APPEAL from the Circuit Court of Macon County; the Hon. JOHN
L. DAVIS, Judge, presiding.
MR. JUSTICE MILLS DELIVERED THE OPINION OF THE COURT:
Rehearing denied June 7, 1978.
We deal here with a suit to recover on an insurance contract that was tried to the bench.
Unfortunately, a vastly detailed narrative of the facts is necessary to fathom this appeal.
It began in December or January, 1972-73, when Ivan Perry and John Birch formed the defendant corporation, Decatur Steel Erectors, Inc. The two incorporators consulted with James Smith, one of the partners of the Roby Insurance Agency, concerning both workmen's compensation insurance and comprehensive liability coverage for their new business. Smith said that he could not write the desired coverage but that he could place the insurance through Ben Ritter of the Davis Insurance Agency, Inc. This eventually was the course of action taken and an application form, bearing Ritter's signature, was duly submitted to the Aetna Insurance Company. The application form designated the kind of operations to be "iron or steel erection in the construction of dwellings not exceeding two stories in height" and stated that the premium code basis was Number 5069. The subsequent policy that was issued to Decatur Steel Erectors, Inc., by Aetna carried this same descriptive language and code number.
(It would be politic to pause here to explain the practice within the insurance industry for the fixing of premium rates for workmen's comp and liability coverage in the hazardous business of construction. The insurance industry compiles and maintains a "manual" that sets forth a schedule of classifications for various types of industrial construction and work, including the general area of "steel erection." That category is then broken down into different kinds of steel erection work (two-story dwellings, multistory dwellings, commercial or business categories, tanks, etc.) and each of the various types of subcategories carry a different classification code. The premium to be charged for workmen's comp and comprehensive liability is computed through the use of a formula and one element of this formula is a rate (of so much per $100 of coverage) which is established by the industry and followed as a standard rate for the particular type of operations being insured. The type of operations, of course, by reference to the manual, gives the code number which in turn establishes the rate. This rate, then, is multiplied by the estimated annual payroll, resulting in an estimated premium. However, since the payroll is a variable factor, an inspection and audit of the insured's books are required and adjustments are then made thereafter, resulting in either an additional premium or a possible refund. Therefore, once we have found the rate from checking the manual using the description of the steel erection work to be covered, we have the formula: RATE X ESTIMATED PAYROLL = ESTIMATED PREMIUM AUDIT = ACTUAL PREMIUM.
Both of the incorporators of Decatur Steel were aware that the amount of estimated payroll submitted determined the amount of the initial deposit premium and they asked that the amount of estimated payroll stated on the application ($80,000) be reduced (to $36,000) so that they would not have to advance such a large first year premium for their new business. They authorized such reduction, which was duly made and which sliced their deposit premium in half. (As a matter of fact, the annual payroll subsequently turned out to be just about $80,000.) The policies were duly issued in accordance with this change of estimated payroll, showed the classification rate as 7.36 and were delivered by the Roby Insurance Agency to Decatur Steel Erectors.
Along in December 1973, Ritter (Davis Insurance) inquired if the insurance would be renewed for a second policy year, and he was advised by Smith (Roby Insurance) that Decatur Steel desired continued coverage. Policies for the second year, commencing January 10, 1974, were then issued by Aetna and delivered to Decatur Steel. The nature of the work, the code number and the required payroll estimate all stayed the same in the reissued policy, and the rate was fixed at 8.27 for the workmen's comp coverage.
Sometime after the policies were reissued effective January 10, 1974, Perry severed his relationship with Decatur Steel. And in February, Aetna sent its auditor, Dale Burger, to audit the books of Decatur Steel pursuant to the policy. The result of the audit showed that Decatur Steel owed Aetna an earned premium due of over $11,000, the difference being a change in two factors: not only did the audit reflect that the actual payroll was around $80,000 instead of the estimate of $36,000, but Aetna asserted that a different steel erection code with a 14.80 rate should have been used instead of the 7.36 rate as charged. After learning of this result, Ritter (Davis Insurance) negotiated with Aetna and obtained a compromise. Aetna agreed to reduce the amount of the workmen's comp premium for $11,000 to $5,946, by keeping the old 7.36 code rate instead of the 14.80 rate. Following this concession obtained by Ritter (Davis Insurance), a letter was written to Decatur Steel by Smith (Roby Insurance) dated July 2, 1974, explaining the change in the code. Two weeks later, Smith (Roby Insurance) contacted Birch (Decatur Steel), explained the audit result, and Mrs. Birch then wrote a check for $5,731 and delivered it to Smith. However, Birch afterwards thought better of it and stopped payment.
In another couple of weeks, Ritter (Davis Ins.) and Smith (Roby Ins.) consulted again with Birch (Decatur Steel) who then paid them $2,508, being the amount that the audit showed was due on the liability policy at the corrected code rate (with credit for a $715 cash deposit). As to the workmen's compensation, however, there was discussion about whether or not some of the payroll classified by Aetna should have been supervisory and consequently subject to a lower rate.
The policy was cancelled on October 10, 1974, and this action was commenced in March of 1975. Defendant counterclaimed against Smith for fraudulent, wilful and intentional misrepresentation, and has filed a cross-appeal.
Capacious and comprehensive evidence (455 pages of testimony and 220 exhibits) went before the trial judge sitting at bench. Two auditors for Aetna testified in detail as to how the second year policy audit was made and how the figures were arrived at. In summary, their testimony reflected that the earned premium for workmen's comp (January 10 October 10, 1974) was $6,532, and subtracting the deposit premium of $3,027, a final balance of $3,505 was due. As to the liability coverage, there was an earned premium of $1,305, a deposit credit of $752, leaving an owed balance of $563. According to their testimony, Decatur Steel owed Aetna for the second year coverage of both workmen's comp and liability a bottom line figure of $4,068.
(It should be noted at this juncture that Birch and Perry (Decatur Steel) signed a note on February 25, 1974, in the amount of $3,399.55 assigned (with recourse) by Ritter to the Millikin National Bank. Decatur Steel stopped making payments on the note ...