American Economy Insurance Company, et al., Respondents,v.State of New York, et al., Appellants.BriefN.Y.September 7, 2017Appeal No. APL-2016-00100 To be argued by: STEVEN C. WU 20 minutes requested Supreme Court, New York County, Index No. 156923/2013 State of New York Court of Appeals AMERICAN ECONOMY INSURANCE COMPANY, AMERICAN FIRE AND CASUALTY COMPANY, AMERICAN STATES INSURANCE COMPANY, EMPLOYERS INSURANCE COMPANY OF WAUSAU, EXCELSIOR INSURANCE COMPANY, FIRST LIBERTY INSURANCE CORP., GENERAL INSURANCE COMPANY OF AMERICA, LIBERTY INSURANCE CORPORATION, LIBERTY MUTUAL FIRE INSURANCE CO., LIBERTY MUTUAL INSURANCE COMPANY, LM INSURANCE CORPORATION, NETHERLANDS INSURANCE COMPANY, THE OHIO CASUALTY INSURANCE COMPANY, OHIO SECURITY INSURANCE COMPANY, PEERLESS INDEMNITY INSURANCE COMPANY, PEERLESS INSURANCE COMPANY, WAUSAU BUSINESS INSURANCE COMPANY, WAUSAU GENERAL INSURANCE COMPANY, WAUSAU UNDERWRITERS INSURANCE COMPANY and WEST AMERICAN INSURANCE COMPANY, Plaintiffs-Respondents, -against- THE STATE OF NEW YORK, THE NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES, BENJAMIN M. LAWSKY, in his official capacity as Superintendent of the New York State Department of Financial Services and STATE OF NEW YORK WORKERS’ COMPENSATION BOARD, Defendants-Appellants. REPLY BRIEF FOR APPELLANTS BARBARA D. UNDERWOOD Solicitor General STEVEN C. WU Deputy Solicitor General PHILIP V. TISNE Assistant Solicitor General of Counsel ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney for Appellants 120 Broadway New York, New York 10271 (212) 416-6073 (212) 416-8962 (facsimile) Dated: December 9, 2016 TABLE OF CONTENTS Page TABLE OF AUTHORITIES ............................................................ iii INTRODUCTION ............................................................................. 1 POINT I THE FUND’S CLOSURE HAD ONLY PROSPECTIVE EFFECT ON CARRIERS’ FUTURE APPLICATIONS TO TRANSFER CERTAIN CLAIMS TO THE FUND ...................... 2 A. The Effect of the Fund’s Closure Was to Prospectively Alter the Manner of Handling the Administration of Newly Arising Claims in Reopened Cases................................................................ 2 B. The Fund’s Closure Did Not Impose a New Liability on Carriers. ....................................................... 6 1. The closure of the Fund required carriers to retain their preexisting liabilities rather than transferring them to the Fund. ................................ 6 2. Carriers have always been legally responsible for covering the costs of administering claims in reopened cases, even after their transfer to the Fund. ................................................................. 10 3. The Fund’s closure does not impose an unfunded mandate on carriers. .............................. 14 POINT II PLAINTIFFS’ CLAIMS FAIL EVEN IF THE FUND’S CLOSURE COULD BE CHARACTERIZED AS HAVING RETROACTIVE EFFECTS ....................................................... 20 ii TABLE OF CONTENTS (cont’d) Page A. The Fund’s Closure Advanced Legitimate State Interests. ........................................................................ 21 1. The Legislature reasonably closed the Fund to end an enormous and unnecessary expense for employers. ............................................................... 22 2. Closure prevented carriers from obtaining an unfair premium windfall. ....................................... 24 B. Plaintiffs’ Constitutional Claims Independently Fail for Other Reasons. .................................................. 27 1. Plaintiffs’ substantive due process claim fails under the multi-factor test from Alliance of American Insurers. ................................................. 27 2. The Fund’s closure did not violate the Contracts Clause. .................................................... 29 3. The Fund’s closure did not effect a taking. ............ 31 POINT III IF PLAINTIFFS’ CLAIMS ARE NOT DISMISSED, THE COURT SHOULD REMAND THIS CASE FOR ADDITIONAL FACTFINDING ................................................. 35 CONCLUSION ............................................................................... 39 iii TABLE OF AUTHORITIES Cases Page(s) 19th St. Assocs. v. State, 79 N.Y.2d 434 (1992) ................................................................. 21 Alliance of American Insurers v. Chu, 77 N.Y.2d 573 (1991) ........................................................... 27, 28 Alvarez v. Prospect Hosp., 68 N.Y.2d 320 (1986) ................................................................. 36 Ballentine v. Koch, 89 N.Y.2d 51 (1996) ................................................................... 29 Brightonian Nursing Home v. Daines, 21 N.Y.3d 570 (2013) ................................................................. 21 Brooks-Scanlon Corp. v. United States, 265 U.S. 106 (1924) .................................................................... 32 Commonwealth Edison Co. v. United States, 271 F.3d 1327 (Fed. Cir. 2001) .................................................. 31 E. Enters. v. Apfel, 524 U.S. 498 (1998) .............................................................. 21, 33 Energy Reserves Grp. v. Kan. Power & Light Co., 459 U.S. 400 (1983) .................................................................... 30 Gen. Motors Corp. v. Romein, 503 U.S. 181 (1992) .................................................................... 30 Health Ins. Ass’n of Am. v. Harnett, 44 N.Y.2d 302 (1978) ................................................................. 31 Hotel Dorset Co. v. Tr. for Cultural Res., 46 N.Y.2d 358 (1978) ................................................................. 20 Landgraf v. USI Film Prods., 511 U.S. 244 (1994) ............................................................ 3, 5, 20 iv TABLE OF AUTHORITIES (cont’d) Cases Page(s) Matter of Becker v. Huss Co., 43 N.Y.2d 527 (1978) ........................................................... 16, 17 Matter of County of Chemung v. Shah, 2016 N.Y. Slip Op. 07043 (Ct. App. Oct. 27, 2016) ................... 38 Matter of Kigin v. N.Y. State Workers’ Comp. Bd., 24 N.Y.3d 459 (2014) ................................................................. 16 Matter of Mills v. Staffking (Hidden Valley), 271 A.D.2d 146 (3d Dep’t 2000) ................................................... 3 Matter of Raynor v. Landmark Chrysler, 18 N.Y.3d 48 (2011) ................................................... 4, 10, 11, 31 Matter of Riley v. Aircraft Prods. Mfg. Corp., 40 N.Y.2d 366 (1976) ................................................................... 3 Matter of Selective Ins. Co. of Am. v. State Workers’ Comp. Bd., 102 A.D.3d 72 (3d Dep’t 2012) ............................................. 