§ 7081. Priority of distribution

The priority of distribution of claims from the insurer‘s estate shall be in accordance with the order in which each class of claims is set forth in this section. Every claim in each class shall be paid in full or adequate funds retained for such payment before the members of the next class receive any payment. No subclass shall be established within any class. The order of distribution of claims shall be:

(1) Class 1. The costs and expenses of administration, during conservation, rehabilitation, and liquidation, including the following:

(A) actual and necessary costs of preserving or recovering the assets of the insurer;

(B) compensation for all services rendered in the conservation, rehabilitation, and liquidation;

(C) necessary filing fees;

(D) fees and mileage payable to witnesses; and

(E) authorized reasonable attorney’s fees and other professional services rendered in the conservation, rehabilitation, and liquidation.

(2) Class 2.

(A) The administrative expenses of guaranty associations. For purposes of this section, these expenses shall be the reasonable expenses incurred by guaranty associations where the expenses are not payments or expenses that are required to be incurred as direct policy benefits in fulfillment of the terms of the insurance contract or policy, and that are of the type and nature that, but for the activities of the guaranty association otherwise would have been incurred by the receiver, including evaluations of policy coverage, activities involved in the adjustment and settlement of claims under policies, including those of in-house or outside adjusters, and the reasonable expenses incurred in connection with the arrangements for ongoing coverage through transfer to other insurers, policy exchanges, or maintaining policies in force. The receiver may in his or her sole discretion approve as an administrative expense under this section any other reasonable expenses of the guaranty association if the receiver finds:

(i) The expenses are not expenses required to be paid or incurred as direct policy benefits by the terms of the policy.

(ii) The expenses were incurred in furtherance of activities that provided a material economic benefit to the estate as a whole, irrespective of whether the activities resulted in additional benefits to covered claimants. The court shall approve such expenses, unless it finds the receiver abused his or her discretion in approving the expenses.

(B) If the receiver determines that the assets of the estate will be sufficient to pay all Class 1 claims in full, Class 2 claims shall be paid currently, provided that the liquidator shall secure from each of the associations receiving disbursements pursuant to this section an agreement to return to the liquidator such disbursements, together with investment income actually earned on such disbursements, as may be required to pay Class 1 claims. No bond shall be required of any such association.

(3) Class 3. All claims under policies including such claims of the federal or any state or local government for losses incurred, including third-party claims, claims for unearned premiums, and all claims of a guaranty association or foreign guaranty association, other than claims included in Class 2, for payment of covered claims or covered obligations of the insurer. It shall include claims of members of a health maintenance organization, if the member is liable to any provider for services provided under the plan; provided, however, claims of providers obligated by statute or agreement to hold members of a health maintenance organization harmless from liability for services provided under the plan shall be Class 6 claims. All claims under life insurance and annuity policies, whether for death proceeds, annuity proceeds, or investment values, shall be treated as loss claims. That 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, other than benefits or advantages recovered or recoverable in discharge of familial obligation of support or by way of succession at death or as proceeds of life insurance, or as gratuities. No payment by an employer to his or her employee shall be treated as a gratuity.

(4) Class 4. Claims of the federal government other than those claims included in Class 3.

(5) Class 5. Debts due employees for services, benefits, contractual or otherwise due arising out of such reasonable compensation to employees for services performed to the extent that they do not exceed two months of monetary compensation and represent payment for services performed within six months before the filing of the petition for liquidation or, if rehabilitation preceded liquidation, within one year before the filing of the petition for rehabilitation. Principal officers and directors shall not be entitled to the benefit of this priority except as otherwise approved by the liquidator and the court. This priority shall be in lieu of any other similar priority that may be authorized by law as to wages or compensation of employees.

(6) Class 6. Claims of any person, including claims of state or local governments, except those specifically classified elsewhere in this section. Class 6 includes claims of providers obligated by statute or agreement to hold members of a health maintenance organization harmless from liability for services provided under the plan, and claims of attorneys for fees and expenses owed them by a person for services rendered in opposing a formal delinquency proceeding. In order to prove the claim, the claimant must show that the insurer that is the subject of the delinquency proceeding incurred such fees and expenses based on its best knowledge, information, and belief, formed after reasonable inquiry indicating opposition was in the best interests of the person, was well-grounded in fact, and was warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that opposition was not pursued for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of the litigation.

(7) Class 7. Claims of any state or local government for a penalty or forfeiture, shall be allowed in this class only to the extent of the pecuniary loss sustained from the act, transaction, or proceeding out of which the penalty or forfeiture arose, with reasonable and actual costs occasioned thereby. The remaining amount of such claims shall be postponed to the class of claims under subdivision (9) of this section.

(8) Class 8. Claims filed late or any other claims other than claims under subdivisions (9) and (10) of this section.

(9) Class 9. Surplus or contribution notes, or similar obligations, and premium refunds on assessable policies. Payments to members of domestic mutual insurance companies shall be limited in accordance with law.

(10) Class 10. The claims of shareholders or other owners in their capacity as shareholders. (Added 1991, No. 45, § 2, eff. May 29, 1991; amended 2001, No. 71, § 14, eff. June 16, 2001.)