Monday, July 25, 2011

Danger lurks in retroactive laws

Although it has little in common with "radioactivity," "retroactivity" can be dangerous when an insurer implements new legislation based on the assumption that the courts will enforce a retroactive law as written.

Retroactivity is the subject of four recent Florida Supreme Court (FSC) decisions, including two issued within the last 30 days. No doubt these FSC cases will be explored and probed as Florida insurers and policyholder attorneys work their way through 2011's key legislation such as sinkhole insurance, crashworthiness, and medical malpractice.

Two-prong or three-step analysis?

The question in "retroactivity" is whether new legislation applies back-in-time to insurance policies, claims, and property rights in existence before the legislation takes effect -- or whether the new law applies "prospectively," meaning only on a going-forward basis."

A traditional analysis of retroactivity employs a “two prong” test. But the two most recent FSC cases approach the issue in the following three-step fashion:
  • First step: is the new law procedural or remedial in nature, in which case retroactivity is presumed – or is it substantive, such that there is a presumption that the Legislature did not intend the law to apply back-in-time?
  • Second step (traditional “first prong” test): if the legislation is substantive in nature (such that retroactivity is not presumed), does it contain a clear expression of legislative intent to apply retroactively?
  • Third step (traditional “second prong”): and only if retroactivity is presumed or clearly intended, would retroactive application to existing contracts and tort rights infringe upon any constitutional principles, such as a “contract clause” or “due process” violation? This constitutionality analysis is closely connected with the first step and often turns on whether retroactive application is procedural or substantive in nature. In simplest terms: procedural changes tend to be constitutionally permissible; substantive changes generally are not; substantive changes are those that adversely affect “vested” rights or create new obligations.
The FSC cases in brief

In last month’s FIGA v. Devon (FSC June 30, 2011)*, the 2005 insurance legislation at issue required that commercial property insurers provide notice of mediation rights as a condition to being able to demand a claims appraisal. As the first step of its analysis, the FSC concluded that the 2005 change was “clearly substantive.” Therefore, the presumption against retroactive application applied and required the Court to consider the “two prong” analysis. Moving to the first prong, the legislation provided that “Effective July 1, 2005, subsections . . . are amended . . . to read.” The FSC concluded that this statement of an effective date alone was not “clear evidence” of legislative intent to apply the new law to pre-existing insurance contracts. Because the legislation applied prospectively only, it was unnecessary to consider constitutionality.

Most recently, in American Optical Corp. v. Spiewak (FSC July 8, 2011), the FSC first engaged in a lengthy analysis of whether claimants possessed any “vested” rights to pursue tort claims prior to passage of the 2005 Asbestos Act. The Court determined that the claimants’ causes of action had vested prior to the Act, requiring it to move forward with its “two prong” analysis. As to the first prong, the 2005 Asbestos Act applied to "any civil action asserting an asbestos claim in which trial has not commenced as of the effective date of this act." The FSC concluded that this language easily met the first prong of the analysis, thus requiring that constitutionality be addressed.

For the second prong, the Asbestos Act required proof of a “physical impairment” as a condition to bringing a claim. As such proof was not a pre-Act condition, the FSC found that the new requirement violated the due process clause of the Florida Constitution, as applied to causes of action that had "vested" prior to the Act. The Act did “not merely impair their vested rights—it destroys them," the FSC majority concluded. The 2005 Asbestos Act contained a declaration that the act "does not impair vested rights" and is "remedial in nature." The FSC discounted the Legislature’s pronouncement, however, based on its prior rulings: "Just because the Legislature labels something as being remedial . . . does not make it so."

Last year’s Menendez  v. Progressive Express Insurance Co. (FSC April 22, 2010) involved pre-suit notice requirements contained in 2001 PIP reform legislation. The FSC took the traditional approach and moved straight into the “two prong” analysis. As to the first prong, the 2001 legislation stated that the pre-suit notice requirements “shall apply to actions filed on or after the effective date of this act." The FSC concluded that this language evidenced clear legislative intent to apply the new requirements retroactively. As to the second prong, the FSC concluded that the “contract clause” of the Florida Constitution was violated by pre-suit notice requirements in 2001 PIP legislation, as applied to pre-existing insurance policies. The PIP pre-suit notice requirements could be used to cut-off a policyholder's rights to attorney fees, which the FSC viewed as constituting a substantive change to contract rights.

The traditional two-prong analysis also was applied earlier this year in Cohn v. Grand Condominium Association (FSC March 31, 2011), which involved 2007 legislation that changed the voting rights of condominium unit owners. Legislative intent was clearly stated in the language “This subsection shall apply retroactively as a remedial measure.” As the change in voting rights altered those provided in the condominium contract documents, the FSC considered this change to be a substantive violation of the Florida Constitution’s contract clause, notwithstanding the Legislature’s pronouncement that the change was “remedial.”

Implications for insurers and business corporations

Almost yearly the Florida Legislature wrestles with difficult issues impacting the insurance industry and the business risks it insures. The advocates of new legislation often seek retroactive application.

The recent FSC cases are reminders that hard-fought legislative gains may push the retroactivity envelope further than the FSC's comfort zone. They remind us also that it takes a long time to get decisions through the court system – 10, 6, and 4 years after the laws were enacted in these FSC cases.

* GrayRobinson represented FIGA, the prevailing party in the FIGA v. Devon decision.

This summary was prepared by Perry Cone and posted at

Legal Notice and Disclaimer

No comments: