Court Opinion

ID: 2871994
Source: CourtListenerOpinion
Date Created: 2015-09-06 04:05:41.135344+00
Date Added: 2024-06-11T11:35:17.917669
License: Public Domain

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

                                      NO. 03-04-00105-CV

    Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, and
                       Liberty Insurance Corporation, Appellants

                                                 v.

  Texas Department of Insurance and Jose Montemayor, as Commissioner of Insurance;
          Amber, Inc.; Champage-Webber, Inc.; Churchill Truck Lines, Inc.;
                          and Royal Seating Corp., Appellees

     FROM THE DISTRICT COURT OF TRAVIS COUNTY, 53RD JUDICIAL DISTRICT
           NO. 97-08264, HONORABLE JOHN K. DIETZ, JUDGE PRESIDING

                                          OPINION

               Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, and

Liberty Insurance Corporation (hereinafter “the Liberty companies”) contend that a rule issued by

the Texas Department of Insurance (the “Department”), which required them to pass surpluses from

the insurance market through to policyholders, deprived them of their contractual rights, deprived

them of property without due process, and is an unconstitutional retroactive law. They appeal the

judgment of the trial court requiring them to issue rebates to policyholders with policies effective

in 1991 and 1992. We will affirm the judgment of the district court.
                 Since 1953, employers who were unable to find workers’ compensation insurance

coverage through an insurance company could obtain coverage from a program funded by all

insurance companies selling workers’ compensation insurance in Texas. In the 1980s, the program

operated at a substantial deficit, which insurers were required to cover. In an effort to prevent

insurance companies from leaving Texas, the Department issued emergency rules, which allowed

insurers to pass through the deficits to policyholders. The legislature followed with a statute

requiring insurers to pass through the deficits and surpluses originating from the program to

policyholders.

                 Starting in 1991, the program experienced unexpected surpluses. Even though there

was a surplus, some insurers continued to bill policyholders for non-existent program deficits. Upon

learning this, the Department issued a letter prohibiting pass-throughs to policyholders. As a result,

the practice stopped. However, in 1997, the Department issued a rule specifying that insurers were

to pass through reinsurance 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 Liberty companies, the Department, and the policyholders all moved for

summary judgment. The district court granted the no-evidence summary judgment motions filed by

the Department and by the policyholders and denied the Liberty companies’ summary judgment

motions. The Liberty companies appeal the granting of the Department’s and the policyholders’ no-

evidence summary judgment and appeal the denial of their own motion.

                                                    2
                                   FACTUAL BACKGROUND

               Before addressing the claims of the parties, we will give a brief overview of

retrospectively-rated insurance policies. When parties contract for a typical insurance policy, the

policyholder knows the amount of money that needs to be paid to the insurer, and the amount of

money paid for the policy period does not change to account for actual losses the policyholder

experienced. Donald Winslow, A Note on Retrospectively Rated Insurance and Federal Income

Taxation, 79 Ky. L.J. 195, 195 (1991). However, insurance coverage for large businesses is not so

simple. For large businesses, the amount of potential losses are much greater, and the policyholders

are exposed to greater risks that are less predictable. Id. Because the potential risks are less

predictable, the insurers and the policyholders will likely have different expectations over how the

risks are to be allocated. Id. at 195-96.

               Retrospectively-rated insurance policies are an attempt to accommodate the different

expectations of insurers and policyholders. Id. at 196. These policies have flexible premium

amounts to prevent policyholders and insurers from forsaking insurance agreements because the

premiums are either too high to be affordable or too low to cover the losses covered. Id. Under a

retrospectively-rated policy, a policyholder pays a premium that corresponds, to some degree, to the

losses the policyholder experiences.

               Generally, retrospectively-rated insurance policies have certain characteristics. First,

the policyholder is given a bill for an initial, estimated premium at the start of each policy period.

Mark G. Ledwin, The Treatment of Retrospectively Rated Insurance Policies in Bankruptcy, 16

                                                  3
Bank. Dev. J. 11, 12 (1999). After the end of the policy period, the insurer uses a formula to

recalculate the premium charged based on actual claims experienced. Id.

                   Retrospectively-rated worker’s compensation policies are available in Texas. The

Texas workers’ compensation market consists of a voluntary market and a residual market. The

voluntary market is composed of employers, or policyholders, who are able to buy workers’

compensation insurance, including retrospectively-rated policies, directly from an insurer.

                   Employers who are unable to buy workers’ compensation insurance directly, or

“rejected risks,” form the residual market. During the 1980s, the Texas Workers’ Compensation

Assigned Risk Pool (the “Pool”) operated the residual market. The Pool was the insurer of last resort

for Texas employers who were unable to obtain workers’ compensation insurance through the

voluntary insurance market. See Act of May 14, 1953, 53d Leg., R.S., ch. 279, § 1, 1953 Tex. Gen.

Laws 716, 716-18, repealed by Act of Dec. 11, 1989, 71st Leg., 2d C.S., ch. 1, § 16.01 (21), 1989

Tex. Gen. Laws 1, 114-15 (hereinafter “Act of May 14, 1953”); see also Texas Worker’s Comp. Ins.

Facility v. Comptroller of Pub. Accounts, 67 S.W.3d 417, 420 (Tex. App.—Austin 2002, no pet.);

see generally Butler Weldments Corp. v. Liberty Mut. Ins. Co., 3 S.W.3d 654, 656 (Tex.

App.—Austin 1999, no writ) (generally explaining workers’ compensation system and insurer of last

resort history).

                   All insurers writing workers’ compensation insurance in Texas belonged to the Pool.

Butler Weldments, 35 S.W.3d at 656. An employer who was seeking insurance but was unable to

obtain coverage in the voluntary market would submit an application to the Pool, and a policy would

be issued by one of the insurers that was a member of the Pool. However, the financial burden for

                                                    4
covering the employer would not fall solely on the insurance company issuing the policy. Rather,

all insurers belonging to the Pool were required to pay a portion of the losses the Pool incurred. See

Act of May 14, 1953, § 1 (stating that “[i]t shall be the duty of companies and associations, [that is,]

members of the [Pool] . . . to provide insurance . . . for any risk under the Workmen’s Compensation

Law of Texas . . . which risk shall have been tendered to and rejected by any member of [the Pool]”).

