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Penalty for lapsed comp coverage was excessive, court rules

Posted On: Mar. 6, 2017 2:09 PM CST


A fine imposed against a business for failing to maintain workers compensation insurance violated the firm’s right to protection against excessive fines under the U.S. Constitution, a Colorado appeals court ruled.

Denver-based Dami Hospitality L.L.C., which operates a motel with fewer than ten employees and an annual payroll of less than $50,000, was fined $841,200 in 2014 by the Colorado Division of Workers’ Compensation for failure to provide comp insurance. The company was without comp coverage between 2006 and 2007 and again between 2010 and 2014, according to the Feb. 23 ruling by the Colorado Court of Appeals in Denver. The fine was based on a per-day formula under Colorado Department of Labor and Employment rules, court records show.

Soon Pak, owner of the company, asked for the fine to be reconsidered in a letter to the director of the workers comp division, saying the penalty represented more money than the company generates in a year and that she would be forced to declare both personal and business bankruptcy and shut her business down if the fine was enforced. Ms. Pak’s insurance agent accepted some responsibility for the lack of coverage in a supporting letter, saying Ms. Pak confused property insurance with comp insurance and that he did not tell her she lacked comp coverage, court records show.

The director concluded that exemptions from penalties are not tied to a respondent’s ability to pay and upheld the fine. On appeal, the state’s Industrial Claim Appeals Office remanded the case to the director, saying he failed to consider factors under a 2005 case that protected against constitutionally excessive fines and penalties, court documents show. Those factors include the defendant’s degree of reprehensibility, the disparity between the harm or potential harm and the fine and the difference between the fine imposed and the penalties authorized in comparable cases.

The director, arguing that the rules already incorporated those factors and that no further consideration was necessary, ordered Dami to pay the fine. The appeals office affirmed the director’s order, court records show.

Dami appealed the decision to the Colorado Court of Appeals, saying the fine was unconstitutional, both on its face and as it was applied in the firm’s case. In a unanimous decision, a three-judge appellate court panel upheld the constitutionality of the statute, but set aside the fine as excessive because the director of the workers comp division failed to apply excessive fine factors.

The court found Dami falls on the low end of the reprehensibility scale because it did not act with indifference or reckless disregard for the safety of others or with intentional malice, trickery or deceit. The court also found that the potential for serious injury to Dami’s employees was low as evidenced by the fact that the company employs few workers and has no history of comp claims.

In addition, the court agreed with Dami that disparate fines for comparable offenses are possible under the statute because the penalty is calculated based on the time elapsed between the onset of the violation and point at which notice is given to the employer, which can vary. The court also concluded, based on similar case law, that ability to pay should be considered when determining whether a penalty imposed against an employer for failure to carry comp insurance is constitutionally excessive.

By failing to take those factors into account, the workers comp division director violated Dami’s right to protection against excessive fines under the Eighth Amendment, the appellate court found.

“We agree with Dami that because the constitutional factors are not sufficiently incorporated into Rule 3-6, the Director abused his discretion in failing to consider facts specific to Dami — including Dami’s ability to pay — when he reimposed the fine after the Panel had directed him to address the Associated Business Products factors.”

The court remanded the case the state’s Industrial Claim Appeals Office to impose a penalty that takes into account excessive fine factor calculations.