Full opinion text
MEMORANDUM OPINION H. FRANKLIN WATERS, Chief Judge. I. The Litigation This is exceptionally complex litigation between Wal-Mart Stores, Inc., one of the largest retail concerns in the country, and the Receiver of an insolvent insurance carrier, Transit Casualty Company, which wrote workers’ compensation insurance covering Wal-Mart’s employees in eighteen states in which Wal-Mart then had facilities. The litigation started as a declaratory judgment action filed by Wal-Mart against Transit (prior to it being declared insolvent) seeking to enforce the provisions of an agreement that it says it entered into with Transit through one of Transit’s agents, calling for Transit to provide workers’ compensation coverage in those states for two separate policy periods, one commencing February 1, 1983, and ending January 31, 1984, and the second beginning February 1, 1984, and ending January 31, 1985. It is alleged that this agreement called for WalMart to pay premiums not to exceed $3,500,000 for each policy year for such coverage. Transit answered, substantially denying the allegations of the complaint, and alleging that the agreement which Wal-Mart seeks to enforce in this litigation is contrary to law and, thus, unenforceable. It counterclaimed, seeking to recover, in addition to the $7,000,000 in premiums already paid by Wal-Mart for the coverage, additional premiums approximating $20,000,-000. In its reply to the counterclaim, WalMart denied its allegations, and affirmatively pled that, in the event the agreement referred to is contrary to law, then Transit is barred from recovery on its counterclaim because it is in pari delicto. Subsequently, Wal-Mart amended its complaint to include allegations in relation to certain retroactive coverage that it says it contracted for which it claims Transit had, since the original complaint was filed, ceased performing the obligations required by such coverage. In addition, Wal-Mart brought into the lawsuit, as a third-party defendant, Alexander & Alexander, Inc., (A & A) an insurance brokerage firm which it claims provided consulting services during the period relevant to this litigation. It seeks recovery from A & A of any amounts that it is required to pay to Wal-Mart. Approximately sixteen months after the original complaint was filed, and after numerous amended pleadings and various motions were filed and disposed of, the Circuit Court of Cole County, Missouri, acting on a petition for liquidation of Transit filed by the Acting Director of the Division of Insurance, Department of Economic Development, State of Missouri, found Transit to be insolvent and appointed a Receiver for it. After a short stay of all litigation, this matter was allowed to proceed with Transit’s interests being pursued by the Receiver, Lewis R. Crist, who was also at the time Director, Division of Insurance, Department of Economic Development, State of Missouri. After substantial additional pretrial motions, including a motion for partial summary judgment, were filed and disposed of by the court, the matter was tried. Initially, a jury was selected at the request of one or more of the parties, and the case was tried to that jury for a period of approximately four and one-half days. At that time, all parties advised the court that they would waive a jury and would agree to have the matter tried and decided by the court. Whereupon, the jury was excused, and testimony was completed in two and one-half additional trial days. The matter was taken under advisement so that the attorneys for the parties could file briefs in relation to the issues. The attorneys for the parties, all of whom performed admirably during the trial of this complex litigation, also favored the court with excellent post-trial briefs. In addition, an amicus curiae brief was filed in behalf of the Director of the Missouri Division of Insurance and was joined in and adopted by the State of Texas acting through its Attorney General. The court has considered the briefs, and after a careful consideration of the evidence received at the trial, is prepared to rule. II. The Facts Transit Casualty Company was, at least when compared to other insurance carriers, a relatively small insurance carrier which, during the 1960s and 1970s, specialized in transportation related insurance, insuring primarily truck and bus operations. However, it had authority to write most types of insurance in most of the states. By the late 1970s, because of changes in the transportation industry and increased competition from other carriers, Transit was “watchpng] ptself] go out of business,” according to Robert J. Olson, an officer with the company at the time. In approximately 1981 Transit’s management decided to “get into the captive movement” and use captive insurance companies to reinsure Transit policies. In this manner, Transit hoped and intended to write insurance policies in lines of business in which it had not previously been involved and in which its employees had little if any experience. The officers of the company decided to proceed into those areas in that manner because, according to Olson, the idea was “that you don’t have an insurance risk, you have a credit risk.” Because Transit had little if any experience in this area of insurance, its management decided that it needed to create a relationship with someone or some entity that did. Negotiations began with Donald F. Muldoon who had prior experience with the types of insurance that would be involved, particularly in “captive programs.” These discussions resulted in the formation of a company known as Donald F. Muldoon & Co., Inc. (Muldoon), which was established in 1981 to “do fronting” for Transit. Transit retained a 24% ownership interest in Muldoon. In January of 1982 Transit and Muldoon entered into a “Managing Agency Agreement” which substantially gave Muldoon the authority to issue any Transit policy which Transit was authorized to issue in any state in which it was qualified to issue insurance policies. The agreement contained certain limitations which do not appear to be material to the issues in this case, except that the agreement provides that Muldoon had the authority to issue coverages on behalf of the company using “policies, contracts, certificates, utilizing rates and forms, endorsements and binders on behalf of the company which have been approved by the company and which have been approved by and/or conform with any applicable state insurance department laws and regulations.” The agreement provided that Muldoon would “observe and comply with all insurance laws, rules and regulations of all states and the District of Columbia wherein any business is transacted for and on behalf of the company.” The Managing Agency Agreement authorized Muldoon to request, from time to time, that certain sub-agents be appointed with substantially the same authority as Muldoon in relation to the production and issuance of Transit insurance policies. Shortly after Muldoon was appointed Transit’s managing agent, a former Alexander & Alexander, Inc., employee introduced Donald F. Muldoon to Carlos Miro, himself a former A & A employee. Mr. Muldoon recommended Miro, then doing business as Miro & Associates Risk Management, Inc. (Miro), to become a sub-agent of Transit. Miro was appointed a sub-agent and a “Managing Agency Agreement” (Wal-Mart Ex. 19) was entered into between Donald F. Muldoon & Co., Inc., and Miro & Associates, Inc. The