George FABE, Superintendent of Insurance, State of Ohio, Plaintiff-Appellant, v. UNITED STATES DEPARTMENT OF the TREASURY; Mitchell A. Levine, Assistant Commissioner, Defendants-Appellees.
No. 90-3364.
United States Court of Appeals, Sixth Circuit.
Argued Nov. 29, 1990. Decided July 17, 1991.
939 F.2d 341
Joseph E. Kane, Asst. U.S. Atty., Columbus, Ohio, J. Christopher Kohn, Sandra P. Spooner (argued), Office of Dept. of Justice, Civil Div., Washington, D.C., for United States Dept. of Treasury.
Joseph E. Kane, Asst. U.S. Atty., Columbus, Ohio, J. Christopher Kohn, Office of the Dept. of Justice, Civil Div., Washington, D.C., for Mitchell A. Levine, Assistant Commissioner.
Before MARTIN and JONES, Circuit Judges, and EDGAR, District Judge.*
In this declaratory judgment action, the district court found that certain claims of the United States against an insolvent Ohio insurance company are entitled to priority as provided by
The facts of this case are uncontested. On April 30, 1986, the Court of Common Pleas for Franklin County, Ohio declared the American Druggists’ Insurance Company insolvent. Pursuant to
The United States filed claims in the liquidation proceedings as obligee on various immigration, appearance, performance and payment bonds issued by American Druggists’ as surety. The United States notified Fabe on August 28, 1986, that it would seek first priority for its claims by virtue of the federal superpriority statute,
Before the district court, both parties stipulated that
Prior to 1944 the authority to regulate insurance transactions rested exclusively with the several states. National Securities, 393 U.S. at 458, 89 S.Ct. at 567 (citing Paul v. Virginia, 75 U.S. (8 Wall.) 168, 183, 19 L.Ed. 357 (1869) (insurance transactions not considered “commerce“)). That relationship changed following the Supreme Court‘s conclusion in United States v. South-Eastern Underwriters Ass‘n, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944), that insurance transactions are commerce, subject to federal regulation under the Commerce Clause. Because Congress feared injury to the traditional policy of state regulation of the insurance industry, it quickly responded.
(a) The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.
(b) No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance[.]2
The first of these three cases interpreting the “business of insurance” under the McCarran-Ferguson Act is Securities & Exchange Commission v. National Securities, id. at 453, 89 S.Ct. at 565. In National Securities the Court confronted the issue of whether the Securities & Exchange Commission had the power to regulate the activities of persons engaged in the insurance business. Specifically, the case focused on an Arizona insurance company which made a number of misrepresentations to shareholders in an attempt to secure their approval for a pending merger. The company sought to avoid prosecution for federal securities violations on the grounds that an Arizona statute aimed at protecting stockholders in domestic insurance companies regulated the “business of insurance,” and thus superceded the federal securities act by operation of McCarran-Ferguson. The Supreme Court disagreed.
The Court determined that the Arizona statute was not protected from federal preemption by McCarran-Ferguson because the Act applied only to laws regulating the “business of insurance,” not the business of insurance companies. Id. at 459, 89 S.Ct. at 568. The Court stated:
Congress was concerned with the type of state regulation that centers around the contract of insurance, the transaction which Paul v. Virginia held was not “commerce.” The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement—these were the core of the “business of insurance.” Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class. But whatever the exact scope of the statutory term, it is clear where the focus was—it was on the relationship between the insurance company and the policyholder. Statutes aimed at protecting this relationship, directly or indirectly, are laws regulating the “business of insurance.”
Id. at 460, 89 S.Ct. at 568. Because the Arizona statute regulated the relationship between shareholder and corporation, rather than insured and insurer, it “is not insurance regulation, but securities regulation[,]” unprotected by McCarran-Ferguson. Id. That the Arizona statute applied exclusively to insurance companies is irrelevant:
The crucial point is that here the State has focused its attention on stockholder protection; it is not attempting to secure the interests of those purchasing insurance policies. Such regulation is not within the scope of the McCarran-Ferguson Act.
