State ex rel. Pope v. U.S. Fire Ins. Co.

• Decision Date: 27 August 2004
• Docket Number: No. E2002-01092-SC-R11-CV,E2002-01092-SC-R11-CV
• Citation: 145 S.W.3d 529
• Parties: STATE of Tennessee, ex rel. Anne B. POPE v. UNITED STATES FIRE INSURANCE COMPANY, et al.
• Court: Tennessee Supreme Court

145 S.W.3d 529

STATE of Tennessee, ex rel. Anne B. POPE v. UNITED STATES FIRE INSURANCE COMPANY, et al.

No. E2002-01092-SC-R11-CV

Supreme Court of Tennessee, at Knoxville.

January 7, 2004 Session.

August 27, 2004.

Appeal from the Chancery Court, Hamilton County, W. Frank Brown, III, Chancellor.

Thomas L. Wyatt and Thomas Greenholtz, Chattanooga, Tennessee, for the appellants/intervening petitioners, Carlise Cagle, David Seale, Bradley Hatfield, Doug West, Sr., Richard Cole, James Workman, Silas Passmore, Jim T. Dickson and Eddie Hart, Sr.

Paul G. Summers, Attorney General and Reporter; Michael E. Moore, Solicitor General; and Sarah Ann Hiestand, Senior Counsel, Financial Division, for the appellee, State of Tennessee, ex rel. Anne B. Pope.

William L. Norton, III, and Eric W. Smith, Nashville, Tennessee, for the appellee, United States Fire Insurance Company, Inc.

John M. Gillum and Brett A. Oeser, Nashville, Tennessee, for the appellee, United States Fidelity and Guaranty Company.

William E. Godbold, III, and M. Andrew Pippenger, Chattanooga, Tennessee, for the appellee, Employers Reinsurance Corporation.

OPINION

ADOLPHO A. BIRCH, JR., J., delivered the opinion of the court, in which FRANK F. DROWOTA, III, C.J., and E. RILEY ANDERSON, JANICE M. HOLDER, and WILLIAM M. BARKER, JJ., joined.

We granted permission to appeal pursuant to Rule 11 of the Tennessee Rules of Appellate Procedure to determine whether the liability of a surety company that issues bonds to self-insured employers under Tennessee Code Annotated section 50-6-405(b) is limited to the penal amount listed on the face of each bond. Because section 50-6-405(b) requires that bonds be of a single, continuous term, we conclude that a surety company's liability is limited to the penal amount on the face of the bonds. Accordingly, we affirm the judgment of the Court of Appeals.

I. Facts and Procedural History

North American Royalties, Inc., and its subsidiaries ("NAR") operated a large foundry in Chattanooga. NAR was self-insured for workers' compensation liability, and as such, NAR was statutorily obligated to furnish proof to the Commissioner of the Department of Commerce and Insurance that it was financially able to pay current workers' compensation claims as well as those arising in the future. See Tenn.Code Ann. § 50-6-405(a)(2) (2003).¹ To ensure the making of these workers' compensation payments as required, NAR purchased surety bonds from several surety companies. See Tenn.Code Ann. § 50-6-405(b)(1) (2003). These bonds, filed with the Commissioner, obligated the respective surety companies to fulfill NAR's obligations under the Workers' Compensation Law.

In November 2001, NAR stopped paying its workers' compensation claims and filed for bankruptcy protection in the United States Bankruptcy Court for the Eastern District of Tennessee, Southern Division. On January 11, 2002, the bankruptcy court lifted the automatic stay regarding NAR's surety bonds and ordered that all workers' compensation claims be decided in the Chancery Court for Hamilton County. The State of Tennessee, through the Commissioner of Commerce and Insurance, filed a "Verified Petition of the Tennessee Commissioner of Commerce and Insurance" against six of the companies that had filed as surety for NAR's workers' compensation. The petition was filed in the Chancery Court for Hamilton County, Tennessee, on January 22, 2002. Because NAR had breached its obligations under the Workers' Compensation Law, the State sought through this petition to force the respondent surety companies² to deposit into the registry of the court the face amount of the last rider to each of several surety bonds purchased by NAR to cover its workers' compensation obligations.

Several former employees of NAR who were workers' compensation obligees intervened in the cause.³ The intervenors, joined by several surety companies,⁴ filed objections to the State's petition. The objectors contended that the sureties were obligated to pay up to the face amount of their respective bonds for each year the bonds were in effect, thereby effectively aggregating the bond amounts from year to year. In a show cause hearing, the State and counsel for the sureties agreed that USFIC, USF&G, and ERC would pay the face amount of the bonds in exchange for a full release from all claims against each respective entity. The intervenors subsequently filed a petition in which they objected, in greater detail, to the proposed agreed order submitted by the Commissioner and the sureties.

