WASHINGTON–The Supreme Court in a split decision yesterday dealt a blow to the insurance industry with a ruling that claims for unpaid workers' compensation premiums do not have priority in bankruptcy actions.
The decision places claims for unpaid workers' compensation premium in the same category as unsecured creditors, meaning the insurance company which provided the coverage to the bankrupt company is likely to collect only pennies on the dollar for unpaid premiums.
Bruce Wood, assistant general counsel at the American Insurance Association, which submitted a friend of the court brief on behalf of the insurance industry, said the case "raised an issue of significant public policy," and the decision "is an unfortunate policy result, irrespective of whatever intellectual gymnastics that led to the majority's result."
He said it means that "this critically important social insurance benefit will be at risk where employers have filed for bankruptcy.
"The distinctions that the majority makes between certain kinds of employee benefit plans and workers' compensation are really distinctions without a difference," he said.
The Supreme Court ruled 6-3 in Howard Delivery Service Inc. vs. Zurich American Insurance Company, No. 05-128.
Zurich American said in a statement after the decision was announced that, although it is "disappointed" that the court did not agree with the company's position, "the court's decision nonetheless provides needed certainty and nationwide uniformity about this question."
Larry Katz, a partner with the Venable law firm in the Washington, D.C. area, who wrote the brief on behalf of the unsecured creditors of the bankruptcy estate, said the decision has significant impact. "It affects millions and perhaps billions of dollars of claims in bankruptcy."
"A loss would mean that other priority creditors granted priority in bankruptcy by Congress because they were 'wage substitutes,' such as health insurance and pension plans, would get less money," Mr. Katz explained.
It is also significant because it ends a major split in the various appeals court jurisdiction over the proper interpretation of "wage substitute."
In this case, the 4th Circuit U.S. Court of Appeals joined the 9th Circuit U.S. Court of Appeals in holding that claims for unpaid workers' compensation insurance premiums have the same priority as claims for unpaid employee fringe benefits.
Conversely, the 6th, 8th and 10th Circuits have held that claims for unpaid workers' compensation insurance premiums do not fall within the statutory language of the Bankruptcy Code giving priority, among unsecured creditors' claims, for unpaid "wages, salaries or commissions," and for unpaid contributions to "an employee benefit plan."
On July 15, 2003, the U.S. Bankruptcy Court in Wheeling. W.Va. denied the Zurich claim priority status, ruling that the unpaid premiums are not bargained-for, wage-substitute-type benefits. Five months later, on appeal to the district court, Zurich's claim was similarly denied.
But a divided panel of the 4th Circuit reversed, and the creditors decided to take the case to the Supreme Court because of its potential value, Mr. Katz said.
Howard Delivery Service is an over-the-road freight carrier based in West Virginia. On Jan. 22, 2002, it cancelled its policy of workers' compensation insurance coverage with Zurich American.
Under West Virginia law, employers are required to subscribe to and pay premium taxes into the state's workers' compensation fund for the protection of their employees.
However, an employer can also self-insure by demonstrating its financial ability to cover any potential workers' comp claims. Howard had purchased workers' compensation insurance coverage from Zurich in 1997 to fulfill state obligations to self-insure.
Eight days after canceling the Zurich policy, Howard filed for bankruptcy, seeking the protection of the court as it reorganized its business operations.
In May 2002, Zurich filed a creditor's claim seeking priority status from the bankruptcy court for its claim for the unpaid premiums owed on the policy. Upon the policy's cancellation, Howard owed Zurich $415,000 in unpaid premiums.
In its ruling, the Supreme Court majority accepted the Venable firm's argument that there was a "fundamental difference" between workers' compensation and other wage substitutes.
One of the factors cited by the court in differentiating between workers' comp and other wage substitutes, Mr. Katz said, is that both the employer and the employee benefit from workers' comp.
"And you can argue that the employer benefits more because providing workers' comp shields the employer from having the employee sue in case of an injury in the workplace," he said.
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