United States District Court, E.D. Kentucky, Central Division, Lexington
MEMORANDUM OPINION AND ORDER
E. Wier United States Magistrate Judge
Acuity, A Mutual Insurance Company, moved for summary
judgment on all claims against Defendant Services
Construction, LLC. DE #25. Defendant responded, DE #29, and
Plaintiff replied, DE #30. The motion is ripe for
consideration. For the following reasons, the Court GRANTS IN
PART and DENIES IN PART Plaintiffs motion for summary
judgment (DE #25). Services Construction is liable for the
as-audited premiums, but the liability amount presents fact
questions precluding summary judgment.
Relevant Factual and Procedural Background
Construction engages in carpentry services, namely,
"framing for residential and commercial buildings."
DE #25-5 (Livio Dep.), at 5. Following the suggestion of its
insurance agent, Assured Neace Lukens Insurance Agency, Inc.,
Service Construction switched from The Hartford to Acuity for
workers' compensation and other business coverage. DE
#29-1 (Affidavit of Osvaldo Livio) ¶¶ 2, 5. Per Mr.
Livio, Services Construction's office manager, Neace
Lukens advised Services Construction that it should switch to
Acuity because "it is better." Id. ¶
5. On July 9, 2012, Acuity issued a policy to Services
Construction, renewed the next year by Services, which
provided general liability and workers' compensation
coverage. DE #25-2 (Policy), at 3; see also DE
##25-3 (Affidavit of Scott VanNorwick) ¶ 3; 29-1 ¶
7. The parties now dispute the amount of premium owed Acuity
for the Policy year between July 9, 2012, and July 9, 2013,
as well as the partial Policy year between July 9, 2013, and
November 17, 2013.
Policy, Acuity calculated premiums for both the workers'
compensation and general liability coverages based on the
total remuneration paid by Services Construction for labor
during the Policy year. DE #25-3 ¶ 3; see also
DE #25-2, at 4, 22. Part Five of the Workers'
Compensation Policy sets out the premium provisions governing
the contract. Specifically, the Policy calculates premium by
multiplying a classification rate by premium basis, i.e.
remuneration. The Policy Information Page notes the premium
as based on "Estimated Total Annual Remuneration, "
and is "subject to verification and change by
audit." Id. at 4. Further:
Item 4 of the Information Page shows the rate and premium
basis for certain business or work classifications. These
classifications were assigned based on an estimate of the
exposures you would have during the policy period. If your
actual exposures are not properly described by those
classifications, we will assign proper classifications, rates
and premium basis by endorsement to this policy.
Premium for each work classification is determined by
multiplying a rate times a premium basis. Remuneration is the
most common premium basis. This premium basis includes
payroll and all other remuneration paid or payable during the
policy period for the services of:
1. All your officers and employees engaged in work covered by
this policy; and
2. All other persons engaged in work that could make us
liable under Part One - Workers' Compensation Insurance
of this policy. If you do not have payroll records for these
persons, the contract price for their services and materials
may be used as the premium basis. This paragraph 2 will not
apply if you give us proof that the employers of these
persons lawfully secured their workers' compensation
DE# 25-2, at 10-11.
issuance, Acuity calculated an estimated annual premium based
on Services Construction's estimated total annual
remuneration of $48, 100 and a work classification of
"Carpentry - Construction of Residential Dwellings Not
Exceeding Three Stories In Height." Id. at 4.
As stated on the Policy Information Page, this initial
premium, remuneration, and classification "is subject to
verification and change by audit, " with such audit
resulting in a final assessed premium. Id. The
Policy language further explains:
E. FINAL PREMIUM
The premium shown on the Information Page, schedules and
endorsements is an estimate. The final premium will be
determined after this policy ends by using the actual, not
the estimated, premium basis and the proper classifications
and rates that lawfully apply to the business and work
covered by this policy. If the final premium is more than the
premium you paid to us, you must pay us the balance. If it is
less, we will refund the balance to you. The final premium
will not be less than the highest minimum premium for the
classifications covered by this policy.
You will let us examine and audit all your records that
relate to this policy. These records include ledgers,
journals, registers, vouchers, contracts, tax reports,
payroll and disbursement records, and programs for storing
and retrieving data. We may conduct the audits during regular
business hours during the policy period and within three
years after the policy period ends. Information developed by
audit will be used to determine final premium. Information
developed by audit will be used to determine final premium.
Insurance rate service organizations have the same rights we
have under this provision.
Id. at 11 (emphasis added).
general liability coverage premium has similar provisions
regarding initial billed premium and audit requirements,
again with premium based, in part, on Services
Construction's payroll, as well as total cost of any
subcontracted work. Id. at 22-23. The Policy states
that initial quoted premium, i.e., Total Advance
The Total Advance Premium shown above is based on the
exposures you anticipated at the time this coverage part
began. We will audit this coverage part in accordance with
the Bis-Pak Liability and Medical Expenses Condition entitled
Premium Audit - Business Liability at the close of the audit
Id. at 22. The Premium Audit - Business Liability
provision is as follows:
a. We will compute all premiums for this Coverage Form in
accordance with our rules and rates.
b. Premium shown in this Coverage Form as advance premium is
a deposit premium only. At the close of each audit period we
will compute the earned premium for that period. If a premium
payment is due, we will send notice to the First Named
Insured. The due date for audit premiums is that date shown
as the due date on the bill. If the sum of the advance
premium is greater than the earned premium, we will return
the excess to the First Named Insured.
