Amicus Curiae Brief — Department of Treasury v. Fabe

fy f Eupreme court, U.S

No. 91-1513 FILED

SEP 8 892

IN THE

Supreme Court of the Unitpdastatew* *°

OCTOBER TERM, 1992

UNITED’ STATES DEPARTMENT OF THE TREASURY and

. MITCHELL A. LEVINE,

ASSISTANT COMMISSIONER,

a Petitioners,

GEORGE FABE, SUPERINTENDENT OF INSURANCE,

STATE OF OHIO,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Sixth Circuit

BRIEF OF THE

COUNCIL OF STATE GOVERNMENTS,

NATIONAL CONFERENCE OF STATE LEGISLATURES,

NATIONAL GOVERNORS’ ASSOCIATION,

INTERNATIONAL CITY/COUNTY MANAGEMENT

ASSOCIATION, NATIONAL ASSOCIATION OF

COUNTIES, U.S. CONFERENCE OF MAYORS,

NATIONAL INSTITUTE OF MUNICIPAL LAW

OFFICERS, AND NATIONAL LEAGUE OF CITIES

AS AMICI CURIAE IN SUPPORT OF RESPONDENT

MICHAEL J. WAHOSKE RICHARD RUDA *

DANIEL P. O’KEEFE Chief Counsel

JOHN B. ORENSTEIN JAMES I. CROWLEY

CATHERINE A. GNATEK STATE AND LOCAL LEGAL

DorsEY & WHITNEY CENTER

2200 First Bank Place East 444 N. Capitol Street, N.W.

Minneapolis, Minnesota 55402 Suite 345

(612) 340-2600 Washington, D.C. 20001

Of Counsel (202) 434-4850

* Counsel of Record for the

Amici Curiae

onto

WILSON - ZPes PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

BEST AVAILABLE COPY)

“ti

QUESTION PRESENTED

Whether Ohio Rev. Code § 3903.42, which estab-

lishes the priority of claims in insurance company

iquidations, regulates the “business of insurance’

within the meaning of the McCarran-Ferguson Act,

15 U.S.C. § 1012.

TABLE OF CONTENTS

QUESTION PRESENTED

TABLE OF AUTHORITIES

INTEREST OF THE AMICI CURIA!

STATEMENT OF THE CASE

SUMMARY OF ARGUMENT’

RGUMENT

OHIO REV. CODE £ 3903.42 REGULATES THE

“BUSINESS OF INSURANCE” WITHIN THE

MEANING OF THE McCARRAN-FERGUSON

ACT

A. Ohio’s Polievholder Priority Statute Regulates

the “Business of Insurance’ in the Ordinar,

Sense of Those Words

|. The “Business of Insurance” Is, Above All,

the Business of Paying Insureds in the Event

of Loss Ps

2. The Purpose of the Policyholder Priority

Statute, and of the Regulatory Scheme of

Which It ts a Part, Is to Make Certain

Policyholders Are Paid 10)

B. MeCarran-Ferguson Recognizes the Traditional!

Authority of the States to Regulate Insurer

Insolvencies 17

C. Under National Securities, Ohio’s Statute Regu

lates the “Business of Insurance’ the Pire

Criteria are inapplicable Here Because The

were Devised to Construe MceCarran-Ferguson’

>.>)

Narrow Antitrust Exemption 22

CONCLUSION -

(lll)

iv

TABLE OF AUTHORITIES

Cases Page

Aetna Casualty & Surety Co. v. Int'l Reinsurance

Corp., 117 N.J. Eq. 190, 175 A. 114 (1934) 17

Aetna Ins. Co. v. Great Amer. Indem. Co., 124

So. 2d 626 (La. App. 1960) 9

Associated Hosp. Serv. v. Mahoney, 161 Me. 391,

213 A.2d 712 (1965) 9

Benevolent Burial Ass'n v. Harrison, 181 Ga. 230,

181 S.E. 829 (1935) a x

Burford v. Sun Oil Co., 319 U.S. 315 (1943) 4

Cal. Physicians’ Serv. v. Garrison, 28 Cal. 2d 790,

172 P.2d 4 (1946) x

Chicago Bonding & Ins. Co. v. Oliner, 139 Md. 408,

115 A. 592 (1921) ............ Sr re ke 9

Comm’r of Internal Revenue v. W.H. Luquire

Burial Ass'n Co., 102 F.2d 89 (5th Cir. 1939) 8

Conway v. Imperial Life Ins. Co., 21 So.2d 151

(La. 1945) 18, 19, 22

Cunningham v. Republic Ins. Co. 94 S.W.2d 140

(Tex. Civ. App. 1936) : 17

EEOC v. FLRA, 476 U.S. 19 (1986) paenetunanne 4

FMC r. Seatrain, 411 U.S. 726 (1973)... 25

Foremost Life las. Co. v. Dep't of Ins., 274 Ind.

181, 409 N.E.2d 1092 (Ind. 1980) 17

Fred L. Emmons, Inc. v. Union Indemnity Co., 175

A. 141 (N.J. 1934) i8

Gregg v. Comm’r Corporations and Taxation, 315

Mass. 704, 54 N.E.2d 169 (1944) 9

Group Life & Health Ins. Co. v. Royal Drug Co.,

Ine., 440 U.S. 205 (1979) passim

Idaho ex rel. Soward v. United States, 858 F.2d 445

(9th Cir. 1988), cert. denied, 490 U.S. 1065

(1989) 15

In re Casualty Co. of America, 196 A.D. 175 (1st

Dep't), aff'd, 232 N.Y. 559 (1921) 18

In re Liquidations of Reserve Ins. Co., 122 Ill. 2d

555, 524 N.E.2d 538 (1988) . 17

In re Peoria Life Ins. Co., 75 F.2d 777 (7th Cir.),

cert. denied, 296 U.S. 594 (1935) 0... | 21

—E————

Vv

TABLE OF AUTHORITIES—Continued

Page

In re Union Guar. & Mortgage Co., 75 F.2d 984

(2d Cir. 1935) 21

Metropolitan Life Ins. Co. v. Massachusetts, 471

U.S. 724 (1985) 25

Nat’l Auto Serv. Corp. v. State, 55 S.W.2d 209

(Tex. Civ. App. 1932) ie)

Neff v. Cherokee Ins. Co.. 704 S.W.2d 1 (Tenn.

