Title: Covington v. Ohio Gen. Ins. Co.

State: ohio

Issuer: Ohio Supreme Court

Document:

[Cite as Covington v. Ohio Gen. Ins. Co., 99 Ohio St.3d 117, 2003-Ohio-2720.] 
 
 
COVINGTON, APPELLANT, v. OHIO GENERAL INSURANCE. COMPANY;  U.M.C.-
U.M.C. LTD., APPELLEE. 
[Cite as Covington v. Ohio Gen. Ins. Co., 99 Ohio St.3d 117, 2003-Ohio-2720.] 
Insurance — In liquidation of an insurance company pursuant to R.C. 3903.42, 
an insurance company filing a claim for reinsurance benefits against an 
insolvent reinsuring company’s estate is a Class 5 creditor — R.C. 
3903.42(B), construed and applied. 
(No. 2001-1874 — Submitted January 7, 2003 — Decided June 11, 2003.) 
APPEAL from the Court of Appeals for Franklin County, No. 01AP-213. 
__________________ 
SYLLABUS OF THE COURT 
In liquidation of an insurance company pursuant to R.C. 3903.42, an insurance 
company filing a claim for reinsurance benefits against an insolvent  
reinsuring company’s estate is a Class 5 creditor. 
__________________ 
PFEIFER, J. 
{¶1} 
The issue before this court is whether an insurance company filing 
a claim in liquidation proceedings against an insolvent insurance company’s estate 
for reinsurance benefits files as a Class 2 creditor or as a Class 5 creditor.  See 
R.C. 3903.42.  For the reasons that follow, we conclude that an insurance 
company with such a claim is a Class 5 creditor. 
{¶2} 
Ohio General Insurance Company is a reinsurance company and, as 
such, entered into reinsurance contracts with appellee U.M.C.-U.M.C. Ltd. 
(“UMC”) between 1981 and 1985.  A reinsurance agreement is a contract in 
which a reinsurance company agrees to indemnify an insurance company for a 
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specified amount when the insurance company pays out on a policy issued to an 
insured. 
{¶3} 
In 1990, Ohio General became insolvent and entered into 
liquidation.  When an insurance company is in liquidation, the Ohio 
Superintendent of Insurance supervises the collection of the insurance company’s 
assets in order to pay the insurance company’s outstanding debts.  R.C. 3903.18.  
Assets are disbursed according to a prioritization of creditors pursuant to R.C. 
3903.42.  In 1991, UMC was notified that to have its claims considered in the 
liquidation proceeding it must submit proofs of claim to the Superintendent of 
Insurance.  UMC submitted proofs of claim, asserting that it was what is now a 
Class 2 creditor.  See 1995 Sub.H.B. No. 374, Section 3, 146 Ohio Laws, Part III, 
4478.  A claimant is entitled to Class 2 status when it submits a proof of claim 
based on “claims under policies for losses incurred.”  R.C. 3903.42(B). 
{¶4} 
The Superintendent of Insurance rejected UMC’s assertion that it 
was a Class 2 creditor, determining that the reinsurance contract was not a policy 
qualifying for Class 2 status.  The superintendent classified UMC as a Class 5 
general creditor under R.C. 3903.42(E).  UMC objected to this classification and 
filed a complaint in Franklin County Court of Common Pleas.  The Franklin 
County Court of Common Pleas determined that the superintendent’s 
classification was correct.  Ohio General appealed, and the court of appeals 
reversed, determining that a reinsurance contract is a policy and, therefore, that 
UMC should be considered a Class 2 creditor. 
{¶5} 
The cause is now before the court upon an allowance of a 
discretionary appeal. 
{¶6} We conclude that the General Assembly did not intend the words 
“claims under policies for losses incurred” in R.C. 3903.42(B) to include a claim 
under a reinsurance agreement.  First, the General Assembly uses different terms 
January Term, 2003 
3 
when referring to consumer insurance policies and reinsurance agreements.  
Second, including reinsurance claims in Class 2 would not be consistent with the 
other types of Class 2 claims.  Accordingly, claims under a reinsurance agreement 
must be filed as Class 5 claims. 
{¶7} 
The Superintendent of Insurance would have us decide this matter 
based on a number of nonstatutory reasons.  The superintendent requests that we 
defer to the Department of Insurance’s administrative interpretation of the statute.  
See Collinsworth v. W. Elec. Co. (1992), 63 Ohio St.3d 268, 272, 586 N.E.2d 
1071.  The superintendent directs our attention to the legislative history associated 
with the 1978 Insurers Supervision, Rehabilitation, and Liquidation Model Act, 
which is the version of the model act enacted by the General Assembly as R.C. 
Chapter 3903, including later comments of the National Association of Insurance 
Commissioners 
Financial 
Condition 
Subcommittee, 
Rehabilitators 
and 
Liquidators Task Force, Model Act Working Group, 1989-1 NAIC Proc. 375, 
451.  The superintendent also cites decisions of other state courts interpreting their 
own statutes to exclude reinsurance claims.  See Foremost Life Ins. Co. v. Indiana 
Dept. of Ins. (1980), 274 Ind. 181, 409 N.E.2d 1092; In re Liquidations of Res. 
Ins. Co. (1988), 122 Ill.2d 555, 120 Ill.Dec. 508, 524 N.E.2d 538; Neff v. 
Cherokee Ins. Co. (Tenn.1986), 704 S.W.2d 1. 
{¶8} 
We agree that these reasons support the superintendent’s 
interpretation of R.C. 3903.42(B); however, we prefer to base our holding on the 
