Brian Frye v. Erie Insurance Company (Justice Hutchison, concurring) ( 2024 )

No. 22-0378 – Brian Frye v. Erie Insurance Company FILED
June 12, 2024
released at 3:00 p.m.
Justice Hutchison, concurring: C. CASEY FORBES, CLERK
SUPREME COURT OF APPEALS
OF WEST VIRGINIA
When you read the majority opinion, a key question should be obvious: Why
is the Board of Risk and Insurance Management (“BRIM”) not a party to this case? I
concur to emphasize that nothing in this case has made sense, from the day it was filed,
because BRIM was both omnipresent in the facts and yet missing as a party. On remand,
the circuit court needs to (1) review the constitutional problems within the mine subsidence
insurance scheme created by West Virginia Code §§ 33-30-1, et seq., and BRIM’s
supporting regulations (115 C.S.R. § 1), and, (2) thereafter, likely reconsider its summary
judgment ruling in favor of the defendant, Erie Insurance.
The primary problem with the statutory and regulatory scheme at issue in this
case is that BRIM and homeowners’ insurers like Erie have, in effect, immunized each
other from having to ever pay mine subsidence claims. In its annual reports, BRIM says
that it operates a legislatively created “coal mine subsidence reinsurance program, which
allows homeowners and businesses to obtain insurance coverage up to $200,000 for
1
collapses and damage caused by underground coal mines.” The gist of the program is that
private insurance companies incorporate a BRIM-drafted mine subsidence insurance
provision into every fire insurance policy they sell to private homeowners and businesses;
1
See, e.g., State of West Virginia Board of Risk and Insurance Management,
2023 Annual Report, 2 (Aug. 28, 2023).
1
the insurers collect an annual premium; and then those “insurers pay BRIM a reinsurance
premium, which is equal to the gross premiums collected for mine subsidence coverage,”
2
except the insurers keep for themselves “a 30% ceding commission.” BRIM claims (with
emphasis added) that it “provides mine subsidence reinsurance to approximately 15,000
3
home and business owners” in West Virginia.
The problem is, as both the majority opinion and Justice Wooton’s separate
opinion make clear, BRIM acts as anything but a plain, generic reinsurer. A classic
reinsurer would have allowed Erie to investigate and pay worthy claims and then
reimbursed Erie for some or all of the claim – that is, it would have reinsured some share
of the risk of subsidence claims covered by Erie. BRIM calls itself a “reinsurance
program,” but state law and BRIM’s regulations penalize insurers like Erie who investigate
and pay claims. BRIM requires every subsidence claim to be “reported to [BRIM] for
4
assignment to qualified independent adjusting firms[.]” Moreover, “[a]ll payment
authorizations will come from the Board. No reinsurance will be available for claims paid
5
by the [insurer] without prior approval from the Board.”
2
Id.
3
Id. at 3. That BRIM represents it provides reinsurance to “home and
business owners,” rather than to insurance companies, suggests that BRIM is not really a
reinsurer at all. Instead, it indicates BRIM understands it has privity with each and every
homeowner who purchases mine subsidence coverage. See infra, footnote 1818.
4
115 C.S.R. § 1.4.1.
5
115 C.S.R., App’x D, ¶ 5.
2
The result is a Dolittlean push-me, pull-you6 legal creation that results in both
insurers and BRIM evading responsibility. Insurers write and issue policies that they insist
cannot be honored without BRIM’s permission; BRIM does all the work to deny claims
against the policy while politely saying it has no responsibility for the policy issued by the
insurer. And, as I discuss below, the premiums collected by BRIM for those policies pile
up in the state treasury within the mine subsidence insurance fund.
And this brings me to a second unifying thread that weaves through this case:
the idea of illusory coverage. Sitting between BRIM and insurers are the homeowners and
business owners who paid their premiums thinking they have mine subsidence insurance.
True, the annual premiums for the maximum amount of $200,000 in coverage are modest,
7
at $43.00 on homes and $86.00 for “non-dwelling structures” (like businesses). But, in
the end, it appears that BRIM and insurers work together to deny just about every claim
that gets filed. People are paying a premium for non-existent coverage.