1986) 17

Paul v. Virginia. 75 U.S. (8 Wall.) 168 (1868) \7

People ex rel. Kasson v. Rose, 174 Ill. 310, 51

N.E. 246 (1898) 8-9

People v. Metropolitan Surety Co., 161 N.Y.S. 616

(1916) 1s

Prude ntial Ins. Co ? Be njamin, 298 US 108

(1946) 17, 19, 22

Robertson v. California, 828 U.S. 440 (1946) 20, 21

SEC vw. National Securities. Inc., 3983 U.S. 453

(1969) passim

SEC v. Variable Annuity Life Ins. Co.. 359 U.S. 65

(1959) 5, 17

NS) ‘ pard ”. Vira nig State . Ins ("a . 1?0 Va. 383.

91 S.E. 140 (1917) 17

State ex rel. Duffy v. W. Auto Supply Co.. 134

Ohio St. 163, 16 N.E.2d 256 (1938) 9

State v. Beacon Ins. Co., 87 N.C. App. 72, 359

S.E.2d 508 (1987) 17

U'nited States v. Knott, 298 U.S. 544 (1936) i8, 21

l'nited States v. South-Eastern Underwriters

Ass’n, 322 U.S. 533 (1944) 1s

l’'nion Labor Life Ins. Co. v. Pireno, 458 U.S. 119

(1982) passim

Van Schaick v. General Indemnity Corp., 274 N.Y.

510, 10-N.E.2d 523 (1937) 17

Young v. Stephenson, 82 Okla. 239, 200 P. 225

(1921) 9

;

s’sS

Act of June 25, 1910, ch. 412, 36 Stat. 839 9}

Bankruptcy Act of 1898, Act of July 1, 1898, ch

541, 30 Stat. 544 21

vi

TABLE OF AUTHORITIES—Continued

Page

Chandler Act, Act of June 22, 1938, ch. 575, 52

Stat. 845 (1938) _. 21

11 U.S.C. § 507 (a) 3

11 U.S.C. § 1011 . 19

15 U.S.C. § 1012 _— passim

31 U.S.C. § 3713(a) (1) (A) : 3

Ohio Rev. Code

§ 3901.07(B) 11

§ 3901.10 11

§ 3901.321(F) (1) (c) 11

$ 3901.341 : _— 12

§ 3903.09 (B) 14

§ 3903.09(C) 14

§ 3903.12(A) ............ en 14

§§ 3903.13, 3903.14(B) 14

$ 3903.26-3903.30 14

§$§ 3903.35-3903.44 14

§ 3903.42 passim

$§ 3905.01-.42 ; 11

$3907.05 11

§ 3907.07 11

§ 3907.14 12

§ 3907.18 | 12

§ 3907.19 11

§ 3909.01 11

§ 3925.05 12

$ 3925.09 12

§ 3929.011 11

§ 3929.012 11

§ 3929.30 11

Wis. Stat. Ann. § 654.68 (West 1991) - 12

Wis. Stat. Ann. $ 654.68 committee comment (West

1980) . as 12,13

Other Authorities

Couch on Insurance 2d (rev. ed. 1984) x

American Heritage Dictionary (2d ed. 1982) .

Black’s Law Dictionary (6th ed. 1990) ~

vill

TABLE OF AUTHORITIES—Continued

Butler. Los Adjustme nt wm F re I) Surance, in

Property and Liability Insurance Handbook (J

Long & D. Gregg eds. 1965)

C. Cissley, Claim Administration: Principles and

Practices (1980)

Howard, lLnele Sam Versus the Insurance Com-

missioners: A Multi-Level Approacl to Definina

the “Business of Insurance’ under the McCar-

ran-Ferguson Act, 25 Willamette L. Rev. 1

(1989)

Spencer L.. Kimball, H story and Di velopme ni of

the Law of State Insurer Insolvency Proceed-

ngs: An Overview, in Law and Practice of In-

surance Company Insolvency (David M. Spector

ed., 1986)

Kristof, Settlement is Proposed on Failed Insurer,

L.A. Times, June 23, 1992

NAIC Model Regulation Service (Jan. 1992)

Richards, /nsurance § 39

Staff of House Comm. on Energy and Commerce,

lOlst Cong., 2d Sess., Failed Promises: Insur-

ance Company Insolvencies (Comm. Print

1990)

Webster’s New Collegiate Dictionary (1977)

J. Wickman, Evaluating the Health Insurance Rish

(1965)

Page

iN THE

Supreme Court of the United States

OCTOBER TERM, 1992

No. 91-1513

UNITED STATES DEPARTMENT OF THE TREASURY and

MITCHELL A. LEVINE,

ASSISTANT COMMISSIONER,

* Petitioners,

GEORGE FABE, SUPERINTENDENT OF INSURANCE,

STATE OF OHIO,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Sixth Circuit

BRIEF OF THE

COUNCIL OF STATE GOVERNMENTS,

NATIONAL CONFERENCE OF STATE LEGISLATURES,

NATIONAL GOVERNORS’ ASSOCIATION,

INTERNATIONAL CITY/COUNTY MANAGEMENT

ASSOCIATION, NATIONAL ASSOCIATION OF

COUNTIES, U.S. CONFERENCE OF MAYORS,

NATIONAL INSTITUTE OF MUNICIPAL LAW

OFFICERS, AND NATIONAL LEAGUE OF CITIES

AS AMICI CURIAE IN SUPPORT OF RESPONDENT

INTEREST OF THE AMICI CURIAE

Amici, organizations whose members include state,

county and municipal governments and _ officials

throughout the United States, have a compelling in-

9

terest in legal issues that affect state and local gov-

ernments. This case presents a question of state reg-

ulatory authority of utmost importance to amici:

whether carefully crafted state statutory schemes ce-

signed to protect policyholders in insurance company

liquidations are to be subverted by the federal “super-

priority” statute.