The portion of the loss an insurer was required to pay corresponded to the insurer’s share of the

voluntary market. See Act of May 14, 1953, § 1; see also Butler Weldments Corp., 3 S.W.3d at 656.

                The Pool’s financial responsibilities were transferred to the Texas Workers’

Compensation Assigned Risk Facility (the “Facility”) in 1991, to the Texas Workers’ Compensation

Insurance Fund (the “Fund”) in 1994, and ultimately to the Texas Mutual Insurance Company in

2001.1

                During the late 1980s, the Pool had a total deficit of approximately $2 billion because

the residual market claims greatly exceeded the premiums collected for the policies. This deficit was

passed on to insurers.

                In response to the deficit, some insurers began to pass their share of the deficit on to

their policyholders in the voluntary market.           However, after discovering this practice, the

Commissioner demanded that insurers stop the practice. After receiving the Commissioner’s

demand, some insurers threatened to leave the state.

         1
         See Act of Dec. 11, 1989, 71st Leg., 2d C.S., ch. 1, § 17.09, 1989 Tex. Gen. Laws 1, 117;
Act of Aug. 25, 1991, 72d Leg., 2d C.S., ch. 12, § 18.24, 1991 Tex. Gen. Laws 252, 362; Tex. Ins.
Code Ann. art. 5-76-3 (West Supp. 2005).

                                                   5
Board Amendments

                In response to insurers’ threats to leave, the Board issued emergency rating rules in

1991 that amended Part Two of the Texas Retrospective Rating Plan Manual (the “Manual”) and

allowed insurers to pass a portion of the deficit on to policyholders. See Tex. Ins. Code Ann. arts.

5.62, 5.77 & 5.96 (West 1981 & Supp. 2005) (giving authority to amend and promulgate rules, rating

plans, and policy forms). The amendments added a new component to the formula used in

calculating the total premiums for retrospectively-rated workers’ compensation policies: the residual

market premium. The residual market premium is the amount of money insurers would charge their

policyholders after the Facility’s operating expenses were passed on to the insurers. To determine

the amount of residual market premium to charge policyholders, insurers would apply a residual

market factor issued by the State Board of Insurance (“the Board”).2

                The first amendment went into effect on May 1, 1991, and governed the pricing of

policies issued from May 1, 1991 to June 6, 1991. See Tex. Ins. Code Ann. art. 5.96(I) (authorizing

Board to take emergency action). The amendment provided for the issuance of an initial residual

market factor, based on projected residual market costs, and a final factor based on the actual

residual market deficit for the calendar year. The amendment also stated that the final factor would

be used in making all future adjustments of the premium. In relevant part, the rule provided as

follows:

       An initial residual market factor (RMF) shall be promulgated annually by the State
       Board of Insurance based on projected residual market costs for that calendar year.

       2
           The State Board of Insurance is now called the Texas Department of Insurance.

                                                  6
       A final RMF shall be determined by the State Board of Insurance at the time the
       actual residual market deficit is declared for each calendar year. The final RMF shall
       be used in making all future adjustments under the plan.

                 To calculate the premiums under a retrospective policy governed by this rule,

insurance companies would need two residual market factors: the 1991 and the 1992 factors. The

amendment required that residual market factors be applied on a calendar year basis prorated to the

policy year when making the residual premium calculation. In other words, for an annual policy

effective on or after May 1, 1991, the residual market factor for 1991 would apply to the months the

policy was effective in 1991 and the 1992 factor would apply to the months the policy was effective

in 1992.3

                 On June 7, 1991, the second amendment to the Manual became effective and

governed insurance policies issued from June 7, 1991, through October 31, 1991. It too instructed

the Board to determine a residual market factor to be used in calculating the residual premium to be

collected from policyholders. Specifically, the rule provided:

       The actual [residual market factor] determined by the [Board] shall be calculated by
       either dividing the actual assessed Texas [Workers’ Compensation] Residual Market
       deficit by the total Texas [Workers’ Compensation] voluntary written premium for

       3
            The actual language of the amendment reads as follows:

            Both residual market factors are to be applied on a calendar year basis prorated
            to the policy year. For example, if a policy is effective 05-01-91, the residual
            market factor effective 01-01-91 would apply from 05-01-91 through 12-31-91
            and the residual market factor effective 01-01-92 would apply from 01-01-92
            through 04-30-92.

This language does not appear in the subsequent emergency rules.

                                                   7
       the year to which the deficit assessment relates or by any other formula adopted by
       the State Board of Insurance.

               On November 1, 1991, the third amendment became effective, governing policies

issued from November 1, 1991, to December 30, 1991. As with the second amendment, the third

instructed insurers to calculate policyholders’ premiums using a residual market factor determined

by the Board when the actual residual-market deficit for the year was declared. The relevant portion

of the rule provides as follows:

       The actual [residual market factor] determined by the State Board of Insurance shall
       be calculated by dividing the actual assessed Texas [Workers’ Compensation]
       residual market deficit by the total Texas [Workers’ Compensation] voluntary written
       premium for the year to which the deficit assessment relates.

               The final amendment to the Manual became effective on December 31, 1991, and

applied to policies issued on or after December 31, 1991. It was instituted in response to a petition

from the deputy commissioner of insurance asking the Board to amend the Manual in order to

comply with alterations to the insurance code that would take effect on January 1, 1992. In this

amendment, the Department changed the residual market calculation to read as follows:

       RMF=[1-(Basic Premium4 / Total Retro Premium)] x (Actual Assessed Residual
       Market Deficit / Total Assessable Voluntary Premiums Written)

               The Manual was also amended as follows:

       4
          The various amendments refer to different types of premiums. First is the standard
premium, which is the premium an insurance company would charge if the policyholder chose to
purchase a regular, non-retrospective, policy. Basic premium is less than the standard premium and
is an amount charged in a retrospective policy.

                                                 8
        The [residual market factor] for the accident year will be updated annually by the
        State Board for four years to reflect any change in the assessments levied for that
        accident year.

        The [residual market factor] which is applicable to the first retrospective premium
        adjustment shall be updated annually through the fourth retrospective premium
        adjusted, provided the retrospective plan remains open, to reflect any change in the
        assessments levied for that accident year. The [residual market factor] at the fourth
        adjustment shall apply to all subsequent retrospective premium adjustments, if any,
        until the plan is finalized.