Let me explain my sense this coverage is illusory. Recall that BRIM only
receives 70% of the premiums collected by insurers; the insurers keep the remainder. In
its latest annual report, BRIM says it collected $4,824,000 in such premiums in 2022.8
6
“Pushmi-pullyus . . . had no tail, but a head at each end, and sharp horns on
each head. They were . . . terribly hard to catch.” Hugh Lofting, The Story of Doctor
Dolittle, 81 (1920).
7
115 C.S.R., App’x C.
8
2023 Annual Report at 11.
3
Missing from BRIM’s report, however, is any clear discussion of how many mine
subsidence claims it paid or how much it paid per claim, or in total, in 2022. Instead, one
must divine results by looking at two charts assessing BRIM’s financial performance over
the prior ten years. These charts show BRIM collected $33,975,000 for mine subsidence
insurance in the ten-year period between Fiscal Years 2013 and 2022. Simultaneously, in
the same ten-year period, BRIM appears to have paid out only $5,018,000 toward
9
subsidence claims.
Read that again: BRIM collected $4.8 million in one year but paid out only
$5 million toward mine subsidence claims over the previous ten years. Without doing an
exhaustive analysis of BRIM’s public-facing records, it seems obvious BRIM pays out
only a fraction of premiums on claims. For instance, another report says that after taking
10
in $2,398,000 in premiums in Fiscal Year 2016, BRIM’s reports show (with emphasis
added) that it paid as little as $184,000 on “[c]laims and claims adjustment expenses
11
attributable to insured events in the current fiscal year.” The emphasis is added because
BRIM’s reports do not make clear how much money BRIM is spending in “claims
9
Id. at 12.
10
Premiums were lower during the 2016 fiscal year because, at that time,
mine subsidence insurance payouts were capped at $75,000.
11
State of West Virginia Board of Risk and Insurance Management, 2018
Annual Report, “Reconciliation of Unpaid Claims and Claims Adjustment Expense
Liability by Type of Contract,” at 171 (Aug. 28, 2018) (emphasis added).
4
adjustment expenses,” such as for hiring “experts” to examine properties. Instead, expert
expenses are combined together with monies paid to property owners.
Regarding expert expenses, recall that in the instant case, the record shows
that BRIM paid no less than four separate engineering groups to examine Mr. Frye’s
12
property claim. These engineering groups note that the Valley Camp No. 1 mine, which
was last mined in 1985, lies 373 feet directly below Mr. Frye’s property. These experts all
opined in harmony that a hollowed-out room collapsing in the Valley Camp mine below
could never damage the Frye property. The opinions from these BRIM-paid experts, in
turn, were used by Erie to decide it would not provide coverage under Mr. Frye’s
homeowner’s insurance policy.
Another measure of just how little BRIM pays out toward subsidence claims
is found in its reported “loss ratio.” In the context of insurance, “loss ratio” is a measure
of losses by the insurer from paying insurance claims, along with the related administrative
and adjustment expenses (like expert fees), all divided by the total earned premiums. A
high loss ratio means less money in an insurer’s pockets; a ratio exceeding 100% means
the insurer is losing money. But these ratios can ebb and flow. For instance, in the last
12
Experts known to have been hired by BRIM to review Mr. Frye’s claim
are: (1) Irvine Associates; (2) Al Bragg of Romauldi, Davidson & Associates (inspected
once but wrote two different reports); (3) Robert Bloomberg of Bloomberg Consulting
Engineers (inspected and wrote one report); and (4) John Hempel (registered professional
geologist), Jennifer Boyle (environmental specialist), and Keven Boyle (wildlife biologist)
of EEI Geophysical Damage Investigations (inspected and wrote one report).
5
quarter of 2021, the overall loss ratio for all U.S. homeowners insurance companies was
89.56 percent, in part because of significant losses from a major hurricane;13 that loss ratio
14
quickly reversed and improved to 53.9 percent in the first quarter of 2022.
At the same time, in BRIM’s 2021 Annual Report, an actuary found that the
mine subsidence reinsurance program “continues to perform at a favorable loss ratio”
because it was averaging a mere “23% over the past 10 years.”15 Stated differently, while
the homeowners insurance industry was swinging between loss ratios of 50 to 90 percent,
BRIM’s mine subsidence insurance program was gliding by on a 23 percent ratio. That
means BRIM – which, the last time I checked, was a public agency designed to serve the
citizens of West Virginia – was pocketing 77 percent of the premiums for mine subsidence
coverage that it received.
