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Ario v. Reliance Insurance Co.

October 5, 2009

JOEL S. ARIO, ACTING INSURANCE COMMISSIONER OF THE COMMONWEALTH OF PENNSYLVANIA, APPELLANT
v.
RELIANCE INSURANCE COMPANY, APPELLEE



Appeal from the Order of the Commonwealth Court, 269 M.D. 2001, dated December 14, 2007 939 A.2d 1004 (Pa. Commw. 2007).

The opinion of the court was delivered by: Madame Justice Greenspan

CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, McCAFFERY, GREENSPAN, JJ.

ARGUED: March 3, 2009

OPINION

We evaluate Section 544 of the Insurance Department Act, 40 P.S. § 221.44 (the "Act") and determine what priority classification ought to be assigned to a subrogation claim held by an insurance company against an insolvent insurer under the Act. We hold that this type of claim is a loss claim for which the loss has been indemnified and therefore that the appropriate classification is set forth in subsection (g) of Section 533 of the Act. We therefore reverse the holding of the Commonwealth Court which improperly adopted a referee's determination that the appropriate classification was set forth in subsection (b).

I. Facts

This case arises from a motor vehicle accident caused by an escaped horse. On January 9, 1998, the horse "Pocket Rocket" ran from the premises of the Sports Creek Raceway into automobile traffic and caused a motor vehicle accident in which Sheila Follen-Davis was injured. At the time of the accident, Pocket Rocket's owners, the Members of the Harness, were insured by Appellee Reliance Insurance Company ("Reliance"). At the time of the accident, Ms. Follen-Davis was insured by Farm Bureau Insurance ("Farm Bureau").

Following the accident, Farm Bureau settled with Ms. Follen-Davis and paid her seven thousand dollars ($7,000) for her injuries. Farm Bureau then sought to recover $7,000 from Reliance. On May 30, 2001 Reliance and the Members of the Harness executed a settlement agreement pursuant to which they agreed to pay Farm Bureau $7,000.

Although a check was issued by Reliance, Farm Bureau allowed the check to become stale. When Farm Bureau finally presented the check to its bank, the check was dishonored due to the lapse of time. On October 3, 2001, Reliance was placed into liquidation and thereafter was unable to issue a new check to Farm Bureau.*fn1 Farm Bureau therefore never received the $7,000 payment from Reliance.

In an effort to seek reimbursement, Farm Bureau submitted Proof of Claim No. 1010161 for $7,000 in the Reliance liquidation (the "Claim").*fn2 Claim priority in the Reliance liquidation is governed by Section 544 of the Act, which sets forth the order of distribution of an insolvent insurer's assets. In its subsections, the Act classifies types of claims into different categories, each afforded more priority than the next. Claims classified under subsection (a) of Section 544, for example, have a higher priority than those classified under subsection (b). It is anticipated that Reliance will not have assets sufficient to pay all claims. As a result, claim priority is important to all claimants in the liquidation.

The parties agree that the Claim could only be classified under either subsection (b) or else the "catch all" subsection (g) of Section 544. 40 P.S. § 221.44(b), (g). Subsection (b) generally applies to "[a]ll claims under policies for losses wherever incurred, including third party claims, and all claims against the insurer for liability for bodily injury or for injury to or destruction of tangible property which are not under policies..." 40 P.S. § 221.44(b). There is a major "carve-out" in subsection (b), however. Pursuant to the language of subsection (b) "[t]hat portion of any loss, indemnification for which is provided by other benefits or advantages recovered by the claimant, shall not be included in this class..." Id. To paraphrase the language of the Act, claims under policies for loss are categorized under subsection (b) unless the loss has been compensated by other benefits or advantages.

In the event that a loss has been compensated by other benefits or advantages, the claim would be classified under subsection (g) of the Act. 40 P.S. § 221.44 (g). Pursuant to the language of subsection (g), classification under this section applies to "[c]laims or portions of claims, payment of which is provided by other benefits or advantages recovered by the claimant." 40 P.S. § 221.44(g)(3). To paraphrase the language of the Act, if a claim is subject to the carve-out described in subparagraph (b), then the claim is classified under subsection (g) of the Act, and that claim receives a lower priority in the liquidation.

