In a memorandum in support of the governor's 2013-2014 New York State Executive Budget, with regard to the portion of the “Business Relief Bill” that concerned the reopened case fund, it was suggested that the Fund was not needed “because the premiums [the insurers] have charged already covers this liability.” The memorandum went on to characterize the Fund as creating a windfall for insurers.

In this case, the insurer plaintiffs disputed that characterization of the Fund (i.e., that the premiums they charged already covered liability for reopened cases). Rather, they pointed out, with respect to those workers' compensation policies that were issued before October 1, 2013, the premiums they charged to employers, as authorized by the New York State Department of Financial Services (“DFS”), would not have been calculated to cover liability for future reopened claims, since at that time such claims were expected to be subject to transfer to the Fund for payment.

In contrast, for policies written on or after October 1, 2013, the DFS approved an increase in premiums to address the additional liability resulting from the closure of the Fund to future reopened cases; however, that premium increase would not cover policies issued before October 1, 2013.

Yet, the insurers contended, because these policies were occurrence-based, a benefit payable on a reopened claim made after January 1, 2014 but arising out of an accident that occurred before October 1, 2013 would impose on the insurers a liability not contemplated when the premium for the pre-October 1, 2013 policy was calculated.

Thus, the insurers asserted, Workers' Compensation Law § 25–a(1–a) improperly shifted liability to insurers for claims reopened after January 1, 2014 involving injuries that occurred before October 1, 2013, although such claims were not included in the calculations of either the premium rates they charged for those policies or the reserves they maintained in order to pay claims. They argued that the amendment imposed on them unfunded liability for claims in reopened cases that arose from accidents or injuries that occurred before October 1, 2013 because premium rates were prospective in nature and the insurers could not recoup the costs of this added liability, which they estimated at $62 million.

The trial court held that the statute did not have an improper retroactive effect, and the insurers appealed.

The Appellate Court's Decision

The appellate court reversed.

In its decision, the appellate court ruled that the Fund's closure “failed to provide for the unfunded liability” it imposed on insurers for reopened cases arising from accidents occurring before October 1, 2013 that otherwise would have qualified for transfer under Workers' Compensation Law § 25–a, and they could “not make up this shortfall.”

The appellate court found that the closure of the Fund, by ending the insurers' right to transfer eligible cases to the Fund, “created a new class of unfunded liability.” The legislature did not have an “understanding of the impact” the amendment would have on policies issued before October 1, 2013, according to the appellate court. Indeed, it added, the memorandum in support of the Business Relief Bill reflected the “incorrect belief that the increased costs to carriers for pre-October 1, 2013 claims were already taken into account in the calculation of those premiums.”

The amendment, as applied retroactively to policies issued before October 1, 2013, was “unconstitutional,” the appellate court concluded.

The case is American Economy Ins. Co. v. Empire State Towing and Recovery Ass'n, Inc., (N.Y. App.Div. 1st Dep't April 14, 2016). Attorneys involved include: Greenberg Traurig, LLP, Albany (Cynthia Neidl of counsel), for appellants; Eric T. Schneiderman, Attorney General, New York (Claude S. Platton and Steven C. Wu of counsel), for respondents; Law Office of Peter O'Connell, Albany (Peter B. O'Connell of counsel), for Empire State Towing and Recovery Association, Inc., and Automotive Recyclers Association of New York, amici curiae.