text of the statute.  The General Assembly generally differentiates between direct 
consumer insurance and reinsurance.  The General Assembly uses “policy” at 
least 23 times in R.C. Chapter 3903 in situations that apply only to direct 
consumer insurance and not to reinsurance.  See, e.g., R.C. 3903.31(A) (regarding 
any “insurer issuing assessable policies”) and R.C. 3903.72(E) and (G)(1) 
(discussing valuation methods for all “policies, riders, and supplemental policy 
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4 
provisions” in a context that does not include reinsurance).  In contrast, the 
General Assembly generally uses the words “contract” and (once) “treaty” when 
referring to reinsurance.  See R.C. 3903.04(C)(2), 3903.09(C)(8), 3903.26(C)(1), 
3903.32. 
{¶9} 
The General Assembly uses “policy” in ways that imply that 
reinsurance is not within the meaning of “policy.”  In R.C. 3903.32, “policy” is 
used to differentiate between reinsurance and the reinsured risk.  R.C. 3903.32 
(“direct payment of the reinsurance to the insured or beneficiary of the insurance 
policy”).  Further, the General Assembly uses the word “reinsurance” with 
“policy” when it intends to include reinsurance in the word “policy.”  See R.C. 
3924.09(D) and 3956.04(B)(2)(b). 
{¶10} We also find it useful to look at the other claims given priority by 
R.C. 3903.42(B) because the General Assembly is assumed to have intended a 
meaning of “claims under policies for losses incurred” that is consistent with the 
other types of Class 2 claims.  See Renfroe v. Ashley (1958), 167 Ohio St. 472, 5 
O.O.2d 154, 150 N.E.2d 50; Smilack v. Bowers (1958), 167 Ohio St. 216, 4 
O.O.2d 271, 147 N.E.2d 499.  The first of these other claims is a claim “against 
the insurer for liability for bodily injury or for injury to or destruction of tangible 
property that are not under policies.” Consumer insurance policies cover similar 
losses.  In contrast, the purpose of reinsurance agreements is to protect an insurer 
from a business risk, not from a loss occasioned by the destruction of property.  14 
Holmes & Sutin, Appleman on Insurance (2000), Section 102.2.  The second type 
of claim is a claim of a guaranty association.  These associations fund the payment 
of direct consumer insurance claims submitted by insureds when their insurance 
company has become insolvent.  Ohio guarantee associations do not pay claims 
under reinsurance agreements.  See R.C. 3955.01(D)(2)(c) and 3956.04(B)(2)(b).  
A third type of claim given priority is a claim under a life insurance policy or 
January Term, 2003 
5 
annuity.  These claims compensate individuals for losses that stem from the 
chance occurrences of life and do not compensate businesses for the calculated 
commercial risks covered by reinsurance agreements.  Couch on Insurance (3d 
Ed.1995), Sections 1.6 and 1.22. Finally, the statute gives priority to claims for 
unearned premiums, those paid in relation to an insurance policy that is 
prematurely terminated. 
{¶11} In short, the purpose of the priority for Class 2 claims is to protect 
consumers who have purchased direct insurance and those in related situations, 
rather than to protect reinsured insurance companies.  Interpreting “claims under 
policies for losses incurred” to be consistent with these other claims requires us to 
exclude reinsurance agreements. 
{¶12} UMC would have us base our decision on the phrase “policy of 
reinsurance” as used in R.C. 3903.04(C)(2).  However, this use of the phrase 
“policy of reinsurance” does not indicate that the General Assembly intended to 
include reinsurance in every use of the word “policy.”  We also reject UMC’s 
proposal to apply the definition of “insurance” found in R.C. 3960.01(D), which 
includes reinsurance, to the word “policy” in R.C. 3903.42(B).  UMC overlooked 
the fact that the definition does not apply to R.C. Chapter 3903 but rather is 
specifically limited to R.C. 3960.01 through 3960.13.  R.C. 3960.01. 
{¶13} For all of the above reasons, we conclude that R.C. 3903.42(B) 
does not include claims under reinsurance agreements within the ambit of Class 2 
claims.  We therefore conclude that claims under reinsurance agreements must be 
filed as Class 5 claims.  Accordingly, the judgment of the court of appeals is 
reversed. 
Judgment reversed. 
 
MOYER, C.J., RESNICK, F.E. SWEENEY, SLABY, LUNDBERG STRATTON and 
O’CONNOR, JJ., concur. 
SUPREME COURT OF OHIO 
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LYNN C. SLABY, J., of the Ninth Appellate District, sitting for COOK, J. 
__________________ 
 
Porter, Wright, Morris & Arthur, L.L.P., Scott E. North and J. Kenneth 
Thien, for appellant. 
Janik & Dorman and Steven G. Janik; D’Amato & Lynch, John P. Higgins 
and Maryann Taylor, for appellee. 
Ross S. Myers, urging reversal for amicus curiae National Association of 
Insurance Commissioners. 
Vorys, Sater, Seymour & Pease, L.L.P., F. James Foley and Michael  
Thomas, urging reversal for amicus curiae National Conference of Insurance 
Guaranty Funds. 
Baker & Daniels, Charles T. Richardson and John R. Burns III, urging 
reversal for amicus curiae National Organization of Life and Health Insurance 
Guaranty Associations. 
__________________