Legislative Enactments

                After the amendments had been implemented, former article 5.76-2, section 4.04 of

the insurance code (the “1992 statute”) became effective on January 1, 1992. Act of Dec. 11, 1989,

71st Leg., 2d C.S., ch. 1, § 13.11(a), 1989 Tex. Gen. Laws 1, 94, amended by, Act of Aug. 25, 1991,

72d Leg., 2d C.S., ch. 12, § 18.13, 1991 Tex. Gen. Laws 252, 345-46 (hereinafter “former art. 5.76-

2"), repealed by, Act of June 1, 1997, 75th Leg., R.S., ch. 594, § 3.01, 1997 Tex. Gen. Laws 2076,

2081. The 1992 statute required a pass-through of Facility surpluses and deficits to policyholders

via a two-step process and contained separate provisions governing policies effective before January

1, 1992, and on or after January 1, 1992. Former art. 5.76-2, § 4.04.

                The first step was explained in subsections (b) and (c) of section 4.04. Id. Subsection

(b) addressed policies effective before 1992, while subsection (c) addressed policies effective on or

after January 1, 1992. Under subsections (b) and (c), the Facility was instructed to calculate the

deficit or surplus from its operational costs. Id. § 4.04(b), (c). Then, each insurer that was a member

of the Facility was required to either pay a proportion of the Facility’s deficit or receive a proportion

                                                   9
of the surplus. Id. The proportion paid or received was based on the member’s pro rata share of the

total voluntary workers’ compensation insurance premiums for the calendar year in question. Id.

               The second step was described in subsections (d) and (e) of section 4.04. Id.

§ 4.04(d), (e). Subsection (d) addressed policies effective before 1992, while subsection (e)

addressed policies effective on or after January 1, 1992. Under subsections (d) and (e), any surplus

or deficit charged to a Facility member was to be passed through to each retrospectively-rated

policyholder in the voluntary market according to the amount of premium the policyholder had paid.

Id. Subsection (d), in relevant part, provided:

       For assessments or rebates made under Subsection (b) of this section, the board shall
       establish an appropriate pass-through allowance so that each retrospectively rated risk
       written during the calendar year shall pay a portion of the assessment or receive a
       proportion of the rebate. The pass-through allowance shall be based on the premium
       paid by the retrospectively rated risk as a proportion of the total voluntary writings
       by the insurance carrier in the calendar year . . . .

Id. § 4.04(d). Subsections (d) and (e) contained nearly identical language with one notable

distinction: subsection (d) contained an additional sentence that stated, “A pass-through allowance

may not be permitted under this subsection after January 1, 1994” for policies effective before 1992.

               The residual market produced an unexpected surplus for policies written in 1991 and

1992. See Butler Weldments Corp., 3 S.W.3d at 657. The surplus was the first surplus in 35 years.

Because there was a surplus, workers’ compensation insurance carriers began receiving rebates of

Facility surpluses instead of assessments for Facility deficits.

               Although they began receiving surpluses, some insurers continued to bill

policyholders for residual market deficits that did not exist. In 1993, when the Department learned

                                                  10
of this practice, the Deputy Commissioner issued circular letter 651,5 which adopted a 0% residual

market factor for calendar years 1991 and 1992. By instructing insurers to use a residual market

factor of 0%, the Department effectively prevented insurers from continuing to charge policyholders

for the nonexistent Facility deficits.

                The letter addressed four groups of policies. First the letter specified that, for policies

with effective dates from May 1, 1991, through June 6, 1991, “the final residual market factors of

0% must be used in making all retrospective premium adjustments for those policies.”6 Second, the

letter specified that policies with effective dates from June 7, 1991, through December 30, 1991, “the

actual residual market factor is 0%.” Third, the letter stated that for policies effective December 31,

1991, the residual market factor was 0% for the first two adjustments and would be updated annually

for two years. Finally, the letter specified that for policies issued during 1992, “the residual market

factor to be applied at the first retro adjustment is 0% and will be updated annually for three more

years.” However, no updates to the residual market factor occurred in the three years after the letter

was issued.

                After letter 651 was issued, employers complained that using a residual market factor

of 0% allowed insurers to keep the surplus issued by the Facility. In support of this complaint, they

        5
        Circular letters are used to notify insurers of changes or developments adopted by the
Department.
        6
         Because of the different language used in the amendments, the letter referred a “final”
residual market factor for policies effective between May 1, 1991, and June 6, 1991, but referred to
an “actual” residual market factor for policies effective between June 7, 1991, and December 30,
1991. Under the first amendment, the Board was required to issue an initial factor, which was based
on projected market costs, and a final factor, which was based on the actual residual market results.
The second and third amendments only required the Board to issue a factor based on the actual
residual market results.

                                                   11
pointed to subsections 4.04(d) and (e) of the statute, which required pass-throughs of Facility

surpluses to policyholders.

The 1997 Rule

               On July 21, 1997, the Commissioner issued order 97-0738 (“the 1997 rule”), which

corrected nunc pro tunc an order previously issued. The order amended the Manual and required

insurers to pass through Facility surpluses to policyholders with policies for years 1991, 1992, and

subsequent years.

               The first subsection of the new rule addressed policies with effective dates between

May 1, 1991 and December 31, 1991. The rule stated that the Department will publish a residual

market factor for 1991, which insurers are required to use in calculating the amount of residual

market premium to either return to or collect from policyholders and specified the formula for

calculating the factor. The rule also stated that, since the Facility reported a surplus for 1991,

retrospective policyholders with policies effective from May 1, 1991 to December 31, 1991 are

entitled to a proportionate share of the surplus. The commentary accompanying the rule stated that

the January 1, 1994 deadline specified in the 1992 statute was not a deadline for the issuance of a

residual market factor but an accounting deadline for a determination of whether there was a surplus

or deficit in the residual market. In other words, when the Department calculated whether there was

a surplus or deficit in the residual market for 1991 and calculated the corresponding residual market

factor, it could not consider expenses, including claims made against 1991 policies, that occurred

in 1994 or in subsequent years.

                                                 12
               The second subsection addressed policies issued between January 1, 1992, and

December 31, 1994. As with the first subsection, this subsection required the Department to issue

a residual market factor for 1992, 1993, and 1994; provided a formula for calculating the residual

market factor; and instructed insurers to calculate the residual market premium for each policyholder

using the residual market factor. Because there was a surplus for 1992, the rule instructed insurers

to calculate the rebate to be given to policyholders with policies effective between January 1, 1992

and December 31, 1992.

