Hayden Lake Fire Protection Dist. v. Alcorn

Decision Date28 February 2005
Docket NumberNo. 28996.,28996.
Citation141 Idaho 388,111 P.3d 73
CourtIdaho Supreme Court
PartiesHAYDEN LAKE FIRE PROTECTION DISTRICT, and all other corporations, entities, or individuals similarly situated, Plaintiffs-Appellants-Cross Respondents, v. James M. ALCORN, Manager of the State Insurance Fund; Drew Forney, former Manager of the State Insurance Fund; W.W. Deal, Milford Terrell, Gerald Geddes, Wayne Meyer, and Marguerite Mc Laughlin, Directors of the State Insurance Fund; the State Insurance Fund, an independent body corporate politic, Defendants-Respondents-Cross Appellants, and State of Idaho, acting by and through the Department of Administration; and State of Idaho, ex rel., Governor Dirk Kempthorne, Intervener, Defendants-Respondents. Kelso & Irwin, P.A., Plaintiff-Appellant-Cross Respondent, v. State Insurance Fund, and Drew Forney, Manager of the State Insurance Fund, individually, pursuant to I.C. 72-907, Defendants-Respondents-Cross Appellants, and State of Idaho, acting by and through the Department of Administration, Defendants-Respondents.

Ball Janik LLP, Portland, Oregon; Starr Kelso, Coeur d'Alene, for appellant's Hayden Lake Fire Protection District, et al. James T. McDermott argued.

Lawrence G. Wasden, Attorney General, Boise, for respondents Alcorn et al. and State Insurance Fund. Michael S. Gilmore argued.

Lawrence G. Wasden, Attorney General, Boise, for respondents State of Idaho, Dept. of Administration. Brian P. Kane argued.

SCHROEDER, Chief Justice.

Hayden Lake Fire Protection District (HLFPD) and Kelso & Irwin, P.A. (Kelso) brought this action against the Idaho State Insurance Fund (SIF) and the State of Idaho (State) challenging the SIF's practices relating to management of its surplus and dividends, and certain real estate investments the SIF made with the State. The district court denied Kelso's and HLFPD's motions for summary judgment, granted the SIF's and the State's motions for summary judgment, and entered two Final Judgments in favor of the SIF and the State. HLFPD appeals, and the SIF cross-appeals.

A. Factual Background

The SIF was created by the 1917 Workmen's (now Workers') Compensation Act (WCA) to provide workers' compensation insurance for Idaho employers. Except for a five-member Commission that ran the SIF from 1939 to 1941, the SIF has been directed by one Manager. From 1917 to 1919 the SIF's surplus, reserve, and premium rates were subject to State Insurance Commission approval, but since 1919 the Manager has had the authority to set surplus and reserves without outside approval and to declare dividends in his discretion.

The Manager is charged with setting premium amounts "at the lowest possible rate consistent with the maintenance of a solvent state insurance fund and the creation of a reasonable surplus and reserve." I.C. § 72-913 (2004). Before 1998, I.C. § 72-911, entitled "Surplus and reserve," provided a framework for the SIF's retention of a percentage of premiums to be set aside for the Fund's surplus. The statute provided that:

"Ten per centum (10%) of the premiums collected from employers insured in the fund shall be set aside by the manager for the creation of a surplus until such surplus shall amount to the sum of $100,000, and thereafter 5 per centum (5%) of such premiums until such time as in the judgment of the manager such surplus shall be sufficiently large to cover the catastrophe hazard and all other unanticipated losses."

The SIF's Managers interpreted the statute as setting forth the minimum amount of premiums the SIF could retain for surplus. The surplus has always consisted of more than 5% of premiums, while dividends were or were not declared at the discretion of the Manager.

In 1998 the Legislature amended the SIF's governing statutes, making the SIF subject to the Idaho Insurance Code. The district court found that the restrictions on investments that apply to all insurers in Idaho applied to the SIF both before and after 1998. A Board of Directors was created to appoint the SIF Manager. I.C. § 72-911, containing the percentages relating to the amount of premiums to be set aside for surplus, was repealed. In general the Manager's authority with respect to setting surplus and reserve levels and declaring dividends was not affected by the amendments.

The SIF's ability to invest its funds is similar to that of other insurers in Idaho. I.C. § 72-912 provides that the SIF may "invest any of the surplus or reserve funds belonging to the state insurance fund in real estate and the same securities and investments authorized for investments by insurance companies in Idaho." Before 1998, I.C. § 72-902 contained a paragraph specifically describing the SIF's ability to invest in office space ("The state insurance manager may acquire real property as a site for an office building.").

