In a recent decision, the U.S. Supreme Court clarified an important issue to workers’ compensation insurers holding that pre-petition unpaid workers’ compensation premiums are not entitled to priority status under the Bankruptcy Code. Howard Delivery Service, Inc., et. al v. Zurich American Ins. Co., 126 S.Ct. 2105 (2006). This decision forecloses any disagreement among the circuit courts that unpaid workers’ compensation premiums are entitled to priority status in a bankruptcy proceeding. In light of Howard, such claims are now considered merely general unsecured claims. Had the Supreme Court afforded priority status to such claims, they would have been paid prior to the claims of general unsecured creditors. Generally, priority expense claims receive a significant, if not a 100% distribution, as opposed to general unsecured claims, which, in many circumstances, receive only pennies on the dollar. In a decision delivered by Justice Ginsberg, joined by five other justices, the Supreme Court’s ruling not only brings consistency to this issue, but also provides opportunities to workers’ compensation insurers to avoid forfeiture of payment of their premiums by financially troubled insureds.
In Howard, Zurich issued various workers’ compensation policies for, and on behalf of, Howard Delivery Services, Inc., a freight trucking business. In 2002, Howard filed for Chapter 11 bankruptcy protection, while still owing Zurich approximately $400,000 in unpaid workers’ compensation premiums. Zurich sought priority status for its claim, asserting that the unpaid premiums qualified as "contributions to an employee benefit plan," which were thus entitled to priority status under Section 507(a)(5) of the Bankruptcy Code. In determining that Zurich’s claims were not entitled to priority status, the Court focused its analysis on whether an unpaid workers’ compensation premium is equivalent to a contribution to an "employee benefit plan." The Court ultimately found that workers’ compensation plans are considerably different than other types of employee benefit plans.
The Supreme Court differentiated workers’ compensation plans from other employee benefit plans on a number of grounds.
- First, as opposed to other types of benefits that run solely to the employee—such as pension plans and group health, life and disability insurance—workers’ compensation programs run to the benefit of both the employee and employer. In exchange for the no-fault fixed payment workers’ compensation administrative system, the employer is relieved of all liability and uncertainty from an employee’s claim against it in the tort system. Consequently, the Court found that there is an overriding benefit to employers under any workers’ compensation plan in contrast to other benefits provided solely to employees.
- Second, the Court distinguished workers’ compensation benefits from other "employee benefit plans" because so-called fringe benefits are either voluntary or bargained-for while workers’ compensation benefits are not; state laws, with limited exceptions, require employers to participate in workers’ compensation arrangements.
- Finally, the Supreme Court looked to the overriding policy of the Bankruptcy Code, which requires equal distribution among creditors. Expanding the definition of "employee benefit plans" to provide a preferred status to workers’ compensation insurers would effectively erode the priority amount available to employees in connection with other unpaid wages and employee benefits, an outcome the Court rejected.
The Court was also unwilling to look at other statutes, namely the Employee Retirement Income Security Act of 1974 (ERISA), to assist in the interpretation of what is meant by an employee benefit plan. While Zurich argued that ERISA expressly included workers’ compensation plans in the definition of an "employee benefit plan," the Court declined to look to ERISA for guidance, concluding that ERISA was not enacted with bankruptcy goals in mind.
A strong dissent was written by Justice Kennedy, in which two other justices joined. Each of these justices believed that the Court was required to apply a strict interpretation of the Bankruptcy Code. In the dissenting opinion, the justices noted that, because workers’ compensation plans benefit employees, as well as employers, this should end the inquiry. As the dissent noted, there is no requirement in the Bankruptcy Code that, to qualify as an employee benefit plan, a court needs to weigh who benefits more from such a benefit, the employer or the employee.
This decision once again highlights the struggles courts face in dealing with insurance issues in any bankruptcy proceeding. Here, in a decision that the Court itself characterized as a "close call," as in other bankruptcy cases involving insurers, the majority opinion tipped the balance in favor of the debtor insured, notwithstanding that, as the dissenting opinion demonstrated, there is no requirement under the Bankruptcy Code to balance the benefits between the employers and employees. Going forward, workers’ compensation insurers may want to consider taking the following steps.
- First, a workers’ compensation insurer should closely monitor the financial viability of its insured. No longer can the insurer rely on the prospect of receiving a priority claim in a bankruptcy proceeding for its unpaid pre-petition workers’ compensation premiums.
- Additionally, the insurer should evaluate requiring the insured to provide collateral to support its obligations under any workers’ compensation policy, including posting a bond or a letter of credit at the time of the initial writing of the policy.
- Finally, at the time of the renewal of any workers’ compensation plans, an insurer should insist that any unpaid premiums be paid currently (to the extent no bankruptcy proceeding is pending and, for retrospectively-rated programs, the loss data is available) before the insurer agrees to the renewal of any such policies.
As all situations in this area are factually unique, consultation with a bankruptcy professional is recommended when deciding upon which course of action to take in this regard.
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