13
S&P Global, US Homeowners Industry Loss Ratio Again Nears 90% (Jan.
6, 2022) (found at https://www.spglobal.com/marketintelligence/en/news-insights/latest-
news-headlines/us-homeowners-industry-loss-ratio-again-nears-90-68160774 (last
accessed May 9, 2024).
14
S&P Global, US Homeowners Industry Posts Big Premium Gains, Loss
Ratio Declines in Q1 (June 22, 2022) (https://www.spglobal.com/marketintelligence/
en/news-insights/latest-news-headlines/us-homeowners-industry-posts-big-premium-
gains-loss-ratio-declines-in-q1-70850250 (last accessed May 9, 2024). The best
performing insurer (Farmers Insurance) posted a 40% loss ratio, while the worst performer
(Liberty Mutual) had a 60.9% ratio.
15
Board of Risk and Insurance Management, 2021 Annual Report, “Risk
Funding Study” by AON at 237 (August 28, 2021).
6
And this showed in BRIM’s balance sheet. By June 30, 2022, BRIM had a
net position of $80,155,000 for “mine subsidence coverage.”16 Then the Legislature, during
its 2023 session and at BRIM’s urging, passed a law moving $50 million out of the mine
subsidence fund for BRIM to spend on claims against various state agencies.17 This
effectively converted years of premiums paid by homeowners and businesses for mine
subsidence insurance into a tax to fund BRIM’s day-to-day expenses. And, in the end,
mine subsidence insurance paid for by some 15,000 West Virginia households and
businesses gave every outward appearance of being illusory.
In summary, this case is confounding because BRIM should have been a
party, or at least have been compelled to have some process whereby property owners could
duly challenge its mine subsidence decisions. If we were to sanction the circuit court’s
summary judgment ruling, homeowners like Mr. Frye would be deprived of any means of
challenging BRIM’s methodology, its push-me, pull-you shell game with private insurance
companies. Thus, the circuit court’s instinct that the entire program was constitutionally
problematic seems correct. Unfortunately, as the majority opinion makes clear, until the
circuit court ruled that Mr. Frye could not proceed with his contract claims against Erie,
his constitutional claims were neither apparent nor necessary. Throughout this case, the
16
2023 Annual Report at 31.
17
See H.B. 3542 (passed March 10, 2023) (decreasing monies in the “Mine
Subsidence Insurance Fund . . . by expiring the amount of $50,000,000”); 2023 Annual
Report at 28 (describing how the money would be used to cover claims against other state
agencies, like schools).
7
circuit court represented to Mr. Frye that he had a viable contract claim against Erie. And
then, at the summary judgment stage, the circuit court changed course and said that he did
not; it was only at that point that Mr. Frye was obligated to challenge the constitutionality
of the statutory and regulatory scheme that rendered the contract claim unviable.
As the current system works, Erie is being “hung out to dry” for something
it did not do, whilst the plaintiff is being deprived of any remedy. With the constitutionality
of the program properly challenged, and the Attorney General advised of Mr. Frye’s claims
and invited to participate, the parties and the circuit court will be better prepared to
understand the true nature of the relationship between insurers and BRIM. And Mr. Frye
and Erie will be able to better address chapter 30 of article 33, and BRIM’s legislative
rules.
