§ 27-14.3-46. Priority of distribution. (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 § 27-14.3-25(a)(12). 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:

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

(ii) Compensation for all authorized services rendered in the conservation, rehabilitation or liquidation;

(iii) Any necessary filing fees;

(iv) The fees and mileage payable to witnesses; and

(v) 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 these expenses shall be the reasonable expenses incurred by guaranty associations where the expenses are not payments or expenses which 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:

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

(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.

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 and 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.

(i) All claims under policies including claims of the federal or any state or local government for losses incurred, ("loss claims") including third party claims, claims for unearned premiums, and all claims of guaranty association for reasonable expenses other than those included in Class 2. All claims under life and health insurance and annuity policies, 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 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;

(ii) Notwithstanding the foregoing, 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;

(C) Obligations to insurers, insurance pools or underwriting associations and their claims for contribution, indemnity or subrogation, equitable or otherwise;

(D) Any claim which is in excess of any applicable limits provided in the insurance policy issued by the insolvent insurer;

(E) Any amount accrued as punitive or exemplary damages unless expressly covered under the terms of the policy; and

(F) Tort claims of any kind against the insurer, and claims against the insurer for bad faith or wrongful settlement practices.

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

(5) Class 5. Debts due to 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 (2) months of monetary compensation and represent payment for services performed within six (6) 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 which 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. 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 which 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. Surplus claims of any state or local government 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.

(8) Class 8. Surplus or contribution notes or similar obligations, premium refunds on assessable policies, interest on claims of Classes 1 through 7 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 other owners, or any other capacity except as they may be qualified in Class 3 or 6 above.

(b) If any claimant of this state, another state or foreign country shall be entitled to or shall receive a dividend upon his or her claim out of a statutory deposit or the proceeds of any bond or other asset located in another state or foreign country, unless such deposit or proceeds shall have been delivered to the domiciliary liquidator, then the claimants shall not be entitled to any further dividend from the receiver until and unless all other claimants of the same class, irrespective of residence or place of the acts or contracts upon which their claims are based, shall have received an equal dividend upon their claims, and after such equalization, such claimants shall be entitled to share in the distribution of further dividends by the receiver, along with and like all other creditors of the same class, wheresoever residing.

(c) 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.

History of Section. (P.L. 1993, ch. 248, § 1; P.L. 2001, ch. 247, § 2; P.L. 2001, ch. 367, § 2; P.L. 2003, ch. 396, § 1; P.L. 2008, ch. 475, § 80.)