Prudential Ins. Co. of America v. Miller Brewing Co., 85-1125

• Decision Date: 06 May 1986
• Docket Number: No. 85-1125,85-1125
• Citation: 789 F.2d 1269
• Parties: The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Plaintiff-Appellee, v. MILLER BREWING COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1269

789 F.2d 1269

The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Plaintiff-Appellee, v. MILLER BREWING COMPANY, Defendant-Appellant.

No. 85-1125.

United States Court of Appeals Seventh Circuit.

Argued Oct. 22, 1985.

Decided May 6, 1986.

Richard E. Reilly, Gimbell, Gimbell & Reilly, Milwaukee, Wis., for defendant-appellant.

Richard M. Esenberg, Foley & Lardner, Milwaukee, Wis., for plaintiff-appellee.

Before CUMMINGS, Chief Judge, COFFEY, Circuit Judge, and FAIRCHILD, Senior Circuit Judge.

COFFEY, Circuit Judge.

Miller Brewing Company ("Miller") appeals from a district court decision, after a five-day trial to the court, finding it liable to the Prudential Insurance Company of America ("Prudential") pursuant to the terms of a Group Insurance contract in the amount of $854,555. We affirm.

I

The dispute between Miller and Prudential arises over the amount of money that Miller allegedly owes Prudential on a group insurance policy issued by Prudential in April, 1978. This Policy included coverage for both group life (AD & D) and group health (A & S/DBL) insurance. In order to understand this dispute, some commonly used terminology in the insurance industry must initially be set forth. The conventional method of funding a group mutual fund insurance plan provides that the insured pays a premium, normally on a monthly basis, composed of three elements: (1) anticipated claims (paid claims and incurred claims); (2) a "retention" figure, which is the insurance carrier's cost of doing business (including administrative expenses, state premium taxes, risk charges, profit and interest); and (3) a "margin" to cover the possibility that actual claims may exceed anticipated claims. At the end of each normal policy year the mutual fund insurance carrier's board of directors calculates a dividend, if any that is to be paid to the policyholder. The dividend is arrived at according to an established formula and represents the amount of the premium payments, determined pursuant to the conventional method of funding, that exceeds actual claims paid out by the company plus its retention charge. Of course, there will be no dividend payment if the amount of the claims paid out by the insurance company and its retention charges exceed in any given year the premium payments made by the insured during that year; the insured will not have to make additional payments for that particular year since the maximum amount of the premium payments is determined annually in advance pursuant to the premium computation clause contained in the policy. ¹ On the other hand, if at year end the insurance company has made a profit, the dividend payment is made to the policyholder. The policyholder has, in effect, reimbursed the insurance company for actual claims paid plus the company's retention charge since the amount of the normal monthly premium paid to the insurance company also includes a "margin" (in addition to the claims and retention charges) ² and this "margin" will in a normal year be returned to the policy holder at the end of the policy year as part of the dividend. Since the insurance company holds the insured's money represented by the "margin" paid during the normal policy year, the group insurance plan funded under the conventional method usually results in a significant cash flow advantage to the insurance carrier, while at the same time the policyholder suffers a corresponding cash flow disadvantage in that it does not have the use of its money during that policy year.

In mid-1976, in order to increase its cash flow, Miller desired to change its group insurance coverage, then funded through the conventional billing method. Miller retained Hewitt & Associates ("Hewitt") as a consultant to assist in selecting a new group insurance carrier. Hewitt prepared premium funding specifications based on a "flexible funding" concept and sent the specifications to the potential bidders. Flexible funding was defined in the bid specifications as, "the insured will pay your retentional charges, excess mortality and claims paid for the month up to the aggregate limit of what premium charges would have been."

Prudential submitted a proposal dated November 14, 1976 containing a quote under the "cost plus" or flexible funding provision of the proposal. ³ The Prudential proposal included a projection of what Miller's retention charge would be, and the language of the proposal cautioned that the projected retention figures were only estimates and that various factors might influence the retention costs significantly:

"Depending upon the growth (or decline) in the number of insurers, and in changes in composition of the group, actual retention at year-end could differ substantially with that projected by the carrier at the beginning of the year."

