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Colorado Insurance Guaranty Association v. Sunstate Equipment Co., LLC

Court of Appeals of Colorado, Third Division

April 21, 2016

Colorado Insurance Guaranty Association, Plaintiff-Appellee and Cross-Appellant,
Sunstate Equipment Company, LLC, Defendant-Appellant and Cross-Appellee.

Announced April 21, 2016.

City and County of Denver District Court No. 13CV33794, Honorable Herbert L. Stern, III, Judge.

Harris, Karstaedt, Jamison & Powers, P.C., Heather A. Salg, Englewood, Colorado, for Plaintiff-Appellee and Cross-Appellant

The Overton Law Firm, Thomas J. Overton, Richard J. Gleason, Denver, Colorado; DLA PIPER LLP, Mark A. Nadeau, Phoenix, Arizona, for Defendant-Appellant and Cross-Appellee



¶ 1 When an insurer becomes insolvent and liquidation of its assets does not produce sufficient funds to pay claims, should the loss be borne by first party insureds or third party claimants? The General Assembly has created a guaranty association to pay the covered claims of an insolvent insurer. But then, after payment to a third party claimant, does the loss stop at the association or return to the first party insured? This opinion concludes that under the applicable statutes, a high-net-worth, first party insured must bear the loss.

¶ 2 In this recoupment action under section 10-4-511(4)(a)(I), C.R.S. 2015 (net worth provision), the trial court entered summary judgment in favor of plaintiff Colorado Insurance Guaranty Association (CIGA) and against defendant Sunstate Equipment Company, LLC (Sunstate), for the workers' compensation benefits that CIGA had paid to a Sunstate employee. CIGA paid the benefits after Sunstate's workers' compensation insurer became insolvent and was liquidated. The court allowed Sunstate an offset based on liquidation proceeds paid to CIGA and refused to award CIGA its attorney fees incurred in connection with the employee's claim.

¶ 3 Sunstate appeals on four grounds:

. the net worth provision is unconstitutional;
. the immunity created by section 10-4-517, C.R.S. 2015 (immunity provision), constitutes unconstitutional special legislation, and the trial court erred in holding that it bars Sunstate from raising affirmative defenses based on CIGA's alleged mishandling of the employee's claim;
. the trial court erred in declining to require CIGA to show that it had reviewed the applicable insurance policy to determine the "covered benefits" to which the employee was entitled; and
. the trial court miscalculated the offset.

¶ 4 As to the constitutional issues - undecided questions in Colorado - we discern no violation of equal protection, procedural due process, or the prohibition against special legislation. As to the remaining issues, we conclude that under the immunity provision, the court properly barred Sunstate from raising its affirmative defenses; Sunstate's argument that CIGA failed to prove covered benefits by reference to the insurance policy is without merit, but for other reasons, CIGA failed to establish that all amounts it paid to the employee were for a "covered claim"; and we need not address any error in calculating the offset because, as we decide in connection with CIGA's cross-appeal, Sunstate is not entitled to any offset.

¶ 5 On cross-appeal, CIGA asserts that the trial court erred in:

. allowing Sunstate any offset for the liquidation proceeds and
. refusing to award CIGA its attorney fees.

¶ 6 We agree with CIGA that Sunstate was not entitled to an offset but conclude that CIGA cannot recover its attorney fees.


I. Facts

¶ 7 In 1997, Michael Menor, a Sunstate employee, was injured in the course and scope of his employment. Sunstate's workers' compensation insurer, Fremont Indemnity Company (Fremont), began paying benefits. In 2002, Fremont entered a final admission of liability (FAL) that Menor was permanently and totally disabled.

¶ 8 In 2003, Fremont became insolvent and liquidation began in California. CIGA took over Menor's claim and began paying benefits to him. (Whether Sunstate received actual notice of CIGA's payments before 2006 is unclear.) Then Sunstate became involved in Menor's underlying workers' compensation proceeding.

¶ 9 In 2010, Menor, CIGA, and Sunstate entered into an agreement to settle that case, subject to contingencies. In 2012, the settlement became final.

