TULSA STOCKYARDS, INC. v. CLARK

Citation: 2014 OK 14

Court: Supreme Court of Oklahoma; March 11, 2014; Oklahoma; State Supreme Court

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Tulsa Stockyards, Inc. (petitioner) challenges the constitutionality of the CompSource Mutual Insurance Company Act, which mandates the restructuring of CompSource Oklahoma into a domestic mutual insurer named CompSource Mutual Insurance Company by January 1, 2015. The petitioner argues that CompSource is a state agency, and its assets, valued at approximately $265 million, belong to the people of Oklahoma. They contend that the Act violates several provisions of the Oklahoma Constitution: the prohibition against gifts of public money (Article X, §15(A)), interference with contracts (Article II, §15), and restrictions on state treasury disbursements (Article V, §55). In contrast, CompSource asserts that its assets are owned by its insured employers and employees, not the state, referencing the precedent set in Moran v. State ex rel. Derryberry. The Supreme Court of Oklahoma assumed original jurisdiction to assess the nature of CompSource's assets and the validity of the Moran decision. The Court concluded that CompSource's funds are held in trust for its insured parties and affirmed that the Oklahoma Constitution does not prevent the Legislature from transferring these assets to a domestic mutual insurer. The request for an extraordinary writ was denied.

The State Insurance Fund (Fund) was established by the Oklahoma Legislature in 1933 to provide workers' compensation insurance to public employers and private employers unable to obtain coverage from private insurers. The Fund operates as a revolving fund within the State Treasury, composed of appropriations, insurance premiums, and other assets. Funds are designated for paying losses from insurance contracts and administrative expenses. The State Treasurer acts as custodian of the Fund's money, which requires a separate bond for accountability. Initially administered by the State Industrial Commission, the Fund's management structure evolved in 1937 with the creation of a Board of Managers, which includes various state officials and appoints a State Insurance Fund Commissioner. This Commissioner is empowered to manage insurance operations similarly to private carriers, with the ability to sue, enter contracts, and invest Fund assets. The Legislature mandates that the Fund remain competitive and self-supporting, with its purposes and management practices codified in 1941, retaining core principles despite subsequent amendments. The legislative intention for the Fund's resources to cover insurance losses and operational costs has remained consistent.

In 2001, the Oklahoma Legislature renamed the Fund to CompSource Oklahoma without altering its operational and managerial structure. The most recent codification of the relevant statutes is found in 85 O.S.2011, 375, 401. A repeal of these statutes, with exceptions, is mandated by section 53 of a 2013 Act, which will take effect on January 1, 2015. Historically, the Fund has been viewed as a state department engaged in a private enterprise for workers' compensation insurance. In O.K. Constr. Co. v. Burwell, the Court held that the Fund, as a state department, was not required to post an appeal bond. The powers of the Fund are administrative and can be revoked by the Legislature at any time; it operates under the control of state officials without additional compensation.

Although treated as a state department for some legal contexts, in a contract action (State Ins. Fund v. Taron), the Fund was considered akin to a private insurer, subject to statutes of limitations relevant to private insurance carriers. The Fund was granted tort sovereign immunity in a case concerning damages from an automobile accident, as allowing tort claims could jeopardize funds allocated for worker compensation. However, this ruling was later overturned by State v. Bone, which established that the legislature had waived the Fund’s sovereign immunity regarding lawsuits connected to its operational activities, thus treating it like a private corporation in matters of liability and negligence.

The court overruled *State ex rel. State Ins. Fund v. District Court of Oklahoma County* to the extent it conflicts with the current ruling regarding sovereign immunity. Following *Bone*, the court did not previously recognize sovereign immunity for the State Insurance Fund (SIF) until it was determined that the Fund falls under the definition of an 'agency' in the Governmental Tort Claims Act (GTCA), thus superseding the earlier decision. The *Fehring* decision clarified that the distinction between governmental and proprietary functions for sovereign immunity is no longer valid under the GTCA, which applies to both types of functions. The SIF, now known as CompSource, serves as an insurer of last resort for workers' compensation claims, fulfilling a public need while being managed as a nonprofit entity by state officials.