agreement authorized Miro to solicit and bind only the types and lines of business as hereinafter stated, under the terms and conditions of this agreement, subject to and in accordance with the insurance laws and regulations of each state, and in accordance with rates, filings, forms, policy limits, underwriting guidelines governing acceptance of such business, and procedures, all as directed, filed and promulgated by the company from time to time; and to issue policies and certificates of such insurance on forms provided by the company, utilizing rates filed by the company pertaining to such coverages; and to amend such policies by endorsements authorized by the company; and to cancel such policies. Muldoon provided Miro with blank policy forms to issue on Transit’s behalf, and all of Miro’s business was to be written or fronted on Transit policies and reinsured with Miro’s captive reinsurers. For providing its insurance policies, name, filings, and, in effect, guaranty, Transit was to receive a fronting fee of 9% of the premium paid. Under the agency agreement, Transit had the right to audit its agent’s records and it recognized that there was a danger that the agent would exceed its authority. Accordingly, Transit had the right to cancel coverages if an audit revealed that an agent had exceeded its authority. After Muldoon’s appointment as Transit’s managing agent, and Miro’s appointment as a sub-agent, the Transit captive program grew very fast. According to Olson, in 1981 premiums from the program went from “zero to $40,000,000; and in 1982 it exceeded $100,000,000.” By 1983, Miro was Muldoon’s biggest premium producer. All of the policies issued by Miro on Transit paper were to be 100% reinsured. If the program had functioned as designed, there was minimal retained risk for Transit so long as reinsurance remained in place with solvent reinsurers. Wal-Mart Stores, Inc., one of the largest retailers in the country, is headquartered in Bentonville, Arkansas. During 1980-1981 Wal-Mart was self-insured for its workers’ compensation and general liability risks in all states in which it did business except the state of Texas and three or four southern states in which it had a limited number of employees. During that period of time it paid a monthly fee of $6,000 (later reduced to $3,000) to Alexander & Alexander, Inc., to act as its insurance consultant. In April, 1980, John Sooter, an accounting graduate from the University of Arkansas in 1970, was appointed Wal-Mart’s Director of Risk Management. Prior to that time, he had been an internal auditor for Wal-Mart and before joining Wal-Mart was an internal auditor for Standard Oil of Indiana (later Amoco Production Company) and Pan-American Petroleum Corporation of Tulsa, Oklahoma. While Sooter, probably understandably, attempted to denigrate his ability and experience as a Risk Manager, the court believes that, at the time of his appointment to the Risk Management job, he was a sophisticated businessman and accountant. In addition, the court finds that he practically had at his beck and call, for $6,000 per month, the substantial insurance experience present within Alexander & Alexander. The evidence indicates that the individual from Alexander & Alexander who primarily consulted with him was George Hallinan, Vice President, a person with in depth experience in almost all phases of the insurance business for approximately thirty years. In late 1982, Sooter asked Hallinan to obtain quotes for the Texas workers’ compensation coverage which was up for renewal or replacement in a few months. In November of 1982 Hallinan brought to Sooter two quotes for the Texas coverage. One was from the Hartford Insurance Company and one was from Transit through Miro. Sooter was certainly sophisticated enough to recognize a “good deal” when he saw one. When he saw the quote on the Texas worker’s compensation coverage, he immediately asked Hallinan to determine if Miro would be interested in bidding on the workers’ compensation coverage for all states, replacing the self-insurance which Wal-Mart had in the other states. After being contacted by Hallinan, Miro indicated that he would gladly provide such quotes. While it is not apparent from the evidence that Miro used much of the information to make the quote that he made, it appears from the evidence that he at least had access to Wal-Mart’s payroll figures for the previous five years and also loss history for the self-insured states. This loss history was provided by a subsidiary of Alexander & Alexander, Alexsis, which had provided the adjusting services for Wal-Mart during the period that its workers’ compensation coverage was self-insured. In mid-January of 1982, Sooter, Hallinan and Pete Proffer, of Alexsis’ St. Louis office where Wal-Mart’s self-insured claims files were kept, attended a meeting in Miro’s Dallas office. The meeting was also attended by two of Miro’s employees who had also previously been employees of A & A. It was obvious that Miro was the decision maker in the group. Certain testimony in relation to Miro is illuminating. When Sooter was asked if Miro was a “young man,” he replied: “He appears to be a very young man. I don’t believe he is quite as young as you would think he was if you saw him.” Then later in his testimony he said: “He was just confident. He felt like he was intelligent and everybody around him thought he was intelligent and he was a very good speaker and just displayed a good bit of confidence.” When he was asked if it was fair to say that he was “a pretty slick guy,” he said, “I’d say he was pretty slick, yes____ Towards the end he had developed quite a staff and I don’t know a number, but they started out with one little corner in an office building and they ended up with at least half of the floor of an office building.” At this Dallas meeting, and a subsequent one, Miro presented to Wal-Mart a quote which is set forth in Plaintiff's Exhibit 1. The court believes that the evidence shows, without question, that Miro proposed to write all of Wal-Mart’s workers’ compensation coverage in all of the states where it did business for a flat and guaranteed premium of $3,500,000. This premium, the court believes the evidence clearly shows, was not to be affected in any way by any factors other than an increase or decrease in Wal-Mart’s payroll from the estimated figure of $547,000,000. The court believes that the evidence indicates that no one at either meeting, probably including Miro, really understood anything Miro said about how the $3.5 million premium was calculated, or the figures in Plaintiff's Exhibit 1, except for the bottom line figure. Everyone knew that he was bidding $3.5 million to provide the coverage, and that appears to be all that Sooter of Wal-Mart and his consultant, Hallinan, were interested in. The testimony indicates that, apparently after arriving at the $3.5 million figure, Miro did some calculation on a Casio calculator and arrived at a “composite rate” of .63985 per $100 of payroll, determined simply by dividing $3,500,000 by $547,000,-000 and multiplying the quotient by 100. The court believes that the evidence indicates that the premium of $3.5 million was “pulled out of the air” and that the composite rate was a mere mathematical calculation which could have been made by anyone with a calculator and rudimentary knowledge about how to use it. The evidence does not indicate that the other figures and calculations shown