companies, under certain circumstances.

The stated purpose of Title II of the Dodd-Frank Act, known as the Orderly Liquidation Authority, is to authorize liquidation under federal law for failing financial companies that pose a ‘significant risk to the financial stability of the United States’ and, as receiver, to do so ‘in a manner that mitigates such risk and minimizes moral hazard.’[3] The Orderly Liquidation Authority thus empowers the Federal Deposit Insurance Corporation (the ‘FDIC’) to liquidate failing companies that are determined to pose a systemic risk to the United States financial system.[4]

The FDIC is authorized to act as the receiver for and liquidate impaired or insolvent insurance companies subject to the provisions of the Dodd-Frank Act.
The Dodd-Frank Act expressly directs the FDIC, as the receiver of a failing financial company, to take all steps necessary and appropriate to assure that all parties – including management, directors and third parties – having responsibility for the condition of the financial company will ‘bear losses consistent with their responsibility, including actions for damages, restitution, and recoupment of compensation and other gains not compatible with such responsibility.’[5]

This appears to suggest the prospect of litigation against directors and officers of failing or insolvent insurance companies in federal court under federal law, which could have a significant impact upon the corporate governance of insurance companies across the industry.

But the Dodd-Frank Act also provides that if an insurance company is determined to be subject to the Orderly Liquidation Authority of the FDIC, the liquidation or rehabilitation of that insurance company, and any subsidiary or affiliate thereof that is also an insurance company, is to be conducted as provided under applicable state law.[6] Thus, the potential of direct federal litigation against directors and officers of a failing or insolvent insurance company in liquidation under the Orderly Liquidation Authority of Dodd-Frank seems unlikely.

The liquidation of an insurance company subject to the Orderly Liquidation Authority of the FDIC is to be conducted as provided under applicable state law.
However, the term ‘insurance company’ under the Orderly Liquidation Authority is defined to include any entity that is engaged in the business of insurance, subject to regulation by a state insurance regulator and ‘covered by a state law that is designed to specifically deal with the rehabilitation, liquidation or insolvency of an insurance company.’[7]

Depending on how these provisions are applied in conjunction with specific state laws, the possibility exists that the directors and officers of certain affiliates, such as management companies or service companies, of a failing or insolvent insurance company could, at the very least, find themselves in federal court arguing the applicability of the exceptions to the Orderly Liquidation Authority in order to avoid federal insolvency proceedings and/or litigation.


1. The Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub.L. 111-203, H.R. 4173.
2/ See § 102(a)(4)(B) and (6) of the Dodd-Frank Act; § 4(k)(4)(B) of the Bank Holding Company Act of 1956.
3. § 204(a) of the Dodd-Frank Act.
4. See § 203(b) and § 204(b) of the Dodd-Frank Act.
5. § 204(a)(3) of the Dodd-Frank Act.
6. § 203(e) of the Dodd-Frank Act.
7. § 201(a)(13) of the Dodd-Frank Act.

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