The Court was next called upon to construe the meaning of “business of insurance” in Group Life & Health Insurance Company v. Royal Drug Company, 440 U.S. 205, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979). In Royal Drug the Court considered whether alleged anticompetitive agreements between an insurance company and several pharmacies were exempt from the federal antitrust laws. Group Life had entered into agreements with certain pharmacies under which those pharmacies agreed to furnish the insurer‘s policyholders with prescription drugs at the price of two dollars per prescription, while Group Life agreed to reimburse the participating pharmacies for their costs in acquiring the prescription drugs sold. Other non-participating pharmacies sued claiming that such agreements violated the Sherman Antitrust Act by fixing the retail price of drugs and by deterring policyholders from dealing with independent retailers. Group Life argued that the agreements were exempt from the antitrust laws as the “business of insurance” regulated by Texas law. Again the Supreme Court disagreed.
The Court began its analysis by noting that central to the definition of the “business of insurance” are “the spreading and underwriting of a policyholder‘s risk [and] the contract between the insurer and the insured.” Id. at 211, 215, 99 S.Ct. at 1073, 1075. It found the provider agreements at issue served neither goal. The agreements acted simply as separate contractual arrangements for the purchase of goods and services between the insurer and a third party which furnished the insurer with a substantial cost savings. Id. at 216, 99 S.Ct. at 1075. They did not, as Group Life argued, affect the “‘reliability, interpretation, and enforcement’ of the insurance contract [or] ‘relate so closely to their status as reliable insurers’ as to fall within the exempted area.” Id. To equate cost effectiveness with reliability would be to distort the notion of the “business of insurance” to such a degree that any business decision made by an insurance company to maximize profits and minimize costs would qualify for exemption.
The Court concluded by suggesting that the provider agreements were not made the business of insurance simply because they were subject to state regulation at the time McCarran-Ferguson was enacted. Id. at 230 n. 38, 99 S.Ct. at 1082 n. 38.
[T]he enabling statutes in existence at the time the Act was enacted typically regulated such diverse aspects of the plans as the composition of their boards of directors, when their books and records could be inspected, how they could invest their funds, when they could liquidate or merge, as well as how they could purchase goods and services by entering into provider agreements.
Provider agreements are no more the “business of insurance” because they were regulated by state law at the time of the McCarran-Ferguson Act than are these other facets of the plans which were similarly regulated.
Id. (emphasis added). Accordingly, the Court found the purpose of McCarran-Ferguson was not to restore the law to the status quo prior to South-Eastern, but to protect state regulation only of the “business of insurance.” Id. at 230, 99 S.Ct. at 1082.
The Court‘s most recent opinion concerning the “business of insurance” is Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 102 S.Ct. 3002, 73 L.Ed.2d 647 (1982). Pireno was a chiropractic practitioner who challenged Union Labor Life‘s use of a chiropractic peer review committee to make non-binding recommendations as to whether policyholder claims were “reasonable charges” for “necessary medical care and services,” and therefore payable within the coverage limits of the insureds’ policies. Id. at 122, 102 S.Ct. at 3005. Pireno‘s methods were criticized by the committee which recommended that Union Labor Life
The Court reviewed its prior decisions and identified a three-part test for determining whether certain conduct is part of the “business of insurance.”
[F]irst, whether the practice has the effect of transferring or spreading a policyholder‘s risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry. None of these criteria is necessarily determinate in itself....
Id. at 129, 102 S.Ct. at 3008. Applying this test, the Court found the agreement between Union Labor Life and the peer review committee to fail each of the three prongs.
