Court Opinion

ID: 9481847
Source: CourtListenerOpinion
Date Created: 2023-08-05 08:33:36.147382+00
Date Added: 2024-06-11T17:48:36.973288
License: Public Domain

NATHANIEL R. JONES, Circuit Judge,
dissenting.
The majority correctly phrases the narrow issue presented to us for review as “whether the Ohio insurance liquidation priority statute is a state law regulating the ‘business of insurance’ within the meaning of the McCarran-Ferguson Act.” Maj. op. at 343. In my view, however, the majority attaches too broad an interpretation to the phrase “the business of insurance”, and as a result incorrectly concludes that Ohio’s liquidation priority scheme is not subject to federal preemption. Such a holding fails to comport with relevant case-law from other Courts of Appeals and the U.S. Supreme Court. I respectfully dissent.
Two other Circuits have already addressed the precise issue before us and have persuasively concluded that the liquidation of insolvent insurance companies is not “the business of insurance” within applicable Supreme Court precedent. In both State of Idaho ex rel. Soward v. United States, 858 F.2d 445 (9th Cir.1988), cert. denied, 490 U.S. 1065, 109 S.Ct. 2063, 104 L.Ed.2d 628 (1989) and Gordon v. U.S. Dep’t of Treasury, 668 F.Supp. 483 (D.Md.1987), aff'd, 846 F.2d 272 (4th Cir.). cert. denied, 488 U.S. 954, 109 S.Ct. 390, 102 L.Ed.2d 379 (1988), as in the instant case, a state’s insurance authorities, in its capacity as liquidator or receiver for an insolvent insurance company, challenged the federal government’s assertion of priority. In both these cases, directly on point with the instant case, the priority of the federal government’s claim was upheld. The majority concedes that the Fourth and Ninth Circuits have explicitly rejected Fabe’s theory, yet reaches a directly opposite result based on abstention cases of questionable relevance and pure ipse dixit.
The majority emphasizes the scope of the Ohio liquidation statute. However, Ohio’s ability to regulate the entire relationship between insurer and insured is not at issue. It is elementary that “[r]eorganization of insolvent insurance companies is a matter of state law and is handled through insolvency proceedings in state court.” Gordon, 668 F.Supp. at 487. The federal government in this case only argues its priority in Ohio’s liquidation of an Ohio insurance company, and does not seek to challenge Ohio’s overall authority to regulate.
“[]In determining whether a particular practice is part of the ‘business of insurance’ ”, three factors should be considered: “first, whether the practice has the effect of transferring or spreading a policyholder’s risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry. None of these criteria is necessarily determinative in itself[.]” Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129, 102 S.Ct. 3002, 3008, 73 L.Ed.2d 647 (1982). The first prong of the Pireno test inquires whether Ohio’s liquidation priority statute transfers or spreads a policyholder’s risk. Pireno stated that “[t]he transfer of risk from insured to insurer is effected by means of the contract between the parties—the insurance policy—and that transfer is complete at the time that the contract is entered.” 458 U.S. at 130, 102 S.Ct. at 3009. It is clear that, under Pireno, the transfer of risk has already been effectuated at the liquidation stage; therefore, any prioritization scheme instituted by the state of Ohio to govern liquidation of insurance companies has nothing to do with the transferring or spreading of risk within the meaning of Pireno. See also Soward, 858 *354F.2d at 454 (“The statute’s assignment of priority to some creditors as against governmental entities does not transfer or spread policyholder risk”); Gordon, 846 F.2d at 273 (insurance commissioner’s arguments fail to satisfy first prong of Pireno test because “the risk of insurer insolvency is certainly qualitatively distinct from the risk the policyholder seeks to transfer in an insurance contract.”).
The majority envisions two kind of risk of loss. First, the policyholder transfers a risk of loss to the insurance company at the time the initial insurance contract is signed. The later transfer of risk of loss occurs at the moment an insurance company is liquidated and Ohio’s Superintendent of Insurance is appointed as liquidator. Although Ohio’s liquidation priority scheme may be characterized as a transferring a risk of loss to some extent, the ordering of creditors’ claims does not effectuate a transfer of risk vis-a-vis the policyholder. The position that the liquidation of an insurance company effects a transfer of risk is directly contradicted by Pireno: “The transfer of risk from insured to insurer ... is complete at the time that the contract is entered.” 458 U.S. at 130, 102 S.Ct. at 3009. The mere fact that Ohio’s liquidation priority statute was enacted “for the protection of policyholders”, maj. op. at 350, is irrelevant to the issue of whether the priority scheme has the effect of transferring a policyholder’s risk under Pireno.