The proposal also quoted various premium rates for life insurance and accidental death and dismemberment insurance. Joseph Young, Miller's manager of employee benefits and personnel from Hewitt were given the proposals submitted by the insurance carriers to review. On July 30, 1977, Miller officially selected Prudential to provide the requested coverage and in September, 1977, the policy for group life, health and accident insurance went into effect for all of Miller's employees.

On April 14, 1978, Prudential issued, and Miller accepted, a group insurance policy retroactive to July, 1977. The Policy provided the same premium rates as quoted in the proposal. The Policy also stated:

"The premium due on each premium due date is the sum of the premium charges for the insurance then provided under the coverage of the group policy, determined from the applicable premium rates then in effect and the employees insured at the periodic intervals established by Prudential. Premiums may be computed by any other method mutually agreeable to the policyholder and Prudential which produces approximately the same amount."

The policy also stated that the terms of the Policy comprised the entire agreement between the parties and the policy's signature page provided that the agreement "supersedes any previous application."

The Policy provided a lag period of six months to allow Prudential to calculate the dividend, if any, that was owed to the policyholder. In September of each year, following the calendar year-end, Prudential presented Miller with an annual report reconciling the monthly payments made by Miller with the contract premium owed to Prudential less the dividend calculated by Prudential. Miller would owe the difference between the sum of its monthly remittances and the contract premium less the dividend paid out. ⁴

For calendar year 1978, Prudential's annual report of Miller's insurance account reflected that Miller owed Prudential approximately $4,000 and Miller paid that amount. In the four succeeding years, the annual report presented to Miller reflected increases in the amounts owed to Prudential from $50,024 for calendar year 1979 to $250,353 for calendar year 1982; the four-year amount of delinquent premiums totaled $691,054. This increase was due to a great number of variables affecting operating expenses, including providing coverage for a greater number of employees, the processing of claims for these Miller employees, an increase in the risk and profit charges, and various interest adjustments to Miller's account. ⁵ (Tr. 200-245, 257). Believing it had been paying its entire premium due under the policy when it remitted the payments covering the actual claims made plus the retention charges listed in the billing worksheets on a monthly basis, Miller contacted Prudential in January 1981 and questioned the calculations of the amounts owed for the calendar year 1979 and 1980. After failing to resolve the dispute over the amounts due under the contract, Miller formally informed Prudential in January 1982 that it did not intend to pay the amounts for 1979 through 1982 requested in the annual reports, contending that it had payed the entire premium due under the Policy when it made its monthly premium payment. Prudential then commenced this action seeking reimbursement for the alleged delinquent premium payments.

At trial, Mr. Young, the person responsible for negotiating the insurance contract on behalf of Miller, testified that he reviewed the Policy only for accuracy regarding the benefit levels. He referred to the rest of the Policy as "boilerplate" and, because he had not read the remainder of the Policy, testified that he was not aware of the premium rates provided in the Policy. Based upon his understanding of "flexible funding," Young testified that he believed Miller would never be liable for anything other than claims plus retention, and that what normally would constitute the "premium" under a conventionally funded policy would instead merely be a maximum liability "cap" under the flexible funding arrangement. ⁶ Thus he believed that Miller would be liable for the conventional contract premium only if the sum of the total of claims plus retention equaled that amount.

Mr. Naughton, also a Miller employee, was responsible for the implementation of the change in insurance carriers at Miller and for the completion of the monthly billing work sheets, provided by Prudential, listing the claims paid by Prudential and the estimated retention figure. He testified that he understood flexible funding to mean "payment of claims plus retention," and that he believed that the total premiums due pursuant to the contract were only the claims plus retention as computed on a monthly basis. At the top of billing work sheet that he completed, Naughton would include the total premium due under the contract by multiplying the insurance rates times the number of employees covered under the group life, health and accident insurance plan. Naughton testified that he believed this figure only to represent Miller's "cap" or maximum liability under the contract if claims plus retention exceeded this figure...