                              2018 IL App (1st) 170996

                                                                   SIXTH DIVISION
                                                            Opinion filed: June 1, 2018

                                 No. 1-17-0996
______________________________________________________________________________

                                      IN THE

                         APPELLATE COURT OF ILLINOIS

                                FIRST DISTRICT
______________________________________________________________________________

In re Liquidation of LUMBERMENS MUTUAL               )  Appeal from the

CASUALTY COMPANY,                                    )  Circuit Court of

                                                     )  Cook County

 (PEOPLE OF THE STATE OF ILLINOIS ex rel.            )

 JENNIFER HAMMER, Director of Illinois               )

 Department of Insurance,                            )

                                                     )

        Plaintiff-Appellant,                         )

                                                     )

 v.                                                  )  No. 12 CH 24227
                                                     )

 LUMBERMENS MUTUAL CASUALTY                          )

 COMPANY, an Illinois domestic property and casualty )

 mutual company, AMERICAN MANUFACTURERS              )

 MUTUAL INSURANCE COMPANY, an Illinois               )

 domestic property and casualty mutual company, and  )

 AMERICAN MOTORISTS INSURANCE                        )

 COMPANY, an Illinois domestic stock insurance       )

 company,                                            )

                                                     )

        Defendants,                                  )

                                                     )  Honorable

 (California Insurance Guarantee Association,        )  Kathleen M. Pantle,

 Claimant-Appellee)).                                )  Judge, Presiding.

______________________________________________________________________________

      PRESIDING JUSTICE HOFFMAN delivered the judgment of the court, with opinion.
      Justices Cunningham and Delort concurred in the judgment and opinion.
No. 1-17-0996


                                            OPINION


¶1     The People of the State of Illinois ex rel. Jennifer Hammer, Director of Insurance

(Director), brought this action against the defendants, Lumbermens Mutual Casualty Company,

American Manufacturers Mutual Insurance Company, and American Motorists Insurance

Company (collectively referred to as “Lumbermens”), seeking to liquidate Lumbermens’ assets.

The Director filed a petition for the interim allowance of claims for administrative expenses of

certain guaranty associations. The claimant, California Insurance Guarantee Association (CIGA),

objected on grounds that the petition improperly required it to reimburse itself from funds held in

a special deposit. The circuit court sustained CIGA’s objection, finding that California law

prohibited CIGA from using special deposits to pay for general administrative expenses. The

Director filed this interlocutory appeal pursuant to Rule 304(b)(2) (Ill. S. Ct. R. 304(b)(2) (eff.

Mar. 8, 2016)), seeking reversal of that order. For the reasons that follow, we affirm.

¶2     The facts giving rise to the instant appeal are not in dispute. Lumbermens is a multi-state

property and casualty insurance company organized under the laws of Illinois. Among other

things, it provided workers’ compensation insurance services to California residents. California

insurance law required Lumbermens to “deposit cash instruments” or “interest bearing

securities” at a California bank (hereinafter referred to as a “special deposit”), which would be

held in trust for the benefit of “workers in [that] state” as a condition to Lumbermens writing

workers’ compensation insurance in California. See Cal. Ins. Code § 11691 (West 2012). By

requiring insurance carriers to maintain such special deposits, California ensures that adequate

funds are available to pay compensable workers’ compensation claims in the event that the

insurer becomes insolvent.




                                                 2

No. 1-17-0996


¶3         For many years, Lumbermens was successful and earned profits from its insurance

operations and, by year-end 2000, it ranked among the top 20 largest property and casualty

insurance companies and the top 5 largest workers’ compensation insurers in the United States

with $2.7 billion in net premiums and more than $2 billion in surplus. The four largest states for

its insurance business were California, Illinois, New York, and Texas, which collectively

comprised more than 40% of the insurance group’s insurance business. Beginning in 2003,

however, Lumbermens began suffering from certain financial difficulties and, in July 2003, the

company agreed to operate under a runoff plan subject to “corrective orders” issued by the

Director. 1 See 215 ILCS 5/186.1 (West 2002). During this time, the Director issued over 500

corrective orders and Lumbermens’ liability was reduced from nearly $7 billion to just under $1

billion.

¶4         Nonetheless, in August 2012, the Director filed a complaint for rehabilitation pursuant to

section 192 of the Illinois Insurance Code (Code) (215 ILCS 5/192 (West 2012)). The Director

alleged that Lumbermens’ financial condition rendered further transaction of business by the

company hazardous to its policyholders, its creditors, and the public. The board of directors of

Lumbermens voted to submit voluntarily to rehabilitation proceedings, and on August 16, 2012,

an agreed order was entered appointing the Director rehabilitator of the company.