12, 13 Matter of Warder v. Bd. of Regents of Univ. of State of N.Y., 53 N.Y.2d 186 (1981) ................................................................. 37 NL Indus., Inc. v. United States, 839 F.2d 1578 (Fed. Cir. 1988) .................................................. 33 Omnia Commercial Co. v. United States, 261 U.S. 502 (1923) .................................................................... 32 Palmyra Pac. Seafoods, L.L.C. v. United States, 561 F.3d 1361 (Fed. Cir. 2009) .................................................. 32 Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304 (1984) ................................................................... 8 v TABLE OF AUTHORITIES (cont’d) Cases Page(s) Sillman v. Twentieth Century-Fox Film Corp., 3 N.Y.2d 395 (1957) ................................................................... 37 U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1 (1977) ........................................................................ 30 Voss v. Netherlands Ins. Co., 22 N.Y.3d 728 (2014) ................................................................. 36 Westview Assocs. v. Guar. Nat. Ins. Co., 95 N.Y.2d 334 (2000) ................................................................... 8 Laws Ch. 6, 2007 N.Y. Laws 54 ............................................................... 25 Ch. 57, 2013 N.Y. Laws (L.R.S.) .................................................... 12 Workers’ Compensation Law § 10 ............................................................................................... 7 § 25-a .................................................................................. 6, 9, 11 § 27 ............................................................................................. 10 § 151 ........................................................................................... 11 Miscellaneous Authorities Am. Ins. Ass’n, “AIA Endorses Gov. Cuomo’s Workers’ Compensation Proposals” (Jan. 23, 2013), available at http://www.aiadc.org/media-center/all-news- releases/aia-endorses-gov-cuomos-workers- compensation-proposals%20355438 .......................................... 23 Gov. Andrew M. Cuomo, N.Y. Rising: State of the State 2013 (Oct. 29, 2012), available at http://www.nyscoss.org/img/news/ news_29j731jzvt.pdf .................................................................. 23 vi TABLE OF AUTHORITIES (cont’d) Miscellaneous Authorities Page(s) John D. Echeverria, Public Takings of Private Contracts, 38 Ecology L.Q. 639 (2011), available at http://scholarship.law.berkeley.edu/cgi/ viewcontent.cgi?article=1954&context=elq ............................... 32 New York Compensation Insurance Rating Board, Bulletin: Workers Compensation – New York Loss Cost Revision – October 1, 2013 (Aug. 1, 2013), available at http://www.nycirb.org/bulletins/ rc2341.pdf ................................................................................... 18 New York Compensation Insurance Rating Board, New York Workers Compensation: Oct. 1, 2007 Rate Revision, Explanatory Mem. (July 2, 2007) available at http://www.dfs.ny.gov/insurance/wc/ 2007_nycirb_rf_expltr.pdf. ......................................................... 26 New York Department of Financial Services, 2011 First Annual Report of the Superintendent to the Governor and Legislature (May 15, 2012), available at http://www.dfs.ny.gov/reportpub/annual/ dfs_annualrpt_2011.pdf ............................................................. 33 New York Department of Financial Services, 2015 Annual Report (June 15, 2016), available at http://www.dfs.ny.gov/reportpub/annual/ dfs_annualrpt_2015.pdf ............................................................. 33 N.Y. Workers’ Compensation Handbook (Matthew Bender 2016) § 2.6 ............................................................................................ 11 § 2.18 .......................................................................................... 11 vii TABLE OF AUTHORITIES (cont’d) Miscellaneous Authorities Page(s) Opinion & Decision, Matter of Workers’ Comp. Ins. Application of N.Y. Comp. Ins. Rating Bd. (Workers’ Comp. Bd. July 15, 2007), available at http://dfs.ny.gov/insurance/wc/ 2007_nysid_wc_rf_opdec.pdf ..................................................... 26 Opinion & Decision, Matter of Workers’ Comp. Rate Application of N.Y. Comp. Ins. Rating Bd. (Workers’ Comp. Bd. July 15, 2016), available at http://dfs.ny.gov/about/hearings/wc_06282016/ wc-opinion.decision_2016.pdf .................................................... 19 Scott J. Lefkowitz & Steven G. McKinnon, New York State Workers Compensation Board Assessments: A Discussion of Assessments and Recent Increases Impacting Employers (Apr. 2013), available at http://tinyurl.com/LefkowitzMcKinnon2013. ...................... 24, 25 Scott J. Lefkowitz, Implications of the April 14, 2016 Ruling in American Economy Ins. Co. v State of New York on the Reopened Case Fund and 25-A Relief (Apr. 20, 2016), available at http://tinyurl.com/LefkowitzImplications2016 .......................... 25 INTRODUCTION Plaintiffs in this action, a group of workers’-compensation insurance carriers, are mistaken in virtually every aspect of their challenge to the Legislature’s decision to close the Special Fund for Reopened Cases (“the Fund”). Contrary to plaintiffs’ assertion, nothing in the Workers’ Compensation Law (WCL) or in plaintiffs’ insurance policies exempted them from the initial responsibility to cover claims in reopened cases. As a result, the fact that plaintiffs must retain responsibility for those claims now that the Fund is closed creates no new liability for carriers. Instead, the sole effect of the Fund’s closure is prospective—the closure limits only future relief from burdens that carriers might experience going forward. But even if the Fund’s closure did have retroactive effect, it would still be constitutional. The Legislature reasonably found that the Fund was no longer serving its original purpose of providing relief in a small number of cases; it therefore reasonably concluded that closing the Fund was necessary to reduce an enormous financial burden on employers and eliminate “windfall” 2 to carriers. These legitimate state interests supply more than sufficient basis to withstand plaintiffs’ constitutional challenges. POINT I THE FUND’S CLOSURE HAD ONLY PROSPECTIVE EFFECT ON CARRIERS’ FUTURE APPLICATIONS TO TRANSFER CERTAIN CLAIMS TO THE FUND A. The Effect of the Fund’s Closure Was to Prospectively Alter the Manner of Handling the Administration of Newly Arising Claims in Reopened Cases. Plaintiffs fundamentally misconstrue the purpose and operation of the Fund in arguing that its closure “increased [carriers’] preexisting obligations” arising from “policies they had previously issued” (Br. for Pls.