in Plaintiffs Exhibit 1 had anything to do with the rate to be charged and the premium to be paid by Wal-Mart for this substantial insurance coverage. At least, no witness was able to explain to the court any other method for calculating the composite rate, and Plaintiffs Exhibit 1 appeared to be largely meaningless to the witnesses who testified, and is certainly meaningless to the court, even after several days of testimony. Unfortunately, Mr. Miro was no longer in the United States at the time of the trial, and did not testify. During the Dallas meeting, either Miro was asked if he would be interested in bidding on what became known as the “tail coverage” or he volunteered to do so. In any event, Miro was asked to also cover, through Transit insurance policies, WalMart’s liability for workers’ compensation benefits for the period from February 1, 1980, to January 31, 1983, when Wal-Mart was self-insured. In other words, Miro was asked to cover for a period of three years any Wal-Mart liability for workers’ compensation benefits, whether they were known or unknown. In addition, he was asked to provide general liability coverage covering claims resulting from incidents which occurred from February 2, 1980, to October 15,1981, again, whether they were known or unknown. Miro agreed to provide this “tail coverage” for $2,852,000, the aggregate amount of “reserves” which Alexsis had established on incurred and reported claims (known claims). Apparently nothing was charged for incurred but not reported (unknown) claims. Miro said he could do that because he would invest the premiums in “Euro dollars.” Although Alexsis, through Proffer, offered to make the claims files available, Miro indicated that he had worked with Alexsis during his tenure with A & A and that he was “familiar with Alexsis and had no problem with their reserves.” In short, the court is convinced that the evidence shows, whether right or wrong, that Miro, in behalf of Transit, agreed to provide workers’ compensation insurance coverage for Wal-Mart’s employees in all states for a guaranteed premium of $3,500,000, to be affected by absolutely nothing except increases or decreases in Wal-Mart’s payroll. In the event of an increase or decrease, the premium would be adjusted using the “composite rate” of .63985, the figure calculated on his Casio. In addition, the “tail coverage” would be supplied for a guaranteed premium of $2,852,000, irrespective of what the losses turned out to be (and as will be indicated below, they turned out to be disastrous). During the second meeting, Miro signed a binder using the figures in his proposal, gave it to Sooter, and they shook hands on the “deal.” Thus, the court is convinced that the evidence indicates that Miro agreed to provide, and Wal-Mart quickly agreed to accept, a “deal” in which both the workers’ compensation coverage and the tail coverage would be provided for a guaranteed premium of $6,352,000. It appears to the court that loss experience played little if any part in development of the premium, and the “deal” was that it would play no part in what Wal-Mart ultimately paid for its coverage. In other words, if its loss history was substantially greater than that of others in the industry (which turned out to be the case), Wal-Mart still would pay no more than the agreed amount for its coverage. After the meeting in which the “deal” was made, Miro prepared and forwarded to A & A, Wal-Mart’s consultant, the insurance policies received as Plaintiff’s Exhibits 2 and 3. The workers’ compensation policy (Plaintiff’s Ex. 2) was issued to WalMart by Miro utilizing Transit policy forms on file with the appropriate state regulatory body. The policy contained a detailed provision for the computation of premiums based on state rates from National Council of Compensation Insurers (NCCI) manuals on file. This policy listed the sixteen states in which Wal-Mart at the time did business and purported to break Wal-Mart's payroll down into the various job classifications provided for in the NCCI manual on file with most states. The NCCI rate was applied to the purported payroll, by classification, and a total premium of $3,967,064 was calculated. Not surprisingly, sufficient discounts were applied on the declarations page to reduce the premium to exactly $3,500,000, the amount earlier agreed to. This workers’ compensation policy also covered the tail coverage in relation to compensation benefits. In addition, the general liability policy (Plaintiff’s Ex. 3) was prepared and issued providing the retroactive general liability coverage which Miro had agreed to provide. These policies, after having been forwarded to A & A, were accepted by them and forwarded to Sooter at Wal-Mart. Sooter reviewed them and placed them in the book where he kept all policies. As indicated above, the workers’ compensation policy appears, on its face, to be a standard policy using manual rates, and appears regular on its face. In fact, the policy when issued contained an endorsement, signed by Paul Stanley, an officer for A & A, Wal-Mart's consultant, which provided that: “It is agreed that the premium for the policy is subject to an experience modifier not available at the time of policy issuance. Such experience modification, when determined, if different from the modification shown on the policy, will be stated in an endorsement issued to form a part of the policy.” It should be noted that even though Sooter and officials of A & A contend that this was not part of the “deal” (and the court believes that it was not), this endorsement was signed by an officer of A & A and included in the policy which was subsequently forwarded to Soot-er at Wal-Mart. Sometime after the policy arrived, Sooter or one of his employees noted that, when the payroll figures shown in the policy and purportedly used to calculate the premium were added, the total was considerably less than the estimated payroll of $547,000,000. (The court believes the total of these figures is slightly in excess of $249,000,000.) When this was noted, Sooter contacted Hallinan at A & A and was told that “there was no problem.” Hallinan told Sooter not to be concerned because it was “a really common practice” to depress payrolls to come up with an agreed upon premium. One of Miro’s employees later confirmed that Miro had “backed into” the premium by depressing the payroll. In other words, it appears to the court that Hallinan knew at the time that what Miro had actually done was arrive at the bottom line and then plug into the formula provided for in the policy whatever figures were necessary to arrive at the bottom line. It is also obvious that Hallinan accepted this as being a “common practice” and told Sooter that there was nothing wrong with it. The policy as written was accepted by Sooter upon the recommendation of Hallinan, his $6,000 per month consultant. As indicated, in contracting to provide the tail coverage Miro had “purchased” the Wal-Mart reserves and had covered all of Wal-Mart’s liability for the prescribed time, whether known or unknown, for the total of the reserves that had been set up by the adjuster. As indicated, this proved to be disastrous. Approximately 185 new claims were reported to Wal-Mart after the “purchase” and Alexsis created approximately $666,000 in additional reserves for these new claims. In addition, there were adverse developments on several major cases including one in which a Wal-Mart customer had