Opinion ID: 2306246
Heading Depth: 3
Heading Rank: 1

Heading: Proper Classification of the Claim

Text: First, we evaluate whether the Commonwealth Court erred in affirming Referee Milspaw's determination that the Claim was properly classified under subsection (b) of the Act. The Commissioner and amicus Northland Insurance Company (Northland) [3] characterize the Claim in divergent ways, and these characterizations would seemingly result in different classifications under the Act. The Commissioner argues that the Claim should be classified under subsection (g) and the Commonwealth Court erred in giving it subsection (b) classification. [4] According to the Commissioner, the statutory claimant is Ms. Follen-Davis, and Farm Bureau merely assumes her posture as her subrogee. The Commissioner argues that Ms. Follen-Davis had a claim under a policy for loss, but that the loss was compensated by Farm Bureau. The Commissioner therefore concludes that the compensation of the loss pushes the Claim outside of subsection (b) and into subsection (g) classification pursuant to the carve-out. 40 P.S. § 221.44(b). The Commissioner emphasizes that a subrogee insurer can be entitled to no greater payment than its insured. Moreover, as the Commissioner argues, public policy supports this result because [s]ubordinating claims as to which recovery has already been secured from another source that is contractually responsible for payment of claims encourages all claimants to seek recovery from other insurers where possible, conserving the insolvent insurer's assets for claimants who have nowhere else to turn. Appellant's Brief, 22. Amicus Northland argues that the Claim was properly classified under subsection (b) and that the Commonwealth Court did not err. According to Northland, the statutory claimant is Farm Bureau pursuant to a settlement agreement with Reliance. Northland argues that Farm Bureau has no alternate source of compensation. Northland therefore concludes that the carve-out is inapplicable so subsection (b) classification is proper. Moreover, Northland argues that the General Assembly could have expressly excluded all subrogation claims from subsection (b), in the way these claims are excluded in later Model Act provisions, but the General Assembly chose not to do so. Accordingly, Northland argues that the legislature must have meant to include some subrogation claims within subsection (b) classification. As is not atypical in the context of liquidation, it is anticipated that Reliance's assets will not be sufficient to fully pay all claims asserted in the liquidation. As a result, the classification of claims in this and other liquidations is a matter of great significance to claimants. The liquidator, here the Commissioner, is charged with properly classifying claims to ensure equitable distribution of assets. 40 P.S. § 221.36(b)(3). Recognizing the importance of classifying claims, the General Assembly enacted the Act to ensure that claimants entitled to more protection have prioritized claims. Section 544 of the Act states, in relevant part, that [e]very claim in each class shall be paid in full or adequate funds retained for such payment before the members of the next class receive any payment. 40 P.S. § 221.44. The plain language of the Act must therefore be the starting point for any classification of claims. At issue in this matter is the language of Section 544, subsection (b) and subsection (g) of the Act. Pursuant to the language of subsection (b), the following claims are classified thereunder: All claims under policies for losses wherever incurred, including third party claims, and all claims against the insurer for liability for bodily injury or for injury to or destruction of tangible property which are not under policies, shall have the next priority. All claims under life insurance and annuity policies, whether for death proceeds, annuity proceeds, or investment values shall be treated as loss claims. That portion of any loss, indemnification for which is provided by other benefits or advantages recovered by the claimant, shall not be included in this class, other than benefits or advantages recovered or recoverable in discharge of familial obligations of support or by way of succession at death or as proceeds of life insurance, or as gratuities. No payment made by an employer to his employe shall be treated as a gratuity. 40 P.S. § 221.44(b). Pursuant to the language of subsection (g), the following claims are classified thereunder: [c]laims or portions of claims, payment of which is provided by other benefits or advantages recovered by the claimant. 40 P.S. § 221.44(g). Here, the Claim arises in a subrogation context. The equitable doctrine of subrogation places the subrogee in the precise position of the one whose rights are subrogated. Wimer v. Pa. Emp. Benefit Trust Fund, 595 Pa. 627, 939 A.2d 843, 853 (2007); Chow v. Rosen, 571 Pa. 369, 812 A.2d 587, 590 (2002); Pennsylvania Mfrs.' Ass'n Ins. Co. v. Wolfe, 534 Pa. 68, 626 A.2d 522, 525 (1993); see also Paxton Nat'l Ins. Co. v. Brickajlik, 513 Pa. 627, 522 A.2d 531, 532 (1987) (Subrogation is the equity called into existence for the purpose of enabling a party secondarily liable, but who has paid the debt, to reap the benefit of any securities which the creditor may hold against the principal debtor, and by the use of which the party paying may thus be made whole.) To determine whether the Commonwealth Court erred in assigning the priority of the Claim, we must engage in a statutory analysis of subsections (b) and (g) of Section 544 of the Act. The objective of interpretation and construction of statutes is to ascertain and effectuate the intention of the General Assembly. 