Colo. Ins. Guaranty Ass'n v. Sunstate Equip. Co.

Citation405 P.3d 320
Decision Date21 April 2016
Docket NumberCourt of Appeals No. 15CA0288
Parties COLORADO INSURANCE GUARANTY ASSOCIATION, Plaintiff–Appellee and Cross–Appellant, v. SUNSTATE EQUIPMENT COMPANY, LLC, Defendant–Appellant and Cross–Appellee.
CourtCourt of Appeals of Colorado

405 P.3d 320

COLORADO INSURANCE GUARANTY ASSOCIATION, Plaintiff–Appellee and Cross–Appellant,
SUNSTATE EQUIPMENT COMPANY, LLC, Defendant–Appellant and Cross–Appellee.

Court of Appeals No. 15CA0288

Colorado Court of Appeals, Div. III.

April 21, 2016
Certiorari Dismissed October 12, 2017

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

Opinion by JUDGE WEBB

¶ 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

405 P.3d 326

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
405 P.3d 327
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, 347 P.3d 606.

• 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.

405 P.3d 328

Even so, according to the affidavit of Sunstate's chief financial officer:

• "Sunstate's net worth was well

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