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Arch Insurance Co. v. R.A. Bright Construction

May 28, 2009

ARCH INSURANCE COMPANY, PLAINTIFF,
v.
R.A. BRIGHT CONSTRUCTION, INC., DEFENDANT.
R.A. BRIGHT CONSTRUCTION, INC., PLAINTIFF,
v.
ARCH INSURANCE COMPANY, DEFENDANT.



The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

Between 2003 and 2005, Arch Insurance Company and R.A. Bright Construction Company, Inc. entered into three year-long, loss-sensitive "Workers Compensation and Employers Liability Insurance" policies (the "Policies"), under which Arch agreed to provide insurance coverage for workers' compensation and employers' liability claims against Bright. In connection with the Policies, Arch and Bright executed a series of separate "Incurred Loss Sensitive Program Agreements" (the "ILSPAs") intended to "describe certain parts of the Program that the Insured and Arch have entered into and set forth certain of the duties and obligations of each party with respect to the Program." (ILSPAs, Exs. A, B, C to Arch Memorandum of Law [Dkt. 41]). By their terms, the ILSPAs superseded any other loss sensitive endorsements to the original Policies. In addition, each ILSPA contained a choice of law provision stating that the "Agreement" would be governed by and interpreted in accordance with New York law.

In September 2007, Arch sued Bright for failure to pay insurance premiums owed under the Policies. Bright denied owing Arch the amounts alleged and countersued Arch for mishandling workers' compensation claims against Bright.*fn1 Bright also asserted six affirmative defenses to Arch's complaint, including a first affirmative defense for setoff based on Arch's breach of contract. Arch moved to dismiss Bright's claim and strike its first affirmative defense. In a reply memorandum in support of that motion, Arch argued for the first time that New York law governed the parties' dispute based on the ILSPAs' choice of law provision. After allowing Bright the opportunity to respond to this new argument, the court reviewed the plain language of the Policies and the ILSPAs and concluded that the parties intended the ILSPAs as a supplement to the original Policies. The court concluded, further, that the ILSPAs' terms were central to the interpretation of the Policies and to Bright's claim. Because New York law does not recognize an action for breach of the implied duty of good faith and fair dealing, the court granted Arch's amended motion to dismiss Bright's counterclaim. Bright has again asserted its breach of contract claim against Arch, and Arch has again moved to dismiss it. For the reasons set forth below, the court now concludes that Bright's claim is not barred by the choice-of-law provision in the ILSPAs and denies the motion.

DISCUSSION

Bright's Second Amended Complaint

In its Second Amended Complaint, Bright again asserts that Arch breached its implied duty of good faith and fair dealing in "handling investigating, defending, settling, and paying of claims against R.A. Bright under the Loss Sensitive Policies." (Second Amended Compl. ¶ 65; compare Amended Compl. ¶ 14.) Bright makes these allegations in three separate counts: In Count I, Bright alleges that Arch breached the implied duty of good faith and fair dealing under Illinois law, and identifies the following factual bases for this claim: Arch's failure to adequately investigate claims against Bright, its failure to use accurate wage information in calculating benefits and average weekly wages, its failure to maintain complete and accurate records, and its failure to comply with its own guidelines and policies in handling claims. (Second Amended Compl. ¶ 67.) Count II of the Second Amended Complaint seeks a declaratory judgment establishing that the Loss Sensitive Policies alone govern Bright's contract claims, that the ILSPAs do not govern the parties' rights and obligations under those Policies, and that the New York choice-of-law provision does not govern those Policies. (Pl. Mem. in Support of Its Mot. to Dismiss [Dkt. 41].) In Count III, Bright alleges that if New York law applies, the court should interpret New York law as recognizing a claim against Arch for breach of contract under Bright's theory.

The Law of the Case Doctrine Does Not Bar Reconsideration of the Choice-of-Law Issue

Arch contends that Bright's Second Amended Complaint is no more than a thinly-veiled attempt to get "a second bite at the apple" regarding the applicability of the ILSPAs' New York choice of law provision to this dispute. Bright's current arguments, Arch contends, were "expressly or implicitly rejected" when the court granted Arch's earlier motion to dismiss, and the renewed motion should therefore be granted under the doctrine of "law of the case."

