Jurisdictional Statement — Department of Treasury v. Fabe

No. 91-1513

Jn the supreme | Court of the United a:

OcTOBER TERM, 1992

NITED STATES DEPARTMENT OF THE TREASURY AND

MITCHELL A. LEVINE

iT COMMISSIONER, PETITIONERS

GEORGE FABE. SUPERINTENDENT OF INS

STATE OF OHIO

ON WRIT OF CERTIORARI TO TH1l

NITED STATES COURT OF APPELALS

FOR THE SIXTH CIRCUIT

BRIEF FOR THRE PETITIONERS

KENNETH W. STARR

Solicitor General

STUART M. GERSON

issistant Attorney General

MAUREEN E. MAHONEY

Deputy Solicitor General

ROBERT A. LONG, JR

issistant to the Solicitor General

WilLLIAM KANTER

JENNIFER H. ZACKS

ifforneys

Department of Justice

Washineton, D.C. 20530

(202) 514-2217

QUESTION PRESENTED

[he federal priority statute, 31 U.S.C. 37] (a), requires

that a debtor’s obligations to the United States be given first

priority in state insolvency proceedings. An Ohio statute

provides that claims of the United States are entitled to fifth

priority in proceedings to liquidate an insolvent insurance

company. The federal priority statute preempts the state

priority statute unless the state statute is subject to the anti

preemption provisions of the McCarran-Ferguson Act, 15

U.S.C. 1012. Accordingly, the question presented is

Whether a state statute establishing the priority of

creditors’ claims in a proceeding to liquidate an insolvent

insurance Company ts a law regulating “the business of in

surance” within the meaning of the McCarran Ferguson Act

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S/. Paul Fire & Marine Ins. ¢ Barry, 438 |

S341 (197)

s Bank of Alaryvland, 26 Am. De S61 (Md

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non Indemnity, In re, 551 N.Y .S.2d 446 (Suy

1990). alld sub nom Curial U/nited States

N.Y¥.S.2d 853 (App. Div. 1991), petition for

pending, No. 91-1347 :

(/nion Labor Life ins. ¢ Pireno, 458 U.S

(1982) 3, 5, 7, 13, 15, 16, 17

(/nited Stat Emory, 314 U.S. 423 (1941)

(/nited State Aey, 397 U.S. 322 (1970)

United State: Anott, 298 U.S. 544 (1936)

United State Vloo 423 US (1975)

United States v. South-Eastern Underwriters As

122? US. $33 (1944)

U/nited State Siate Bank. 31 U.S. (6 Pet.)

(1832)

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Act of Mar. 3, 1797, ch. 20, § 5, 1 Stat. 515

Act of Mar 1799, ch. 22 65. | Stat. 676

Act of Nov. 6, 1978, Pub. L. No. 95-598. § 322

J? Stat. 2678

Act of Sept. 13, 198 Pub. L. No. 97-258, § |

Stat. 972 (31 US $713)

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Jn the Supreme Court of the United States

OcTroBER TERM, 1992

No. 91-1513

UNITED STATES DEPARTMENT OF THE TREASURY AND

MirtcHett A. LEVINE

ASSISTANT COMMISSIONER. PETITIONERS

GEORGE FABLE. SUPERINTENDENT OF INSURANCE:

STATE OF OHIO

ON WRIT OF CLELRITORARI IO TH

UNITED STATES COURT OF APPEALS

POR THE SIXTH CIRCUIT

BRIEF FOR THE PETITIONERS

OPINIONS BELOW

[he opinion of the court of appeals (Pet. App. la-30a)

is reported at 939 F.2d 341. The opinion of the district court

(Pet. App. 3la-49a) is unreported

JURISDICTION

[he judgment of the court of appeals (Pet. App. 5O0a-Sla)

was entered on July 17, 1991. A petition for rehearing was

denied on November 21, 1991. Pet. App. 52a-S3a. On

February 10, 1992, Justice Stevens extended the time for

filing a petition for a writ of certiorari to and including

March 20, 1992. The petition was filed on March 17, 1992,

and was granted on May 18, 1992. The jurisdiction of this

Court rests on 28 U.S.C. 1254(1)

(1)

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

Article VI, Clause 2 of the United States Constitution;

4) U.S.C. 3713; 18 U.S.C. 1012; and Ohio Rev. Code Ann

3903.02(D) and 3903.42 (Anderson 1989) are reproduced

as an appendix to this brief. See App., fra, la-Sa.

STATEMENT

| On April 30, 1986, the Court of Common Pleas tor

lranklin County, Ohio, declared American Druggists’ In

surance Company (ADIC) insolvent. The court ordered that

ADIC be liquidated and appointed respondent, Ohio's

Superintendent of Insurance, as liquidator. Pet. App. 2a.

he United States filed claims in the state liquidation pro

ceedings in excess of $10.7 million on immigration, ap

pearance, performance, and payment bonds issued by ADIC

as surety. The United States asserted that its claims are en

titled to first priority under the federal priority statute, 31

U.S.C. 3713(ayl (A). Pet. App. 2a. See App., infra, la.

Respondent brought a declaratory judgment action in

federal district court seeking to establish that the federal

priority statute does not preempt an Ohio statute that estab

lishes the priority of claims in insurance liquidation pro

ceedings. Under the Ohio statute, claims of federal, state,

and local governments are entitled to. fifth priority, rank

ing behind (1) administrative expenses, (2) wage and benefi!

claims, (3) policyholders’ claims, and (4) claims of general

creditors. Ohio Rev. Code Ann. § 3903.42 (Anderson 1989);

see App., infra, 2a-4a. Respondent argued that the Ohio

priority statute, rather than the federal priority statute,

determines the priority of claims of the United States

because of the anti-preemption provisions of the McCarran

Ferguson Aci, 15 U.S.C. 1012. Pet. App. 2a-3a; see App.,

infra, la-2a.

2. The district court entered summary judgment for the

United States. Pet. App. 3la-49a. The court first conclud-

ed that the federal priority statute governs the priority of

claims of the United States against an insolvent insurer

unless the Ohio priority statute is a law regulating “the

business of insurance” within the meaning of the McCarran-

Ferguson Act, 15 U.S.C. 1012. The court then applied this

Court’s three-part test for determining whether a practice

is part of the business of insurance. That test looks to:

[F]irst, whether the practice has the effect of trans-

ferring 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.

Pet. App. 36a (quoting Union Labor Life Ins. Co. v. Pireno,

458 U.S. 119, 129 (1982)). As to the first factor, the court

concluded that “the liquidation process, with its prioritiza-

tion and payment of claims, does not involve the transfer

[or] spreading of policyholder risk.” Pet. App. 41a. As to

the second factor, the court concluded that “[t}he contrac-

tual liability [to] pay on a policy of insurance is obviously

distinct from the question of who gets paid first.” /bid.