The importance of this issue to amici is demon-

strated by the fact that more than twenty-five States

have priority statutes that, like the Ohio statute here,

place policyholder claims ahead of federal, state, and

local government claims. See NAIC Model Regula-

tion Service 555-39 - 555-42 (Jan. 1992). See also Br.

Am. Cur. of National Association of Insurance Com-

missioners Gordon v. United States, No. 88-302 (U.S.)

(brief filed Sept. 1988), Appendix D (collecting laws

of 35 States that confer a higher priority on policy-

holder claims than federal government claims). The

interests of millions of policyholders are directly at

stake.

Because of the importance of this case to amici and

their citizens, amici submit this brief to assist the

Court in its resolution of the case.’

STATEMENT OF THE CASE

This case arises out of the liquidation of the

American Druggists’ Insurance Company pursuant

to Chapter 3903 of the Ohio Revised Code. Section

3903.42 priorities claims in insurance company liqui-

dations. It grants first and second priority to costs

of administering the liquidation and salary claims of

nonexecutive employees (limited to $1,000 per em-

'The parties’ letters of consent have been filed with the

Clerk pursuant to Rule 37.3 of the Court.

Tin enseeeeneneneneneesennteemmammnnainsnel

3

ployee). Ohio Rev. Code § 3903.42(A), (B). Follow-

ing these traditional priorities "—-which are necessary

to fund the administration of the estate and provide

limited compensation to employees—priority is then

granted to “claims under policies for losses incurred.”’

Id. § 3903.42(C). Ranked behind those are ‘“‘[¢]laims

of general creditors,” and behind general creditors

are “|c}laims of the federal or any state or local gov-

ernment.” /d. § 3903.42(D), (E).

In the ADIC liquidation, the United States filed

over $10.7 million in claims based on immigration,

appearance, performance and payment bonds and

sought first priority under the federal superpriority

statute, 31 U.S.C. §$37138(a)(1)(A). Pet. Br. 2.

Thereafter, respondent George Fabe, Superintendent

of Insurance of the State of Ohio, sought a cdeclara-

tory judgment in federal district court that Ohio

Rey. Code § 3903.42 is a regulation of the ‘business

of insurance” under section 2 of the McCarran-

Ferguson Act, 15 U.S.C. § 1012, and that the United

States’ claims were subject to the Ohio statute. The

district court held that § 3903.42 does not regulate

the “business of insurance” and that accordingly the

federal superpriority statute preempted Ohio law.

Pet. App. 44a-45a.

The court of appeals reversed. Relying principally

on the three-factor test of Union Labor Life Ins.

Co. v. Piveno, 458 U.S. 119 (1982), the court held

that Ohio’s pricritization of the United States’ claim

was “a state regulation which protects the interests

of the insured, and therefore is protected from federal

preemption as a law regulating the ‘business of in-

“See 11 U.S.C. §$507(a) (conferring favored priority on

costs of administration and employee claims).

4

surance.’” Pet. App. 20a." In the court of appeals’

view, the Ohio statute satisfies the Pireno factors be-

cause it

(1) transfers the policyholders risk of loss by in-

solvency at the time of contracting, (2) is an

integral part of the relationship between insurer

and insured, and (3) is exclusive in its operation

to entities within the insurance industry.

Id. at 21a.’

SUMMARY OF ARGUMENT

The McCarran-Ferguson Act expressly preserves

the “business of insurance’ as a subject of state

regulation. 15 U.S.C. $1012(a). The Act provides

that no general federal legislation “shall be con-

strued 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).

Both the piain meaning of McCarran-Ferguson and

the understanding of the enacting Congress demon-

strate that Ohio Rev. Code § 3903.42 regulates the

*The parties have stipulated that the state priority pro-

visions rerulate the insurance industry, that application of

the superpriority statute would “invalidate, impair, or super-

sede” the state provisions, and that the federal! superpriority

statute does not specifically relate to the business of insurance.

Pet. App. 3a.

‘The United States argued below that “even if the Ohio

statute governs the priority of claims of the United States,

the [federal] government’s claims are entitled to third pri-

ority under the Ohio statute as policyholder’s claims.” Pet.

Br. 11 n.4. This issue of state law was not addressed by the

courts below, /d., and should not be addressed by this Court.

See EROC v. FLRA-4%- USS. 19, 24 (1986); Burford v. Sun

Oil Co., 319 U.S. 315 (1943).

—

“business of insurance” and is not preempted by the

federal superpriority statute.

A. The core of insurance is an undertaking by the

insurer “to indemnify or guarantee another against

ain specified contingency or peril.”

Group Life & Health Ins. Co. v. Royal Druq Co.,

140 U.S, 205, 211 n.7 (1979) (citation omitted).

Obviously central to the “business of insurance” is

yment of the insured’s claim in the event such a

loss occurs. “The key representation of the insur-

ance company and the principal expectation of the

’

’ ‘ se4

(me hy ? (‘or

policyholder is that prompt payment will be made

| insured against actually occurs.”

[’; ion Lahor Lite lns. Co. v. Pive HO, $58 U.S. 119,

136 (1982) (Rehnquist, J., dissenting).

1e} Tne even!

The purpose of state regulation of the “business

of insurance” is to ensure that policyholders get

iat they bargained for. Ohio, like most States, has

adopted 2 comprehensive regulatory scheme that

preserves Insurer solvency in order to protect policy-

holders “tate regulation of the ‘‘husiness of insur-

nee’ does not end when on insurer becomes insolvent.

The State’s overriding purpose—the protection of

nolicyholders—is no less great. Ohio Rev. Code

3.42 is thus an integral part of the State’s com-

nrenensive regulation of the “business of Insurance.