               After the 1997 rule was issued, the Department issued circular letter 686-A specifying

residual market factors to be used in the determination of the amount of pass-through to be issued

to 1991 and 1992 policyholders. Unlike the previous factors of 0% specified in letter 651, which

required no pass-through be given to policyholders, the new factors required insurers to pay a rebate

to policyholders. The letter explained that the factors were based on the operating results of the

Facility. The letter also stated that the residual market factor for 1992 might change if there were

future changes in the Facility’s operating results and that the 1992 factor was based on operating

results through the end of 1995.7 Insurers were instructed to calculate and issue the rebate to

policyholders no later than 180 days after the effective date of the rule.

       7
           Because the statute and rule did not provide a deadline for determining pass-throughs for
policies effective in 1992, the residual market factor for 1992 might change from year to year.
Claims under the 1992 policies may be made years after the policy period has ended due to lengthy
litigation, latent injuries, or other causes, which would affect the operating expenses of the Facility
and, accordingly, the surpluses or deficits passed through to insurers and to policyholders.

                                                  13
                                   PROCEDURAL HISTORY

               In 1997, sixty-three insurers, including the Liberty companies, sued the Department

and the Commissioner, asking the district court to declare that the 1997 rule and the residual market

factor specified in circular letter 686-A were invalid. Around the same time, policyholders alleging

a putative class sued approximately 200 insurers, seeking the surplus and a declaration that the order

was valid.

               In an order denying the insurers’ motion for temporary injunction, the district court

made the following findings and conclusions: (1) letter 651 was issued only to prevent insurers from

charging for non-existent deficits, did not constitute a rule or regulation, and was not adopted by the

Board or the Commissioner under the insurance code; (2) section 4.04 of article 5.76-2 required the

Department to issue residual market factors that corresponded to the operational results of the

residual market to be used in calculating retrospective premiums; (3) the 0% factors listed in letter

651 were not the residual market factors the Department was required to issue because they did not

require insurers to pay policyholders a portion of the residual market surplus; (4) the 1992 statute

advances the public interest by spreading the costs and benefits of the residual market among

policyholders in the voluntary market; (5) the 1997 rule is not an unconstitutional retroactive law;

and (6) the insurers do not have a vested right to the 1991 or 1992 surpluses.

               Both the insurers’ and the policyholders’ suits were consolidated.                After

consolidation, all the insurers except the Liberty companies settled with the policyholders, the

Department, and the Commissioner. The Liberty companies paid $13,454,036 to the policyholders

before the deadline listed in letter no. 686-A under protest.

                                                  14
               After paying the pass-through, the Liberty companies entered into a partial settlement

agreement. The agreement provided for the certification of a mandatory litigation class composed

of employers who had purchased retrospectively-rated policies from the Liberty companies sometime

between May 1, 1991, and December 31, 1992. Amber, Inc., Champagne-Webber, Inc., Churchill

Truck Lines, Inc., and Royal Seating Corp. (the “policyholder appellees”) are retrospectively-rated

policyholders who purchased workers’compensation insurance policies from one of the Liberty

companies during the relevant time period and were certified as class representatives.

               The Liberty companies, the Department, the Commissioner, and the policyholder

appellees all moved for summary judgment. The district court signed a final judgment that (1)

denied the Liberty companies’ motion for summary judgment and (2) granted the no-evidence

summary judgment motions of the Commissioner, the Department, and the policyholder appellees.

See Tex. R. Civ. P. 166a(a), (i). The Liberty companies appeal and ask the Court to reverse the

judgment of the district court and render judgment in their favor.8

                                    STANDARD OF REVIEW

               A no-evidence summary judgment is essentially a directed verdict granted before trial,

to which we apply a legal-sufficiency standard of review. Perdue v. Patten Corp., 142 S.W.3d 596,

603 (Tex. App.—Austin 2004, no pet.) (citing King Ranch, Inc. v. Chapman, 118 S.W.3d 742,

       8
          The Liberty companies seek a judgment stating the following: (1) that the 1997 rule and
the residual market factors specified in letter 686-A are invalid as applied to policies with effective
dates from May 1, 1991, to December 30, 1992; and (2) that the factors listed in letter 651 for these
policies are valid.

                                                  15
750-51 (Tex. 2003); Jackson v. Fiesta Mart, Inc., 979 S.W.2d 68, 70 (Tex. App.—Austin 1998, no

pet.)). In reviewing a no-evidence summary judgment, the court cannot substitute its judgment for

that of the trier-of-fact, so long as the evidence falls within the realm of reasonable disagreement.

City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005). In conducting a legal-sufficiency review,

the court must credit favorable evidence if a reasonable juror could and disregard contrary evidence

unless a reasonable juror could not. Id. at 827-28. The test for legal sufficiency is whether the

evidence would enable reasonable people to reach the judgment being reviewed. Id.

               When both sides move for summary judgment and the trial court grants one motion

and denies the other, the reviewing court should review the summary-judgment evidence presented

by both sides and determine all questions presented. Commissioners Court of Titus County v. Agan,

940 S.W.2d 77, 81 (Tex. 1997). The reviewing court should render the judgment that the trial court

should have rendered. Id.

               Issues of statutory construction are questions of law and are reviewed de novo. In re

Forlenza, 140 S.W.3d 373, 376 (Tex. 2003). Administrative rules are ordinarily construed in the

same way as statutes. El Paso County Hosp. Dist. v. Texas Health & Human Servs. Comm’n, 161
S.W.3d 587, 591 (Tex. App.—Austin 2005, pet. filed); see also Central Texas Nudists v. County of

Travis, No. 03-00-00024-CV, 2000 Tex. App. LEXIS 8136, at *3 (Austin Dec. 7, 2000, pet. denied)

(not designated for publication) (constitutionality of a rule raises question of law reviewed de novo).

The constitutionality of a statute is a question of law, which appellate courts review de novo. In re

C.P.J., 129 S.W.3d 573, 576 (Tex. App.—Dallas 2003, pet. denied).

