Howard Delivery Service, Inc. v. Zurich American Insurance
The Supreme Court ruled that unpaid workers' compensation insurance premiums do not qualify for the special bankruptcy priority given to "employee benefit plan" contributions like pensions and health insurance.
The decision means workers' compensation insurers stand in the same line as ordinary unsecured creditors when an employer goes bankrupt, preserving more of a limited priority pool for pension and health-plan claims.
“Although the question is close, we conclude that premiums paid for workers’ compensation insurance are more appropriately bracketed with premiums paid for other liability insurance, e.g., motor vehicle, fire, or theft insurance, than with contributions made to secure employee retirement, health, and disability benefits.”
The majority's central holding distinguishing workers' compensation from true employee benefit plans.
How it got here: A bankruptcy court and district court denied Zurich's claim priority; a divided Fourth Circuit panel reversed without a common rationale, and the Supreme Court agreed to resolve a circuit split.
The Case in Depth
What happened
Howard Delivery Service, a trucking company, was required by the states it operated in to carry workers' compensation insurance, which it purchased from Zurich American Insurance Co. When Howard filed for Chapter 11 bankruptcy owing about $400,000 in unpaid premiums, Zurich claimed its unpaid premiums deserved priority payment as contributions to an "employee benefit plan," ahead of most other unsecured creditors.
The question before the Court
When a trucking company went bankrupt, could its workers' compensation insurer get paid ahead of other creditors as an "employee benefit plan" contribution?
The Court's answer
No — the Court ruled that unpaid workers' compensation insurance premiums do not count as contributions to an "employee benefit plan" entitled to priority payment in bankruptcy. The Court reasoned that this priority was designed for benefits that substitute for or supplement wages, like pensions and health insurance, while workers' compensation instead replaces an employer's exposure to lawsuits over workplace injuries and protects the employer as much as the employee.
Because workers' compensation serves a different purpose and structure than true wage-substitute benefits, and because bankruptcy priorities are read narrowly to preserve equal treatment among creditors, the Court placed workers' compensation insurers in the same category as ordinary liability insurers rather than benefit-plan providers. Their unpaid premium claims are treated as ordinary unsecured debts, not priority claims.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
Insurance companies that provide workers' compensation coverage to employers who later go bankrupt will recover less, since they can't jump ahead of ordinary creditors. Workers with pension or health-plan claims benefit because there's more money left in the priority pool set aside for those wage-related benefits, which is capped at a fixed dollar amount per employee.
What changes now
The case is sent back to the lower courts for further proceedings consistent with the ruling, meaning Zurich's claim for unpaid premiums will be treated as an ordinary unsecured claim rather than a priority claim. This is a final decision on the legal question, resolving a split among federal appeals courts on how workers' compensation premiums are treated in bankruptcy nationwide.
What this does not decide
The Court explicitly did not decide whether unpaid premiums owed to a state-run workers' compensation fund (rather than a private insurer) might qualify for a different bankruptcy priority as a tax-like payment, an issue raised in an earlier Fourth Circuit case the Court declined to address.
Concurrences and dissents
Dissent — Justice Kennedy
“The answer, one would think, depends on whether workers’ compensation plans provide benefits to employees.”Kennedy's framing of what he saw as the real question the majority got wrong.
Justice Kennedy argued that workers' compensation payments plainly meet the statute's plain text: they are 'contributions' arising 'from services rendered,' regardless of being mandatory. He contended workers' compensation is a genuine benefit to employees despite also helping employers, and that economic evidence shows employers pass its costs onto workers through lower wages, making it a wage substitute like pensions or health plans. He would have looked to ERISA's definition, which he read as confirming that workers' compensation counts as an employee benefit plan, and would have affirmed the Fourth Circuit's priority ruling for Zurich.
How the Court got there
The legal reasoning, step by step
- The Court traced the history of the bankruptcy priority for 'employee benefit plan' contributions, noting Congress created it after two earlier Supreme Court rulings held that fringe-benefit contributions like life insurance and annuities did not count as 'wages' entitled to priority.
- Because Congress placed the employee-benefit-plan priority immediately below, and capped together with, the wages priority, the Court read this pairing as showing that Congress meant the benefit-plan priority to cover things that substitute for or supplement a worker's pay, such as pensions and health insurance.
- The Court declined to import the broad definition of 'employee benefit plan' from a different federal law, ERISA, reasoning that Congress did not direct courts to borrow ERISA's definition for bankruptcy purposes, and that ERISA itself exempts workers'-compensation-only plans from its coverage.
- Turning to the nature of workers' compensation itself, the Court found it fundamentally different from pension or health benefits: it replaces the employer's exposure to lawsuits for on-the-job injuries rather than supplementing pay, and it protects the employer's own liability, not just the employee.
- Applying the Bankruptcy Code's general principle that special priorities must be read narrowly to preserve equal treatment among creditors, the Court concluded that extending the priority to workers' compensation premiums would shrink the limited, capped pool available for true wage-substitute plans like pensions and health insurance.
- The Court therefore held that unpaid workers' compensation premiums do not fall within the 'employee benefit plan' priority.
Doctrinal impact
Cases affected by this decision
Reaffirms United States v. Embassy Restaurant, Inc. (359 U. S. 29)
The Court relied on this 1959 ruling that unpaid fringe-benefit contributions were not 'wages' to explain why Congress created a separate benefit-plan priority.
Reaffirms Joint Industry Bd. of Elec. Industry v. United States (391 U. S. 224)
The Court relied on this 1968 ruling, which followed Embassy Restaurant, to support its reading of the benefit-plan priority's purpose.