Saturday, September 13, 2008

Rupugning the Re-Rating

American Home Assur. Co. v. Daffodil General Contracting, Inc.
(Sup. Ct., New York Co., decided 9/3/2008)

Those of us employers who carry workers' compensation coverage for our employees know a little about employee classifications and premium audits. At the beginning of a policy term, the annual premium is an estimate, and is based on, among other things, the projected classification of employees and their annual remuneration. At the end of a policy term, the New York Compensation Insurance Rating Board requires WC insurers to audit the payroll records of employers for the purpose of determining premiums for workers’ compensation policies. If the employer is found to owe less than the estimated premium, it gets a refund. If it is found to owe more, it gets a bill.

In the legal business, there's less chance of misclassifying employees, whether deliberately or not. In the construction business, however... But how would you like to get a post-premium audit bill for more than 10 times the estimated premium? That's what happened in this case and, not surprisingly, the employer did not pay the bill.

American Home issued a WC policy to Daffodil General Contracting for the term January 2, 2004 to January 2, 2005. The estimated annual premium was $8,280, subject to an audit after completion of the term. On July 6, 2005, American Home audited Daffodil's records to determine the actual payroll that had accrued during the year and determined that the total adjusted premium was $84,749. American Home sent Daffodil an invoice for the unpaid adjusted premium dated August 4, 2005. When Daffodil did not pay that invoice, American Home commenced this action in 2006.

Initially, the insurance policy classified Daffodil's employees as masonry, wallboard, and painting workers. In the audit, American Home reclassified all the employees, except for the office manager, as masonry workers, which accounted for the substantial increase in premium. Daffodil argued that only some of its employees were masonry workers and that others were engaged in painting, drywall installation, and tiling. Key to the court's decision in this case was the fact that American Home had not actually been able to complete its audit, having reclassified all but one of Daffodil's employees as masonry workers after having received no response to its audit requests from Daffodil.

American Home moved for summary judgment arguing, among other things, that Daffodil could not challenge employee classifications in court but was required within one year of the rating period in question to request an inspection or review by the New York Compensation Rating Board, which Daffodil had not done. While agreeing with American Home's argument in that regard (as well as that American Home was not required to notify Daffodil of this administrative review requirement and deadline), New York County Supreme Court Justice Louis York nevertheless DENIED American Home's motion:
Despite the foregoing, plaintiff‘s motion must be denied because this case does not present a question of classification. Plaintiff did not examine defendant’s records and then determine that all employees were masonry workers. Plaintiff states that it applied the masonry classification to all of the employees, because it did not have the records to determine the real nature of the employees’ work.

Insurance Law § 2319(b) provides that every insurer must provide “reasonable means whereby any person aggrieved by the application of its rating system may be heard, in person or by an authorized representative, on written request to review the manner in which such rating system has been applied in connection with the insurance afforded or offered.” Whether defendant was afforded “reasonable means” to challenge plaintiff's determinations is not clear. For this reason, summary judgment is denied.

The court is aware that defendant may not be able to produce records showing the nature of its employees' work. Discovery has been had and defendant has not yet produced such information applicable to the time period of the policy. The list noted above was apparently prepared for litigation. Nonetheless, it is plaintiff's burden to establish the correctness of its account and it has not done so.

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