Kentucky Group Self-Insurance Guaranty Fund v. Sharon P. Clark, Commissioner of the Kentucky Department of Insurance, in Her Capacity as rehabilitator/liquidator of Aik Comp

• Court: Court of Appeals of Kentucky
• Decided: October 12, 2023
• Docket: 2022 CA 001122
• Status: Unknown

Opinion

RENDERED: OCTOBER 13, 2023; 10:00 A.M. NOT TO BE PUBLISHED

Commonwealth of Kentucky Court of Appeals NO. 2022-CA-1122-MR

KENTUCKY GROUP SELF- INSURANCE GUARANTY FUND APPELLANT

APPEAL FROM FRANKLIN CIRCUIT COURT v. HONORABLE THOMAS D. WINGATE, JUDGE ACTION NO. 04-CI-01067

SHARON P. CLARK, COMMISSIONER OF THE KENTUCKY DEPARTMENT OF INSURANCE, IN HER CAPACITY AS REHABILITATOR/LIQUIDATOR OF AIK COMP APPELLEE

OPINION AFFIRMING

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BEFORE: THOMPSON, CHIEF JUDGE; GOODWINE AND TAYLOR, JUDGES.

TAYLOR, JUDGE: The Kentucky Group Self-Insurance Guaranty Fund

(Guaranty Fund) brings this appeal from a July 5, 2022, Order of Liquidation entered by the Franklin Circuit Court as concerns a workers’ compensation self-

insured group fund known as AIK Comp.1 We affirm.

The procedural history of this case is lengthy and convoluted, so we

will only recite those facts necessary to resolution of this appeal. In August 2004,

the Executive Director of the Kentucky Office of Insurance filed a petition for

rehabilitation of AIK Comp and requested the Court to appoint him rehabilitator.2

AIK Comp was a workers’ compensation self-insurance group, which was

composed of member employers.3 Each group member paid assessments to AIK

Comp to cover workers’ compensation liabilities and was jointly and severally

liable for AIK Comp’s workers’ compensation liabilities. AIK Comp was placed

into rehabilitation in August of 2004 due to the group’s financial distress and

inability to meet its workers’ compensation liabilities. The Guaranty Fund was

named a party in the rehabilitation action and is a statutorily created entity that

provides coverage for unpaid workers’ compensation liabilities of an insolvent

self-insurance group, like AIK Comp.

1 AIK Comp is an unincorporated association and a self-insured group insurance fund which consisted of various employers who agreed to jointly and severally pool their workers’ compensation liabilities. See Kentucky Revised Statutes (KRS) 342.350(4). 2 During the course of the rehabilitation action, there were different rehabilitators appointed by the circuit court, with Sharon P. Clark, Commissioner of the Kentucky Department of Insurance, being the last. 3 There were approximately 3,800 members of AIK Comp prior to the filing of the rehabilitation action.

-2- During the rehabilitation action, the rehabilitator proposed a

reorganization and assessment plan (2005 Reorganization and Assessment Plan),

which was approved by the circuit court in its December 8, 2005, Findings of Fact

and Conclusions of Law and Order. Therein, AIK Comp’s members were ordered

to pay assessments, on a pro rata basis, to address the financial deficit of AIK

Comp. Specifically, each member would make a cash payment representing 80

percent of its pro rata share of the deficit and execute callable promissory notes for

the remaining 20 percent. Also, upon the cash payment and execution of the

callable promissory note, the member would be released from its joint and several

liability to AIK Comp. However, the member would still be liable for any future

assessments to cover claims.

Thereafter, the rehabilitator proposed a 2009 Amendment to the 2005

Reorganization and Assessment Plan due to the need for additional funds to meet

the workers’ compensation liabilities of AIK Comp. By Findings of Fact,

Conclusions of Law, and Order entered February 23, 2010, the circuit court

approved the 2009 Amendment. Thereunder, members could voluntarily pay the

callable promissory notes in exchange for a full and final release of liability to AIK

-3- Comp, which included not being liable for any future assessments. This order was

not challenged by the Guaranty Fund.4

Then, in 2014, the rehabilitator again needed additional funds to pay

the workers’ compensations liabilities of AIK Comp and sought to require the

members to pay their callable promissory notes. By Findings of Fact, Conclusions

of Law, and Order entered July 29, 2014, the circuit court determined that the

rehabilitator demonstrated a need for additional funds and mandated that members,

who had not previously paid the callable promissory notes, were obligated to do so.

