Travelers Indem. Co. v. D.J. Franzen, Inc.

• Decision Date: 22 December 2010
• Docket Number: No. 09-0040.,09-0040.
• Citation: 792 N.W.2d 242
• Parties: The TRAVELERS INDEMNITY COMPANY, Appellant, v. D.J. FRANZEN, INC., Appellee.
• Court: Iowa Supreme Court

792 N.W.2d 242

The TRAVELERS INDEMNITY COMPANY, Appellant,

v.D.J. FRANZEN, INC., Appellee.

No. 09-0040.

Supreme Court of Iowa.

Oct. 29, 2010.

Rehearing Denied Dec. 22, 2010.

CeCelia C. Ibson of Ibson Law Firm, Des Moines, for appellant.

Stanley J. Thompson of Davis Brown Law Firm, Des Moines, for appellee.

BAKER, Justice.

The Travelers Indemnity Company (Travelers), a workers' compensation assigned risk insurer, seeks further review of the court of appeals' decision affirming the district court's summary judgment ruling for the insured on Travelers' claim for payment of additional premiums as a result of Travelers' reclassification of the insured's workers as employees. Travelers asserts that the court of appeals erred in (1) determining Travelers could not raise the doctrine of exhaustion of administrative remedies to bar the insured from presenting a defense to Travelers' suit and (2) determining the employment status of the insured's workers, arguing the court of appeals' decision conflicts with case law supporting the administrative resolution of the underlying premium rate dispute. We hold the administrative exhaustion doctrine bars the insured from raising a defense to Travelers' claim. Accordingly, the decision of the court of appeals is vacated, and the district court judgment reversed.

I. Background Facts and Proceedings.

In September 2003, D.J. Franzen, Inc. (Franzen), an over-the-road trucking company,applied for workers' compensation insurance through the State of Iowa's assigned risk plan. Iowa's assigned risk plan is a statutorily created program that matches insurance providers with employers who are unable to obtain workers' compensation insurance on the open market. See Iowa Code § 515A.15 (2003) ¹ (outlining Iowa's assigned risk plan). Under Iowa law, employers are required to carry workers' compensation insurance for certain employees. See id. § 87.14A ("An employer subject to this chapter and chapters 85, 85A, 85B, and 86 shall not engage in business without first obtaining insurance covering compensation benefits or obtaining relief from insurance as provided in this chapter....").

The National Council on Compensation Insurance, Inc. (NCCI) has been licensed as an approved rating organization in Iowa. See id. § 515A.6 (providing authority for organizations to apply to the insurance commissioner of Iowa to become licensed rating organizations for specific types of insurance). NCCI administers Iowa's assigned risk plan. See id. § 515A.15B ("An agreement among licensed insurers to offer workers' compensation insurance for applicants unable to procure workers' compensation insurance through ordinary methods shall be administered by a rating organization licensed under this chapter."). NCCI selected Travelers to be Franzen's workers' compensation insurance carrier.

Travelers' contract with Franzen offered insurance coverage for one year, starting September 15, 2003. At the time Travelers offered Franzen the coverage, Travelers calculated Franzen's deposit premium to be $1775. This figure was computed using figures Franzen had provided on its application to the assigned risk plan. On this application, Franzen was required to identify its total number of employees, its estimated annual payroll, and the class code of each employee that needed to be covered under the policy. The cost of the insurance plan varies based on the covered employees' class code and total payroll. Franzen listed seven clerical office employees with an estimated annual payroll of $230,000. Franzen did not list drivers on its application because it considered its drivers to be owner-operators, not employees.

As the administrator of Iowa's assigned risk plan, NCCI prepares reports for the insurers participating in the plan. These reports contain information concerning the insured's workers' compensation coverage and claims for three years prior to the date of the report. NCCI prepared a report for Travelers, revealing that in the previous three years Franzen carried workers' compensation insurance for its drivers in addition to its clerical employees. After receiving this report and discovering that Franzen owned Hartland Lease Inc., a truck lease company, a Travelers' underwriter became concerned with the status of Franzen's drivers.

The underwriter for Travelers, Joseph Pinto, attempted to perform a preliminary audit of Franzen's employment practices, but Franzen was allegedly uncooperative. Travelers claims that Franzen refused to give Travelers' auditors access to any documentation regarding the company's relationship with its drivers. As a result, Travelers sent Franzen a letter stating that Franzen's policy would be cancelled on January 14, 2004. The letter stated that the coverage would not be reinstated until Franzen cooperated with the preliminary audit. Franzen then provided copies of contracts that stated the drivers were infact owner-operators and did not need to be covered by the policy.