-Resps. (Br.) at 31). While the Fund was in effect, it operated essentially as an ongoing subsidy to carriers by relieving them of some of the burdens in reopened cases. As the State’s opening brief explained (Br. for Appellants (State Br.) at 18-20, 29-38), the decision to limit that subsidy going forward—by requiring carriers to retain the burdens of administering new claims in reopened cases, rather than shift those burdens to the Fund—had only prospective effect because it 3 operated solely to cut off future applications to transfer newly arising claims to the Fund. The legislation closing the Fund thus affected no “completed” event, Landgraf v. USI Film Prods., 511 U.S. 244, 269-70 (1994), particularly since its generous nine-month grace period allowed carriers to identify and apply to transfer any claims that were actually eligible for transfer before the Fund finally closed. Instead, the closure affected only future “fresh application[s]” for an award of benefits arising from newly reopened claims, Matter of Riley v. Aircraft Prods. Mfg. Corp., 40 N.Y.2d 366, 369 (1976) (quotation marks omitted), which would only occur at some point in the future, see Matter of Mills v. Staffking (Hidden Valley), 271 A.D.2d 146, 149-50 (3d Dep’t 2000) (retroactivity analysis turns on the date when a claim for benefits is determined). In essence, the Fund merely provided a form of relief to carriers on an ongoing basis, in a similar manner as the federal tax deduction for mortgage-interest payments helps to defray the ongoing costs of a homeowner’s mortgage loan. Plaintiffs’ fundamental mistake is in confusing a mechanism for relieving 4 liability at the back end with an initial reduction of that liability at the front end—the equivalent of a homeowner arguing that the availability of the mortgage-interest deduction meant that her initial interest rate was reduced. The Legislature’s decision to stop providing carriers with relief in the future does not mean that the Fund’s closure retroactively affected some event in the past. To be sure, the future transfer applications affected by the Fund’s closure are related to a past injury. But as plaintiffs concede (Br. at 32), that fact is not enough to render the closure of the Fund retroactive. See Matter of Raynor v. Landmark Chrysler, 18 N.Y.3d 48, 57 (2011). “‘A statute is not retroactive . . . when made to apply to future transactions merely because such transactions relate to and are founded upon antecedent events.’” Id. (quoting Forti v. N.Y. State Ethics Comm’n, 75 N.Y.2d 596, 609 (1990)). Here, the Fund’s closure applies only to “future transactions”—namely, new applications to transfer newly arising financial costs in newly reopened cases. That these future costs are ultimately related to past injuries and past policy years is thus not enough to render the Fund’s closure retroactive in effect. 5 It may also be the case, as plaintiffs argue, that the many years that the Fund remained in operation led carriers to expect that the Fund would remain open indefinitely, and to “structure[] their conduct” accordingly (Br. at 1). But a statute “does not operate retrospectively merely because it . . . upsets expectations based in prior law.” Landgraf, 511 U.S. at 269 (quotation marks omitted). “Even uncontroversially prospective statutes may unsettle expectations and impose burdens on past conduct.” Id. at 269 n.24. Carriers’ expectation that the Fund would forever remain available to them thus does not render the Legislature’s closure of the Fund retroactive in effect.1 1 For example, suppose a family anticipated sending their child to a state university and saved money to afford an in-state tuition. If the State then closed the university before the child graduated high school, the family would incur the additional, unanticipated cost of sending their child to a university with a higher tuition. But that additional, unanticipated cost would not mean that the university’s closure acted retroactively. Closure may have upset the family’s expectations and caused them to incur greater costs, but it did not affect some transaction completed in the past. 6 B. The Fund’s Closure Did Not Impose a New Liability on Carriers. 1. The closure of the Fund required carriers to retain their preexisting liabilities rather than transferring them to the Fund. Plaintiffs’ main retroactivity argument is that the Fund’s mere existence exempted carriers from any responsibility for claims in reopened cases, whether under their policies or under the WCL. (See Br. at 26-27.) As a result, plaintiffs argue, the Fund’s closure imposed new liabilities on carriers. This argument is wrong for at least three reasons. (See State Br. at 33-36.) First, the plain language of the statute makes clear that the Fund was created to accept the “transfer of liability” for reopened claims based on an “application by . . . an insurance carrier.” WCL § 25-a(1-a) (emphasis added). It would make no sense for a carrier to apply to “transfer” liability that it never had. Rather, these provisions make clear that if the Fund accepts an application to transfer the carrier’s preexisting liability for a reopened claim, then the Fund “shall be” liable for payment on that claim. Id. 7 Nothing in these provisions suggests that carriers were exempted from liability from the outset merely due to the Fund’s existence.2 Second, if it were true, as plaintiffs contend (Br. at 26), that the WCL and carriers’ policies “categorically excluded” carriers’ responsibility for reopened claims at the outset, even before the Fund accepted the transfer of such claims, then the closure of the Fund would cause carriers no injury. Under this view, carriers would have been relieved of liability for reopened claims even before the Fund assumed responsibility for them, and the mere closure of the Fund to such claims would not automatically cause them to revert to the carriers—it would merely deny injured workers any avenue for compensation. But plaintiffs’ vigorous efforts to keep the Fund open belie any such characterization. The only reason that carriers are injured by the prospective closure of the Fund to future transfer applications is that this closure 2 Contrary to amici’s suggestion, the cross-reference to the Fund in WCL § 10 merely recognizes that if a claim is properly transferred to the Fund, then—and only then—does the payment obligation shift to the Fund. (See Br. of Amici Curiae Am. Ins. Ass’n et al. (AIA Br.) at 6-8.) 8 requires them to retain preexisting liabilities that they would otherwise have been able to shift to the Fund. Third, plaintiffs’ insurance policies provide no support for the argument that they have never had responsibility for reopened claims. Provisions excluding an insurer’s coverage obligations “must be specific and clear in order to be enforced,” must be afforded a “strict and narrow construction,” and cannot be “extended by interpretation or implication.” Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 311 (1984). Here, carriers’ policies include a specific list of exclusions from coverage; none of those exclusions even mentions claims in reopened cases, let alone purports to exclude carriers’ obligation to provide coverage for those claims (R. 506). And in the absence of a specific exclusion for reopened claims, plaintiffs’ attempt to read an exclusion into their policies by implication must be rejected. See Westview Assocs. v. Guar. Nat. Ins. Co., 95 N.Y.2d 334, 339 (2000). Rather than identify a “specific and clear” exclusion for reopened claims, Seaboard, 64 N.Y.2d at 311, plaintiffs point to a provision stating that carriers “will pay . . . the benefits required 9 of [employers] by the [WCL] . . . in effect during the policy period.” Br. at 26-27. (See also R. 504.) But this language only undermines their argument. By its plain terms, this provision makes a carrier’s coverage obligation coextensive with an employer’s underlying obligation to pay benefits under the WCL. And nothing in the WCL (including nothing in the statutory provisions defining the Fund) purports to eliminate an employer’s initial responsibility for reopened claims. This policy term thus confirms that the carrier retains such responsibility on the employer’s behalf as an initial matter, unless and until the Fund accepts the transfer of a claim. Plaintiffs also point to policy language stating that their policies “conform[] to the parts of the [WCL] that apply to . . . payments into . . . special funds, and assessments payable by [the carrier] under the [WCL].” Br. at 27. (See also R. 505.) But by its own terms this provision speaks only of payments into special funds, such as the assessments that carriers pay to cover the Fund’s ongoing operation (see State Br. at 11-12; infra at 11-13), see WCL § 25-a(3) (requiring carriers to “pay into” the Fund), or 10 deposits of lump-sum awards into the Aggregate Trust Fund under WCL § 27(2), see Matter of Raynor, 18 N.Y.3d at 54. This language thus requires carriers to comply with their own payment obligations.3 It does not, however, address payments by the Fund (such as to cover reopened claims), let alone suggest an enforceable commitment that the Fund—a nonparty to these policies—would forever accept claims in reopened cases arising from the policy year. 2. Carriers have always been legally responsible for covering the costs of administering claims in reopened cases, even after their transfer to the Fund. Plaintiffs are thus wrong in asserting that the closure of the Fund imposed new coverage liability on them, rather than requiring them to retain the coverage mandated by their policies and the WCL. They are also wrong in asserting that the closure of 3 This requirement was important because many special funds depended on payments from carriers for their operations. Maintaining such payments was thus critical to ensure that such funds continued to serve their purpose of protecting workers, employers, or carriers themselves. 11 the Fund imposed categorically new financial responsibilities on them. Contrary to plaintiffs’ arguments, carriers have always been legally responsible for the costs of administering claims in reopened cases, even after those claims were transferred to the Fund. The closure of the Fund “merely changed the time and manner of [their] payments” to cover the costs of such claims. Matter of Raynor, 18 N.Y.3d at 57. As the State’s opening brief explained (State Br. at 6-11), and as plaintiffs acknowledge (Br. at 10), the Fund’s acceptance of a carrier’s transfer application did not absolve the carrier of all financial responsibility for the costs of administering these reopened claims. While the Fund assumed administrative responsibility for claims in reopened cases, carriers remained obligated to provide the funding necessary to pay those claims through annual assessments levied by the Fund and charged to carriers. (R. 54.) See WCL §§ 25-a(3), 151(1); see also N.Y. Workers’ Compensation Handbook, §§ 2.16(6), 2.18(3) (Matthew Bender 2016). 12 As a result, every single dollar used to pay claims in reopened cases administered by the Fund had always come directly from carriers. While carriers were able to obtain reimbursement for the cost of those assessments by imposing premium surcharges on employers (R. 54-55), the availability of such reimbursement did not alter the carriers’ underlying legal responsibility to cover the costs of the Fund’s operation. The Third Department recognized as much in Matter of Selective Insurance Co. of America v. State Workers’ Compensation Board, 102 A.D.3d 72 (3d Dep’t 2012). In that case, several carriers had collected less in premium surcharges than they were required to pay in assessments to the Fund, and sued the Workers’ Compensation Board to be excused from making up the shortfall.4 See id. at 73- 75. The Third Department rejected this argument, holding that a carrier’s “obligation to pay assessments to the Board is not 4 The legislation that closed the Fund also eliminated the risk of such a shortfall by enabling carriers to pass-through the exact cost of assessments directly to their insureds. (R. 401.) See Budget Reconciliation Act of 2013, ch. 57, pt. GG, § 22, 2013 N.Y. Laws (L.R.S.), at 151-53. 13 dependent upon the amount of surcharges separately collected by that carrier” from their insureds. Id. at 79. Matter of Selective Insurance Co. thus confirms that carriers have always been legally obligated to cover the financial costs of the Fund—which is another way of saying that carriers have always covered the financial costs associated with claims in reopened cases, even when they did not administer those claims themselves. The closure of the Fund to new transfer applications simply requires carriers to cover those costs in a different manner. Rather than paying assessments to the Fund to administer reopened claims (while recouping the costs of those assessments through premium surcharges), carriers must now administer their own reopened claims and cover the costs themselves (while recouping those costs from premium increases). This change to the treatment of future reopened claims thus does not impose any categorically new financial responsibilities on carriers, but rather adjusts the manner in which they satisfy those responsibilities. 