                                                  16
                                           DISCUSSION

               On appeal, the Liberty companies contend that the 1997 rule and the residual market

factors specified in letter 686-A are invalid because (1) they violate both the federal and the Texas

constitutions by impairing the contractual obligations existing under their 1991 and 1992 policies;

(2) they deprive the companies of their property without due process of law; and (3) they violate the

Texas Constitution’s prohibition against retroactive laws. Although the Liberty companies listed the

federal and Texas contract issues separately, we will discuss them in the same section because they

are related. Further, we will address the retroactive issue first, and then address the remaining two

issues.

Retroactive Legislation

               In their final issue on appeal, the Liberty companies insist that the 1997 rule and the

market factors specified in letter 686-A violate the prohibition against retroactive legislation found

in the Texas Constitution as applied to policies effective in 1991 and 1992. The Texas Constitution,

unlike the federal constitution, specifically prohibits retroactive laws. See Texas Water Rights

Comm’n v. Wright, 464 S.W.2d 642, 648-49 (Tex. 1971). It provides that “[n]o bill of attainder, ex

post facto law, retroactive law, or any law impairing the obligation of contracts shall be made.” Tex.

Const. art. I, § 16. The retroactive prohibition is not absolute and must yield to the State’s

responsibility to safeguard the public welfare. State Bd. of Registration for Prof’l Eng’rs v. Wichita

Eng’g Co., 504 S.W.2d 606, 608 (Tex. Civ. App.—Fort Worth 1973, writ ref’d n.r.e.).

               When determining if an agency order constitutes an impermissible retroactive law,

two questions must be considered. See Southwestern Bell Tel. Co. v. Public Util. Comm’n, 615

                                                 17
S.W.2d 947, 953 (Tex. Civ. App.—Austin 1981), writ ref’d n.r.e., 622 S.W.2d 82 (Tex. 1981) (per

curiam). First, we must determine whether the statute authorizing the order is intended to allow the

agency to issue a rule with retroactive effect. See id. at 953. This condition is satisfied here because

the 1992 statute specifies that the Board is required to establish an appropriate pass-through for

policies written before and after January 1, 1992, the effective date of the statute. See former art.

5.76-2, § 4.04(b)-(e); see also Barshop v. Medina County Underground Water Conservation Dist.,

925 S.W.2d 618, 633 (Tex. 1996) (statute that authorizes agency to consider conduct occurring

before statute’s effective date has retroactive effect).

                The second question is whether the order is constitutionally objectionable. See

Southwestern Bell, 615 S.W.2d at 953. A retroactive law violates the Texas Constitution when the

law deprives parties of a vested right. See State v. Project Principle, Inc., 724 S.W.2d 387, 390

(Tex. 1987); Southwestern Bell, 615 S.W.2d at 956. A right becomes vested when there is “more

than a mere expectation based on an anticipation of the continuance of an existing law; it must have

become a title, legal or equitable, to the present or future enforcement of a demand.” Aetna Ins. Co.

v. Richardelle, 528 S.W.2d 280, 284 (Tex. App.—Corpus Christi 1975, writ ref’d n.r.e.). When

determining whether a law retroactively impairs a vested right, the court must consider (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.

Southwestern Bell, 615 S.W.2d at 956-57.

                                                  18
               The Liberty companies insist that the issuance of letter 651 gave them a vested right

to retain surpluses for the 1991 and 1992 calendar years. In support of this argument, the Liberty

companies claim that circular letters have the effect and force of law and that if they had not

complied with the requirements specified in letter 651, they would have been subject to some kind

of enforcement action.

               Because various amendments were being implemented, we will address different

policy time periods. First, we will address the policies issued between May 1 and December 30,

1991, and governed by the first three amendments. Next, we will address policies issued on the

effective date of the fourth amendment, December 31, 1991, and in 1992.

               Regarding policies issued between May 1 and December 31, 1991, letter 651 stated

that a residual market factor of 0% must be used in making premium adjustments. The Liberty

companies claim that the 0% factor specified for these policies comported with the requirements of

the first three amendments. They contend the emergency amendments governing these policies only

allowed for the issuance of a single residual market factor without the possibility of a subsequent

readjustment.9 The Liberty companies also assert that none of the amendments allowed for the pass-

through of Facility surpluses, only deficits. In addition, they contend that the 1992 statute does not

apply to the 1991 policies, despite the statutory language addressing policies effective before 1992,

because the policies were entered before the effective date of the statute and cannot justify the

       9
           In further support of their assertion that the final residual market factor could not be
readjusted, the Liberty companies point to a letter written by an employee of the Department to an
insurer, specifying the employee’s belief that the residual market factor would not be readjusted.

                                                 19
application of the 1997 rule to 1991 policies.10 Therefore, they insist they have a vested right to

retain the 1991 residual market surplus. Alternatively, the Liberty companies contend that they have

a vested right to the 1991 surplus because the 1992 statute prohibited the Board from issuing a

residual market factor for the 1991 policies after January 1, 1994. Therefore, the Liberty companies

insist that the 1997 rule’s directive that a proportionate share of the surplus be given to 1991

policyholders is invalid.

               Regarding policies effective December 31, 1991, letter 651 stated that a residual

market factor of 0% was to be used in the first two retrospective adjustments and that the factor

would be updated annually for two years. For policies issued during 1992, the letter stated that a 0%

factor was to be used for the first adjustment but would be updated annually for three years. No

updated factors were issued for either group of policies. Further, the fourth amendment, which

applied to policies issued on or after December 31, 1991, specified that the residual market factor

issued by the Department would be updated annually for four years and that the fourth update would

be used in all future adjustments until the plan was finalized. Because different factors were not

issued annually as specified in letter 651 and in the amendment and because the fourth adjustment

       10
           In support of this argument, the Liberty companies point to language in the commentary
accompanying the 1997 rule stating that the 1991 amendments were adopted to pass through Facility
deficits, were written with the anticipation that continued deficits would be incurred, and were not
amended to pass through surpluses until the 1997 rule. They also point to a letter written by an
employee of the Department stating that pass-throughs for policies effective May 1, 1991 and after
were authorized if the Facility incurred a deficit and point to another letter written by a Department
employee stating that any “adjustment to a policy effective since May 1, 1991 would be based on
rules in effect as of the actual effective date of the policy.” Finally, they point to similar language
in Butler Weldments Corp. v. Liberty Mutual Insurance Co., in which this Court concluded that the
1991 amendments did not address the possibility of Facility surpluses. 3 S.W.3d 654, 657 n.4 (Tex.
App.—Austin 1999, no pet.).