(quoting Gordon v. United States Dep’t of the Treasury,

668 F. Supp. 483, 491 (D. Md. 1987), aff'd, 846 F.2d 272

(4th Cir.), cert. denied, 488 U.S. 954 (1988)). As to the third

factor, the court observed that the Ohio priority statute

“lajtfects the claims of various types of creditors,” and

therefore is not limited to entities within the insurance in-

dustry. Pet. App. 41a. The court also noted that “{i]nsolven-

cy and priority statutes * * * are not peculiar to the in-

surance industry.” /bid. (quoting Gordon, 668 F. Supp. at

491)). Accordingly, the district court held that a state statute

determining the priority of claims against an insolvent

msurance company does not regulate the “business of in

surance” within the meaning of the McCarran-berguson Act,

and theretore the claims of the United States avallisl ADI

ue entitled to first proormty under the tederal priority

sLalule

} lhe court of appeals reversed. Pet. App. la- 30a. The

court of appeals, like the district court, apphed Pireno's

three-part test for determining whether a practice ts pari

of the business of insurance. /d. at Ya-lla. The court of

appeals also recognized that two other courts of appeals

have “rejected the argument that * * * liquidation priori

iy statutes * * *

revgulate[ |] the ‘business of insurance.’ '

Id. at Wa (citing Idaho ex rel. Soward v. United States, 858

| 2d 445 (9th Cir. 1988), cert. denied, 490 U.S. 1065 (1989):

Gordon v. United States Dept of the Treasury, 846 t.2d

272 (4th Cir.) (per curiam), cert. denied, 488 U.S. 954

(1988)). The court nevertheless held that the Ohio priority

statute regulates the business of insurance because it “is a

state regulation which protects the interests of the insured.”

Pet. App. 20a

[he court then held that the Ohio statute meets all three

parts of Pireno’s tripartite test First, the court concluded

that the Ohio priority statute has the effect of transferring

and spreading the policyholder’s risk that the insurer will

become insolvent. Pet. App. 2la-22a. Second, the court con

cluded that the priority statute is an integral part of the

insurer-insured relationship because the statute is designed

to protect that relationship by providing assurances as to the

reliability of insurance policies. /d. at 22a. Finally, although

fhe district court also held that claims of laborers, materialmen

ind subcontractors suing on payment bonds under the Miller Act, 40

L S.¢ 270b, are not claims of the United States tor purposes of the

tederal insolvency statute. See Pet App 48a-48a. The government did

appeal trom that ruling

recognizing that not all creditors of an insolvent insurance

company are policyholders, the court nevertheless concluded

that the third prong of Pireno was satisfied because the

“tocus” of the statute is the protection of policyholders. /d

at 23a

Judge Edgar concurred separately. Pet. App. 23a-25Sa

Hle observed that, in enacting McCarran-Ferguson, Con

gress intended “to restore the law to its status prior to

[United States v.| South-Eastern Underwriters [Ass'n, 322

U.S. $33 (1944)].” Pet. App. 24a. Judge Edgar concluded

that McCarran-Ferguson did not modify the “long stand

ing, traditional state regulation of insurance company |i

quidations,” and therefore did not modify the type of regula

tion at issue in this case. /bid.

Judge Jones dissented. Pet. App. 25a-30a. As to the first

Pireno tactor, he concluded that the risk of insurer insolven

cy 1s “qualitatively distinct from the risk the policyholder

seeks to transfer in an insurance contract.” /d. at 27a

(quoting Gordon, 846 F.2d at 273). Judge Jones therefore

reyected the majority’s conclusion that the priority statute

involves risk transfer and risk spreading. Judge Jones

reasoned that the majority’s view was contradicted by this

Court’s conclusion in Pireno that “[t}he transfer of risk from

insured to insurer 1s effected by means of the contract be

tween the parties — the insurance policy —and that transfer

is complete at the time that the contract is entered.” Pet

App. 27a (quoting 458 U.S. at 130). As to the second Pireno

factor, Judge Jones concluded that the priority statute is

not an integral part of the policy relationship. “Rather than

playing an integral role in the policy relationship between

insurer and insured,” the Ohio priority statute instead “ad

dresses ‘the relationship between those left in the lurch by

the expiration of the insurer.’” Pet. App. 29a (quoting

Soward, 858 F.2d at 454). Finally, Judge Jones found that

the third Pireno tactor also supported preemption because

'é)

the Ohio priority statute ts not limited to entities within the

insurance industry, but instead governs the rights of all

creditors. /d. at 30a

SUMMARY OF ARGUMENI

Ihe tederal priority statute requires that claims of

the United States against insolvent debtors be accorded first

priority in state insolvency proceedings. Congress enacted

a federal priority statute in the earliest days of the Republic;

the statute has remained in effect with little substantive

change for two centuries. Statutory priority tor federal

claims serves the vital purpose of securing an adequate

tederal revenue

By its terms, the federal priority statute applies to the

claims at issue in this case. Those ciaims are “claim [sj] of

the United States Government.” See 31 U.S.C. 3713. In ad

dition, ADIC has been declared insolvent, and the appoint

ment of respondent to serve as liquidator of ADIC was a

classic “act of bankruptcy” within the meaning of the statute

[he Ohio priority statute directly conflicts with the federal

priority statute because it ranks claims of the United States

behind numerous other claims, including claims of general

business creditors. Under ordinary principles of preemp

tion, the federal priority statute applies to the claims of the

United States and preempts inconsistent state law

2. a Ihe McCarran-Ferguson Act does not require a

ditterent result. That Act provides that “[nJo Act of Con

vress Shall be construed to invalidate, impair, or supersede

any law enacted by any State for the purpose of regulating

the business of insurance.” 15 U.S.C. 1012(b). The Court

has consistently distinguished between laws “regulating the

business of insurance” and those regulating a variety of othe

corporate activilles conducted by insurers.

[he plain language of the McCarran-Ferguson Act

answers the question presented in this case. The Ohio priori

ly statute was not “enacted * * * for the purpose of

regulating the business of insurance.” 15 U.S.C. 1012(b).

[he purpose of the statute is to regulate the priority of com-

peting claims of creditors in an insolvency proceeding, and

to displace the historic superiority of federal claims. The

law does not regulate the terms of insurance policies, or any

other aspect of the commercial activities of insurers. Indeed,

the statute is not even addressed to insurers. Instead, it is

addressed to the liquidator or trustee of the “estate” of a

defunct insurance company, and applies only when the

business of the defunct company has been wound up and

its assets are being distributed to its creditors.

b. Although the plain language is dispositive here, this

textualist interpretation is confirmed by application of the

Pireno test. Under that test, the Court considers (1) whether

the practice at issue has the effect of transferring and

spreading a policyholder’s risk; (2) whether the practice is

an integral part of the policy relationship between the in-

surer and the insured; and (3) whether the practice is limited

to entities within the insurance industry. See Union Labor

Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982). Each of

these factors confirms what the plain language suggests: the

Ohio priority statute does not regulate the business of

insurance.