The Court first rejected Union Labor Life‘s argument that the peer review activity was within the “business of insurance” because it aided the insurer in determining the scope of the risk transferred. The Court found the foundation of this argument, that risks were transferred upon payment, to be contrary to the fundamental tenets of insurance: “The transfer of risk from insured to insurer is effected by means of the contract between the parties—the insurance policy—and that transfer is complete at the time that the contract is entered.” Id. at 130, 102 S.Ct. at 3009; See 9 G. Couch, Cyclopedia of Insurance Law §§ 39:53, 39:63 (2d ed.1962). Though the Court did find the actual claims adjustment process to be within the “business of insurance,” the non-binding nature of the committee‘s recommendations removed it so far from the policy relationship that it could not be said to be central to the risks spread at the time of contracting. Id. at 134 n. 8, 102 S.Ct. at 3011 n. 8.
In addressing the second criterion, the Court found it clear that the peer review system was not “an integral part of the policy relationship between insurer and insured.” Id. at 131, 102 S.Ct. at 3010. Like the provider agreements at issue in Royal Drug, the arrangement between Union Labor Life and the peer review committee was a separate and distinct contract between the insurer and a third party non-insurer, with only ancillary impact upon the contract of insurance. Such arrangements are not the “business of insurance,” but merely cost savings devices which are immaterial to the policyholder whose only concern is that his claim be paid, not why it is paid. Id. at 132, 102 S.Ct. at 3010.
The Court also had little difficulty finding that the challenged peer review activities were not “limited to entities within the insurance industry,” because the very nature of the agreement at issue implicated the substantial and direct involvement of third party non-insurers. Id. Though “the challenged peer review practices need not be denied the [McCarran-Ferguson] § 2(b) exemption solely because they involve parties outside the insurance industry[,]” it is clear that such third party arrangements which have only an ancillary effect on policyholders were not at the core of Congressional concern during the passage of the McCarran-Ferguson Act. Id. at 133, 102 S.Ct. at 3010. Accordingly, the peer review agreements are subject to the provisions of the Sherman Act, because they do not regulate the “business of insurance.”
Though Pireno is the latest case addressing the meaning of the “business of insurance,” its analysis is but a distillation of the earlier cases. We disagree with Fabe‘s assertion here that Pireno and Royal Drug are limited to antitrust exemption; given the Supreme Court‘s use of the Pireno analysis in other contexts, we find that argument to be untenable. See Metropoli-
The state regulation at issue in this case,
The stated purpose of Chapter 3903 is to provide a coherent policy for the liquidation of insurers for “the protection of the interests of insureds, creditors, and the public generally....”
The Superintendent of Insurance may file a complaint seeking an order to liquidate an insurer for one of a number of reasons,
Ohio Rev. Code § 3903.17 , and if the Court of Common Pleas issues an order to liquidate[,] the superintendent is appointed as liquidator and is directed to liquidate the company.Ohio Rev.Code § 3903.18(A) . Within such liquidationOhio Rev.Code § 3903.43 establishes the priorities for payment of claims.Under
§ 3903.42 , all claims against the liquidated insurance company are placed into classes and prioritized. All claims in each class are to be paid in full before members of subordinate classes may receive any payment. Classes one and two contain the usual provisions for the costs and expenses of administering the scheme, and compensating employees for services performed and benefits accrued. Class three includes “all claims under policies for losses incurred,” including policyholders who seek to recover their investments. Class four is limited to the claims of general creditors. Class five provides for any claims filed by federal, state, or local governments.
In the present case, American Druggists’ was liquidated pursuant to the Ohio scheme. The United States filed claims in the insolvency proceedings as obligee on various general obligation surety bonds defaulted by American Druggists‘. This case does not involve federal claims for taxes due, but merely federal claims against a defaulted surety in which the United States stands in the same position as other bond obligees. However, the United States asserts that, pursuant to the federal superpriority statute, it may leapfrog the claims of other policyholders solely because it is the United States. That argument turns on whether the Ohio liquidation priority statute regulates the “business of insurance.”
