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November 19, 2004.


The opinion of the court was delivered by: REBECCA PALLMEYER, District Judge


Plaintiff United States Fire Protection Illinois, Inc. ("USFP") purchased a variety of comprehensive business insurance policies from Defendant St. Paul Fire and Marine Insurance Company ("St. Paul"). USFP alleges that St. Paul breached its contractual obligations under certain workers' compensation and general liability policies, as well as the implied duties of good faith and reasonable care, by mishandling 16 workers' compensation claims filed by USFP employees in policy years October 27, 1990 through October 27, 1994. USFP claims that as a result of these breaches, St. Paul overstated USFP's premiums by more than $800,000. St. Paul denies any wrongdoing and alleges in a counterclaim that USFP still owes $117,153 in unpaid premiums. St. Paul now seeks summary judgment on both the complaint and the counterclaim. For the reasons set forth here, the motion is denied.


  USFP is an Illinois corporation with its principal place of business in Lake Forest, Illinois. USFP provides full service industrial, commercial, and residential fire sprinkler systems. (St. Paul 56.1 ¶ 1; Cmplt. ¶ 1;*fn1 St. Paul is a Minnesota corporation with its principal place of business in St. Paul, Minnesota. It is licensed and authorized to sell insurance in Illinois and other states. (St. Paul 56.1 ¶ 2; Cmplt. ¶ 2.)

  A. The Loss Sensitive Policies

  Beginning in 1990, USFP purchased certain comprehensive business insurance policies from St. Paul, including "Workers Compensation and Employers Liability Insurance" and "Commercial General Liability" covering the years October 27, 1990 through October 27, 1994 (collectively, the "Loss Sensitive Policies").*fn2 (USFP 56.1 ¶ 1; Cmplt. ¶ 4.) All of the Loss Sensitive Policies were subject to St. Paul's Retrospective Rating and/or Deductible Endorsement, which St. Paul used to determine the amount of premium USFP owed each year. That Endorsement gave St. Paul the right to recalculate and collect premiums for each one-year policy after it had expired, based on losses incurred in that year. St. Paul calculated premiums using retrospective and deductible formulas that were based on USFP's Standard Premium rate. One of the elements used to develop the Standard Premium was "Ratable Incurred Loss" or "Incurred Losses." Ratable Incurred Loss "can equal amounts that have been paid [out on claims] plus reserves set aside for possible future payments." It may also include "allocated loss adjustment expenses"*fn3 and expenses incurred by St. Paul in seeking recovery of paid losses from third parties. (Cmplt. ¶¶ 5-7; St. Paul 56.1 ¶ 16; USFP 56.1 ¶ 4.)

  In calculating the annual premiums charged on the Loss Sensitive Policies, St. Paul included certain percentages or factors that it used as multipliers against the Standard Premium. Depending on the type of policy, St. Paul used such multipliers as a "Basic Premium Factor," a "Loss Conversion Factor," a "Tax Multiplier," and a "Deductible Factor."*fn4 (Cmplt. ¶ 9.) St. Paul determined its claim handling fee by applying a Loss Conversion Factor to the Ratable Incurred Loss. As the Ratable Incurred Loss increased, St. Paul's fee for handling claims also increased. (Id. ¶ 10.)

  St. Paul developed the Standard Premium for the Loss Sensitive Policies based on every hundred dollars of payroll multiplied by the "employee classification rate,"*fn5 multiplied by the "experience modification factor" for USFP. (Cmplt. ¶ 12.) USFP's experience modification factor, which compares actual and expected losses, is developed by the National Council of Compensation Insurance based on USFP's loss history. When actual losses exceed expected losses, the experience modification factor increases and causes the Standard Premium to increase as well. (Id. ¶ 13.) USFP's Ratable Incurred Loss in a given policy year is reflected in the experience modification factor applied in the next three years. In other words, "the experience modification factor impacted the development of the Standard Premium of USFP in the second, third and fourth years subsequent to the policy-year the losses occurred." (Id. ¶ 14.) The greater the amount of money St. Paul paid, or estimated that it paid for losses and expenses associated with claims under the Loss Sensitive Policies, the higher the "Experience Modifiers" became, and the more St. Paul could charge USFP in annual premiums. (Id. ¶¶ 16, 17; St. Paul 56.1 ¶ 7; USFP 56.1 Resp. ¶ 7.)*fn6

