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Meardon v. Freedom Life Insurance Co. of America

Court of Appeals of Colorado, Seventh Division

March 8, 2018

Kathryn D. Meardon, Plaintiff-Appellee,
Freedom Life Insurance Company of America and Robert J. Pavese, Defendants-Appellants.

         City and County of Denver District Court No. 16CV32553 Honorable Catherine A. Lemon, Judge

          Meier & Giovanini, LLC, Doug E. Meier, Lakewood, Colorado, for Plaintiff-Appellee

          Lewis Roca Rothgerber Christie LLP, Hilary D. Wells, Frances Scioscia Staadt, Denver, Colorado, for Defendants-Appellants


          FREYRE JUDGE.

          ¶ 1 The defendants, Freedom Life Insurance Company of America and Robert J. Pavese (collectively Freedom Life), denied health insurance benefits claimed by plaintiff Kathryn D. Meardon under a health insurance policy (policy) issued to her by Freedom Life. We must decide a novel issue: whether that policy's mandatory arbitration clause is displaced by section 10-3-1116(3), C.R.S. 2017, which allows denied claims to be contested in court before a jury. We conclude that it is.

         ¶ 2 The policy purchased by Ms. Meardon sets forth a three-step procedure for contesting a denied claim. Step one is negotiation, step two is mediation, and step three is binding arbitration. At issue here is the last step - final and binding arbitration; the policy expressly prohibits the filing of any state or federal court action. Section 10-3-1116(3), by contrast, provides that an insured who is wholly or partially denied a claim for health benefits "shall be entitled" to de novo review in any court with jurisdiction and to a trial by a jury, after exhausting administrative remedies. Thus, the question before us is whether Ms. Meardon is bound by the policy's arbitration clause or whether she may seek relief from a jury in a court.

          ¶ 3 To resolve this case, we first analyze the "conformity clause" that Freedom Life elected to include in its policy. Then we address the difficult issues presented both by the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16 (2012), and the arcane doctrine of reverse-preemption under the McCarren-Ferguson Act, 15 U.S.C. §§ 1011-1015 (2012), which may or may not preempt section 10-3-1116(3) and render the arbitration clause operative.

         ¶ 4 Freedom Life appeals the trial court's order that denied their motion to dismiss or compel arbitration. Because we conclude that the state statute displaces the arbitration clause for those claims that fall within the ambit of the statute, we affirm the trial court's order as to those claims. However, because some of Ms. Meardon's claims fall outside the scope of the statute, we reverse the court's order to that extent and remand with directions.

         I. Background

         ¶ 5 Ms. Meardon alleged that Mr. Pavese, acting as a Freedom Life insurance agent, sold her a policy that did not comply with the Affordable Care Act, even though she requested one. She further alleged that the policy did not cover a pre-existing condition, which the Act also required.

          ¶ 6 Later that year, Ms. Meardon underwent surgery, and she submitted a claim to Freedom Life. Freedom Life denied the claim because it decided that the surgery resulted from a pre-existing condition that was not covered by the plan. Ms. Meardon tried to resolve the dispute by sending letters and documents showing that the surgery did not result from her pre-existing condition. Freedom Life reaffirmed its decision to deny Ms. Meardon's claim, and she filed this lawsuit.

         ¶ 7 Freedom Life moved to compel arbitration and to dismiss the case. It relied on the policy's mandatory arbitration clause, which states as follows:

(1) The policyholder was required to resolve "[a]ny [d]ispute" through "mandatory and binding arbitration." (The policy defines "[d]ispute" to include practically every claim "in any way arising out of or pertaining to, or in connection with th[e] policy.")
(2) The policyholder does not have a right to seek resolution of her claim in a federal or state court.
(3) If the policyholder tries to file a complaint in a federal or state court, the court should dismiss the complaint.

         ¶ 8 The policy also contains a "conformity clause, " which states that "[a]ny provision of this [p]olicy which, on its effective date, is in conflict with the laws of the state in which [y]ou live on that date, is amended to conform to the minimum requirements of such laws."

         ¶ 9 The trial court denied Freedom Life's arbitration motion. Relying on the conformity clause, the court decided that (1) section 10-3-1116(3) gives a policy holder a right to a judicial resolution of her claim; and (2) this statutory right voids the policy's arbitration clause. Expanding on the second point, the court wrote that subsection 1116(3) "effectively forbids mandatory arbitration clauses in [health insurance] policies, and confers specifically upon . . . policy holders the statutory right to pursue denial of benefits claims in a court before a jury."

         II. Analysis

         ¶ 10 Freedom Life contends that (1) section 10-3-1116(3) cannot be applied because it is preempted by federal law, namely the FAA; (2) even if the FAA does not preempt the statute, the arbitration clause remains in effect for those claims that fall outside the statute; and (3) Ms. Meardon must arbitrate her claims to "exhaust her administrative remedies" under section 10-3-1116(3). It further argues that even if, as a matter of contract law, the conformity clause operates to invalidate the arbitration clause, under FAA preemption rules, the arbitration clause prevails.