An essential characteristic of the business of insurance

is the spreading and underwriting of risk. The transfer of

risk from the insured to the insurer is effected by means

of the contract of insurance. It is complete at the time the

parties enter into the contract. Pireno, 458 U.S. at 130. The

Ohio statute does not result in any underwriting or invest-

ment risk-taking by the insurance company. The risk that

the insurance company will become insolvent is not a risk

covered by the insurance contract or transferred at the

time the parties enter into the contract. Instead, that risk

remains with the policyholders and other creditors of the

insurance company. The state insolvency statute merely

determines the order in which creditors’ claims will be paid

Nor is the state priority statute integral to the relation-

ship between the insurance company and the insured. The

statute is distinct from the contract of insurance. And the

statute comes into play only if the insurance company

becomes insolvent and is liquidated. In that event, the in

surance company ceases to exist and the relationship be

tween the iagsurance company and the insured ts terminated.

Rather than addressing the relationship between the in-

surance company and the insured, the statute addresses the

relationship between policyholders and other creditors of

the defunct insurer.

In addition, the state priority statute plainly is not limited

to entities in the insurance industry. Instead, it applies to

all creditors of insolvent insurance companies, including

employees and general business creditors. A priority statute

does not regulate the business of insurance, but instead is

a standard feature of bankruptcy laws.

3. In prior cases, this Court has defined the “business

of insurance” through examination of McCarran-Ferguson’s

enactment history. To the extent the Court repairs to the

measure’s legislative background, that history strongly rein

forces the conclusion that a statute regulating the priority

of federal claims against an insolvent enterprise that former

ly sold insurance is not a law regulating the “business of

insurance.” Congress passed the McCarran-Ferguson Act

in response to this Court’s decision in United States v. South

Eastern Underwriters Ass'n, 322 U.S. 533 (1944), which held

that insurance transactions are subject to federal regulation

under the Commerce Clause. The Act was intended to “turn

back the clock” to pre-South-Eastern Underwriters days by

ensuring that the States could continue to regulate and tax

insurance companies. The Court has accordingly held that

the Act should “be read as protecting the right of the States

to regulate what they traditionally regulated.” Group Life

& Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 218

(1979). That reading of McCarran-Ferguson precludes

assumption of State control over the question whether

federal claims are superior to the claims of other creditors

in dissolution proceedings.

Prior to the Court’s decision in South-Eastern Under

writers, \ was well established that the federal priority

statute applied in state proceedings to liquidate insolvent

insurance companies and preempted inconsistent state law

United States v. Knott, 298 U.S. 544 (1936). The federal

priority statute was an exercise of Congress’s power to estab

lish bankruptcy laws. Consequently, the “business of insur

ance” should not be construed to displace the supremacy

of federal law tn resolving the priority of the United States’

claims against a defunct insurance company. That subject

was not “traditionally regulated” by the States

ARGUMENT

CLAIMS OF THE UNITED STATES ARE ENTITLED TO

FIRST PRIORITY IN A PROCEEDING TO LIQUIDATE AN

INSOLVENT INSURANCE COMPANY

A. The Federal Priority Statute Applies to Claims of the United

States Against Insolvent Insurance Companies

|. The federal priority statute provides in part that “{a]

claim of the United States Government shall be paid first

when * * * a person indebted to the Government is insoly

ent and * * * an act of bankruptcy is committed.” 3}

U.S.C. 3713ayl MA); App., infra, la. Congress enacted a

federal priority statute in “the earliest days of the Republic”

(United States v. Key, 397 U.S. 322, 324 (1970)), pursuant

to the constitutional grant of authority “[t}o establish * * *

uniform laws on the subject of Bankruptcies throughout

the United States.” U.S. Const. Art. 1, § 8, Cl. 4. The origins

he statute “reach back even turther into the English com

mon law.” under which “the Crown exercised a sovereign

crowative lO require that debts owed it be paid betore the

debts owed other creditors.” United States v. Moore, 423

\! S. 77. 80 (1975). See 33 Hen. &. ch. 39, § 74 (1541); 13

[he tirst federal priority statute — the filth statute enacted

by the First Congress — applied to debts due to the United

States for customs duties. See Act of July 31, 1789, ch. 5

»1, | Stat. 42. In 1797, Congress amended the statute t

x<tend its coverage to any “person herealter becoming In

lebted to the United States, by bond or otherwise.” Act of

Mar. 3, 1797, ch. 20, § 5, 1 Stat. SIS. In 1799, Congres

further amended the priority statute to provide that the ad

ministrator of any insolvent or decedent's estate is personally

liable for any amount not paid to the United States Decauss

the administrator gave another creditor preference. See A

.

Mar. 2. 1799. ch. 22. § 68. 1 Stat. 676; 31 U.S.C. 3713(b)

ihe tederal priority statute has remained in torce tor tw

turies. Indeed, “[t}he 1797 and 1799 Acts have survived

this day essentially unchanged Vfoore, 423 U.S. at BI

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The purpose of the federal priority statute is to “secure

an adequate revenue to sustain the public burdens, and

discharge the public debts.” United States v. State Bank,

31 U.S. (6 Pet.) 29, 35 (1832). See Moore, 423 U.S. at 82:

King v. United States, 379 U.S. 329 (1964). That purpose

is fundamental to the success of the national government.

Accordingly, “it is established that the terms of [the priori-

ly statute] are to be liberally construed to achieve [its] broad

purpose.” Key, 397 U.S. at 324 (citing Bramwell v. United

States Fidelity & Guaranty Co., 269 U.S. 483, 487 (1926):

Beaston vy. Farmers’ Bank, 37 U.S. (12 Pet.) 102, 134

(1838)).

Che Ohio priority statute ranks claims of the United States

behind several other classes of claims against insolvent in-

surance companies, including claims of general business

creditors. Similar priority statutes enacted by other States

also subordinate claims of the United States to other claims.4

States in non-bankrupicy proceedings.” United States v. Emory, 314

U.S. 423, 427 (1941)

In 1982, Congress revised the federal priority statute as part of a

general recodification of Title 31. See Act of Sept. 13, 1982, Pub. I

No. 97-258, § 3713, 96 Stat. 972. The 1982 revision was not intended

to make any substantive change in the statute. See H.R. Rep. No. 651,

97th Cong., 2d Sess. 1, 3-4, 134 (1982)

* The state priority statutes at issue in Gordon and Soward provide

additional examples. See Md. Ins. Code Ann. §§ 158-158A (1991)

(assigning fourth priority to claims of the United States as policyholder);

Idaho Code § 41-3342 (Supp. 1990) (assigning fifth priority to claims

of the United States). See also Uniform Insurers Liquidation Act §§ 6-8,

13 U.L.A. 321-353 (1986); National Association of Insurance Commis

sioners, Insurers’“Supervision, Rehabilitation, and Liquidation Model

Act § 42 (1979)

