Consedine v. Personnel Management, Inc., 090913 FED5, 11-31202

Docket Nº:11-31202
Opinion Judge:PER CURIAM
Party Name:Michael F. CONSEDINE, Insurance Commissioner of the Commonwealth of Pennsylvania, in his official capacity as Statutory Liquidator of Reliance Insurance Co., Plaintiff - Appellant and Cross-Appellee v. PERSONNEL MANAGEMENT, INC. Defendant-Appellee and Cross-Appellant
Judge Panel:Before REAVLEY, DENNIS, and CLEMENT, Circuit Judges. EDITH BROWN CLEMENT, Circuit Judge, dissenting.
Case Date:September 09, 2013
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Michael F. CONSEDINE, Insurance Commissioner of the Commonwealth of Pennsylvania, in his official capacity as Statutory Liquidator of Reliance Insurance Co., Plaintiff - Appellant and Cross-Appellee


PERSONNEL MANAGEMENT, INC. Defendant-Appellee and Cross-Appellant

No. 11-31202

United States Court of Appeals, Fifth Circuit

September 9, 2013

Appeals from the United States District Court for the Western District of Louisiana USDC No. 06-CV-02277

Before REAVLEY, DENNIS, and CLEMENT, Circuit Judges.


This appeal arises out of an insurance contract dispute between a workers' compensation insurance carrier, Reliance Insurance Co. (Reliance), which is now in liquidation, and the insured employer, Personnel Management, Inc. (PMI). Reliance seeks from PMI $349, 140.63 in adjusted premiums and $604, 435.00 in deductible losses it claims PMI owes under the policy. Following a bench trial, the district court entered a final judgment awarding Reliance partial relief in the form of the adjusted premiums but, after finding that Reliance breached its obligations to follow claims-adjustment procedures, the district court rejected Reliance's claim for the remaining $604, 435 in deductible losses. We affirm.



The parties' dispute arose out of two workers' compensation policies and related agreements negotiated in the late 1990s, issued by Reliance to PMI. PMI is a Louisiana corporation that operates as an employee-leasing agency. Reliance is an insurance corporation organized and existing under the laws of Pennsylvania. In 1998, PMI sought a workers' compensation insurance carrier. It hired an insurance agent to procure insurance for its workers. The agent in turn solicited an insurance broker to secure the policy, and the broker contacted Union Pacific Insurance Company, which was an affiliate of Reliance Insurance Company (together, "Reliance") at the time.1 The broker asked Reliance for a quote and in response, Reliance prepared a document called a "Casualty Insurance Program" (or "CIP") Binder, which outlined coverages, premiums, deductibles, aggregate limits, and other financial terms on which the policy would be issued.

PMI decided to retain the services of Reliance for its workers' compensation insurance. Reliance and PMI's agents agreed on pricing terms, and Reliance then issued a separate one-page "Binder of Insurance, " which contained the same pricing terms as in the CIP Binder. The policies themselves were issued and delivered to PMI's agents after the terms and conditions were finalized. The first policy covered the period of April 1, 1998 to April 1, 1999. The policy was renewed for a second year covering the period of April 1, 1999 to April 1, 2000. The policies' deductible endorsement specified a deductible in the amount of $100, 000 per claim, subject to aggregate deductible limits based on PMI's payroll volume.2

A functionally identical CIP Binder and Binder of Insurance were issued for the second policy year before the renewed policy was delivered. The annual premium for the first year, based on an estimated payroll of $6, 300, 000, supplied by PMI during the negotiation of the policy, was $95, 120, with a cash collateral of $85, 000. The estimated premium for the second policy was $145, 160, based on an estimated payroll of $12, 063, 199, based on information supplied by PMI. PMI paid those estimated premiums and the cash collateral.

There were three principal features of the parties' insurance coverage and claims-handling arrangement: first, the insurance premiums would be adjustable, based on PMI's annual payroll; second, PMI's insurance would be a "high deductible" policy, effectively requiring PMI to self-insure up to $100, 000 per claim, with Reliance to pay claims over $100, 000; and third, Reliance, through a professional claims administrator, would process, investigate, and pay any claims filed by PMI's employees, and PMI would then reimburse Reliance for any claims within its deductible limit. In effect, the parties had two agreements: first, Reliance would provide insurance coverage based on payroll, and PMI would pay the adjustable premiums; and second, Reliance would administer the claims-handling process for all of PMI's employees, and PMI would pay out all claims valued under $100, 000, similar to an administrative services only ("ASO") contract.3

The adjustable premium agreement was based on the parties' anticipation that PMI's payroll could change drastically over the insurance coverage period, thereby affecting both parties' degree of risk. In fact, during the coverage period between 1998 and 1999, PMI underwent substantial growth. Its payroll expanded from 600 to over 1, 000 and it tripled the number of states in which it did business, from three to nine. In anticipation of the company's growth, the parties agreed on a method of adjusting policy premiums dependent on PMI's actual payroll volume in a given year. The policies contained provisions entitling Reliance to audit PMI's payrolls and to adjust the premiums accordingly. Part Five, Section E of both policies provided, in relevant part:

[T]he final premium will be determined after this policy ends by using the actual, not the estimated, premium basis and the proper classifications and rates that lawfully apply to the business and work covered by this policy. If the final premium is more than the premium you paid to us, you must pay us the balance.

Likewise, Part Five, Section G of the policies stated that "[i]nformation developed by audit will be used to determine final premium." Reliance conducted timely physical audits of PMI's payroll and discovered that the actual payroll was over twice the amount that PMI had estimated (over $14 million rather than $6.3 million in 1998 and $31.4 million rather than $12 million in 1999).

The details of the parties' deductible agreement are also not contained in one single document. The outline of the parties' deductible agreement was set forth in part in the policy itself and in the second policy's deductible endorsement. However, the details of the deductible agreement was set forth in documents issued separately from each policy, the "Insurance Program Agreements" (IPAs). At trial, PMI described each IPA as the "'customized' document . . . set[ting] forth the 'guts' of the high deductible policy." The IPAs set forth the method by which the deductibles would be calculated and by which the claims processing would be handled. While the parties did not sign and finalize the IPAs, both parties acknowledge that they intended the IPAs to be enforceable. The district court concluded that the IPA documents did not "constitute part of the policies of insurance, " although "PMI received a considerable benefit from the application of the terms contained within the[m]." Nevertheless, the district court concluded that "Reliance always considered that the [IPA] was a part of the Insurance Program, because it contained the provisions, reflected in the binders, establishing aggregate limits. Those limits were of considerable benefit[ ] to PMI, because they limited PMI's maximum exposure for deductible losses. Reliance has always given PMI the benefit of the aggregate limits." Thus, the district court concluded that while the IPAs were not part of the policies themselves, they were intended to be a part of Reliance's "Insurance Program" that governed the handling of PMI's claims and deductible losses, and that the parties' conduct reflected this intention.

At trial, both parties agreed that the policies were intended to be "high deductible policies" whereby PMI would be responsible for the first $100, 000 of claims and Reliance would pay the portion of any claim exceeding that dollar value. As consideration for purchasing a large deductible policy, PMI was given a large deductible credit, in the amount of $100, 000, which substantially reduced the price of additional premiums. In the first year, the credits brought the premiums down from $304, 000 to $95, 000, and in the second year, from $492, 960 to $235, 000.

The second policy's deductible endorsement stated that PMI must reimburse Reliance "for the payments we make on your behalf." PMI was required to provide, and did provide, security for its reimbursement obligations, in either cash or letters of credit. The security amount for the first policy was $85, 000, and $235, 000 for the second. The CIP binders also provided an upper limit to PMI's obligation to reimburse Reliance for the deductibles based on a percentage of payroll, which ultimately amounted to $310, 111 for the first policy year and $612, 324.00 for the second policy year. At trial, Reliance acknowledged that PMI was entitled to benefit from those aggregate limits though they only appeared in the CIP binders.

In effect, this contractual arrangement provided that PMI would be self-insured for claims up to $100, 000, but that Reliance would perform the administrative service of adjusting and paying out all claims on PMI's behalf. For claims that Reliance paid on PMI's behalf that were under the $100, 000 deductible limit, PMI would be responsible for reimbursing Reliance. As stated in the IPA, the parties contemplated that PMI would establish an escrow or loss fund account for payment of the deductible losses directly. The IPA states that "[t]he Insured agrees to fund and pay for Paid Losses in accordance with Article III of this Agreement." Article III of the IPA provided, in relevant part, that "[t]he Insured shall establish an account for the payment of Paid Losses[.]" The IPA did not specify which party would fund the escrow account. Although the parties never signed or executed this document, uncontradicted testimony at trial established that the parties' failure to execute the IPA did not...

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