W. Bend Mut. Ins. Co. v. Procaccio Painting & Drywall Co.

• Decision Date: 10 July 2015
• Docket Number: No. 13–2252.,13–2252.
• Citation: 794 F.3d 666
• Parties: WEST BEND MUTUAL INSURANCE COMPANY, Plaintiff–Appellant, v. PROCACCIO PAINTING & DRYWALL COMPANY, INC., Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

794 F.3d 666

WEST BEND MUTUAL INSURANCE COMPANY, Plaintiff–Appellant

v.PROCACCIO PAINTING & DRYWALL COMPANY, INC., Defendant–Appellee.

No. 13–2252.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 9, 2013.

Decided July 10, 2015.

Daniel J. Cunningham, Attorney, Tressler LLP, Chicago, IL, for Plaintiff–Appellant.

Charles L. Philbrick, Attorney, Kaitlyn Anne Wild, Attorney, Rathje & Woodward, LLC, Wheaton, IL, for Defendant–Appellee.

Before WILLIAMS, SYKES, and HAMILTON, Circuit Judges.

Opinion

SYKES, Circuit Judge.

This case requires us to explore the arcana of workers' compensation insurance—more specifically, the complex formula used to calculate an employer's annual premium for this coverage.

For many years Procaccio Painting & Drywall Company, Inc., a large Illinois construction contractor, purchased its workers' compensation insurance from West Bend Mutual Insurance Company, a Wisconsin-based insurer. Because Procaccio paid above-average wages, it was entitled to a special premium credit under the Illinois Contracting Classification Premium Adjustment Program. The parties refer to this as the “ICC credit,” so we'll use that shorthand too. The amount of the ICC credit was calculated by a third—the National Council on Compensation Insurance (“National Council”)—but typically not until after West Bend renewed Procaccio's annual policy and estimated its new premium based on other rating factors. As a high-wage union contractor with a large work force, Procaccio was entitled to a substantial ICC credit every year.

This litigation concerns three policy years: 2006, 2007, and 2010. West Bend's general practice was to apply the ICC credit via an endorsement to the policy after the National Council determined the amount. During these three years, however, West Bend largely offset the ICC credit by simultaneously reducing a different credit, known as the Schedule Modification credit, which it had temporarily inflated when initially estimating Procaccio's premium at the time the policy was renewed. This manipulation of the two credits—artificially inflating one and later using the other to offset the inflation—was a premium—stabilization measure intended to benefit Procaccio by ensuring that it did not have to pay excessive monthly premiums while waiting for the National Council to calculate the ICC credit. Or so says West Bend.

The problem is that the insurance policy doesn't mention this credit-offset procedure. West Bend claims that Procaccio's president orally blessed the arrangement. Procaccio denies that and raises the parol-evidence rule to block any evidence of an oral “side agreement” to “front” the ICC credit in this way. Procaccio contends that West Bend's offset procedure effectively nullified its ICC credit for these policy years, resulting in substantial overcharges. The district court agreed and awarded a large sum in damages.

We affirm. The insurance policy contained no agreement to adjust the Schedule Modification credit after the ICC credit became due. West Bend needs parol evidence to prove its version of the parties' agreement, but the insurance contract was fully integrated so any evidence of an oral understanding with Procaccio's president is inadmissible. And while West Bend had the unilateral right to issue endorsements, that authority is cabined by contractual and statutory restrictions on its ability to alter its rates. In short, even if the Schedule Modification credit was artificially inflated for these policy years, West Bend was not permitted to reduce it based on Procaccio's ICC credit.

I. Background

Workers' compensation insurance is premised on retrospective ratings. An employer's premium depends upon (among other things) its actual payroll and the classification of its employees—data that changes during the course of a policy year. Accordingly, the insurer sets the final premium after the policy lapses, and until then the employer pays a series of estimated premiums. Because of the ongoing need to update the policy, the insurance contract generally gives the insurer the unilateral right to modify the contract by subsequent endorsement. As the facts determining the employer's rating change, the insurer will issue endorsements reflecting the changes.

