Liberty Mutual Prevails in $3.6M ‘Guaranteed Cost’ Workers’ Comp Premium Case

July 5, 2017

Liberty Mutual Insurance Co. has won a case against a company that refused to pay $3.64 million in additional workers’ compensation premium after a payroll audit revealed it had more high risk employees than originally claimed.

The U.S. District Court in Houston had granted Liberty Mutual a summary judgment and ordered the aircraft ground handling firm Servisair to pay the additional premium. The U.S. Circuit Curt of Appeals for the Fifth Circuit last week upheld that ruling.

The three-judge appeals panel rejected Servisair’s claims that the policy was a “mutual mistake” and that the terms were ambiguous.

“Servisair made a deal that, in retrospect, it did not like. That does not allow it to rewrite or avoid its obligations,” the ruling states.

Liberty Mutual and Servisair (now known as Swissport) entered into a “guaranteed cost” workers’ compensation policy under which the final premium would be determined based on an audit of Servisair’s payroll classifications at the end of the policy period. At the inception of the policy, an estimated premium was generated based on payroll numbers and classifications provided by Servisair’s payroll department.

After the policy period ended, the payroll audit revealed that Servisair’s actual payroll had much greater exposure to more expensive classifications and less exposure to the less expensive clerical classification than the payroll department originally reported. Servisair did not deny its mistakes in classifying employees. Based on the more expensive actual payroll numbers and the agreed-upon rates used for the estimated premium, Liberty Mutual billed Servisair for an additional $3.64 million.

Servisair refused to pay the additional premium and the insurer sued Servisair for breach of contract.

In its appeal, Servisair argued that the policy was the product of a mutual mistake about the premium calculations and that the premium calculation provisions were ambiguous.

The court dismissed the mutual mistake argument. “The mistake, if any, was Servisair’s alone,” the decision stated, noting that Servisair had over-allocated payroll to less expensive clerical employees, an error that resulted in a premium estimate significantly less expensive than the final premium. But the courts said that the policy clearly contemplated that the payroll classification numbers might be inaccurate and shifted that risk to Servisair.

“By its plain terms, the policy provides that Servisair is responsible for paying more than the estimated premium if the final premium exceeds the estimated premium. This is an open-ended obligation with no limit on the amount of additional premium Servisair might ultimately owe,” the appeals court stated.

Servisair also argued that the terms “guaranteed cost,” “rules,” and “rating plans” were ambiguous, particularly regarding their effect on the “schedule ratings” used to calculate the final premium after the audit. But the court found that Servisair’s real argument was that Liberty Mutual had a particular profit in mind considering Servisair’s loss history and pursued that goal in setting the schedule ratings. Servisair contends that Liberty Mutual did not care about the payroll inaccuracies when setting the policy; it cared about achieving a particular profit and achieved that profit by adjusting the schedule ratings according to loss history. Servisair maintained that Liberty Mutual should have readjusted the schedule ratings when calculating the final premium to achieve the exact same profit goal pursued in the estimated premium.

But the court said the terms of the policy were clearly spelled out and agreed to by both parties. The policy itself explains how premiums are initially calculated and then subject to modification. “No ambiguity is presented there,” the judges said.

As for the “rules” and “rating plans,” the policy states that the applicable rules and rating plans used to calculate the final premium are the rules and rating plans in Liberty Mutual’s manuals, which are not in the record. The policy itself clearly refers to these manuals as the source of the rules and rating plans and is thus unambiguous and however those “schedule ratings” were calculated, they were clearly stated and agreed upon at the policy’s inception and were not changed at the time of final calculation, according to the appeals court.

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