Continental Casualty Co. v. First Financial Employee Leasing, Inc. (716 F. Supp. 2d 1176, 2010)

ORDER

JAMES D. WHITTEMORE, District Judge.

BEFORE THE COURT are: (1) Defendant First Financial Employee Leasing, Inc.’s Motion for Partial Summary Judgment (Dkt. 64), to which Plaintiffs have responded (Dkt. 82); (2) Plaintiffs’ Motion for Partial Summary Judgment (Dkt. 67) and separate Memorandum of Law (Dkt. 69), to which Defendant has responded (Dkt. 80); (3) Defendant’s Motion to Strike Plaintiffs’ Response Memorandum (Dkt. 84), to which Plaintiffs have responded (Dkt. 91); (4) Plaintiffs’ Cross-Motion to Strike Defendant’s Opposition and Defendant’s Motion for Summary Judgment (Dkt. 91), to which Defendant has responded (Dkt. 94); and (5) Defendant’s Motion to Strike Affidavit of Cynthia Goral and to Exclude Testimony at Trial (Dkt. 96), to which Plaintiffs have responded (Dkt. 107).

Plaintiffs brought this action to recover amounts owing under two policies of workers’ compensation and employers liability insurance issued to Defendant. Defendant counterclaimed and asserted (a) a claim for breach of contract (Count I) alleging that one or more Plaintiffs breached their claims management and settlement obligations under one of the policies; (b) a second claim for breach of contract (Count II) alleging that Plaintiffs overcharged Defendant by failing to apply a premium credit in accordance with the policies and as mandated by Florida law; and (c) a claim for equitable accounting (Count III).

As to Count II, Defendant contends that (1) in determining the amount of premium owed by Defendant, Plaintiff was required by Florida law and the insurance policies to apply a premium credit provided by the Florida Contracting Classification Premium Adjustment Program (“FCCPAP”), as promulgated by the National Council on Compensation Insurance, Inc. (“NCCI”) and (2) after being instructed to do so by NCCI, Plaintiff did initially apply the FCCPAP credit in its premium audit statements and thereby “endorsed” the policies to include the credit. In response, Plaintiffs argue that applying the FCCPAP to reduce Defendant’s premium was neither required by the policies nor consistent with Plaintiffs’ filed and approved rating plan. Additionally, Plaintiffs argue that, as Count II challenges a premium rate calculation and seeks a premium rate adjustment, Defendant was required to exhaust its administrative remedies under Section 627.371, Florida Statutes, before suing on Count II. As set forth below, the Court agrees that Defendant was required to exhaust its administrative remedies but failed to do so. Accordingly, Plaintiffs’ Motion for Partial Summary Judgment is GRANTED and Defendant’s Motion for Partial Summary Judgment is DENIED.

Background

Plaintiffs American Casualty Co. of Reading, Pennsylvania (“American”) and Continental Casualty Co. (“Continental”) are insurance carriers. (Pretrial Statement, Dkt. 86 ¶ 9(c)). Plaintiff CNA ClaimPlus, Inc. is a claims administration company. Although the nature of their affiliation is not entirely clear, Plaintiffs state that they all operate under the CNA Insurance Companies trademark and they refer to themselves collectively as CNA. Sather Aff. I, ¶ 2. Defendant First Financial Employee Leasing, Inc. (“FFEL”) is an employee leasing company. (Dkt. 86 ¶ 9(c)).

Plaintiff American issued to FFEL a policy of workers’ compensation and employers liability insurance for the effective dates of February 4, 2001 to February 4, 2002 (the “2001 Policy [Dkt. 64-1]”) and a renewal policy for the effective dates of February 4, 2002 to February 4, 2003, (the “2002 Policy [Dkt. 64-2]”). (Dkt. 86 ¶ 9(d)-(e)). At FFEL’s request, the 2002 Policy was terminated early, on December 31, 2002. Id. ¶ 9(e); Sather Aff. ¶ 3.

The Policies were issued as part of large deductible insurance programs (the “Programs”) whose terms and conditions were outlined in the Policies and in (1) a Deductible Reimbursement Agreement between Plaintiff Continental and FFEL effective February 4, 2001; (2) a Claim Service Agreement between FFEL and RSKCo Claims Services, Inc., Plaintiff CNA ClaimPlus, Inc.’s predecessor in interest, effective February 4, 2001; and (3) confirmation letters sent by CNA to FFEL. See Sather Aff. I ¶ 5 and Exs. B, C, D & E (Dkt. 82-1 at 35-55 and Dkt. 82-2 at 1^14); see also Dkt. 86, ¶ 9(f)-(g).