¶5         On March 8, 2013, the Director filed a complaint for liquidation with a finding of

insolvency pursuant to section 188 of the Code (215 ILCS 5/188 (West 2012)). On May 8, 2013,

the circuit court entered an order of liquidation with a finding of insolvency and authorized the




           1
          Pursuant to the runoff plan, Lumbermens could not issue any new policies; rather, it could only
collect premiums and pay claims under existing policies.



                                                   3

No. 1-17-0996


Director to liquidate Lumbermens. 2 The liquidation order triggered the statutory obligations of

state guaranty associations, such as CIGA, to pay the covered claims of Lumbermens’ insureds

located within their respective states.

¶6      On May 28, 2013, shortly after the circuit court entered the liquidation order, the

Commissioner of the California Department of Insurance issued an administrative order pursuant

to section 11698(a) of the California Insurance Code (Cal. Ins. Code § 11698(a) (West 2012)),

directing that the funds held in Lumbermens’ special deposit be immediately transferred to

CIGA and held in a segregated account. Tracking the language of section 11698.3(b), the

administrative order states, in pertinent part, as follows:

                         “AND, FURTHER, that CIGA shall use the proceeds of the workers’

                compensation deposit and any interest earned thereon *** solely in accordance

                with the provisions of CIC section 11698.3(b) for the payment of compensable

                workers’ compensation claims arising under the insolvent insurer’s policies and

                which are otherwise covered claims, *** and all expenses related thereto.”

Finally, the administrative order provides that “CIGA shall return the surplus to the Liquidator of

[the Lumbermens Estate].”

¶7      In the months following entry of the liquidation order, guaranty associations began

adjusting claims under Lumbermens’ policies and also began submitting claims to the Director

for reimbursement of administrative expenses related to the payment of covered claims.



        2
           By statute, the Director serves as the receiver of insolvent insurance companies domiciled in
Illinois. 215 ILCS 5/191 (West 2012). As the domiciliary receiver, the Director “shall be vested by
operation of law with the title to all property, contracts and rights of action of the company as of the date
of the order directing *** liquidation.” Id. Section 193 of the Code grants the Director broad powers to
“immediately proceed to liquidate the property, business, and affairs of the company.” 215 ILCS 5/193
(West 2012).



                                                     4

No. 1-17-0996


¶8      On November 19, 2014, the Director filed a petition for the interim allowance of claims

for administrative expenses of certain state guaranty associations pursuant to section 205(1)(a) of

the Code (215 ILCS 5/205(1)(a) (West 2014)). A key element in the Director’s petition was the

treatment of guaranty associations that had access to Lumbermens’ special deposits. Some

guaranty associations, such as CIGA, had access to the special deposit that Lumbermens posted

as a condition of entering that state’s insurance marketplace. Other guaranty associations,

however, did not have access to special deposits or, if they did, had either returned the deposit to

Lumbermens or already used the funds by paying covered claims. 3

¶9      Relevant here, the Director’s petition provides that the amount distributed to a guaranty

association for administrative expenses would be reduced by the amount that the guaranty

association has received, or can receive, from a special deposit. In other words, guaranty

associations such as CIGA would be required to exhaust the funds held in their state’s special

deposit before they could receive disbursements for administrative expenses from the general

assets of the Lumbermens estate. The Director sought to prevent guaranty associations from

receiving a preference by virtue of having access to a special deposit.

¶ 10    In January 2016, CIGA filed the instant objection to the Director’s petition. It argued

that, under California law, it could not use the special deposit to reimburse itself for general

administrative expenses such as rent, postage, telephone, lighting, cleaning, heating, and

electricity because those expenses are not “related” to the payment of a “compensable workers’

compensation claim.” More specifically, CIGA argued that, pursuant to section 11698.3(b) of the


        3
          The Director’s petition alleged that 9 of 29 guaranty associations whose claims are being
recommended for allowance at level (a) of the priority schedule have access to their state’s special
deposit. An additional eight guaranty associations, whose claims are either under review or have not yet
been submitted, also have access to their state’s special deposit. The record reflects that California holds a
Lumbermens special deposit in the amount of $167 million.



                                                      5

No. 1-17-0996


California Insurance Code, special deposits shall only be used to pay “compensable workers’

compensation claims” and “all expenses related thereto.” Cal. Ins. Code § 11698.3(b) (West

2012). According to CIGA, the phrase “all expenses related thereto” applies to “allocated loss

adjustment expenses” (ALAE), which are expenses attributable to the processing of specific

insurance claims. CIGA argued that the imposition of an exhaustion requirement is not only

contrary to California law, but defeats the purpose of the special deposit—namely, to protect

California residents who had workers’ compensation insurance with Lumbermens. Second,

CIGA argued that the Director is required under Illinois law to “promptly pay the guaranty

associations’ expenses out of estate assets within [her] control” (emphasis in original), and may

not discriminate or give preferential treatment to guaranty associations based on whether or not

they have access to a special deposit. The record reflects that CIGA had submitted over $8

million in general administrative expenses for which it sought reimbursement. 4

¶ 11   In response, the Director argued that special deposits are general assets of the

Lumbermens estate and, because she has title to those funds, it is appropriate for the circuit court

to approve her petition requiring guaranty associations with access to special deposits to

reimburse themselves for administrative expenses. The Director also disputed CIGA’s claim

regarding the use of funds held in California’s special deposit. She asserted that the phrase “all

expenses related thereto” in section 11698.3(b) of the California Insurance Code is plain and

unambiguous and applies to both ALAE and general administrative expenses incurred by CIGA

in adjusting workers’ compensation claims by Lumbermens policyholders.



