Howard Delivery Service, Inc. v. Zurich American Insurance

Background

Howard Delivery Service, a freight trucking employer with up to 480 workers operating in about a dozen States, bought workers’ compensation insurance from an insurer for operations in ten States. When Howard filed for Chapter 11 bankruptcy on January 30, 2002, the insurer (Zurich) filed an unsecured claim for roughly $400,000 in unpaid premiums and asked for priority treatment under the Bankruptcy Code’s provision for contributions to an employee benefit plan. The bankruptcy court and the district court denied priority; a divided Fourth Circuit reversed; the Supreme Court agreed to resolve the split.

Reasoning

The Court considered whether unpaid workers’ compensation premiums count as payments to an “employee benefit plan.” It held they do not. The opinion explains that pension and group health plans primarily compensate employees and serve as wage substitutes, while workers’ compensation is designed to assure payments for work injuries and also protects employers by replacing tort liability. The Court declined to import a definition from another statute (ERISA) and emphasized that priority rules must be narrowly read to preserve equal distribution among creditors.

Real world impact

The decision means private workers’ compensation carriers cannot claim the specific bankruptcy priority for unpaid premiums unless Congress changes the law. That result preserves limited priority dollars for pension and health plan claims, may reduce what insurers can recover from bankrupt employers, and leaves state funds or tort remedies as possible employee recourse.

Dissents or concurrances

Justice Kennedy, joined by Justices Souter and Alito, dissented, arguing that the payments are contributions arising from services, that ERISA’s definition supports coverage, and that mandatory coverage should not defeat priority.