There was no appeal of this order by the Guaranty Fund.

The financial distress of AIK Comp finally culminated with the

rehabilitator filing a petition for an order directing liquidation of AIK Comp on

June 28, 2022. In the petition, the rehabilitator maintained that AIK Comp had a

considerable financial deficit and “that further attempts to rehabilitate AIK Comp

would substantially increase the risk of loss to creditors and policyholders and

would be futile.” Petition to liquidate at 4. The rehabilitator sought to assign AIK

Comp’s workers’ compensation liabilities, occurring after March 1, 1997, to the

Guaranty Fund per Kentucky Revised Statutes (KRS) 342.906. At a hearing on the

4 Several members of AIK Comp filed a Petition for Writ of Prohibition in the Court of Appeals regarding this Order. The Petition was subsequently dismissed by joint motion of the parties.

-4- petition, the Guaranty Fund objected to the assignment of AIK Comp’s workers’

compensation liabilities.

By Order of Liquidation entered July 5, 2022, the circuit court upon

finding AIK Comp to be insolvent placed AIK Comp into liquidation and

appointed the rehabilitator to serve as liquidator. The court also assigned unpaid

AIK Comp’s workers’ compensation liabilities for injuries occurring after March

1, 1997, to the Guaranty Fund.5

The Guaranty Fund filed a motion to vacate the liquidation order, but

the circuit court denied the motion by order entered August 25, 2022. This appeal

follows.

The Guaranty Fund contends that the circuit court erroneously

assigned AIK Comp’s workers’ compensation unpaid claims liabilities to the

Guaranty Fund. Citing to KRS 304.50-090(1), (8), and (9), the Guaranty Fund

maintains that members of AIK Comp are jointly and severally liable for workers’

compensation claims incurred during their membership and may only be relieved

thereof through payment of such liability. The Guaranty Fund further argues that

the 2005 Reorganization and Assessment Plan and the 2009 Amendment

improperly released certain members from joint and several liability and from

5 Pursuant to KRS 342.906 and KRS 342.912, the Guaranty Fund was only responsible for workers’ compensation claims that occurred after March 1, 1997. And, upon the filing of the rehabilitation petition in August of 2004, no new claims were permitted against AIK Comp.

-5- liability for future assessments. The Guaranty Fund maintains that the “released

members would have been perfectly capable of paying additional assessments

needed to cover AIK Comp’s present deficit and, had they not been released, there

would be no deficit today.” Guaranty Fund’s Brief at 14. As members can be

assessed for AIK Comp’s workers’ compensation liability, the Guaranty Fund

maintains that AIK Comp and/or its members have not defaulted upon their

workers’ compensation claims and that without a true default, the Guaranty Fund is

not liable for AIK Comp’s workers’ compensation liabilities. Moreover, the

Guaranty Fund believes that assignment of AIK Comp’s workers’ compensation

liability is inconsistent with legislative intent surrounding the Guaranty Fund’s

creation.

The Guaranty Fund was created by legislative fiat for the express

purpose of ensuring “the continuation of workers’ compensation benefits otherwise

delayed or terminated due to the failure of a self-insured employer to meet

obligations because of insolvency.” KRS 342.900(2). Each qualified self-

insurance group or association, like AIK Comp, is a member of the Guaranty Fund.

KRS 342.906(2). The Kentucky Supreme Court has declared that the “statutory

provisions reflect a legislative intent that the Guaranty Fund step in and meet,

without qualification, the ‘obligations’ of its insolvent member[.]” McCoy Elkhorn

Coal Corp. v. Sargent, 553 S.W.3d 802, 806 (Ky. 2018).

-6- KRS 342.912(3) specifically mandates that the Guaranty Fund “shall

be liable for payment of benefits only for members where there has been a

declaration of bankruptcy or insolvency by a court of competent jurisdiction[.]”

The plain and unambiguous language of KRS 342.912(3) reflects that the Guaranty

Fund is liable upon a self-insurance group or association filing bankruptcy or being

adjudicated to be insolvent. And, as to legislative intent, “[t]he plain meaning of

the statutory language is presumed to be what the legislature intended[.]” Univ. of

Louisville v. Rothstein, 532 S.W.3d 644, 648 (Ky. 2017) (quoting Revenue Cabinet

v. O’Daniel, 153 S.W.3d 815, 819 (Ky. 2005)).

