Supreme Court Rejects Priority for Workers' Comp Premiums

June 19, 2006 ( - The US Supreme Court ruled 6-3 that workers' compensation premiums owed by an employer are not entitled to priority status under the section of bankruptcy law pertaining to employee benefits.

According to the opinion, workers’ compensation premiums more closely resemble liability insurance premiums for motor vehicle, fire or theft insurance, rather than contributions made for fringe benefits included in pay packages such as pension plans and group health, life and disability insurance.

Noting that workers’ compensation plans substitute for the common-law tort liability to which employers are exposed for work-related accidents, the court said this benefit of removing risk for employers makes it unlike other employee benefits that only insure employees and their beneficiaries. In addition, the court said almost all states require employers to maintain workers’ compensation insurance, with penalties for not doing so, while leaving fringe benefits to the discretion of the employer.

Howard Delivery Service, Inc. was required by each state in which it operated to maintain workers’ compensation coverage to secure its employees’ receipt of health, disability and death benefits in the event of on-the-job accidents, according to the court document. Howard contracted with Zurich American Insurance Co. to provide this insurance. After Howard filed a Chapter 11 bankruptcy petition,Zurich  filed an unsecured creditor’s claim for about $400,000 in premiums, asserting that they qualified as “contributions to an employee benefit plan” entitled to priority under Section 507of the Bankruptcy Code.

A 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 of Section 507. A District Court affirmed that ruling, but a 4th US Circuit Court of Appeals panel reversed the district court’s decision.

Zurich had tried to reason that giving priority status to the premiums would provide incentive for workers’ compensation carriers to continue to provide coverage to ailing companies, promoting rehabilitation of a business. The Supreme Court said this argument was unpersuasive and that the court is guided by the bankruptcy code’s objective of ensuring equal distribution among creditors.

The court said granting priority status to the premiums could shrink the amount of funds available for unpaid contributions to benefit plans that unquestionably fall under Section 507 of the code.

The court was split on whether the Employee Retirement Income Security Act (ERISA) was properly used in other court opinions concerning the priority status of workers’ compensation premiums. In their dissenting opinion, Justices Kennedy, Souter and Alito said that workers’ compensation insurance falls under ERISA’s definition of employee benefit plans that includes an “employee welfare benefit plan,” which in turn “mean[s] any plan, fund, or program which … was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise … benefits in the event of sickness, accident, disability, death or unemployment.”

The opinion in Howard Delivery Service Inc., et al v. Zurich American Insurance Co. ishere.