                                                  20
period described in the amendment had passed when the 1997 rule and letter 686-A were issued, the

Liberty companies insist that the 0% factors in letter 651 constituted the final factors the Board was

required to issue under the fourth amendment. Therefore, they insist that they obtained a vested right

to retain the surpluses corresponding to this time period.

               We disagree. The issuance of letter 651 did not give the Liberty companies a vested

right to the surpluses. First, letter 651 was not an agency rule. Cf. Board of Regents of State

Colleges v. Roth, 408 U.S. 546, 577 (1972) (property interests created and defined by rules and

statutes). Letter 651 was written by deputy commissioner Moore after being informed that insurers

were still charging policyholders for Facility deficits even though the Facility was actually

experiencing surpluses. The letter did not satisfy any of the requirements listed in the Administrative

Procedure Act (“APA”) necessary for the issuance of a rule. See Unified Loans, Inc. v. Pettijohn,

955 S.W.2d 649, 650-51 (Tex. App.—Austin 1997, no pet.) (rule invalid if not adopted in substantial

compliance of APA). The Department did not issue and did not publish in the Texas Register a

notice announcing its intention to issue a rule. Tex. Gov’t Code Ann. § 2001.023(a), (b) (West

2000).11 Further, interested parties were not given the opportunity to request a public hearing nor

were they given an opportunity to comment before the letter was issued. Id. § 2001.029(a), (b) (West

2000).

         11
           The notice must contain a brief description of the rule, the text of the rule, a statement
explaining the statutory authority authorizing the rule, a note explaining the estimated cost of
enforcing the rule, a note explaining the costs to parties forced to comply with the new rule and
benefits to the public of adopting the rule, and a request for comments from interested parties. Tex.
Gov’t Code Ann. § 2001.024(1)-(7) (West 2000).

                                                  21
                Also, the residual market factors specified in letter 651 did not satisfy the

requirements specified in the amendments or the 1992 statute. The emergency amendments specify

that the Board will issue a residual market factor that is based on residual market results for the year.

Although the amendments used the word “deficits” because only deficits were anticipated, the

amendments tied the market factors to operations in the residual market. Similarly, subsections (d)

and (e) of the 1992 statute require the Board to establish an “appropriate pass-through allowance so

that each retrospectively-rated risk . . . shall pay a proportion of the assessment or receive a

proportion of the rebate.” Former art. 5.76-2, § 4.04(d), (e). The factors specified in letter 651 did

not correspond to the actual operations of the residual market and, therefore, could not have

represented the “appropriate” factors the Board was charged with implementing. Cf. Butler

Weldments, 3 S.W.3d at 660 (every word in statute has a purpose).

                Additionally, for policies issued between December 31, 1991 and the end of 1992,

the fourth amendment does not say that if a residual market factor is not issued by the fourth

adjustment period, no factor could ever be issued. Rather, the amendment says that the residual

market factor at the fourth adjustment will apply to all future adjustments until the plan is finalized.

When the Department issued the 1997 rule, the plan was finalized, and the residual market factor

was appropriately issued shortly after.12

        12
            Even if we were to adopt the Liberty companies’ argument, only policies issued on
December 31, 1991, would be affected by this because policies issued on January 1, 1992 or later
were governed by the 1992 statute. The 1992 statute does not provide a time limit for the issuance
of a residual market factor for 1992 policies, and, if we were to construe the amendment as imposing
a time limit, then the amendment would be inconsistent with the statute and would be inoperative
to policies issued on or after the effective date of the statute, January 1, 1992. See former art. 5.76-2,
§ 4.04(e); see also Riess v. Appraisal Dist., 735 S.W.2d 633, 638 (Tex. App.—Austin 1987, writ

                                                   22
               Further, the 1997 rule advances the public interest. The amendments were issued

after insurers had threatened to leave Texas. In an attempt to preserve the workers’ compensation

market, the Department issued amendments that relieved insurers of the obligation of financing the

residual market. The amendments were written after years of deficits in the residual market. The

1997 rules and the factors listed in letter 686-A implement the 1992 statute’s equitable directive that

Facility deficits and surpluses were to be passed on to policyholders, including 1991 and 1992

policyholders. Allowing insurers to retain Facility surpluses but pass on Facility deficits would be

contrary to the public interest and would reward insurers at the expense of policyholders.

               Similarly, the insurers could not have had reasonable expectations that they would

be able to retain the Facility surpluses. The amendments allowed a pass-through of Facility

expenses, and the 1992 statute, written in 1991, required a pass-through of Facility surpluses or

deficits. Because insurers were relieved of the financial obligation of covering the Facility’s

expenses, they could not reasonably expect to retain the surpluses. On the contrary, policyholders,

faced with the prospect of having to cover Facility costs, would reasonably expect that they would

also be allowed to share in any surplus.13 The 1997 rule gave effect to the reasonable expectations

of both insurers and policyholders.

denied) (agency may not impose additional burdens inconsistent with statute).
       13
          As the obligated parties, policyholders possessed an expectation to the surpluses. This
expectation turned into a vested right when the Department issued its 1997 rule and the letter
specifying the actual residual market factors to be used based upon actual residual market costs. See
Butler Weldments Co. v. Liberty Mutual Insurance Co., 3 S.W.3d 654, 659 (Tex. App.—Austin
1999, no pet.).

                                                  23
                Finally, there was no prior law upon which the insurers had long relied allowing the

insurers to pass through deficits but retain surpluses. The 1997 rule is unlikely to have surprised

insurers because it was known that the obligation of funding the Facility had been shifted and that

there was an unexpected surplus.

                We do not agree with the Liberty companies’ alternative contention that the 1992

statute prohibited pass-throughs for the 1991 policies. In support of their argument, they highlight

the last sentence of section 4.04(d), which states “a pass-through allowance may not be permitted

under this subsection after January 1, 1994.” However, when determining legislative intent, the

entire act, not isolated portions, must be considered. City of San Antonio v. City of Boerne, 111
S.W.3d 22, 25 (Tex. 2003). When subsection (d) is read in light of the remainder of section 4.04,

which emphasizes the need to pass through Facility surpluses or deficits, the deadline specified is

not a deadline for the issuance of a residual market factor; rather, the deadline refers to an accounting

cut off that limits the information that may be included when calculating the surplus or deficit for

1991. Accordingly, the Department could issue a residual market factor to pass through Facility

surpluses or deficits determined for policies issued in 1991 after January 1, 1994.