       4
          According to the affidavit of Tony Kennedy, CIGA’s director of finance, as of March 31, 2016,
CIGA paid approximately $48 million in workers’ compensation claims and ALAE. He expects that
CIGA’s liability for covered claims and ALAE to reach $326 million, which far exceeds the $167 million
held in the special deposit.



                                                  6

No. 1-17-0996


¶ 12    Following a hearing on the objection, the circuit court entered a written order on March

22, 2017, finding that section 11698.3(b) of the California Insurance Code did not authorize

CIGA to use special deposit funds to reimburse itself for general administrative expenses. In so

holding, the court agreed with CIGA’s argument that the phrase “all expenses related thereto”

applies only to ALAE. In so holding, the court reasoned that section 11698.3(b) should be

“harmonized” with section 11698.02 of the California Insurance Code (id. § 11698.02), which

similarly restricts the use of special deposit proceeds to the payment of “compensable workers’

compensation claims” and “allocated claims expense[s] necessary to pay those claims.” It further

reasoned that the Director’s broad interpretation of section 11698.3(b) would produce a result

inconsistent with “clearly expressed legislative intent of [the California Insurance Code], as

millions of dollars would go to overhead costs of CIGA and not to insured workers of California

for whom the funds are reserved.” Therefore, the circuit court sustained CIGA’s objection to the

Director’s petition for the interim allowance of claims of certain guaranty associations for

administrative expenses. 5 The Director filed this interlocutory appeal pursuant to Rule 304(b)(2)

(Ill. S. Ct. R. 304(b)(2) (eff. Mar. 8, 2016)), seeking reversal of that order.

¶ 13    In urging reversal of the circuit court’s order, the Director contends that the funds held in

special deposits are “general assets” of the Lumbermens estate and, therefore, are subject to

distribution under the priority scheme set forth in section 205(1)(a) of the Code. In addition, she

argues that the circuit court erred in construing section 11698.3(b) of the California Insurance

Code.




        5
           Because the circuit court found that California law barred CIGA from using special deposit
funds to pay for general administrative expenses, it did not address whether the Director’s proposed
distribution was authorized under the priority scheme set forth in section 205(1)(a) of the Code (215 ILCS
5/205(1)(a) (West 2014)).


                                                    7

No. 1-17-0996


¶ 14   The disposition of this appeal hinges on our construction of articles XIII and XIII1/ 2 of

the Code, as well as article 1 of the California Insurance Code. Article XIII of the Code provides

the basic mechanism for the liquidation of Lumbermens. 215 ILCS 5/187 et seq. (West 2012).

Article XIII1/ 2 , commonly referred to as the Uniform Insurers Liquidation Act (UILA), governs

“the affairs of delinquent domestic companies” that have assets and liabilities in multiple states.

215 ILCS 5/221.1 et seq. (West 2012). Meanwhile, article 1 of the California Insurance Code

governs special deposits by workers’ compensation insurers. “Because the construction of a

statute presents a question of law, we review the underlying judgment de novo.” Manago v.

County of Cook, 2017 IL 121078, ¶ 10. “In construing a statute, our goal is to effectuate the

intent of the legislature, with the plain and unambiguous language enacted providing the most

reliable indicator of that intent.” Id. Whenever possible, courts must enforce clear and

unambiguous statutory language as written, without reading in unstated exceptions, conditions,

or limitations. People ex rel. Glasgow v. Carlson, 2016 IL 120544, ¶ 17.

¶ 15   In order to put this dispute into perspective, we begin our analysis by setting forth the

statutory framework governing the liquidation of multi-state insurance companies. The

liquidation of insurance companies doing business in multiple states presents unique problems

that have been alleviated in many states, to some extent, by the adoption in one form or another

of the UILA. The UILA was created to facilitate coordination among the states for the orderly

resolution of insolvent insurance companies. Because insurers are barred from seeking federal

bankruptcy protection, the UILA establishes an alternative statutory scheme and provides a

uniform method for processing claims against, and distributing assets of, insolvent insurance

companies with assets and policyholders in multiple jurisdictions throughout the United States.

