Court of Appeals OKs Retroactive Impact of Closure of Workers Compensation Law’s Special Fund for Reopened Cases

In American Economy Insurance Company v State of New York (No. 96), previewed here, two titans of the appellate world faced off in a dispute over the phase out of a special workers’ compensation fund that pays benefits to injured workers whose cases were closed and later reopened. The plaintiffs, represented by WilmerHale’s Seth Waxman, former Solicitor General of the United States, challenged “the legislature’s 2013 amendment to Workers’ Compensation Law § 25-a, which closed the Special Fund for Reopened Cases (the Fund) to new applications after January 1, 2014,” arguing that the closure retroactively imposed about a $60 million unfunded mandate on the workers compensation insurers for policies written before October 2013 (Opn, at 2).

Workers compensation is complicated.  So here’s a quick breakdown of this case.  The Special Fund for Reopened Cases was created to ensure that claimants who have unexpected medical costs related to a prior eligible workplace injury can still receive benefits even if their insurer has gone bankrupt.  In those cases, the Special Fund would pay the benefits, and the costs eventually get passed on to the insurance carriers in annual assessments.  Because the annual assessment costs had increased to more than $300 million by the end of 2012, the Legislature decided to close the Special Fund to new claims at the end of 2013.

That’s a big deal for insurers.  Workers compensation policies are occurrence-based policies, which means that they provide coverage for any claims for accidents occurring during that policy year.  So, the yearly policy premiums are based on the insurers’ expected losses for the accidents that happened during the prior year, plus “loss-cost multipliers” that are based on each insurer’s profit and expense structures. A non-profit association of insurance carriers makes recommendations to the New York Department of Financial Services on the appropriate loss cost figures for the upcoming policy year, and DFS then sets the rates.

Here’s the thing, though, the premiums approved by DFS before October 2013 didn’t include any costs for claims that were transferred to the Special Fund.  So, when the Special Fund was closed, the Plaintiffs’ premiums for the years before that didn’t include the increased costs for the claims that would have otherwise been paid by the Special Fund.  That meant the insurers had to bear those increased costs retroactively, which they argued violated the Contracts Clause of the US Constitution and the Due Process Clauses of the State and Federal Constitutions.

After Supreme Court rejected the claims, the Appellate Division, First Department reversed, and declared the amendment unconstitutional as applied to the pre-October 2013 policies. Particularly, the Court held, because the workers compensation premiums for these policies assumed that reopened claims would be transferred to the now phased out fund for payment, retroactive application of the phase out amendment to the pre-October 2013 policies imposed a brand new liability on the insurers after the premiums had already been charged. This, the Court held, violated due process, impaired existing contractual obligations in violation of the Contracts Clause, and constituted an unconstitutional regulatory taking.

The Court of Appeals, however, disagreed, and reversed.  Assuming without deciding that the amendment to the Workers Compensation Law had a retroactive effect, the Court held that the retroactive impact passed constitutional muster.  The amendment didn’t violate the Contracts Clause, the Court held, because the insurer’s obligation to pay all benefits owed under the Workers Compensation Law, including those that would have been previously paid by the Special Fund, didn’t impair the insurers’ contractual relationship with their insured, and no contract existed between the insurers and the Special Fund. As the Court put it,

plaintiffs’ Contract Clause claim confuses their legal liability for reopened cases with their ability to transfer the costs of that liability. Plaintiffs’ contracts with their insureds obligated them to pay all benefits required of their insureds by the Workers’ Compensation Law, including any amendments to that law which are in effect during the policy period, and thus require plaintiffs to pay all necessary benefits on reopened cases.

Pursuant to those contracts, which consistently assume the risk of legislative change, liability for any benefit required of employers by the Workers’ Compensation Law ultimately rested with the carriers. The amendment merely altered the allocation of costs of that liability by removing an avenue for carriers to transfer reopened cases to the Fund, and then to pass assessments for the costs of those cases onto their insureds. Inasmuch as plaintiffs did not contract with their insureds for the right to transfer reopened cases to the Fund, or condition their liability to pay benefits on reopened cases on the Fund’s continuing acceptance of those cases, plaintiffs’ contracts with their insureds have not been impaired by the amendment. Put differently, there is no provision of plaintiffs’ contracts with their insureds relieving them of the obligation to pay an injured worker’s benefits in the event that the Fund did not accept a reopened case.

At most, plaintiffs’ contracts with their insureds have become less profitable (Opn, at 19-20).

Plaintiffs’ Takings and Due Process claims fared no better. The Court held that the Plaintiffs had no vested property interest in the value of their insurance contracts that could have been taken by the amendment (Opn, at 26).  Further, applying rational basis review, the Court held that the amendment to close the Special Fund had a rational legislative purpose, that is, “to save New York businesses hundreds of millions of dollars in assessments per year” (Opn, at 30 [quotation marks omitted]). The Court noted that the annual assessments weren’t actually paid by the insurers because those costs were ultimately passed on to employers through the insurance premiums.  And so the insurers’ due process rights weren’t offended by the Legislature’s choice to take that burden off of New York’s employers.

The Court of Appeals’ opinion can be found here.

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