been hit above the eye while using an exercise machine in a Wal-Mart store. Alexsis had reserved that incident at $750 and Miro had “bought it” for that. It later resulted in a judgment of $135,000. A subrogation suit later recovered $88,000 which was paid into the registry of the court pending the outcome of this case. Another case involved a “slip and fall” in front of a Wal-Mart store. It was initially reserved for $4,000, and was accepted by Miro at that figure, but later resulted in a $200,000 verdict. When things began to “go bad” in relation to the tail coverage, Muldoon in behalf of Transit had an independent adjuster, Wendell Donahue, review the Alexsis files. He found many files in which a zero reserve was shown. He inspected 170 claims in which the reserve was over $5,000, and found that 103 of them were severely under reserved. In late August of 1983, Sooter, Hallinan, Miro and one of Miro’s employees met in Bentonville to discuss the possibility of providing Wal-Mart with a Transit general liability policy effective October 1, 1983. Miro was very interested and sent a written proposal offering general liability coverage. He also offered, as part of the package, to renew the workers’ compensation coverage for a maximum premium of $3,500,000. Hallinan sent a letter to Sooter confirming Miro’s renewal proposal for “the same guaranteed maximum premium.” There were to be no other adjustments to this figure. Hallinan later confirmed in an October 14, 1983, letter to Miro Wal-Mart’s “firm order” to renew the workers’ compensation policy on the “same terms, conditions and premium as the current policy.” In December of 1983, Sooter, Proffer and Hallinan met with Carlos Miro and some of his employees in Miro’s Dallas office and Miro confirmed the renewal. Sooter was asked to prepare an estimated payroll for the renewal period. He first provided an estimate of $551,000,000, which he later revised to $630,000,000. In January of 1984, Robin Page, one of Miro’s employees, wrote to Hallinan suggesting that the workers’ compensation premium for the second policy be increased to a little more than $4,000,000 for the coming year to reflect the increased payroll. Page wanted to apply the same “composite rate” of .6398 calculated by Miro at one of the early meetings as outlined above. When that “composite rate” was applied to the estimated payroll of $630,-000,000, it resulted in a premium of $4,031,-623. Hallinan and Sooter discussed the proposal. They believed that Miro had already agreed to the same maximum premium, $3,500,000. This led to a June 12, 1984, meeting in Kansas City. Page, Hallinan and Sooter attended. By this time, WalMart had calculated its actual 1983-84 payroll and reported a figure lower than the $547,000,000 estimate. This would result in a return premium to Wal-Mart of slight ly in excess of $362,000. It turned out that Sooter’s estimate of the 1983-84 payroll was much too low, but that was not discovered until several months later. In any event, based on what he apparently believed to be the lower total payroll, Sooter agreed to forego the return premium which he believed was due Wal-Mart if Miro would agree that the index figure or “composite rate” for the workers’ compensation renewal be lowered to provide for a $3,500,-000 maximum premium based on the $630,-000,000 estimated payroll. The new “composite rate” would be .55555 per $100 of payroll which, not surprisingly, is the result when $3,500,000 is divided by $630,-000,000 and the quotient multiplied by 100. Again, it was that simple. Miro and WalMart negotiated a guaranteed premium and the “composite rate” was changed as necessary to reflect it. The rate had nothing to do with Wal-Mart’s loss experience which, by that time, everyone involved knew, or should have known, had been dismal. Miro prepared and forwarded to Hallinan the renewal policy (Plaintiff’s Ex. 9) and Hallinan delivered it to Sooter. Again, it appears to be a standard workers’ compensation policy listing the states in which Wal-Mart had employees, and reflecting standard NCCI rates. The purported payroll was broken down into job classification categories, and the rate for those categories applied. The premium purportedly developed through this method was reduced by sufficient discounts to arrive at the agreed $3,500,000 premium. Again, the policy called for an experience modifier endorsement to be attached. Although Sooter says that he did not add the payroll figures shown, it is clear, that by this time, everyone concerned knew that those figures meant nothing other than they were the figures necessary to “back into” the agreed premium. In fact, the total of the payroll figures used in the policy appears to be $263,788,776 on a payroll that was estimated by Wal-Mart to total for the policy year $630,000,000. This policy was forwarded by Hallinan, with its obvious deficiencies and misstatements, to Sooter, apparently because Hallinan believes, according to his testimony, that such misstatements and untruths are common practice in the insurance industry. The policy was accepted by Hallinan and Soot-er. In July of 1984, shortly after the second policy was issued, Hallman’s assistant sent Sooter endorsements No. 9, 10, 11 and 12 for the second year policy, and endorsement No. 16 for the first year policy. Endorsements No. 9 and No. 16 contained experience modifiers prepared by NCCI showing how Wal-Mart’s loss experience compared with like employers in similar industries. The endorsement for the first year policy showed an experience modifier of 1.70, and for the second year, 1.73. This means that, according to NCCI, Wal-Mart’s loss experience was 70% and 73% greater than the industry average. This means, if the provisions of the policies are complied with, that the premium would have to be adjusted upward 70% for the first policy, and 73% for the second. Of course, it is Hallman’s and Wal-Mart’s contention that the “deal” was that these experience modifiers would play no part in arriving at the premium to be paid by Wal-Mart. This is true even though they were sent to WalMart by one of Hallman’s employees and included in the policies as the policies clearly provide that they should be. During early 1984, apparently at Transit’s request and demand, White & White Inspection Services, an independent auditing firm, was hired to audit the Wal-Mart payroll. In the fall of 1984, White & White concluded its audit and notified Miro of an increase in 1983 payroll from the purported $243,000,000 shown on the policy to $549,-000,000. Miro applied this difference in payroll to the state rates on file in the various jurisdictions, applied the experience modifier received earlier from NCCI of 1.70, and after applying applicable discounts, reached an additional premium figure of $6,028,894. Between September and December of 1984, three meetings were held among WalMart, Miro and A & A personnel concerning payment of this additional premium. It appears that Miro advised Sooter and Hallinan that he knew that the additional $6,000,000 premium was not really owed since the policy had been sold for a guaranteed premium of $3,500,000, but that, in order to satisfy certain statutory requirements, and to satisfy Transit, it was going to be necessary for it to be billed and shown as paid. He suggested that the way that this could be done would be for his company to bill Wal-Mart and for Wal-Mart to then pay the bill by wire transferring $6,000,000 to