Before turning our attention to those cases which have considered the issue of whether such priority schemes may be con-
The United States’ second conclusory argument is that footnote 38 of Royal Drug, 440 U.S. at 230, 99 S.Ct. at 1082, forecloses plaintiff‘s claim by listing among those statutes that do not regulate the business of insurance rules that concern when insurance companies may liquidate. We cannot agree with the implicit foundation of this argument, that any regulation of insurance liquidation is per se not a regulation of the “business of insurance.” Rather, we find the better approach to be an independent assessment as to whether each facet of a challenged plan regulates the “business of insurance” under the Pireno/ Royal Drug/ National Securities trilogy.
As the parties have stipulated, it is beyond doubt that the provisions of the federal superpriority statute,
Only two federal circuit courts have addressed the precise question raised in this appeal, State of Idaho ex rel. Soward v. United States, 858 F.2d 445 (9th Cir.1988), cert. denied sub nom. Fagiano v. United States, 490 U.S. 1065, 109 S.Ct. 2063, 104 L.Ed.2d 628 (1989) and Gordon v. United States Dep‘t of the Treasury, 668 F.Supp. 483 (D.Md.1987), aff‘d, 846 F.2d 272 (4th Cir.), cert. denied, 488 U.S. 954, 109 S.Ct. 390, 102 L.Ed.2d 379 (1988). Both rejected the argument that the liquidation priority statutes before them regulated the “business of insurance,” though on divergent grounds. Other courts have considered the issue as an ancillary matter and have come to a different conclusion. Grimes, 857 F.2d at 704; Muir, 792 F.2d at 364; Levy, 635 F.2d at 965; Washburn, 643 F.Supp. at 556. Because each case makes fundamental assumptions as to the nature of the “business of insurance” within the Pireno/ Royal Drug/ National Securities line of cases, we shall review the major decisions to facilitate our analysis.
The first case to squarely address the issue, Gordon v. United States Dep‘t of the Treasury, 846 F.2d at 272, demonstrates some of the controversies surrounding the Pireno analysis. Gordon involved a Maryland insurance liquidation priority statute which placed government claims at the same level with those of policyholders. Gordon, 668 F.Supp. at 486. The United States asserted priority status in the liquidation proceedings of a Maryland insurer under
The Ninth Circuit addressed the question before us in State of Idaho Ex Rel. Soward v. United States, 858 F.2d 445 (9th Cir.1988). Soward involved an Idaho liquidation priority statute,
The Idaho district court agreed. Soward, 662 F.Supp. 60 (1987). The court found the liquidation priority scheme to be part of a larger administrative system for regulating of the entire life of domestic insurance companies. Relying on the abstention case of Washburn v. Corcoran, 643 F.Supp. at 554 (laws concerning winding up of insurance companies regulate the “business of insurance“), the court concluded that laws providing for the rehabilitation, liquidation or dissolution of insurance companies are laws regulating the “business of insurance” exempt from federal legislation because, “[t]he right of the state to regulate and control the insurance company should include the right to manage its dissolution and liquidation as part of the overall regulatory scheme.” Soward, 662 F.Supp. at 63. However, the district court did not apply the Pireno analysis.
On appeal, the Ninth Circuit reversed. Soward, 858 F.2d at 445. The court analyzed the liquidation priority statute under the National Securities definition of “business of insurance,” stating
Although ostensibly appearing to speak to the precise issue raised here, neither Royal Drug nor Pireno are necessary to decide this case. Both cases are refinements of the seminal analysis of National Securities tailored to address activities of insurance companies that would implicate the antitrust laws in the absence of the McCarran-Ferguson Act.
Id. at 452. The court found that the Idaho statute did not affect “the type of policy which could be issued, its reliability, interpretation, and enforcement” or protect the “relationship [of insured and insurer], directly or indirectly,” because the regulation applies only to companies that are no longer in the business of insurance. Id. at 452 (quoting National Securities, 393 U.S. at 460, 89 S.Ct. at 568.) Therefore, the court concluded the only relationship regulated by Idaho is that of debtor and creditor, a relationship that is not protected by McCarran-Ferguson.4 Soward, 858 F.2d at 452.