See 215 ILCS 5/221.10 (West 2012) (the purpose of the UILA “is to promote uniformity in the



                                                8

No. 1-17-0996


liquidation, rehabilitation, reorganization or conservation of insurers doing business in more than

one state.”). One of the core “embarrassments” that the UILA sought to remedy was “the

ineffective administration of the liquidation process caused by differences in the laws of the

various States regarding the title and right to possession of the property of a defunct nonresident

insurer.” Murphy Co. v. Reserve Insurance Co., 54 N.Y.2d 69, 76-77 (1981). The UILA employs

two primary mechanisms to accomplish its uniform scheme. First, it provides a uniform set of

laws to determine issues such as preference and control and title to assets. Second, and more

relevant to the analysis here, the UILA establishes a receivership system to enhance cooperation

between reciprocal states in which the insolvent insurance company did business.

¶ 16    Under the UILA, when an insurer is declared insolvent, a domiciliary receiver will be

appointed to assume possession and control of the insurer and its assets in the state where the

insurer is incorporated or organized. 215 ILCS 5/221.1(4) (West 2012). The domiciliary receiver

is then entitled to recover the assets, “except as to special deposits,” of the insurer in reciprocal

states. 6 Id. § 221.2. If the insurer has sufficient assets located within another state, however, an

ancillary receiver may be appointed in that state with the sole right to recover the assets of the

insurer located within that state and to settle certain claims related to such domestic assets of the

insurer that are under the ancillary receiver’s control. Id. Under the UILA, ancillary proceedings

in reciprocal states are intended to resolve claims related exclusively to special deposit claims

and secured claims in those states, with all remaining assets to be transferred to the domiciliary

receiver. Id. § 221.8.




        6
         “Reciprocal State” is defined by the UILA as any other state in which the “substance and effect
the provisions of Sections 221.1 to 221.10, both inclusive are in force.” Id. § 221.1(1)(b). Both parties
acknowledge that California has enacted the UILA and is a reciprocal state.



                                                   9

No. 1-17-0996


¶ 17   Illinois’s policy regarding the domiciliary receiver’s authority over the general assets of

an insolvent insurance company’s estate, and the ancillary receiver’s authority over special

deposits, is consistent with the policy in California, which adopted the UILA in article 14.3 of

the California Insurance Code. See Cal. Ins. Code § 1064.1 et seq. (West 2012). The provisions

of California’s UILA concerning interstate relations mimic those of Illinois’s. By adopting the

UILA, both states seek to secure equal treatment for all creditors of defunct insurance

companies, wherever situated.

¶ 18   With this framework in mind, we now turn to the Director’s contention that funds held in

special deposits are “general assets” of the Lumbermens estate and, thus, subject to the

distribution scheme set forth in section 205(1) of the Code. In support of her argument, the

Director cites to section 187(6) of the Code, which defines “assets” as “all deposits and funds of

a special or trust nature.” 215 ILCS 5/187(6) (West 2012). The definition relied upon by the

Director, however, is taken from article XIII of the Code and is expressly limited to the

provisions of that article. See id. (“The word ‘assets’ as used in this Article includes all deposits

and funds of a special or trust nature.” (Emphasis added.)). Because Lumbermens is a domestic

insurance company with assets and liabilities in multiple states, and since the special deposit in

question is located in California, a reciprocal state, the provisions of article XIII1/ 2 (i.e., the

UILA) apply. See 215 ILCS 5/221.1 (“this Article shall apply to the administration by the

Director of the affairs of delinquent domestic companies with respect to matters affecting or

related to reciprocal states”). Therefore, we rely upon the definition of “general assets” appearing

in the UILA.

¶ 19   Section 221.1(6) of the UILA defines “[g]eneral [a]ssets” as “all property, real or

personal, not specifically *** deposited as security or otherwise encumbered, and as to such



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No. 1-17-0996


specifically encumbered property[,] the term includes all [funds held] in excess of the amount

necessary to discharge the sum or sums secured.” (Emphasis added.) Id. § 221.1(6). The funds in

question in this case are held in a special deposit as security for the payment of workers’

compensation claims in California and, based on the statutory language, are expressly excluded

from the general assets of the Lumbermens estate. Nowhere in the definition of “general assets”

in section 221.1(6) does it state that funds held in special deposits are included within the ambit

of the term. As a result, because these funds were “deposited as security” for the special benefit

of local policyholders in California, they are not “general assets” of the Lumbermens estate. See

State ex rel. Ingram v Reserve Insurance Co., 303 N.C. 623, 629 (1981) (special deposits

“constitute a trust for the benefit of *** policyholders and are not assets of the insolvent

insurance company” (emphasis in original)).

