Ionosphere Clubs, Inc., In re

• Decision Date: 05 June 1996
• Docket Number: No. 956,D,956
• Citation: 85 F.3d 992
• Parties: In re IONOSPHERE CLUBS, INC., Eastern Air Lines, Inc., and Bar Harbor Airways, Inc., doing business as Eastern Express, Debtors. EASTERN AIR LINES, INC., Plaintiff-Appellant, v. The INSURANCE COMPANY OF the STATE OF PENNSYLVANIA, Defendant-Appellee. ocket 95-5038.
• Court: U.S. Court of Appeals — Second Circuit

Page 992

85 F.3d 992

29 Bankr.Ct.Dec. 203

In re IONOSPHERE CLUBS, INC., Eastern Air Lines, Inc., and

Bar Harbor Airways, Inc., doing business as

Eastern Express, Debtors.

EASTERN AIR LINES, INC., Plaintiff-Appellant, v. The INSURANCE COMPANY OF the STATE OF PENNSYLVANIA,

Defendant-Appellee.

No. 956, Docket 95-5038.

United States Court of Appeals, Second Circuit.

Argued Feb. 20, 1996.

Decided June 5, 1996.

Thomas J. Jones, Tallahassee, Florida (Susan L. Turner, Holland & Knight, Tallahassee, Florida, Daniel J. King, Michael E. Norton, King & Spalding, New York City, on the brief), for Plaintiff-Appellant.

Laurence J. Kaiser, New York City (Fisher, Fischer & Berger, New York City, on the brief), for Defendant-Appellee.

Gregory B. Stites, Kansas City, Missouri, filed a brief, for amicus curiae National Association of Insurance Commissioners in support of Appellant.

Dennis Silverman, Tallahassee, Florida, filed a brief, for amicus curiae Florida Department of Insurance in support of Appellant.

Before: NEWMAN, Chief Judge, KEARSE, Circuit Judge, and WEXLER, District Judge. ^*

KEARSE, Circuit Judge:

Plaintiff Eastern Air Lines, Inc. ("Eastern"), appeals from a final judgment of the United States District Court for the Southern District of New York, John E. Sprizzo, Judge, affirming an order of the bankruptcy court that dismissed Eastern's complaint against defendant The Insurance Company of the State of Pennsylvania ("ISOP") for the immediate refund of a premium overpayment under the terms of an insurance contract and of an additional amount of premium that allegedly exceeded the rate permitted by the State of Florida. The district court affirmed the bankruptcy court's grant of summary judgment in favor of ISOP dismissing the complaint on the grounds that the insurance contract (a) was enforceable and (b) did not require ISOP to refund Eastern's premium overpayment prior to January 31, 1994. On appeal, Eastern contends that it was entitled to judgment in its favor principally on the ground that the challenged premium term of the contract was invalid because ISOP failed to obtain Eastern's consent to that term as required by Florida law and failed to file the contract with the pertinent Florida regulatory agency. For the reasons that follow, we disagree and affirm the judgment of the district court.

I. BACKGROUND

The present controversy centers on workers' compensation insurance needed by Eastern in order to comply with various state laws and with provisions of its labor contracts.

The relevant events are not in dispute.

A. The Negotiations and the Insurance Contract

In January 1989, Eastern's insurance broker solicited from a number of insurance companies proposals for a nationwide worker's compensation insurance policy to become effective upon the expiration of Eastern's existing policy some three weeks thence. At that time it was common knowledge that Eastern was facing mounting labor and financial difficulties, and no insurance carrier was willing to issue to Eastern a "guaranteed cost" plan under which premium payments would be established chiefly on a prospective basis without regard to actual losses incurred. Instead, each carrier proposed a loss-sensitive plan, under which the premium would be calculated largely retrospectively by reference to Eastern's actual loss claims.

ISOP proposed a loss-sensitive plan calling for Eastern to pay at the beginning of the coverage period a premium deposit, in cash and by letter of credit, totaling approximately $23 million, which approximated Eastern's anticipated covered losses (including associated expenses). If it turned out that actual covered losses were significantly below the amount deposited, Eastern would be entitled to a partial refund. If, instead, it turned out that such losses significantly exceeded the initial deposit, Eastern would be required to pay additional premium; however, regardless of actual loss experience, the proposed plan set a ceiling, expected to be approximately $28 million, on Eastern's premium (the "maximum premium"). The maximum premium was to be computed retrospectively essentially by multiplying Eastern's actual payroll by two factors: (a) ISOP's "filed rates," and (b) a "maximum premium factor" of 1.6. Filed rates are, basically, multipliers that states require an insurer to file with state regulatory agencies; the insurer then multiplies the applicable filed rates by the insured's payroll to yield a figure known as "standard audited premium." Thus, ISOP's proposed policy provided in essence that the formula for calculating Eastern's maximum premium would be {Eastern's actual payroll} X {ISOP's filed rates} X 1.6; i.e., the maximum premium would be 160% of ISOP's "standard audited premium."

