Workers’ Comp Premiums Take Priority in Bankruptcy Claim

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Not only do workers' compensation people have to know something about taxes, but they might need to brush up on the ins and outs of bankruptcy law, as a case from 2003 shows. Simply Research subscribers have access to the full text of the Bankruptcy Court's ruling.

Case

In re Integrated Health Services, Inc., 291 B.R. 611 (Bankr. D. Del. 2003).

What Happened

A health care provider was a Chapter 11 debtor, and its insurer asserted a priority claim for premiums owing in connection with workers' compensation insurance coverage for the provider's employees. To wit, the insurer filed a claim for $3,919,891, and the provider objected, asserting that the claim should be classified as a general unsecured claim.

Rule of Law

At the time of the decision, the Bankruptcy Court in this case noted that there was a Circuit split on whether insurance premiums constitute contributions:

9th Cir. -- There's no reason for concluding that Congress intended to deny priority to workers' compensation benefit plans while granting the same statutory priority to other plans providing benefits to employees. See Employers Ins. of Wausau v. Plaid Pantries, Inc. 10 F.3d 605 (9th Cir. 1993).

6th Cir. -- Workers' compensation insurance premiums are not "wage substitutes" and therefore did not fit the statutory priority framework. See Travelers Prop. and Cas. Corp. v. Birmingham-Nashville Express, Inc., 224 F.3d 511 (6th Cir. 2000). This approach was adopted by the 10th Circuit in State Ins. Fund v. S. Star Foods, Inc., 144 F.3d 712 (10th Cir. 1998) and the 8th Circuit in Employers Ins. of Wausau v. Ramette, 62 F.3d 224 (8th Cir. 1995).

What the Court Said

Thanks to the "plain meaning" of the Bankruptcy Code, the court found that the premiums due were "contributions to an employee benefit plan" and thus, the claim enjoyed priority.

The court reasoned that workers' compensation benefits were "classic benefits that inure to employees."

"When an employee is injured on the job, workers' compensation covers health care costs, death benefits, and lost wages," the court wrote. "Thus, the underlying payments to injured employees from workers' compensation fit the archetypical examples of employee benefit plans such as health insurance, disability, and pension plans." 

The court also rejected an argument from the provider that, based on legislative history, to enjoy priority, employee benefits must be the result of bargain between a debtor and employee.

"That reference is given by way of example, not as the exclusive type of employee benefit for which priority is conferred," the court wrote. "We do not graft the distinction of bargained for (versus statutorily mandated) benefits onto 'employee benefit plans.'"

As a result, the court concluded that the insurer's claim based upon workers' compensation insurance premiums was a contribution to an employee benefit plan and was entitled to priority status.

Takeaway

Workers' compensation insurance is an "employee benefit plan" under the priority provision of the Bankruptcy Code.

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