¶ 20   Indeed, this construction comports with other provisions of the UILA, which routinely

distinguishes between general assets and special deposits, and recognizes the right of ancillary

receivers (not domiciliary receivers) to liquidate claims against special deposits. For example,

unlike general assets, which are subject to the priority scheme set forth in section 205(1) of the

Code, funds held in special deposits must be distributed “in accordance with the provisions of the

statutes requiring the creation and maintenance of such special deposits.” 215 ILCS 5/221.6

(West 2012). Thus, whatever section 11698.3 of the California Insurance Code provides relating

to the priority of special deposit claims, controls. Moreover, section 221.8 of the Code

distinguishes between general assets and special deposits by providing that, only after all claims

have been paid, does any surplus or excess amount remaining in a special deposit become part of

the general assets of the estate and shall be transferred to the domiciliary receiver. 215 ILCS

5/221.8 (West 2012). Applying the Director’s broad understanding of the term “general assets”



                                                11

No. 1-17-0996


to include special deposits would render the provisions in sections 221.6 and 221.8, meaningless.

We conclude, therefore, that the funds held in special deposits are not general assets of the

Lumbermens estate.

¶ 21    Having found that the funds held in special deposits are not general assets of the

Lumbermens estate, resolution of this appeal requires us to address two issues: First, we must

address the parties’ disagreement as to whether section 11698.3 of the California Insurance Code

(Cal. Ins. Code § 11698.3 (West 2012)) bars CIGA from using special deposit funds to pay for

general administrative expenses. Second, we must decide whether the Director’s petition, which

seeks to impose an exhaustion requirement on some guaranty associations, violates the priority

scheme set forth in section 205(1)(a) of the Code (215 ILCS 5/205(1)(a) (West Supp. 2017)). We

address each issue in turn.

¶ 22    To determine the proper construction of section 11698.3 of the California Insurance

Code, we must look to California case law. Magee v. Huppin-Cleck, 279 Ill. App. 3d 81, 87

(1996). A search of California cases reveals that its courts have not, as yet, construed the statute.

“Where a statute has not been construed by the courts of the State in which it was enacted, a

court of another jurisdiction in which a question with respect to the effect of such statute arises

may place its own construction thereon.” Ray Schools-Chicago, Inc. v. Cummins, 12 Ill. 2d 376,

380 (1957). However, “[b]ecause rules for statutory construction are [a] means for ascertaining

substance, those employed in the enacting State are most relevant.” Magee, 279 Ill. App. 3d at

88. Accordingly, in construing section 11698.3 of the California Insurance Code, we turn to

principles of statutory construction adhered to by California courts. See id. (applying the

“principles of statutory construction adhered to by Oregon courts” to construe an Oregon

statute).



                                                 12

No. 1-17-0996


¶ 23   The California Supreme Court has set forth the following principles for interpreting

statutes. The primary objective in construing a statute is to ascertain and give effect to the

legislature’s intent. McCarther v. Pacific Telesis Group, 48 Cal. 4th 104, 110 (2010). Legislative

intent is best derived from the language of the statute itself, which, if unambiguous, should be

enforced as written, without resorting to extrinsic aids for construction. Diamond Multimedia

Systems, Inc. v. Superior Court, 19 Cal. 4th 1036, 1047 (1999). Additionally, the entire statute

must be read as a whole, considering all relevant parts. McCarther, 48 Cal. 4th at 110. Each

word, clause, and sentence of a statute must be given a reasonable meaning, if possible, and no

provision should be rendered useless or superfluous. Id. As a general rule, courts accord

deference to the interpretation of a statue by the agency charged with its administration. Ste.

Marie v. Riverside County Regional Park and Open-Space District, 46 Cal. 4th 282, 292 (2009).

However, an agency’s interpretation is not binding and will be rejected if it is erroneous. Id.

¶ 24   CIGA was created in 1969 with the purpose of protecting residents in California who

make claims under policies issued by insurers that have become insolvent. California Insurance

Guarantee Ass’n v. W.C.A.B., 112 Cal. App. 4th 358, 363 (2003). It “issues no policies, collects

no premiums, makes no profits, and assumes no contractual obligations.” California Insurance

Guarantee Ass’n v. Workers’ Compensation Appeals Board, 153 Cal. App. 4th 524, 532 (2007).

Rather, its role is limited to paying the amount of covered claims of an insolvent insurer. Id.

Because CIGA is a statutory entity, it depends on the California Insurance Code for its existence

and for a definition of the scope of its powers, duties, and protections. California Insurance

Guarantee Ass’n, 112 Cal. App. 4th at 363-64.




                                                 13

No. 1-17-0996


¶ 25   Here, the parties dispute the interpretation of section 11698.3 of the California Insurance

Code, which governs CIGA’s use of special deposit funds where a member insurer is subject to

an order of liquidation with a finding of insolvency. Section 11698.3 provides as follows:

                       “(a) If the insurer is a member insurer of [CIGA] and has been the subject

                of an order of liquidation or receivership with a finding of insolvency which has

                been entered by a court of competent jurisdiction [CIGA] then becomes obligated

                to pay compensable workers’ compensation claims arising under the insurer’s

                policies, which are otherwise “covered claims” ***. The commissioner shall

                immediately take control or possession of the deposit required pursuant to Section

                11691 and shall transfer the deposit to [CIGA].