¶ 10 CIGA sought reimbursement from Sunstate under the net worth provision on the basis that in the year before Fremont had become insolvent, Sunstate's net worth exceeded $25 million. Sunstate did not contest its net worth for that year, but declined to pay CIGA for other reasons. CIGA commenced an action in federal district court, which eventually was dismissed for lack of diversity jurisdiction. Then CIGA brought this action. By 2012, CIGA had received significant distributions from the Fremont liquidation.

¶ 11 Sunstate defended on the grounds that the net worth provision is unconstitutional; it is entitled to an offset from the Fremont liquidation distributions paid to CIGA; and CIGA's recovery should be further reduced based on its mishandling of the underlying claim.

In rulings on a series of motions, the trial court:

. upheld the constitutionality of the net worth provision;
. afforded Sunstate an offset of $78, 271.17 based on comparing the amount CIGA had paid to Menor with the amounts CIGA had received from liquidation distributions as of 2012;
. held that the immunity provision precludes considering whether CIGA had mishandled the claim;
. after the offset, awarded CIGA $717, 261.80 for benefits paid to Menor, plus statutory interest of $250, 954.10; and
. declined to award CIGA any attorney fees incurred in connection with Menor's claim.

II. Summary Judgment Standard of Review and Preservation The following principles inform our review:

. A trial court's order granting or denying summary judgment is subject to de novo review. Westin Operator, LLC v. Groh, 2015 CO 25, ¶ 19.
. Summary judgment is appropriate only if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Id. (quoting C.R.C.P. 56(c)).
. "All doubts must be resolved against the moving party; at the same time, the nonmoving party 'must receive the benefit of all favorable inferences that may be reasonably drawn from the undisputed facts.'" Id. at ¶ 20 (citation omitted).

Other standards of review will be addressed for particular issues.

¶ 12 Because all of the issues being argued on appeal and cross-appeal were raised before the trial court, they are preserved.

III. Constitutionality of the Net Worth Provision

¶ 13 Under the Colorado Insurance Guaranty Association Act, § 10-4-501 to -520, C.R.S. 2015 (Act or Colorado Act), CIGA "is a nonprofit, unincorporated legal entity" that provides "a means for insureds to recover on claims against insolvent insurers." Alexander v. Indus. Claim Appeals Office, 42 P.3d 46, 47 (Colo.App. 2001). It does so by stepping "into the shoes of the insolvent insurer to pay claims within the coverage and limits of the insurance policy." Id. The net worth provision allows CIGA to recoup these payments from some of an insolvent insurer's insureds:

(4)(a) The association shall have the right to recover from the following persons the amount of any covered claim paid on behalf of such person pursuant to this part 5:
(I) Any insured whose net worth on December 31 of the year immediately preceding the date the insurer becomes an insolvent insurer exceeds twenty-five million dollars and whose liability obligations to other persons are satisfied in whole or in part by payments made under this part 5. An insured's net worth on such date shall be deemed to include the aggregate net worth of the insured and all of its subsidiaries as calculated on a consolidated basis[.]

§ 10-4-511(4)(a)(I) (emphasis added).

¶ 14 Sunstate contends the net worth provision violates its rights to equal protection and procedural due process, as applied. Colorado courts have not addressed any similar contentions.

¶ 15 As described below, courts in other jurisdictions - with net worth statutes that, like Colorado's, derive from the Post-Assessment Property and Liability Insurance Guaranty Association Model Act (Model Act), as proposed by the National Association of Insurance Commissioners - have uniformly upheld such statutes against constitutional challenges. We consider these opinions well-reasoned and rely on them in concluding that the net worth provision does not violate either equal protection or procedural due process. See Colo. Ins. Guar. Ass'n v. Menor, 166 P.3d 205, 214 (Colo.App. 2007) (looking to cases from other jurisdictions interpreting Model Act provisions as guidance).