3. This conclusion is underscored by the fact that

the time MeCarran-Ferguson was enacted, the

power of the States to regulate insurer insolvencies

lone established. The regulation of insurance

‘has traditionally been under the control of the

states.” SEC v. Variable Annuity Life Ins. Co.,

359 U.S. 65, 69 (1959). Congress enacted Me-

Carran-Ferguson to “broadly . . . give support to

6

the existing and future state systems for regulating

and taxing the business of insurance.” SEC v. Na-

tional Securities, Inc., 393 U.S. 453, 458 (1969)

(citation omitted). Such state regulation was un-

derstood by Congress to encompass regulation of all

aspects of “the relationship between the insurance

company and the policyholder.” Jd. at 460. ‘The

relationship between insurer and insured, the type

of policy which could be issued, its reliability, inter-

pretation, and enforcement—these were the core of

the ‘business of insurance’”’ as understood by Con-

gress when it enacted McCarran-Ferguson. /d. (em-

phasis added). Ohbio’s grant of priority to the claims

of policyholders epitomizes the State’s concern for the

“reliability” and “enforcement” of insurance policies.

C. Under this Court’s analysis in National Securi-

ties, the Ohio statute regulates the “business of in-

surance” because it is an “attempt[] to secure the

interests of those purchasing policies’ and protects

“the security of and service to be rendered to policy-

holders.” 393 U.S. at 460, 462. The criteria ad-

vanced by this Court in construing the scope of

McCarran-Ferguson’s antitrust exemption in Pireno

and Royal Drug are inapplicable here because they

focus solely on the “business practices” of insurers,

not on the expectations of policyholders. Both Pireno

and Royal Drug recognize, however, that payment of

policyholders’ claims is at. the “core of the ‘business of

insurance.” Pireno, 458 U.S. at 128; Royal Drug,

440 U.S. at 215-16. The United States’ reliance on

these criteria ignores the fundamental purpose of

insurance, the broad authority Congress gave the

States to regulate the “business of insurance,” and

the limited scene of McCarran-Ferguson’s antitrust

exemption.

ARGUMENT

OHIO REV. CODE § 590342 REGULATES THE “BUSI-

NESS OF INSURANCE” WITHIN THE MEANING OF

THE MeCARRAN-FERGUSON ACT.

A. Ohio’s Policyholder Priority Statute Regulates the

“Business of Insurance” in the Ordinary Sense of Those

Words.

The McCarran-Ferguson Act provides that “[t]he

business of insurance... shall be subject to the laws

of the several States which relate to the regulation

or taxation of such business,” 15 U.S.C. § 1012(a).

“shall be con-

strued to invalidate, impair, or supersede any law

enacied by any State for the purpose of regulating

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

In order to determine whether Ohio Rev. Code

$ 5903.42 is saved from preemption by McCarran-

Ferguson, the Court must decide whether it has “the

and that no general federal legislation

purpose of regulating’ the “business of insurance.”

The answer to this inquiry is clear. The payment

of policyholders’ claims in the event of loss or injury

is at the core of the “business of insurance.” State

regulation of the payment of claims in insolvency—

including laws that establish favored priority for

accordingly protects the fun-

damental interests of. policyholders by ensuring that

policyholders’ claims

this core purpose of insurance is achieved.

S

l. The “Business of Insurance” Is, Above All, the Busi-

ness of Paying Insureds in the Event of Loss.

“| T]he starting point in a case involving construc-

tion 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. In this case the controlling language

is “business of insurance.”

The pertinent principles are well settled. An in-

surance contract is one “by which one party ... prom-

ises to make a certain payment of money upon the

destruction or injury of something in which the other

party has an interest.’”’ 1 Couch on Insurance 2d

$1.2 at 4-5 (rev. ed. 1984). The insurance company,

in other words, “undertakes to indemnify or guar-

antee another against loss by a certain specified con-

tingency or peril.” Royal Drug, 440 U.S. at 211 n.7

(citation omitted). See Black’s Law Dictionary 802

(6th ed. 1990) (insurance is “‘[a] contract whereby,

for a stipulated consideration, one party undertakes

to compensate the other for loss on a specified subject

by specified perils”); American Heritage Dictionary

667 (2d ed. 1982) (insurance is “[c]loverage by a

contract binding a party to indemnify another against

specified loss in return for premiums paid’); Web-

ster’s New Collegiate Dictionary 600 (1977) (insur-

ance is “coverage by contract whereby one party

underiakes to indemnify or guarantee another against

loss by a specified contingency or peril’’).’

‘See also Comm’r of Internal Revenue v. W.H. Luquire

Burial Ass'n Co., 102 F.2d 89, 90 (5th Cir. 1939); Cal. Phy-

sicians’ Serv. v. Garrison, 28 Cal. 2d 790, 172 P.2d 4, 13

(1946): Benevolent Burial Ass'n v. Harrison, 181 Ga. 230,

181 S.E. 829, 833 (1935): People ex rel. Kasson v. Rose,

i eee

10

act in the insurance process. The payment of a claim

by an insurance company brings the insurance con-

tract ‘to life’ in a fashion far more vivid than does

any other single act in connection with the purpose,

issuance, and maintenance of the contract.”), quoted

in Piveno, 458 U.S. at 137 n.2 (Rehnquist, J., dis-

senting); C. Cissley, Claim Administration: Princi-

ples and Practices ili (1980) (“Claim administration

is the last link in the process of insurance. . . . Indeed,

it is the claim administration function that delivers

on the product sold to the policyowner.”), quoted in

Pireno, 458 U.S. at 137 n.2 (Rehnquist, J., dissent-

ing).”

2. The Purpose of the Policyholder Priority Statute,

and of the Regulatory Scheme of Which It Is a

Part, Is to Make Certain Policyholders Are Paid.

A. The primary purpose of state regulation of the

“business of insurance” is to ensure that policyholders

get what they bargained for: the insurer’s payment

on the policy in the event of loss. See Dingell Report

at 1 (“An insurer’s ability to pay—its solvency—

must be subjected to proper regulation on a continu-

ing basis, from the time premium payments are ac-

cepted until the time all anticipated insured events

have occurred. The policyholder must rely on the

" As a recent, authoritative House report explains,

When an insurer wrongfully fails to honor its promise to

pay, the whole concept of insurance .. . fails. ... The

expectation that an insurance company wil! be around

to pay legitimate claims is the first and most basic con-

sumer right of every policyholder.

Staff of House Comm. on Energy and Commerce, 101st Cong.,

2d Sess., Failed Promises: Insurance Company Insolvencies

1 (Comm. Print 1990) (hereinafter “Dingell Report’).