14 3. The Fund’s closure does not impose an unfunded mandate on carriers. Because the closure of the Fund imposes no new legal or financial liabilities on carriers, it has no retroactive effect that would trigger constitutional concerns. And retroactivity is absent even if, as plaintiffs assert, the closure of the Fund will be costly to carriers. Those costs arise from the Fund’s prospective effect, and such prospective costs—however significant—simply do not trigger the unique concerns raised by truly retroactive legislation. In any event, plaintiffs vastly overstate the concrete costs imposed by the Fund’s closure. For several reasons, that cost is nowhere near the magnitude that plaintiffs assert. First, plaintiffs ignore the “windfall” that carriers have received from “the premiums they have charged already” prior to the Fund’s closure. (R. 401.) This “windfall” arose from the carriers’ recent and accelerating use of the Fund to relieve themselves of liability—a change that their past premiums did not anticipate or reflect. As the State’s opening brief explained (State Br. at 14-16), carriers’ utilization of the Fund skyrocketed starting in 2006. This dramatic increase in Fund utilization meant that 15 carriers were increasingly shifting losses to the Fund that they had historically retained. As a result, the premiums approved by rate-making agencies were higher than necessary to cover the losses that the carriers actually faced (R. 447, 471-477).5 This “windfall” to carriers based on their previously collected premiums blunts any financial impact that may be caused by the Fund’s prospective closure. Second, as the State explained in its opening brief (State Br. at 20, 50-51), any financial burden caused by the Fund’s closure is mitigated by other legislative reforms—including reforms enacted in the same 2013 legislation closing the Fund—that benefit carriers by reducing their ongoing costs. For instance, the legislation that closed the Fund also significantly altered the assessment system to eliminate the possibility that carriers would 5 For example, premium charged in 2003 was based in part on loss data that assumed that carriers would transfer only a certain proportion of their losses to the Fund. If by 2010 carriers were instead transferring a much larger proportion of their losses to the Fund, then carriers would effectively have collected more in premiums than they actually required to satisfy their contractual obligations. 16 experience a shortfall between their assessments and the premium surcharges intended to cover those assessments—a reform that reduced costs for carriers (R. 365).6 While these benefits may not directly offset the costs of the Fund’s closure, they nonetheless provide important context for understanding whether the overall “adjustment” of the “allocation of economic benefits and burdens” under the WCL has had a retroactive effect on carriers. Matter of Becker v. Huss Co., 43 N.Y.2d 527, 541-42 (1978). Plaintiffs do not dispute that they benefit—sometimes substantially—from legislative changes that reduce the financial costs of their past policies. Yet they have never returned premiums or otherwise refunded employers due to these unanticipated benefits. Plaintiffs’ retroactivity argument 6 To take another example, application of the Medical Treatment Guidelines recently promulgated by the Board has had the practical effect of reducing liabilities associated with medical treatment significantly, and did so even for injuries or policy years that preceded the regulation’s effective date. See generally Matter of Kigin v. N.Y. State Workers’ Comp. Bd., 24 N.Y.3d 459 (2014). This change thus increased the profitability of policies issued by carriers because the Guidelines were not contemplated at the time the carriers issued their policies, or at the time their premium rates were calculated. 17 here would thus subject legislative reforms of the workers’- compensation system to an unfair one-way ratchet: carriers would be entitled to retain the benefits of any reforms, but any burdens imposed on carriers by such reforms would be reviewed suspiciously as retroactive legislation. Such one-sided scrutiny of the Legislature’s adjustments to the WCL is incompatible with the “flexibility of the compensation law” that is critical to its “achieving its social goals.” Id. Contrary to plaintiffs’ argument (Br. at 28-29), the fact that carriers received approval to increase their premium rates by 4.5 percent in 2013 does not demonstrate that they will experience any concrete shortfall in revenues due to the cost of administering reopened claims. If anything, the rate increase suggests the opposite. The timing of the premium increase coincides with the closure of the Fund, meaning that carriers’ revenue will increase just as they begin to retain administration of reopened claims. 18 And the amount of the increase coincides with the estimates of the current costs of administering reopened claims.7 Plaintiffs assert that this 4.5 percent increase was intended to cover only projected liabilities for policies issued after the rate increase went into effect (Br. at 15). But while actuarial principles may support such a characterization, in practice carriers would be free to use the premium increase immediately to cover any additional costs they incur from administering claims in reopened cases. Moreover, premium rates in future years will increasingly incorporate carriers’ costs of administering reopened claims as 7 As the New York Compensation Insurance Rating Board (CIRB) 2013 rate proposal (R. 442, 463) and the Department of Financial Services (DFS) opinion adopting that proposal (R. 354) make clear, the 4.5 percent premium increase was calculated by estimating the costs of the assessments that carriers would have paid in that year to cover the Fund’s ongoing operation. It is thus no coincidence that the 4.5 percent premium increase for 2014 closely matched the 4.9 percent premium surcharge that carriers were authorized to collect from insureds before the Fund’s closure. See N.Y. CIRB, Bulletin: Workers Compensation – New York Loss Cost Revision – October 1, 2013 (Aug. 1, 2013) (revisions to pt. 3 of Workers’ Compensation and Employers Liability Manual), at image 8 (revisions to manual p. 6). 19 they begin to report such data to rate-making authorities.8 Because premium rates after the Fund’s closure thus immediately provided carriers additional income to cover the costs of reopened claims, and will continue to do so for the foreseeable future, plaintiffs have failed to identify when and how they will actually suffer a concrete financial injury from the alleged shortfall of their past-collected premiums. 8 Most recently, in 2016, DFS authorized an additional premium increase to account for an increase in carriers’ loss costs due to claims in reopened cases. See Opinion & Decision, Matter of Workers’ Comp. Rate Application of N.Y. Comp. Ins. Rating Bd., at 8 (Workers’ Comp. Bd. July 15, 2016). 