  B. Procedures for Handling Claims

  St. Paul's Claim Division Procedure Manual "details the procedures by which claims are to be handled by various Company claim offices." (Claim Division Procedure Manual, Ex. 17 to USFP 56.1, at 25.) For "lost time" claims resulting from employees missing work due to injury, St. Paul claims adjusters are expected to obtain a variety of medical reports, including (1) the initial medical report; (2) a medical report summarizing each office visit; (3) change of condition medical reports; (4) admitting and discharge hospital reports; (5) operative reports; (6) emergency room reports; (7) PPD (permanent partial disability) rating reports; and (8) final medical reports. (Id. at 376.) The Manual's "guidelines for thorough investigatory procedures" state that claims adjusters should obtain statements from the insured, the claimant, and appropriate witnesses "wherever good judgment indicates the need to secure and preserve facts." (Id. at 440.) The types of injuries requiring the adjuster to engage in "statement activity" include: (1) occupational disease; (2) cumulative trauma; (3) heart attack or stroke; (4) emotional distress; (5) back injuries where the claimant is off work two weeks or longer, or has a previous history of back injury; (6) questions of compensability, including those claims occurring away from premises controlled by the insured or late reporting by claimant to insured; (7) subrogation; and (8) possible involvement of the "Second Injury Fund."*fn7 (Id. at 441.) The Manual provides that claims adjusters should obtain independent medical examinations if: (1) consultation is required; (2) the treating physician is not furnishing substantive reports; or (3) final disability rating by a specialist is desired. (Id. at 447.) In addition, claims adjusters "usually . . . might want to visit the loss site if there is some type of possible subrogation involved in the claim." (Keil Dep., Ex. 18 to USFP 56.1, at 61-62.) As St. Paul characterizes it, the Manual merely sets forth "guidelines" for handling claims and requires a "reasonable, common sense approach to the problems faced by [St. Paul's] insureds." (St. Paul 56.1 Resp. ¶¶ 30-35.)

  C. The Dispute Over Premiums

  USFP contends that St. Paul claims adjusters failed to follow proper procedures for handling 16 workers' compensation claims. Before discussing USFP's challenges to each specific claim file, the court will review the procedural history of the parties' dispute. USFP first began questioning St. Paul's handling of certain workers' compensation claims in 1997. On July 8, 1997, David L. Jennings of The Rockwood Company*fn8 sent a letter to USFP President Gregg Huennekens enclosing a "tentative retrospective adjustment" from St. Paul seeking payment by USFP of an additional $59,132 in retrospective premiums for the 1992-93 and 1993-94 policy years. (Letter from D. Jennings to G. Huennekens of 7/8/97, Ex. 11 to WRAMSCO Audit Report, Ex. F to St. Paul 56.1.) On August 25, 1997, Jennings sent a letter to Joe Zydlo, a Chartered Property Casualty Underwriter for St. Paul, requesting a meeting between Huennekens and "a St. Paul representative" to discuss the workers' compensation claims that had generated the additional $59,132 premium obligation.*fn9 (Letter from D. Jennings to J. Zydlo of 8/2/97, Ex. 5 to USFP 56.1; St. Paul 56.1 ¶ 9.) There is no indication in the record that anyone responded to Jennings's letter.

  On December 19, 1997, St. Paul issued a final invoice to USFP for the $59,132. (USFP 56.1 ¶ 6.) USFP refused to pay the invoice. Instead, early in January 1998, Huennekens called Zydlo directly to request additional information regarding the underlying workers' compensation claims. Zydlo did not respond immediately and on January 13, 1998, Huennekens hired WRAMSCO*fn10 to conduct an audit of the St. Paul claim files. (Id. ¶¶ 12-14; Audit Contract, Ex. 7 to USFP 56.1; Amended Counterclaim ¶ 15.) Huennekens called Zydlo to notify him of that decision. This time, Zydlo responded by letter dated January 26, 1998, stating that he had advised Jennings "a few months ago" to contact St. Paul's Claim Service Coordinator, Song Kim, to discuss the claims but that no one from The Rockwood Company or USFP had done so.*fn11 Zydlo reiterated that Huennekens could contact Mr. Kim to discuss the claims or to schedule a claim audit. (Letter from J. Zydlo to G. Huennekens of 1/26/98, Ex. 6 to USFP 56.1.)

  WRAMSCO did conduct an initial audit of nine of the claim files at issue in this case in early 1998 and reported its findings to Huennekens on July 24, 1998.*fn12 (USFP 56.1 ¶¶ 15, 17; Letter from R. Wills to G. Huennekens of 8/7/98, Ex. 10 to USFP 56.1.) There does not appear to be any written summary of those initial findings, but in an August 7, 1998 letter to Huennekens, Raymond W. Wills, Assistant Vice President of WRAMSCO, stated that in WRAMSCO's opinion, USFP did not owe any further premium to St. Paul on the nine claim files and was, in fact, entitled to a refund. (Letter from R. Wills to G. Huennekens of 8/7/98, Ex. 10 to USFP 56.1.)

