Star Ins. Co. v. Neighbors
| Decision Date | 20 July 2006 |
| Docket Number | No. 42926.,42926. |
| Citation | 138 P.3d 507 |
| Court | Nevada Supreme Court |
| Parties | STAR INSURANCE COMPANY, Appellant, v. William NEIGHBORS; Faulkner & Company; and State of Nevada Division of Industrial Relations of the Department of Business and Industry, Respondents. |
Beckett, Yott & McCarty and Laurie A. Yott, Reno; Berman, Berman & Berman, LLP, and Spencer A. Schneider, Los Angeles, California, for Appellant.
Barbara A. Wall, Nevada Attorney for Injured Workers, Carson City, for Respondent Neighbors.
Nancy E. Wong, Carson City, for Respondent State of Nevada Department of Business and Industry, Division of Industrial Relations.
Before MAUPIN, GIBBONS and HARDESTY, JJ.
In this case, we consider whether a workers' compensation insurer may avoid payment of a claim submitted under retroactive coverage procured by employer fraud. We hold that the fraud in this instance voids the retroactive coverage from its inception and that NRS 616B.033, governing rights as between workers' compensation insurers and the injured employees, does not negate a fraud defense as asserted by the insurer below. We also consider whether the worker in this case may claim benefits from the Uninsured Employers' Claim Account (UECA) under NRS 616C.220, as amended after the date of the workplace accident in this case. We conclude that the expansion of employee rights under that amendment must be prospectively applied.
Respondent Faulkner and Company operated a marginally funded roofing concern in the northern Nevada area and, as this case demonstrates, engaged in the rather unscrupulous practice of hiring cheap labor to engage in dangerous undertakings without providing current workers' compensation insurance.
In July 2001, Faulkner and Company engaged respondent William Neighbors as a day laborer to assist with a roofing job in South Lake Tahoe, California. While carrying materials up a ladder, Neighbors lost his footing and fell twenty feet, landing partially on his head and neck. Neighbors sustained serious brain and chest injuries, rendering him incompetent and requiring appointment of a public guardian to represent him in his affairs.
On the day following the accident, Richard Faulkner, the owner of the business, requested that appellant, Star Insurance Company, reinstate his workers' compensation insurance, which had lapsed the previous March for nonpayment of premium. As a condition to reinstatement, Star required payment of $1,800, the unpaid premium amount, and a letter from Faulkner verifying that no known losses had occurred during the cancellation period. Faulkner fraudulently complied, knowing that Neighbors had sustained catastrophic injuries, and Star reinstated the policy.
Shortly thereafter, Neighbors submitted a claim for workers' compensation benefits. Star denied the claim in writing, asserting that the policy was void. Star then rescinded the policy, stating in the notice of rescission that Faulkner misrepresented that he had no known losses during the lapsed period. Star later returned the $1,800. Faulkner was criminally charged with concealing a material fact in an insurance application and for operating a business without industrial insurance. Faulkner paid approximately $500 in fines and spent two days in jail. He also declared bankruptcy and obtained a discharge of debtor.
Through his public guardian, Neighbors appealed Star's denial of his claim to the Nevada Department of Administration. A hearing officer reversed the claim denial, and an appeals officer upheld the hearing officer's decision. As part of its ruling, the appeals officer indicated that, in no event, was Neighbors entitled to claim benefits under the UECA. The district court denied Star's petition for judicial review. Star appeals.