Idaho's Insurance Code is located in Title 41. Regarding real estate investments, I.C. § 41-728(1) states that "[a]n insurer may acquire, invest in, own, maintain, alter, furnish, improve, manage, lease and convey the following real estate only: (a) land and buildings used for home office purposes .... (f) real estate for the production of income, under lease, or being constructed under a definite agreement providing for lease...." Subsection (3) provides "An insurer may lease to others part of real property otherwise occupied by it for home office and other purposes under subsection (1)(a) above...." Thus, the SIF is authorized to enter into lease agreements for the production of income.

Like other Idaho insurers, the SIF is also permitted to invest in mortgage loans and contracts, subject to certain limitations. I.C. § 41-722 provides that "[n]o mortgage loan or investment therein upon any one (1) parcel of real property shall exceed in amount, at the time of acquisition, seventy-five per cent (75%) of the fair value of the property. ..." Pursuant to these statutes, the SIF made a number of real estate investments in State buildings.

B. Procedural History
1. Kelso & Irwin, P.A. v. State Ins. Fund, 134 Idaho 130, 997 P.2d 591 (2000).

In 1996 Kelso filed a Complaint against the SIF alleging that the SIF's sale of workers' compensation insurance at artificially low premiums threatened the fund's surplus. The Complaint arose out of a 1996 law enabling the SIF to sell workers' compensation insurance to farm workers and lowering the minimum premium for qualifying small employers. The Complaint sought injunctive relief and attorney fees. No jury trial was demanded.

Kelso filed a First Amended Complaint in 1998, alleging that the SIF was retaining premiums for its surplus in excess of the amount authorized by statute. Kelso also challenged an SIF investment in State property, alleging that the SIF had squandered its assets on terms unreasonably favorable to the State. The State was added as a defendant. No jury trial was demanded.

The district court granted the SIF's motion to dismiss the First Amended Complaint. Kelso appealed to the Supreme Court. This Court held that the SIF's policyholders had no property interests in the SIF's assets and that the SIF could not be estopped from denying that its policyholders had any property interest in its surpluses and reserves. The Court held that the sale of insurance policies at the lower premiums did not breach the policyholders' insurance contracts with the SIF. However, the Court determined that because the statutes governing the SIF were "necessarily part of Kelso's contract with the SIF, and Kelso has alleged a violation of these statutory provisions, we believe Kelso has alleged sufficient facts to support a cause of action for breach of contract." Kelso & Irwin, P.A. v. State Ins. Fund, 134 Idaho 130, 140, 997 P.2d 591, 601 (2000).

2. HLFPD's Lawsuit

In January of 2000, while a final decision by the Supreme Court in Kelso was pending, HLFPD filed a Complaint against the SIF, James Alcorn as Manager of the SIF, Drew Forney, a former Manager of the SIF, the Directors of the SIF, the Department of Administration, and the State. The Complaint contained many claims similar to those asserted in Kelso, so the action was stayed pending resolution of that case.

After this Court remanded Kelso to the district court, it was consolidated with HLFPD's case, and the case was certified as a class action. HLFPD was named as class representative for all private policyholders and public policyholders other than the State. The State was permitted to intervene as a defendant. HLFPD filed an Amended Consolidated Complaint on November 10, 2000, alleging breach of contract, breach of the covenant of good faith and fair dealing, breach of fiduciary duty, money had and received, rescission, declaratory relief, injunction, equitable accounting, and attorney fees. HLFPD demanded a jury trial pursuant to I.R.C.P. 38(b).

On March 5, 2001, the district court entered an Order striking the demand for a jury trial as untimely. HLFPD filed a motion for jury trial under I.R.C.P. 39. The district court denied the motion.

The parties brought cross-motions for partial summary judgment. On July 27, 2001, the district court entered the first of three Memorandum Opinion and Orders at issue in this appeal. The district court dismissed the claims against the SIF Directors as individuals. In regards to the claims that the SIF violated former I.C. § 72-911 by setting aside more than 5% of premiums for surplus, the district court determined that the statute was ambiguous. The "5%" language could be reasonably interpreted as a minimum or a maximum amount of premiums to be set aside for surplus. The court refused to give Simplot deference to the SIF's longstanding interpretation of the statute as a minimum amount of premiums for surplus since it held that the SIF was not a state agency granted the authority to interpret its governing statutes. J.R....

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