12

As one commentator has explained, the emphasis of

the regulatory scheme is

placed simply upon protecting the little policy-

holder who cannot tell when he is charged too

much for his insurance; since he does not inves-

tigate 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 estab-

lished regulatory bodies to secure that necessary

measure of protection.

Richards, Insurance $39 (emphasis added) (quoted

in Fabe, 939 F.2d at 350).° The structure and scope

between insurers and their affiliates are also subject to the

superintendent’s approval, which he cannot give if the amount

of the transaction exceeds a certain percentage of the in-

surer’s assets or its “surplus as regards policyholders.” /d.

§ 3901.341.

Permitted investments are set forth in the statutes in

yreat detail, with the evident purpose of prohibiting overly

speculative investments and restricting the amounts insurers

may place at risk. Jd. $§ 3907.14, 3925.05, 3925.09. Loans

are similarly limited, and life insurers may not declare divi-

dends without first setting aside “an amount equal to the

reserve on all... outstanding risks and policies.” Id.

$£ 3907.14, 3907.18, 3925.05.

‘The first state statute to prioritize claims in insurer

liquidations, that enacted by Wisconsin in 1967, Wis. Stat.

Ann. £654.68 (West 1991), served as the paradigm for

NAIC’s Model Act, which in turn provides the model for

Ohio’s statute and those of many other States. See Spencer

L. Kimball. History and Development of the Law of State

Insurer Insolvency Proceedings: An Overview, in Law and

Practice of Insurance Company Insolvency 9, 21 & n.37 (David

M. Spector ed., 1986). In the committee notes included in the

Wisconsin legislation and printed in the session laws, see id.

at 25, the Wisconsin legislature explained why federal (as well

14

for active supervision by the State via three different

levels of oversight.

First, the superintendent, upon finding “that [the]

insurer is in such condition as to render the continu-

ance of its business hazardous to the public or to

holders of its policies or certificates of insurance,”

Ohio Rey. Code § 3903.09(B), may place the company

under “supervision.” Jd. § 3903.09(C). Second, the

superintendent may seek court approval to “rehabili-

tate” the insurer when, inter alia, [t]he insurer is in

such condition that the further transaction of business

would be hazardous, financially, to its policyholders,

creditors, or the public.” Jd. § 3903.12(A). An order

of rehabilitation places the assets and management of

the company in the hands of the superintendent, who

is charged with doing whatever he “considers neces-

sary or appropriate to reform and revitalize the in-

surer.” Jd. $$ 3903.13, 3903.14(B).

The greatest degree of state oversight occurs in the

event of liquidation, which typically occurs only after

an unsuccessful rehabilitation effort. See Howard,

Uncle Sam Versus the Insurance Commissioners: A

Multi-Level Approach to Defining the “Business of

Insurance” under the McCarran-Ferguson Act, 25

Willamette L. Rev. 1, 9 (1989). In liquidation, the

objective of the superintendent shifts from revitaliz-

ing the insurer to paying claims. Indeed, receiving

and making determinations on claims is the superin-

tendent’s principal concern once a company enters

liquidation. See Ohio Rev. Code §§ 3903.26-30,

3903,.35-44."

*The potential for federal disruption of orderly state ad-

ministration of insolvencies based upon abusive assertions of

first priority is virtually limitless. For example, in one recent

15

B. The United States, however, grossly mischarac-

terizes liquidation as a clean-up operation that occurs

only after an insurer is no longer conducting the

“business of insurance.” According to the United

States, Ohio’s priority statute is not directed to the

insurer but to the liquidator of its estate and “comes

into play only when... [t]he only business being con-

ducted is the liquidation of a corporation which hap-

pens to have been an insurance company.” Pet. Br.

14 (quoting Idaho ex vel. Soward wv. U.S... 858 F.2d

445, 452 (9th Cir. 1988), cert. denied, 490 U.S. 1065

(1989)). This argument is untenable.

To be sure, once a company enters liquidation it is

no longer an ongoing concern with the primary aim

of generating profits. Yet in its ordinary meaning,

the term “business” does not necessarily embrace

profit-generating activity. Webster’s New Collegiate

Dictionary, for example, defines the term, ‘nter alia,

as “Role, Function,” “an immediate task or objec-

tive.” Certainly, the “function” and “immediate ob-

jective” of insurance is the payment of policyholders’

claims. See, e.g., Pireno, 458 U.S. at 136 (“The key

representation of the insurance company and the

principal expectation of the policyholder is that

prompt payment will be made when the event insured

case, the Resolution Trust Corporation filed claims totalling

$7.5 billion alleging’that the now insolvent insurer had been

“a link in [a] junk bond ‘daisy chain’ that artificially inflated

the price of junk, bonds and indirectly led to the failure of

about 50 thrifts.” Kristof, Settlement is Proposed on Failed

Insurer, L.A, Times, June 23, 1992, at D2. The liquidator

settled the claims for approximately $5 million (less than one-

one thousandth/of the amount RTC sought) solely to avoid

“vears of litigation that could indefinitely stall rehabilitation

of the failed insurer.” /d.

16

against actually oecurs.”) (Rehnquist, J., dissent-

ing); Royal Drug, 440 U.S. at 213 (“fundamental

element[] of insurance is... the payment of a pre-

mium in exchange for a promise to indemnify the in-

sured against losses upon the happening of a speci-

fied contingency”); sce a/so authorities cited supra

at 9-10. Fron the policyholder’s perspective it is ir-

relevant whether his claira is paid by a functioning

insurer engaged in profit-making activity or one in

liquidation. See Pireno, 458 U.S. at 132 (“to the

policyholder, . . . [the] only concern is whether his

claim is paid, not why it is paid’). And in any case,

it is “the ‘business of insurance’ and not the ‘business

of insurance companies’ which McCarran-Ferguson

speaks to. /d. at 152 (quoting Royal Drug, 440 U.S.

at 217).

Ohio’s statute, like other state statutes that regu-

late the priority of claims, is thus an essential part

of state efforts to protect policyholders through recu-

lation. When an insurer enters liquidation, confer-

ring a favored priority on the claims of policyholders

is Ohio’s last resort in its effort to make sure that

insurance companies live up to their obligations."