  On November 12, 1998, Zydlo and Kim met with a representative from WRAMSCO (presumably Wills) to discuss the results of WRAMSCO's audit. (USFP 56.1 ¶ 18; Letter from R. Wills to S. Kim of 6/17/99, Ex. 8 to USFP 56.1.) Kim apparently advised that St. Paul would review the issues and concerns raised by USFP and get back to WRAMSCO with a response. (Ex. 8 to USFP 56.1.) A few days later on November 17, 1998, St. Paul issued an invoice to USFP for $81,915 in additional premiums owed under the 1992-93 and 1993-94 Loss Sensitive Policies ($59,132 for the 1997 retrospective adjustment plus $22,783 for the 1998 retrospective adjustment); USFP again refused to pay the bill. (USFP 56.1 ¶ 7; Amended Counterclaim ¶¶ 16, 17; Answer to Amended Counterclaim ¶ 16.) Several months passed without any apparent contact from Kim regarding the concerns raised at the November 12, 1998 meeting. Wills sent Kim a letter on June 17, 1999 and again on July 12, 1999 seeking St. Paul's position, but it does not appear that Kim or anyone else at St. Paul responded to that correspondence. (Exs. 8 and 12 to USFP 56.1.)

  Almost one year later, on July 20, 2000, Wills met with certain unspecified representatives of St. Paul to again discuss the initial audit findings. (Letter from R. Wills to G. Huennekens of 7/20/00, Ex. 13 to USFP 56.1.) Neither party has provided details regarding that meeting, but the participants apparently discussed settlement and possible arbitration. (Id.) Also in 2000, St. Paul charged USFP an additional $6,722 in retrospective premiums for that year.*fn13 (USFP 56.1 ¶ 8.)

  The record does not describe the parties' interactions between July 20, 2000 and May 2001. On May 13, 2001, St. Paul issued USFP an invoice for $28,516 in additional premiums under the "10/27/90 to 10/27/94" policy years. (USFP 56.1 ¶ 9; Letter from D. Page to G. Huennekens of 5/13/01, Ex. 3 to USFP 56.1.) On August 16, 2001, WRAMSCO audited six additional claim files at issue in this case.*fn14 (USFP 56.1 ¶ 21; Email from R. Wills to D. Finney of 8/9/01, Ex. 14 to USFP 56.1.)

  D. The Disputed Claim Files

  With this background in mind, the court turns to USFP's specific objections to St. Paul's handling of the 16 disputed workers' compensation files. In each case, USFP argues, St. Paul valued the claim at more than it was actually worth. In making its objections, USFP relies primarily on the Audit Report and Audit Notes of Raymond Wills. Wills has worked in the insurance industry for more than 25 years and, as Vice President of WRAMSCO, is involved in risk management, risk retention, risk transfer, and risk finance programs, including claim investigation and management, insurance program and claim audits, underwriting and premium development, and experience modification factor investigation and development. (USFP 56.1 ¶¶ 95, 96.)

  St. Paul generally denies that its adjusters mishandled claims and objects to USFP's exclusive reliance on the opinions of Wills. St. Paul, not USFP, has moved for summary judgment; St. Paul nevertheless charges USFP with "attempting to use the Local Rules to require St. Paul to defeat a motion for summary judgment by dumping their expert's opinions into a Rule 56.1(b)(3)(B) Statement of Undisputed Facts." (St. Paul 56.1 Resp. ¶ 48.) St. Paul notes that USFP's President Huennekens testified that he "almost always" attended claims meetings, asked questions at those meetings, and does not recall being dissatisfied with St. Paul during those meetings. (St. Paul 56.1 ¶¶ 9, 11.)

  The parties' positions regarding the disputed claim files are set forth below. 1. Claimant No. 1

  Claimant No. 1 injured his shoulder on December 5, 1990 and ultimately underwent surgery. (St. Paul 56.1 ¶ 37; Ex. 12 to WRAMSCO Audit Notes, Ex. H to St. Paul 56.1, at 2.) St. Paul calculated his average weekly wage for purposes of computing workers' compensation as $880, but Wills says the average weekly wage should have been $842.35.*fn15 (USFP 56.1 ¶ 48; Ex. 12 to WRAMSCO Audit Notes, at 4.) Wills notes that Claimant No. 1 had a lawsuit pending in Indiana but that St. Paul did not investigate it. Wills does not know the basis for the lawsuit but questions whether it may have involved the same injuries at issue in the workers' compensation claim. (Ex. 12 to WRAMSCO Audit Notes, at 4.) Wills also points out that, as reflected in a handwritten note from USFP Superintendent Robert Martens dated December 6, 1990, the day after Claimant No. 1's injury, Martens called Claimant No. 1 at home to tell him where to report for work the next day and Claimant No. 1 did not mention any problems with his arm at that time. (USFP 56.1 ¶ 51; Ex. 12 to WRAMSCO Audit Notes, at 1-2.)

