Filed Rate Doctrine Controls
August 4, 2014
A group of plaintiffs, faced with an additional premium, asked the courts of New York state to change the way premiums are charged in the state as approved by the state insurance regulators. In W. Park Assoc., Inc. v. Everest Natl. Ins. Co., 2013-07724 (N.Y. 2013) the appellate court resolved the dispute.
In connection with a residential construction project, the affiliated plaintiffs purchased a commercial general liability insurance policy from Everest. The policy was underwritten by Everest Inter-Reco, Inc. (Inter-Reco) and was issued pursuant to a “program,” denominated the “Inter-Reco Program,” which provides commercial general liability insurance to contractors. The policy contained an endorsement titled “Independent Contractors,” by which the named insured agreed that independent contractors would have in force certificates of insurance from subcontractors, “providing evidence of like coverage” and containing “limits of liability…at least equal to the limits of [the] policy.”
The policy contained an exclusion from coverage providing that the policy did not apply to “'bodily injury,' property damage' or personal and advertising injury'” arising out of work performed by subcontractors when (1) there was no “prior written and signed contract,” requiring the subcontractor “to indemnify and hold harmless the Named Insured”; or (2) when the named insured's subcontractor “fails to have in force commercial general liability insurance including contractual liability coverage for the benefit of the… subcontractor… as well as the Named Insured for indemnification and/or contribution claims.”
The underwriter employed a classification system set forth in the Commercial Lines Manual prepared by the Insurance Services Office, Inc. (ISO). Everest asserted, and the plaintiffs did not dispute, that the Commercial Lines Manual was approved by the New York State Insurance Department. According to the plaintiffs, the rates applicable to the payroll premium base are higher than those applicable to the premium base that had originally been assigned to the work of the uninsured electrical subcontractor. Using the entire amount that the plaintiffs paid to the uninsured electrical subcontractor, including for both labor and materials, Inter-Reco determined that the plaintiffs owed an additional premium of $2,683.
The plaintiffs sought to recover damages against Everest for breach of contract, contending that Everest improperly charged an additional premium for a risk excluded from coverage (i.e., that relating to the work of the uninsured subcontractor), and, alternatively, assuming such a charge was proper, that Everest overcharged them by basing the premium on the amount that the plaintiffs had paid to the uninsured subcontractor for both labor and materials, instead of just labor.
Everest argued, among other things, that all of the plaintiffs' claims were barred by the filed rate doctrine. In support of that assertion, Everest submitted part of the papers they filed (the filing) with the Insurance Department in order to obtain approval of their proposed rates and rules for the Inter-Reco Program. The filing, which was approved by the Insurance Department, included the independent contractor endorsement and the exclusion.
The appellate court first concluded that the breach of contract and unjust enrichment causes of action should have been dismissed in their entirety because the plaintiffs refused to pay the additional premium. For the same reason, the trial court should have directed dismissal of the cause of action alleging that Inter-Reco was unjustly enriched in its entirety.
The filed rate doctrine bars actions against federal and state regulated entities that are grounded on the allegation that the rates charged by those entities are unreasonable. Simply stated, the doctrine holds that any filed rate is per se reasonable and unassailable in judicial proceedings brought by ratepayers. It is supported by two distinct policy strands: (1) The non-discrimination rationale recognizes that legislative bodies design agencies for the specific purpose of setting uniform rates in order to prevent price discrimination, and that allowing individual ratepayers to attack the filed rate would undermine that scheme of uniform rate regulation; and (2) The justiciability rationale based on the belief that regulatory agencies are deeply familiar with the workings of the regulated industry and utilize this special expertise in evaluating the reasonableness of rates.
In the present case, the issue is the manner in which the premium for the commercial general liability policy, under which the plaintiffs undisputedly had coverage, is calculated.
The plaintiffs were not charged a separate premium for having used uninsured subcontractors. They were charged one premium, and into that calculation was factored their use of uninsured subcontractors. The Insurance Department approved both the method of calculating premiums, including use of payroll as a base with respect to any uninsured subcontractors and the particular rate applied to the payroll base, as well as the use of the Exclusion. “Since the method of calculating the plaintiffs' premium for a policy which includes the Exclusion was approved by the Insurance Department, it is unassailable in a judicial action.”
The filed rate doctrine is applied strictly to prevent a plaintiff from bringing a cause of action even in the face of apparent inequities. If the court was to determine that it was improper for Everest to, effectively, enhance the plaintiffs' premium on the basis of its use of uninsured subcontractors, the plaintiffs would have won a reduced rate for their insurance policy, and nonparty insureds covered by identical policies, who also used uninsured subcontractors, would pay a higher rate. Such a discriminatory result cannot be squared with the filed rate doctrine's mandate of equal rates for equal service.
As to the justiciability strand, the Insurance Department approved both the exclusion for uninsured subcontractors and use of the ISO rating rules, which provide for a different calculation of premiums where uninsured subcontractors are used. The courts lack the expertise to determine whether that method for calculating premiums is unreasonable in light of the exclusion from coverage.
The plaintiffs asked the appellate court to determine that the premium they were charged is not reasonable in light of the coverage provided and to require Everest to recalculate their premium to, in the plaintiffs' view, more fairly comport with the coverage provided. Such a judicial determination of impropriety in the existing filed rates, which are at all times subject to the Superintendent's review, would offend the Legislature's determination to commit enforcement of the regulatory scheme to the Department of Insurance.
Editor's Note: The New York appellate court performed an unusual analysis by enforcing the rates filed. When insurers and state regulators agree that insurance can be sold for premiums that are appropriate to protect the interests of those insured and the insurer, the determination of the amount of insurance premium should not be subject to modification by a court with less knowledge and experience with regard to premium.
By: Barry Zalma, Contributing Editor