' Many jurisdictions that grant policyholders priority have

decided that claims. by insurance companies against insolvent

reinsurers do not qualify as claims of policyholders, reaffirm-

ing the principle that the purpose of the priority and other

insolvency regulatory provisions is to protect the policyhold-

ing public. As the Virginia Supreme Court put it,

The average individual property owner is uninformed as

to many of the details of the business [of insurance], and,

for this and other reasons, is not in a position to judge of

the solvency of any particular company. The danger of

imposition upon its citizens by irresponsible companies is

17

B. McCarran-Ferguson Recognizes the Traditional Au-

thority of the States to Regulate Insurer Insolvencies.

The United States argues that McCarran-Ferguson

has a “narrow reach,” extending only to state regu-

lation of policy formation and interpretation. Pet.

Br. 15, 18-19. To the contrary, at the time McCarran-

Ferguson was enacted, the States had long exercised

broad regulatory authority over the “business of in-

surance,” including insurer insolvencies.

The regulation of insurance “has traditionally been

under the control of the states.” SEC v. Variable

Annuity Life Ins. Co., 359 U.S. 65. 69 (1959): see

also Paul v. Virginia, 75 U.S. (8 Wall.) 168. 183

(1868), (“[ilssuing a policy of insurance is not a

transaction of commerce” within the Commerce

Clause). For the seventy-five years after Paul, that

case was understood to have ‘“‘nulliffied] federal au-

thority” over the insurance business, making regula-

tion of insurance a state matter. Prudential Ins. Co.

' Benjamin, 328 U.S. 408, 414 (1946). Paul re-

one of the controlling reasons for the enactment of such

a provision.

Shepard ». Virginia State Ins. (’o., 120 Va. 383, 91 S.E. 140,

141 (1917). See also Cunningham v. Republic Ins. Co., 94

5S.W.2d 140, 142-43 (Tex. Civ. App. 1936) (quoting Shepard) ;

Aetna Casualty & Surety Co. v. Int'l Reinsurance Corp., 117

N.J Eq. 190, 175 A. 114, 121 (1934): Foremost Life Ins. Co.

». Dep't of Ins., 274 Ind. 181, 409 N.E.2d 1092, 1097 (1980):

In re Liquidations of Reserve Ins. Co., 122 Tl. 2d 555, 524

N.E.2d 538 (1988): Van pong’ ’ General Inde mnity * orp.,

274 “> os 10 N.E.2d 5283 (1937): State v. Beacon Ins.

(o., 87 N.C. App. 72, 359 ‘one0 508, 511 (1987) (purpose of

stheahadihen priority is to protect “consumer, who must rely

upon the industry for protection, and yet who clearly does not

have equal knowledge or resources at his disposal in his deal-

ings with the business of insurance”); Neff v. Cherokee Ins.

Co., 704 S.W.2d 1 (Tenn. 1986).

18

mained the law until it was overruled in United .

States v. South-Eastern Underwriters Ass'n, 322 U.S.

533 (1944)."'

! Relying on United States v. Knott, 298 U.S. 544 (1936),

- the United States argues that McCarran-Ferguson could not

have given States the right to prioritize policyholders’ claims

ahead of those of the United States because the States had

no such right prior to Sovth-Eastern Underwriters. Pet. Br.

24-25. In Knott. the United States demanded payment otf

judgments it recovered on appearance bonds, asserting that

it was entitled to priority. While this Court concluded that

the United States’ claim was “entitled to priority” over the

claims of in-state creditors, 298 U.S. at 548, there is no indi-

cation that the in-state creditors were policyholders of the

type given priority by the Ohio statute or that the Florida

insolvency statute gave priority to policyholders in a manner

similar to the Ohio statute. At most, Kvoft stands for the

entirely unremarkable proposition that, in paying the claims

ef a class of creditors, a State cannot give priority to other

ereditors over the United States solely on the basis of its

governmental status. Moreover, no issue of whether a statute

could give priority to the claims of policyholders over any

claim of the United States was present.

The United States also relies on cases from New York,

New Jersey and Louisiana to argue that the States had, prior

to South-Eastern Underwriters, acknowledged the preemptive

force of the federal superpriority statute in insurer insolvency

proceedings. See Pet. Br. 24 n.11. Neither the New Jersey

case, Fred L. Emmons, Ine. v. Union Indemnity Co., 175 A.

141 (N.J. 1934), nor the New York cases, /” re Casualty Co.

of America, 196 A.D. 175, 176-77 (1st Dep't), aff'd, 232 N.Y.

559, 561 (1921), and People v. Metropolitan Surety Co., 161

N.Y.S. 616 (1916), contain any indication that claims of

policyholders were involved. Quite remarkably, the United

States also relies on Conway v. Imperial Life Ins. Co., 21

So.2d 151 (La. 1945). In Conway, the issue of the preemptive

effect of the federal superpriority statute on policyholders’

claims was squarely presented. The Louisiana Supreme Court

held. however, that a state law requiring the insurer to deposit

|

19

Rightly or wrongly, Congress considered the Sowth-

Eastern decision * ‘precedent-smashing.’ ”’ Prudential,

$28 U.S. at 414 (quoting S. Rep. No. 1112, 78th

Cong., 2d Sess. at 2). Faced with the possibility that

South-Eastern had invalidated the entire existing

system of state regulation, Congress enacted the Mc-

Carran-Ferguson Act for one purpose: “ ‘to broadly

give support to the existing and future state

systems for regulating and taxing the business of

insurance.” SHC v. National Securities, Ine., 393

U.S. 453, 458 (1969) (quoting Prudential, 328 U.S.

at 429). Congress manifested its intent “to throw

the whole weight of its power behind the state sys-

tems,” Prudential, 328 U.S. at 430, as evidenced by

McCarran-Ferguson’s “Declaration of Policy” that

“the continued regulation and taxation by the several

States of the business of insurance is in the public

interest.” 15 U.S.C. §$ 1011.

