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The recent case of Zurich v. Lexington Coal, from a substantive standpoint, involves a Chapter 11 Bankruptcy, but it still might prove instructive for underwriters of workers’ compensation policies.

In  Zurich v. Lexington Coal, the insurance company sought priority in Bankruptcy Court over unsecured creditors on $14.5 million in prospective payments that it would eventually have to make on claims brought under an old workers’ compensation insurance policy with Lexington Coal.  The policy in question was a  “deductible policy”, where claims are paid in full by the insured with the deductibles later being recouped from the debtor).  Under that policy, Zurich agreed to pay the employer’s future workers’ compensation liabilities, with the employer agreeing to reimburse it for a percentage of such pursuant to the terms of the contract.

The issue at hand was whether the insurance company’s future payments constituted “administrative expenses” under the Bankruptcy Act, thereby affording their estimated future expenses priority over the debtor’s obligations to unsecured creditors under 11 U.S.C. 502 (b)(1)(A). In other words, did the creditor’s estimated future expenses under a workers’ compensation policy arise at the time the contract was made, or when those financial obligations actually come to fruition?

The United States Supreme Court elected not to grant Zurich’s petition for writ of certiorari, effectively affirming the United States 6th Circuit Court, the District Court and the Bankruptcy court all of which had previously determined that the administrative expense priority extends only to actual payments made during the debtor’s bankruptcy case, even if later payments arise in connection with a contractual obligation that originated prior to the bankruptcy claim.

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