Liberty Mut. Ins. v. Texas Dept. of Ins.
| Decision Date | 03 March 2006 |
| Docket Number | No. 03-04-00105-CV.,03-04-00105-CV. |
| Citation | 187 S.W.3d 808 |
| Parties | LIBERTY MUTUAL INSURANCE COMPANY, Liberty Mutual Fire Insurance Company, and Liberty Insurance Corporation, Appellants v. TEXAS DEPARTMENT OF INSURANCE and Jose Montemayor, as Commissioner of Insurance; Amber, Inc.; Champage-Webber, Inc.; Churchill Truck Lines, Inc.; and Royal Seating Corp., Appellees. |
| Court | Texas Court of Appeals |
Russell Yager, David P. Blanke, and Spikes Kangerga, Vinson & Elkins, L.L.P., Austin, for Appellants.
John M. Hohengarten, Asst. Atty. Gen., Austin, Scott M. Clearman, Michael D. Myers, McClanahan & Clearman, L.L.P., Houston, Mark L. Perlmutter, Perlmutter
& Schuelke, L.L.P., Brad R. Reagan, Reagan & Juarez, L.L.P., and Charles M. Silver, Austin, for Amber, Inc., Champagne-Webber, Inc., Churchill Truck Lines, Inc., and Royal Seating Corp.
Before Justices KIDD, PATTERSON and PURYEAR.
Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, and Liberty Insurance Corporation (hereinafter "the Liberty companies") contend that a rule issued by the Texas Department of Insurance (the "Department"), which required them to pass surpluses from the insurance market through to policyholders, deprived them of their contractual rights, deprived them of property without due process, and is an unconstitutional retroactive law. They appeal the judgment of the trial court requiring them to issue rebates to policyholders with policies effective in 1991 and 1992. We will affirm the judgment of the district court.
Since 1953, employers who were unable to find workers' compensation insurance coverage through an insurance company could obtain coverage from a program funded by all insurance companies selling workers' compensation insurance in Texas. In the 1980s, the program operated at a substantial deficit, which insurers were required to cover. In an effort to prevent insurance companies from leaving Texas, the Department issued emergency rules, which allowed insurers to pass through the deficits to policyholders. The legislature followed with a statute requiring insurers to pass through the deficits and surpluses originating from the program to policyholders.
Starting in 1991, the program experienced unexpected surpluses. Even though there was a surplus, some insurers continued to bill policyholders for non-existent program deficits. Upon learning this, the Department issued a letter prohibiting pass-throughs to policyholders. As a result, the practice stopped. However, in 1997, the Department issued a rule specifying that insurers were to pass through reinsurance surpluses for policies issued between 1991 and 1992.
Insurers, including the Liberty companies, sued the Department and sought a declaration that the rule issued in 1997 was invalid. Conversely, policyholders sued insurers seeking a proportionate share of the reinsurance surplus.
The Liberty companies, the Department, and the policyholders all moved for summary judgment. The district court granted the no-evidence summary judgment motions filed by the Department and by the policyholders and denied the Liberty companies' summary judgment motions. The Liberty companies appeal the granting of the Department's and the policyholders' no-evidence summary judgment and appeal the denial of their own motion.
Before addressing the claims of the parties, we will give a brief overview of retrospectively-rated insurance policies. When parties contract for a typical insurance policy, the policyholder knows the amount of money that needs to be paid to the insurer, and the amount of money paid for the policy period does not change to account for actual losses the policyholder experienced. Donald Winslow, A Note on Retrospectively Rated Insurance and Federal Income Taxation, 79 Ky. L.J. 195, 195 (1991). However, insurance coverage for large businesses is not so simple. For large businesses, the amount of potential losses are much greater, and the policyholders are exposed to greater risks that are less predictable. Id. Because the potential risks are less predictable, the insurers and the policyholders will likely have different expectations over how the risks are to be allocated. Id. at 195-96.
Retrospectively-rated insurance policies are an attempt to accommodate the different expectations of insurers and policyholders. Id. at 196. These policies have flexible premium amounts to prevent policyholders and insurers from forsaking insurance agreements because the premiums are either too high to be affordable or too low to cover the losses covered. Id. Under a retrospectively-rated policy, a policyholder pays a premium that corresponds, to some degree, to the losses the policyholder experiences.
