Case Name: Kathryn D. MEARDON, Plaintiff-Appellee, v. FREEDOM LIFE INSURANCE COMPANY OF AMERICA and Robert J. Pavese, Defendants-Appellants.
Court: Colorado Court of Appeals, Division VII
Jurisdiction: Colorado
Decision Date: 2018-03-08
Citations: 417 P.3d 929
Docket Number: Court of Appeals No. 17CA0019
Parties: Kathryn D. MEARDON, Plaintiff-Appellee,
v.
FREEDOM LIFE INSURANCE COMPANY OF AMERICA and Robert J. Pavese, Defendants-Appellants.
Judges: 
Reporter: Pacific Reporter 3d
Volume: 417
Pages: 929–939

Head Matter:
Kathryn D. MEARDON, Plaintiff-Appellee,
v.
FREEDOM LIFE INSURANCE COMPANY OF AMERICA and Robert J. Pavese, Defendants-Appellants.
Court of Appeals No. 17CA0019
Colorado Court of Appeals, Division VII.
Announced March 8, 2018
Rehearing Denied April 5, 2018
Meier & Giovanini, LLC, Doug E. Meier, Lakewood, Colorado, for Plaintiff-Appellee
Lewis Roca Rothgerber Christie LLP, Hilary D. Wells, Frances Scioscia Staadt, Denver, Colorado, for Defendants-Appellants

Opinion:
Opinion by JUDGE FREYRE
¶ 1 The defendants, Freedom Life Insurance Company of America and Robert J. Pavese (collectively Freedom Life), denied health insurance benefits claimed by plaintiff Kathryn D. Meardon under a health insurance policy (policy) issued to her by Freedom Life. We must decide a novel issue: whether that policy's mandatory arbitration clause is displaced by section 10-3-1116(3), C.R.S. 2017, which allows denied claims to be contested in court before a jury. We conclude that it is.
¶ 2 The policy purchased by Ms. Meardon sets forth a three-step procedure for contesting a denied claim. Step one is negotiation, step two is mediation, and step three is binding arbitration. At issue here is the last step-final and binding arbitration; the policy expressly prohibits the filing of any state or federal court action. Section 10-3-1116(3), by contrast, provides that an insured who is wholly or partially denied a claim for health benefits "shall be entitled" to de novo review in any court with jurisdiction and to a trial by a jury, after exhausting administrative remedies. Thus, the question before us is whether Ms. Meardon is bound by the policy's arbitration clause or whether she may seek relief from a jury in a court.
¶ 3 To resolve this case, we first analyze the "conformity clause" that Freedom Life elected to include in its policy. Then we address the difficult issues presented both by the Federal Arbitration Act (FAA), 9 U.S.C. § 1 - 16 (2012), and the arcane doctrine of reverse-preemption under the McCarran-Ferguson Act, 15 U.S.C. § 1011 - 1015 (2012), which may or may not preempt section 10-3-1116(3) and render the arbitration clause operative.
¶ 4 Freedom Life appeals the trial court's order that denied their motion to dismiss or compel arbitration. Because we conclude that the state statute displaces the arbitration clause for those claims that fall within the ambit of the statute, we affirm the trial court's order as to those claims. However, because some of Ms. Meardon's claims fall outside the scope of the statute, we reverse the court's order to that extent and remand with directions.
I. Background
¶ 5 Ms. Meardon alleged that Mr. Pavese, acting as a Freedom Life insurance agent, sold her a policy that did not comply with the Affordable Care Act, even though she requested one. She further alleged that the policy did not cover a pre-existing condition, which the Act also required.
¶ 6 Later that year, Ms. Meardon underwent surgery, and she submitted a claim to Freedom Life. Freedom Life denied the claim because it decided that the surgery resulted from a pre-existing condition that was not covered by the plan. Ms. Meardon tried to resolve the dispute by sending letters and documents showing that the surgery did not result from her pre-existing condition. Freedom Life reaffirmed its decision to deny Ms. Meardon's claim, and she filed this lawsuit.