Fraudulent policy procurement and NRS 616B.033
On appeal, Star asserts that the appeals officer and the district court erroneously interpreted NRS 616B.033 to require Star to pay Neighbors compensation. NRS 616B.033(2) provides, in pertinent part, as follows:
No statement in an employer's application for a policy of industrial insurance voids the policy as between the insurer and employer unless the statement is false and would have materially affected the acceptance of the risk if known by the insurer, but in no case does the invalidation of a policy as between the insurer and employer affect the insurer's obligation to provide compensation to claimants arising before the cancellation of the policy. If the insurer is required pursuant to this subsection to provide compensation under an invalid policy, the insurer is subrogated to the claimant's rights against the employer.1
Although we, like the district court, review an appeals officer's factual determinations for clear error or abuse of discretion questions of law, including questions of statutory interpretation like the one presented in this appeal, are reviewed independently.2 When the text of a statute is plain and unambiguous, a court should impart it with ordinary meaning and not go beyond that meaning.3 If a statute is ambiguous, meaning that it is susceptible to differing reasonable interpretations, "the statute should be construed consistently with what reason and public policy would indicate the Legislature intended."4 Going further, we must construe ambiguous statutes so as to avoid absurd results.5
Star points to the language in NRS 616B.033(2), providing that "[n]o statement in an employer's application for a policy of industrial insurance voids the policy as between the insurer and employer unless the statement is false and would have materially affected the acceptance of the risk if known by the insurer." Star asserts that this language supports its ability to rescind, rendering the policy void ab initio and placing the parties in the positions they occupied before executing the contract. The problem with this analysis comes from the remainder of the text of subsection two:
[B]ut in no case does the invalidation of a policy as between the insurer and employer affect the insurer's obligation to provide compensation to claimants arising before the cancellation of the policy.6
NRS 616B.033(2) clearly precludes defenses to employee claims against coverage in place at the time of an accident based upon employer misconduct, coverage upon which employees have a right to rely. However, the phrase, "in no case does the invalidation of a policy as between the insurer and employer affect the insurer's obligation to provide compensation to claimants arising before the cancellation," does not clearly apply to retroactive insurance which, by definition, did not exist at the time of the injury. (Emphasis added.) Certainly, an obligation to provide compensation under the statute is normally stimulated by an accident, the obligation normally arises under pre-existing coverage, and the term "cancellation" normally presumes the discontinuation of a pre-existing policy.7 Further, an anomalous situation occurs where the employer fraudulently seeks to create the "obligation to provide compensation" after the fact. Thus, when the employer has fraudulently procured retroactive or back-dated insurance for the explicit purpose of obtaining coverage for a pre-existing loss, a latent ambiguity arises in connection with the scope of NRS 616B.033(2).8 In resolving the ambiguity, we must take a neutral approach to interpreting the statute.9 In this, we must examine the purposes of the provisions.
NRS 616B.033(2) addresses a number of issues. First, it protects employers from losing required coverage through rescission or cancellation based upon nonmaterial misrepresentations in the employer's application for coverage. Second, subject to enumerated exceptions, it allows the insurer to rescind or cancel coverage at any time during the policy period based upon a material misrepresentation in the application for coverage. Third, while this right exists as between the employer and the insurer, it does not affect compensation owed for injuries sustained before the exercise of rescission or cancellation rights. Thus, the measure prohibits the practice of "post-accident" underwriting, i.e., claim avoidance under a pre-existing policy, based upon an act of fraud that is totally unrelated to the subsequent claim or otherwise. Finally, the measure gives the insurer a limited remedy against the employer if the insurer is required to pay benefits under a policy induced by the employer's fraud.
Star concedes that NRS 616B.033(2) gives the insurer the right to rescind a pre-accident policy acquired by fraud in the application as to the employer but not the employee. Accordingly, as to an employee injured during the policy period, the insurer may only cancel prospectively. The net effect of this choice of language, Star reasons, is that a pre-existing policy is merely voidable at the election of the insurer. This being the case, the statute cannot be construed to create rights under a policy issued after the accident, which is void from the beginning. We agree.
This is not a case of post-accident underwriting with regard to an existing policy. In other words, Star is not attempting to avoid coverage it had placed before an accident based upon misconduct that is in no way related to the claim in question. In this instance, Faulkner obtained the policy by fraud to get coverage for this particular claim. To avoid the absurd result of allowing an employer to fraudulently obtain back-dated coverage, other courts have refused to impose coverage upon insurers that have been induced by fraud to issue retroactive insurance.10 We agree with the position taken by the courts from our sister states, including the Kansas court in Matlock v. Hollis,11 in which the court stated:
The distinction between a fraudulent concealment of a loss already suffered, in order to secure insurance coverage of such loss, and fraudulent representations as to...
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