Liquidation of Sussex Mut. Ins. Co., Matter of

Decision Date05 June 1997
PartiesIn the Matter of the LIQUIDATION OF SUSSEX MUTUAL INSURANCE COMPANY.
CourtNew Jersey Superior Court — Appellate Division

Thomas M. Hunt, Deputy Attorney General, for appellant Commissioner of the New Jersey Department of Banking and Insurance as Liquidator of Sussex Mutual Insurance Company (Peter Verniero, Attorney General, attorney; Mary C. Jacobson, Assistant Attorney General, of counsel; Mr. Hunt, on the brief).

Sean T. O'Neil, Florham Park, for intervenor-appellant New Jersey Property Liability Insurance Guaranty Association (Bressler, Amery & Ross, attorneys; Richard R. Spencer, Jr. of counsel; Mr. O'Neil and Cynthia J. Borrelli, on the brief).

Joseph K. Molloy, of the New York Bar, admitted pro hac vice, argued the cause for respondents National Casualty Company and National Casualty Company of America, Ltd. (Dwyer, Connell & Lisbona, attorneys; Donald T. Okner and Mr. Molloy, of counsel and on the brief).

Before Judges PETRELLA, LANDAU and WALLACE.

The opinion of the court was delivered by

PETRELLA, P.J.A.D.

The Commissioner of Banking and Insurance, in the capacity of Liquidator of Sussex Mutual Insurance Company (Liquidator), appeals from the Chancery Division's determination that two insurance companies for which Sussex Mutual Insurance Company (Sussex Mutual), now in liquidation, acted as reinsurer, National Casualty Company and National Casualty Company of America, Ltd. (referred to collectively as National Casualty) qualified for the category of priority in liquidation set forth in N.J.S.A. 17:30C-26c(4). The Chancery Judge rejected the Liquidator's argument that National Casualty fell within the residual category of "all other claims" under N.J.S.A. 17:30C-26c(5) (Class 5), rather than N.J.S.A. 17:30C-26c(4) (Class 4), which identifies "claims by policyholders, beneficiaries and insurers."

The statutory provision at issue in this case is part of the regulatory scheme governing the liquidation of Sussex Mutual. In general, the statute has been referred to as part of the Uniform Insurers Liquidation Act (UILA), N.J.S.A. 17:30C-1 through -31. 1 The Commissioner was appointed Liquidator of Sussex Mutual by the Chancery Judge on July 17, 1992, pursuant to the UILA. Under N.J.S.A. 17:30C-26, the Liquidator determined that National Casualty's claims for compensation as a reinsured of Sussex Mutual fell within the catch-all Class 5 priority category under N.J.S.A. 17:30C-26c(5). Apparently, there are insufficient funds available to the Liquidator to satisfy the Class 5 claims. Consequently, National Casualty objected to the Liquidator's assignment of its claim to Class 5, resulting in the Chancery Judge's order that National Casualty's claims should be classified as Class 4 claims under the statute. This appeal ensued.

Essentially, the Liquidator contends that the judge erred in overturning the administrative determination of Class 5 priority status for National Casualty because National Casualty is Sussex Mutual's reinsured. The Liquidator asserts that N.J.S.A. 17:30C-26c(4), enacted by L. 1979, c. 470, § 1, effective February 27, 1980, was erroneously transcribed into the statute books, 2 and should be read as "[c]laims by policyholders, beneficiaries and insureds." Additionally, the Liquidator claims that even if the word "insurer" was properly included in the statute National Casualty cannot qualify for Class 4 priority because the traditional distinction between insurance and reinsurance demonstrates that the Legislature would not have granted reinsured insurance companies such priority status without explicitly stating so and that the term "insurer" cannot be read as equivalent to "reinsured." The New Jersey Property-Liability Insurance Guaranty Association (Guaranty Association) 3 has intervened as an appellant and joined in the Liquidator's arguments.

Sussex Mutual was a property and casualty insurer that eventually began acting as a reinsurer of other insurance companies. In 1989 the Liquidator determined that Sussex Mutual was insolvent and the company was placed into rehabilitation. Ultimately, a liquidation order was issued on July 17, 1992. Thereafter, proofs of claims were submitted to the Liquidator, including claims by National Casualty, which it characterized as those of a "general creditor" or "other claimants" without claiming policyholder protection. Those claims were originally filed as Class 5 claims, and it was noted that Sussex Mutual's assets were insufficient to pay any claims in that class.