Under Florida law, as to workers’ compensation and employers liability insurance, every insurer must file with the Department of Financial Services (f/k/a the Department of Insurance) “every manual of classifications, rules, and rates, every rating plan, and every modification of any of the foregoing which it proposes to use.” Fla. Stat. § 627.091(1). However, an insurer “may satisfy its obligation to make such filings by becoming a member of, or a subscriber to, a licensed rating organization which makes such filings and by authorizing the office to accept such filings in its behalf ...” Id. § 627.091(4). CNA states that NCCI has operated the only rating organization in the State of Florida for several decades. (Dkt. 82 at 21). NCCI has filed on behalf of its member carriers the Florida rates and rules contained in its Basic Manual for Workers Compensation and Employers Liability Insurance (the “NCCI Manual”). See Dkt. 110 at 4. Generally, an insurer may not issue a contract of insurance except in accordance with its filings, see Fla. Stat. § 627.191, and must “adhere to the filings made on its behalf’ by NCCI, Fla. Stat. § 627.211; see also Dkt. 110 at 4.

The Programs were issued pursuant to a Workers’ Compensation Loss Reimbursement Rating Plan approved by the Department of Insurance in January, 1996. See Sather Aff. I ¶ 8 and Ex. F (Dkt. 82-3 at 2-65); Dkt. 64-1 at 19-22; Dkt. 64-2 at 20-24. The Rating Plan provides for a premium calculated pursuant to actuarial formulas based, in part, on the amount of the deductible to be borne by the insured and the insured’s expected losses (ie., the estimated frequency and magnitude of claims based on the insured’s claims experience in prior years). Sather Aff. I ¶ 12.

The 2001 and 2002 Program’s premiums are based on formulas that contemplate FFEL’s deductible obligations (ie., risk retention) and loss experience. Sather Aff. I ¶ 13. The 2001 Policy and confirmation letters provide for a premium rate of $2.03 per $100 of payroll of covered employees. See id. ¶ 14; Dkt. 82-2 at 9, 13. Because the insured’s actual payroll over the course of the policy term cannot be determined in advance, the payroll (and hence the premium based thereon) is subject to an audit following expiration of the policy’s effective dates. Sather Aff. I ¶ 14.

The 2002 Policy and confirmation letters provide for a premium rate of 25.9% of “unmodified premium,” which is defined as the “the State rates per class times the payroll for that class” but excludes charges for increased employers liability limits and the effects of an experience modifier. See id. ¶ 17; Dkt. 82-2 at 31, 35; Dkt. 64-2 at 21. Again, because unmodified premium is based on payroll and actual payroll over the course of the policy term cannot be determined in advance, the payroll (and hence the premium) is subject to an audit following expiration of the policy’s effective dates. Sather Aff. I ¶ 18.

The Florida Contracting Classification Premium Adjustment Program was originally implemented in 1984 and was in effeet throughout the effective dates of the Policies. Generally, FCCPAP provides a premium credit for construction industry employers who pay higher than average hourly wages, apparently to account for the fact that, although the higher wages result in a higher premium (because premium calculations are based on payroll), they may not result in correspondingly greater liability exposure. See Sather Dep. at 91-92, 155-56; Sather Aff. I ¶ 21 (“In essence, FCCPAP is a rate equalization tool.”).

The Florida pages of the NCCI Manual (effective Jan. 1, 2001) provide that, to obtain the credit, the insured must within three years after the policy period ends submit required information about payroll to NCCI, which then calculates the credit. Dkt. 64-3 at 2. Additionally, the Manual provides:

The carrier shall, upon audit, verify the information that was submitted by the insured and used in the calculation of the credit. If the carrier discovers an error in the [insured’s] original request for policy credit, the revised information must be submitted to [NCCI] for recalculation .... The credit, authorized by [NCCI] shall appear on Item 4. [sic] of the policy. If the credit is not available at the time of policy issuance, the carrier shall endorse the policy to provide this credit information.

Id.

Additionally, the Manual requires the carrier to use an approved form to notify insureds with contracting classifications on their policy that the insureds may be eligible for a premium adjustment credit. Id.