         ¶ 11 Ms. Meardon responds that the trial court correctly interpreted the conformity clause to invalidate the arbitration clause, and that even if FAA preemption would otherwise prohibit this operation of the conformity clause, reverse-preemption, a doctrine unique to statutes that regulate the insurance business, preempts FAA preemption (thus the term "reverse-preemption"). We proceed to separately address the effects of the conformity clause and the various preemption arguments and counterarguments.

         A. Standard of Review and Legal Principles

         ¶ 12 We must interpret the policy and subsection 1116(3) to resolve this appeal. We review questions of statutory interpretation and insurance contract interpretation de novo. Goodman v. Heritage Builders, Inc., 2017 CO 13, ¶ 5; Allstate Ins. Co. v. Huizar, 52 P.3d 816, 819 (Colo. 2002).

         ¶ 13 When we interpret a statute, we must ascertain and give effect to the legislature's intent. Colo. Dep't of Revenue v. Creager Mercantile Co., 2017 CO 41M, ¶ 16. "We construe the entire statutory scheme to give consistent, harmonious, and sensible effect to all parts, " and "we give effect to words and phrases according to their plain and ordinary meaning." Denver Post Corp. v. Ritter, 255 P.3d 1083, 1089 (Colo. 2011). If a statute's language is clear, we apply it as written. Id. But "[i]f the statutory language is ambiguous, we may use other tools of statutory interpretation to determine the General Assembly's intent." Id.

         ¶ 14 Similarly, the words of an insurance policy "should be given their plain meaning according to common usage, and strained constructions should be avoided." Allstate Ins. Co., 52 P.3d at 819. As pertinent here, "[b]ecause of the policy favoring arbitration, we construe any ambiguities [in the insurance policy] in favor of arbitration, and when an arbitration clause is broad or unrestricted, the strong presumption favoring arbitration applies with even greater force." BFN-Greeley, LLC v. Adair Grp., Inc., 141 P.3d 937, 940 (Colo.App. 2006). "A valid and enforceable arbitration provision divests the courts of jurisdiction over all disputes that are to be arbitrated pending the conclusion of arbitration." Mountain Plains Constructors, Inc. v. Torrez, 785 P.2d 928, 930 (Colo. 1990).

         B. Conformity Clause

         ¶ 15 Parties to an insurance contract cannot agree to disregard statutory requirements. See Peterman v. State Farm Mut. Auto. Ins. Co., 961 P.2d 487, 492 (Colo. 1998) (examining a consent-to-sue clause in an insurance contract and explaining that "[p]arties may not privately contract to abrogate statutory requirements or contravene the public policy of this state"). To reflect this reality, Freedom Life elected to include a conformity clause in its insurance policy. The general effect of a conformity clause is to modify the contract to conform to the laws in the insured's state. See 2 Steven Plitt, Daniel Maldonado, Joshua D. Rogers & Jordan R. Plitt, Couch on Insurance § 19:3, Westlaw (3d ed. database updated Dec. 2017). A conformity clause can be triggered when an insurer is prohibited from, or required to, include a certain provision in the policy. Id. Thus, when an insurance policy contains a conformity clause, that clause amends the policy terms that conflict with state law. See Traders & Gen. Ins. Co. v. Pioneer Mut. Comp. Co., 127 Colo. 516, 517-19, 258 P.2d 776, 777 (1953) (finding that a conformity clause requiring conformity to the motor vehicle financial responsibility law made the statute part of the insurance contract); see also Peters v. Time Ins. Co., No. 10-CV-02962-RPM, 2011 WL 2784291 (D. Colo. July 14, 2011) (unpublished opinion) (concluding that a conformity clause reformed the pre-existing condition exclusion in the insurance policy to conform with the state statute); Burke v. First Unum Life Ins. Co., 975 F.Supp. 310, 316 (S.D.N.Y. 1997) (finding that policy's conformity clause "dictates that the policy be considered as if it contained the statutory language"); Ill. Farmers Ins. Co. v. Glass Serv. Co., 683 N.W.2d 792, 802 (Minn. 2004) ("When an insurance policy contains a conformity clause, as Farmers' policies do, that clause amends all policy terms in conflict with Minnesota law to conform to those laws.").

         ¶ 16 Importantly, a predicate for operation of the conformity clause is a true conflict with state law. A mere "difference" between the contract and state law is insufficient to trigger the conformity clause. See Grant Farms, Inc. v. Colo. Farm Bureau Mut. Ins. Co., 155 P.3d 537, 538 (Colo.App. 2006) ("A statute and [a] policy provision ...

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