¶ 7 Freedom Life moved to compel arbitration and to dismiss the case. It relied on the policy's mandatory arbitration clause, which states as follows:
(1) The policyholder was required to resolve "[a]ny [d]ispute" through "mandatory and binding arbitration." (The policy defines "[d]ispute" to include practically every claim "in any way arising out of or pertaining to, or in connection with th[e] policy.")
(2) The policyholder does not have a right to seek resolution of her claim in a federal or state court.
(3) If the policyholder tries to file a complaint in a federal or state court, the court should dismiss the complaint.
¶ 8 The policy also contains a "conformity clause," which states that "[a]ny provision of this [p]olicy which, on its effective date, is in conflict with the laws of the state in which [y]ou live on that date, is amended to conform to the minimum requirements of such laws."
¶ 9 The trial court denied Freedom Life's arbitration motion. Relying on the conformity clause, the court decided that (1) section 10-3-1116(3) gives a policy holder a right to a judicial resolution of her claim; and (2) this statutory right voids the policy's arbitration clause. Expanding on the second point, the court wrote that subsection 1116(3) "effectively forbids mandatory arbitration clauses in [health insurance] policies, and confers specifically upon . policy holders the statutory right to pursue denial of benefits claims in a court before a jury."
II. Analysis
¶ 10 Freedom Life contends that (1) section 10-3-1116(3) cannot be applied because it is preempted by federal law, namely the FAA; (2) even if the FAA does not preempt the statute, the arbitration clause remains in effect for those claims that fall outside the statute; and (3) Ms. Meardon must arbitrate her claims to "exhaust her administrative remedies" under section 10-3-1116(3). It further argues that even if, as a matter of contract law, the conformity clause operates to invalidate the arbitration clause, under FAA preemption rules, the arbitration clause prevails.
¶ 11 Ms. Meardon responds that the trial court correctly interpreted the conformity clause to invalidate the arbitration clause, and that even if FAA preemption would otherwise prohibit this operation of the conformity clause, reverse-preemption, a doctrine unique to statutes that regulate the insurance business, preempts FAA preemption (thus the term "reverse-preemption"). We proceed to separately address the effects of the conformity clause and the various preemption arguments and counterarguments.
A. Standard of Review and Legal Principles
¶ 12 We must interpret the policy and subsection 1116(3) to resolve this appeal. We review questions of statutory interpretation and insurance contract interpretation de novo. Goodman v. Heritage Builders, Inc. , 2017 CO 13, ¶ 5, 390 P.3d 398 ; Allstate Ins. Co. v. Huizar , 52 P.3d 816, 819 (Colo. 2002).
¶ 13 When we interpret a statute, we must ascertain and give effect to the legislature's intent. Colo. Dep't of Revenue v. Creager Mercantile Co. , 2017 CO 41M, ¶ 16, 395 P.3d 741. "We construe the entire statutory scheme to give consistent, harmonious, and sensible effect to all parts," and "we give effect to words and phrases according to their plain and ordinary meaning." Denver Post Corp. v. Ritter , 255 P.3d 1083, 1089 (Colo. 2011). If a statute's language is clear, we apply it as written. Id. But "[i]f the statutory language is ambiguous, we may use other tools of statutory interpretation to determine the General Assembly's intent." Id.
¶ 14 Similarly, the words of an insurance policy "should be given their plain meaning according to common usage, and strained constructions should be avoided." Allstate Ins. Co. , 52 P.3d at 819. As pertinent here, "[b]ecause of the policy favoring arbitration, we construe any ambiguities [in the insurance policy] in favor of arbitration, and when an arbitration clause is broad or unrestricted, the strong presumption favoring arbitration applies with even greater force." BFN-Greeley, LLC v. Adair Grp., Inc. , 141 P.3d 937, 940 (Colo. App. 2006). "A valid and enforceable arbitration provision divests the courts of jurisdiction over all disputes that are to be arbitrated pending the conclusion of arbitration." Mountain Plains Constructors, Inc. v. Torrez , 785 P.2d 928, 930 (Colo. 1990).