A November 7, 2003 NCCI Circular (the “NCCI Circular” [Dkt. 64-9 at 2-7]) describes the administration of the FCCPAP program in greater detail. The NCCI Circular notes the extension of the program to 2004 and states that “[t]his program is mandatory and is applicable to all policies” with anniversary rating dates during 2004 that cover one or more of the eligible contracting classifications. (Dkt. 64-9 at 2). The NCCI Circular states that each carrier must issue a standard letter or notice (which is attached to the Circular) to every insured having a policy containing one or more of the eligible classifications. Id. The NCCI Circular further states that, upon the insured’s submission of the required payroll data, NCCI will compute “the applicable premium classification credit, and the overall policy credit factor,” which is expressed as a percentage to be applied to the employer’s entire Florida standard premium to arrive at the credit amount, and will notify the carrier accordingly. Id.; cf. Borba Rep. at 16. The NCCI Circular further provides:

The carrier will use this policy credit factor in the calculation of the insured’s estimated premium at policy issuance. In those cases in which the carrier receives the policy credit factor after the insured’s policy has been issued, the policy will be so endorsed.

At audit, the carrier will use the same policy credit factor in the calculation of the insured’s final earned premium....

Id. (emphasis added).

Finally, the NCCI Circular provides that the earned premium dollar adjustment amount resulting from application of the policy credit factor “must be reported on unit statistical reports under Classification Code 9046.” Id. at 3.

The required notice was attached to the 2002 Policy. See Sather Aff. I ¶ 24; Dkt. 64-2 at 3-4. Entitled “Florida Contracting Classification Premium Adjustment Program Workers’ Compensation Premium Credit Application 2001,” the notice (1) informs FFEL that the FCCPAP applies to policies with effective dates on or after January 1, 2001; (2) states that “[a] special premium calculation, which may result in a premium credit for you, will be based on average hourly pay rates for each classification of contracting operations”; (3) instructs FFEL to send NCCI a completed premium credit application, which is attached, “[i]n order that your premium may be correctly established”; (4) advises FFEL that NCCI “will advise us of any premium credit applicable”; and (5) warns that if NCCI does not receive the insured’s application within three years after the policy period ends, “your 2001 premium calculation will not reflect any possible premium credit.” Dkt. 64-2 at 3-4. The 2002 Policy’s endorsement schedule advises FFEL to read this “important” notice. (Dkt. 64-2 at 17).

As for the 2001 Policy, CNA admits that, pursuant to NCCI guidelines and based on the classification codes covered by the policy, CNA was obligated to provide FFEL with the same FCCPAP notice. See Sather Aff. I ¶ 23. Sather states that, because attachment of the notice to the policy documents was not an automated process in 2001, if the notice was provided with the 2001 policy (a point as to which Sather offers no information), “the underwriter or rater would have needed to manually attach the notice to the policy.” Id.

Howard Rosendale, who negotiated the 2001 and 2002 Programs with FFEL’s broker, did not recall the applicability of the FCCPAP credit ever being a part of the negotiations. Rosendale Dep. at 229.

Evidently, FFEL did apply for the FCCPAP credit. A July 15, 2003 letter from NCCI to CNA states that FFEL had applied and qualified for a 2001 FCCPAP premium credit, notifies CNA of the appropriate policy credit factor, and instructs CNA to “[pjlease endorse the insured’s 2001/2002 policy.” (Dkt. 64—5).

FFEL submits a document (Dkt. 64-6) by which it contends CNA endorsed the policies. The endorsement has an effective date of February 4, 2001 and changes item 4 of policy no. WC194263450 (the number for both Policies) to add the “Florida Contracting Premium Adjustment,” code 9046, in an amount to be determined at audit. However, the endorsement states that it shall not be binding upon the carrier unless countersigned by an authorized representative of the company and no signature appears on the document. Terri Hill, who discovered the document in the audit file, did not know whether it was sent to the insured. Surprisingly, CNA does not even mention the endorsement in its response.

Sather states that CNA complied with NCCI’s instructions and endorsed the policies “through the audit process” to reflect the FCCPAP credit. Sather Aff. If 28. Specifically, Sather avers that a July 28, 2003 audit adjustment for the 2001 Policy and an August 12, 2003 audit adjustment for the 2002 Policy “applied the designated credit percentages for the respective years pursuant to NCCI’s instructions.” Id. ¶ 29.

