Integrity Insurance Company was a New Jersey stock insurance company that issued various types of insurance policies as well as surety bonds. Integrity was declared insolvent by an order of liquidation dated March 24, 1987 under section 26 of the New Jersey Insurers Liquidation Act, N.J.S.A. 17:30C (hereinafter the "liquidation act"). The New Jersey Commissioner of Insurance was appointed liquidator. Pursuant to procedures established in N.J.S.A. 17:30C-20 and implemented by an order dated July 8, 1987, approximately 26,000 claims were filed against the Integrity estate in liquidation (hereinafter "Integrity"), of which an estimated 856 arose from surety bonds written by Integrity. Special masters were assigned to hear and decide these claims.
The Commissioner of Insurance, acting in his capacity as liquidator of Integrity, brought this motion to establish the priority status of surety bond claimants. The motion was on notice to all surety bond claimants and guaranty funds. If surety bond claimants are entitled to fifth priority in the distribution of the estate's assets, the liquidator and the claimants have indicated an unwillingness to participate in further proceedings. Thus, to establish their status before all claims have been presented and decided by the special masters, in the interest of judicial economy and with the intent that this issue be resolved without further expenditure of funds, this motion has been made, entertained and decided.
The issue in this motion is whether surety bonds are "insurance policies and insurance contracts" within the meaning of N.J.S.A. 17:30C-26(c)(4). If so, holders of surety bonds are entitled to a higher priority in the asset distribution of an insolvent insurer than that afforded to holders of "all other claims," N.J.S.A. 17:30C-26(c)(5). The statute, N.J.S.A. 17:30C-26(c), provides that the priority of distribution in a liquidation proceeding is as follows:
(1) Expenses of administration;
(2) Compensation of employees as provided in subsection (a) of this section;
(3) Claims for taxes and debts due to Federal or any state or local government which are secured by liens perfected prior to the commencement of delinquency proceedings;
(4) Claims by policyholders, beneficiaries and insurers arising from and within the coverage of and not in excess of the applicable limits of insurance policies and insurance contracts issued by the company and liability claims against insurers which claims are within the coverage of and not in excess of the applicable limits of insurance policies and insurance contracts issued by the company and claims presented by the New Jersey Property-Liability Insurance Guaranty Association and claims presented by any similar organization in another state.
The significance of this question is that claimants entitled to priority distribution under the fourth priority, N.J.S.A. 17:30C-26(c)(4) are far more likely to receive some payment of their claims than those in the fifth priority, N.J.S.A. 17:30C-26(c)(5).
The liquidator places reliance on Grode v. Mutual Fire, Marine & Inland Ins. Co., 132 Pa.Cmwlth. 196, 572 A.2d 798 (1990), a case of first impression in Pennsylvania. There, the court held surety bondholders were not holders of "claims against insurance policies." Id. 572 A.2d at 801. The Pennsylvania statute at issue, 40 Pa.Stat. § 221.44, provides:
The order of distribution of claims from the insurer's estate shall be in accordance with the order in which each class of claims is herein set forth. 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 subclasses shall be established within any class.