Kathryn D. Meardon, Plaintiff-Appellee, v. Freedom Life Insurance Company of America and Robert J. Pavese, Defendants-Appellants.
No. 17CA0019
COLORADO COURT OF APPEALS
March 8, 2018
2018COA32
Opinion by JUDGE FREYRE; Berger, J. concurs; Bernard, J., dissents
City and County of Denver District Court No. 16CV32553; Honorable Catherine A. Lemon, Judge
The summaries of the Colorado Court of Appeals published opinions constitute no part of the opinion of the division but have been prepared by the division for the convenience of the reader. The summaries may not be cited or relied upon as they are not the official language of the division. Any discrepancy between the language in the summary and in the opinion should be resolved in favor of the language in the opinion.
SUMMARY
March 8, 2018
2018COA32
No. 17CA0019 Meardon v. Freedom Life Insurance— Health Insurance — Remedies for Unreasonable Delay or Denial of Benefits — Federal Supremacy — Preemption — McCarran-Ferguson Act
A division of the court of appeals considers, as a matter of first impression, whether a mandatory arbitration clause in a health care insurance policy is displaced by
The dissent would reverse the trial court‘s order denying Freedom Life‘s motion to compel arbitration and remand this case to the trial court to grant that motion and then to dismiss this case.
Division VII
Opinion by JUDGE FREYRE
Berger, J. concurs
Bernard, J., dissents
Announced March 8, 2018
Meier & Giovanini, LLC, Doug E. Meier, Lakewood, Colorado, for Plaintiff-Appellee
Lewis Roca Rothgerber Christie LLP, Hilary D. Wells, Frances Scioscia Staadt, Denver, Colorado, for Defendants-Appellants
¶ 2 The policy purchased by Ms. Meardon sets forth a three-step procedure for contesting a denied claim. Step one is negotiation, step two is mediation, and step three is binding arbitration. At issue here is the last step — final and binding arbitration; the policy expressly prohibits the filing of any state or federal court action.
¶ 4 Freedom Life appeals the trial court‘s order that denied their motion to dismiss or compel arbitration. Because we conclude that the state statute displaces the arbitration clause for those claims that fall within the ambit of the statute, we affirm the trial court‘s order as to those claims. However, because some of Ms. Meardon‘s claims fall outside the scope of the statute, we reverse the court‘s order to that extent and remand with directions.
I. Background
¶ 5 Ms. Meardon alleged that Mr. Pavese, acting as a Freedom Life insurance agent, sold her a policy that did not comply with the Affordable Care Act, even though she requested one. She further alleged that the policy did not cover a pre-existing condition, which the Act also required.
¶ 7 Freedom Life moved to compel arbitration and to dismiss the case. It relied on the policy‘s mandatory arbitration clause, which states as follows:
(1) The policyholder was required to resolve “[a]ny [d]ispute” through “mandatory and binding arbitration.” (The policy defines “[d]ispute” to include practically every claim “in any way arising out of or pertaining to, or in connection with th[e] policy.“)
(2) The policyholder does not have a right to seek resolution of her claim in a federal or state court.
(3) If the policyholder tries to file a complaint in a federal or state court, the court should dismiss the complaint.
¶ 9 The trial court denied Freedom Life‘s arbitration motion. Relying on the conformity clause, the court decided that (1)
II. Analysis
¶ 10 Freedom Life contends that (1)
¶ 11 Ms. Meardon responds that the trial court correctly interpreted the conformity clause to invalidate the arbitration clause, and that even if FAA preemption would otherwise prohibit this operation of the conformity clause, reverse-preemption, a doctrine unique to statutes that regulate the insurance business, preempts FAA preemption (thus the term “reverse-preemption“). We proceed to separately address the effects of the conformity clause and the various preemption arguments and counterarguments.
A. Standard of Review and Legal Principles
¶ 12 We must interpret the policy and
¶ 13 When we interpret a statute, we must ascertain and give effect to the legislature‘s intent. Colo. Dep‘t of Revenue v. Creager Mercantile Co., 2017 CO 41M, ¶ 16. “We construe the entire
¶ 14 Similarly, the words of an insurance policy “should be given their plain meaning according to common usage, and strained constructions should be avoided.” Allstate Ins. Co., 52 P.3d at 819. As pertinent here, “[b]ecause of the policy favoring arbitration, we construe any ambiguities [in the insurance policy] in favor of arbitration, and when an arbitration clause is broad or unrestricted, the strong presumption favoring arbitration applies with even greater force.” BFN-Greeley, LLC v. Adair Grp., Inc., 141 P.3d 937, 940 (Colo. App. 2006). “A valid and enforceable arbitration provision divests the courts of jurisdiction over all disputes that are to be arbitrated pending the conclusion of arbitration.” Mountain Plains Constructors, Inc. v. Torrez, 785 P.2d 928, 930 (Colo. 1990).