CNA’s July 28, 2003 premium audit statement for the 2001 Policy voids a prior audit billed on August 21, 2002 and states that the reason for the correction is to “apply FL contracting credit of 7.00%.” (Dkt. 82-4 at 38). A line item for code 9046 records a $32,884 FCCPAP credit that (after application of a loss reimbursement plan factor, which is the factor that accounts for FFEL’s deductible reimbursement obligation, ie., its retained risk, see Borba Rep. at 9) results in a total earned premium of $846,254. (Dkt. 82^4 at 51; see also Borba Rep. at 14).

Similarly, CNA’s August 12, 2003 premium audit statement for the 2002 Policy voids a prior audit billed on June 25, 2003 and states that the reason for the correction is to “revise to add FL contracting credit .92” (Dkt. 82-4 at 53). A line item for code 9046 records a $683,033 FCCPAP credit that (after application of a loss reimbursement plan factor) results in a total earned premium of $1,903, 174. (Dkt. 82-4 at 60; see also Borba Rep. at 16).

Sather opines that this application of the 7% policy credit factor in the July 28, 2003 and August 12, 2003 audit adjustments “serves as the endorsement to the policies to which NCCI refers” in its July 15, 2003 letter. Sather Aff. I ¶ 29; see also Sather Dep. at 108; Hill Dep. at 19. Sather avers that CNA endorsed the policies in this manner “to comply with NCCI’s instructions pertaining to statistical reporting requirements,” Sather Aff. I ¶29, and to comply with “NCCI guidelines as well as Florida law for statistical reporting of data related to the qualifying class codes under the FCCPAP program,” Id. ¶ 30. Apparently, the July 28, 2003 and August 12, 2003 audit adjustments were sent to NCCI. See Sather Dep. at 140.

Sather concedes that NCCI uses the reported information “to verify that the insured had the FCCPAP credit modified onto the policy....” Sather Aff. ¶1 39. However, Sather believes that NCCI is not interested in whether the required modification (ie., application of the policy credit factor) actually reduces the premium charged to the insured. See Sather Aff. I ¶ 40 (“NCCI does not concern itself with whether the FCCPAP alters the [insured’s] premium or not. NCCI simply tracks what insureds are entitled to the credit for statistical reporting purposes.”); Sather Dep. at 101.

Sather asserts that, although CNA applied the policy credit factor in the July 28, 2003 and August 12, 2003 audit statements, “CNA is reporting to NCCI that they applied the credit and the credit is inapplicable to the subject policy.” Sather Aff. I ¶ 41 (emphasis added). Sather does not identify which part of the July 28, 2003 or August 12, 2003 audit statements indicate that the FCCPAP credit is inapplicable, and a review of those statements, by themselves, provides no indication that the FCCPAP credit is inapplicable. Rather, those statements apply the FCCPAP credit to arrive at a reduced total earned premium.

Sather believes that “[i]ncluding the FCCPAP credit at the time of the audit does not mean that the credit [actually] applies to the ... policies.” Id. ¶ 30. At his deposition, Sather appeared to acknowledge the incongruity of “applying” in the audit process a premium credit that did not in fact apply to the Policies (ie., to which the insured is not entitled). Asked why CNA did not simply respond to NCCI’s letter by informing NCCI that the credit did not apply (and therefore CNA would not endorse the Policy as directed), Sather admitted that CNA could have so responded “when this credit was first put on—or actually when the large deductible policy was first put into place.” Sather Dep. at 169. Sather at first stated that he did not know why CNA had not done so. Id. However, Sather added that, as he understood it, CNA had handled the situation as it did to avoid criticism or other adverse action by NCCI for noncompliance with its directive to endorse the policy. Id. at 169-70.

At all events, the “application” of the contracting credit in the July 28, 2003 and August 12, 2003 audit statements did not ultimately result in a reduction of the premium charged to the insured. This is because, after “application” of the credit in the first step of a two-step (and two-day) audit adjustment process, CNA changed the loss reimbursement plan factor (or deductible factor, as some witnesses called it) in the second step (and second day) of the process to offset the FCCPAP credit amount.

Thus, for the 2001 policy, although in the July 28, 2003 audit statement (or, as Borba calls it, audit report) “CNA included a 7% Florida CCPAP credit in the premium calculation” to arrive at a total earned premium of $846,254, in the audit on the following day, July 29, 2003, CNA “included the 7% Florida CCPAP credit in the premium calculation [but] decreased the loss reimbursement credit factor” to arrive back at a total earned premium of $909,935 (ie., the total earned premium reported in an audit performed before CNA received the NCCI letter).