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LM Insurance Corp. v. Fed Equities

March 27, 2008

LM INSURANCE CORPORATION, PLAINTIFF,
v.
FED EQUITIES, INC., MERR, INC., AFFILIATED INSURANCE AGENCY, INC., AND ROBERT GRIMM, DEFENDANTS/THIRD-PARTY PLAINTIFFS,
v.
SOURCEONE GROUP, INC., THIRD-PARTY DEFENDANT/COUNTERCLAIMANT



The opinion of the court was delivered by: Judge Joan B. Gottschall

MEMORANDUM OPINION AND ORDER

Third party defendant SourceOne Group, Inc. ("SOG") has filed a counterclaim against defendants Fed Equities, Inc. ("Fed Equities"), Merr, Inc. ("Merr"), Affiliated Insurance Agency, Inc. ("AIA"), and Robert Grimm ("Grimm") (collectively "AIA/Merriman") alleging negligence. Presently before the court is the defendants' motion for summary judgment on SOG's counterclaim. For the reasons set forth below, defendants' motion for summary judgment with respect to defendants Merr and Grimm is denied, and defendants' motion for summary judgment with respect to defendants Fed Equities and AIA is granted.

I. BACKGROUND

Third party defendant SOG is a professional employer organization (a "PEO"). PEOs typically provide human resources-related services to their client companies; such services typically include benefits and payroll administration, as well as procuring insurance. Since PEOs may represent several different clients involved in a similar line of business, they may receive favorable group rates, a savings that they can then pass on to their clients. In late 2002, SOG was the PEO for several minor league sports franchises, including the Quad City Mallards (hockey), Rockford Ice Hogs (hockey), and Georgia Force (arena football). SOG, through its then-insurance broker, the DuPre Agency of California, had obtained a workers' compensation insurance policy, no. WC5-34535147-012 (the "012 policy"), with plaintiff Liberty Mutual Insurance Corp. ("LM"). All Illinois companies are required by statute to provide workers' compensation, and this requirement is typically satisfied via the acquisition of a workers' compensation insurance policy. See generally 820 ILCS § 305/1, et seq.

In or about January 2003, SOG decided to switch insurance brokers from the DuPre Agency to AIA/Merriman. Robert Grimm, AIA/Merriman's president, was informed that the 012 policy's "producer of record" (the broker acting as agent for the insured) could not be changed mid-policy. Grimm therefore attempted a "cancel and rewrite" of the policy, by which means the 012 policy would be cancelled and a new policy would be issued with broker AIA/Merriman as the producer of record. Documents canceling the 012 policy were prepared at the end of February 2003, and on March 13, 2003 an application for new coverage was submitted by AIA/Merriman to the National Council on Compensation Insurance's Assigned Risk Plan (the "Assigned Risk Plan").*fn1

Grimm believed that the re-issued policy would also be assigned to LM; however, the policy was assigned instead to the Travelers Indemnity Company (the "Travelers"), which issued a policy (the "Travelers policy") covering SOG's then-current client companies' workers' compensation claims.

At approximately the same time, SOG was entering into negotiations to provide workers' compensation insurance for Arena Football 2 Operating Co. LLC ("AF2"). AIA/Merriman allegedly attended a meeting with representatives of SOG in January 2003, specifically so that SOG could have an expert opinion as to what types of risks it might be exposed to with a client such as AF2. SOG intended that the policy covering AF2 would be endorsed onto the 012 policy that covered the other minor league teams that were then SOG's clients. On March 10, 2003, SOG entered into a Client Service Agreement (the "CSA") with AF2, agreeing, inter alia, to provide workers' compensation insurance for AF2. SOG intended to have AF2 endorsed onto the 012 policy, and Grimm, who believed that the re-issued policy would be assigned to LM, had issued a certificate of insurance showing coverage for AF2 with LM. However, when the policy was assigned to Travelers, Grimm re-issued a new certificate, stating that AF2 was instead covered by the Travelers policy.

The Travelers policy erroneously listed "Source One Group" as an insured and, presumably as a result, the 012 policy was not cancelled. Thus SOG had two workers' compensation policies in place: the prior 012 policy (in which all of the minor league teams, but not AF2, were insured) and the Travelers policy (which, in due course, included AF2 as an insured).