¶ 15 Parties to an insurance contract cannot agree to disregard statutory requirements. See Peterman v. State Farm Mut. Auto. Ins. Co., 961 P.2d 487, 492 (Colo. 1998) (examining a consent-to-sue clause in an insurance contract and explaining that “[p]arties may not privately contract to abrogate statutory requirements or contravene the public policy of this state“). To reflect this reality, Freedom Life elected to include a conformity clause in its insurance policy. The general effect of a conformity clause is to modify the contract to conform to the laws in the insured‘s state. See 2 Steven Plitt, Daniel Maldonado, Joshua D. Rogers & Jordan R. Plitt, Couch on Insurance § 19:3, Westlaw (3d ed. database updated Dec. 2017). A conformity clause can be triggered when an insurer is prohibited from, or required to, include a certain provision in the policy. Id. Thus, when an insurance policy contains a conformity clause, that clause amends the policy terms that conflict with state law. See Traders & Gen. Ins. Co. v. Pioneer Mut. Comp. Co., 127 Colo. 516, 517-19, 258 P.2d 776, 777 (1953) (finding that a conformity clause requiring conformity to the motor vehicle financial responsibility law made the statute part of the insurance contract); see also Peters v.
¶ 16 Importantly, a predicate for operation of the conformity clause is a true conflict with state law. A mere “difference” between the contract and state law is insufficient to trigger the conformity clause. See Grant Farms, Inc. v. Colo. Farm Bureau Mut. Ins. Co., 155 P.3d 537, 538 (Colo. App. 2006) (“A statute and [a] policy provision are not ‘in conflict’ merely because they are different from one another.“).
¶ 17 As previously noted,
no Disputes arising between the parties shall be decided in Federal or State courts or before a judge or jury and the courts shall bar and dismiss any such attempted litigation.
¶ 18 In contrast,
An insurance policy, insurance contract, or plan that is issued in this state shall provide that a person who claims health, life, or disability benefits, whose claim has been denied in whole or in part, and who has exhausted his or her administrative remedies shall be entitled to have his or her claim reviewed de novo in any court with jurisdiction and to a trial by jury.
¶ 19 The plain words of the statute conflict with the mandatory arbitration clause: the statute guarantees to insureds such as Ms. Meardon a forum in court before a jury and the arbitration clause plainly prohibits such a lawsuit.1 This conflict triggered the policy‘s
¶ 20 This conclusion, however, does not resolve all issues. Freedom Life appears to argue that operation of the conformity clause is itself preempted by the FAA.4 Put another way, Freedom Life seems to say that a conformity clause can only operate to invalidate contract provisions that are in conflict with a valid state law and that
¶ 21 Generally, to the extent a state law conflicts with the FAA, that state law is preempted by operation of the Supremacy Clause of the United States Constitution,
¶ 22 However, the McCarran-Ferguson Act provides a narrow exception to FAA preemption. It provides in relevant part as follows:
No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance . . . .
¶ 23 Thus, the McCarran-Ferguson Act exempts a state law from FAA preemption if the state law is enacted for the purpose of regulating the business of insurance and if the federal statute — here the FAA — does not specifically relate to the business of insurance. Allen v. Pacheco, 71 P.3d 375, 382 (Colo. 2003); see also 21 Williston on Contracts § 57:178, Westlaw (4th ed. database updated July 2017) (“Because of McCarran-Ferguson . . . the
¶ 24 In Allen, 71 P.3d at 384, the Colorado Supreme Court recognized the effect of the McCarran-Ferguson Act on a health insurance statute that might otherwise be preempted by the FAA. See 71 P.3d at 384 (applying reverse-preemption to invalidate an arbitration clause in a health insurance contract that conflicted with the HCAA,
¶ 25 Regarding the second and third requirements for reverse-preemption, Freedom Life does not argue that the FAA “relates to the business of insurance,” or that
¶ 26 We respectfully reject the dissent‘s analysis of
¶ 28 Third, we are concerned that the dissent‘s analysis transcends our obligation to decide the issues presented to us by the parties. Indeed, Freedom Life concedes that “issues that do not appear in the record are not appropriate for consideration on appeal.” See Melat, Pressman & Higbie, L.L.P. v. Hannon Law Firm, L.L.C., 2012 CO 61, ¶ 18 (“It is axiomatic that issues not raised in or decided by a lower court will not be addressed for the first time on appeal.“); see also Andrew Low, Neither Briefed Nor Argued, 38 Colo. Law. 87 (Sept. 2009).