Miro at the Dallas bank with which it did business. These funds would then be transferred to Lafayette Re, which was Miro’s reinsurance company owned by him, domiciled either in the Cayman Islands or on the Isle of Man. Lafayette Re would then retransfer the $6,000,000 to Wal-Mart as a “dividend.” He said that since all of the parties involved did business with the same Dallas bank, this could be done in one day. Surprisingly, and in fact astoundingly, Sooter of Wal-Mart, after consulting with another officer of Wal-Mart, agreed that “this would be no problem” if they could be assured that their funds would not be at risk. There is a great deal of testimony by both Sooter and Hallinan about this proposed transaction, but it is not at all clear from this testimony what they believe or wish the court to believe the purpose of this fake transfer was. Hallinan, for several pages of the transcript, testified that they only were told that the transfer was necessary to satisfy statutory requirements but they didn’t know what those requirements were. Finally, in answer to the court’s questions, after ducking and dodging for almost three transcript pages (pp. 6-160 — 6-162), Hallman finally admitted that he saw no purpose for this illusory transfer other than to attempt to “fool someone.” He finally admitted that he knew of no one that Miro, he, and Sooter would have any reason to “fool” other than Transit and regulatory authorities. Sooter’s testimony on this subject is not substantially more enlightening. Although he agrees that he and his superior, also an officer of Wal-Mart, decided “that should we be given the proper assurances that the money would flow through as described back to us that it probably wouldn’t present a problem,” he professes not to know what the purpose of the sham $6,000,000 transfer was. The best that he could do was to say that they (Miro and Hallinan) told him that it was something that had to be done. The fictitious transfer was not made because Miro’s house of cards came tumbling down before it could be. Transit and WalMart received word that Alexsis had not been reimbursed for claims paid by it in several weeks and was owed approximately $700,000. Transit subsequently cancelled Miro’s authority and drew down the letter of credit that was established to guarantee the obligations of his reinsurance company. According to the testimony, the letter of credit was only $1.3 million. In November-December of 1984, Transit learned that the reinsurers that had been paying claims under the Miro program had stopped making payments. On December 4, 1984, Miro’s agency was terminated by Transit. On January 2, 1985, Muldoon sent an invoice for $13,000,000 additional premium for the Wal-Mart coverage to Hallinan. Hallinan did not forward the bill to WalMart, or even tell Wal-Mart personnel about it. Instead, he returned it to Muldoon, advising that it was not in compliance with the “deal.” In mid-January of 1985, Alexander & Alexander advised Sooter that there would be a meeting in the New York offices of Muldoon. At the meeting, George Bowie, Chairman of the Board of Transit, announced that Wal-Mart owed Transit an additional $13,000,000 in premiums and that additional amounts would probably be owed in the future. He produced the invoice earlier sent to Hallinan, with a copy of the letter to Hallinan attached and demanded that the bill be paid in two weeks. Sooter of Wal-Mart, after overcoming the shock occasioned by the bill and the fact that Hallinan had not told him of the earlier billing, returned to Bentonville, Arkansas, to consult with other officers of WalMart. Bowie was advised by Wal-Mart personnel that the senior officers that would be required to make the decision were not in the office, and they requested additional time to advise Bowie of their decision. However, rather than advise Bowie of their decision, Wal-Mart quickly filed this action in Arkansas in an obvious attempt to prevent suit from being filed against it in some other jurisdiction. The Receiver claimed during the trial that total losses paid on the two workers’ compensation policies and the tail coverage policy approximated $30,000,000, with approximately $21,000,000 of this being paid on the workers’ compensation policies alone. Sooter testified (Tr. 2-68) that he believed this figure was too high, but admitted that payments on the policy were “somewhere in the neighborhood of sixteen to seventeen million dollars.” In respect to Sooter’s sophistication in relation to insurance matters, he admitted (Tr. 2-70) that he had monitored the Texas self-insurance program for approximately three years. He recognized that that coverage required an audit and an adjustment of the premium based on the experience modifier. Wal-Mart had additional premiums to pay after the audits and application of the experience modifier, and he agreed that he saw such modifiers for each of the years on the Texas policy, but says that he had only a “vague understanding” of what an experience modifier was and how it applied. Then, with further cross-examination, it became obvious that he was fully aware of the purpose of these modifiers, and how they affected the premiums that Wal-Mart was required to pay on the Texas policy. The court is particularly troubled by some of the testimony of Mr. Hallinan. Although, as indicated, he had over thirty years of experience in the insurance industry and, at least during part of the period, was receiving $6,000 a month to consult with Wal-Mart, he professed to have an amazing lack of knowledge about insurance matters. In addition, the court had a distinct feeling that Mr. Hallinan’s testimony was less than credible. To see why, one only needs to read his cross-examination at Tr. 6-49 through Tr. 6-56. It took over six pages of transcript to get him to finally admit that the purpose of depressing the payrolls as was done on both of the policies issued was to show regulatory authorities something that didn’t exist. In other words, if the estimated payrolls of $547,-000,000 on the first policy and $630,000,000 on the second policy were shown, it would be obvious to authorities with whom the policies had to be filed that the “deal” did not comply with requirements of law. After a great deal of sparring with the attorney examining him, the following question was asked and the following answer given: Q. All right. Now, Mr. Hallinan, isn’t it a simple fact that since your testimony is that the way the rate structure is shown in the policy is not the way you’re actually going to calculate policy premium has nothing to do with the way you’re actually going to calculate the premium? That the only reason it was put in there with the wrong payroll is so that the state regulatory authorities would read it and say, well, that looks about right on a 3.5 million dollar premium? A. That’s right. Mr. Hallinan also testified that a “deal” for a $3.5 million premium on a payroll of $547,000,000 does not conform to state regulatory requirements, although it, again, took some “doing” to get him to say that. At Tr. 6-75 the following testimony is shown: Q. (By Mr. Sutton) Mr. Hallinan, you have referred to a contracted for maximum premium. And I don't know whether you claim that’s what was done in this case or not; do you? A. Yes. There’s an indication that a maximum premium would be available. Q. And did you tell us on your deposition that that kind of a proposal does not conform to state