20 POINT II PLAINTIFFS’ CLAIMS FAIL EVEN IF THE FUND’S CLOSURE COULD BE CHARACTERIZED AS HAVING RETROACTIVE EFFECTS Even if the Fund’s closure could be characterized as retroactive, that characterization would not be determinative. There is no constitutional bar—or even a particularly high constitutional hurdle—to retroactive legislation. Indeed, as the U.S. Supreme Court has made clear, retroactive statutes “often serve entirely benign and legitimate purposes.” See Landgraf, 511 U.S. at 267–68. The state and federal constitutions thus impose only “modest” limitations on legislation that applies retroactively. Id. at 272. Plaintiffs have failed to establish “beyond a reasonable doubt” that the Fund’s closure transgresses those modest limitations. Hotel Dorset Co. v. Tr. for Cultural Res., 46 N.Y.2d 358, 370 (1978). 21 A. The Fund’s Closure Advanced Legitimate State Interests. As plaintiffs acknowledge (Br. at 42-43, 52, 55), each of the specific constitutional provisions invoked here recognizes that legislation is permissibly retroactive if it serves legitimate government interests. See 19th St. Assocs. v. State, 79 N.Y.2d 434, 442-43 (1992) (Contracts Clause); Brightonian Nursing Home v. Daines, 21 N.Y.3d 570, 575-76 (2013) (due process); E. Enters. v. Apfel, 524 U.S. 498, 522, 524 (1998) (Takings Clause). Plaintiffs’ main argument in this appeal is that the retroactive effects of the Fund’s closure are unconstitutional because the closure served no legitimate governmental purpose at all (Br. at 45-47, 54-55, 56). The Appellate Division found the closure unconstitutional for the same reason (R. 541-542). This argument fails, and the Appellate Division’s decision must be reversed, because the Fund’s closure was rationally related to two separate interests: reducing unnecessary costs for employers, and preventing a windfall for carriers (R. 401). 22 1. The Legislature reasonably closed the Fund to end an enormous and unnecessary expense for employers. In proposing to close the Fund, the Governor correctly observed that carriers’ skyrocketing use of the Fund in recent years had exceeded “the original intent of the Fund . . . to provide carriers relief in a small number of cases” and that its closure would “save New York businesses hundreds of millions of dollars in assessments per year.” (R. 401.) Plaintiffs concede that their Fund utilization had increased significantly in the years before the Fund’s closure, and it is undisputed that during this period assessments on carriers—and corresponding premium surcharges on employers—had increased from less than $100 million in 2006 to nearly $315 million in 2013. (R. 66-67 [¶ 59].) The Legislature reasonably responded to this problem by closing the Fund. Plaintiffs assert that the broad benefits of the Fund’s closure for the State have been “fabricated . . . for purposes of this litigation” (Br. at 47), but this account is entirely baseless. The Fund’s closure was supported by a broad array of business interests (see State Br. at 17-18, 56-57), including the American 23 Insurance Association, which recognized that the Fund was no longer serving its original purpose but was instead “simply add[ing] costs to the system without providing any benefits to injured workers.” Am. Ins. Ass’n, “AIA Endorses Gov. Cuomo’s Workers’ Compensation Proposals” (Jan. 23, 2013). The Legislature and the Governor reasonably relied on these expressions of support to conclude that closing the Fund to new transfer applications would thus benefit the State’s economy by “reduc[ing] the cost and improv[ing] the administration of workers’ compensation for New York’s businesses and workers.” Gov. Andrew M. Cuomo, N.Y. Rising: State of the State 2013, at 21 (Oct. 29, 2012). Plaintiffs also insist that the actual purpose of the closure was “nothing more than a transfer of wealth from carriers to employers.” (Br. at 47.) They provide zero support for this assertion. In any event, it would still have been reasonable for the Legislature to close the Fund if its sole purpose were to shift the burden of administering reopened claims from employers to carriers. As amici concede (AIA Br. at 17-18), such a shift would: 24 (i) eliminate the costly and time-consuming legal process associated with transferring claims from carriers to the Fund (see State Br. at 9-11); and (ii) assign claims-administration duties to entities—insurance carriers—that have greater experience than the Fund in administering claims efficiently. See Scott J. Lefkowitz & Steven G. McKinnon, New York State Workers Compensation Board Assessments: A Discussion of Assessments and Recent Increases Impacting Employers, at 9 (Apr. 2013). A similar rationale motivated the Legislature’s decision in 2007 to close the Special Fund for Second Injuries (see State Br. at 12-14), and would thus be sufficient to sustain the Fund’s closure here. 2. Closure prevented carriers from obtaining an unfair premium windfall. Plaintiffs also assert that another justification proffered by the Governor was “completely false” (Br. at 56; see also id. at 14, 23, 46): namely, that closure of the Fund would prevent a “windfall” for carriers (R. 401). But as explained above (see supra at 14-15), carriers did experience such a windfall: they had previously collected premiums that were excessive because the 25 premium rates did not properly account for the carriers’ subsequent skyrocketing use of the Fund. This dramatic increase meant that carriers were experiencing a windfall in the form of compensation through premium for losses that they would never incur because those losses would instead be absorbed by the Fund. It was entirely reasonable for the Legislature to close the Fund in part to address this windfall. What is more, as experts recognized before the Fund’s closure, the Fund was set to experience a large influx of new claims in 2014 due to changes in the WCL enacted in 2007. See Lefkowitz & McKinnon, supra, at 6, 9; see also Ch. 6, § 4, 2007 N.Y. Laws 54, 57-58 (amending WCL § 15(3)(w)). Those changes created a large pool of cases with ongoing medical benefits that carriers would now be able to shift to the Fund. See Scott J. Lefkowitz, Implications of the April 14, 2016 Ruling in American Economy Ins. Co. v State of New York on the Reopened Case Fund and 25-A Relief, at 3 (Apr. 20, 2016). But carriers’ premium rates had been set on the assumption that carriers would retain those claims rather than transfer them to the Fund—thus providing 26 carriers with another potential premium windfall.9 See N.Y. CIRB, New York Workers Compensation: Oct. 1, 2007 Rate Revision, Explanatory Mem., at 6 & Ex. F, sheet 1 (July 2, 2007); see also Opinion & Decision, Matter of Workers’ Comp. Ins. Application of N.Y. Comp. Ins. Rating Bd., at 10 (Workers’ Comp. Bd. July 15, 2007). The Legislature could reasonably decide to close the Fund to avoid this impending influx of claims and the windfall for carriers that would have resulted. 