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Great Central Insurance Company v. Insurance Services Office

January 17, 1996

GREAT CENTRAL INSURANCE COMPANY,

PLAINTIFF-APPELLANT,

v.

INSURANCE SERVICES OFFICE, INCORPORATED,

DEFENDANT-APPELLEE.



Appeal from the United States District Court for the Central District of Illinois, Peoria Division.

No. 90 C 1330--Michael M. Mihm, Chief Judge. ARGUED NOVEMBER 29, 1995

Before POSNER, Chief Judge, and COFFEY and KANNE, Circuit Judges.

POSNER, Chief Judge.

DECIDED JANUARY 17, 1996

This is a very novel and interesting suit for breach of contract and for tort. A diversity suit governed by Illinois law, it was brought by an insurance company against the nation's largest insurance rating service. The district court granted summary judgment for the defendant, precipitating this appeal.

The plaintiff, Great Central Insurance Company, is, despite the first word in its name, a small insurance company (its total assets in 1987 were only $106 million, though it was and is the wholly owned subsidiary of a much larger company), specializing in writing liability insurance for supermarkets. Half its customers are supermarkets, a concentration that appears to be highly unusual. Hundreds of insurance companies write liability insurance for supermarkets but for the vast majority of these companies, indeed perhaps for all but Great Central, their supermarket business is minute. Indeed, despite its small size, Great Central appears to write more supermarket liability insurance than any other company.

The defendant, Insurance Services Office, is a nonprofit corporation the members of which are insurance companies. Great Central is not a member of ISO but is a customer. ISO sells a variety of services to the property and casualty (liability) insurance industry. Among these are actuarial and filing services. ISO gathers from the members of the industry and consolidates a vast amount of data concerning risks. For example, it collects data concerning slip and fall accidents in grocery stores and supermarkets. These data enable it to calculate insurance rates that will cover the risk of the various insured activities. The calculation of these rates is the actuarial function of ISO and the filing function is the filing of the rates with the state insurance commissions for their approval. Insurance companies are not required to charge the filed rates. Unlike the rates promulgated by the old insurance rate bureaus, ISO's rates are strictly advisory. Insurance companies can file their own rates, also subject of course to commission approval. But thanks to the antitrust exemption created by section 2(b) of the McCarran-Ferguson Act, 15 U.S.C. sec. 1012(b), ISO is permitted to suggest what rates the members of the insurance industry should charge even though they are competitors, and the insurance companies are permitted to charge the filed rates.

If an insurance company, whatever its size, writes so little of a particular type of insurance that its claims experience is too meager for it to be able to calculate a rate reasonably likely to cover future claims, it is more or less compelled to charge ISO's filed rates; at least we may assume so for purposes of this appeal. The inability of many insurers to compute compensatory rates without an industry-wide pooling of loss experience is the rationale of the antitrust exemption. Great Central may be unique in writing so much supermarket insurance that it can calculate a compensatory rate on the basis of its own loss experience.

All this is by way of background to the events out of which this suit arises. In the early 1980s ISO embarked on an ambitious program of simplifying the rate structure of its Comprehensive General Liability policy, the standard commercial liability insurance policy issued by many hundreds of insurance companies to many thousands of businesses. As part of the simplification ISO combined what had been two separate rate classifications, one for grocery stores and one for supermarkets, into a single classification. The old rate structure had defined a supermarket as a grocery store with annual sales of at least $500,000 and a floor area of at least 3,000 square feet; all other grocery stores were classified in the grocery store classification. Within each of the two classes, the rates varied by floor area as well as, of course, by coverage (and also by state, but that is not relevant to the appeal). A grocery store having a floor area of 2,000 square feet would pay a higher rate, for the same limits of coverage, than a 1,000 square foot grocery store, while a 5,000 square foot supermarket would pay a higher rate than a 4,000 square foot supermarket. More important, the rate per square foot differed for the two types of store; in some states, the rate for supermarkets was five times greater than the rate for grocery stores.