Upon review of Farm Bureau's Proof of Claim, Appellant Commissioner designated the Claim as being classified under subsection (g). As the basis for this designation, the Commissioner reasoned that Farm Bureau's rights could be no greater than those of its insured, Ms. Follen-Davis, who was otherwise compensated. Farm Bureau filed an objection in the Commonwealth Court, arguing that the Claim should have been designated as one classified under subsection (b).

There are numerous claims in the Reliance liquidation. Some claims are subject to disputes regarding classification and priority. In an effort to resolve these disputes, the Commonwealth Court has appointed various referees to review claims and issue recommendations.

A subrogation claim by Empire Fire & Marine Insurance Company ("Empire") against Reliance was reviewed by Referee James C. Schwartzman. This claim arose from the fact that a Reliance insured caused a motor vehicle accident injuring Empire's insured David Wyrick. Empire paid Mr. Wyrick for his injures and then sought payment from Reliance. After reviewing the facts underlying the claim, Referee Schwartzman determined that Empire's subrogation claim should be classified under subsection (g). Referee Schwartzman's recommendation was affirmed by the Commonwealth Court on May 16, 2005.

A subrogation claim by Factory Mutual Insurance Company ("Factory") against Reliance was reviewed by Referee G. Alan Bailey. This claim arose from a fire in a building insured by Factory that was caused by a gasoline spill created by an employee of a Reliance insured. Factory paid its insured for the fire and then sought payment from Reliance. After reviewing the facts underlying the claim, Referee Bailey determined that Factory's subrogation claim should be classified under subsection (g). Referee Bailey's recommendation was affirmed by the Commonwealth Court on July 14, 2005.

Nearly a year after the resolution of the Empire and Factory claims, on February 25, 2006, the dispute regarding the instant Claim was referred to Referee Luther E. Milspaw. On May 3, 2006, Referee Milspaw issued a report and recommendation concluding that the Claim should be classified under subsection (b) (the "Report and Recommendation"). As the basis for his Report and Recommendation, Referee Milspaw found that Farm Bureau is a "claimant" under a policy for loss as defined by the Act in subsection (b). Referee Milspaw further reasoned that because Farm Bureau has no other source of reimbursement, the carve-out does not apply so the Claim must be classified under subsection (b), rather than subsection (g).

The Commissioner filed an exception to Referee Milspaw's Report and Recommendation in the Commonwealth Court. On December 14, 2007, the Commonwealth Court overruled the Commissioner's exception. Ario v. Reliance Ins. Co., 939 A.2d 1004 (Pa. Commw. 2007). The Commonwealth Court agreed with Referee Milspaw that the "claimant" was Farm Bureau, not Ms. Follen-Davis, who had been paid in full. Id. at 1006. Because Farm Bureau was the claimant and had not been otherwise compensated for its loss, the Commonwealth Court reasoned that the Claim fit squarely into subsection (b) of the Act. Id. at 1007-1008. The Commonwealth Court further reasoned that the language of subsection (g) referring to "other benefits or advantages" did not apply to a primary insurance policy issued by Farm Bureau because this language applied to "excess coverage." Id. at 1007.

The Commissioner filed a Motion for Reconsideration. In support thereof, the Commissioner cited the referee determinations relating to the Empire and Factory subrogation claims. As the Commissioner noted, these claims had been classified under subsection (g) of the Act and therefore similar claims had been dissimilarly classified in the Reliance liquidation. The Commonwealth Court denied the Motion for Reconsideration and the Commissioner filed a timely appeal to this Court.

II. Analysis

In his brief the Commissioner posits the following two issues for this Court's review:

Did the lower court err when it affirmed the Report and Recommendation of Referee Milspaw who found that insurer Farm Bureau Insurance Company, having paid its insured a settlement payment for wrongs allegedly committed by Reliance's insured, as it was required to do under its policy with insured, was entitled to (b) priority (pursuant to 40 P.S. ยง221.44(b)) for its subrogation claim against Reliance, where (1) Farm Bureau Insurance Company's claim is entirely derivative of the rights of its fully-compensated [insured]; (2) the statute explicitly carves out from priority (b) "[t]hat portion of any loss, indemnification for which is provided ...


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