C. Claims Subject to Arbitration
¶ 29 Freedom Life alternatively contends that only those claims covered by
III. Conclusion
¶ 30 We affirm the court‘s order denying arbitration of those claims covered by
JUDGE BERGER concurs.
JUDGE BERNARD dissents.
¶ 31 Aristotle wrote that, “[i]f you would understand anything, observe its beginning and its development.” It is my view that the key to this case is found in the origins of
¶ 32 As is pertinent to my analysis,
¶ 33
¶ 34 Subsection 1116(3) concerns insurance policies that provide “health, life, or disability benefits.” It states that, if an insurer has partially or completely denied a claim for such benefits, then those policies “shall provide” that an insured (1) who “has exhausted his or her administrative remedies”; (2) is “entitled to have his or her claim reviewed de novo in any court with jurisdiction and to a trial by jury.” Id.
¶ 35 Where did these two statutes come from? I think that the answer to this question can be found in an ongoing controversy about something called a “discretionary clause.”
¶ 36 Discretionary clauses often read something like this: “Insurer has full discretion and authority to determine the benefits and amounts payable [as well as] to construe and interpret all terms and provisions of the plan.” John Morrison & Jonathan McDonald, Exorcising Discretion: The Death of Caprice in ERISA Claims Handling, 56 S.D. L. Rev. 482, 483 (2011). These clauses became
¶ 37 Firestone Tire addressed the following issue concerning health, life, or disability policies that were governed by the Employee Retirement Income Security Act, which is known as ERISA: What standard of review should a federal district court use when deciding whether an insurer had improperly denied benefits? The Supreme Court held that de novo review was the proper standard, “unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan.” Firestone Tire, 489 U.S. at 115. But, if a health plan‘s language gives its administrator such discretionary authority, then federal district courts reviewing ERISA claims must apply the abuse of discretion standard to the administrator‘s decision to deny benefits. Metro. Life Ins. Co. v. Glenn, 554 U.S. 105, 111 (2008); Firestone Tire, 489 U.S. at 109, 115. The
¶ 38 The proliferation of discretionary clauses caught the attention of the National Association of Insurance Commissioners. The Commissioners were bothered by what they perceived as a conflict of interest that arose when “the claims adjudicator [— who is often the plan‘s administrator —] is also the insurer that pays the benefit.” McDermott, 39 Colo. Law. at 75. So, in 2002, they drafted a model act, which was entitled “Prohibition on the Use of Discretionary Clauses Model Act.” Joshua Foster, Note, ERISA, Trust Law, and the Appropriate Standard of Review: A De Novo Review of Why the Elimination of Discretionary Clauses Would Be an Abuse of Discretion, 82 St. John‘s L. Rev. 735, 744-45 (Spring 2008). The model act showed state legislatures how to pass laws that prohibited discretionary clauses in health insurance contracts. Id.
¶ 40 Colorado was one of those twenty-five states. Id.; Radha A. Pathak, Discretionary Clause Bans & ERISA Preemption, 56 S.D. L. Rev. 500, 504 n.30 (2011); Morrison & McDonald, 56 S.D. L. Rev. at 488 nn.44-45. The means that it chose to ban discretionary clauses was statutory, in the form of subsections 1116(2) and 1116(3). McDermott, 39 Colo. Law. at 76. More specifically, subsection 1116(2) banned the discretionary clauses, and subsection 1116(3) made it clear that a court reviewing an insurer‘s decision to deny an insured‘s benefits must apply the de novo standard.