A. Background

¶ 16 Because Fremont became insolvent in mid-2003, under the net worth provision Sunstate's net worth was determined as of December 31, 2002. Sunstate agrees that it then had a net worth exceeding $25 million. Even so, according to the affidavit of Sunstate's chief financial officer:

. "Sunstate's net worth was well below $25 million by December 31, 2005, and throughout 2006"; and
. "Sunstate's net worth also suffered from 2009-2011, during which time Sunstate's liabilities far exceeded Sunstate's assets as Sunstate's business was highly dependent on the construction industry . . . ."

¶ 17 But after the trial court entered judgment for CIGA in 2014, Sunstate moved to stay the judgment pending appeal. In that motion, Sunstate asserted:

[T]here is no threat to CIGA that Sunstate will not be able to pay the Judgment in the event it loses on appeal. Sunstate is financially sound, and its most recent statement of net worth in the improving economy is approximately $160 million.

B. Equal Protection

1. Standard of Review

¶ 18 "We review de novo a constitutional challenge to a statute." People v. Stotz, 2016 COA 16, ¶ 24.

¶ 19 The Fourteenth Amendment to the United States Constitution provides that "[n]o State shall . . . deny to any person within its jurisdiction the equal protection of the laws." Although the Colorado Constitution does not contain an identical provision, "it is well-established that a like guarantee exists within the constitution's due process clause, Colo. Const. art. II, sec. 25, and that its substantive application is the same insofar as equal protection analysis is concerned." Qwest Corp. v. Colo. Div. of Prop. Taxation, 2013 CO 39, ¶ 22 (quoting Lujan v. Colo. State Bd. of Educ., 649 P.2d 1005, 1014 (Colo. 1982)).

¶ 20 Both parties agree that the rational basis test applies to an equal protection challenge of economic legislation such as the net worth provision. See People v. Diaz, 2015 CO 28, ¶ 25 (A court applies a rational basis test "where, as here, no traditionally suspect class is present, no fundamental right is at issue, and no other classification warrants review under strict or intermediate scrutiny.").

¶ 21 Under this test, "a statutory classification is presumed constitutional and does not violate equal protection unless it is proven beyond a reasonable doubt that the classification does not bear a rational relationship to a legitimate legislative purpose." Pace Membership Warehouse, Div. of K-Mart Corp. v. Axelson, 938 P.2d 504, 506 (Colo. 1997). In applying rational basis review, "we do not decide whether the legislature has chosen the best route to accomplish its objectives." People v. Dean, 2016 CO 14, ¶ 13. Instead, "[o]ur inquiry is limited to whether the scheme as constituted furthers a legitimate state purpose in a rational manner." Id.

2. Sunstate's Constitutional Arguments

¶ 22 Sunstate asserts that two aspects of the net worth provision fail this rational basis test.

¶ 23 First, it argues that using a fixed date to determine net worth - December 31 of the year immediately preceding the date the insurer became insolvent - results in similarly situated insureds being treated differently because such a date fails to account for fluctuations in net worth during the years after the insurer became insolvent and the claim remains open. As indicated, between 2003 and 2012, while CIGA was paying Menor's claim, Sunstate's net worth fluctuated and sometimes was below $25 million. For purposes of this argument, Sunstate compares itself to an insured with a net worth that remained above $25 million.

¶ 24 Second, Sunstate argues that even assuming the $25 million classification was minimally rational when the net worth provision was enacted in 1999, because the provision fails to adjust for inflation, the classification no longer bears a rational relationship to a legitimate legislative purpose. Specifically, Sunstate explains that, by failing to adjust for inflation, "the legislature has allowed the net worth provision to apply to companies that they recognized in 1999 would find such losses unaffordable." For purposes of this argument, it does not identify a comparator.

¶ 25 Sunstate frames both of these challenges "as applied" rather than as facial challenges. Yet, the "distinction between a 'facial' and an 'as applied' equal protection challenge is not always clear cut." United Airlines v. Indus. Claim Appeals Office, 2013 COA 48, ¶ 30 (quoting City of Florence v. Pepper, 145 P.3d 654 (Colo. 2006)). And this distinction becomes even murkier as to Sunstate's second argument, because the magnitude of the inflation effect changes over time: for Sunstate, the operative period is 1999 to 2003; for other insureds, the operative period is from 1999 to the present and beyond, unless and until the General Assembly acts to change the net worth provision.

