New York Appellate Court Finds Closure of Reopened Case Fund Unconstitutional

The New York State Supreme Court, Appellate Division First Department[fn1] rendered a decision on April 14, 2016 holding that the closing of New York’s Reopened Case Fund on January 1, 2014 was unconstitutional. Specifically, the Court held that the amendment to N.Y. Workers’ Compensation Law §25-a[1-a] enacted as part of the Business Relief Act of 2013, which closed the Reopened Case Fund to new claims effective 1/1/14, violated the Contract and Takings Clauses of the U.S. Constitution. American Economy Insurance Company et al. v. State of New York, et al., 2016 N.Y. Slip Op. 02924 (1st Dept. April 14, 2016).

The Reopened Case Fund is a fund unique to New York, set up to administer and pay claims arising from the reopening of closed cases. Supported by assessments on employers and carriers, the Special Fund for Reopened Cases was said to have balanced the need for continuing jurisdiction in order to ensure fairness to injured workers, where injury manifests itself long after a case has been closed, with the practical difficulties inherent in adjudicating matters that may be many years old. The Reopened Case Fund was created to save employers and carriers from liability for “stale” claims of injured employees by transferring liability for indemnity and medical payments, where more than seven years have elapsed from the date of injury or death, and more than three years have elapsed from the last payment of compensation.

The Memorandum in Support of the legislation closing the Fund argued that closing the Fund would save New York businesses hundreds of millions of dollars in assessments per year. It contended that “… carriers do not need this relief because the premiums they have charged already cover this liability. This reform prevents a windfall for such carriers.”

The insurance carrier plaintiffs in the American Economy Insurance case and the Appellate Division itself strongly disagreed with the Memorandum supporting the legislation. The Court found that insurance policies issued before October 1, 2013 charged premiums based on the assumption that reopened claims may be shifted to the Reopened Case Fund under WCL §25-a. It was only for policies issued on or after October 1, 2013 that the New York State Department of Financial Services approved a an increase in premiums to cover the additional liability resulting from the closure of the Fund to new claims as of 1/1/14.

The Court noted that policies are occurrence based, covering accidents that would occur during the policy term. Thus, any claim for benefits in a case involving a pre-10/1/13 accident, no matter when it was made, would still be covered by the policy in force on the date of that accident, unless liability was transferred to the Reopened Case Fund. Premiums paying for such a policy, however, assumed that liability for reopened claims may be shifted to the Reopened Case Fund. The Court thus agreed that the closure of the Fund under WCL §25-a increased liability on carriers, which they could not recover with increased premiums, creating an unfunded liability. The Court held, therefore, that as to carriers with policies issued before 10/1/13, the closure of the Reopened Case Fund constituted an illegal, retroactive impairment of an existing contractual obligation and imposition of an unfunded liability. Thus, the amendment to the statute violated the Contract and Takings Clauses of the U.S. Constitution.[fn2]

The lawsuit in American Economy Insurance Company was brought solely by insurance carriers and the Court’s ruling specifically applied to insurance carriers with policies issued before October 1, 2013. It is submitted, nevertheless, that in finding the amendment to WCL §25-a[1-a] to be unconstitutional, the Court rendered the closure of the Fund null and void. Under the Appellate Division’s decision, the Reopened Case Fund should be considered reopened to insurance carriers and self-insured employers alike on qualifying claims.

On May 4, 2016, the Workers’ Compensation Board announced that it had filed a Notice of Appeal to the Court of Appeals, the highest appeals Court in New York State, from the Appellate Division’s decision in the American Economy Insurance case. The appeal by New York State effects a stay of the Appellate Division decision, such that the Board has announced that it will not adjudicate any claims for transfer of liability to the Reopened Case Fund until decision by the Court of Appeals.

In its Subject No. 046-851, the Board confirmed that it would accept, but hold in abeyance, any and all applications for transfer of liability to the Reopened Case Fund pending decision from the Court of Appeals. This would include written applications in the form of Requests for Further Action (RFA-2s) or requests made at the workers’ compensation hearings.

At this point many carriers and employers are making applications for transfer of cases to the Reopened Case Fund despite the Board’s advice that it will not adjudicate the applications. Carriers and employers are motivated to make transfer applications now because under the statute the Reopened Case Fund’s liability to cover indemnity and medical payments is limited retroactively to two years prior to the date the application to transfer the claim to the Fund is made.

Decision by the Court of Appeals in the American Economy Insurance case is not expected for many months, perhaps up to a year.

Should the Court of Appeals affirm the Appellate Division, the Reopened Case Fund and the Workers’ Compensation Board will have to deal with what can be expected to be thousands of claims for transfer of liability to the Fund. An affirmance would likely require increased assessments on employers and carriers to fund the liability of the Reopened Case Fund under WCL §25-a.

Footnotes:

1. In New York State most cases involving the Workers' Compensation Law are heard by the Appellate Division Third Department on appeal from the Workers' Compensation Board. This case was brought as a declaratory judgement action in Manhattan and the plaintiffs were able to have a different court review the decision on their appeal.

2. It should be noted that because a case may not qualify for Reopened Case Fund relief until at least 7 years from the date of accident and 3 years from the last payment of compensation, under the Court’s analysis the earliest date under which the Fund could be considered constitutionally closed to new claims would be October 1, 2020. October 1, 2013 would be the first date of accident for which premiums accounted for the Fund’s closure.

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