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Acuity v. Services Construction, LLC

United States District Court, E.D. Kentucky, Central Division, Lexington

June 12, 2017



          Robert E. Wier United States Magistrate Judge

         Plaintiff 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.

         I. Relevant Factual and Procedural Background

         Services 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.

         Per the 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 obligations.

DE# 25-2, at 10-11.

         At 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:

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).

         The 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 Premium, is:

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 period.

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.

         Services 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.[1] 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.

         Acuity 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).

         Services 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.

         Acuity 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. ...

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