9 In other words, after the 2007 amendments, premium rates were set assuming that carriers would pay medical benefits, rather than transfer those payment obligations to the Fund. 27 B. Plaintiffs’ Constitutional Claims Independently Fail for Other Reasons. 1. Plaintiffs’ substantive due process claim fails under the multi-factor test from Alliance of American Insurers. Even if the Fund’s closure was rationally related to a legitimate government interest, plaintiffs contend (Br. at 57) that the closure still violates substantive due process based on the multi-factor test found in Alliance of American Insurers v. Chu, 77 N.Y.2d 573, 586 (1991). This argument is meritless. The Alliance of American Insurers test only addresses legislation that seeks to “impair vested or property rights.” Id. at 586 (quotation marks omitted). For instance, in that case, carriers sought access to a specific fund of existing money that had been irrevocably guaranteed to carriers by state law. See id. at 577-78. By contrast, there is no vested property right in this case. Plaintiffs have not identified (and indeed could not identify) any existing claim that the Fund would have accepted but no longer will due to its closure because, by definition, those claims have not yet arisen. Rather, plaintiffs assert only a right to have continued access to the Fund to transfer future, inchoate claims in reopened 28 cases. Such a claim does not identify a concrete “vested or property right[]” protected by substantive due process. In any event, the Fund’s closure would satisfy the Alliance of American Insurers test even if that test applied here. Under the test, “courts must balance a number of factors, including fairness to the parties, reliance on pre-existing law, the extent of retroactivity and the nature of the public interest to be served by the law.” Alliance of Am. Insurers, 77 N.Y.2d at 586 (quotation marks omitted). As discussed above (see supra at 22-26) and in the State’s opening brief (see State Br. at 56-57), the public interest strongly supports the Fund’s closure to new applications. The closure was also fair to carriers because it preserved past transfers to the Fund and gave carriers a generous grace period to transfer all pending eligible claims. Moreover, carriers could not reasonably have relied on the Fund’s indefinite existence given the flexibility inherent in the workers’-compensation system (State Br. at 42-43) and the extraordinary and unsustainable increase in the Fund’s liabilities in the last decade (R. 66 [¶¶ 52-58]). The 29 closure of the Fund thus would satisfy the Alliance of American Insurers test if that test applied here. 2. The Fund’s closure did not violate the Contracts Clause. Plaintiffs’ Contracts Clause claim fails because the Fund’s closure did not impair any particular contractual provision. As previously explained (see supra at 8-10; State Br. at 59-60), plaintiffs’ insurance policies do not guarantee them the right to transfer reopened cases to the Fund. “[W]here there is no existing contractual agreement regarding the terms changed by the legislation, there is no need to consider whether there was in fact an impairment and whether it was substantial.” Ballentine v. Koch, 89 N.Y.2d 51, 60 (1996). Even if there were such a contractual provision, its existence would not entitle plaintiffs to freeze the Legislature’s ability to regulate the ongoing operation of the Fund. The U.S. Supreme Court has squarely rejected the notion that contractual terms can preclude application of subsequent legislative changes, explaining that “[t]he States must possess broad power to adopt general 30 regulatory measures without being concerned that private contracts will be impaired, or even destroyed, as a result. Otherwise, one would be able to obtain immunity from state regulation by making private contractual arrangements.”10 U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 22 (1977). Plaintiffs’ attempt to restrain legislative action is particularly ill-suited in the context of workers’ compensation, which is “a heavily regulated industry” where state “supervision . . . [is] extensive and intrusive.” Energy Reserves Grp. v. Kan. Power & Light Co., 459 U.S. 400, 413-14 (1983). Legislative changes made applicable to preexisting cases are commonplace under the WCL, and plaintiffs could not reasonably have believed that the law as it existed when they issued their policies would become a binding contractual term that insulated them from future legislative changes. 10 There is a narrow exception to this principle, under which a state law could be treated as an implied contractual term where it affected “the validity, construction, and enforcement of contracts.” Gen. Motors Corp. v. Romein, 503 U.S. 181, 189 (1992). Plaintiffs have never invoked this exception, and for good reason: the prior version of WCL § 25-a merely described a benefit for carriers; it did not address the validity, construction, or enforcement of any insurance contract. 31 Plaintiffs mistakenly rely on Health Insurance Ass’n of America v. Harnett, 44 N.Y.2d 302 (1978), for an argument that the Fund’s closure unconstitutionally “require[d] the addition of . . . coverage to policies in existence” before the Fund’s closure (Br. at 41 (quotation marks omitted)). As explained above (see supra at 6-10), the Fund’s closure did not create any new coverage liability. “At most,” the closure of the Fund has made plaintiffs’ contracts “less profitable,” but that result is “not a substantial impairment” of their contracts. Matter of Raynor, 18 N.Y.3d at 58-59. 3. The Fund’s closure did not effect a taking. Plaintiffs’ takings claim fails because the Fund’s closure simply did not take any property. At most, the Fund’s closure imposed future costs on carriers—what plaintiffs’ complaint calls “unanticipated losses” (R. 46 [¶ 121])—but as the State’s opening brief explained (State Br. at 63-64), legislation that imposes a future obligation to pay money does not effect a taking of property, see, e.g., Commonwealth Edison Co. v. United States, 271 F.3d 1327, 1339-40 (Fed. Cir. 2001). 