When it combined the grocery-store and supermarket base rates, ISO did what at first glance seems very strange: rather than averaging the rates, it used the old grocery store rate per square foot as the basis for calculating rates for the new, combined class. This is not quite so crazy as it sounds, because at the same time that the classes were being combined the method of calculating the rate was being changed. Instead of varying the rate within each class (now within a single class) on the basis of area, the new rate system varied it by volume of sales. Apparently the reason for the change was that the number of slip and fall accidents, and hence the number of claims, are proportional to the amount of "foot traffic" in a store, which in turn, ISO determined, was more closely correlated with sales than with area. In principle at least, the new rate system could have generated higher liability insurance rates for some supermarkets.

The rates were duly filed with the various state commissions and by the middle of 1986 were in effect. Shortly afterward Great Central realized that the new method of calculating the rates for supermarket liability insurance would yield much lower rates than under the old system. It protested to ISO, which quickly agreed that the rates were indeed "too low." We use quotation marks to flag a significant ambiguity in the concept of "too low" rates. ISO has never conceded, and there is no evidence, that the new rates were inadequate to cover the reasonably predictable risks of claims by supermarkets, together with the other expenses of the insurer. (An insurance rate is composed of the "loss premium," compensating the insurer for the risk of having to indemnify the insured, and the "loading expense," covering the insurer's administrative costs. Since 1989, ISO has computed only loss premiums. The change has no bearing on the issues in this case.) Despite our earlier point that Great Central is probably the only insurer with enough claims experience to realize that a supermarket rate promulgated by ISO might be too low to cover likely future claims, there is no evidence that Great Central believed that the new rates were inadequate in that sense. So far as appears, it squawked only because it saw a threat to its revenues, and thus to its profits, that is, to the difference between revenues and costs, and those revenues, the revenues generated by the previous supermarket rate, may have been well above any reasonable expectation of future claims. Its brief describes the new rates as having had a "catastrophic impact on its profits" (emphasis added). We add that even "inadequate" rates in the sense that we have defined them may not really be inadequate, since an insurance company's revenues include not only the premiums it charges but also the investment income on those premiums before they are expended to cover claims against insureds.

However all this may be, all that ISO has ever conceded was that the new rates would in fact be much lower than the old, and as this had not been intended, and as ISO is a service organization for insurance companies, it was unlikely to resist Great Central's plea and did not. It readily conceded then, and it concedes now, that the new rates were a "mistake," though not that they were "inadequate" in the sense just explained.

According to Great Central, ISO, while acknowledging its mistake, dragged its heels in correcting it by rescinding the new rates. Not until 1994 were they withdrawn from every state in which they had been filed. ISO denies that it dragged its heels. It points out, plausibly enough, that withdrawing a filed rate is easier said than done. State insurance regulators, charged as they are by law with protecting consumer interests, may look askance at a request to withdraw a recently filed rate because the rate is too low and to substitute a much higher rate. ISO wanted to wait until it could sweeten a request to withdraw the low rates with the submission of a low rate for some other type of insurance, and this waiting game, played out over 50 states, was bound to take years. (Great Central calls this waiting game that we've described a "fraud." It is not.) Only one company besides Great Central complained about the new rates. The matter could not have seemed an emergency requiring ISO to circumvent its normal procedures. For purposes of this appeal, however, we assume both that the acknowledged original mistake in combining the grocery store and supermarket rate classifications in the way that ISO did and the slow pace at which ISO corrected the mistake were negligent.

Great Central was not deceived by the new low rates that went into effect in 1986. But, it claims, many of its competitors were. Having too little experience with supermarket liability insurance to know what a proper rate for such insurance was, they, like so many sheep, docilely charged the rates filed by ISO. Great Central claims, surprisingly in view of the McCarran-Ferguson exemption, to have been inhibited by fear of antitrust liability from notifying its competitors of their mistake. See Hartford Fire Ins. Co. v. California, 113 S. Ct. 2891 (1993), esp. p. 2901. But McCarran-Ferguson is an exemption only from federal antitrust law; ...


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