After reviewing the sample contract between Franzen and its drivers, Pinto declared that "any trucker signing these documents would be excluded from coverage under our policy." Thus, Travelers would consider any driver who had signed a contract to be an owner-operator, but all other drivers would be deemed employees and included in the workers' compensation policy. Travelers, however, determined that it needed to perform a second audit in early 2004. After performing this second audit, which included a review of Franzen's payroll documents for drivers, Travelers determined that only eight of Franzen's drivers were owner-operators, but the rest of the drivers were employees and should be included under the insurance policy. This reclassification of drivers significantly increased Franzen's premium for the policy.

On April 16, 2004, Travelers sent Franzen a premium adjustment notice showing that the company's total premium had increased to $580,601. Franzen refused to pay the increased premium, insisting it had no employee drivers, only owner-operators that did not need to be covered under the policy. Travelers refused to revise its audit. Travelers, on several occasions, informed Franzen that if the company wished to appeal the premium determination it must file a written request with the NCCI. Franzen did not appeal the determination, nor did the company pay the additional premium. The policy was cancelled on June 4, 2004. After cancelling the policy, Travelers again adjusted Franzen's premium. The adjusted premium for the pre-cancellation term of the policy was $552,436.

In June 2007, Travelers filed a petition seeking judgment against Franzen for the increased premium. Franzen filed a motion for summary judgment, arguing that its drivers were independent contractors and should not have been included in the insurance policy. Travelers filed a resistance to Franzen's motion and a cross-motion for summary judgment. Franzen also sought to strike Travelers' cross-motion as untimely. After a hearing on the motions, the district court denied Travelers' motion for summary judgment and granted Franzen's motion. The court did not address the motion to strike the cross-motion.

Travelers appealed and argued that as a matter of law, Travelers alone was authorized to determine all matters related to the calculation of premiums; the majority of Franzen's drivers were correctly determined to be employees; and Franzen's failure to appeal Travelers' decision to NCCI constitutes a failure to exhaust administrative remedies and bars Franzen's defense of any and all claims.

The court of appeals determined Franzen did not need to exhaust its administrative remedies to defend Travelers' claims, and Travelers did not generate a fact question as to whether the drivers at issue were employees or independent contractors. The court of appeals affirmed the district court's grant of Franzen's motion for summary judgment.

Travelers filed an application for further review with this court, which we accepted.

II. Scope of Review.

The scope of review on a district court's grant of summary judgment is well established. We review rulings on motions for summary judgment for the correction of errors at law. Farm Bureau Life Ins. Co. v. Chubb Custom Ins. Co., 780 N.W.2d 735, 739 (Iowa 2010). A grant of summary judgment is only appropriate when the " 'moving party [has] affirmativelyestablish[ed] the existence of undisputed facts entitling that party to a particular result under controlling law.' " Id. (quoting Interstate Power Co. v. Ins. Co. of N. Am., 603 N.W.2d 751, 756 (Iowa 1999)). In determining whether this standard has been met, the record must be viewed in the light most favorable to the nonmoving party. Schoff v. Combined Ins. Co. of Am., 604 N.W.2d 43, 45 (Iowa 1999).

When no extrinsic evidence is offered on the meaning of language in a policy, "the interpretation and construction of an insurance policy are questions of law for the court." "[W]e adhere to the rule 'that the intent of the parties must control' " when construing insurance contracts. Except in cases of ambiguity, the intent of the parties is determined by what the policy says.

Farm Bureau Life Ins. Co., 780 N.W.2d at 739 (quoting Lee v. Grinnell Mut. Reins. Co., 646 N.W.2d 403, 406 (Iowa 2002) (first quote); Swainston v. Am. Family Mut. Ins. Co., 774 N.W.2d 478, 481 (Iowa 2009) (second quote)). "We review questions of statutory construction for the correction of errors at law." Zimmer v. Vander Waal, 780 N.W.2d 730, 733 (Iowa 2010).

III. Discussion and Analysis.

A. Failure to Exhaust Administrative Remedies. Travelers first claim of error is that the court of appeals erred in determining Travelers could not use the doctrine of exhaustion of administrative remedies to bar Franzen from presenting a defense in a suit for damages. Travelers appears to be making two separate arguments for why the district court erred in this determination.

First, Travelers argues that the language of the insurance...