(a) 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. Once such funds are retained by the liquidator and approved by the court, the insurer’s estate shall have no further liability to members of that class except to the extent of the retained funds and any other undistributed funds. No subclasses shall be established within any class, except as provided in subdivision (1) of subsection (a) of § 38a-923. No claim by a shareholder, policyholder or other creditor shall be permitted to circumvent the priority classes through the use of equitable remedies. The order of distribution of claims shall be:

(1) Class 1. The costs and expenses of administration expressly approved by the receiver, including but not limited to the following: (A) The actual and necessary costs of preserving or recovering the assets of the insurer; (B) compensation for all services rendered in the conservation, rehabilitation or liquidation; (C) any necessary filing fees; (D) the fees and mileage payable to witnesses; and (E) authorized reasonable attorney’s fees and other professional services rendered in the conservation, rehabilitation or liquidation.

(2) Class 2. The administrative expenses of guaranty associations. For purposes of this section such expenses shall be those 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, but not limited to, 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: (A) The expenses are not expenses required to be paid or incurred as direct policy benefits by the terms of the policy, and (B) 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. 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 the liquidator shall secure from each of the associations receiving disbursements pursuant to this section an agreement to return to the liquidator such disbursement, 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 for payment of covered claims or covered obligations of the insurer. All claims of a guaranty association for reasonable expenses other than those included in class 2. All claims under life and health insurance policies, annuity contracts and funding agreements, whether for death proceeds, health benefits, 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 obligations 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 employee shall be treated as a gratuity. Notwithstanding the provisions of this subdivision, the following claims shall be excluded from class 3 priority: (A) Obligations of the insolvent insurer arising out of reinsurance contracts; (B) obligations incurred after the expiration date of the insurance policy or after the policy has been replaced by the insured or canceled at the insured’s request or after the policy has been canceled as provided in this chapter. Notwithstanding the provisions of this subdivision, earned premium claims on policies, other than reinsurance agreements, shall not be excluded; (C) obligations to insurers, insurance pools or underwriting associations and their claims for contribution, indemnity or subrogation, equitable or otherwise; and (D) any claim which is in excess of any applicable limits provided in the insurance policy issued by the insolvent insurer.

(4) Class 4. Claims of the federal government except those under 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. Officers and directors shall not be entitled to the benefit of this priority, except as otherwise approved by the liquidator and the court. Such priority shall be in lieu of any other similar priority which may be authorized by law as to wages or compensation of employees.

(6) Class 6. Claims of general creditors, including claims of ceding and assuming companies in their capacity as such, and claims against the insurer for liability for bodily injury or for injury to or destruction of tangible property which are not under policies.

(7) Class 7. Claims of any state or local government, except those under class 4. Claims of any such governmental body for a penalty or forfeiture, but 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 remainder of such claims shall be postponed to the class of claims under subdivision (8) of this subsection.

(8) Class 8. Surplus or contribution notes, or similar obligations, and premium refunds on assessable policies, interest on claims of classes 1 to 7, inclusive, and any other claims specifically subordinated to this class.

(9) Class 9. Claims of shareholders or other owners arising out of their capacity as shareholders or owners, or arising in any other capacity or facts except as they may be qualified in class 3 or 4.

(b) Upon the declaration of a dividend, the receiver shall apply the amount of the dividend against any indebtedness owed to the insurer by the person entitled to the dividend. There shall be no claim allowed for any deductible charged by a guaranty association or entity performing a similar function.

(c) Every claim under a separate account agreement providing, in effect, that the assets in the separate account shall not be chargeable with liabilities arising out of any other business of the insurer shall be satisfied out of the assets in the separate account equal to the reserves maintained in such account for such agreement and, to the extent, if any, not fully discharged thereby, shall be treated as a class 3 claim against the estate. For the purposes of this section, “insurer’s estate” means the general assets of such company less any assets held in separate accounts that, pursuant to § 38a-433 or 38a-459, are not chargeable with liabilities arising out of any other business of the insurer.