Although both the Fourth and Ninth Circuits have rejected the theory of Fabe‘s claim, he is not without authority for his position. A number of courts have abstained from exercising federal jurisdiction in cases involving state insurance liquidation priority schemes on McCarran-Ferguson grounds. See, e.g., Grimes, 857 F.2d at 699 (court abstains declaring recei-
Though most of the abstention cases cited by plaintiff are weakened by their failure to apply the Pireno analysis, we do find these cases to be persuasive as to whether state regulation of insurance company insolvency and rehabilitation constitutes the regulation of the “business of insurance” within the meaning of the McCarran-Ferguson Act. One case, however, United Services Auto. Ass‘n v. Muir, 792 F.2d at 365, does discuss the effect of the Pireno paradigm on insurance liquidation priority statutes. In Muir, a domestic insurer sought to enjoin the state insurance commission from revoking its license to sell insurance for its violation of a state regulation prohibiting mergers between insurers and financial institutions. Id. at 359-60 Relying on Levy, 635 F.2d at 960, the district court found that abstention was appropriate because the statute at issue was one regulating the “business of insurance” under McCarran-Ferguson, over which the states have exclusive control. Id. at 364.
The Third Circuit reversed. Applying Pireno, the court found abstention inappropriate because the anti-merger provision did not implicate the “business of insurance.” However, the court distinguished its holding from those abstention cases involving insurance liquidation proceedings, which it felt met the Pireno standard.
The state regulations implicated in Levy concerned both the future coverage of policyholders and their relationship with a defunct insurer, and so were authorized under McCarran-Ferguson.... Unlike the regulations in Levy, the [merger] section is not concerned with transferring or spreading the policyholder‘s risk; the [merger section] has no integral connection to the relationship between the insured and insurer; and [the merger section involves groups that are] not entities within the insurance industry.
As our discussion has developed, we are confronted with a confusing mass of interpretations as to the term “business of insurance” which leaves basic, fundamental questions unanswered. Our starting point is the recognition that “[i]n the absence of the type of comprehensive federal regulation over insurance accorded the banking, securities and commodities industries, and because of the exclusion of insurance companies from the operation of federal bankruptcy law,
[t]he emphasis [of which has] been placed simply upon protecting the little policyholder who cannot tell when he is charged too much for his insurance; since he does not investigate his purchase too carefully nor could he determine if a given insurer has the capacity, i.e. the solvency, to perform in the future when the insured event occurs, the States have established regulatory bodies to secure that necessary measure of protection.
Richards, Insurance, at 39. Thus if we apply a test of logic,
We find nothing in Pireno to suggest that its three part test should not be applied in the present case.
Section
The United States argues that
Although
The United States asserts that
Finally, we find that
Because we find
EDGAR, District Judge, concurring:
I concur that the application of the three-part Pireno test to
The states have always presided over the liquidation of insolvent companies. The states did this for many years prior to the Supreme Court‘s decision in United States v. South-Eastern Underwriters Ass‘n, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944). See Motlow v. Southern Holding & Securities Corp., 95 F.2d 721, 725-26 (8th Cir.), cert. denied, 305 U.S. 609, 59 S.Ct. 68, 83 L.Ed. 388 (1938); In re Peoria Life Ins. Co., 75 F.2d 777, 778 (7th Cir.), cert. denied, 296 U.S. 594, 56 S.Ct. 110, 80 L.Ed. 421 (1935). The states have continued to play this role. The federal Bankruptcy Code has never attempted to invade the province of the states in handling the liquidation of insurance companies.
Although Judge Martin has reached a different conclusion, I believe the purpose of McCarran-Ferguson was to restore the law to its status prior to South-Eastern Underwriters. As Justice Stewart said in Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979), “There is no question that the primary purpose of the McCarran-Ferguson Act was to preserve state regulation of the activities of insurance companies, as it existed before the South-Eastern Underwriters case.” 440 U.S. at 218 n. 18, 99 S.Ct. at 1077 n. 18 (emphasis in original). See Securities and Exchange Comm‘n v. National Securities, Inc., 393 U.S. 453, 459, 89 S.Ct. 564, 568, 21 L.Ed.2d 668 (1969). It may reasonably be inferred, therefore, that Congress intended that long standing, traditional state regulation of insurance company liquidations continue unmodified by federal statute after the enactment of McCarran-Ferguson. Certainly there is no language in either McCarran-Ferguson or the federal superpriority statute which indicates otherwise.
