Supreme Court: Workers Comp Premiums Not Priority in Bankruptcy

A workers' compensation insurer does not have a claim against     
a bankrupt business for unpaid premiums under bankruptcy law, according to the     
U.S. Supreme Court in a 6-3 decision that insurers are warning could disrupt the     
insurance marketplace unless Congress acts to reverse it.   
    
The Supreme Court majority rejected an insurer's argument that     
an employer's liability to carry workers' compensation coverage fits the     
employee benefit plan category that would assign it priority in the event of a     
bankruptcy.   
   
Instead, the high court ruled that workers' compensation     
premiums are more like liability premiums than employee benefit costs and as     
such do not fall under the section of bankruptcy code (11 U.S.C. section     
507(a)(5)), which assigns priorities to unsecured creditors' claims for unpaid     
contributions to an employee benefit plan.   
    
"Weighing against such categorization, workers' compensation     
does not compensate employees for work performed, but instead, for on-the-job     
injuries incurred; workers' compensation regimes substitute not for wage     
payments, but for tort liability," Justice Ruth Bader Ginsburg wrote on behalf     
of the majority.   
   
In Howard Delivery Service, Inc., et al v. Zurich American     
Insurance Co., handed down June 15, the high court reversed the Court of     
Appeals for the Fourth Circuit which had held that payments for workers'     
compensation coverage were "contributions to an employee benefit plan ...     
arising from services rendered" and thus subject to the bankruptcy priority     
provision.   
   
Zurich had urged the court to borrow the broader definition of     
employee benefit plan contained in the Employee Retirement Income Security Act     
of 1974 (ERISA): "[A]ny plan, fund, or program [that provides] its participants     
... , through the purchase of insurance or otherwise, ... benefits in the event     
of sickness, accident, disability, [or] death."   
   
But the majority noted that federal courts have questioned     
whether ERISA is appropriately used to fill in blanks in a Bankruptcy Code     
provision.   
   
The court further noted that workers' compensation also     
differs from fringe benefits in that while nearly all states require employers     
to carry workers' compensation, they commonly do not mandate employee benefits.   
   
In the case before the court, Howard contracted with Zurich to     
provide workers' compensation coverage for its operations in 10 states. After     
Howard filed a Chapter 11 bankruptcy petition, Zurich filed an unsecured     
creditor's claim for some $400,000 in premiums, asserting that they qualified as     
"contributions to an employee benefit plan" entitled to priority under     
§507(a)(5).   
   
The Bankruptcy Court denied priority status to the claim,     
reasoning that because overdue premiums do not qualify as bargained-for benefits     
furnished in lieu of increased wages, they fall outside §507(a)(5)'s compass.     
The District Court affirmed, similarly determining that unpaid workers'     
compensation premiums do not share the priority provided for unpaid     
contributions to employee pension and health plans.   
   
But a Fourth Circuit panel reversed without a rationale, which     
resulted in the case being brought before the Supreme Court.   
   
Justice Ginsburg was joined in her majority opinion b