To be sure, MceCarran-Ferguson did not exempt

every activity of insurance companies from federal

regulation. This Court, however, has made clear that

Congress intended that the core of insurance regu-

lation—regulation of the insurer-policyholder rela-

tionship—remain securely within the States’ ambit:

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 be-

tween insurer and insured, the type of policy

which could be issued, its reliability, interpreta-

securities with the State Treasurer “for the benefit and pro-

tection of and as security for the policyholders” created a trust

and that “the claim of the policyholders to the funds in ques-

tion must prevail over the claim of the United States.” 21

So.2d at 153.

20

tion, and enforcement—these were the core of the

‘business of insurance.’ Undoubtedly, other ac-

tivities 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 policy-

holder.

SEC wv. National Securities, Inc., 393 U.S. at 460

(emphasis added). Accordingly, state laws “aimed

at protecting or regulating this relationship, directly

ov indirectly, ave laws regulating the ‘business of

insurance.’”’ /d. (emphasis added).

State laws regulating insurer solvency plainly go

to “the core of the ‘business of insurance’ ”’ as it was

understood at the time McCarran-Ferguson was

enacted. See, e.g., Robertson v. California, 328 U.S.

410, 459-62 (1946) (upholding state authority to en-

force minimum asset requirements for insurers). As

Robertson noted, }

[South-Eastern] did not wipe out the experience

of the states in the regulation of the business of

insurance or its effects for the continued validity

of that regulation. Much of this was concerned

with the activities of so-called foreign insurance

companies and, in particular, with requirements

designed to secure minimum quaranties of sol-

vency and ability to pay claims as they mature.

Robertson, 328 U.S. at 457-58 (emphasis added).

If anything is critical to the “reliability” of insur-

i: Although the case was not decided under McCarran-

Ferguson because the criminal conviction under review took

place before passage of the Act, the Court noted that “the

ee

21

ance policies and the issuing companies’ “status as

reliable insurers,” National Securities, 393 U.S. at

460, it is the companies’ solvency. State regulation

directed at ensuring solvency is quintessential regu-

lation of “the relationship between the insurance

company and the policyholder,” id., because it is de-

signed to uphold the policyholder’s expectations.

Just as the prevention of insurer insolvency was

within the States’ domain when McCarran-Ferguson

was enacted, so too was the regulation of insurer

insolvency. See, e.g., United States v. Knott, 298

U.S. 544 (1936); In ve Union Guar. & Mortgage

Co., 75 F.2d 984 (2d Cir. 1935) (L. Hand, Swan,

and A. Hand, JJ.); In re Peoria Life Ins. Co., 75

F.2d 777 (7th Cir.), cert. denied, 296 U.S. 594

(1955). Congress so legislated in 1910, when it

amended the Bankruptcy Act of 1898" to specify

that insurance companies could not liquidate under

federal law. See Act of June 25, 1910. ch. 412, 36

Stat. 859."' Congress’ purpose was

to leave to local winding up statutes the liquida-

tion of such companies: that, since the states

commonly kept supervision over them during

their lives, it was reasonable that they should

take charge on their demise.

Union Guar. & Mortgage Co., 75 F.2d at 984. Con-

gress thus expressly recognized the tradition of state

regulation of insurer insolvency.

McCarran Act, if applied, would dictate the same result.”

Robertson, 328 U.S. at 462.

’ Act of July 1, 1898, ch. 541, 30 Stat. 544.

‘Congress reenacted the insurance company exclusion in

1958. See Chandler Act, Act of June 22, 1938, ch. 575, 52

Stat. $45 (1938).

22

In “throw[ing] the whole weight of its power

behind the state systems,” the McCarran-Ferguson

Congress “must have had full knowledge of the

nation-wide existence of state systems of regulation

and taxation.” Prudential, 328 U.S. at 430. Protec-

tion of policyholders’ interests in liquidations is just

aus much within the “core of the ‘business of insur-

ance,’ "’ National Securities, 393 U.S. at 460, as in-

solvency prevention. See, e.g., Conway v. Imperial

Life Ins. Co., 21 So.2d 151, 153 (La. 1945). Under

Ohio’s priority statute, liquidation proceedings are

principally concerned with the “reliability” and “en-

forcement” of the promises made by insurers to pol-

icyholders. National Securities, 393 U.S. at 460.

Enforcement of those promises goes directly to “the

relationship between the insurance company and the

policyholder.” /d. The McCarran-Ferguson Congress

clearly viewed those enforcement mechanisms as reg-

ulation of the “business of insurance.”

(. Under National Securities, Ohio's Statute Regulates the

“Business of Insurance”; the Pireno Criteria are In-

applicable Here Because They were Devised to Con-

strue McCarran-Ferguson’s Narrow Antitrust Exemp-

tion.

This Court has only once considered whether a

particular state statute was “enacted .. . for the

purpose of regulating the business of insurance”

under McCarran-Ferguson. See National Securities,

393 U.S. at 453. National Securities involved whether

two distinct provisions of Arizona law were pre-

empted by the federal securities laws or were per-

missible state regulations of the business of insur-

ance. The first provision required that the Arizona

Director of Insurance approve a merger involving a

state insurer only if it was fair to the company’s

ee

23

stockholders and not otherwise contrary to law. The

Court held that the law did not regulate the ‘business

of insurance,” noting that “[t]he crucial point is

that here the State has focused its attention on stock-

holder protection; it is not attempting to secure the

interests of those purchasing policies.” /d. at 460.

The second provision required the Director to find

that the transaction “would not ‘substantially reduce

the security of and service to be rendered to policy-

holders’ before he gives his approval.” Jd. at 462

(quoting Ariz. Rev. Stat. Ann. § 20-731(B)(3)

(Supp. 1969)). This Court readily concluded that the

statute “clearly relate[d] to the ‘business of insur-

ance.’ ”’ /d. This Court thus held that state regulation

of the “security” of insurance—that is, insurer sol-

vency regulation—constitutes regulation of the “busi-

ness of insurance.”

Ohio’s priority statute is, of course, an “attempt[]

to secure the interests of those purchasing policies.”

ld. at 460. Moreover, the provision is clearly aimed

at protecting “the security of and service to be ren-

dered to policyholders.” Jd. at 462. National Secu-

rities’ analysis thus fully supports the conclusion

that the Ohio statute regulates the “business of

insurance.”