                       (b) [CIGA] shall use the proceeds of the deposit and any interest earned

                thereon, for the payment of compensable workers’ compensation claims arising

                under the insolvent insurer’s policies and which are otherwise covered claims,

                *** and all expenses related thereto.” (Emphasis added.) Cal. Ins. Code

                § 11698.3(a)-(b) (West 2012).

The Director argues, as she did before the circuit court, that the phrase “all expenses related

thereto” authorizes CIGA to use special deposit funds to pay for all expenses, including general

administrative expenses. We disagree.

¶ 26   In our view, the words in section 11698.3(b) are clear, and the language is not susceptible

to more than one reasonable interpretation. Section 11698.3(b) plainly states that special deposit

proceeds must be used solely for the payment of compensable workers’ compensation claims

arising under Lumbermens’ policies and all expenses related thereto. The legislature’s use of the

phrase “related thereto” limits the type of expenses that CIGA may pay to those directly related



                                                14

No. 1-17-0996


to the payment of compensable workers’ compensation claims. As noted by CIGA, these types of

expenses are commonly referred to as “allocated claims expenses,” “loss adjustment expenses,”

and “allocated loss adjustment expenses” or ALAE. See Woodliff v. California Insurance

Guarantee Ass’n, 110 Cal. App. 4th 1690, 1694 (2003) (“In the insurance industry, the phrase

‘loss adjustment expenses’ generally means the expense incurred by the insurer to investigate

and settle a claim.”); 20th Century Insurance Co. v. Garamendi, 8 Cal. 4th 216, 250 (1994)

(defining allocated loss adjustment expenses or ALAE as “the costs associated with the

adjustment of specific claims”). Expenses related to the payment of compensable workers’

compensation claims typically includes, for example, court costs; attorney fees; costs of

undercover and detective services; fees of independent medical examiners; costs of employing

expert witnesses; court reporter costs; and costs of depositions. See, e.g., Huff v. Integral

Insurance Co., 354 S.W.3d 228, 231-32 (2011); Planet Insurance Co. v. Mead Reinsurance

Corp., 789 F.2d 668, 672 (9th Cir. 1986). General administrative expenses, in contrast, are

“expense[s] incurred in running a business, as distinguished from *** expense[s] incurred in

manufacturing or selling; overhead. Examples include executive and clerical salaries, rent,

utilities, and legal and accounting services.” Black’s Law Dictionary (10th ed. 2014); see also

Huff, 354 S.W.3d at 232 (noting that “the salaries of officials, administrators or other employees

or normal overhead charges such as rent, postage, telephone, lighting, cleaning, heating or

similar expenses” are excluded from the definition of ALAE). Put simply, general administrative

expenses are not related to the payment of a specific workers’ compensation claim. As a

consequence, CIGA is not authorized to use the funds held in the special deposit to pay for

general administrative expenses.




                                               15

No. 1-17-0996


¶ 27   The Director argues that, if the California legislature sought to limit the type of expenses

payable from special deposit proceeds, it could have easily done so by removing the phrase “all

expenses related thereto” and inserting the phrase “allocated claims expense” as it did in section

11698.02 of the California Insurance Code. See Cal. Ins. Code § 11698.02 (West 2012) (“The

proceeds of the deposit *** shall be used solely to pay compensable workers’ compensation

claims under the insured or reinsured policies, allocated claims expense necessary to pay those

claims, and expenses connected with all proceedings *** in furtherance of the payment of those

claims ***.” (Emphasis added.)). According to the Director, the phrase “all expenses related

thereto” is broad and evinces the legislature’s intent that special deposit proceeds be used to pay

for both ALAE and general administrative expenses. The Director appears to argue that if the

legislature uses certain words in one instance and different words in another, it intends different

results. We are not persuaded.

¶ 28   As noted by CIGA, the California Insurance Code uses several terms interchangeably

when referring to the types of expenses payable from special deposit funds. See, e.g., id.

§ 1063.2(d) (“allocated claims expense”); id. § 11691(a)(1) (“loss adjustment expenses”); id.

§ 11698.02 (“allocated claims expense” and “expenses connected with all proceedings”). All of

these phrases, however, mean the same thing—namely, expenses related to the investigation and

settlement of covered claims. We can discern no reason why the minor differences in the

statutory phrases “expenses related thereto,” “expenses connected with all proceedings,” “loss

adjustment expenses,” and “allocated claims expense” should require different interpretations.