Moreover, the majority opinion is rightly silent regarding the circuit court’s
summary judgment order. With the constitutional questions again before the circuit court
in plaintiff Frye’s Rule 59 motion, the parties are situated to readdress Mr. Frye’s contract
claims in the context of the constitutional questions presented. I see nothing in state law
or BRIM’s regulations that prohibit a homeowner from asserting a breach-of-contract claim
against an insurer with whom the homeowner maintained a mine subsidence insurance
contract. I likewise see nothing to preclude the homeowner from pursuing an action against
18
BRIM for interfering with that privately obtained insurance contract. Essentially, it
18
A handful of courts have recognized that, in limited circumstances, an
insured may have a cause of action against their insurer’s reinsurer. One of those limited
8
circumstances is when the reinsurance contract is more than a contract of indemnity but is,
effectively, the contract for insurance directly to the insured where the reinsurer takes the
reins of administering and adjusting claims. For instance, in O’Hare v. Pursell, 329
S.W.2d 614 (Mo. 1959), the court allowed insureds to pursue claims directly against a
reinsurer because the reinsurer’s policy was effectively for the benefit of the insured, not
the primary insurer:
An ordinary contract of reinsurance, in the absence of
provisions to the contrary, operates solely as between the
reinsurer and the reinsured. It creates no privity between the
original insured and the reinsurer. The contract of insurance
and the contract of reinsurance are totally distinct and
unconnected. An ordinary contract of reinsurance is one of
indemnity against loss, and no action will lie until the loss has
been paid. . . . The liability of the reinsurer is solely and
exclusively to the reinsured. The reinsurer has no contractual
obligation with the original insured and is not liable to him. . .
. [H]owever, reinsurance contracts may be drafted in such a
form as to create a liability on the part of the reinsurer not only
to the reinsured primitive insurer but also in favor of the
original insured. . . . [W]here the contract of reinsurance is
more than a mere contract of indemnity, and is made for the
benefit of the policyholders of the reinsured, and by it the
reinsurer assumes the liability of the latter upon its policies, the
liability of the reinsurer may be directly enforced by the
insured[.]
329 S.W.2d at 620 (cleaned up). The discussion in O’Hare seems indistinguishable from
the instant case. West Virginia law requires insurers to offer mine subsidence insurance
ostensibly backed by the reinsurance fund administered by BRIM. But private insurers
must charge premiums set by BRIM, irrespective of the private insurers’ actual processing,
indemnity, or bad faith expenses; insurers must use policy language drafted by BRIM;
BRIM adjusts every claim; and BRIM represents in its annual reports that it provides
reinsurance to “home and business owners,” rather than to insurance companies. These
circumstances suggest that BRIM is not really a reinsurer at all. Instead, it indicates BRIM
understands it has privity with each and every home and business owner who purchases
mine subsidence coverage. See also, Felman Prod., Inc. v. Indus. Risk Insurers, No. CIV.A.
3:09-0481, 2009 WL 3380345, at *2 (S.D.W. Va. Oct. 19, 2009) (“A reinsurer may also
become directly liable to the insured via conduct; generally by directly handling an
insured’s claim. See Klocker Stadler Hurter Ltd. v. The Insur. Co. of Penn., 785 F.Supp.
1130, 1134 (S.D.N.Y.1990) (finding a reinsurer that directly handled an insured’s claim is
directly liable to that insured); Allstate Insur. Co. v. Administratia Asigurariloar De Stat,
9
behooves homeowners and insurers alike to assess the nature of private mine subsidence
insurance contracts in the light of BRIM’s public responsibility to maintain the mine
subsidence fund, and for BRIM to fairly meet its reinsurance obligations, within
constitutional considerations of due process.
Accordingly, I respectfully concur with the majority’s opinion.
948 F.Supp. 285 (S.D.N.Y.1996) (same); Venetsanos v. Zucker, Facher & Zucker, 271
N.J.Super. 459, 638 A.2d 1333 (N.J.Super.1994) (same).”); 8 Blashfield Automobile Law
and Practice § 342:12 (2023) (“[A] reinsurance contract may be drawn in such form and
with such provisions as to create a liability on the part of the reinsurer directly to the
original insured.”); David J. Marchitelli, Who May Enforce Liability of Reinsurer, 87
A.L.R.6th 319 (2013) (“[C]ourts have found that . . . third parties were entitled to proceed
directly against a reinsurer . . . where the reinsuring document, either by intent or poor
draftsmanship, created rights in third parties and became more than an ordinary reinsurance
agreement or where an overreaching reinsurer exposed itself to liability by behaving more
like a primary insurer than a reinsurer.”).
The statutory-regulatory-contractual relationship between BRIM and Erie
might also be characterized as a “fronting” arrangement where a licensed insurer writes a
policy that is then ceded to an unlicensed reinsurer who controls claims decisions. Esteban
Carranza-Kopper, Fronting Arrangements: Industry Practices and Regulatory Concerns,
17 Conn. Ins. L.J. 227 (2010).
10