Ignoring the manifest purpose of subsection 2(a)

of McCarran-Ferguson to preserve the States’ broad

regulatory authority, the United States principally

relies on Uywion Labor Life Ins. Co. v. Pire no, 458

U.S. 119 (1982), and Group Life d& Health Ins.

v. Royal Drug, 440 U.S. 205 (1979), to argue that

Ohio’s priority statute does not regulate the “business

of insurance.” The United States’ reliance on these

two cases, which interpret McCarran-Ferguson’s an-

24

titrust exemption of subsection 2(b), 15 U.S.C. $ 1012

(b), is misplaced.

It is obvious that both Congress’ grant to the

States of the authority to regulate insurers and the

antitrust exemption use the same “business of in-

surance” language.'* These two provisions of Mc-

Carran-Ferguson serve entirely distinct purposes,

however, as this Court recognized in Royal Drug:

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... . The MeCarran-Ferguson

Act operates to assure that the States are free to

regulate insurance companies without fear of

Commerce Clause attack. ... [T]he quite differ-

ent secondary purpose of the McCarran-Ferguson

Act [is] to give insurance companies only a lim-

ited exemption from the antitrust laws.

440 U.S. at 218 n. 18 (emphasis in original). Given

the distinct purpose of each provision, it does not fol-

low that this Court’s identification in both Pireno and

Royal Drug of three criteria for “determining wheth-

er a particular practice is part of the ‘business of in-

surance’ exempted from the antitrust laws by 2(b),”

'° The full text of the antitrust exemption reads:

. Provided, That after June 30, 1948, the Act of July 2,

1890, as amended, known as the Sherman Act, and the

Act of October 15, 1914, as amended, known as the Clay-

ton Act, and the Act of September 26, 1914, known as

the Federal Trade Commission Act, as amended, shall

be applicable to the business of insurance to the extent

that such business is not regulated by State Law.

15 U.S.C. § 1012(b).

a

26

ratemaking” on the part of insurers. Royal Drug,

440 U.S. at 221."

Of equal significance here, Royal Drug makes clear

that at “the core of the business of insurance” is the

insurer’s payment of the policyholder’s claims. As

¢his Court noted in rejecting the insurer’s argument

that the pharmacy reimbursement agreement consti-

tuted the “business of insurance” :

The fallacy of the petitioners’ position is that

they confuse the obligations of [the insurer] un-

der its insurance policies, which insure against

the risk that policyholders will be unable to pay

for prescription drugs during the period of cover-

age, and the agreements between ithe insurer]

and the participating pharmacies, which serve

only to minimize the costs [the insurer] incurs

in fulfilling its underwriting obligations. The

benefit promised to [the] policyholders is that

their premiums will cover the cost of prescription

drugs except for a $2 charge for each prescrip-

tion. So long as that promise is kept, policyho!d-

ers 2re basically unconcerned with arrangements

made between [the insurers] and participating

pharmacies.

Royal Drug, 440 U.S. at 214 (footnotes omitted; em-

phasis added); see also Pireno, 458 U.S, at 152 (the

17 Of note, neither Pireno nor Royal Drug involved “the core

of the “business of insurance,’” Pireno, 458 U.S. at 128

(quoting National Secvrities, 393 U.S. at 460), that is, “the

‘relationship between insurer and insured, the type of policy

which could be issued, its reliability, interpretation, and ¢n-

forcement.” Id. (emphasis added). Neither the reimburse-

ment agreement between the insurer and pharmacies at issue

in Royal Drug, see 440 U.S. at 209, nor the peer review

procedre at issue in Pireno, see 458 U.S. at 122-23, directly

involve the promise of an insurer to pay claims.

_

27

“only concern [of the policyholder] is whether his

claim is paid, not why it is paid’) (emphasis in orig-

nal). Both Royal Drug and Pireno make clear that

the payment of the policyholder’s claims is at the

“core of the ‘business of insurance.’” Pireno, 458

U.S. at 128; Royal Drug, 440 U.S. at 215-216 (both

quoting National Securities, 393 U.S. at 460). Be-

cause the Pireno criteria are concerned solely with

the insurer’s understanding of the “business of in-

surance,” and disregard the perspective of the policy-

holder, it is particularly inappropriate to apply them

here.

In short, both Pireno and Royal Drug make clear

that their three criteria are inapplicable outside of

the antitrust context. The United States’ insistence

that these criteria apply in this case ignores the fun-

damental purpose of insurance, the broad authority

Congress gave the States to regulate the “business of

insurance” and the limited scope of McCarran-Fergu-

son's antitrust exemption."

'* The United States also relies on dictum in Royal Drug

which states that statutes regulating “such diverse aspects

of . plans as... when they could liquidate or merge” do

not regulate the business of insurance. See Royal Drug, 440

U.S. at 230 n.38: see also Pet. Brief at 15. The United States’

argument is contradicted by this Court’s holding in National

See fies that a state law requiring the Director of Insur-

ance to find that a merger “would not ‘substantially reduce

the security of and service to be rendered to policyholders’

before ... giv{ing| his approval,” was a valid state regu-

lation of the “business of insurance.” 393 U.S. at 462. The

United States’ position is further undercut by Royal Druq’s

own acknowledgment that it is the insurer’s promise of pay-

ment to the policyholder that is at the “core of the ‘business

of insurance.’” See 440 U.S. at 211-17.

OR

CONCLUSION

The judgment of the court of appeals should be

affirmed.

Respectfully submitted,

MICHAEL J. WAHOSKE RICHARD RUDA *

DANIEL P. O'KEEFE Chief Counsel

JOHN B. ORENSTEIN JAMES |. CROWLEY

CATHERINE A. GNATEK STATE AND LOCAL LEGAL

DorseY & WHITNEY CENTER

2200 First Bank Place East 144 N. Capitol Street, N.W.

Minneapolis, Minnesota 55402 Suite 345

(612) 340-2600 Washington, D.C. 20001

Of Counsel (202) 434-4850

* Counsel of Record for the

Sepember 8, 1992 Amici Curiae