Workers’ Compensation Amendment Found Unconstitutional; How It Affects Fund for Reopened Cases

The New York Appellate Division First Department last week addressed the validity and constitutionality of a 2013 amendment to New York Workers’ Compensation Law §25-a.

As a background, §25-a provides for a Special Fund to be set up especially to administer and pay claims arising from the reopening of closed cases. The primary purpose of §25-a is to transfer liability for awards from self-insured employers and insurance carriers to the Special Fund where the claim has become “stale.” Under §25-a, claim is “stale” if it meets certain criteria:

  1. more than seven years has elapsed from the date of the injury or death, and;
  2. where more than three years has elapsed after the last payment of compensation.

Essentially, insurance carriers and self-insured employers could potentially shift liability to the Special Fund in claims that met the criteria of §25-a. Whether a case has been officially closed so as to shift liability to the Special Fund is a decision for the Board to make. Upon transfer to the Special Fund, the carrier or self-insured employer is no longer responsible for payment or management of the claim.

In an effort to phase out the Special Fund/Fund for Reopened Cases, the Business Relief Act of 2013 created an amendment to §25-a that no application by an employer or insurance carrier to transfer liability to the Fund for Reopened Cases would be accepted by the Board on or after January 1, 2014. In short, the amendment to be addressed in American Economy Ins. Co. v State of New York closed the reopened case fund to newly reopened claims as of January 1, 2014. Following the amendment to §25-a, any claims that were reopened that previously would have transferred to the Fund became the obligation of the carrier, liability would not shift to the Special Fund.

The plaintiffs in American Economy, private insurance companies that underwrite workers’ compensation insurance policies in New York, challenged the validity and constitutionality of the 2013 amendment to Workers’ Compensation Law § 25-a to the extent it imposes liability on them with respect to policies issued before October 1, 2013. The plaintiffs successfully argued the existence of the Special Fund meant that reopened workers’ compensation claims were not included when insurers’ premium rates were calculated by the New York Compensation Insurance Rating Board (CIRB) and approved by the New York State Department of Financial Services (DFS). The plaintiffs also argued that because reopened claims were handled and paid by the Special Fund rather than by insurers, insurers did not maintain reserves to cover future reopened claim losses. The plaintiffs argued that policies written on or after October 1, 2013, DFS approved an increase in premiums to address the additional liability resulting from the closure of the Fund to future reopened cases; however, that premium increase would not cover policies issued before October 1, 2013. Therefore, as a result of the amendment closing the Special Fund, the amendment will impose on the insurer a liability that was not contemplated when the premium for the pre-October 1, 2013 policy was calculated.

The court in American Economy ruled “the central question here is whether closing the Fund to new applications and requiring the insurers to handle and pay on reopened claims arising out of accidents that occurred before October 1, 2013 impermissibly ‘attache[d] new legal consequences to events completed before its enactment.” [Link]

The court ruled the 2013 amendment:

violates the Contract Clause of the US Constitution because it retroactively impairs an existing contractual obligation to provide insurance coverage “[w]here *** the insurer does not have the right to terminate the policy or change the premium rate” (Health Ins. Assn. of Am. v Harnett,44 NY2d 302, 313 [1978] [internal quotation marks omitted] [asterisks in original]; see US Const, art I, § 10, cl 1). Defendants failed to show that the impairment is “reasonable and necessary to serve” “a significant and legitimate public purpose *** such as the remedying of a broad and general social or economic problem” (19th St. Assoc. v State of New York, 79 NY2d 434, 443 [1992] [internal quotation marks omitted] [asterisks in original]). Indeed, the legislation’s stated purpose of preventing a windfall to insurance carriers was based upon the erroneous premise that premiums already cover this new liability.

Retroactive application would also constitute a regulatory taking in violation of the Takings Clause (see US Const Amend V; NY Const, art I, § 7[a]; Eastern Enterprises, 524 US at 528-529 [“it imposes severe retroactive liability on a limited class of parties that could not have anticipated the liability, and the extent of that liability is substantially disproportionate to the parties’ experience”]).

The court ruled “that Workers’ Compensation Law § 25-a(1-a) as retroactively applied to policies issued before October 1, 2013 is unconstitutional.”

As a result, New York workers’ compensation claims that meet the criteria from policy years prior to October 1, 2013 should now be able to be apply for relief under §25-a.

If you have any questions about §25-a, do not hesitate to contact me directly via e-mail or join our live Q & A session offered April 22, 2016. Register here for the live event.

Declan is an attorney licensed to practice law in New Jersey, New York and the U.S. District Court of New Jersey. Declan is a Partner at Lois LLC where he defends employers and carrier in New York workers’ compensation claims. He can be reached directly at dgourley@loisllc.com or 201-880-7213.