In the courts below, the government argued that even if the Ohio

tatute governs the priority of claims of the United States, the govern

ment’s claims are entitled to third priority under the Ohio statute as

policyholders’ claims. The courts below did not address that argument

} )

Under the state priority statutes, the United States would

often recover litthe or nothing on claims — including tax

claims — against insolvent insurers. The effect on the tederai

revenue would be significant. Nearly $11 million is at stake

in this case alone. The amount of revenue at issue has in

creased as the rate of insurance company insolvencies has

increased. See generally Staff of House Comm. on Energy

and Commerce, 10Ist Cong., 2d Sess., Failed Promises: In

surance Company Insolvencies 2 (Comm. Print 1990)

(noting that nearly half of 150 property-casualty insurance

company insolvencies since 1969 occurred within the last

five years, and that insurance company assessments lO COver!

the costs of insolvencies totalled $900 million in 1987, nearly

half the total assessments of $2.2 billion for the period from

1969 to 1987)

2 Ihe federal priority statute, by its terms, applies to

the claims at issue in this case. Those claims plainly are

“claims of the United States Government.” In addition, an

Ohio court has determined that ADIC is insolvent, has

ordered that ADIC be liquidated, and has appointed re

spondent to serve as liquidator. “The appointment of a

receiver under such circumstances is among the most com

mon examples of an ‘act of bankruptcy.’ ” United States

v. Emory, 314 U.S. 423, 426 (1941). Accordingly, the federal

priority statute applies to the governmeni’s claims — and pre

empts inconsistent state law—unless the McCarran

Ferguson Act, 15 U.S.C. 1012, requires a different result

See Florida Lime & Avocado Growers, Inc. v. Paul, 373

U.S. 132, 142-143 (1963)

5

” Pet App 23a (court of appeals remands tor entry ol judgment

pursuant to Ohio law”); id. at 45a (district court “need not address

the arguments of the parties as to the priority given to the claims ol

the federal government under Ohio Rev. Code § 3903.42”)

13

B. A State Statute Establishing the Priority of Claims Against

An Insolvent insurance Company Is Not a Law “Regulating

the Business of Insurance”

lhe McCarran-Ferguson Act provides that “[nJo 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 * * * unless such Act

specifically relates to the business of insurance.” 15 U.S.C.

1012(b); App., infra, 2a. This Court described the narrow

reach of that clause in SEC v. National Securities, Inc., 393

U.S. 453, 459-460 (1969), stating that McCarran-Ferguson

did not purport to make the States supreme in

regulating all the activities of insurance companies; its

language refers not to the person or companies who

are subject to state regulation, but to laws “regulating

the business of insurance.” Insurance companies may

do many things which are subject to paramount federal

regulation; only when they are engaged in the “business

of insurance” does the statute apply.

Consistent with that reading of the language, this

Court has repeatedly held that federal law governs the

propriety of a variety of corporate activities conducted

by insurance companies. See Union Labor Life Ins. Co. v.

Pireno, 458 U.S. 119 (1982) (insurer’s use of peer review

committee to determine whether particular charges are

covered by an insurance policy is not the business of in-

surance); Royal Drug, 440 U.S. at 230 n.38 (holding that

price agreements between insurers and pharmacies are not

the business of insurance and observing that among the

“aspects of insurance companies [that] are regulated by state

law, but are not the ‘business of insurance,’ ” are “the com-

position of their boards of directors, when their books and

records could be inspected, how they could invest their

funds, [and] when they could liquidate or merge”); SEC v.

14

Vational Securities, Inc., supra (state regulation of an in

surance company merger is not the business of insurance).

The state law at issue here purports to eviscerate the

superiority of the federal government’s claims to the pro-

ceeds derived from liquidation of a defunct insurance com

pany. The plain language of McCarran-Ferguson

demonstrates that such a statute does not regulate the

“business of insurance.”

1. “[{T)}he starting point in a case involving construction

of the McCarran-Ferguson Act, like the starting point in

any case involving the meaning of a statute, is the language

of the statute itself.” Royal Drug, 440 U.S. at 210. See also

Si. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531,

§41 (1978). McCarran-Ferguson provides that no Act of

Congress shall preempt a state statute “enacted * * * for

the purpose of regulating the business of insurance,” unless

the federal law “specifically relates to the business of in-

surance.” 15 U.S.C. 1012(b). The Ohio priority statute can-

not reasonably be viewed as a law “enacted * * * for the

purpose of regulating the business of insurance.”

Ohio’s priority statute does not regulate the terms of in-

surance policies, the selling and advertising of insurance,

or any other commercial activity of insurers. Indeed, the

statute is not even addressed to insurance companies.

instead, the statute is a bankruptcy law directed at the

“estate” of the company (Ohio Rev. Code Ann. § 3903.42

(Anderson 1989)). It comes into play only when an insolv-

ent insurance company’s business has been wound up and

its assets are distributed among its creditors. At that point,

“(t]he only ‘business’ being conducted is the liquidation of

a corporation which happens to have been an insurance

company.” Jdaho ex rel. So: yard v. United States, 858 F.2d

at 452. The priority statute addresses the liquidator rather

than the insurer, and instructs him to pay out the assets of

the insolvent company to its creditors in the order of their

priority. See ibid. (state priority statute speaks to “the

ee

1S

relationship between the insureds [and other creditors] and

the government official charged with overseeing the liquida

tion of the insolvents.”).> Regulation of the final distribu-

tion of liquidated assets —like regulation of when an in-

surance company may “liquidate or merge” — is an “aspect{| |

of insurance companies [that is] regulated by state law, but

{is} not the ‘business of insurance.’ ” Royal Drug, 440 U.S.

at 230 n.38.

In Pireno and Royal Drug, the Court considered whether

particular practices of insurance companies conducted in

the ordinary course of their ongoing business operations

were part of “business of insurance” under McCarran-

Ferguson. In holding that the practices in issue were subject

tO paramount federal regulation, the Court developed a

three-factor inquiry focusing on the nature of the insurance

company practice at issue. See Pireno, 458 U.S. at 129.

Because the Ohio priority statute does not address insurance

companies or activities conducted in the ordinary course of

their business, it plainly was not enacted for the purpose

of regulating the business of insurance. Consequently, resort

to the three-part Pireno test is unnecessary to resolve any

ambiguity in the application of McCarran-Ferguson to this

> The court of appeals believed that the priority statute regulates the

business Of insurance because “[o}nce an insurer is placed in receiver

ship, only the sale of new policies is suspended during liquidation; the

actual adjustment of claims and the payment of existing claims con

tinue.” Pet. App. 22a. The court of appeals’ argument is a non sequitur

Although an insurance company that has been declared insolvent and

placed under the control of a liquidator may continue to engage in

aspects of the business of insurance during the liquidation, it does not

follow that every state statute regulating the liquidation process is a

statute “enacted * * * for the purpose of regulating the business of

insurance.”

statute.