regulations on standard workmen’s compensation policies? A. In this particular instance it is a different agreement. Q. It does not conform to state regulatory authorities, does it? A. Well, you’re — it does conform to state regulatory requirements under the terms of the agreement. Q. Which one? The one that was filed with the state regulatory authorities? A. Well, yes. Q. But a contract for a flat 3.5 million dollar premium on a payroll of 532 or 547 or 549 million dollars— A. Right. Q. —does not conform to the state regulatory authorities, does it, sir? A. Not under that situation. THE COURT: I’m not understanding. What did you say? Not under that situation? THE WITNESS: Right. THE COURT: Are you saying it does or it doesn’t. I don’t know what that answer means. THE WITNESS: It doesn’t. THE COURT: It doesn’t. All right. There is other testimony, coming from the mouths of Wal-Mart’s consultants, that the “deal” was not filed with regulatory authorities but the sham policies with depressed payrolls were filed instead because those involved recognized that the “deal” would not be approved. At Tr. 6-163, Hallinan agreed that “you could not file in any state a 3.5 million dollar premium showing a $547,000,000 payroll.” Paul F. Stanley, a vice president with Alexander & Alexander, with thirty-three years of insurance experience, the last twenty-two with Alexander & Alexander, was asked why “deals” such as the one in question in this case, were not filed with regulatory authorities. Although he did not appear to want to answer the question during the trial, it was obvious during impeachment by counsel for Transit, that he had testified in a deposition as follows: Q. Have you ever asked an underwriter why they don’t put the agreement in the policy? A. As I believe I stated earlier, my assumption would be that the agreement is not entirely according to the filings that they have in all the statements [sic], (Based on additional passages that were read from the deposition, it appears obvious that “statements” should read “states.”) Then, in answer to questions asked by the court, Mr. Stanley testified: A. ... All right. In this case I’m convinced the evidence shows that the first premium, the premium for the first policy, the ’83-’84 was — at least I think there’s plenty of evidence to indicate that Mr. Miro at least agreed with Wal-Mart and with A & A that the premiums would be $3.5 million. They then, I suspect used the $547 million payroll, divided that into 3.5 and came up with .6398. At least it looks like that’s what happened. A. Right. Q. It looks like .6398 had no relation to anything. Have you heard the testimony and had you looked at the file to see if that’s a fact? A. I’ve looked at the file. I don’t recall the composite rate, but that’s the way a composite rate of that sort would always be done, divide the premium by the estimated exposure. Q. In other words, you do whatever you want to to arrive at what you think you can sell this policy for and then you — your composite rate is nothing more than the premium divided by the payroll. A. That’s correct. Q. That’s correct, and then in — or the next policy, ’84-’85 I guess it would be, after a lot of negotiation the evidence shows having to do with whether or not some returned premium was due Wal-Mart, they said okay, we'll let you have it for the same 3.5, and I guess not too surprisingly they’ve merely — and I’ve done that on my calculator — they merely divided 3.5 by $630 million and says oh, that’s 555555 ratio and that’s what the composite rating is going to be. Is that the way you understand this was done in this case? A. Yes, sir. Q. All right. Forgetting again about what’s “right” and “wrong”, do you believe that the filing of any state allows a premium — or the law of any state allows a premium to be arrived at in those kinds of ways? In other words, take any state — let’s take Arkansas for example. If you told Arkansas that’s the way we arrived at this rate by filing, what do you think would happen? A. I don’t think that would be satisfactory to the regulators in Arkansas. Q. Would it be satisfactory based on your 30 some years of experience— would that be satisfactory anywhere? A. No, I doubt that it would, sir. Q. Every state requires that you charge a premium for the business you write in that state based on the statute and on the filings that are on file. Is that correct? A. Yes, sir. Q. All right. A. Again, within whatever latitude your accepted filings in that state gives you. Q. Sure, sure, sure. A. Yes, sir. Q. In other words, if the evidence shows that in Arkansas for ’83 and ’84 they had deviations or a deduction, I’m not sure which one it was, but a deviation of 25% on file, what you’d have to do in order to be legal in Arkansas is apply the manual rates times the individual classifications of the payroll, apply the experience modifier to that and then deduct 25%. A. That’s correct. Q. In other words, if you don’t come up with a premium of at least that much you’re not legal in Arkansas. A. If you don’t — -yes, sir, that’s correct. Q. All right. The same kinds of things are done in all of the other states, or say at least similar things. You may have different filings as I understand it in other states, but the same kind of arithmetic has to be done in other states. Is that correct? A. Yes, sir and as I understand the way it’s done it’s the composite of all those under the various filings that end up being — they are used to back into the premium that was quoted to the client. Obviously if the premium quoted to the client is lower than the composite of all those can be justified, then the insurance underwriter who did it has a problem, but I’ve never in my experience had an underwriter come back and tell me that was the case. The testimony of Jan Taylor, an employee of the Arkansas Department of Insurance since 1979, was particularly helpful to the court. At the time of her testimony, Ms. Taylor was the Director of the Division of the Arkansas Department of Insurance responsible for reviewing contracts that property and casualty insurers issue in Arkansas, including workers’ compensation insurance. Among other things, Ms. Taylor described that workers’ compensation insurance is social insurance and is regulated by the state of Arkansas, although controls had been reduced somewhat in recent years. However, it was her testimony that her department still had the responsibility of reviewing and approving or disapproving rate rule and form filings made by insurance carriers who desired to write insurance in Arkansas. She testified that Arkansas is a “prior approval state” which means that an insurance carrier must have prior approval of its rates and policies before issuing such policies in Arkansas. She testified that it was the department’s duty to see that filings made and policies issued and rates agreed upon were not excessive, unfairly discriminatory, or inadequate. She said that the department had a duty to attempt to prevent carriers from treating one insured “different from another insured.” Ms. Taylor was asked: “What types of things have to be approved before they are used for workers’ compensation in Arkansas?” Her answer was: Every aspect of workers’ compensation has to receive approval. Some of it can be done by the National Council on Compensation Insurance for their companies like coming up with a new job classification, but that does receive prior approval. The prices going to be