B. Conformity Clause
¶ 15 Parties to an insurance contract cannot agree to disregard statutory requirements.
See Peterman v. State Farm Mut. Auto. Ins. Co. , 961 P.2d 487, 492 (Colo. 1998) (examining a consent-to-sue clause in an insurance contract and explaining that "[p]arties may not privately contract to abrogate statutory requirements or contravene the public policy of this state"). To reflect this reality, Freedom Life elected to include a conformity clause in its insurance policy. The general effect of a conformity clause is to modify the contract to conform to the laws in the insured's state. See 2 Steven Plitt, Daniel Maldonado, Joshua D. Rogers & Jordan R. Plitt, Couch on Insurance § 19:3, Westlaw (3d ed. database updated Dec. 2017). A conformity clause can be triggered when an insurer is prohibited from, or required to, include a certain provision in the policy. Id. Thus, when an insurance policy contains a conformity clause, that clause amends the policy terms that conflict with state law. See Traders & Gen. Ins. Co. v. Pioneer Mut. Comp. Co. , 127 Colo. 516, 517-19, 258 P.2d 776, 777 (1953) (finding that a conformity clause requiring conformity to the motor vehicle financial responsibility law made the statute part of the insurance contract); see also Peters v.Time Ins. Co. , No. 10-CV-02962-RPM, 2011 WL 2784291 (D. Colo. July 14, 2011) (unpublished opinion) (concluding that a conformity clause reformed the pre-existing condition exclusion in the insurance policy to conform with the state statute); Burke v. First Unum Life Ins. Co. , 975 F.Supp. 310, 316 (S.D.N.Y. 1997) (finding that policy's conformity clause "dictates that the policy be considered as if it contained the statutory language"); Ill. Farmers Ins. Co. v. Glass Serv. Co. , 683 N.W.2d 792, 802 (Minn. 2004) ("When an insurance policy contains a conformity clause, as Farmers' policies do, that clause amends all policy terms in conflict with Minnesota law to conform to those laws.").
¶ 16 Importantly, a predicate for operation of the conformity clause is a true conflict with state law. A mere "difference" between the contract and state law is insufficient to trigger the conformity clause. See Grant Farms, Inc. v. Colo. Farm Bureau Mut. Ins. Co. , 155 P.3d 537, 538 (Colo. App. 2006) ("A statute and [a] policy provision are not 'in conflict' merely because they are different from one another.").
¶ 17 As previously noted, subsection 1116(3) unambiguously entitles an insured to a de novo review in a court with jurisdiction, and to a jury trial of denied claims. In contrast, the operative language in the arbitration clause states that
no Disputes arising between the parties shall be decided in Federal or State courts or before a judge or jury and the courts shall bar and dismiss any such attempted litigation.
¶ 18 In contrast, section 10-3-1116(3) provides
An insurance policy, insurance contract, or plan that is issued in this state shall provide that a person who claims health, life, or disability benefits, whose claim has been denied in whole or in part, and who has exhausted his or her administrative remedies shall be entitled to have his or her claim reviewed de novo in any court with jurisdiction and to a trial by jury.
¶ 19 The plain words of the statute conflict with the mandatory arbitration clause: the statute guarantees to insureds such as Ms. Meardon a forum in court before a jury and the arbitration clause plainly prohibits such a lawsuit. This conflict triggered the policy's conformity clause. Application of the policy's conformity clause results in the invalidation of the policy's arbitration clause. Accordingly, as the trial court held, after operation of the conformity clause, there was no arbitration clause to enforce.
¶ 20 This conclusion, however, does not resolve all issues. Freedom Life appears to argue that operation of the conformity clause is itself preempted by the FAA. Put another way, Freedom Life seems to say that a conformity clause can only operate to invalidate contract provisions that are in conflict with a valid state law and that section 10-3-1116(3) does not qualify because it conflicts with, and therefore is invalidated by, the FAA. We reject this argument because even if the operation of the conformity clause were so limited, FAA preemption is itself reverse-preempted by the McCarran-Ferguson Act, 15 U.S.C. § 1012(b) (2012). That statute exempts state laws enacted for the purpose of regulating the insurance business from FAA preemption. The end result is that section 10-3-1116(3) is a valid statute notwithstanding the FAA, and the conformity clause operates to displace the arbitration clause.