See Delaney v. Baker, 20 Cal. 4th 23, 41-42 (1999) (where the same, or substantially the same,

words or phrases appear in different parts of the same statute they will be given a generally

accepted and consistent meaning, where the legislative intent is not clearly expressed to the



                                                16

No. 1-17-0996


contrary). Our reading does not raise concerns about redundancy or surplusage sometimes

associated with reading dissimilar terms to mean the same thing. Only one reasonable

interpretation of these phrases exists—CIGA may use special deposit funds to pay for expenses

related to the payment of covered claims, which includes compensable workers’ compensation

claims. By giving the same meaning to the phrases “all expenses related thereto,” “allocated

claims expense,” and “loss adjustment expenses,” we give meaning and effect to both sections

11698.3(b) and 11698.02 of the California Insurance Code.

¶ 29   In light of the California Insurance Code’s salutary policy of protecting policyholders of

insolvent insurers, which is clearly and repeatedly expressed throughout its many articles, we

reject any argument that the California legislature intended section 11698.3(b) to authorize

CIGA to use special deposit funds to pay for general administrative expenses. Accordingly, we

hold that section 11698.3(b) of the California Insurance Code does not authorize CIGA to use

funds held in Lumbermens’ California special deposit to pay for general administrative expenses.

¶ 30   Next, we address the issue of whether the Director’s petition requiring CIGA to

reimburse itself for general administrative expenses from Lumbermens’ California special

deposit violates the priority scheme set forth in section 205(1)(a) of the Code (215 ILCS

5/205(1)(a) (West Supp. 2017)).

¶ 31   Article XIII of the Code provides the basic mechanism for the liquidation of

Lumbermens. Our supreme court has long recognized that the object of article XIII is to secure a

ratable distribution of an insolvent insurance company’s assets. People ex rel. Jones v. Chicago

Lloyds, 391 Ill. 492, 498 (1945), rev’d on other grounds, Morris v. Jones, 329 U.S. 545 (1947).

It was designed to provide a comprehensive, orderly and efficient procedure for liquidating

insurance companies while protecting the rights of interested parties. In re Liquidation of



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No. 1-17-0996


Security Casualty Co., 127 Ill. 2d 434, 447 (1989). To avoid preferential treatment of creditors,

article XIII protects individual policyholders and other claimants without permitting certain

classes of creditors to place themselves in a superior position. In re Liquidation of Coronet

Insurance Co., 298 Ill. App. 3d 411, 418 (1998). Section 205(1) of the Code establishes the

following priority of distribution of an insolvent insurance company’s assets:

                       “(a) The costs and expenses of administration, including, but not limited to

                the following:

                                 (i) The reasonable expenses of the Illinois Insurance Guaranty

                       Fund *** and of any similar organization in any other state, including

                       overhead, salaries, and other general administrative expenses allocable to

                       the receivership (administrative and claims handling expenses and

                       expenses in connection with arrangements for ongoing coverage) ***.

                                                       ***

                       (b) Secured claims *** that are secured by liens perfected prior to the

                filing of the complaint.

                       (c) Claims for wages actually owing to employees for services rendered

                within 3 months prior to the date of the filing of the complaint, ***.

                       (d) Claims by policyholders, beneficiaries, insureds and liability claims

                against insureds covered under insurance policies and insurance contracts issued

                by the company ***.

                       (e) Claims by policyholders, beneficiaries, and insureds, the allowed

                values of which were determined by estimation under paragraph (b) of subsection

                (4) of Section 209.



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No. 1-17-0996


                         (f) Any other claims due the federal government.

                         (g) All other claims of general creditors ***.

                         (h) Claims of guaranty fund certificate holders, guaranty capital

                 shareholders, capital note holders, and surplus note holders.

                         (i) Proprietary claims of shareholders, members, or other owners.”

                 (Emphasis added.) 215 ILCS 5/205(1)(a)-(i) (West Supp. 2017).

Section 205(1) establishes a rule of absolute priority in which no succeeding class of claimants

may share in the distribution of assets until the allowed claims of all senior interests have been

satisfied in full. In re Liquidations of Reserve Insurance Co., 122 Ill. 2d 555, 558 (1988).

¶ 32   The language of section 205(1)(a) is plain, unambiguous, and expansive. It states that

guaranty associations are entitled to recover their “reasonable expenses” including “overhead,

salaries, and other general administrative expenses,” (215 ILCS 5/2015(1)(a)(i) (West Supp.

2017)), which are precisely the types of expenses for which CIGA seeks reimbursement from the

general assets of the Lumbermens estate. Nothing in section 205(1)(a) requires the exhaustion of

a special deposit fund before guaranty associations are entitled to a distribution from the estate

for the payment of general administrative expenses.