But the insurer's right to issue endorsements is not unlimited. Illinois heavily regulates how workers' compensation insurers formulate their rates. 215 Ill. Comp. Stat. 5/456. State law mandates that insurance companies file manuals of classifications, rules, and rates within 30 days after they become effective. Id. § 5/457. The law requires insurers to apply the “correct classifications, payrolls and other factors of a rating system to compute premiums.” Id. § 5/462b. If an insurance company incorrectly calculates the premium to the detriment of an insured, the company must refund the overage. Id. The insured must receive advance notice if the insurance company attempts to raise rates by more than 30% when renewing a policy. Id. § 5/143.17a. Finally, the parties can cabin the premium by contracting for a specific formula and minimum and maximum premiums.

To give an oversimplified example of how this system works in practice, suppose a car wash has two types of employees: those who operate the car washing machines and the salespersons behind the cash register. The car wash may pay a rate of $2 for every $1,000 of payroll for those who operate the machines and $1 for every $1,000 of payroll for the salespersons. This specific rate—$2 for machine operators and $1 for salespersons—is fixed ex ante pursuant to the insurance company's filed rate plan. But the actual premium can only be calculated ex post: The car wash will add and lose employees during the course of the year, and employees will work extra hours or take days off, depending on workload and personal circumstances. Consequently, the car wash will pay the final premium after its policy has expired and it has submitted actual employment information for the year to the insurer.

Procaccio first contracted with West Bend for workers' compensation insurance in 2001 and renewed the policy annually through at least 2010. The three policies at issue here cover the 2006, 2007, and 2010 calendar years.

West Bend's policies were form contracts created by the National Council. Each policy had several components. The first was the “information sheet,” which identified the insured and the actual or estimated premium. The information sheet also listed the endorsements. The second component contained the primary terms and conditions—this was the “policy” in the conventional sense. The final component was a series of endorsements, including those for the Schedule Modification credit and the ICC credit.

As we've noted, workers' compensation policies are continually updated throughout the policy year. West Bend updated Procaccio's policies by issuing new information sheets and endorsements to reflect changes in the employer's payroll history and other elements of the premium formula. For example, when the National Council issued the ICC credit, West Bend would send Procaccio a new information sheet reflecting the adjusted premium and an endorsement reflecting the credit. West Bend calculated Procaccio's final premium in an audit conducted during the month of March or April following the expiration of each annual policy.¹

The policies issued to Procaccio for the three years in question here contained materially identical terms and conditions. Each one contained the following clause:

A. The Policy

This policy includes at its effective date the Information Page and all endorsements and schedules listed there. It is a contract of insurance between you (the employer named in Item 1 of the Information Page) and us (the insurer named on the Information Page). The only agreements related to this insurance are stated in this policy. The terms of this policy may not be changed or waived except by endorsement issued by us to be part of this policy.

(Emphasis added.) Because the three policies were identical in all relevant respects, we will refer to them collectively as “the policy” unless the context requires otherwise.

Every year West Bend issued an endorsement reflecting the credit due to Procaccio under the Illinois Contracting Classification Premium Adjustment Program, which subsidizes employers that pay above-average wages by reducing their workers' compensation premiums. The amount of the subsidy depends on the size of the employer's work force and its average hourly wage. As a large, high-wage union employer, Procaccio usually received a sizable ICC credit every year, sometimes exceeding $100,000.

To obtain the ICC credit (also called the ICC “factor”), Procaccio had to apply to the National Council, which is tasked with calculating the amount of the credit. This calculation, however, was often unavailable at policy-renewal time, when West Bend had to re-estimate Procaccio's annual premium. So the policy carried the following general endorsement:

The premium for the policy may be adjusted by an Illinois Contracting Classification Premium Adjustment factor. The factor was not available when the policy was issued. If you qualify, or if an estimated factor has been applied, we will issue an endorsement to show the proper premium adjustment factor after it is calculated.

When the National Council later calculated the amount of Procaccio's ICC credit, West Bend would issue a specific endorsement applying the credit to the previously estimated premium.

Because Procaccio usually received a large ICC credit every year, West Bend claims that the parties agreed to a special arrangement for the 2006, 2007, and 2010 policy years whereby West Bend would “front” the credit to Procaccio. The insurer did this by inflating a different credit—the Schedule Modification credit—by the amount it anticipated Procaccio would receive as its ICC credit when the National Council's calculation eventually became available. When the actual ICC...