The second Pireno prong asks us to consider whether Ohio’s prioritization statute is an integral part of the policy relationship between the insurer and the insured. The majority answers this inquiry in the affirmative solely because the payment of claims continues after the insurer is placed in receivership. This analysis, however, attributes to the liquidator rights which have already vested by virtue of the initial contract between the insurer and the insured. Simply because the insured’s right to receive payment under the initial contract of insurance continues after the insurer is placed in receivership does not indicate to me that the statute at issue is “an integral part of the policy relationship between the [now-defunct] insurer and the insured.” 458 U.S. at 129, 102 S.Ct. at 3008. The policyholder’s rights and responsibilities are still governed by the original contract of insurance entered into with the insured. Rather than playing an integral role in the policy relationship between insurer and insured, Ohio’s priority statute instead addresses “the relationship between those left in the lurch by the expiration of the insurer.” Soward, 858 F.2d at 454. I am persuaded by the reasoning of the district court in Gordon, specifically adopted by the Fourth Circuit:
[N]either the liquidation statute nor the priority statute are an “integral part” of the relationship between the insured and the insurer. The contractual liability to pay on a policy of insurance is obviously distinct from the question of who gets paid first. As with the claims adjustment process described in Pireno, the concern is whether a claim is paid, not why it is paid. Pireno, 458 U.S. at 132, 102 S.Ct. at 3010. Plaintiff contends that the priority statute does in fact determine whether a policyholder gets paid. The fallacy of plaintiff’s argument is in his focus on the sufficiency of assets of the insurance company and its financial ability to pay rather than its liability for risks of loss as embodied in the contract of insurance. Whether the individual policyholder would be entitled to payment was determined when the contract was entered into; that is, when the risk was transferred, and not at the time of payment, if any.
668 F.Supp. at 491.
Under the third prong of Pireno, we must determine whether Ohio’s priority statute “is limited to entities within the insurance industry.” 458 U.S. at 129, 102 S.Ct. at 3009. This inquiry is easily resolved because this statute “govern[s] the rights of all creditors, not just policyholders.” 668 F.Supp. at 491. “Creditors of all varieties have their claims assigned priorities by the statute, including the local, state, and federal governments.” Soward, 858 F.2d at 454. The majority initially admits that an insurance company’s liquidation encompasses non-policied creditors, *355but nevertheless finds for plaintiff on this issue because the funds used to pay non-policied creditors may reduce the funds available to pay policyholders. Although ensuring that valid claims of policyholders are paid is an admirable goal, it is not relevant to our inquiry under Pireno. Indeed, were we writing on a clean slate I would agree with the majority that the concerns of the policyholders of a liquidated insurance policy should figure prominently in our analysis.1 However, as a lower court, we are obliged to follow the dictates of the Supreme Court and to eschew broad public policy considerations, especially in this case where constitutional questions of due process or equal protection are not presented. Accordingly, because I believe that applicable law mandates the priority of the federal claim in this liquidation proceeding, I dissent.

. The majority assertion that "it is clear” that the focus of Ohio’s liquidation priority statute "is the protection of insureds”, maj. op. at 350, is correct in the sense that Ohio’s priority statute prioritizes the claims of policyholders above the claims of general creditors and claims of any federal, state, or local government. Ohio Rev. Code Ann. § 3903.42 (Baldwin 1989). However, there are two categories whose claims take priority over the claims of policyholders: (1) ”[t]he costs and expenses of administration”, and (2) ”[d]ebts due to employees for services performed[J” Id.