In National Securities the “business of insurance,” which was re-subjected to state regulation by McCarran-Ferguson, was described by the Supreme Court as follows:
Congress was concerned with the type of state regulation that centers around the contract of insurance, the transaction which Paul v. Virginia[, 75 U.S. [8 Wall.] 168, 19 L.Ed. 357 (1869),] held was not “commerce.” The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement—these were the core of the “business of insurance.” Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class. But whatever the exact scope of the statutory term, it is clear where the focus was—it was on the relationship between the insurance company and the policyholder. Statutes aimed as protecting or regulating this relationship, directly or indirectly, are laws regulating the “business of insurance.”
393 U.S. 453 at 460, 89 S.Ct. at 568 (emphasis added).
NATHANIEL R. JONES, Circuit Judge, dissenting.
The majority correctly phrases the narrow issue presented to us for review as “whether the Ohio insurance liquidation priority statute is a state law regulating the ‘business of insurance’ within the meaning of the McCarran-Ferguson Act.” Maj. op. at 343. In my view, however, the majority attaches too broad an interpretation to the phrase “the business of insurance“, and as a result incorrectly concludes that Ohio‘s liquidation priority scheme is not subject to federal preemption. Such a holding fails to comport with relevant case-law from other Courts of Appeals and the U.S. Supreme Court. I respectfully dissent.
Two other Circuits have already addressed the precise issue before us and have persuasively concluded that the liquidation of insolvent insurance companies is not “the business of insurance” within applicable Supreme Court precedent. In both State of Idaho ex rel. Soward v. United States, 858 F.2d 445 (9th Cir.1988), cert. denied, 490 U.S. 1065, 109 S.Ct. 2063, 104 L.Ed.2d 628 (1989) and Gordon v. U.S. Dep‘t of Treasury, 668 F.Supp. 483 (D.Md.1987), aff‘d, 846 F.2d 272 (4th Cir.). cert. denied, 488 U.S. 954, 109 S.Ct. 390, 102 L.Ed.2d 379 (1988), as in the instant case, a state‘s insurance authorities, in its capacity as liquidator or receiver for an insolvent insurance company, challenged the federal government‘s assertion of priority. In both these cases, directly on point with the instant case, the priority of the federal government‘s claim was upheld. The majority concedes that the Fourth and Ninth Circuits have explicitly rejected Fabe‘s theory, yet reaches a directly opposite result based on abstention cases of questionable relevance and pure ipse dixit.
The majority emphasizes the scope of the Ohio liquidation statute. However, Ohio‘s ability to regulate the entire relationship between insurer and insured is not at issue. It is elementary that “[r]eorganization of insolvent insurance companies is a matter of state law and is handled through insolvency proceedings in state court.” Gordon, 668 F.Supp. at 487. The federal government in this case only argues its priority in Ohio‘s liquidation of an Ohio insurance company, and does not seek to challenge Ohio‘s overall authority to regulate.
