Failure to Pay Premium Finance Can be Expensive in Many Ways

By Barry Zalma on May 17, 2021

Cancellation Triggered Audit Which Cost Insured Much Additional Premium

FAILING TO PAY ADDITIONAL PREMIUM IS BREACH OF CONTRACT

Ryan and Heather Bollschweiler own Redstang Enterprises (collectively, Redstang), an unincorporated business that builds horse-related corrals and structures. Redstang appealed the superior court’s grant of summary judgment for Travelers Property Casualty Company of America. In Travelers Property Casualty Company Of America v. Ryan Bollschweiler, et al., No. 1 CA-CV 20-0338, Arizona Court Of Appeals Division One (May 11, 2021) the Court of Appeal was faced with claims of bad faith.

FACTUAL HISTORY

Redstang did not qualify for workers’ compensation insurance coverage in the marketplace because it had a lapse in insurance coverage. Redstang, therefore, applied for workers’ compensation insurance through the National Council for Compensation Insurance (NCCI), the designated plan administrator for Arizona’s “assigned risk plan.” NCCI does not provide insurance coverage. Instead, it accepts applications, estimates the annual premium based on the application, and assigns the application to an insurer to provide coverage.

Employers apply for coverage through the assigned risk plan using standardized application forms. The application specifically notifies applicants that insurance coverage is “afforded under the applicable Workers Compensation Insurance Plan [WCIP] developed or administered by NCCI.” (Emphasis added.)

In total, the application forms mention NCCI’s plans, policies, and procedures more than two dozen times. In its application, Redstang listed four employees and no uninsured subcontractors. Based on this information, NCCI estimated Redstang’s annual premium at about $6,850.00. NCCI then assigned the application to Travelers, who issued a workers’ compensation policy to Redstang.

The policy expressly stated the initial premium was merely an estimate, and “[t]he final premium will be determined after this policy ends by using the actual, not the estimated, premium basis and the proper classifications and rates that lawfully apply to the business and work covered by this policy.” To that end, the policy required Redstang to “keep records of information needed to compute premium.”

Redstang entered into a financing agreement with Imperial PFS to pay the estimated premium. The agreement included a power of attorney, giving Imperial the authority to cancel the policy on Redstang’s behalf if Redstang defaulted on its installment payments.

Several months later, Redstang defaulted on its payments to Imperial. Based on the default, Imperial exercised its authority under the power of attorney and mailed a letter to Redstang and Travelers cancelling Redstang’s policy. Redstang did not object to the cancellation, and Travelers complied with Imperial’s request to cancel the policy.

Under NCCI practices and consistent with the policy terms, Travelers conducted a cancellation audit. The audit revealed two notable issues: (1) along with the four listed employees, two subcontractors required coverage; and (2) Redstang’s records did not contain adequate information to allow Travelers to segregate Redstang’s employees’ work by classification as required by NCCI Rule 2G.

The time sheets available for audit typically have a few words to explain each employee’s workday—sometimes covering more than 12 hours. Though some explicitly say “roofing,” most contain vague descriptions such as “welding,” “sheet metal,” or “red heads.” Others have multiple duties lumped together for a day. One timesheet provides no work description at all listing only “47 y Greenway.”

Because Travelers could not identify “the actual time spent working within each job classification,” it calculated Redstang’s final premium using only “the highest rated classification,” code 5059, as Rule 2G requires. This resulted in an annual premium of $48,171.00.

When Redstang failed to pay the outstanding balance, Travelers sued for breach of contract. Redstang answered, asserting counterclaims of consumer fraud and deceptive insurance practices. The superior court found for Travelers, entering judgment against Redstang for: $40,604.00, with interest, in contract damages; $10,000.00 in attorney fees; and $6,405.03 in taxable costs.

ANALYSIS

Although some believe the best defense is a strong offense, charging an insurer with consumer fraud and deceptive insurance practices – without evidence to prove the charges – is contumacious.

The Court of Appeal noted that summary judgment is appropriate when no genuine dispute as to any material fact exists and the moving party is entitled to judgment as a matter of law.

Redstang argued it did not breach its contract with Travelers because the NCCI Basic Manual does not control the policy. Contrary to the argument it is clear that Arizona established the assigned risk plan by statute as the coverage of last resort for employers who cannot otherwise obtain workers’ compensation insurance. As the designated plan administrator, NCCI must “develop a plan of operation” for the assigned risk plan, including “[a] method for apportioning the workers’ compensation assigned risks among all insurers.” Travelers, in turn, must participate in the assigned risk plan because it provides workers’ compensation insurance in Arizona. Arizona statute expressly prohibits any deviation from NCCI rating rules by providers in the assigned risk plan.

Arizona state law, the application, and the final policy provided notice that NCCI’s rules and procedures governed Redstang’s insurance coverage. Redstang also argued its payroll records provided sufficiently detailed information for Travelers to differentiate between class codes. Redstang further argued its policy with Travelers does not say anything about what form the records need to be in.

To begin, the issue was not about the type of records Redstang kept. Indeed, Redstang maintained “payroll and disbursement records” as required by the policy. Rather, the issue was whether Redstang’s payroll records comply with the policy’s requirement to contain “information needed to compute premium.” They did not.

Redstang was on notice that: (1) its initial premium was merely an estimate; and (2) its final premium would be determined by applying the same calculations to the actual time each of its employees spent within each NCCI rate code. Redstang, therefore, knew or should have known its payroll records needed to contain enough information for Travelers’s auditor to identify the specific tasks employees performed and appropriately segregate the time.

Redstang’s timesheets, as contained in the record, did not meet the required standard. Indeed, some simply refer to a job location, while others provide only generic descriptions such as “sheet metal” or “welding” and nothing more. Though some records provide more detailed information, they include only a single entry for the entire day showing the total hours worked across multiple tasks. Such records fall short of “reflect[ing] actual time spent working within each job classification” as required by Rule 2G.

Redstang was on notice the initial premium was merely an estimate. Redstang also was aware Travelers would calculate the final premium after determining the actual risk exposure based on an audit of Redstang’s workplace and its payroll-related records.

Travelers established the premium due based on the audit was $47,453.00, which included the short-term cancellation fee of $4,650.00. After accounting for the $6,849.00 Redstang paid toward the estimated premium, the balance remaining was $40,604.00—the amount of the superior court’s award.

The Court of Appeals exercised its discretion and awarded Travelers, as the successful party on appeal, its reasonable attorney fees and costs.

ZALMA OPINON

Travelers clearly complied with the requirements of Arizona law and the terms of the policy. Redstang did the opposite and then, in an attempt to avoid paying the premium it owed, hoping to frighten Travelers away from exercising its rights to damages for breach of contract, wrongfully accused Travelers of fraud. That attempt, appropriately, failed. Redstang was its own biggest problem – it worked without workers’ compensation insurance and, as a result, it could only get insurance through the assigned risk plan, then it financed the premium and did not pay the finance company who cancelled the policy triggering an audit that proved lies on the application allowing a large additional premium. This case teaches that it is always best to truthfully report the risk to an insurer and that attempts to charge wrongdoing will not deter an insurer whose suit is based on facts and law.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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