¶ 41 But what about the reference to a right to a jury trial in subsection 1116(3)? At least eight federal circuit courts of appeal, including the Tenth Circuit, have held that insureds who file claims
¶ 42 (I note that there is an open question whether ERISA preempts subsection 1116(3)‘s jury trial right. See Shafer v. Metro. Life Ins. Co., 80 F. Supp. 3d 1244, 1255-57 (D. Colo. 2015)(concluding that ERISA preempted subsection 1116(3) in its entirety because the statutory jury trial right “undermine[d]” ERISA by “inhibit[ing] prompt adjudication by the judiciary.”). But I do not need to cross
¶ 43 Based on this background, I think that our legislature intended subsections 1116(2) and (3) to change the standard of reviewing an insurer‘s decision to deny benefits from abuse of discretion review to de novo review and the identity of the entity reviewing that decision from a court to a jury. See Lewis v. Taylor, 2016 CO 48, ¶ 20 (“The primary goal of statutory interpretation is to ascertain and give effect to the legislature‘s intent.”); 2A Norman J. Singer & Shambie Singer, Sutherland Statutes and Statutory Construction §§ 48.3 (7th ed. 2014) (“Courts look to a statute‘s contemporary history and historical background as aids to interpretation. . . . [C]ourts generally turn to a law‘s pre-enactment history to discover its purpose, or object, or the mischief at which it was aimed, when the statute‘s language is inadequate to reveal legislative intent. . . . Courts discussing an act‘s legal history usually are speaking more specifically about prior statutes on the same subject, and recent statutes on similar subjects, and the case law interpreting such legislation.” (footnotes omitted)). The
¶ 44 For the following reasons, I conclude that the plain language of subsections 1116(2) and (3) supports my view of the legislature‘s intent. See Lewis, ¶ 20 (To determine the legislature‘s intent, “we look to the plain meaning of the statutory language and consider it within the context of the statute as a whole.”).
¶ 45 First, neither subsection includes the words “arbitrate” or “arbitration.” And courts do not add language to statutes when interpreting them. See Spahmer v. Gullette, 113 P.3d 158, 162 (Colo. 2005)(“We will not create an addition to a statute that the plain language does not suggest or demand.”); Carruthers v. Carrier Access Corp., 251 P.3d 1199, 1204 (Colo. App. 2010)(“[W]e will not interpret a statute to mean that which it does not express.”).
¶ 46 The legislature knows how to modify or invalidate arbitration clauses if it wants to do so. See
¶ 47 Second, Colorado favors arbitration. See Meister v. Stout, 2015 COA 60, ¶ 10; BFN-Greeley, LLC v. Adair Grp., Inc., 141 P.3d 937, 940 (Colo. App. 2006). And a broad or unrestricted arbitration clause, such as the one in this case, gives greater force to the presumption in favor of arbitration. See Meister, ¶ 10.
¶ 48 Third, the phrase “has exhausted his or her administrative remedies” that appears in subsection 1116(3) indicates to me that an insured must go through whatever arbitration process the policy requires before he or she may even consider filing a lawsuit. In Timm v. Prudential Insurance Co. of America, 259 P.3d 521, 529 (Colo. App. 2011), the division stated that “[a]n ERISA cause of action generally accrues when a plan administrator denies a claim for benefits. A participant must therefore generally exhaust
¶ 49 Federal courts have included arbitration within the class of administrative remedies that must be exhausted. “[I]f the plan contains an arbitration clause, the plaintiff must arbitrate the dispute in accordance with the clause in order to exhaust his administrative remedies before filing suit in federal court.” Chappel v. Lab. Corp. of Am., 232 F.3d 719, 724 (9th Cir. 2000); accord Kilkenny v. Guy C. Long, Inc., 288 F.3d 116, 122 (3d Cir. 2002)(“Under ERISA, internal administrative remedies like the arbitration procedures mandated in . . . labor agreements must be exhausted prior to bringing suit in federal court.”); Int‘l Molders & Allied Workers Union, AFL-CIO, CLC v. Aquarius Shoe Corp., 511 F. Supp. 361, 363 (E.D. Mo. 1981); 15 Steven Plitt, Daniel Maldonado, Joshua D. Rogers, & Jordan R. Plitt, Couch on Insurance § 210:22, Westlaw (3d ed. database updated Dec. 2017)(“In keeping with the general ERISA requirement of exhaustion of administrative
¶ 50 The policy in this case describes three levels of administrative remedies: negotiation, mediation, and binding arbitration. The first two administrative remedies do not bar a subsequent lawsuit. As a result, if those were the only two administrative remedies in the policy, Ms. Meardon would be entitled, under subsection 1116(3), “to have . . . her claim reviewed de novo in any court with jurisdiction and to a trial by jury.”
¶ 51 But those are not the only administrative remedies. I conclude that, not only do the policy and subsection 1116(3) require Ms. Meardon to submit to binding arbitration, but Ms. Meardon cannot file a lawsuit after the arbitral process is over because the arbitration is binding arbitration.