charged to the insurer has to receive, we’re talking about the front end price going out according to the risk, has to receive prior approval. Any sort of departure from anything previously on file has to receive approval. She described that companies issuing policies in Arkansas could choose to adopt rates promulgated by the National Council on Compensation Insurance. She described the function of this Council as follows: A. Because of the social nature of workers' compensation and because there are so many jobs performed by workers across the United States it’s important for insurance companies who provide workers’ compensation insurance to employers to have some kind of credible data so that they can use it as a point to determine how much they need to charge when they're going to issue policies to Dillards who has some clerical workers and has some retail salespersons, they have some drivers. All of these job classifications for across the United States are all reported together so if this is Class A-120 for instance, we’ll have the experience of everybody that falls into that across the United States from all the insurance companies writing that. They take that and they weigh each one for the various states, in other words we may have an awful lot of credibility, we have a lot of clerical workers in Arkansas. There are some classes that we have very little credibility for and an insurance company that wants to come in and write this in a state will need some idea how much they need to charge for that classification. The National Council collects the data and promulgates the rate that’s going to be used for every job classification basically. THE COURT: You say there’s something over 600 jobs in the classes? BY MR. TURNER: Q. Now in Arkansas it’s my understanding that they’re not required to follow the National Council on Compensation, is that right? A. Yes. Q. Now if an insurance company desires to adopt what the National Council has promulgated as far as these national rates go, in other words if they want to use what the National Council has promulgated, how would they go about doing that in Arkansas? A. They would generate a letter to the insurance department saying they’re going to use the rates and rating plans on file by the National Council. Q. Now let’s go back to the years of 1983 and 1984. Are you familiar enough with filings that were in Defendant's Exhibit #3 and could you tell the jury during that period of time whether Transit Casualty was a member of the NCCI in Arkansas. A. Yes, they were a member of NCCI. Q. Okay. Now once you become a member of the National Council in Arkansas, and you’re writing workers’ compensation insurance, and you want to modify this rate which is made by the National Council, you want to change it say from 110 to 115, can an agent for an insurance company or an insurance company just begin applying a different rate or must they first notify the Insurance Commissioner’s office? A. If they’re going to use a member of NCCI and they have filed to use NCCI and they’re not going to use $1.10 which is what NCCI had for that class code, they would have to file a request to use something other than $1.10. Ms. Taylor testified that Transit had on file the deviations and scheduled rating plans introduced as Plaintiff’s Exhibits 27, 28 and 29, with the effective dates shown, but that if any of these were to apply to a specific policy, it should be shown on the policy issued. In answer to questions by Transit’s counsel, Ms. Taylor said that she knew of no basis for writing workers’ compensation insurance and calculating the premium other than on the basis of the expected payroll. The premium is calculated by breaking the estimated payroll down into the various job classifications, and then for NCCI companies, applying the rate for each job classification to the payroll for that category. To that is applied, at a subsequent time, the experience modifier developed by the NCCI. At Tr. 3-149, she testified: Q. In those seven years, Ms. Taylor, have you ever had the opportunity or the occasion to run into a situation where a workers’ compensation policy which is standard, has got the NCCI rates, it’s got the appropriate payroll and it’s got the experience modifier attached to it and endorsement and it’s got everything that complies with what these statutory requirements are and that policy has been furnished to the insured but there’s been some kind of side deal cut that alters the premium. Have you ever run into that? A. I assume you mean a side deal — no. Q. And that’s not something that you would consider as being to the insurance department something that’s common in the insurance industry, would you? A. As far as we know? Q. As far as you know. A. I would have to say no. Q. In fact is a side deal — if the determined premium is different than what’s been furnished to the insurance commissioner’s office and the rates used are not on file, those are incorrect, are they not? A. Using a rate other than that filed is incorrect. She said that she had never seen a “composite rate” used in workers’ compensation insurance. In respect to the “deal” which Miro made with Wal-Mart, she testified: Q. Okay. Now, when we’re talking about a composite rate we’re talking about a rate for job classifications kind of like this rate right here for clerical, are we not? A. I’m not sure what you’re talking about in workers’ compensation. I assume you are talking about combining all of the factors that go into it and using a composite rate. Q. Okay. If you combined all of the factors for let’s say clerical and I think you mentioned some number about in the different classifications there are but if you combined all of those average numbers, would that in some way reflect what it should reflect when you use them in the correct way by listing them separately? Do you understand my question? A. No, I don’t. Q. Okay. I’m having a hard time. What I’m trying to say is if you use 100 classifications and 100 manual rates you come to some figure and then you used a composite rate and came to some figure, that messes up the whole procedure, does it not? A. I don’t think we would accept that. Q. Okay. Now, let me show you a formula which has been called a rating formula as we’ve been discussing. On this blow up right here — can you see that from there? I can bring it closer. A. It’s alright. Q. It says right here, earned premium equals chargable losses minus investment income over one minus six cost factor. Let me ask you if you have ever seen in your experience in the workers’ comp, department down in Little Rock — have you ever seen a formula for workers’ compensation rating anything like this? A. No. Those things are used by the National Council to come up with the manual rate but their fixed cost factor — the earned premium of the losses, investment income, but not for developing a premium on an individual risk. Q. If this formula right here, prior to either one of these policies being issued, if that formula had been submitted to your office to be approved on behalf of Wal-Mart — I mean on behalf of Transit Casualty for the Wal-Mart account, would it have been approved? A. I don’t think — I would say that we would have a lot of reservations, that we would probably spend quite a bit of time looking at it. It would not have been automatically approved, no. Q. Out of the three standards that you described to us earlier today— A. Uh-huh. Q. —the unfairly