2. Inany event, application of the tripartite Pireno test

likewise leads to the conclusion that the Ohio priority statute

does not regulate the business of insurance. Pireno con-

siders: “first, whether the practice has the effect of trans-

ferring or spreading a policyholder’s risk; second, whether

the practice is an integra! part of the policy relationship be-

tween the insurer and the insured; and third, whether the

practice is limited to entities within the insurance industry.”

Pireno, 458 U.S. at 129. Applying those factors, Pireno held

that an insurer’s use of a peer review committee in the or-

dinary course of business to determine whether certain chiro-

practic charges were covered by the insurance policy was

not part of the business of insurance. Given that result, it

would be anomalous to hold that rules governing a liqui-

dator’s distribution of assets to creditors in dissolution

proceedings —rules that do not concern whether the policy-

holder has a contractual right to recover, or whether a par-

ticular claim is within the limits of the policy —are never-

* Ohio law itself appears to recognize a distinction between deter

mining the priority of creditors’ claims and regulating th ¢ business of

insurance. The Ohio Code provides, in part:

[he purpose of sections 3903.01 to 3903.59 of the Revised Code

is the protection of the interests of insureds, claimants, creditors,

and the public generally, with minimum interference with the nor

mal prerogatives of the owners and managers of insurers, through

all of the tollowing:

> * . > *

(4) Equitable apportionment of any unavoidable loss;

* * * * *

(6) Regulation of the insuranice business by the impact of the

law relating to delinquency procedures and substantive rules on

the entire insurance business

Ohio Rev. Code Ann. § 3903.02(D) (Anderson 1989)

17

theless part of the “business of insurance.” Moreover, con-

sideration of each Pireno tactor confirms that Ohio’s statute

does not regulate “the business of insurance.” ’

a. “The primary elements of an insurance contract are

the spreading and underwriting of a policyholder’s risk.”

Royal Drug, 440 U.S. at 211. Indeed, the Court has

recognized that the spreading and underwriting of risk are

“indispensable characteristic[s] of insurance.” Pireno, 458

U.S. at 127 (citing Royal Drug, 440 U.S. at 212). See also

1 G. Couch, Cyclopedia of Insurance Law § 1.3 (2d ed.

1984) (“It is characteristic of insurance that a number of

risks are accepted, some of which will involve losses, and

that such losses are spread over all the risks so as to enable

the insurer to accept each risk at a slight fraction of the

possible liability upon it.”); R. Keeton, /nsurance Law

§ 1.2(a) (1971) (“Insurance is an arrangement for transfer-

ring and distributing risk.”).°

’ As the court of appeals recognized (Pet. App. | 1a), the Pireno test

is not limited to cases involving the antitrust laws. See Pilot Life Ins.

Co. v. Dedeaux, 481 U.S. 41 (1987) (applying Pireno in ERISA con-

text) Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724 (1985)

(same). Pireno and Royal Drug, in turn, relied on cases involving the

federal securities laws. See SEC v. National Securities, Inc., 393 U.S.

453 (1969); SEC v. Variable Annuity Life Ins. Co. of America, 359

U.S. 65 (1959).

* Risk-shifting (or underwriting) and risk-spreading (or risk distribu-

tion) are distinct concepts. “Shifting risk entails the transfer of the im-

pact of a potential loss from the insured to the insurer.” Clougherty Pack-

ine Co. v. Commissioner, 811 F.2d 1297, 1300 (9th Cir. 1987). Risk

spreading entails “[iJnsuring many independent risks in return for

numerous premiums. * * * By assuming numerous relatively small, in-

dependent risks that occur randomly over time, the insurer smoothes

out losses to match more closely its receipt of premiums.” /bid; see also

Royal Drug, 440 U.S. at 211-212. Both risk shifting and risk spreading

are essential characteristics of insurance. See Helvering v. La Gierse, 312

U.S. 531, 539 (1941) (“Historically and commonly insurance involves risk-

shifting and risk-distributing. * * * That these elements * * * are essen-

tial to a life insurance contract is agreed by courts and commentators.”).

1s

In SEC v. bartable Annuity Life Ins. Co. of America,

$89 US. 65, 71 (1959), the Court held that variable annut

ty contracts are not insurance because they “place | all the

investment risk on the annuitant and none on the company

Roval Drug, 440 U.S. at 212. “Central to the Court’s

holding” in the Variable Annuity case was the principle that

“the concept of ‘insurance’ involves some investment risk

taking on the part of the company.” Royal Drug, 440 U.S

at 212 (quoting Variable Annuity Life Ins. Co. of America,

3$9 U.S. at 71). Because variable annuities involved “no true

underwriting of risks,” the Court concluded that they lacked

“the one earmark of insurance as it has commonly been con

ceived of in popular understanding and usage.” 359 U.S

at 73

The Ohio priority statute does not result in any under

writing Or investment risk-taking by the insurance company

[he policyholders and other creditors of an insurance com

pany, rather than the insurance company, bear the risk that

their claims will not be paid if the company becomes in

solvent. This risk of nonpayment arising out of a default

by a debtor is common to a multitude of contractual at

rangements; it ls NOt In any way an essential characteristic

of the “business of insurance.” The Ohio statute merely

determines the priority of the creditors’ claims in the event

the company ts liquidated. The statute thus does not regulate

the “true underwriting of risks, the one earmark of in

surance.” Variable Annuity Life Ins. Co. of America, 359

U.S. at 73.

[he Court’s discussion of risk transfer in Pireno confirms

that the State’s assignment of priority to claims against an

insolvent insurer does not involve any such transfer. In

Pireno, the Court explained that “[t}he transfer of risk from

insured to insurer ts effected by means of the contract be

19

tween the parties — the insurance policy — and that transfer

is complete at the time that the contract is entered.” 458

U.S. at 130. The Court concluded that the use of peer review

to determine whether a particular claim fell within the limits

of an insurance policy “is logically and temporally uncon-

nected to the transfer of risk accomplished by [the] insurance

policies.” /bid. The Court rejected the view that “the transfer

of risk from an insured to his insurer actually takes place

not when the contract between those parties is completed,

but rather only when the insured’s claim ts settled.” /d. at

131. The Court observed that such a view “is contrary to

the fundamental principle of insurance that the insurance

policy defines the scope of the risk assumed by the insurer

from the insured.” /bid. The Ohio priority statute, like the

peer review process at issue in Pireno, is “logically and tem-

porally unconnected to the transfer of risk accomplished

by [the] insurance polic[y].” /bid. The risk of insurer in-

solvency is not a risk covered by the insurance policy. Con-

sequently, there is no transfer of the risk of insurer insolven-

cy from insured to insurer when at the time the parties enter

the insurance contract —or, indeed, at any time.’