As a result of the proceedings instituted by National Casualty in the Chancery Division the judge concluded that both the plain meaning and the legislative history of the 1979 amendments to N.J.S.A. 17:30C-26 by L. 1979, c. 470, indicated that the use of the word "insurers" in subsection c(4) was consistent with the legislative intent and that the term included insurers, such as National Casualty, who were reinsureds of the liquidated insurance company.

The Liquidator argues that the judge erred in overturning Class 5 claim priority for National Casualty because the Class 5 determination was based on the only reasonable interpretation of the UILA, and specifically of N.J.S.A. 17:30C-26c(4). The Liquidator relies heavily on what is perceived as a typographical error in the statute in the use of "insurers" instead of "insureds." The Guaranty Association joins in that argument and asserts that reversal of the Class 4 allocation to National Casualty is necessary because National Casualty's Class 4 status would result in harm to policyholders and third party claimants--both covered and uncovered by the Guaranty Association's statutory scheme--and the sharing of limited funds with a reinsured in a way clearly unintended by the Legislature.

I.

Although the determination of an administrative agency is entitled to deference where agency expertise is involved, see Mayflower Securities Co. v. Bureau of Securities, 64 N.J. 85, 92-93, 312 A.2d 497 (1973); In re Aetna Casualty Surety Co., 248 N.J.Super. 367, 376, 591 A.2d 631 (App.Div.), certif. denied, 126 N.J. 385, 599 A.2d 162 (1991), cert. denied, 502 U.S. 1121, 112 S.Ct. 1244, 117 L. Ed.2d 476 (1992), an agency's interpretation with respect to a matter of statutory construction stands on a different footing. New Jersey Guild of Hearing Aid Dispensers v. Long, 75 N.J. 544, 575, 384 A.2d 795 (1978); Mayflower Securities Co. v. Bureau of Securities, supra, 64 N.J. at 93, 312 A.2d 497.

N.J.S.A. 17:30C-26, captioned "Priority of claims for compensation," was amended by L. 1979, c. 470, § 1 (effective February 27, 1980) to add subsection c. Under the prior law (L. 1975, c. 113, § 26) the only priorities specified were those for administration expenses and employee compensation. Despite the claim of the Liquidator that the statute contains a technical error, our inquiry at oral argument indicated that to date no legislative initiative has been taken by the executive branch or the Legislature, including the Office of Legislative Services, to correct this supposed error. This provision was passed by the Legislature in 1979, and approved by the Governor in 1980. Moreover, the Department of Banking and Insurance, 4 and presumably the Legislature, have had knowledge of the "error" at least since the date of National Casualty's objection to the assignment of its claims to Class 5, and certainly since the arguments on the cross-motions for summary judgment on May 24 and June 21, 1996. Nonetheless, no action has been taken to administratively or legislatively address the matter, the Liquidator pursuing the litigation route.

By virtue of the 1979 amendment the statute now provides five classes of priorities for distribution of a liquidated insurance company's assets:

c. The priorities of distribution in a liquidation proceeding shall be in the following order:

(1) Expenses of administration;

(2) Compensation of employees as provided in subsection (a) of this section;

(3) Claims for taxes and debts due to Federal or any state or local government which are secured by liens perfected prior to the commencement of delinquency proceedings;

(4) Claims by policyholders, beneficiaries and insurers arising from and within the coverage of and not in excess of the applicable limits of insurance policies and insurance contracts issued by the company and liability claims against insurers which claims are within the coverage of and not in excess of the applicable limits of insurance policies and insurance contracts issued by the company and claims presented by the New Jersey Property-Liability Insurance Guaranty Association and claims presented by any similar organization in another state;

(5) All other claims.

[ N.J.S.A. 17:30C-26(c) (emphasis added).]

Although the record is meager, as is the legislative history, a reading of subsection c(4) nonetheless leads to the conclusion that National Casualty does not qualify for Class 4 priority because its claim here is that of a reinsured. Whether subsection c(4) is read literally to include "insurers" or read liberally to include "insureds" only, the legislative history and caselaw applying the UILA lead to the inescapable conclusion that reinsureds were not intended to be given the same priority status as primary policyholders and direct insureds.

II.

The Chancery Judge in this case took the view that only legislative history demonstrating that a transcription error occurred would justify such judicial action. However, the question is whether National Casualty, a reinsured of Sussex Mutual, is entitled to Class 4 priority status, the same status afforded primary insureds and policyholders under N.J.S.A. 17:30C-26c(4). Determining whether National Casualty qualifies for Class 4 priority status requires examination of the textual construction of the provision, caselaw, legislation of other states, and legislative...

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