                We hold that the 1997 rule and the factors specified in letter 686-A do not violate

the prohibition against retroactive legislation. Accordingly, we overrule the Liberty companies’ third

issue on appeal.14

        14
            Alternatively, for all the reasons already stated, the 1997 rule is a valid exercise of
legislative power. The rule equitably implements the scheme specified in the 1992 statute and the
amendments that were implemented to save the workers’ compensation market. A “valid exercise
of the police power by the legislature to safeguard the public safety and welfare of the public can
prevail over a finding that the law is unconstitutionally retroactive.” Cf. Barshop v. Medina County

                                                   24
Contracts Clause

                In their first issue on appeal, the Liberty companies assert that the 1997 rule

unconstitutionally impairs the obligations under their 1991 and 1992 policies. Both the federal and

the Texas Constitutions provide protection from the impairment of contractual obligations. U.S.

Const. Art. I, § 10, cl. 1; Tex. Const. Art. I, § 16. Both prohibitions are interpreted nearly identically.

Chandler v. Jorge A. Gutierrez, P.C., 906 S.W.2d 195, 203 (Tex. App.—Austin 1995, writ denied).

Although the prohibitions listed in the contracts clauses of both constitutions are “facially absolute,”

the prohibitions must be reconciled with the power of the state to safeguard the interests of the

public. See Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 410 (1983);

State Bd. of Registration for Prof’l Eng’rs, 504 S.W.2d at 608.

                Determining whether there has been a violation of the contracts clause under the

federal constitution involves several considerations. First, a court must determine whether the state

law has, in fact, operated as a substantial impairment of the contract. Energy Reserves Group, 459
U.S. at 411. Regulations that restrict parties to profits they reasonably expected from the contract

do not necessarily qualify as substantial impairments. Id.; City of El Paso v. Simmons, 379 U.S. 497,

515 (1965) (law not subject to attack under the contracts clause if it restricts party to gains it

reasonably could have expected from contract).            One factor to consider when making this

Underground Water Conservation Dist., 925 S.W.2d 618, 633-34 (Tex. 1996) (Edward’s Aquifer
Act imposed cap on water withdrawal for preexisting users that was based on previous consumption
and that was different than the cap placed on new users; court concluded that, because Act necessary
to general economy and welfare of the state, retroactive effect resulting from consideration of actions
occurring before effective date of Act did not render Act unconstitutional).

                                                    25
determination is whether the industry the complaining party belongs to has been regulated in the

past. See Energy Reserves Group, 459 U.S. at 411.

               If there is a substantial impairment, the court must then determine if there is a

significant and legitimate public purpose behind the regulation, such as remedying a broad economic

problem. See id. at 411-12. A legitimate public purpose is necessary to ensure the state is using its

police power and not simply benefitting a special interest. Id. at 412. The public purpose does not

have to address a temporary or emergency situation. Id. One example of a significant and legitimate

public purpose that has been upheld is the elimination of unforeseen windfall profits. Id. (citing

United States Trust Co. v. New Jersey, 431 U.S. 1, 31 n. 30 (1976)); see also Southern Cal. Gas Co.

v. City of Santa Ana, 336 F.3d 885, 895 (9th Cir. 1993) (per curiam) (“if a statute causes unforeseen

and unintended consequences such that private parties would obtain windfalls they never expected,

later amendment to realign statute with the parties’ expected bargain may be reasonable”).

               If a significant and legitimate public purpose is present, then the court must determine

whether the “adjustment of ‘the rights and responsibilities of contracting parties [is based] upon

reasonable conditions and [is] of a character appropriate to the public purpose justifying’” the

adjustment. Energy Reserves Group, 459 U.S. at 412 (quoting United States Trust Co. v. New

Jersey, 431 U.S. 1, 22 (1977)). Unless the State is a party to the contract, “‘courts properly defer to

legislative judgment as to the necessity and reasonableness of a particular measure.’” Id. at 412-13

(quoting United States Trust Co., 431 U.S. at 22-23).

               A similar analysis is employed for the Texas Constitution. A statute does not

unconstitutionally impair contractual rights if the action is a “valid exercise of the police power

                                                  26
necessary to safeguard the public safety and welfare.” Barshop, 925 S.W.2d at 635. Laws that are

remedial in nature and that do not disturb vested rights are not within the prohibition against the

impairment of contracts. Pratt v. Story, 530 S.W.2d 325, 328 (Tex. Civ. App.—Tyler 1975, no

writ). An example of a remedial law is one that is designed to correct “defects, mistakes, and

omissions” in the law. Rey v. Acosta, 860 S.W.2d 654, 657 (Tex. App.—El Paso 1993, no writ).

               The Liberty companies assert that the 1997 rule that required pass-throughs of the

1991 and 1992 surpluses substantially impairs the policies between the Liberty companies and their

policyholders by requiring the Liberty companies to forfeit substantial portions of premiums and by

affecting the time period under which the premiums may be retrospectively adjusted. Further, the

Liberty companies insist the rule does not serve a substantial and legitimate public purpose; rather,

they argue the rule simply favors the pecuniary interests of a narrow group of employers.

               As discussed previously, the Liberty companies did not have a vested right to retain

the surpluses. Without a vested right, there could be no impermissible impairment of the Liberty

companies’ contractual rights under the federal or the Texas Constitutions. See Kestler v. Board of

Trustees of N.C. Local Governmental Employees Ret. Sys., 48 F.3d 800, 804 (4th Cir. 1995), cert.

denied, 516 U.S. 868 (1995); Pratt, 530 S.W.2d at 328.15

       15
            The Liberty companies also argue that, even if the 1992 statute authorized the issuance
of the 1997 rule, the rule and letter 686-A were issued too late because they had obtained vested
rights to the surpluses by that time. They contend the rule was issued beyond the time limitations
specified in the fourth amendment and in circular 651. In support of this proposition, they cite to
two cases stating parties had a vested right to rely on statutes of limitations as barring claims after
the limitations period had passed. See Mann v. Jack Roach Bissonet, Inc., 623 S.W.2d 716, 719
(Tex. Civ. App.—Houston [1st Dist.] 1981, no writ); Southern Pac. Transp. Co. v. State of Texas,
380 S.W.2d 123, 127 (Tex. Civ. App.—Houston 1964, writ ref’d). However, as discussed earlier,
the Liberty companies did not gain vested rights to the surpluses through the issuance of letter 651

                                                  27
               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. Cf. Energy Reserves Group, 459 U.S. at 411. 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. At the time the 1991 amendments and the 1992 statute

were enacted, insurers and policyholders understood that the burden of funding the residual market

was shifted to policyholders. Neither insurers nor policyholders expected a Facility surplus, and

insurers were not expecting to retain an additional profit from a Facility surplus.