b. In addition, the Ohio priority statute is not integral

to the contractual relationship between the insurance com-

pany and the insured. The Ohio statute plainly does not

regulate the contract of insurance itself. And it is not the

case that the Ohio statute “so closely affect[{s] the ‘reliabili-

ly, interpretation, and enforcement’ of the insurance con-

tract * * * as to fall within the exempted area.” Royal Drug,

440 U.S. at 216. The statute has nothing to do with whether

the policyholder has a valid contractual claim against the

* Nor does the priority statute involve risk spreading —that is, the

assumption of “numerous relatively small, independent risks that oc

cur randomly over time” in return for numerous premiums. Clougher-

ty Packing Co., 811 F.2d at 1300. Each creditor faces the risk that the

insurance company will become insolvent; thus, the risks are not in

dependent, and losses due to insolvency do not occur randomly over

time. Rather than spreading risk, the priority statute merely determines

the order in which creditors’ claims will be paid

20

imsurer. Rather, the statute comes into play only in the event

that the insurance company vecomes insolvent and ts hi

quidated. At that point, there is no longer a relationship

between the policyholder and there ts nothing the liquidator

“could do to make the defunct entity a reliable insurer.”

Idaho ex rel. Soward v. United States, 858 k.2d at 453. In

deed, the Ohio priority statute does not even address the

relationship between the insurance company and the in

sured. Instead, tt addresses the relationship between policy

holders and other creditors of insolvent insurance com

panies. See id. at 454 (priority statute “address[es] * * *

the relationship [among] those lett in the lurch by the ex-

piration of the insurer”).

lo be sure, the Ohio priority statute affects the risk that

a policyholder’s claims will not be paid in the event the in

surance company becomes insolvent. But as the Court

observed in Royal Drug, an argument that such an eftect

is sufficient to bring the statute within the McCarran-

Ferguson Act exemption “proves too much.” 440 U.S. at

216. Virtually all government regulation of insurance com

panies has some impact on a policyholder’s risk of non-

payment. For example, regulation of the cost-cutting

measures at issue in Royal Drug, and the peer review system

at issue in Pireno, affected insurer costs, and therefore the

risk that the insurer would be unable to pay claims. As the

Court noted in Royal Drug, “|mjany aspects of insurance

companies are regulated by state law, but are not the

‘business of insurance.’ ” 440 U.S. at 230 n.38 (citing as ex-

amples “how [insurance companies] could invest their funds,

when they could liquidate or merge, as well as how they

could purchase goods and services”). Consequently, the

Ohio statute is properly viewed as one of many state laws

applicable to insurance companies that are not integral to

the contractual relationship, even though they may affect

the probability that future policyholder claims will be paid.

aac reeaeaie

21

¢. The Ohio priority statute plainly is not limited to en-

tities in the insurance industry. As the court of appeals

recognized (Pet. App. 23a), the statute governs the rights

of all creditors of insolvent insurance companies, including

general business creditors, stockholders, and employees, as

well as government entities. Moreover, a priority statute is

not a regulation that is peculiar to the business of insurance.

Instead, it is a standard feature of bankruptcy laws.

The court of appeals nevertheless concluded that the

statute is limited to entities in the insurance industry be-

cause it “focus[es]” on the protection of policyholders. /d.

at 23a. That conclusion is flawed for two reasons. First,

the Ohio statute does not “focus” exclusively on the pro-

tection of policyholders. It is a comprehensive ordering of

all classes of claims against an insolvent insurance company.

The Ohio statute itself states expressly that its broad pur-

pose is “the protection of the interests of insureds, claim-

ants, creditors, and the public generally, with minimum

interference with the normal prerogatives of the owners and

managers of insurers.” See Ohio Rev. Code Ann.

§ 3903.02(D) (Anderson 1989); App., infra, 4a. The Ohio

Statute ranks two classes of claims — administrative expenses

and wages — ahead of policyholder claims. See id. at 3a-4a.

And it ranks claims of general creditors behind claims of

policyholders but ahead of government claims. /d. at 4a.

A policy of protecting policyholders cannot justify that

result.

Second, the relevant question under this Court’s decisions

is not whether the statute “focus[es]” on policyholders, but

whether it is limited to entities within the insurance industry.

The Ohio priority statute does not meet the third Pireno

criterion because, as the court of appeals acknowledged

(Pet. App. 23a), it “necessarily involves the claims of non-

policied creditors.”

in sum, the Ohio priority statute flunks Pireno’s three-

part test for determining whether a statute regulates the

a

business of insurance. Accordingly, the tederal priority

statute governs the priority of claims of the United States

UZ4aINSt an insolvent insurance Company

( Ihe Fnactment History of MceCarran-Ferguson Supports the

Conclusion that the Federal Preemption Statute Applies to

Claims Against an Insolvent Insurer

lhis Court’s prior decisions construing McCarran

lergzuson have elaborately considered the measure’s enact

ment history. See Roval Drug, 440 U.S. at 217-230; Barry,

438 U.S. at 546-550; SEC v. National Securities, Inc., 393

U.S. at 458-460. In this case, that history strongly reintorces

the conclusion that the Ohio priority statute does not

revulate the “business of insurance.”

|. Congress adopted McCarran-Ferguson in 1945 in

response to the Court’s decision in United States v. South

Leustern Underwriters Ass'n, 322 U.S. 533 (1944). See Si

Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 538

(1978). Prior to South-Eastern Underwriters, tt had been

assumed for more than 70 years that “[i]ssuing a policy of

insurance is not a transaction of commerce.” Paul v

Vireinia, 75 U.S. (8 Wall.) 168, 183 (1868). Because in

surance Was not viewed as part of interstate commerce, “the

States enjoyed a virtually exclusive domain over the tn

surance industry.” Barry, 438 U.S. at 539. In South-Eastern

Underwriters, however, the Court held that insurance trans

actions are subject to federal regulation under the Com

merce Clause, and that Congress did not intend to exempt

the business of insurance from the provisions of the Sher

man Act. The Court’s decision in South-Eastern Under

writers “provoked widespread concern that the States would

no longer be able to engage in taxation and effective regula-

tion of the insurance industry.” Barry, 438 U.S. at 539.

23

Congress reacted swiltly to South-Eastern Underwriters

by enacting McCarran-Ferguson. The purpose of the Act

“was stated quite clearly in its first section; Congress

declared that ‘the continued regulation and taxation by the

several States of the business of insurance ts in the public

interest.’ ” National Securities, 393 U.S. at 458 (quoting 15

U.S.C. O11). The Act was thus “an attempt to turn back

the clock” to pre-South-Eastern Underwriters days. National

Sec., 393 U.S. at 459. See FTC v. Travelers Health Ass'n,

362 U.S. 293, 299 (1960). As the House Report stated

lt [was] not the intention of Congress in the enactment

ot this legislation to clothe the States with any power

to regulate or tax the business of insurance beyond that

which they had been held to possess prior to the deci

sion of the United States Supreme Court in the South

eastern Underwriters Association case.