Id. at 37. Acuity, again, calculated Services
Construction's Total Advance Premium based on payroll of
$48, 100. Id. at 22.
Construction renewed the Policy for the July 2013 - July 2014
Policy term. Following the first Policy period, Acuity
performed an audit of Services Construction's business
records. During the audit, Services Construction provided
some records detailing payroll and other remuneration paid
during the July 2012 - July 2013 Policy period. DE ##25-3
¶ 5; 29-1 ¶ 9. As part of these records, Acuity
received and reviewed a copy of Services Construction's
Federal Form 1096 for calendar year 2012. DE ##25-3 ¶ 5;
25-4 (Tax Documents), at 3. This Form 1096 lists a total of
$612, 387.00 paid to 42 recipients of Federal 1099-MISC
forms. Id. Per Acuity, the auditor requested copies
of all Form 1099-MISC's for the 2012 calendar year, and
Services Construction advised it did not have copies of the
forms. Id. During discovery, Services
Construction produced the 2012 Federal Schedule C for Eduardo
Rodriguez Rosas (sole-member of Services Construction), which
lists $612, 387.00 in LLC "contract labor"
expenses. DE #25-4, at 2. Based on the reported $612, 387.00
in payments to individuals for contract labor or other
services performed in calendar year 2012, which Acuity
classified as remuneration under the Policy, Acuity
recalculated the premium owed for the July 2012 -July 2013
Policy period, as well as the estimated premium for the July
2013 - July 2014 Policy period. DE #25-3 ¶¶ 6, 7.
Acuity increased the premium basis to an estimated $660, 000
for both Policy periods, representing an estimate of the
total remuneration premised on the $48, 100 initial estimated
remuneration reported and the payments ($612, 387) reflected
in the received tax documents. Id.
terminated the Policy on November 17, 2013, for non-payment
of premium. Id. ¶ 8. Per the Affidavit of Scott
VanNorwick, an Acuity employee, Acuity issued endorsements to
the Policy modifying the premium basis for the July 2013 -
July 2014 Policy period to the estimated total remuneration
of $660, 000. Id. Following termination, Acuity
calculated the total premium due for the July 2012 - July
2013 Policy period and the July 2013 - July 2014 truncated
Policy period to be $152, 656.96. Id.; Id. at 7
(calculating balance due as of November 18, 2013). Following
receipt of additional records from Services Construction
regarding the second Policy period, Acuity, using a lower
estimate premium basis, reduced the payment due by $35,
036.00. DE #25-3 ¶ 9. Ultimately, Acuity calculated the
total sum owed by Services Construction, as claimed in this
suit, to be $117, 620.96. Id. ¶ 10;
id. at 7 (balance due as of May 2, 2014, based on
subsequent audit of prorated second Policy period).
Construction disputes this liability and calculation. Per
Defendant, any payments it made to individuals reflected on a
Form 1099-MISC were payments made to independent contractors,
not employees, and therefore, remuneration paid to these
individuals should not have been included to calculate the
Policy premium bases. DE #29-5 (Services Construction Answers
to Interrogatories), at 4, 5, 7 (answers to Interrogatory
Nos. 7, 10, 19). Per Services Construction, it had only three
actual employees on its payroll: Eduardo Rodriguez,
Superintendent; Salvador Rodriguez, Foreman; and Enrique
Gonzales, Carpenter. Id. at 2 (answers to
Interrogatory Nos. 4 and 5). Defendant attached payroll
documents to its summary judgment response that support a
total amount of remuneration paid to these three employees
between July 2012 and July 2013 of $61, 053.75. See
DE #29-4. While maintaining that payments made to independent
contractors do not form a proper basis for any additional
premium, Services Construction does admit that these payment
were made in exchange for carpentry services on residential
dwellings and that it neither has in its possession nor
provided Acuity copies of any documentation showing these
independent contractors were covered by other workers'
compensation insurance. DE #25-6 (Services Constructions
Responses to Requests for Admissions), at 2-4 (responses to
Request Nos. 2, 6, 7). Services Construction also disputes
the application and validity, but perhaps not the
interpretation or meaning, of the premium audit and
adjustment provisions, claiming that the company did not
agree to these terms within the contract and, alternatively,
that the terms are unconscionable.
filed the instant lawsuit alleging that Services Construction
breached the insurance contract by failing to pay the final
premium calculated following the audit. DE #1 (Complaint).
Acuity seeks unpaid sums totaling $117, 620.96. Id;
DE #25. ...