32 In an effort to identify a property right taken by the Fund’s closure, plaintiffs argue that the Fund’s closure rendered their insurance policies less profitable and that this “diminution in the value” of their contracts may support a takings claim. (Br. at 52.) But the law is clear that a mere “diminution in the value” of a contract is insufficient to support a takings claim. “[T]he government does not ‘take’ contract rights pertaining to a contract between two private parties simply by engaging in lawful action that affects the value of one of the parties’ contract rights.” Palmyra Pac. Seafoods, L.L.C. v. United States, 561 F.3d 1361, 1365 (Fed. Cir. 2009). Rather, a takings claim will lie only where the government has “appropriated” the contract—i.e., acquired “the obligation or the right to enforce” it. Omnia Commercial Co. v. United States, 261 U.S. 502, 511 (1923); see also John D. Echeverria, Public Takings of Private Contracts, 38 Ecology L.Q. 639, 656-57 (2011) (discussing the “frustration versus appropriation standard” from Omnia). In this case, plaintiffs have alleged no such appropriation. Compare Brooks-Scanlon Corp. v. United States, 265 U.S. 106, 119-21 (1924) (taking occurred where 33 government requisitioned private contract for the production of a ship), with NL Indus., Inc. v. United States, 839 F.2d 1578, 1579 (Fed. Cir. 1988) (no taking where government interference with contract amounted to a “frustration of [the claimant’s] business”). Plaintiffs’ decision to recast their takings claim as premised on their contract rights means that the balancing test governing regulatory takings of other forms of property is inapplicable. See, e.g., E. Enters., 524 U.S. at 523. But even if that test applied here, it would still bar plaintiffs’ takings claims. (See generally State Br. at 64-68.) Plaintiffs’ assertion that they face additional liability of $62 million from 2006 to 2013 due to the Fund’s closure is not a “significant economic impact” (Br. at 53; see also R. 211- 212) in light of the fact that plaintiffs collected two to three billion dollars in premium during that period.11 It hardly “beggars belief” 11 Carriers in New York collected in excess of $33 billion in premium during that period, see DFS, 2015 Annual Report, at 56 (June 15, 2016); DFS, 2011 First Annual Report of the Superintendent to the Governor and Legislature, at 45 (May 15, 2012), making plaintiffs’ approximate share of that total between $2.3 and $3.3 billion (R. 215 [¶ 27] (plaintiffs’ approximate market share was between 7.1 and 10 percent)). 34 (Br. at 60) to suggest that the $62 million cost allegedly created by the Fund’s closure is not as significant as plaintiffs say it is. Plaintiffs also refer vaguely to their “investment-backed expectations” (Br. at 53) without actually identifying those expectations. Plaintiffs appear to claim an expectation that “the Fund would pay” claims in reopened cases indefinitely. (Br. at 54.) But as discussed above and in the State’s opening brief (State Br. at 42-44), that expectation was not a reasonable one, especially in the oft-adjusted field of workers’ compensation. 35 POINT III IF PLAINTIFFS’ CLAIMS ARE NOT DISMISSED, THE COURT SHOULD REMAND THIS CASE FOR ADDITIONAL FACTFINDING As explained in the State’s opening brief (State Br. at 68-72), open issues of fact preclude summary judgment for plaintiffs, if this Court does not dismiss their claims outright. Plaintiffs incorrectly suggest that the State “forfeited the ability to oppose summary judgment” (Br. at 59), but the State challenged the sufficiency of plaintiffs’ factual submissions throughout its reply and opposition to plaintiffs’ summary judgment motion. See Reply Memorandum of Law in Further Support of Defendants’ Motion to Dismiss and in Opposition to Plaintiffs’ Cross-Motion for Summary Judgment (Dec. 20, 2013). Plaintiffs also incorrectly suggest that they are entitled to summary judgment because the State “never submitted or pointed to any additional evidentiary proof supporting its contention that there are genuine disputes of material fact.” (Br. at 58.) The State was not required to submit such evidence. As the moving party, plaintiffs had the burden of making “a prima facie showing of 36 entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact.” Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 324 (1986). It is settled law that “[i]f the moving party fails to meet this initial burden, summary judgment must be denied regardless of the sufficiency of the opposing papers.” Voss v. Netherlands Ins. Co., 22 N.Y.3d 728, 734 (2014) (quotation marks omitted). Here, the State’s burden to come forward with evidence of its own never arose because plaintiffs failed to satisfy their initial burden. For instance, plaintiffs’ summary-judgment evidence did not eliminate fact questions on their claim that the Fund’s closure created a funding shortfall. As explained above (see supra at 14- 19), there are good reasons to believe that no such shortfall existed, or that it was substantially or entirely satisfied in other ways. Plaintiffs’ evidence also failed to conclusively establish that any retroactive effects were impermissible. There was no evidence that contradicted the Governor’s stated justification that closing the Fund would reduce costs for employers (State Br. at 68-69) 37 and prevent a windfall to carriers (see supra at 14-15). These issues are hardly “immaterial” (Br. at 59), as they bear directly on whether the Fund’s closure was reasonably related to a legitimate government interest—something plaintiffs concede they are required to establish to sustain their claims (Br. at 42, 52, 55). Nor was there evidence that plaintiffs’ supposed $62 million injury from the Fund’s closure “substantially impaired” their contracts (see State Br. at 70)—in fact, the evidence suggests that any impairment here was far from substantial (see supra at 14-19). As this Court emphasized long ago, summary judgment is a “drastic remedy” that should not be awarded if there is “any doubt as to the existence” of material issues of fact, Sillman v. Twentieth Century-Fox Film Corp., 3 N.Y.2d 395, 404 (1957), or where the existence of such issues is even “arguable,” Matter of Warder v. Bd. of Regents of Univ. of State of N.Y., 53 N.Y.2d 186, 199 (1981). This caution in awarding summary judgment is especially justified in cases, like this one, that challenge duly-enacted state laws, which enjoy a “strong presumption of constitutionality” and can be struck down only if shown to be invalid “beyond a 38 reasonable doubt.” Matter of County of Chemung v. Shah, 2016 N.Y. Slip Op. 07043, at *4 (Ct. App. Oct. 27, 2016) (quotation marks omitted). Plaintiffs have not made that extraordinary showing in this case, and this Court should therefore reverse the Appellate Division’s grant of summary judgment in plaintiffs’ favor and remand this matter to Supreme Court for further proceedings. 39 CONCLUSION The decision and order of the Appellate Division should be reversed. Dated: New York, NY December 9, 2016 BARBARA D. UNDERWOOD Solicitor General STEVEN C. WU Deputy Solicitor General PHILIP V. TISNE Assistant Solicitor General of Counsel Respectfully submitted, ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney for Appellants By: _______________________ PHILIP V. TISNE Assistant Solicitor General 120 Broadway, 25th Floor New York, NY 10271 (212) 416-6073 Reproduced on Recycled Paper