“[]In determining whether a particular practice is part of the ‘business of insurance‘“, three factors should be considered: “first, whether the practice has the effect of transferring or spreading a policyholder‘s risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry. None of these criteria is necessarily determinative in itself[.]” Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129, 102 S.Ct. 3002, 3008, 73 L.Ed.2d 647 (1982). The first prong of the Pireno test inquires whether Ohio‘s liquidation priority statute transfers or spreads a policyholder‘s risk. Pireno stated that “[t]he transfer of risk from insured to insurer is effected by means of the contract between the parties—the insurance policy—and that transfer is complete at the time that the contract is entered.” 458 U.S. at 130, 102 S.Ct. at 3009. It is clear that, under Pireno, the transfer of risk has already been effectuated at the liquidation stage; therefore, any prioritization scheme instituted by the state of Ohio to govern liquidation of insurance companies has nothing to do with the transferring or spreading of risk within the meaning of Pireno. See also Soward,
The majority envisions two kind of risk of loss. First, the policyholder transfers a risk of loss to the insurance company at the time the initial insurance contract is signed. The later transfer of risk of loss occurs at the moment an insurance company is liquidated and Ohio‘s Superintendent of Insurance is appointed as liquidator. Although Ohio‘s liquidation priority scheme may be characterized as a transferring a risk of loss to some extent, the ordering of creditors’ claims does not effectuate a transfer of risk vis-a-vis the policyholder. The position that the liquidation of an insurance company effects a transfer of risk is directly contradicted by Pireno: “The transfer of risk from insured to insurer is complete at the time that the contract is entered.” 458 U.S. at 130, 102 S.Ct. at 3009. The mere fact that Ohio‘s liquidation priority statute was enacted “for the protection of policyholders“, maj. op. at 350, is irrelevant to the issue of whether the priority scheme has the effect of transferring a policyholder‘s risk under Pireno.
The second Pireno prong asks us to consider whether Ohio‘s prioritization statute is an integral part of the policy relationship between the insurer and the insured. The majority answers this inquiry in the affirmative solely because the payment of claims continues after the insurer is placed in receivership. This analysis, however, attributes to the liquidator rights which have already vested by virtue of the initial contract between the insurer and the insured. Simply because the insured‘s right to receive payment under the initial contract of insurance continues after the insurer is placed in receivership does not indicate to me that the statute at issue is “an integral part of the policy relationship between the [now-defunct] insurer and the insured.” 458 U.S. at 129, 102 S.Ct. at 3008. The policyholder‘s rights and responsibilities are still governed by the original contract of insurance entered into with the insured. Rather than playing an integral role in the policy relationship between insurer and insured, Ohio‘s priority statute instead addresses “the relationship between those left in the lurch by the expiration of the insurer.” Soward, 858 F.2d at 454. I am persuaded by the reasoning of the district court in Gordon, specifically adopted by the Fourth Circuit:
[N]either the liquidation statute nor the priority statute are an “integral part” of the relationship between the insured and the insurer. The contractual liability to pay on a policy of insurance is obviously distinct from the question of who gets paid first. As with the claims adjustment process described in Pireno, the concern is whether a claim is paid, not why it is paid. Pireno, 458 U.S. at 132, 102 S.Ct. at 3010. Plaintiff contends that the priority statute does in fact determine whether a policyholder gets paid. The fallacy of plaintiff‘s argument is in his focus on the sufficiency of assets of the insurance company and its financial ability to pay rather than its liability for risks of loss as embodied in the contract of insurance. Whether the individual policyholder would be entitled to payment was determined when the contract was entered into; that is, when the risk was transferred, and not at the time of payment, if any.
Under the third prong of Pireno, we must determine whether Ohio‘s priority statute “is limited to entities within the insurance industry.” 458 U.S. at 129, 102 S.Ct. at 3009. This inquiry is easily resolved because this statute “govern[s] the rights of all creditors, not just policyholders.” 668 F.Supp. at 491. “Creditors of all varieties have their claims assigned priorities by the statute, including the local, state, and federal governments.” Soward, 858 F.2d at 454. The majority initially admits that an insurance company‘s liquidation encompasses non-policied creditors,
Notes
(a)(1) A claim of the United States shall be paid first when—
(A) a person indebted to the Government is insolvent and—
(i) a debtor without enough property to pay all debts makes a voluntary assignment of property;
(ii) property of the debtor, if absent, is attached; or
(iii) an act of bankruptcy is committed[.]
The majority assertion that “it is clear” that the focus of Ohio‘s liquidation priority statute “is the protection of insureds“, maj. op. at 350, is correct in the sense that Ohio‘s priority statute prioritizes the claims of policyholders above the claims of general creditors and claims of any federal, state, or local government.