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Click here for the full text of this decision FACTS:Since 1953, employers who could not find workers’ compensation insurance coverage through an insurance company � called “rejected risk” � could get coverage from a program funded by all insurance companies selling workers’ compensation insurance in Texas through the Texas Workers’ Compensation Assigned Risk Pool. The pool represented the residual market, while employers who bought insurance directly from insurers operated within the voluntary market. Employers who wanted insurance through the pool would submit an application to the pool. A pool member would issue a policy, but instead of that member bearing all of the cost of providing coverage to the employer, all pool members bore at least a portion of any costs they were required to pay out in coverage. The pool’s financial responsibilities were transferred to the Texas Workers’ Compensation Assigned Risk Facility in 1991. In the 1980s, the pool/facility operated at a $2 billion deficit because the residual market claims greatly exceeded the premiums collected for the policies. Insurers were required to cover. Insurers began passing through the deficit to their policyholders in both the residual and voluntary markets. When the Department of Insurance demanded that the insurers stop the practice with respect to the voluntary market, some insurers threatened to pull out of the facility and leave Texas. The State Board of Insurance then issued emergency rating rules in 1991 that allowed insurers to pass through the deficits to policyholders in the residual market. The board allowed insurers to apply a “residual market premium” that was based on a residual market factor issued by the State Board of Insurance. An amendment to the rule went into effect May 1, 1991, and governed pricing policies issued from May 1, 1991, to June 6, 1991. A second amendment went into effect for policies issued from June 7 to Oct. 31 of that year, a third amendment applied from Nov. 1 to Dec. 30, and a fourth amendment was issued for Dec. 31 to apply to all policies issued thereafter. At around the same time, a law passed by the Legislature went into effect. It required insurers to pass through the deficits and surpluses originating from the program to policyholders. The law contained a two-step process, and it contained separate provisions for policies effective before Jan. 1, 1992, and those issued after that date. Starting in 1991, the residual market experienced unexpected surpluses, the first surpluses in 35 years. Facility members began receiving rebates instead of deficit assessments. Even though there was a surplus, some insurers continued to bill policyholders for non-existent program deficits. Upon learning this, the department issued Circular Letter 651, prohibiting pass-throughs to policyholders by setting the residual market factor at 0 percent. The letter addressed how the factor and other rate-setting factors were to be applied for the four periods previously addressed by the amendments. Many insurers complained about the 0 percent residual market factor, claiming that it ran counter to the statute that required pass-through of deficits and surpluses. In 1997, therefore, the insurance commissioner issued a rule correcting the amendments to require that insurers pass through surpluses for policies issued between 1991 and 1992. Insurers, including the Liberty companies, sued the department and sought a declaration that the rule issued in 1997 was invalid. Conversely, policyholders sued insurers seeking a proportionate share of the reinsurance surplus. The department then issued Circular Letter 686-A, which adjusted the residual market factors for policies issued from 1991 to 1992. The new factors required insurers to pay a rebate to policyholders within 180 days after the effective date of the 1997 rule. Liberty Mutual Insurance Co. and 62 other insurers sued the department and the commissioner over the 1997 rule and Letter 686-A. Meanwhile, policyholders sued approximately 200 insurers, asking for a surplus payments and a declaration that the rule and letter were valid. The suits were consolidated, and all of the insurers except Liberty settled. Under protest, Liberty paid more than $13.4 million in surpluses to the policyholders before the 180-day deadline. Liberty then entered into a partial settlement agreement that provided for the certification of a mandatory litigation class of employers. Liberty, the policyholders, the department and the commissioner all moved for summary judgment. The trial court denied Liberty’s motion, and granted the no-evidence motions filed by the commissioner, the department and the policyholders. HOLDING:Affirmed. Liberty’s first issue on appeal is that the 1997 rule and the market factors listed in Letter 686-A were illegal retroactive legislation as applied to the 1991 and 1992 policies. The court says the statute that went into effect in 1992 contemplated a retroactive effect, as it required the board to establish an appropriate pass-through for policies written before and after the statute’s effective date. The court considers three factors when determining whether this retroactive application is constitutionally objectionable: (1) whether the law advances or retards the public interest; (2) whether the retroactive portion of the law gives effect to or defeats the bona fide intentions or reasonable expectations of affected persons; and (3) whether the law surprises people who have relied on contrary law for a long period of time. The court rejects Liberty’s argument that Letter 651 gave Liberty a vested right to the surpluses. The letter was not an agency rule because it did not satisfy the requirements of the Administrative Procedures Act. The residual market factors stated within the letter did not satisfy the requirements specified in the board amendments passed before the 1992 legislation or the legislation itself. Also, for policies issued between Dec. 31, 1991, and the end of 1992, the fourth amendment did not say that if a residual market factor is not issued by the end of the adjustment period that no factor could ever be issued. The court finds that the 1997 rule advances the public interest, because it disallows insurers from passing on deficits but retaining surpluses. The insurers could not have reasonably expected that they would be able to do both. Finally, there was no prior law upon which the insurers had long relied that allowed them to do so. The court next addresses Liberty’s argument on appeal that the 1997 rule unconstitutionally impairs its contractual obligations under their 1991 and 1992 policies. As with Liberty’s first argument, Liberty did not have a vested right to retain the surpluses. Without a vested right, there could be no impermissible impairment of its contractual rights under the federal or the Texas Constitutions. “Further, the 1997 rule did not substantially impair the 1991 and 1992 policies. First, the insurance industry is a heavily regulated industry, which weighs against a finding of substantial impairment. . . . Second, the 1997 rule restricted insurers to the profits they reasonably expected: the profits from the sale of workers’ compensation insurance to policyholders in the voluntary market.” The court also notes again that the 1997 rule serves a legitimate public purpose. The court ends by holding that the neither the 1997 rule nor Letter 686-A deprived Liberty of its constitutionally protected property rights without due process of law, and without advancing any legitimate state interest. The court reminds Liberty that a law that does not affect a fundamental right does not violate substantive due process, as long as it has a rational relationship to a state interest, the interests discussed above in response to Liberty’s first two arguments on appeal. OPINION:Puryear, J.; Kidd, Patterson and Puryear, JJ. Kidd, J., not participating.

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