In 1974, the Oklahoma Legislature mandated the liquidation of SIF's assets, leading to a $4 million appropriation to the State Board of Education. Employers insured by SIF, including John C. Moran, challenged this liquidation, resulting in a district court ruling that deemed the legislative acts unconstitutional. The court affirmed this decision after analyzing the Fund's legal status, emphasizing that the SIF operates without state liability beyond its own funds and must be self-supporting. The *Bone* ruling established that the SIF, as a state agency, lacks sovereign immunity and can be sued for negligence without implicating the state's general funds.

Independent control of the Fund allows it to operate an insurance company akin to privately owned entities, establishing it as a distinct business enterprise rather than a purely governmental function. The State Insurance Fund is recognized as a business entity where tort liability is applicable under the consent statute, 85 O.S. 1951, § 133. Drawing from the Bone opinion, it is concluded that the Fund operates as a non-profit insurer, with a legislative mandate ensuring it remains self-supporting without the State profiting from it or receiving excess reserves at the expense of employers and employees.

In cases of insolvency, insured employers would still be liable to fulfill compensation awards. The Fund's reserves are deemed crucial for both employers and their employees. The Moran Court interpreted 85 O.S. 1971, § 131(b) to mean that the Fund's assets are held in trust for policyholders, indicating that these funds are not state funds and cannot be appropriated for other state purposes.

The Moran Court also determined that new legislation interfered with existing insurance contracts, reaffirming the principle that laws in effect at the time of contract formation are integral to those contracts. Vested rights, defined as lawful powers to act or possess certain things, are protected from legislative interference by constitutional provisions. The 1974 legislative enactments were found to impair these insurance contracts and were deemed unconstitutional and void, with the Moran opinion frequently cited as authoritative.

The Court determined that the State Insurance Fund (SIF) is protected under the Governmental Tort Claims Act, as outlined in 85 O.S. 1991, 131 et seq., which governs Oklahoma's workers' compensation laws. Established in 1933, SIF was intended to provide workers' compensation insurance for employers unable to secure coverage from private insurers, particularly in high-risk industries. Its primary role is to insure employers against workers' compensation liability and ensure employees receive benefits. Although SIF operates competitively with private insurers, it is fundamentally a non-profit entity.

The Court acknowledged that the SIF is an agency under the Act, noting the State Insurance Fund Commissioner's status as a state officer and the Fund's personnel being part of the Merit System of Personnel Administration. Despite this, the Court maintained that SIF's funds are trust funds, distinct from state funds, benefiting employers and employees under the workers' compensation framework. Previous rulings, including those in State ex rel. Wright and State v. Young, reinforced that SIF’s funds are not public funds for certain legal purposes.

CompSource, the successor to SIF, was established to function similarly to a private insurance carrier while remaining self-sustaining. CompSource's funds, generated from selling workers' compensation insurance and investments, are also held in trust for the benefit of insured employers and employees. The legal status of these funds has been clarified to not be classified as state funds, despite both SIF and CompSource being considered state entities managed by state officials. The case of Zaloudek Grain Co. v. CompSource Oklahoma highlighted this legal paradox while addressing CompSource's compliance with specific statutory requirements during policy cancellations.

CompSource is characterized by the Court as a state department rather than an independent corporate entity or governmental agency, with its employees classified as state employees and the CEO's salary dictated by statute. Established to provide insurance coverage for employers against compensation liability under the Workers' Compensation Code, CompSource is required to remain competitive with other insurers but does not fit the traditional definitions of various types of insurers. Despite its nearly eighty-year history, it has not been formally recognized as an 'insurer' under the Insurance Code. Petitioner argues that changes in law over the past forty years have established the Fund/CompSource's sovereign immunity and accountability within the merit system, among other factors, yet these do not change the nature of the funds held in trust for insured employers and their employees. The precedent set by the Moran opinion persists, affirming CompSource’s status as a state-created department and the nature of its funds as trust assets.

The CompSource Mutual Insurance Company Act, effective January 1, 2015, mandates CompSource’s transition to a domestic mutual insurer. The Act requires Insurance Commissioner approval of articles of incorporation and the issuance of a certificate of authority by August 1, 2014. CompSource Mutual is to operate as a financially independent, nonprofit corporation offering competitively-priced workers' compensation insurance. It must function as an insurance carrier under relevant statutes, with exceptions for three years, and is explicitly stated not to be a state agency or public body. Additionally, it will be governed by a board primarily appointed by the Governor or legislative officials, ensuring its operational independence from the state.

