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Insurance Guaranty Association (“MIGA”) pay the $300,000 statutory maximum
toward the claim for a judgment in excess of the primary insurer/assignor’s own
policy limits. The court held that the assignor’s claim to MIGA was not a
“covered claim” within the meaning of the Insurance Guaranty Act, but rather,
the assignment was a disguised subrogation attempt by the primary
insurer/assignor. The court reasoned that, to be entitled to subrogation, the
assignor would have to show that it paid something that it was not legally
obligated to pay. In this context, the assignor was the primary insurer and, in
failing to settle the claim within policy limits, was obligated to pay in full the sum
of the judgment obtained against it.
Distribution of the Assets
Priorities in Allowance of Claims ‐ In General
Fourth Circuit
North Carolina v. United States, 139 F.3d 892, 1998 WL 178374 (4 th Cir. (N.C.)).
Northwestern Security Life Insurance Company, which specialized in life,
health, and accident insurance, failed after rehabilitation efforts proved
unsuccessful. On May 8, 1990, Northwestern was placed into liquidation
under the control of the North Carolina Insurance Commissioner. The
federal priority statute required the Commissioner to pay the federal tax
claims of the United States first. After the Supreme Court held, in U.S. Dept.
of Treasury v. Fabe, 508 U.S. 491 (1993), that under the McCarran‐Ferguson
Act, 15 U.S.C. § 1012, state insurance insolvency statutes are not preempted
by the federal priority statute to the extent that the state statutes afford a
higher priority to policyholder claims and claims for administrative expenses
than to claims of the United States, the commissioner filed an amended tax
return for 1990 and 1991. The Internal Revenue Service claimed that federal
income taxes accrued during liquidation were entitled to first priority status
as administrative expenses under North Carolina General Statute § 58‐30‐
220(l).
The question presented was whether federal taxes are costs of
administration under the priority structure of the North Carolina Insurance
Insolvency Statute. The court held that taxes accrued before liquidation
cannot be considered administrative expenses because they accrued long
before an estate was being administered. The taxes accrued after liquidation
are administrative expenses. For tax purposes, the earned income from
insurance premiums is spread over the life of the policy, thus, income taxed
subsequent to the year the premium is actually paid is still real income. The
income taxes accrued in 1990 and 1991, for premiums already paid to
Northwestern, constituted administrative expenses because there was a
liquidation order at the time of the accrual. Therefore, the court granted
summary judgment for the United States, holding that under the North
Carolina Statute when taxes accrued after the court entered a liquidation
order, those taxes should be considered administrative expenses entitled to
first priority.
Seventh Circuit
Cullom v. Traders Ins. Co. 163 F. 45 (7th Cir. 1908). Plaintiff and other general
agents of insolvent insurance company (resulting from the San Francisco
earthquake of 1906), challenged the appointment of a receiver with a view to
secure a right to the insolvent company's unearned premium reserve on the
theory that the agents, in paying unearned premium claims on behalf of the
company, were entitled to a priority claim to this "trust fund". The court held
constitutional the statute under which dissolutions was authorized and the
general agents' petition for intervention was rejected.