Hi.R. Rep. No. 143, 79th Cong., Ist Sess. 3 (1945). See also

90 Cong. Rec. 6524 (1944) (statement of Rep. Walter)

(“| T]he legislation * * * is designed to restore to the status

quo the position the insurance business of this Nation oc

cupied before the Supreme Court recently legislated [in

South-Eastern Underwriters|.”). Accordingly, “[t}he

MecCarran-Ferguson Act should be read as protecting the

right of the States to regulate what they traditionally regu

lated.” Royal Drug, 440 U.S. at 218 n.18.'° The Act ts thus

addressed to the distribution, between the States and the

federal government, of power to tax and regulate commerce

consisting of the business of insurance — not to the long

'’ To be sure, McCarran-Ferguson did not simply overrule the Court's

decision in South-Eastern Underwriters. Priot to South-Eastern Under

wrifers, insurance company boycotts, coercion, and intimidation did

not violate the federal antitrust laws, because insurance was not thought

to be part of interstate commerce w the same reason, it was thought

that Congress lacked power to regulate the business of insurance, and

therefore federal laws did not apply to the business of insurance even

in the absence of state regulation. See Royal Drug, 440 U.S. at 220

& n.24; id. at 205, 237-238 & n.4 (Brennan, J., dissenting); see 91 Cong

Rec. 478 (1945). Although McCarran-Ferguson thus departed from pre

24

standing authority of the federal government to adopt rules

pursuant to its power under the Bankruptcy Clause

[his reading of McCarran-Ferguson strongly reimlorces

the conclusion that the Ohio statute does not regulate the

“business of insurance” because the States did not “tradi

tionally” have “the right * * * to regulate” the priority ol

United States’ claims in insurance liquidation proceedings

Construing MeCarran-Ferguson to preclude application of

the federal priority statute to federal claims against an in

> *

solvent insurer would “clothe the States with * powel

* >

to regulate * the business of insurance beyond that

which they had been held to possess prior to the decision

of the United States Supreme Court in the Southeastern

Underwriters Association case.” H.R. Rep. No. 143, supra,

(4

Prior to South-Eastern Underwriters, the Court held tn

United States v. Knott, 298 U.S. 544 (1936), that the federal

insolvency statute applied in state court proceedings to hi

guidate an insolvent insurance company and preempted a

state statute that provided for repayment of in-state creditors

ahead of all other creditors. In Anott, the United States tiled

a claim for payment of judgments on bail bonds, and

asserted that its claim was entitled to first priority under

the federal priority statute. Despite the conflicting Florida

statute, the Court concluded “that the claim presented 1s,

in its nature, one entitled to priority.” 298 U.S. at 548

South-Eastern Underwriters law in some respects, those differences are

cicVant in (his Case

Prior to South Lastern Underwriters, state courts also considered

apphcability of the tederal priority statute in insurance company

nsolvency proceedings, and held or assumed that the federal statute

applied to claims of the United States. See In re Casualty Co. of

imerica, 196 A.D. 175, 176-177 (ist Dep't), afd, 232 N.Y. 559, S6l

|); People v. Metropolitan Surety Co., 161 N.Y .S. 616 (1916). See

ilso Conway v. Imperial Life Ins. Co., 21 So. 2d 151 (La. 1945); Fred

i. Emmons, Inc. v. Union Indemnity Co., 175 A. 141 (N.J. 1934). State

ints reached the same result following passage of the McCarran

(19.

ee

iN

St

[he court of appeals’ efforts to distinguish Knott are

unpersuasive. The court observed that “McCarran-Ferguson

did not return to the sfatus quo prior to South-Eastern

Underwriters; instead, it only permitted state regulation of

the ‘business of insurance’ without federal interference.” Pet

App. i4a (citing Royal Drug, 440 U.S. at 220 0.24). But

as we have explained, see note 9, supra, the differences be

tween McCarran-Ferguson and the law prior to South

Eastern Underwriters do not affect the application of the

federal priority statute to claims against insolvent insurers

Moreover, the court of appeals’ reliance on Royal Drug is

misplaced. The passage cited by the court of appeals con

cluded only that MecCarran-Ferguson “embodfies] a

legislative rejection of the concept that the insurance in

dustry is Outside the scope of the antitrust laws —a concept

that had prevailed before the South-Eastern Underwriters

decision.” 440 U.S. at 220. The Court thus recognized in

Royal Drug that McCarran-Ferguson did not restore all of

the regulatory authority that the States had enjoyed prior

to South-Eastern Underwriters; the Court did not suggest

that McCarran-Ferguson granted the States additional

regulatory authority beyond that which they had “tradi-

tionally” possessed. 440 U.S. at 218 n.18.

[he court of appeals also sought to distinguish Knott on

the ground that “the Florida statute at issue in Knott con-

tained only generalized provisions protecting domestic

creditors in Florida insurance companies over foreign

creditors; it in no way regulaied the ‘business of insurance’

lor the protection of the insured.” Pet. App. 14a. But the

Florida statute at issue in Knott, like the Ohio statute in

Ferguson Act. See /n re Union Indemnity, 581 N.Y .S.2d 446 (Sup. Ct

1990), ald sub nom. Curiale v. United States, 566 N.Y .S.2d 853 (App

Div. 1991), petition for cert. pending, No. 91-1347; Lanedeau v. United

Siates, 363 S.\W.2d 327 (Tex. Civ. App. 1962)

Neer eerree deren

6

this case, addressed the claims of all creditors of an insolvent

msurance company. Moreover, the Florida statute, as in

terpreted by the Florida courts, entitled “obhigees on Florida

surety bonds and surety contracts” (.e., policyholders) “to

preferential payment in advance of other claims of a subor

dinate order, such as claims of Florida creditors in general.”

