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Richard J. Fidei, Esq.
(954) 592-5530
Fred E. Karlinsky, Esq.
(954) 768-8278


Every state within the United States has adopted a statutory scheme for the receivership and liquidation of insolvent insurance companies. In late 2010, the United States Department of Labor filed a complaint in a federal court seeking declaratory and injunctive relief with respect to the Department of Labor's rights and priority of payment owed under a federal workers' compensation law in an insurance company's pending state liquidation proceeding based upon theories including federal preemption of state law. One motion currently pending before the court is a motion to dismiss the federal court action filed by the New Hampshire Insurance Commissioner, as liquidator of the insolvent insurer, urging the federal court to abstain from considering the action based on an argument that issues related to insurer liquidation proceedings are a matter of state law, not federal law. The National Association of Insurance Commissioners filed an amicus curiae brief in this proceeding asserting that claims filed in insurer liquidation proceedings should be determined and prioritized in accordance with state insurer insolvency law.

I. Department of Labor's Complaint

The Home Insurance Company ("Home"), a New Hampshire domiciled property and casualty insurer, was declared insolvent and ordered into liquidation by the Superior Court of Merrimack County in 2003. In re Liquidation of the Home Ins. Co., No. 03-E-0106 (N.H. Sup. Ct. filed June 13, 2003). In June 2003, the Department of Labor ("DOL") filed its proof of claim, followed by amended proofs of claim in February and April 2005, with the New Hampshire Insurance Commissioner claiming $2,672,527 in unpaid assessments under the federal Longshore and Harbor Workers' Compensation Act ("LHWCA" or "Act") for the years 2000 through 2004. Subsequently, the liquidator issued a notice allowing the full amount of the claim and assigning the DOL's claim to priority Class III. The notice indicated that there would not be sufficient assets to make a distribution to creditors below Class II.

On December 9, 2010, the DOL filed a complaint in the United States District Court, District of New Hampshire arguing that its right to unpaid assessments under the LHWCA preempted New Hampshire's statutory liquidation scheme and the priorities set forth in the state law. U.S. Dept. of Labor v. the Home Ins. Co., No. 1:10-cv-572 (D.N.H. filed Dec. 9, 2010). Currently, any matters related to the DOL's proof of claim are stayed in the state court proceeding pending the outcome of the federal action.

A. Department of Labor's Claim Under the Longshore and Harbor Workers' Compensation Act

The DOL's claim is for unpaid assessments under the LHWCA, which is a federal workers' compensation program administered by the Office of Workers' Compensation Programs. The Act provides for compensation and medical care to employees disabled from injuries that occur on the navigable waters of the United States, or in adjoining areas used in loading, unloading, repairing, or building certain vessels.

The law applies to certain maritime workers, to employers who employ such workers "in whole or in part, upon the navigable waters of the United States," and to carriers authorized to provide the workers' compensation insurance required by the LHWCA. A "carrier" includes any person or fund authorized under 33 U.S.C. ยง 932 to insure under the Act. Employers are to secure payment of the compensation available under the LHWCA by contracting with an authorized insurance carrier or by obtaining authorization to self- insure. The DOL's complaint provides that Home was an authorized carrier under the LHWCA.

The benefits are paid directly by an authorized self-insured employer, by an authorized insurance carrier, or, in particular circumstances, by a special fund ("Special Fund") established in the Treasury of the United States in trust for injured workers and administered directly by the Division of Longshore and Harbor Workers' Compensation. The Special Fund is financed in part by the DOL's annual assessment of insurance carriers and self-insured employers according to a statutory formula. Carriers are required to pay these annual assessments in the amounts determined by the Secretary of the DOL. The DOL's complaint asserts that Home did not pay Special Fund annual assessments for the years at issue.

B. New Hampshire's Insurance Insolvency Laws

The New Hampshire insurance insolvency laws provide for a statutory framework regulating the rehabilitation and liquidation of insurers. This framework sets forth certain classes of claims of unsecured creditors and the order in which claims are to be paid in an insurer liquidation proceeding. Under New Hampshire law, Class I claims include costs and expenses of administration of the proceeding. Class II claims encompass policy related claims, which include guaranty associations and any other similar organizations in another state. Claims of the federal government are included in Class III. The law provides for other subordinate classes of claims and their priority of distribution.

C. The Department of Labor's Arguments

In its Complaint, the DOL argued that its claim under the LHWCA preempted the New Hampshire priority statute and is entitled to absolute priority. Essentially, the DOL reasoned that according to the Supremacy Clause of the United States Constitution, which provides that federal law is the supreme law of the land, the federal LHWCA preempts any state law with regard to the DOL's claim. Specifically, the DOL argued that the state law must yield to the federal law because it would be impossible for Home and the Liquidator to comply with the LHWCA if Class I and Class II claims were to be paid ahead of the DOL's claim. In addition, the DOL explained that the McCarran-Ferguson Act would not act to protect state laws from preemption because the LHWCA, an act of Congress, specifically relates to the business of insurance.

In the alternative, the DOL argued that its claim should be assigned to Class II because the Special Fund is similar to state guaranty associations, in that the Special Fund was established, in part, to pay claims of insolvent insurers. The DOL also argued, in the alternative, that its claim should be assigned to Class I because its claim represents a cost and expense of administration, such as the payment of federal taxes, which some courts have considered to be a cost and expense of administration.