1 Pa. C.S. § 1921(a). Generally, the best indication of legislative intent is the plain language of the statute. Commonwealth v. Shiffler, 583 Pa. 478, 879 A.2d 185, 189 (2005); Allegheny County Sportsmen's League v. Rendell, 580 Pa. 149, 860 A.2d 10, 15 (2004). It is well settled that when the words of a statute are clear and unambiguous, they are not to be disregarded under the pretext of pursuing [the statute's] spirit. 1 Pa.C.S. § 1921(b). It is only when the words of the statute are not explicit that the court should seek to determine the General Assembly's intent through consideration of statutory construction factors. 1 Pa.C.S. § 1921(c). The plain language of Section 544 demonstrates that a subrogated claim, like the Claim at issue in this matter, is subject to the carve-out in subsection (b) and therefore is properly classified under subsection (g). First, the plain language of subsection (b) states that [a]ll claims under policies for losses wherever incurred, including third party claims are entitled to priority under subsection (b). 40 P.S. § 221.44(b) (emphasis added). Therefore, in order to be classified under this subsection, a claim must be alleged under a policy for loss. Second, even if a claim is alleged under a policy for loss, it may still be exempt pursuant to the carve-out in subsection (b). The plain language of subsection (b) states that a portion of any loss, indemnification for which is provided by other benefits or advantages recovered by the claimant, shall not be included in this class ... Id. (emphasis added). Therefore, where there has been compensation for loss, a claim may not properly be classified under subsection (b). In evaluating this subsection of the Act, we note that the use of the word shall renders the carve-out mandatory. See Koken v. Reliance Ins. Co., 586 Pa. 269, 893 A.2d 70, 81 (2006) (holding that the term shall is mandatory for purposes of statutory construction when the statute is unambiguous). If a claim is subject to the carve-out in subsection (b), the plain language of the Act dictates that the claim be classified under subsection (g). Pursuant to its plain language, subsection (g) applies to [c]laims or portions of claims, payment of which is provided by other benefits or advantages recovered by the claimant. The language of the Act is clear. In order to be classified under subsection (b), a claim must: 1) derive from a policy covering loss; and 2) must not have been otherwise compensated. If neither is true, that claim is classified under subsection (g). Applied to the facts of this matter the plain language of the Act directs the classification of the Claim under subsection (g). [5] Northland's argument to the contrary places it in a double bind. On one hand, Northland argues that the Claim arises not from subrogation directly, but from the settlement agreement between Farm Bureau and Reliance. If this is true, then the Claim fails to meet the first element, that a claim derive from a policy covering loss. There is no policy between Farm Bureau and Reliance. The only applicable policy is an insurance contract between Reliance and the Members of the Harness that applies to third parties injured by Pocket Rocket. Under the facts of the instant matter, that policy covers injury to Ms. Follen-Davis but not Farm Bureau. In order to avail itself of any coverage under the policy, Farm Bureau must stand in the shoes of its insured Ms. Follen-Davis. Without this subrogation context, there is no policy under which Farm Bureau can seek payment from Reliance. Moreover, Northland's interpretation of the Claim is faulty. Farm Bureau is not a third party claimant merely as a result of the settlement agreement. Farm Bureau would have no cause of action against Reliance without its insured, Ms. Follen-Davis. Farm Bureau's entire posture in the Reliance liquidation is vis-à-vis its relationship with its insured. If, on the other hand, Northland acknowledges that the Claim arises from subrogation, then Farm Bureau stands in the shoes of Ms. Follen-Davis. See Johnson v. Beane, 541 Pa. 449, 664 A.2d 96, 100 (1995) (holding that an insurance company stands in the shoes of the insured when pursuing an action against the tortfeasor). The true statutory claimant is Ms. Follen-Davis. Even when Farm Bureau steps into her position pursuant to the rules of subrogation, Ms. Follen-Davis remains the true claimant. Because she has already been compensated, the carve-out applies to the Claim. Ms. Follen-Davisand thus Farm Bureauis a third party claimant with a claim against Reliance for injuries committed by Reliance's insured. Were it not for the compensation by Farm Bureau, Ms. Follen-Davis could have asserted a claim subject to classification under subsection (b). But Ms. Follen-Davis had coverage through her own insurer, Farm Bureau, and was compensated. Farm Bureau cannot claim any higher status than Ms. Follen-Davis could have claimed herself, and payment to Ms. Follen-Davis triggers the application of the carve-out. Therefore, since Ms. Follen-Davis would not be entitled to priority under subsection (b), Farm Bureau cannot be entitled to such priority. Northland's argument, if accepted, would result in Farm Bureau having more rights than its insured. This result is contrary to the principles of subrogation and Pennsylvania Law. See, e.g., Bell v. Slezak, 571 Pa. 333, 812 A.2d 566, 574 (2002) (a subrogee has no greater rights than those held by the subrogor).