Arch's reliance on this doctrine is misplaced. The court is free to revisit its earlier conclusion under even the most rigid understanding of the doctrine. As this court has written elsewhere, the law-of-the-case doctrine is "no more than a presumption, one whose strength varies with the circumstances; it is not a straightjacket." In re Spiegel, Inc. Securities Litigation, No. 02 C 8946, 2005 WL 1838449, at *7 (N.D. Ill. July 29, 2005) (quoting Alston v. King, 157 F.3d 1113, 1116 (7th Cir. 1998)); see also Tice v. Am. Airlines, Inc., 373 F.3d 851, 853 (7th Cir. 2004) (the doctrine is not "hard and fast, and so a party is free to argue that an intervening change in law or other changed or special circumstance warrants a departure"). "Pre-judgment orders, such as motions to dismiss, are interlocutory and may be reconsidered at any time" before the entry of judgment or resolution on appeal. In re Spiegel, 2005 WL 1838449, at *7(quoting Cameo Convalescent Ctr., Inc. v. Percy, 800 F.2d 108, 110 (7th Cir.1986)). Despite Arch's protestations that the doctrine of law of the case should apply, none of the authority Arch cites holds that the doctrine must bar a court from altering its own ruling in the course of the same litigation. See In re Soybean Futures Litigation, 892 F. Supp. 1025, 1042 (7th Cir. 1995) ("In matters involving interlocutory orders, such as motions to dismiss, or matters that have not been taken to judgment or determined on appeal, the Seventh Circuit has made clear that the district courts have the discretion to reconsider their decisions at any time.") Further, as Arch itself acknowledges, a court has a duty to correct a plain error in judgment. See Pickett v. Prince, 207 F.3d 402, 407 (7th Cir. 2000) ("[A] judge's refusal to correct a plain error that he had committed weeks before is not justified by the doctrine of the law of the case, or anything else we can think of.") The court is thus free to consider Bright's argument that the ILSPAs do not apply to its claims against Arch.

The ILSPAs Are Not Directly Relevant to Bright's Claims

Bright alleges that Arch failed to act reasonably in handling workers' compensation claims against Bright, thereby violating its duties under the Policies and causing Bright to experience greater losses than it would have, had Arch handled the claims properly. Because the Policies are "loss sensitive," these greater losses resulted in higher premiums for Bright. Bright does not contend that Arch calculated the premiums improperly or that Arch's methodology in determining the premiums was fraudulent or unsound. Rather, Bright complains only that Arch breached its duty under the policies to investigate, defend, settle and pay out claims in a reasonable manner. In assessing this argument, the court has taken a closer look at the documents that comprise the Policies, including the ILSPAs.

The Policies

It is undisputed that the policies at issue are "loss sensitive." Put simply, a loss sensitive policy's premiums vary depending on actual losses the insured incurs over the course of the policy's term. Loss sensitive policies come in one of two forms: "retrospectively rated" policies and "large deductible" policies. A "retrospectively rated" policy calculates the annual premium based on the insured's actual losses over the course of the term. A "large deductible" policy requires the insured to reimburse the insurer for payments made in the form of benefits, damages, and expenses associated with defending and settling claims against the insured over the course of the policy's term, up to a deductible cap. Losses exceeding the deductible are covered by the insurer up to the policy's prescribed limit. In addition to paying all losses under the deductible, the insured must also pay a reduced "deductible premium," which is estimated at the beginning of the policy term and finalized based on an end-of-term audit by the insurer. See Margaret M. Anderson, Courtney E. Barr, & Kara J. Bruce, The Creditor Is Always There: The Insurance Company,17 NORTON J. OF BANKR. L. AND PRACTICE 4 (2008).

The Policies between Arch and Bright employ the "large deductible" model: Bright's standard annual premium was based on an end-of-term payroll audit using a formula that begins with Bright's payroll, takes account of certain employee classification rates (assigned by Arch in accordance with its internal guidelines), and then is adjusted upwards or downwards on the basis of Bright's "experience modification factor." (Second Amended Compl. ¶ 59.) The "experience modification factor" "reflects a comparison between actual losses and expected losses," using a formula developed by the National Council of Compensation Insurance, Inc. (Id. ¶ 60.) The losses experienced in one policy year thus affect the experience modification factor and, ...


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