280_C036

CARRIER CAN CHANGE CLASSIFICATION CODE AND CHARGE INCREASED PREMIUM RETROSPECTIVELY

Workers Compensation	National Council on Compensation Insurance (NCCI)
Proper Classification Code	NCCI Basic Manual

International Nutrition, Inc. (International) produced and sold nutritional and medicated supplements to the poultry and livestock industry. It received bulk raw materials such as rice and limestone and stored them in large holding storage areas. It then mixed supplemental products such as medications and vitamins into the bulk raw material. It packaged the finished mixed product into 25- and 50-pound bags. It sold the finished product to egg operations, poultry farms, feed manufacturers, animal food manufacturers, and feedlots. The United States Food and Drug Administration regulated its administrative procedures and manufacturing practices.

International described its operations as “primarily one of mixing and packaging.” It was not able to obtain Workers Compensation coverage in the voluntary market and applied to the Nebraska Assigned Risk Program. Its application included payroll for class code 4611–Drug, Medicine, or Pharmaceutical Preparation, Compounding, or Blending–No Mfg. of Ingredients. On March 16, 2001, Travelers Indemnity Company (Travelers) agreed to write the coverage and sent International a binder letter and a six-page manual that Travelers prepared. Among other things, it contained a section titled “Premium Audits” that stated in part that Travelers had the right to conduct a preliminary audit within 90 days of assuming coverage if it chose to.

Travelers sent International’s insurance agent a letter on March 22, 2001, requesting a detailed description of International’s business to verify the classification codes on International’s application. International sent Travelers a written description of its business on April 4, 2001. Travelers issued the policy based on International’s application for an estimated annual premium of $27,806. Travelers conducted a Loss Control Survey on May 22, 2001. The surveyor provided a detailed description of International’s operations that contained additional details about it. Although the report did not contradict International’s description, Travelers decided to change the class code to 2014–Grain or Feed Milling. This code applies to grist mill operations where grains are milled. It also applied to manufacture of feed or feed additives for poultry and livestock.

Travelers informed the insurance agent of the change, conducted a preliminary audit to verify it, and subsequently endorsed the policy, charging an additional premium of $65,285 to reflect the change. The audit also revealed that the payroll should have been approximately $808,000 instead of the $549,000 used to issue the policy. This change resulted in an additional premium charge of almost $50,000. International disputed these changes, despite Travelers and the National Council on Compensation Insurance (NCCI) verifying that they were correct. Travelers cancelled the policy for non-payment of premium on March 9, 2002 and its final audit determined a total premium of $113,571. International paid $33,367 and offered a final payment of $26,110 which Travelers refused.

Travelers sued International for breach of contract and sought total payment of $83,472, the unpaid premium balance. International filed a counterclaim, seeking a declaratory judgment that it did not have a legal or equitable obligation to pay any and additional premiums, that Travelers breached the policy by retroactively changing the classification code and increasing the premiums, and that Travelers engaged in unfair and deceptive acts, violating the Consumer Protection Act. Both parties filed cross motions for summary judgment.

The district court granted Travelers’ motion for summary judgment, awarded it the $83,472 it demanded, and denied International’s motion. It concluded that Travelers’ conduct was not a breach of the policy because its’ clear and unambiguous language allowed Travelers to audit International, change the classification code, and retroactively charge the higher premium. It also determined that the new classification was correct and that Travelers did not engage in unfair or deceptive acts or conduct. International appealed.

The Supreme Court of Nebraska addressed each of International’s arguments and refuted every one of them. Based on the policy’s plain and unambiguous language and application of the NCCI Basic Manual, the court concluded that Travelers had the authority to change the classification code and retroactively charge the additional premium based on the correct rate. It determined that Travelers did not breach the policy or waive its right to change the classification code simply based on its decision to not perform a preliminary audit within the first 90 days of coverage. It ruled that the district court did not err in any part of its decision and completely affirmed its judgment.

Supreme Court of Nebraska. The Travelers Indemnity Company, appellee, v. International Nutrition, Inc. appellant. No. S-06-063. July 13, 2007. 273 Neb. 943, 734 N.W.2d 719