CompSource Mutual's Board of Directors oversees its administration, possessing the authority to establish actuarially sound insurance rates for three-year terms. The Board consists of ten members, including the Lieutenant Governor or a designee, the State Auditor and Inspector or a designee, an appointee from the Governor, one from the Speaker of the House, one from the President Pro Tempore of the Senate, and four elected by policyholders. Board members, the Chief Executive Officer, and other officials are protected from personal liability for actions taken in good faith within their official capacities. CompSource Mutual has the legal capacity to sue and be sued and is subject to a premiums tax while being protected by the Oklahoma Property and Casualty Insurance Guaranty Association.

As of January 1, 2015, CompSource Mutual is recognized as a continuation of CompSource, inheriting all its assets, which are governed by laws pertaining to domestic mutual insurance companies. The state ensures that it will not divert these assets for other purposes and bears no liability if CompSource Mutual faces insolvency or conservatorship. CompSource Mutual operates under Oklahoma law, independent of the state, addressing public needs for workers' compensation insurance. While similar to CompSource, it is not required for governmental bodies to purchase insurance from it, and certain statutory provisions applicable to CompSource do not extend to CompSource Mutual. The constitutionality of converting a state department into a private insurance entity is questioned, with guidance drawn from established legal principles.

State and federal constitutions serve as the foundation for all statutes, which are presumed constitutional unless proven otherwise by the challenging party. The burden is on the challenger to demonstrate that a statute exceeds legislative authority. The petitioner argues that CompSource, identified as a 'major component unit' of the State in Oklahoma's 2012 Comprehensive Annual Financial Report, cannot be transferred without just compensation as stipulated in the Oklahoma Constitution. Although CompSource is included in the financial report due to public entities purchasing its workers' compensation insurance, this does not determine its legal status or affect previous rulings in Moran and related cases.

The petitioner also claims the Legislature treats CompSource's surplus funds as state money through the 'Market Equalization Assessment,' enacted in 2009, which imposes a 2.25% assessment on various income sources of CompSource. This assessment mirrors an insurance premiums tax from which CompSource is exempt, suggesting its purpose is to align CompSource with private insurers.

Furthermore, the petitioner contends that the Legislature cannot convert CompSource's assets for private use or allow a private entity to take over these assets, arguing that CompSource's federal tax exemption relies on its assets reverting to the State upon dissolution. However, this argument is dismissed as the relevant law explicitly prohibits CompSource's dissolution. 

The Court acknowledges the significant public interest in the workers' compensation insurance system and notes that the statutes under review will not become effective until January 1, 2015. The original jurisdiction was assumed to address this dispute, affirming that the precedent set in Moran v. State ex rel. Derryberry remains valid.

CompSource's funds and assets are deemed to be held in trust for the benefit of employers and employees covered by its insurance policies. The Oklahoma Constitution permits the Legislature to place CompSource's assets in trust with a domestic mutual insurer, and this trust will continue upon the assets' transfer to CompSource Mutual. The extraordinary writ has been denied with all justices concurring.

Effective January 1, 2015, CompSource Oklahoma will operate as CompSource Mutual Insurance Company, a domestic mutual insurer without capital stock, as authorized by Title 36 of the Oklahoma Statutes. The Insurance Commissioner will approve its articles of incorporation and issue a certificate of authority to provide workers' compensation insurance by August 1, 2014. The transition to CompSource Mutual will be managed by the Chief Executive Officer of CompSource Oklahoma.

CompSource Mutual will benefit Oklahoma citizens by offering competitively priced workers' compensation and related coverages while remaining financially independent. It may provide incidental coverages related to workers' compensation, including certain federal coverages. The company will also cover volunteer firefighters as stipulated in Oklahoma law.

CompSource Mutual will qualify as an insurance carrier under the Workers' Compensation Code and must adhere to Title 36 regulations, except for specific exemptions for three years following its operational start. Notably, CompSource Mutual will not be classified as a state agency or public entity, thereby exempting it from various Oklahoma statutes related to open meetings, records, tort claims, and public works.