  St. Paul settled the claim on or about August 5, 1992.*fn16 (St. Paul 56.1 ¶ 37.) By Wills's calculations, Claimant No. 1 received approximately 96% of the value of his arm even though the highest total percentage listed for arm injuries on St. Paul's 1997 Workers' Compensation Reserve Guide for Workers' Compensation Claims is 25% permanent partial disability of the arm. (USFP 56.1 ¶ 50; Workers' Compensation Reserve Guide, Ex. 28 to USFP 56.1, at SPC011089.) St. Paul claims that Wills did not take into consideration the "claim as a whole" or "the view of the claim in terms of a percentage of the `man as a whole.'" (St. Paul 56.1 Resp. ¶ 50.) According to St. Paul, "[t]he Guidelines attached as Exhibit 28 to U.S. Fire's Motion themselves recognize factors of increased exposure." (Id.)

  2. Claimant No. 2

  Claimant No. 2 injured his left buttock and back when he fell off a ladder on December 5, 1990 while working at a job site in Elgin, Illinois. (St. Paul 56.1 ¶ 32; Ex. 7 to WRAMSCO Audit Notes, at 1, Workers Compensation & Structural Work Act Investigations dated 12/29/90, at 3 (SPC008347).) St. Paul's claims adjuster did not believe USFP had a subrogation claim against the ladder manufacturer and stated that a subrogation claim against the general contractor, W.E. O'Neil Construction Company, "might be very difficult because according to the contract we have obtained, the general contractor has been made an additional insured under your [USFP's] policy." (Ex. 7 to WRAMSCO Audit Notes, at 4, quoting Workers Compensation & Structural Work Act Investigations dated 12/29/90, at 8 (SPC008342).) St. Paul did not pursue any third-party recovery and settled the claim on August 26, 1991. (USFP 56.1 ¶ 52; St. Paul 56.1 ¶ 32.) USFP suggests that this was improper but does not explain why. Wills acknowledges that the contract with the general contractor "reflect[ed] that it did require a waiver of subrogation to the benefit of" the general contractor. He notes, however, that the file "did not contain a copy of the general liability policy in the event a common law action was filed by the claimant against the general contractor and the general contractor in turn filed a third party complaint seeking contribution from the employer." (Ex. 7 to WRAMSCO Audit Notes, at 4.)

  In addition to these issues, it is Wills's opinion that "[c]ase management duties resembled claim adjuster duties that were charged as medical in the amount of $4,215." (Ex. 7 to WRAMSCO Audit Notes, at 4-5.) 3. Claimant No. 3

  Claimant No. 3 injured his wrist and shoulder on April 16, 1993. He continued regular employment until June 22, 1993 when he stopped working due to the injury. (St. Paul 56.1 ¶ 36; Ex. 11 to WRAMSCO Audit Notes, at 1-2.) According to Wills, St. Paul's investigation did not include any inquiry into the job Claimant No. 3 was performing on April 16, 1993; whether he had complained of injuries between April 16 and June 22, 1993; whether he had exhibited any disability between those dates; what he claimed as an injury between those dates; or whether USFP had accommodated his job duties between those dates. (Ex. 11 to WRAMSCO Audit Notes, at 5.) In addition, USFP notes that an internal fax between St. Paul investigators concerning the merits of a different claim contrasted that other claim, which "sound[ed] legitimate," with this one, which the investigators called an "obvious B.S. claim?." (Fax from J. White to N. Houlihan of 10/27/94, Ex. 29 to USFP 56.1; USFP 56.1 ¶ 57.) St. Paul calculated Claimant No. 1's average weekly wage as $998.80; Wills calculated the average weekly wage as $934.59. (USFP 56.1 ¶ 56.) St. Paul settled the case on or about January 4, 1995. (St. Paul 56.1 ¶ 36.)

  4. Claimant No. 4

  Claimant No. 4 fell off a ladder and injured his knee on June 28, 1994. (Ex. 8 to WRAMSCO Audit Notes, at 1.) He did not report the injury, however, until November 14, 1994. (Id.; USFP 56.1 ¶ 58.) According to Wills, St. Paul did not obtain any statements from Claimant No. 4, his supervisor, or any witnesses. (USFP 56.1 ¶ 59.) St. Paul insists that such statements are reflected in the claimant's First Report of Injury and the medical history as recorded by Claimant No. 4's doctors. (St. Paul 56.1 Resp. ¶ 59.) The case settled when Claimant No. 4 ...

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