¶ 26 When asserting an as-applied challenge, the party "contends that the statute would be unconstitutional under the circumstances in which the [party] has acted or proposes to act." Sanger v. Dennis, 148 P.3d 404, 410-11 (Colo.App. 2006). "The practical effect of holding a statute unconstitutional as applied is to prevent its future application in a similar context, but not to render it utterly inoperative." Dev. Pathways v. Ritter, 178 P.3d 524, 534 (Colo. 2008) (quoting Sanger, 148 P.3d at 410).

¶ 27 In contrast, a facial constitutional challenge is used when a party seeks "to render [a statute] utterly inoperative." Id. (quoting Sanger, 148 P.3d at 410). Under such challenges, a statute can be stricken using the rational basis test only "if there exists no reasonably conceivable set of facts to establish a rational relationship between the statute and a legitimate governmental purpose." Pace Membership Warehouse, 938 P.2d at 507. And "[s]imply because a statutory classification creates a harsh result in one instance does not mean that the statute fails to meet constitutionality requirements under the rational basis standard." Id.

¶ 28 Sunstate's challenge based on the fixed date involves application of the net worth provision to particular circumstances, i.e., its fluctuating net worth after 2002. Thus, we agree that this challenge is "as applied." The lack of an adjustment for inflation, however, is not so clear. On the one hand, because lack of an adjustment will affect insureds differently, treating it as a facial challenge is problematic. On the other hand, Sunstate seeks to invalidate the net worth provision in its entirety - the hallmark of a facial challenge. See Doe v. City of Albuquerque, 667 F.3d 1111, 1127 (10th Cir. 2012) ("[A] facial challenge is just that - a challenge to the terms of the statute, not hypothetical applications.").

¶ 29 We need not resolve this question because whether the challenge is facial or as applied, a statute will not be held unconstitutional "simply because distinctions created by the statute are not made with mathematical nicety." Pace Membership Warehouse, 938 P.2d at 507; see Citizens United v. Fed. Election Comm'n, 558 U.S. 310, 331 (2010) ("[T]he distinction between facial and as-applied challenges is not so well defined that it has some automatic effect or that it must always control the pleadings and disposition in every case involving a constitutional challenge."). Rather, "the problems of government being practical ones, equal protection will tolerate 'a rough accommodation of variant interests.'" Pace Membership Warehouse, 938 P.2d at 507 (quoting Dawson ex rel. McKelvey v. Pub. Emps.' Ret. Ass'n, 664 P.2d 702, 708 (Colo. 1983)). One such interest "is the government's interest in its own efficient and effective operation." Qwest Corp. v. Colo. Div. of Prop. Taxation, 310 P.3d 113, 121 (Colo.App. 2011), aff'd, 2013 CO 39.

3. Fixed Date for Determining Net Worth

¶ 30 Sunstate asserts that the net worth provision is unconstitutional as applied "because Sunstate's net worth declined below the net worth threshold before CIGA sought reimbursement for Menor's claims." According to Sunstate, the net worth provision is not rationally related to a legitimate legislative purpose because it ignores the financial condition of an insured when "CIGA makes a payment on the insured's behalf." We conclude that Sunstate has not shown beyond a reasonable doubt how the $25 million threshold, as applied to it, lacks a rational relationship to a legitimate legislative purpose.

¶ 31 To begin, the purposes of the Act are

to provide a mechanism for the payment of covered claims under certain insurance policies, to avoid excessive delay in payment and financial loss to claimants or policyholders because of the insolvency of an insurer, to assist in the detection and prevention of insurer insolvencies, and to provide an association to assess the cost of such protection among insurers.

§ 10-4-502, C.R.S. 2015; see also § 10-4-505, C.R.S. 2015 (The Act "shall be liberally construed to effect the[se] purposes . . . .").

