# Amicus Curiae Brief — Department of Treasury v. Fabe

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0253%3A13

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1993
- **Citation:** 508 U.S. 491

## Text

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0253%3A13. Public record. Not legal advice.