II. New Hampshire Insurance Commissioner's Motion to Dismiss

On February 11, 2011, the New Hampshire Insurance Commissioner, Roger A Sevigny, as liquidator of Home, filed a motion dismiss the DOL's complaint in the federal court. Generally, the motion raised several abstention arguments and alleged that the DOL was forum shopping because its claim was assigned a lower priority in the state court. The Commissioner argued that the federal court should abstain from considering the action (1) under the principle that the court first assuming jurisdiction over property may maintain and exercise that jurisdiction to the exclusion of the other in accordance with United States v. Bank of New York & Trust Co., 296 U.S. 463 (1936), (2) in light of the discretion to avoid duplicate proceedings under Wilton v. Seven Falls Co., 515 U.S. 277 (1995) (related to Colo. River Water Conserv. Dist. v. United States, 424 U.S. 800 (1976)), and (3) in light of the principles of federalism and comity of Younger v. Harris, 401 U.S. 37 (1971).

As noted, the first argument made by the Commissioner relies upon Bank of New York, a case very similar to the one at hand. In Bank of New York, a federal district court dismissed suits brought by the United States seeking an accounting of assets held under order of the New York state courts. In each of these cases, the state proceedings had started as liquidations in which the New York Superintendent had been appointed as liquidator of insolvent U.S. branches of foreign insurers.

In Bank of New York, the United States Supreme Court affirmed the decrees of the district court based on a determination that the federal court interfered with the state court's in rem jurisdiction and rejected the position that the United States was entitled to a federal forum. The Court explained that the federal court's action sought to take property from the control of the state court and to vest the property in the United States to the exclusion of all other claimants, thereby interfering with the previously exercised court jurisdiction. In addition, the Court indicated that "[t]he fact that the complainant [in the federal court] is the United States does not justify a departure from the rule which would otherwise be applicable. . . . [T]he United States is free to invoke the jurisdiction of the state court for the determination of its claim, and the decision of the state court of any federal question which may be presented upon such an invocation, may be reviewed by this court, and thus all the questions which the government seeks to raise in these suits may be appropriately and finally decided."

Furthermore, the Commissioner argued in his motion that banking institutions and insurance companies are excluded from liquidation under the bankruptcy laws because they are bodies for which alternative provision is made for their liquidation, a principle which should apply equally to Home's liquidation proceeding. In addition, the Commissioner contended that the McCarran-Ferguson Act reflects federal policy to leave insurance matters to the states unless Congress has specifically provided otherwise. The Commissioner's motion to dismiss indicated that state insurer liquidation proceedings are included within such a purpose because states have traditionally been the preeminent regulators of insurance.

III. National Association of Insurance Commissioners' Amicus Curiae Brief

On March 16, 2011, the National Association of Insurance Commissioners ("NAIC") filed an amicus curiae brief in the pending federal court action urging the court to abstain from hearing the merits of the case. Essentially, the NAIC's brief re-alleges the New Hampshire Insurance Commissioner's motion to dismiss the federal court action, but provides further guidance with regard to a state's effective administration of the liquidation of insurers.

In summary, the NAIC argued that the federal court should abstain from hearing the complaint filed by the DOL because state liquidation proceedings are the exclusive jurisdiction and forum for resolving disputes related to the liquidation of an insolvent insurer, especially with respect to the priority of distribution of assets. A state court's exclusivity with regard to insurer receivership is a long-standing principle that contributes to the efficiency of estate administration and the strength of state-based insurance regulation.

The NAIC's brief discusses its Insolvency Models, which provide, among others, for the priority of distribution of claims in an insurer liquidation proceeding. Many of the states have adopted some version of the NAIC's Insolvency Models. The NAIC indicated that the New Hampshire liquidation chapter is taken directly from a series of NAIC Insolvency Models dating back to the original version adopted in 1969.

As explained in the NAIC's brief, the commentary to the Models illustrates the historical significance of regulatory and judicial attempts to fashion a comprehensive, equitable, and efficient system to handle insurer insolvencies at the state level. As a result, it would be impractical for a court to interfere on an issue so central to an insurer liquidation as the application of the priority of distribution of assets. If a federal court were not to abstain, but rather hear the merits of the DOL's complaint, the NAIC emphasized that this would introduce uncertainty into determinations properly before a liquidator.

The NAIC discussed another significant factor in that state insolvency laws are tied to the NAIC's Financial Regulation Standards and Accreditation Program. This Program promotes interstate reliance and ultimately saves money in duplicative examination costs. According to the NAIC's brief, fifty-one jurisdictions, including New Hampshire, are accredited under this Program. Should the federal court hear the DOL's complaint, it would call into question the stability and uniformity of New Hampshire's receivership scheme that the accreditation standard requires. In addition, should the federal court decide to entertain the case, it could affect the interpretation and application of the NAIC Insolvency Models and other state insolvency statutes because all states have adopted some version of the NAIC Insolvency Models. Courts have looked to other state courts for assistance in interpreting similar statutory provisions based onthe models. Essentially, this one federal case could cast doubt on the entire statutory scheme of insolvency and the web of interstate reliance fostered through the accreditation program.

IV. Conclusion

As of the date of this article, no decision has been made regarding whether the federal court will abstain from considering the case and defer jurisdiction to the state court. The potential effects of the federal court's decision are numerous and widespread. A decision to hear the merits of the case and determine claim priorities in a manner inconsistent with state law could raise serious concerns with state statutory liquidation schemes. In addition, a decision to hear the merits of the case in a federal court could create jurisdictional issues with regard to the proper forum to resolve disputes in an insurer liquidation proceeding. As is common, the legal ramifications of a seemingly isolated issue have the potential to create an environment of uncertainty.