discriminatory, inadequate and excessive, could you tell me what problems you would have with that formula right there? A. I think you might have all three of them with that formula. Unfairly discriminatory because, you know, I assume it would be for one insured, and excessive because — do you want me to go ahead? Excessive because the — I can’t really see it but I believe it has a fixed cost factor in the investment income. I’m not sure how you would pro rate that out for Transit Casualty when they’re already included in the manual rates, the figures that are used by the National Council and could be inadequate, I don’t know, it just depends on what numbers they plugged there and how they segregated that account out. The “proof” in relation to the amounts owed according to the policies of workers’ compensation insurance as issued came from Frank R. Watkins who until June of 1986 was with Transit Casualty Company or its Receiver. When Transit was a solvent company, he was a Vice President in the Underwriting Department and, among other things, it was his duty to calculate premiums on workers’ compensation policies. He prepared defendant’s exhibit 40 which is a summary of his calculations showing the amounts that the Receiver claims Wal-Mart owes on the two policies. He says that he reviewed Transit’s filings in all applicable jurisdictions and applied deviations on file. In fact, he testified that he applied the 15% deviation in Arkansas which was filed a few days before the initial policy was issued, even though it was not shown on that policy by Miro. In addition, he applied the relevant experience modifiers and discounts and computed the premiums shown on defendant’s exhibit 40 using standard underwriting guidelines. Although Wal-Mart, through its attorneys, contends that these figures are not accurate, no evidence was offered by it to refute them. Calculated in the manner described by Watkins, he testified that Wal-Mart owed an additional premium of $9,696,845 on the first policy, when the payroll determined by the White & White audit is used, and $7,505,378 if the payroll that Wal-Mart contends was the correct one is used. On the policy for the second year, he testified that the additional premium due is $9,266,766. Thus, according to these figures, Wal-Mart either owes an additional premium of $16,-772,144 if the Wal-Mart payroll figures are used for the first year and the White & White audit figures for the second, or $18,-963,611 if the White & White payroll audit figures are used for both years. III. Did Carlos Do It? As indicated by the facts set forth in the preceding section, the evidence shows that Carlos Miro agreed with Wal-Mart to provide workers’ compensation coverage for Wal-Mart in all of the states in which it did business for a flat and guaranteed premium of $3,500,000, to be affected by no other factors, for both of the years in question. It is also clear that, rather than show the “deal” entered into, undoubtedly, as will be discussed below, because it was obviously not in compliance with the law of any state, Miro prepared and forwarded to Hallinan for his review and acceptance standard worker’s compensation insurance policies showing premium calculations which, if one was not aware of the depressed payroll shown, would comply with the laws of the states in which Wal-Mart had employees. Hallinan reviewed the policies, accepted them, and forwarded them on to John Sooter of Wal-Mart. This was done by Miro and accepted by Hallinan and, in fact, Sooter, even though none of the three believed for one moment that the policy correctly reflected the “deal.” Hallinan apparently accepted it and sent it on to Wal-Mart because he believed that this was “common practice.” In other words, his excuse was that “everybody does it.” Prior to and during the trial, Transit contended that Wal-Mart was bound by the terms of the insurance policies delivered and accepted, and it objected on the basis of the parol evidence rule to any evidence being offered and received to show the “deal.” At the start of the trial, the court ruled that the parol evidence rule did not apply, and, after hearing the evidence, the court is even more convinced that it does not. The court does not believe that anyone involved in the transactions or, in fact, anyone in the courtroom during the trial, really believes that the policies reflected the arrangement reached by the parties. The policies delivered were shams to show someone (and it must have been regulatory authorities) that policies had been issued which complied with the law of the states in which they had to be filed and reviewed. Arkansas law permits parol evidence to show, among other things, that the written agreement is not really the agreement of the parties and what the parties in fact intended their agreement to be. See L.L. Cole & Son, Inc. v. Hickman, 282 Ark. 6, 665 S.W.2d 278 (1984); Jefferson Square, Inc. v. Hart Shoes, Inc., 239 Ark. 129, 388 S.W.2d 902 (1965); Kyser v. T.M. Bragg & Sons, 228 Ark. 578, 309 S.W.2d 198 (1958). Parol evidence is always permitted where “there is a question of whether the parties intended to integrate their entire agreement into the document involved in the case.” Starling v. Valmac Industries, Inc., 589 F.2d 382, 386 (8th Cir.1979), citing Farmers Coop. Ass’n v. Garrison, 248 Ark. 948, 454 S.W.2d 644 (1976), citing 3 Corbin on Contracts § 573 (1960); see also 30 Am.Jur.2d Evidence § 1034 (1967). In this respect, Transit contends that the “sham theory” which allows parol evidence to show that the writing is a “sham” is not applicable where parol evidence is offered to negate a legal contract and prove the terms of an illegal contract where the “real agreement” was made for the illegal or immoral purpose of deceiving or misleading public authorities or is contrary to public policy. See Bank of America Nat. Trust & Sav. Assoc. v. Gillaizeau, 593 F.Supp. 239 (S.D.N.Y.1984); Bersani v. General Accident F. & L. Assur. Co., 36 N.Y.2d 457, 369 N.Y.S.2d 108, 330 N.E.2d 68 (N.Y.1975); Kergil v. Central Oregon Fir Supply Co., 213 Or. 186, 323 P.2d 947 (1958); 30 Am.Jur.2d Evidence § 1034 (Supp.1986). While this argument is not without merit, the court believes that that contention can be more logically and properly discussed in the section below which discusses the enforceability of the “deal.” As indicated, the court believes that the evidence was admissible. The question of whether it should be considered by the court to prove an illegal or immoral contract or one against public policy is another question. In short, the court is convinced that, in fact, Carlos Miro did exactly what WalMart charges him with doing. He agreed to provide Wal-Mart’s workers’ compensation coverage for two years at a flat $3,500,000 per year, to be affected by nothing. In addition, he provided retroactive coverage, agreeing to pay any workers’ compensation claims, whether known or unknown, arising in any of the Wal-Mart locations during the period from February 1, 1980, to January 31, 1983. He agreed to accept this liability, both known and unknown, for the amount of reserves set up by Wal-Mart’s adjusters at the time the known claims were filed. In addition, he agreed to insure general liability claims at any Wal-Mart location, both known or unknown, which resulted from any incident occurring between February 1, 1980, and January 31, 1983. Thus, the answer to the question posed at the beginning of this section, “Did Carl