¶ 32 But CIGA does not receive government funding. And the private funding available to CIGA under the Act is limited. Specifically, "[n]o member insurer may be assessed in any year on any account an amount greater than two percent of that member insurer's net direct written premiums for the preceding calendar year on the kinds of insurance in the account." § 10-4-508, C.R.S. 2015. In light of this limitation, and as explained in Menor, 166 P.3d at 214, various provisions of the Act - including the net worth provision - "further [the Act's] purposes by conserving the resources available to CIGA to pay claimants and policyholders." According to the division, such provisions "address the problem of conserving resources to protect the financial stability of CIGA." Id.

¶ 33 Two types of net worth provisions are found in Colorado's Act and the Model Act - one for recoupment claims, as here, and the other for first party claims, see § 10-4-503(4)(b)(II), C.R.S. 2015 (A covered claim does not include "[a] first party claim by an insured whose net worth exceeds ten million dollars."). But in either context, use of a net worth limitation preserves CIGA's assets, albeit in slightly different ways. Section 10-4-503(4)(b)(II) excludes first party claims against CIGA by an insured with a high net worth; section 10-4-511(4)(a)(I) allows CIGA to recover payments from even higher net worth insureds.

¶ 34 Other jurisdictions analyzing the constitutionality of net worth provisions have upheld both types of provisions. Yet, because the underlying purpose of a net worth provision is shifting losses from insolvency to higher net worth insureds remains the same - whether it involves a first party claim or a recoupment claim - we look to both lines of authority for guidance.

¶ 35 In Rhode Island Insurers' Insolvency Fund v. Leviton Manufacturing Company, Inc., 716 A.2d 730, 734-35 (R.I. 1998), the court analyzed a recoupment provision and explained that by providing "for recovery of payments, as opposed to an outright denial of coverage, " the legislature intended "to deliver benefits to those in immediate need . . . without regard to a company's net worth . . . ." And the legislature's "decision to include a recoupment provision applicable to companies with net worths in excess of $50 million . . . ensures that sufficient funds will be available to accomplish this important objective." Id. at 735.

¶ 36 In Cresswood Farm, Inc. v. Illinois Insurance Guaranty Fund, No. 03 C 7051, 2004 WL 838037, at *4 (N.D. Ill. Apr. 19, 2004), the court analyzed a net worth provision applicable to both first party and recoupment claims. The court found that "[t]he rationale [sic] bases identified . . . are not so 'patently, wildly, [or] totally irrational' as to render the affiliate net worth exclusion unconstitutional." Id. It explained that "[t]he Act is a benefit program established by the Illinois legislature [and i]t was not intended to render the Fund absolutely liable to policyholders due to the insolvency of their insurance companies." Id. Therefore, the net worth exclusion "would assist in weeding out those less likely in need." Id.

¶ 37 And in Borman's, Inc. v. Michigan Property & Casualty Guaranty Association, 925 F.2d 160, 162 (6th Cir. 1991) - which involved an equal protection challenge to a first party net worth provision - the court explained that the "purpose of the net worth calculation was to ensure that the Association's limited funds go to those insureds who are least able to absorb an unexpected loss due to the insolvency of an insurer." See also Ga. Insurers Insolvency Pool v. Se. Atl. Cargo Operators, Inc., 440 S.E.2d 254, 256 (Ga.Ct.App. 1994) ("Because . . . resources are limited, however, the Legislature determined that parties with assets of over $3 million should not be able to make claims against the fund, because they are in a position to better bear the inevitable loss themselves.").

¶ 38 The equal protection challenge addressed in Borman's was whether "use of a company's net worth to determine that company's ability to absorb loss was rational." 925 F.2d at 162. In concluding that it was, the court acknowledged that net worth was "an imperfect measure in that at times there can be real or perceived inequalities." Id. at 163 (citation omitted). Yet, it also recognized that net worth was "certainly . . . an indicator of the capacity to absorb loss." Id. (citation omitted). Ultimately, the court held that the "test for constitutional purposes is not whether the legislative scheme is imperfect, but whether it is wholly irrational." Id. Thus, the "legislature's use of net worth as a proxy for a more complex calculation" was rational. Id.; see also Oakland Cty. Bd. of Rd. Comm'rs v. ...

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