¶ 21 Generally, to the extent a state law conflicts with the FAA, that state law is preempted by operation of the Supremacy Clause of the United States Constitution, U.S. Const. art. VI, cl. 2. Preston v. Ferrer , 552 U.S. 346, 349, 128 S.Ct. 978, 169 L.Ed.2d 917 (2008). The United States Supreme Court repeatedly has ruled that, "[b]y enacting § 2 [FAA], we have several times said, Congress precluded States from singling out arbitration provisions for suspect status, requiring instead that such provisions be placed 'upon the same footing as other contracts.' . The FAA thus displaces [state statutes] with respect to arbitration agreements covered by the Act." Doctor's Assocs., Inc. v. Casarotto , 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996).
¶ 22 However, the McCarran-Ferguson Act provides a narrow exception to FAA preemption. It provides in relevant part as follows:
No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . unless such Act specifically relates to the business of insurance....
15 U.S.C. § 1012(b).
¶ 23 Thus, the McCarran-Ferguson Act exempts a state law from FAA preemption if the state law is enacted for the purpose of regulating the business of insurance and if the federal statute-here the FAA-does not specifically relate to the business of insurance. Allen v. Pacheco , 71 P.3d 375, 382 (Colo. 2003) ; see also 21 Williston on Contracts § 57:178, Westlaw (4th ed. database updated July 2017) ("Because of McCarran-Ferguson . the majority of courts have held that states may enact and enforce statutes that make mandatory arbitration agreements in insurance policies void or unenforceable in whole or in part.").
¶ 24 In Allen , 71 P.3d at 384, the Colorado Supreme Court recognized the effect of the McCarran-Ferguson Act on a health insurance statute that might otherwise be preempted by the FAA. See 71 P.3d at 384 (applying reverse-preemption to invalidate an arbitration clause in a health insurance contract that conflicted with the HCAA, § 13-64-403(3), (4), & (5), 5 C.R.S. 2002); see also S. Pioneer Life Ins. Co. v. Thomas , 2011 Ark. 490, 385 S.W.3d 770, 774 (2011) (finding that the McCarran-Ferguson Act precludes FAA preemption of a state statute regulating insurance);
Cont'l Ins. Co. v. Equity Residential Props. Tr. , 255 Ga.App. 445, 565 S.E.2d 603, 605-06 (2002) (holding that McCarran-Ferguson Act bars FAA preemption of a state statute that precludes insurance policy arbitration clauses); Scott v. Louisville Bedding Co. , 404 S.W.3d 870, 880 (Ky. Ct. App. 2013) (concluding that FAA did not preempt state statute exempting insurance contracts from arbitration); Speece v. Allied Prof'ls Ins. Co. , 289 Neb. 75, 853 N.W.2d 169, 174-75 (2014) (validating a state statute enacted to regulate the insurance business under reverse-preemption and concluding the FAA did not relate specifically to the insurance business).
¶ 25 Regarding the second and third requirements for reverse-preemption, Freedom Life does not argue that the FAA "relates to the business of insurance," or that subsection 1116(3) was not enacted for the purpose of regulating the business of insurance. Any such arguments would be frivolous.
¶ 26 We respectfully reject the dissent's analysis of section 10-3-1116(3) for three reasons. First, because there is nothing ambiguous about that statute (and neither party has asserted that there is), we may not consider its legislative history. People v. Luther , 58 P.3d 1013, 1015 (Colo. 2002). The dissent bases most of its argument on its conclusion that the General Assembly did not intend to displace mandatory arbitration provisions. But that is not the plain import of the words of the statute.
¶ 27 Second, we find irrelevant the Employee Retirement Income Security Act (ERISA) cases on which the dissent relies. This is not an ERISA case and whether the complexities of ERISA law affect the enforceability of section 10-3-1116(3) simply has no relevance to this case.