               In addition, the 1997 rule serves a legitimate public purpose. The workers’

compensation insurance industry was in a crisis when the emergency rules were promulgated. In

order to prevent insurers from leaving the state and to save the workers’ compensation market, the

burden of funding the residual market was transferred to and spread among policyholders in the

voluntary market. The 1997 rule implements the policy specified in the 1992 statute. The rule is

based on reasonable conditions, the unexpected surpluses and the transfer of the obligation of

funding the Facility to policyholders, and is of a “character appropriate” to the legitimate purpose

of saving the residual market. Cf. Energy Reserves Group, 459 U.S. at 412.16 The 1997 rule also

or through the time periods listed in the fourth amendment. Therefore, the length of time between
the passage of the 1992 statute and the issuance of the 1997 rule and letter 686-A is not a pivotal
factor. Cf. In re Workers’ Compensation Refund, 46 F.3d at 820 (because claims may be paid long
after initial injury, years may pass before determining whether distribution is appropriate).
       16
           Because the state is not a party to the insurance policies affected by the 1997 rule, we also
defer to the legislative judgment evidenced in the 1992 statute and implemented in the 1997 rule that
the 1991 and 1992 Facility surpluses and deficits be passed through to policyholders. See Energy
Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 412 (1983).

                                                  28
prevents insurers from being awarded an unforeseen windfall after being relieved of the burden of

funding the Facility.

                For all the reasons discussed in the previous paragraphs, the 1997 rule does not

violate the prohibition against the impairment of contracts found in the Texas Constitution either.

As discussed in the previous section, the rule is a valid exercise of the police power necessary to

safeguard the public welfare. Further, the law is remedial in nature; it corrects omissions in the 1991

amendments that only specifically mentioned the pass-through of deficits without addressing the

unexpected possibility of Facility surpluses.

                We hold that the 1997 rule and the factors specified in letter 686-A do not

unconstitutionally impair the Liberty companies’ contractual rights. Accordingly, we overrule the

Liberty companies’ first issue on appeal.17

        17
           In support of their contention that the 1997 rule impairs their contractual rights, the Liberty
companies cite to In re Workers’ Compensation Refund, 46 F.3d 813 (8th Cir. 1995). In that case,
the court concluded that a statute that retroactively distributed excess premiums unconstitutionally
impaired insurers’ contract rights with the Workers’ Compensation Reinsurance Association (the
“Association,”) which reinsured all insurers providing workers’ compensation insurance in
Minnesota. All insurers were required to be members of the Association and to pay premiums to the
Association. Under the terms of the documents constituting the contractual relationship between the
insurers and the Association, the Association was required to “collect or distribute to the insurance
companies extra or excess premiums in the event of shortages or unneeded accumulations.” Id. at
816. The Association experienced a surplus, distributed $100 million to insurers, and planned to
distribute an additional $302 million to insurers. Id. However, before the second surplus was
distributed, the Minnesota legislature enacted a statute that required the insurers to refund the first
surplus to policyholders and directed the Association to pay the second surplus to policyholders
directly.

          The court concluded the statute impermissibly impaired the insurers contractual rights
because the contract specified that insurers would receive the surpluses and, therefore, gave insurers
a reasonable expectation to the surpluses. Id. at 817-18. The court also reasoned that benefitting the
few policyholders who purchased policies in a particular year was not a significant or legitimate

                                                   29
Deprived of property without due process of law

               In their second issue on appeal, the Liberty companies contend that the 1997 rule and

letter 686-A, which require pass-throughs of Facility surpluses for 1991 and 1992, deprive the

Liberty companies of their constitutionally protected property rights without due process of law and

without advancing any legitimate state interest. The Liberty companies insist that the 1991

emergency rules, the 1992 rule, and circular letter 651 give the Liberty companies a legitimate claim

to the surpluses in question under state law. See Roth, 408 U.S. at 577 (state-granted benefits that

private party has “a legitimate claim of entitlement” under state law are afforded constitutional

protection).

               We disagree. 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 legitimate state interest. See

Texas Workers’ Comp. Comm’n v. Garcia, 893 S.W.2d 504, 545 (Tex. 1994). For the reasons

discussed earlier, we find the 1997 rule rationally furthers legitimate state purposes.

               In addition, in order to bring a substantive due process claim, an individual must show

they have a protected interest. Neuwirth v. Louisiana State Bd. of Dentistry, 845 F.2d 553, 558 (5th

Cir. 1988); Woody v. Dallas, 809 F. Supp. 466, 473 (N.D. Tex. 1992). To have a protected interest,

public purpose and amounted to an unexpected windfall for the policyholders. Id. at 821.

           This case is distinguishable. The Facility surpluses were experienced after, not before,
the burden of funding the residual market had been shifted to policyholders at the request of insurers.
As discussed previously, policyholders, not insurers, had a reasonable expectation to the surpluses
because they were the obligated parties. The amendments and the 1992 statute served a legitimate
public purpose. The 1997 rule implements the directive specified in the 1992 statute and prevents
insurers from being awarded a windfall profit.

                                                  30
the individual must have a legitimate claim of entitlement, which is more than a unilateral

expectation. Roth, 408 U.S. at 577. Further, property interests are created and defined by existing

rules or from independent sources like state law. Id. As we discussed previously, the Liberty

companies did not have a vested right to retain the surplus from the 1991 and 1992 calendar years,

either by law or rule.

               We hold that the 1997 rule and the factors specified in letter 686-A do not deprive

the Liberty companies of their property without due process of law. Accordingly, we overrule the

Liberty companies’ third issue on appeal.

                                        CONCLUSION

               Because we have overruled all of the Liberty companies’ issues on appeal, we affirm

the judgment of the district court.

                                               David Puryear, Justice

Before Justices Kidd, Patterson and Puryear;
    Justice Kidd Not Participating

Affirmed

Filed: March 3, 2006

                                                 31