¶ 52 In other words, subsection 1116(3) is conditional, rather than categorical. If insureds are able to file lawsuits concerning the insurers’ decisions to deny benefits after exhausting the policy‘s administrative remedies, then juries will review their claims de
¶ 53 This reading of subsections 1116(2) and (3) renders the policy‘s conformity clause irrelevant for the purposes of this discussion. Because the legislature did not intend subsection 1116(3) to void arbitration clauses, the conformity clause cannot void the arbitration clause in this case. See Grant Farms, Inc. v. Colo. Farm Bureau Mut. Ins. Co., 155 P.3d 537, 538 (Colo. App. 2006)(“A statute and [a] policy provision are not ‘in conflict’ merely because they are different from one another.”).
¶ 54 The majority rejects the preceding analysis of subsection 1116(3) for three reasons. I respectfully disagree with each of them.
¶ 55 Reason one: I should not consider the ancestry of subsection 1116(3) because “there is nothing ambiguous about” the subsection and because “neither party has asserted that there is.”
¶ 56 The majority and I reach different conclusions about what subsection 1116(3) means. For example, the majority concludes that the “plain words of [subsection 1116(3)] conflict with the mandatory arbitration clause.” Supra ¶ 19. I conclude that subsection 1116(3) does not apply to arbitration clauses at all. Part
¶ 57 Making the fair assumption that both the majority‘s interpretation and my interpretation of subsection 1116(3) are reasonable, the difference between them starkly illustrates the ambiguity that the majority concludes does not exist. See Vensor v. People, 151 P.3d 1274, 1277 (Colo. 2007)(“If statutory language is susceptible of more than one reasonable interpretation, it is considered ambiguous and subject to construction according to well-accepted aids for determining legislative intent.”).
¶ 58 Two well-accepted tools for construing ambiguous statutes are “examining the legislative intent[] [and] the circumstances surrounding [the statute‘s] adoption . . . .” Coffman v. Williamson, 2015 CO 35, ¶ 23 (quoting Williams v. Kunau, 147 P.3d 33, 36 (Colo. 2006)). Decisions from courts in other jurisdictions may assist in determining legislative intent when they discuss similar statutes. See Mosley v. Indus. Claim Appeals Office, 119 P.3d 576, 579 (Colo. App. 2005)(“Courts from other states have almost uniformly concluded that the language and purpose of their states’
¶ 59 Reason two: The discussion of ERISA cases is irrelevant because this is not an ERISA case.
¶ 60 It does not matter that this case is not an ERISA case. As I have already explained, subsection 1116(3) arose out of ERISA cases. Those cases are therefore helpful in deciding what subsection 1116(3) means, and that meaning spills over to non-ERISA cases.
¶ 61 More particularly, the ERISA precedent is especially instructive because insureds may file cases involving specified ERISA issues in Colorado state courts concerning their health, life, or disability policies. “State courts . . . and district courts of the
¶ 62 Reason three: My “analysis transcends [the division‘s] obligation to decide the issues presented to us by the parties.”
¶ 63 The question whether subsection 1116(3) voids arbitration clauses in certain insurance policies has always been front and center in this case. The trial court concluded that,
by requiring health insurance policies issued in Colorado to provide for litigation of claim denials, [subsection 1116(3)] effectively forbids mandatory arbitration clauses in such policies, and confers specifically upon life, health, and disability policyholders the statutory right to pursue denial of benefits claims in court before a jury. The arbitration clause in [Ms. Meardon‘s] policy is in conflict with [subsection 1116(3)]. It is, therefore, unenforceable and
automatically amended by its own terms” [in the policy‘s conformity clause].
¶ 64 What the reader has already encountered in this dissent responds directly to the trial court‘s ruling by explaining why subsection 1116(3) does not “effectively forbid[] mandatory arbitration clauses . . . .” See Melat, Pressman & Higbie, L.L.P. v. Hannon Law Firm, L.L.C., 2012 CO 61, ¶ 18 (“It is axiomatic that issues not raised in or decided by a lower court will not be addressed for the first time on appeal.”) (emphasis added).
¶ 65 In conclusion, I do not think that subsection 1116(3) voided the arbitration clause in this case because (1) the subsection‘s language does not refer to arbitration; and (2) the legislature did not intend that it would have such an effect. I would therefore reverse the trial court‘s order denying Freedom Life‘s motion to compel arbitration, and I would remand this case to the trial court to grant that motion and then to dismiss this case.