Kelly v. Anott, 163 So. 64, 68 (Fla. 1935). Accordingly, the

“tocus” of the Florida statute at tissue in Anolft was not

significantly different from the “tocus” of the Ohio priort

iy statute in this case

2. Consideration of MeCarran-berguson’s broader pur

poses leads to the same conclusion. “The primary concern of

(Congress in the wake of [South-Eastern Underwriters| was in

enacting legislation that would ensure that the States would

continue to have the ability to tax and regulate the business

of insurance.” Royal Drug, 440 U.S. at 217-218. As the Court

has explained, “[t}he problem was that if insurance was in

terstate commerce, then the constitutionality of state regula

tion and taxation would be questionable.” /d. at 218 n.16

(citing S. Rep. No. 20, 79th Cong., Ist Sess. 2 (1945); H.R

Rep. No. 143, 79th Cong., Ist Sess. (1945)). The tssue in

this case is simply whether the federal priority statute, im

plementing the longstanding congressional power to establish

bankruptcy laws, applies to claims of the United States

against insolvent insurance companies. Resolution of that

narrow issue in favor of the United States will not call into

question the States’ broad authority to tax and regulate the

business of insurance or the distribution of power to tax and

regulate commerce effected by the McCarran-Ferguson Act

Finally, the Court has recognized that an additional con

cern of Congress in enacting McCarran-Ferguson “was the

applicability of the antitrust laws to the insurance industry

Roval Drug, 440 U.S. at 218. The antitrust exemption was

directed primarily at cooperative ratemaking, “[bJecause of

the widespread view that it is very difficult to underwrite

risks in an informed and responsible way without intra-

industry cooperation.” Jd. at 221. See also Pireno, 458

| \

». at 133. Neither the antitrust laws nor cooperative rate ‘

making are at issue here. Accordingly, application of the

lederal priority statute to claims of the United States against

in insolvent insurance company ts consistent with the pul

poses of the McCarran-kerguson Act

CONCLUSION

i hudygyment of the Ourt OF appeals hould be reversed

Kes] hull ubmitted

rn} } i ‘A >

mw tsenerdi

\K M (stk

} faril Viforn Y (sere TS

MIAUREELN EF. MAHONEY

Deputy solicitor CGreneral

APPENDIX

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

Article VI of the United States Constitution provides,

in part: “[T]he Laws of the United States * * * shall be the

supreme Law of the Land.”

2. The tederal priority statute, 31 U.S.¢ 3713,

provides:

Priority of Government claims

(ail) A claim of the United States Government

shall be paid first when

(A) a person indebted to the Government is in

solvent and

(i) the debtor without enough property to pay

all debts makes a voluntary assignment of prop

erly;

(ii) property of the debtor, if absent, is at

tached: Or

(i) an act of bankruptcy is committed; o1

(B) the estate of a deceased debtor, in the custody

of the executor or administrator, is not enough to pay

all debts of the debtor.

(2) This subsection does not apply to a case under

title 11

(b) A representative of a person or an estate (ex

cept a trustee acting under title 11) paying any part of

a debt of the person or estate before paying a claim

of the Government is liable to the extent of the pay

ment for unpaid claims of the government.

3. The McCarran-Ferguson Act, 15 U.S.C. 1011-1012,

provides in part:

(la)

2a

) 1OLL. Declaration of policy

Congress hereby declares that the continued regula

tion and taxation by the several States of the business

ot insurance ts in the public interest, and that silence

on the part of the Congress shall not be construed to

impose any barrier to the regulation or taxation of such

business by the several States.

§ 1012. Regulation by state law; Federal law relating specifically

to insurance; applicability of certain Federal laws after June 30,

1948

(a) State regulation

[he 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) kederal regulation

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

* * * unless such Act specifically relates to the business

Of insurance.

4 Ihe Ohio Insurers Supervision, Rehabilitation and

| iquidation Act, Ohio Rev. Code Ann. §§ 3903.02(D) and

3903.42 (Anderson 1989) provides:

S 3903.42 Priority of distribution of claims.

[he priority of distribution of claims from the in

surer’s estate shall be in accordance with the order in

which each class of claims is set forth in this section.

t-very claim in each class shall be paid in full or ade

quate funds retained for such payment before the

members of the next class receive any payment. No sub

classes shall be established within any class. The ordet

of distribution of claims shall be:

3a

(A) Class |. The costs and expenses of ad-

ministration, including hut not limited to the following:

(1) The actual and necessary costs of preserving or

recovering the assets of the insurer;

(2) Compensation for all services rendered in the

liquidation;

(3) Any necessary filing fees;

(4) The fees and mileage payable to witnesses;

(5) Reasonable attorney’s fees;

(6) The reasonable expenses of a guaranty associa-

tion or foreign guaranty association in handling claims.

(B) Class 2. Debts due to employees for services

performed to the extent that they do not exceed one

thousand dollars and represem payment for services

performed within one year before the filing of the com-

plaint for liquidationn. Officers and directors shall not

be entitled to the benefit of this priority. Such priority

shall be in lieu of any other similar priority that may

be authorized by law as to wages or compensation of

employees.

(C) Class 3. All claims under policies for losses

incurred, including third party claims, all claims against

the insurer far liability for bodily injury or for injury

to or destruction of tangible property that are not under

policies, and all claims of a guaranty association or

foreign guaranty association. All claims under life in-

surance and annuity policies, whether for death pro-

ceeds, annuity proceeds, or investment values, shall be

treated as loss claims. That portion of any loss, indem-

nification for which is provided by other benefits or

advantages recovered by the claimant, shall not be in-

cluded in this class, other than benefits or advantages

recovered or recoverable in discharge of familial obliga-

tions of support or by way of succession at death or

as proceeds of life insurance, or as gratuities. No pay-

4a

ment by an employer to an employee shall be treated

as a gratuity. Claims under nonassessable policies tor

unearned premium or other premium refunds

(ID) Class 4. Claims of general creditors.

(t:) Class 5. Claims of the tederal or any state or

local government. Claims, including those of any

vovernmental body tor a penalty or torteiture, shall

be allowed in this class only to the extent of the

pecuniary loss sustained trom the act, transaction, o1

proceeding out of which the penalty or forfeiture arose,

with reasonable and actual costs occasioned thereby

[he remainder of such claims shall be postponed to

the class of claims under division (H) of this section.

(Fk) Class6. Claims filed late or any other claims

other than claims under divisions (G) and (H) of this

section.

(G) Class 7. Surplus or contribution notes, o1

similar obligations, and premium retunds on assessable

policies. Payments to members of domestic mutual in

surance companies shall be limited in accordance with

law

(H) Class 8 [he claims of shareholders or other

OWES

§ 3903.02 Citation, construction and purpose of act.

(D) The purpose of sections 3903.01 to 3903.59 of

the Revised Code ts the protection of the interests ol

insureds, claimants, creditors, and the public general-

ly, with minimum interference with the normal pre-

rogatives of the owners and managers of insurers,

through all of the following:

(1) Early detection of any potentially dangerous

condition in an insurer, and prompt application of ap-

propriate corrective measures;

(2) Improved methods for rehabilitating insurers,

involving the cooperation and management expertise

of the insurance industry;

(3) Enhanced efficiency and economy of liquida

tion, through clarification of the law, to minimize lega!

uncertainty and litigation;

(4) Eguitable apportionment of any unavoidable

loss:

(S) Lessening the problems of interstate rehabilita-

tion and liquidation by facilitating cooperation between

states in the liquidation process, and by extending the

scope of personal jurisdiction over debtors of the in-

surer Outside this state;

)) Regulation of the insurance business by the im

pact of the law relating to delinquency procedures and

substantive rules on the entire insurance business.