The Colorado Supreme Court on April 27 issued a decision clarifying whether Colorado law or an interstate compact should govern life insurance exclusions for suicide.
In a case that has been closely watched by plaintiffs’ attorneys and the insurance industry, the court concluded the state legislature may not give an interstate insurance commission the power to adopt regulations that effectively override state statute.
Since 2004, Colorado has been part of an interstate compact allowing the Interstate Insurance Product Regulation Commission to make rules and standards for insurance policies sold in member states. These standards allow for a two-year suicide exclusion for life insurance policies. A Colorado statute, however, says insurers doing business in the state may not deny life insurance payouts due to suicide after the first policy year.
The case stems from a dispute between plaintiff Amica Life Insurance Company and defendant Michael Wertz, the beneficiary of an Amica life insurance policy held by Martin Fisher. The policy included a suicide exclusion that said suicide by the policyholder, “while sane or insane,” is not covered within two years from the date of issue.
Fisher killed himself a little over a year after the policy was issued, and Amica denied Wertz’s claim for the death benefit, citing the two-year exclusion.
Anticipating a challenge to its decision, Amica sought declaratory judgment in federal district court that it had properly denied Wertz’s claim. Wertz responded, saying the two-year suicide exclusion violated state law and should be declared unenforceable. He also brought counterclaims including breach of contract and bad faith breach of insurance contract.
The district court ruled against Wertz, concluding the two-year exclusion is valid and the state legislature may delegate an administrative agency power to make rules that modify a statute. Wertz appealed to the 10th Circuit, which sent the question to the Colorado Supreme Court.
The Supreme Court agreed to answer the question because, among other reasons, it involves “a significant question of first impression as to the reach of the non-delegation doctrine in Colorado.”
Under this doctrine, the court said, “it has long been settled” that the legislature may not delegate its legislative power to another agency or person. Giving the commission authority to adopt a standard that circumvents the clear language of a Colorado statute “is to confer legislative powers on the Commission,” the court said, concluding the “General Assembly may not properly do this.”
The high court added that if the Colorado Commissioner of Insurance believes the interstate commission should enact rules or standards that conflict with state statutes, the commissioner must request action from the Colorado General Assembly, since only the legislature can override laws it has enacted.
The Colorado Supreme Court said its conclusions in the Amica case only apply to the General Assembly’s ability to delegate power under interstate compacts that have not been approved by Congress. Amica had cited a number of cases to support its argument that rules under interstate compacts can supersede state law, but all of these cases had dealt with congressionally approved interstate compacts and thus relied on federal preemption or supremacy clause principles. The Interstate Insurance Product Regulation Compact has not been approved by Congress, so those principles don’t apply in the Amica case, the court said.
Tim Garvey of McDermott Law, who filed an amicus brief on behalf of the Colorado Trial Lawyers Association in support of Wertz, noted that many of the congressionally approved compacts cited in the opinion exist to make it easier for states to work together when it comes to things like water rights. “But the [IIPRC] isn’t really about convenience for the states,” he said.
The court’s opinion would apply to any other interstate insurance commission rules that conflict with Colorado law, Garvey said. It could potentially apply to other interstate compacts that have not been approved by Congress and whose regulations are at odds with state law, he added, although he wasn’t sure whether any such conflicts exist.
“I don’t know what the long-term implications of this decision are going to be, other than to tell the insurance industry: You can’t come in here and try to circumvent Colorado law. Colorado protects its insured residents,” said Garvey.
It could have been easy for the court to come to a different decision to avoid upsetting a contract that involves more than 40 states, Garvey said, especially since disputes over suicide exclusion rules are unlikely to surface very often.
“But I’m really proud that all seven justices stood up and said, ‘No, this isn’t okay… We have these laws to protect our insureds. And even if it’s this relatively minor and obscure rule, we’re going to stand up and we’re going to protect it,’” he said.
Now that the Colorado Supreme Court has weighed in on the question, the half-decade-long battle between Amica and Wertz can continue in federal court.
— Jessica Folker