The trial court conducted an evidentiary hearing to determine the extent of the sureties' liability. The intervenors contended that because Tennessee Code Annotated section 50-6-405(b)(2) requires self-insurers to file annually certain information so that the required amount of security may be annually calculated, the General Assembly intended the sureties' liability to be for the face amount for each annual period during which a particular surety ensured the payment of NAR's workers' compensation obligations (in other words, the cumulative sum of the bonds for each year in effect). The sureties contended, on the other hand, that their liability was limited to the face amount of the bonds regardless of the number of years the bonds were in effect.

Two people familiar with the customs and practices of the self-insuring process testified at the evidentiary hearing. According to Mark Brothers, the Director of the Self-Insurance Surplus Lines for Workers' Compensation Division ("Self-Insurance Division") within the Department of Commerce and Insurance,⁵ once an employer is qualified as a self-insurer, no further qualification is necessary. A self-insurer is, however, required to file certified financial reports and its loss history annually with the Self-Insurance Division so that its ability to pay claims may be reviewed and the required bond amount may be determined. If the Self-Insurance Division determines that a bond should be increased, the increase may be accomplished through the issuance of a rider, rather than by a new bond. A self-insurer is not required to post a new bond instrument each year if the security in place is deemed sufficient.

Mark Gasaway, a surety manager for USF&G, testified at the evidentiary hearing that the USF&G bond in this case, issued on a statutory form, was originally issued in 1996 in the face amount of $350,000. There was no expiration date on the bond form; the form states that the bond may be cancelled upon giving thirty days' written notice to the Commissioner. The Self-Insurance Division sent a letter to NAR in 1998 requesting that the amount of the USF&G bond be increased to $600,000. The letter requested only that the amount of the existing bond be increased, not that a new bond be posted. USF&G issued a rider amending the original bond to increase the face amount of the bond from $350,000 to $600,000. The rider, accepted by the Self-Insurance Division, stated that "in no event shall the aggregate liability of [USF&G] on account of any and all acts exceed the larger amount." USF&G claimed it had only one bond in effect for the period between February 1996 and 2000, and the annual premium notices sent to NAR indicated that only one bond was in force.

The bonds submitted by the sureties and accepted by the State were printed on forms provided by the Commissioner. The form states that the surety "shall be liable, within the penal sum mentioned herein, for the default of the principal." NAR paid and the surety companies accepted annual premiums for the bonds at issue. The premiums were adjusted annually as NAR's ability to pay workers' compensation claims was re-evaluated.

Ruling against the intervenors, the trial court entered an order essentially adopting the agreed order proposed by the Commissioner and the sureties.⁶ Because the bond funds were inadequate to pay the workers' compensation benefits owed by NAR to injured employees, most claimants received less than $1,000 as compensation for the medical benefits to which they are entitled under the Tennessee Workers' Compensation Law.

The Court of Appeals affirmed the trial court. The intervenors filed an Application for Permission to Appeal pursuant to Rule 11 of the Tennessee Rules of Appellate Procedure. This Court granted permission to appeal to consider whether the liability of surety companies that issue bonds to self-insured employers pursuant to Tennessee Code Annotated section 50-6-405(b) is limited to the face amount of the bonds.

II. Standard of Review

In order to resolve the issue before this Court, we must interpret the meaning of Tennessee Code Annotated section 50-6-405(b) and the surety bond contracts. Both the interpretation of statutes and the interpretation of contracts are questions of law and, therefore, require a de novo review on appeal with no presumption of correctness given to the lower courts' conclusions of law. See State v. Williams, 38 S.W.3d 532, 535 (Tenn.2001) (indicating that the construction of statutes and the application of the law to the facts are questions of law); see also Guiliano v. Cleo, Inc., 995 S.W.2d 88, 95 (Tenn.1999) (holding that "[t]he interpretation of a contract is a matter of law that requires a de novo review on appeal"); Sherman v. Cate, 159 Tenn. 69, 16 S.W.2d 25, 25-26 (1929) (finding that since a surety's statutory bond is a contract, courts should determine the intent of the parties to the bond in the same way in which courts would construe a contract).

III. Analysis

We are faced with a legal issue that has not been previously addressed by our courts. Many states have debated whether the liability under statutorily-required surety bonds renewed annually are cumulative (the aggregate of the face amount for each year the bond was in force) or continuous (limited to the face amount of the bond). See, e.g., United States v. Am. Sur. Co. of N.Y., 172 F.2d 135 (2d Cir. 1949); United States...