74 F.3d 778 (7th Cir. 1996), 95-2599, Great Cent. Ins. Co. v. Insurance Services Office, Inc.

Docket Nº:95-2599.
Citation:74 F.3d 778
Case Date:January 17, 1996
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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74 F.3d 778 (7th Cir. 1996)




No. 95-2599.

United States Court of Appeals, Seventh Circuit

January 17, 1996

Argued Nov. 29, 1995.

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Eugene J. Schiltz, Robert F. Coleman (argued), Coleman & Associates, Chicago, IL, for Plaintiff-Appellant.

James E. Betke (argued), Anne R. Pramaggiore, McDermott, Will & Emery, Chicago, IL, for Defendant-Appellee.

Before POSNER, Chief Judge, and COFFEY and KANNE, Circuit Judges.

POSNER, Chief Judge.

This is a very novel and interesting suit for breach of contract and for tort. A diversity suit governed by Illinois law, it was brought by an insurance company against the nation's largest insurance rating service. The district court granted summary judgment for the defendant, precipitating this appeal.

The plaintiff, Great Central Insurance Company, is, despite the first word in its name, a small insurance company (its total assets in 1987 were only $106 million, though it was and is the wholly owned subsidiary of a much larger company), specializing in writing liability insurance for supermarkets. Half its customers are supermarkets, a concentration that appears to be highly unusual. Hundreds of insurance companies write liability insurance for supermarkets but for the vast majority of these companies, indeed perhaps for all but Great Central, their supermarket business is minute. Indeed, despite its small size, Great Central appears to write more supermarket liability insurance than any other company.

The defendant, Insurance Services Office, is a nonprofit corporation the members of which are insurance companies. Great Central is not a member of ISO but is a customer. ISO sells a variety of services to the property and casualty (liability) insurance industry. Among these are actuarial and filing services. ISO gathers from the members of the industry and consolidates a vast amount of data concerning risks. For example, it collects data concerning slip and fall accidents in grocery stores and supermarkets. These data enable it to calculate insurance rates that will cover the risk of the various insured activities. The calculation of these rates is the actuarial function of ISO and the filing function is the filing of the rates with the state insurance commissions for their approval. Insurance companies are not required to charge the filed rates. Unlike the rates promulgated by the old insurance rate bureaus, ISO's rates are strictly advisory. Insurance companies can file their own rates, also subject of course to commission approval. But thanks to the antitrust exemption created by section 2(b) of the McCarran-Ferguson Act, 15 U.S.C. Sec. 1012(b), ISO is permitted to suggest what rates the members of the insurance industry should charge even though they are competitors, and the insurance companies are permitted to charge the filed rates.

If an insurance company, whatever its size, writes so little of a particular type of insurance that its claims experience is too meager for it to be able to calculate a rate reasonably likely to cover future claims, it is more or less compelled to charge ISO's filed rates; at least we may assume so for purposes of this appeal. The inability of many insurers to compute compensatory rates without an industry-wide pooling of loss experience is the rationale of the antitrust exemption. Great Central may be unique in writing so much supermarket insurance that it can calculate a compensatory rate on the basis of its own loss experience.

All this is by way of background to the events out of which this suit arises. In the

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early 1980s ISO embarked on an ambitious program of simplifying the rate structure of its Comprehensive General Liability policy, the standard commercial liability insurance policy issued by many hundreds of insurance companies to many thousands of businesses. As part of the simplification ISO combined what had been two separate rate classifications, one for grocery stores and one for supermarkets, into a single classification. The old rate structure had defined a supermarket as a grocery store with annual sales of at least $500,000 and a floor area of at least 3,000 square feet; all other grocery stores were classified in the grocery-store classification. Within each of the two classes, the rates varied by floor area as well as, of course, by coverage (and also by state, but that is not relevant to the appeal). A grocery store having a floor area of 2,000 square feet would pay a higher rate, for the same limits of coverage, than a 1,000 square foot grocery store, while a 5,000 square foot supermarket would pay a higher rate than a 4,000 square foot supermarket. More important, the rate per square foot differed for the two types of store; in some states, the rate for supermarkets was five times greater than the rate for grocery stores.

When it combined the grocery-store and supermarket base rates, ISO did what at first glance seems very strange: rather than averaging the rates, it used the old grocery-store rate per square foot as the basis for calculating rates for the new, combined class. This is not quite so crazy as it sounds, because at the same time that the classes were being combined the method of calculating the rate was being changed. Instead of varying the rate within each class (now within a single class) on the basis of area, the new rate system varied it by volume of sales. Apparently the reason for the change was that the number of slip and fall accidents, and hence the number of claims, are proportional to the amount of "foot traffic" in a store, which in turn, ISO determined, was more closely correlated with sales than with area. In principle at least, the new rate system could have generated higher liability-insurance rates for some supermarkets.

The rates were duly filed with the various state commissions and by the middle of 1986 were in effect. Shortly afterward Great Central realized that the new method of calculating the rates for supermarket liability insurance would yield much lower rates than under the old system. It protested to ISO, which quickly agreed that the rates were indeed "too low." We use quotation marks to flag a significant ambiguity in the concept of "too low" rates. ISO has never conceded, and...

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