In this case, it is uncontroverted that AIK Comp was a member of the

Guaranty Fund. Additionally, AIK Comp was found to be insolvent and was

placed into liquidation. As a result, the liability of the Guaranty Fund was

triggered by the circuit court’s declaration that AIK Comp was insolvent. KRS

342.912(3); McCoy Elkhorn Coal Corp., 553 S.W.3d at 806. The Guaranty Fund’s

argument to the contrary is without merit.

We also reject the Guaranty Fund’s argument that AIK Comp must

default in the payment of workers’ compensation benefit claims before it is liable

under the statutes. Again, the plain statutory language set out in KRS 342.912(3)

triggers the liability of the Guaranty Fund if the member group is found to be

insolvent. In this case, the circuit court has declared AIK Comp to be insolvent.

-7- The Guaranty Fund additionally argues that KRS 304.50-090

mandates that members of a workers’ compensation self-insured group are jointly

and severally liable for payment of workers’ compensation liabilities incurred

during their membership. During a self-insured group’s normal operations, the

members of that group are jointly and severally liable for workers’ compensation

liabilities. However, during rehabilitation proceedings, it is well-established that

the circuit court and rehabilitator exercise broad discretion to create a plan of

rehabilitation. Minor v. Stephens, 898 S.W.2d 71, 80 (Ky. 1995); Ky. Cent. Life

Ins. Co. v. Stephens, 897 S.W.2d 587 (Ky. 1995). In fact, the rehabilitator is

granted authority to “take action as he or she deems necessary or appropriate to

reform and revitalize the insurer.” KRS 304.33-160(2). More particularly, the

rehabilitator may create a plan of reorganization of the insurer, and upon the circuit

court’s approval, the reorganization plan is implemented with a goal of revitalizing

the insurer. KRS 304.33-160(2) and (5); see also Minor, 898 S.W.2d at 80; Ky.

Cent. Life Ins. Co., 897 S.W.2d at 587.

In this case, the rehabilitator proposed and the circuit court approved

the 2005 Reorganization and Assessment Plan and the 2009 Amendment that

extinguished certain member’s joint and several liability and liability for future

assessments. To obtain such a release from liability, the members were required to

make cash payments and execute callable promissory notes. The circuit court

-8- determined by separate orders that the 2005 Reorganization and Assessment Plan

and the 2009 Amendment were reasonable and necessary to generate sufficient

funds to pay the workers’ compensation liabilities and administrative expenses of

AIK Comp. Neither of these orders were challenged by the Guaranty Fund.

Rehabilitation and liquidation proceedings are special statutory

proceedings, which are conducted under the supervision of the circuit court subject

to the court’s exercise of sound judicial discretion. Ky. Cent. Life Ins. Co. v.

Stephens, 897 S.W.2d at 588. Based upon our review of the record, we are unable

to conclude that the circuit court abused such discretion by approving the 2005

Reorganization and Assessment Plan or the 2009 Amendment, which released

certain members from continuing liability. Had these actions not been taken, AIK

Comp would likely have been declared insolvent at that time. In the final analysis,

AIK Comp was found to be insolvent by the circuit court in 2022, thus mandating

“the Guaranty Fund [to] step in and meet, without qualification, the ‘obligations’

of its insolvent member [AIK Comp].”6 McCoy Elkhorn Coal Corp., 553 S.W.3d

at 806. We find no error in the circuit court’s ruling.

For the foregoing reasons, the Order of Liquation entered by the

Franklin Circuit Court is affirmed.

6 The Guaranty Fund’s concerns centering upon its financial ability to meet AIK Comp’s workers’ compensation obligations are legislative matters solely within the purview of the Kentucky General Assembly.

-9- ALL CONCUR.

BRIEFS FOR APPELLANT: BRIEF FOR APPELLEE:

John E. Hanley Paul C. Harnice Hayden A. Holbrook Sarah J. Bishop Louisville, Kentucky Andrew T. Hagerman Frankfort, Kentucky ORAL ARGUMENT FOR APPELLANT: ORAL ARGUMENT FOR APPELLEE: Hayden A. Holbrook Louisville, Kentucky Sarah J. Bishop Frankfort, Kentucky

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