¶ 33   The Director nevertheless seeks to circumvent our rules of statutory construction by

improperly adding a condition—i.e., an exhaustion requirement—to section 205(1)(a)(i)’s clear

and unambiguous terms. If the legislature intended to impose an exhaustion requirement on

guaranty associations with access to special deposits, it could have readily done so. Indeed,

during the pendency of this appeal, section 205 was amended by the Illinois General Assembly

(see Pub. Act 100-410, § 5 (eff. Aug. 25, 2017)), and is now far more detailed than it once was.7


       7
           Section 205(3) states that the “changes made in this Section by this amendatory Act of the 100th


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No. 1-17-0996


Prior to the amendment, section 205(1)(a)(i) simply provided that guaranty associations were

entitled to reimbursement of “[t]he costs and expenses of administration.” Section 205 now

provides that guaranty associations may recover “[t]he reasonable expenses ***, including

overhead, salaries, and other general administrative expenses allocable to the receivership

(administrative and claims handling expenses and expenses in connection with arrangements for

ongoing coverage).” 215 ILCS 5/2015(1)(a)(i) (West Supp. 2017). The expansive language

added to section 205(1)(a)(i) refutes any claim that the legislature intended to create a limitation

on guaranty associations that have access to funds in a special deposit.

¶ 34    The Director contends, however, that absent an exhaustion requirement, guaranty

associations such as CIGA, which has access to special deposits, will place themselves in a

superior position over guaranty associations in states that have little or no funds in their special

deposits. The Director asserts that her proposed plan “equalizes” treatment of all guaranty

associations by preventing CIGA from using the special deposit solely for the benefit of

Lumbermens’ policyholders in California. We disagree.

¶ 35    This court considered and rejected a similar argument in In re Conservation of Alpine

Insurance Co., 318 Ill. App. 3d 457 (2000). In that case, the Director engaged in discussions with

Alpine regarding a possible plan for rehabilitation. Alpine proposed dividing its policyholders

into two classes: (1) those having insurance through Alpine (Alpine-only insured); and (2) those

having additional insurance through other carriers (Alpine multiple policy insureds). According

to the plan, Alpine would first pay the claims of Alpine-only insureds. As to the other class, the

proposed plan required that they exhaust their other insurance coverage before seeking to recover


General Assembly apply to all liquidation, *** proceedings that are pending on the effective date of this
amendatory Act *** and to all future liquidation, rehabilitation, or conservation proceedings.” 2015 ILCS
5/205(3) (West Supp. 2017).



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No. 1-17-0996


on Alpine’s policies. Id. at 459. Alpine argued that its plan was the only way to ensure that the

claims of its policyholders would be paid in full. The circuit court entered summary judgment in

favor of the Director and Alpine appealed. Id. at 460. On appeal, this court affirmed. We

reasoned that:

                           “Alpine’s proposed rehabilitation plan creates a new class of claimants

                 altogether, namely Alpine multiple policy insureds, and subordinates those claims

                 to those of Alpine-only insureds in direct contravention of the Illinois supreme

                 court’s holding that ‘[s]ection 205(1) establishes a rule of absolute priority.’

                 [Citation.] Section 205(1)(d) simply does not provide for the subordination of the

                 claims of multiple policy claimants to those of single policy claimants. In other

                 words, the Code does not provide for the punishment of multiple policy insureds

                 based on the fortuitous circumstance of their seeking out additional coverage.” Id.

                 at 462.

We concluded that Alpine’s proposed rehabilitation plan was “impermissibly discriminatory and

therefore illegal.” Id. at 463.

¶ 36    Similarly, here, the effect of the Director’s petition—imposing an exhaustion requirement

on guaranty associations with access to special deposit funds—is to subordinate their claims for

administrative expenses to the claims of guaranty association without access to special deposits.

By imposing an exhaustion requirement on some guaranty associations, but not others, the

Director has effectively created a new, sub-class of guaranty associations, which contradicts the

statutory goal of “equivalent distribution to creditors of the same class of priority.” See In re

Liquidation of Security Casualty Co., 127 Ill. 2d at 444; In re Liquidation of Pine Top Insurance

Co., 322 Ill. App. 3d 693, 705 (2001).



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No. 1-17-0996


¶ 37   We are not insensitive to the plight of guaranty associations and citizens of states who

have and will continue to suffer financially as a result of the lack of special deposits. However,

this court is not tasked with evaluating and setting public policy (Clark v. Children’s Memorial

Hospital, 2011 IL 108656, ¶ 79); that job is reserved for our respective, duly elected, legislatures

(Blumenthal v. Brewer, 2016 IL 118781, ¶ 80). Indeed, we lack any objective standards or

procedures to assist us in weighing the relative merits of such widely divergent public policy

interests. See id. ¶ 77 (the legislature alone possesses the necessary investigative and fact-finding

abilities). The Director’s dissatisfaction with the UILA and article XIII does not furnish authority

for us to rewrite this legislation. We decline the Director’s invitation to look outside the plain

and unambiguous statutory language to weigh the merits of the allegedly competing public

policy interests underlying article XIII and the UILA.

¶ 38   For the foregoing reasons, we affirm the judgment of the circuit court of Cook County.

¶ 39   Affirmed.




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