Generally, retrospectively-rated insurance policies have certain characteristics. First, the policyholder is given a bill for an initial, estimated premium at the start of each policy period. Mark G. Ledwin, The Treatment of Retrospectively Rated Insurance Policies in Bankruptcy, 16 Bank. Dev. J. 11, 12 (1999). After the end of the policy period, the insurer uses a formula to recalculate the premium charged based on actual claims experienced. Id.
Retrospectively-rated worker's compensation policies are available in Texas. The Texas workers' compensation market consists of a voluntary market and a residual market. The voluntary market is composed of employers, or policyholders, who are able to buy workers' compensation insurance, including retrospectively-rated policies, directly from an insurer.
Employers who are unable to buy workers' compensation insurance directly, or "rejected risks," form the residual market. During the 1980s, the Texas Workers' Compensation Assigned Risk Pool (the "Pool") operated the residual market. The Pool was the insurer of last resort for Texas employers who were unable to obtain workers' compensation insurance through the voluntary insurance market. See Act of May 14, 1953, 53d Leg., R.S., ch. 279, § 1, 1953 Tex. Gen. Laws 716, 716-18, repealed by Act of Dec. 11, 1989, 71st Leg., 2d C.S., ch. 1, § 16.01 (21), 1989 Tex. Gen. Laws 1, 114-15 (hereinafter "Act of May 14, 1953"); see also Texas Worker's Comp. Ins. Facility v. Comptroller of Pub. Accounts, 67 S.W.3d 417, 420 (Tex.App.-Austin 2002, no pet.); see generally Butler Weldments Corp. v. Liberty Mut. Ins. Co., 3 S.W.3d 654, 656 (Tex.App.-Austin 1999, no writ) (generally explaining workers' compensation system and insurer of last resort history).
All insurers writing workers' compensation insurance in Texas belonged to the Pool. Butler Weldments, 3 S.W.3d at 656. An employer who was seeking insurance but was unable to obtain coverage in the voluntary market would submit an application to the Pool, and a policy would be issued by one of the insurers that was a member of the Pool. However, the financial burden for covering the employer would not fall solely on the insurance company issuing the policy. Rather, all insurers belonging to the Pool were required to pay a portion of the losses the Pool incurred. See Act of May 14, 1953, § 1 (). The portion of the loss an insurer was required to pay corresponded to the insurer's share of the voluntary market. See Act of May 14, 1953, § 1; see also Butler Weldments Corp., 3 S.W.3d at 656.
The Pool's financial responsibilities were transferred to the Texas Workers' Compensation Assigned Risk Facility (the "Facility") in 1991, to the Texas Workers' Compensation Insurance Fund (the "Fund") in 1994, and ultimately to the Texas Mutual Insurance Company in 2001.1
During the late 1980s, the Pool had a total deficit of approximately $2 billion because the residual market claims greatly exceeded the premiums collected for the policies. This deficit was passed on to insurers.
In response to the deficit, some insurers began to pass their share of the deficit on to their policyholders in the voluntary market. However, after discovering this practice, the Commissioner demanded that insurers stop the practice. After receiving the Commissioner's demand, some insurers threatened to leave the state.
In response to insurers' threats to leave, the Board issued emergency rating rules in 1991 that amended Part Two of the Texas Retrospective Rating Plan Manual (the "Manual") and allowed insurers to pass a portion of the deficit on to policyholders. See Tex. Ins.Code Ann. arts. 5.62, 5.77 & 5.96 (West 1981 & Supp.2005) (giving authority to amend and promulgate rules, rating plans, and policy forms). The amendments added a new component to the formula used in calculating the total premiums for retrospectively-rated workers' compensation policies: the residual market premium. The residual market premium is the amount of money insurers would charge their policyholders after the Facility's operating expenses were passed on to the insurers. To determine the amount of residual market premium to charge policyholders, insurers would apply a residual market factor issued by the State Board of Insurance ("the Board").2
The first amendment went into effect on May 1, 1991, and governed the pricing of policies issued from May 1, 1991 to June 6, 1991. See Tex. Ins.Code Ann. art. 5.96(I) (). The amendment provided for the issuance of an initial residual market factor, based on projected residual market costs, and a final factor based on the actual residual market deficit for the calendar year. The amendment also stated that the final factor would be used in making all future adjustments of the premium. In relevant part, the rule provided as follows:
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