Breaking The Mold Of The Assembly Line Workers’ Compensation Firm By Building Client-Based Defense Partnerships

Court of Appeals Upholds 2013 Amendment to Section 25-a – Marking the End for The Fund for Reopened Cases

by | Oct 26, 2017 | MAD News, NYS Workers Compensation |

On October 24, 2017, the Court of Appeals in American Economy Insurance Co. v. State of New York, — N.E.3d —-, 2017 WL 4779421 (N.Y. Ct. of App., Oct. 24, 2017), effectively marked the end of The Fund for Reopened Cases by holding the 2013 amendment to WCL § 25-a is constitutional in light of any retroactive effect the amendment could have on prior cases or issued Workers’ Compensation policies.

This case initially arose as a result of the New York Legislature’s enactment of an amendment to WCL § 25-a in 2013, which mandated The Fund for Reopened Cases would be closed to new applications after January 1, 2014. Shortly thereafter, approximately twenty insurance companies who issued Workers’ Compensation policies in New York (hereinafter “Plaintiffs”) banded together to challenge the constitutionality of the 2013 amendment. Specifically, the Plaintiffs argued that the amendment retroactively imposed unfunded liability upon them in connection with future reopened cases in violation of the Contract Clause of the Federal Constitution and the Takings Clause and Due Process Clause of the Federal and State Constitutions. At the Supreme Court level, the State of New York as defendant motioned to dismiss the complaint. The Supreme Court granted the State’s motion, concluding that the amendment to § 25-a operated prospectively as it closed the Fund only to new applications, and rejected Plaintiffs’ constitutional arguments. On appeal, the Appellate Division, First Department reversed, and held that the 2013 amendment to § 25-a was unconstitutional “as retroactively applied to policies issued before October 1, 2013.” Additionally, the First Department held that the amendment, applied retroactively, violates the Contracts Clause and the Takings Clause, but did not address the Due Process arguments.

Subsequently, the State appealed as of right (pursuant to CPLR § 5601(b)(1)) to the Court of Appeals. The issue on appeal was whether the 2013 amendment to WCL § 25-a created a retroactive effect which is unconstitutional in light of the Contracts Clause, Takings Clause, and the Due Process Clause. Justice Fahey, writing for a unanimous Court, reversed the First Department and held that the amendment is constitutional in light of any retroactive effect.

The Court initially examined whether or not the amendment had a retroactive effect. Without affirmatively holding either way, the Court proceeded with their analysis assuming Plaintiffs’ argument was accurate insofar as there was a retroactive effect which would impose additional liability on the Plaintiffs.

Moving to the constitutional arguments, the Court first addressed the Contracts Clause. The Court acknowledged that there is a three-part initial inquiry when analyzing a Contracts Clause constitutionality issue: “whether there is a contractual relationship, whether a change in law impairs that contractual relationship, and whether the impairment is substantial.” The Court found that the amendment does not impair the contractual relationship between the Plaintiffs and their insured, and therefore the amendment does not violate the Contracts Clause. Specifically, the court noted that the amendment did not change the legal enforceability of the insurance contracts and the parties still have the same ability to enforce the bargained-for terms of the contracts that they did prior to the amendment. Additionally, the insurance policies at issue expressly assumed the risk of legislative change.

Next, in analyzing Plaintiffs’ Takings Clause argument, the Court identified that the threshold analysis is to determine whether a vested property interest has been identified. Plaintiffs asserted that they have a protected interest in the value of their contracts with their insured, and the alleged diminution in the value of those contracts would be a taking. However, the Court found that “as a general matter, the government does not ‘take’ contract rights pertaining to a contract between two private parties simply by engaging in lawful action that affects the value of one of the parties’ contract rights.” Accordingly, since the Plaintiffs could not identify any vested property interest impaired by the amendment, the Court held that their argument fails.

Finally, the Court addressed the Plaintiffs’ Due Process argument. In the context of a substantive due process challenge to retroactive legislation, the Court applies a rational basis scrutiny test. This test requires a “legitimate legislative purpose furthered by rational means.” For retroactive legislation, this test “is met simply by showing that the retroactive application of the legislation is itself justified by a rational legislative purpose.” Accordingly, the Court held that the State’s contention that the amendment’s retroactive effect was to prevent substantial liabilities for many years after the effective date of the amendment constituted a sufficient showing that the retroactive effect was justified by a rational legislative purpose. Therefore, the Court rejected this argument.

The entire American Economy decision can be found here:   https://www.nycourts.gov/ctapps/Decisions/2017/Oct17/96opn17-Decision.pdf