Travelers v. International Nutrition
| Decision Date | 13 July 2007 |
| Docket Number | No. S-06-063.,S-06-063. |
| Citation | 734 N.W.2d 719,273 Neb. 943 |
| Parties | The TRAVELERS INDEMNITY COMPANY, appellee, v. INTERNATIONAL NUTRITION, INC., appellant. |
| Court | Nebraska Supreme Court |
James L. Quinlan, David J. Stubstad, and Russell A. Westerhold, of Fraser, Stryker, Meusey, Olson, Boyer & Bloch, P.C., Omaha, for appellant.
CeCelia Ibson Wagner, of Smith, Schneider, Stiles & Serangeli, P.C., Des Moines, IA, for appellee.
International Nutrition, Inc., acquired workers' compensation insurance from The Travelers Indemnity Company (Travelers) through the State of Nebraska's assigned risk program. Soon after the policy term began, Travelers changed International Nutrition's classification code and retroactively applied the change, which resulted in an increase in International Nutrition's premium payments. Travelers sued International Nutrition for failure to pay the premiums. The primary issue presented in this appeal is whether Travelers had the authority to change International Nutrition's classification code and retroactively apply the change.
The Nebraska Workers' Compensation Act1 requires, with few exceptions, that every employer carry workers' compensation insurance.2 For employers who cannot acquire such insurance on the open market, the State of Nebraska has established a workers' compensation insurance program that allows employers to obtain insurance coverage under the state's assigned risk program.3 At all times relevant to this case, Travelers was under contract with the state to serve as the sole provider of workers' compensation coverage to employers required to use the assigned risk program.
Under the assigned risk program, an employer's premium payment is determined by, among other things, the employer's annual payroll and classification code. Classification codes are assigned based on the general nature of the employer's business. Different types of businesses involve different levels of risk, and as a result, different levels of premiums apply. The classification codes are promulgated by the National Council on Compensation Insurance, Inc. (NCCI), a rating organization licensed in Nebraska to make and file rules, rating values, classifications, and rating plans for workers' compensation insurance. Pursuant to Travelers' contract with the State of Nebraska, Travelers is required to use the classification codes, rates, filing data, and forms filed by the NCCI and approved by the Nebraska Department of Insurance.
Two manuals published by the NCCI are relevant to this case, the "Basic Manual," which, among other things, promulgates rules for insurers, and the "Scopes of Basic Manual Classifications" or "Scopes Manual," which lists and describes the classification codes. The NCCI Basic Manual provides that when a correction in a classification results in an increased premium, the correction is retroactively applied to the start of the policy if the correction is made during the first 120 days of the policy.
International Nutrition is a company involved in the production and sale of nutritional and medicated supplements to the livestock and poultry industries. International Nutrition receives bulk raw materials, such as rice hulls and limestone, which are stored in large holding storage areas. Supplemental products such as medications and vitamins are then mixed into the bulk raw material. After the mixing is complete, the finished product is packaged into both 25- and 50-pound bags. International Nutrition describes its manufacturing operation as "primarily one of mixing and packaging." The finished product is then sold to International Nutrition's customers, including feed manufacturers, animal food manufacturers, feedlots, egg operations, and poultry farms. International Nutrition's administrative procedures and manufacturing practices are regulated by the U.S. Food and Drug Administration.
International Nutrition was unable to obtain workers' compensation insurance on the open market and, as a result, submitted an application for coverage under the assigned risk program. In its application International Nutrition provided its estimated annual payroll and indicated that the work performed by a portion of its employees fell under the NCCI's job classification code 4611. Classification code 4611 applies to employers "engaged in the compounding, blending or packing of drugs, medicines or pharmaceutical preparations."
Given this information, Travelers extended coverage to International Nutrition on March 16, 2001, by issuing a binder letter and manual. The binder letter explained that it was only a temporary insurance contract and that International Nutrition would be receiving its new policy in approximately 20 days, at which point the binder letter would be canceled.
Included with the binder letter was a 6-page manual prepared by Travelers. Section V of this manual, entitled "Premium Audits," stated:
In accordance with policy provisions, and so that you pay only what you owe, audits are required for all workers' compensation policies to determine accurate premiums.
To confirm that your policy is priced accurately from the start, we may need to conduct a preliminary audit that involves a review of recent payroll and other business records within the first 90 days of coverage on new policies. If this is needed, an auditor will contact you to schedule a convenient time.
On March 22, 2001, Travelers sent a letter to International Nutrition's insurance agent, requesting a detailed description of International Nutrition's business. Travelers requested this information in order to verify that the classification codes listed on International Nutrition's application were correct. International Nutrition provided Travelers with a description of its business on April 4.
Travelers had issued the actual insurance policy to International Nutrition on March 30, 2001. Based on the information provided in International Nutrition's application, the policy included an estimated annual premium of $27,806 and classified a portion of International Nutrition's employees under classification code 4611.
The precise language of the policy will be set forth in greater detail below. Summarized, the policy provided that its terms could not be changed or waived except by endorsement. The policy further provided that the premiums would be determined by the relevant manuals. The policy explained that the work classifications in the policy were an estimate and that if they were inaccurate, then proper classifications would be assigned. The premium shown on the policy was also an estimate, and the final premium was to be determined later using the actual premium basis and proper classifications. The policy required International Nutrition to permit Travelers to audit its records and inspect its workplaces.
On May 22, 2001, a loss control consultant from Travelers performed a "Loss Prevention and Engineering Survey" on International Nutrition. The purposes of this survey were "to gain a better understanding of [International Nutrition's] operations and to discuss [International Nutrition's] loss prevention activities." Following the survey, the loss control consultant prepared a written survey report which provided, among other things, a description of International Nutrition's operations. Although similar to the description provided by International Nutrition on April 4, this description contained additional details relating to International Nutrition's operations. The description in the survey report did not contain any information contradicting the information provided by International Nutrition in its April 4 business description.
In light of International Nutrition's description of its business operations and the results of the loss prevention and engineering survey, Travelers decided to change International Nutrition's classification code from 4611 to 2014. Classification code 2014 applies to "insureds engaged in the operation of grist mills where grains such as wheat, oats, barley, rye, rice and corn are milled." Code 2014 also applies to "[t]he manufacture of feed or feed additives for livestock and poultry . . . ."
On June 18, 2001, Travelers informed International Nutrition's insurance agent that it was changing International Nutrition's classification code. Travelers explained that a preliminary audit would be ordered to verify that the classification code change was correct and that it would suspend billing for the endorsement until the audit was complete. Also on June 18. Travelers issued an endorsement to the policy that added classification code 2014 and resulted in an additional estimated premium of $65,285.
Travelers conducted the preliminary audit and on August 17, 2001, informed International Nutrition's insurance agent that the change from classification code 4611 to 2014 was correct. The preliminary audit also revealed that International Nutrition had significantly underestimated the payroll for employees initially classified under code 4611 in its original application. International Nutrition had estimated in its application that the annual payroll for employees classified under code 4611 was $549,000. However, the preliminary audit revealed that for these same employees now classified under code 2014, the payroll was actually $807,797. Travelers issued an endorsement reflecting these changes on August 17, the result of which was an additional estimated premium of $49,847.
International Nutrition disagreed with the change in classification code and on October 9, 2001, informed Travelers that it had requested an NCCI inspection to verify the validity of the classification code change. Travelers agreed to suspend billing for the endorsement pending the outcome of the NCCI inspection. NCCI performed an onsite survey...
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