Eventually, the administrator of the Assigned Risk Plan became aware of the fact that both the 012 policy and the Travelers policy improperly covered the same workers' compensation risk. Consequently, on May 27, 2003, the administrator instructed Travelers to cancel the Travelers policy to allow LM to maintain its senior policy in effect, and to transfer any claims against Travelers to LM.*fn2 AF2, which was not listed as an insured under the 012 policy, was therefore without workers' compensation insurance coverage. SOG and LM consequently began negotiations by which AF2 could be endorsed onto the 012 policy as an insured.

Unlike other insurance policies, both the 012 policy and the Travelers policy list only an "estimated" premium along with the means by which the actual premium is to be calculated; it is the latter amount that the client is bound by the policy to pay. The actual premium is determined by a number of factors. Initially, an audit of the company's payroll assigns the amount paid to various classes (codes) of covered employees, as well as the specific premium assigned to each code depending upon its risk (e.g., a franchises' arena football players are more likely to be injured than its office workers). The rates are thus determined by applying the premium rate for a given code to the amount of payroll assigned to that code. For this reason, insurers frequently conduct an audit of an insured to determine the accuracy of the assignment of the payroll to the various covered codes.

The calculated premium rates are then subject to an "experience modification factor" (the "experience modifier") which is a multiplier assigned to the premium based on the payroll audit, and which adjusts the premium based on the likelihood of that particular class of employer submitting claims against the insurer and the amount of those claims. At his early meetings with SOG, Grimm calculated that the "experience modifier" for AF2 would be 1.0 if it were endorsed onto SOG's policy.

After the Traveler's policy was canceled, Neil Johnson ("Johnson") of LM told SOG that he would require payroll information and a calculated premium "up front" before he would endorse AF2 onto the 012 policy. Consequently, on July 22 and 29, 2003, a partial audit of AF2 was conducted and a payroll of $3.9 million was determined. Furthermore, according to Johnson, the experience modifier to be applied to the premium was not 1.0, but rather 2.41.*fn3 On July 25, 2003, an agreement was allegedly reached between Johnson and David Stone ("Stone") (legal counsel for SOG) which set forth a payroll based premium of $648,000 and an experience modifier of 2.41, for a total premium of $1,929,342.50.

Negotiations between LM and SOG (with the alleged intermediary assistance of AIA/Merriman) continued through July and August, 2003. These negotiations resulted in a letter proposing an agreement between SOG and LM. The letter, dated August 28, 2003 (the "August 28 letter"), was signed by Brian Bonar ("Bonar"), CEO of SOG, and purported to confirm an understanding between SOG and LM and to "supplement the terms and conditions of the policy and agreement reached between SOG and LM on or about July 25, 2003." The letter establishes a premium of $1,929,342.50 in exchange for the AF2 endorsement and sets out a payment schedule. Upon receipt of the August 28 letter, Johnson made some handwritten edits to his copy of the letter, changing and adding certain language and initialing each of his changes.*fn4 Johnson signed his amended letter and sent copies to both AF2 and SOG's claim management provider, and also left Bonar a voicemail, allegedly informing him of the changes and stating that he would sign a final version of the letter incorporating his changes.

On September 3, 2003, SOG wired a payment of $1.1 million to LM as per the payment schedule set forth in the August 28 letter. The following day, LM cancelled the 012 policy and issued a new policy, no. WC5-34S-351417-022 (the "022 policy"), which endorsed AF2 coverage along with the other minor league teams. LM characterized the 022 policy as a "rewrite" of the 012 policy, because its internal administrative system allegedly prohibited LM from endorsing AF2 onto the 012 policy. On September 4, 2003, LM began paying on AF2's workers' compensation claims. However, on September 28, 2003, LM informed SOG that it was canceling the 022 policy due to SOG's failure to cooperate with LM in conducting an audit of the payroll under the 022 policy.*fn5 LM allegedly wished to continue to attempt to obtain SOG's cooperation in conducting an audit. Nevertheless, on September 30, 2003 (the date the first payment from SOG was due), Bonar sent a letter to Johnson purporting to provide "formal notice to cancel the unauthorized endorsement of [AF2] to [SOG's] policy of workers' compensation coverage." LM subsequently filed suit against SOG, alleging, inter alia, breach of contract, specific performance, promissory estoppel, unjust enrichment, negligent misrepresentation, fraud and fraudulent inducement, and conversion and constructive trust. See Case No. 04-C-0618 (filed Jan. 27, 2004). LM also filed separately the instant suit against the defendants, alleging breach of contract, malpractice, negligent ...


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