¶ 28 Third, we are concerned that the dissent's analysis transcends our obligation to decide the issues presented to us by the parties. Indeed, Freedom Life concedes that "issues that do not appear in the record are not appropriate for consideration on appeal." See Melat, Pressman & Higbie, L.L.P. v. Hannon Law Firm, L.L.C. , 2012 CO 61, ¶ 18, 287 P.3d 842 ("It is axiomatic that issues not raised in or decided by a lower court will not be addressed for the first time on appeal."); see also Andrew Low, Neither Briefed Nor Argued , 38 Colo. Law. 87 (Sept. 2009).
C. Claims Subject to Arbitration
¶ 29 Freedom Life alternatively contends that only those claims covered by section 10-3-1116(3) are exempted from the arbitration clause and that the remaining claims must be arbitrated. While this may be true, the parties did not seek a ruling from the trial court on this specific issue, but only argued the application of the arbitration clause generally. Under these circumstances, we are unable to decide what claims are subject to the arbitration clause. See Micciche v. Billings , 727 P.2d 367, 373 (Colo. 1986) ("In the absence of a fully developed factual record and adequate findings of fact, however, we cannot determine whether that equitable doctrine should be applied here. We leave it to the hearing officer to resolve this issue on remand of the case."). Therefore, on remand the trial court must determine which claims are covered by section 10-3-1116(3) and which are not.
III. Conclusion
¶ 30 We affirm the court's order denying arbitration of those claims covered by section 10-3-1116(3). We remand the case for the trial court to decide which claims fall under section 10-3-1116(3) (and are exempt from arbitration), and which claims are subject to the policy's arbitration clause. The trial court retains substantial discretion to manage the claims subject to arbitration and those not subject to arbitration to avoid delays and unnecessary expense.
JUDGE BERGER concurs.
JUDGE BERNARD dissents.
Freedom Life does not contend that Ms. Meardon may exercise her rights to a de novo trial after arbitration. To the contrary, Freedom Life asserts that the mandatory arbitration clause precludes any court action by Ms. Meardon either before or after the completion of arbitration. The dissent appears to concede that once arbitration is completed, Ms. Meardon has no right under the statute, or otherwise, to have her claims reviewed or decided in court, much less by a jury.
Although not argued by the parties, we note that section 10-3-1116(3) actually requires that the insurance policy "shall provide" that a person who claims health benefits is entitled to de novo court review and jury trial. Ms. Meardon's policy did not provide this review and is, thus, does not conform to the statute.
Section 10-3-1116(3) expressly requires exhaustion of administrative remedies as a condition precedent to the exercise of the rights granted by the statute. The parties do not address what, if any, administrative remedies, such as mediation, may remain, so we do not address whether Ms. Meardon has yet exhausted all of those remedies. But, based on our analysis, arbitration is not an administrative remedy in this case, because it precludes judicial review. These questions are for the trial court to determine on remand.
We reject Freedom Life's argument that Ms. Meardon did not preserve the reverse-preemption argument in the trial court and is precluded from raising it on appeal. As an appellee, Ms. Reardon may defend the trial court's judgment on any grounds supported by the record. See Atl. Richfield Co. v. Whiting Oil & Gas Corp. , 2014 CO 16, ¶ 19 n.6, 320 P.3d 1179 ("It is settled law that a respondent may defend the judgment of the trial court or the court of appeals on any ground supported by the record, so long as the party's rights are not increased under the judgment." (quoting Farmers Grp., Inc. v. Williams , 805 P.2d 419, 428 (Colo. 1991) ) ).
At oral argument, Freedom Life presented a variation on the arguments it briefed. It argued that under preemption principles, only a statute that by its express terms precludes arbitration can act to displace a mandatory arbitration agreement. We do not address arguments made for the first time at oral argument. See Rucker v. Fed. Nat'l Mortg. Ass'n , 2016 COA 114, ¶ 35, 410 P.3d 675.