Title 62 of the Oklahoma Statutes relates to Public Finance, while Title 65 pertains to the Department of Libraries, and Title 67 covers various aspects of Records Management and the Archives and Records Commission. Title 73 addresses the Capitol Grounds, and Title 74 includes numerous chapters relevant to state governance. The CompSource Mutual Insurance Company Act establishes the CompSource Mutual Insurance Company, which operates independently under Oklahoma law to provide workers' compensation insurance to qualifying employers. It is mandated that the company cannot dissolve and that the majority of its Board of Directors is appointed by the Governor or legislative officers. Effective January 1, 2015, references to CompSource Oklahoma or The State Insurance Fund will refer to the CompSource Mutual Insurance Company. 

The document notes that petitioners did not adequately support their legal arguments regarding constitutional violations and thus those claims are not considered. It also defines a revolving fund in the State Treasury, which is established by legislative act for specific purposes and financed through dedicated revenue sources, ensuring that expenditures from such funds do not incur state indebtedness or affect the general revenue. Historical context includes a 1933 appropriation of $25,000 for awards from a fund, with questions surrounding its legislative approval. The current Board of Managers of CompSource consists of eight members, including state officials and appointees from the legislative leadership. Changes regarding volunteer firefighters are set to take effect on January 1, 2015.

Sections 383, 396, and 398-399 regarding warrants, non-disclosure of information, and self-insurance are not repealed, while Section 52 of the Act is repealed. The Petroleum Storage Tank Release Indemnity Fund, funded by a one-cent per gallon motor fuel assessment, is recognized as not becoming state funds solely based on legislative declaration. Section 375.3 clarifies that CompSource Mutual is not a governmental department. Private insurers are subject to a 2.25% tax on premiums, which CompSource has also paid since 2010. The Act allows CompSource employees to remain in the Oklahoma Public Employees Retirement System (OPERS), potentially creating state liability for retirement benefits from private employment, though this issue is not addressed here.

Since the 1957 state insurance code enactment, governmental bodies have been permitted to join a domestic mutual insurer. A mutual insurance company, owned by policyholders, is required to hold prepaid premiums in trust, which become the insurer's funds upon issuing a certificate of authority. The Oklahoma Constitution allows the state to engage in public occupations, with exceptions for agriculture. The term "major component unit," as defined by the Governmental Accounting Standards Board (GASB), applies to state and local governments, determining financial reporting based on fiscal dependence or operational responsibility. After July 2012, a major component unit must demonstrate a financial relationship with the government for inclusion in financial reports; the Board of Managers oversees CompSource's operations.

Under the Oklahoma Constitution, Article X, Section 15(A), the State is prohibited from giving, pledging, or loaning its credit to any individual, company, or corporation, nor can it become an owner or stockholder in these entities. The federal income tax exemption outlined in 26 U.S.C. 501(c)(27)(B)(iii) specifies conditions under which the State can make a financial commitment to an organization, including the requirement that the State's credit must back the organization’s initial debt or provide its initial operating capital. Additionally, it mandates that the organization’s assets revert to the State upon dissolution, or that state law prevents its dissolution. Judicial restraint was deemed inappropriate in this case, as previously established in Keating v. Johnson, highlighting the court's stance on maintaining oversight in related matters.

The document details various provisions of the Oklahoma Statutes (O.S.) related to workers' compensation and the legislative changes affecting them. Key statutes mentioned include:

- 74 O.S. 85.29, which pertains to the schedule of surety amounts required.
- 85 O.S. 152, which has been repealed as of October 1, 1978.
- 85 O.S. 375, which was renumbered to 85 O.S. 376.1 in 2013.
- 85 O.S. 376, which was renumbered to 85 O.S. 376.2 in 2013.
- 85 O.S. 377, repealed effective January 1, 2015.
- 85 O.S. 380, concerning volunteer fire departments and their insurance pool.
- 85 O.S. 382, 85 O.S. 401, and 85 O.S. 375.1, all of which have undergone various legislative changes.
- 85 O.S. 375.3 discusses CompSource Mutual Insurance Company and its organizational transition.
- Several statutes from O.S. 131 to O.S. 135 have been renumbered due to legislative updates in 2011.

The document emphasizes the legislative history and the current status of these statutes, indicating a series of repeals and renumberings affecting workers' compensation law in Oklahoma.