Eastern was amenable to ISOP's proposal, except that it could not obtain a sufficiently large letter of credit to make an immediate deposit of $23 million. Following negotiations, ISOP agreed to accommodate Eastern's financial condition by lowering the initial deposit amount, spreading deposit payments over a 10-month period, and forgoing any requirement that Eastern post collateral. In return for these concessions, Eastern agreed that if it were eventually entitled to a refund, ISOP would not be required to refund the paid-in premium, at least up to the amount of the maximum premium, prior to January 31, 1994.

Accordingly, Eastern and ISOP entered into a contract entitled "THE INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA WORKERS COMPENSATION DIVIDEND PLAN RATING AGREEMENT" (the "Plan" or "ISOP-Eastern Plan"), under which ISOP agreed to provide Eastern with nationwide workers' compensation coverage for the period February 1, 1989, to February 1, 1990. With respect to Eastern's premium deposit, the Plan provided that the "Expected Total Premium" was "$21,000,000" (Plan Addendum No. 1, at 1), of which $3,500,000 was to be paid by Eastern on February 1, 1989, with the remaining $17,500,000 paid in 10 equal monthly installments beginning on March 1, 1989. The Plan stated that the "Maximum Premium Factor" was "1.60." (Plan at 1.)

With respect to the retrospective calculations of loss and the final premium amount payable by Eastern, the Plan provided, in pertinent part, as follows:

4. PREMIUM ADJUSTMENT PROCEDURES

After the initial twelve (12) months, losses will be examined quarterly. Ultimate loss levels will be estimated using the Table of Loss Development Factors indicated below. Final Premium and Dividend (if any) will be calculated and recorded. If at anytime, [sic ] the Final Premium indicated by these calculations exceeds the Paid-in Premium, the additional premium will ....

                be immediately billed, subject to Maximum Premium Limitations.   All billings will be due and payable within thirty (30) days
                

5. PLAN TERM

The term of this plan is five (5) years. At the expiration of the term, the reported incurred losses will be adjusted to ultimate level using the appropriate Loss Development Factor, and will be considered final.

6. PLAN TERMINATION

Upon receipt of the January 31, 1994 Loss Report, the calculation of final premium and dividend (if any) will be made according to the formula contained in this plan. Any additional premium, subject to maximum premium limitation, will be immediately due and payable. Any dividend or return of paid-in premium will be immediately credited and the account will be closed.

(Plan Addendum No. 1, at 1-2.)

B. The Florida Statute

The largest portion of the risk covered under the Plan was in Florida, as the covered Florida residents outnumbered the covered residents of all other states combined. Florida has an elaborate insurance regulatory scheme, see generally Fla.Stat.Ann. § 627.011, et. seq., designed chiefly "to protect policyholders and the public against the adverse effects of excessive, inadequate, or unfairly discriminatory insurance rates," id. § 627.031(2). To this end, each insurance company doing business in Florida and providing workers' compensation coverage for residents of Florida is required to, inter alia, file with the Florida Department of Insurance ("FDOI" or the "Department") every rating plan--i.e., the methodology by which the premium for an insurance policy is calculated--and every rating plan modification that the insurer proposes to use. See id. § 627.091(1). Such plans and plan modifications do not become effective as filed rates unless and until FDOI approves. See id. § 627.101(1).

Once approved, the filed rates must be adhered to by the insurer unless there is compliance with Fla.Stat.Ann. § 627.171. See id. § 627.211. At the times pertinent to this litigation, § 627.171 provided that a rate in excess of the otherwise applicable filed rate could be used with the "written consent of the insured filed with the insurer." Id. § 627.171 (effective prior to October 1, 1989). FDOI has taken the position that in order to comply with § 627.171, an insurer was required to have the insured sign a separate document that mentioned the statute and stated that the insured understood that he was agreeing to pay rates higher than those theretofore filed. (Deposition of James D. Watford, actuary in FDOI's Division of Insurer Services, Bureau of Property and Casualty Forms and Rates, March 12, 1993, at 42-43.)

The Florida statute provides that if a term of an insurance policy violates one of these statutory provisions, the policy is not void but rather must be construed to conform with the statute. See Fla.Stat.Ann. § 627.418. The ISOP-Eastern Plan was not filed with FDOI, and Eastern did not sign a separate form indicating its consent to a premium of 160% of the standard audited premium.

C. The Present Litigation

1. Proceedings in the Bankruptcy Court

Some five weeks after the Plan became effective, Eastern suffered a major labor strike and, on March 9, 1989, voluntarily petitioned in the Southern District of New York for relief under Chapter 11 of the Bankruptcy Code, 11...