A risk retention group (RRG) is a state-chartered insurance company that insures commercial businesses and government entities against liability risks, including medical malpractice. In 2017, Oceanus Insurance Company, RPG, an RRG organized and licensed in South Carolina, was declared insolvent. The South Carolina liquidation order enjoined the institution or further prosecution of any actions or proceedings against its insureds, and provided for an automatic stay of proceedings.

Oceanus conducts business in several states, including New York. The following issue arose: whether out-of-state liquidation orders for RRGs are entitled to full faith and credit by New York Courts. A multitude of medical malpractice actions in New York were stayed for more than one year pending the resolution of this issue. New York’s Appellate Division, Second Department, in Hala v. Orange Regional Medical Center, 2019 WL 5198903 (2d Dept. October 16, 2019), resolved this controversy. Based on due process considerations, Oceanus’s South Carolina liquidation order was not entitled to full faith and credit by New York Courts, the South Carolina Court lacked personal jurisdiction of the plaintiff and the liquidation order was also denied recognition based on interstate comity.

Hala is a New York medical malpractice action in Supreme Court, Orange County. Certain defendants insured by Oceanus moved to stay the action based on the South Carolina liquidation order. The lower court denied the motion, holding in order to honor the liquidation order’s stay, the liquidation order must be recognized by New York pursuant to the following three doctrines: (1) Uniform Insurance Liquidation Act, (2) the Full Faith and Credit Clause of the United States Constitution, and (3) interstate comity. The Hala Oceanus defendants appealed to the Second Department, contending the South Carolina liquidation order should be given full faith and credit by New York Courts and the case was stayed pending the liquidation proceedings. Many trial courts throughout New York State followed suit and stayed their cases pending this appeal.

The Appellate Division found that based on due process, the liquidation order was not entitled to full faith and credit. Additionally, the South Carolina court lacked personal jurisdiction over the Hala plaintiffs, as Oceanus was not a party to the Hala case, the Hala plaintiffs were not named as parties in the South Carolina liquidation proceeding and were not given an opportunity to be heard. The South Carolina Court’s lack of personal jurisdiction, and the reasons that preclude affording full faith and credit, also precluded extending interstate comity to the South Carolina liquidation order. Citing public policy, the Appellate Division noted in high that those who sought such insurance coverage (i.e., by a RRG) should bear the primary risk, and the risks and consequences of failed insurance coverage are more properly born by the defendants who chose the insurer (rather than plaintiffs who had no say in same).

A state is not required to afford full faith and credit to a judgment by a court that does not have jurisdiction over the subject matter or parties. Given this application, it is expected that this decision will be extended to all liquidated RRGs and any pending stays due to RRG liquidation will be lifted throughout New York.