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LM Insurance Corporation v. B&R Insurance Partners, LLC

Court of Appeals of Illinois, First District, Second Division

December 13, 2016

LM INSURANCE CORPORATION, Plaintiff-Appellant,
v.
B&R INSURANCE PARTNERS, LLC; SOUTHERN ILLINOIS WORKERS INC.; SPEED SEJA SCHOOL DISTRICT 802; BILLY SUDDUTH; CHRISTOPHER CONOVER; DONYETTA JONES; JOHN LEWIS; and CALVIN WORKS; Defendants-Appellees.

         Appeal from the Circuit Court of Cook County No. 14 CH 4394 Honorable Mary L. Mikva, Judge Presiding.

          JUSTICE PIERCE delivered the judgment of the court, with opinion. Presiding Justice Hyman and Justice Neville concurred in the judgment and opinion.

          OPINION

          PIERCE, JUSTICE

         ¶ 1 B&R Insurance Partners, LLC (B&R), entered into client agreements with Southern Illinois Workers Inc. and Speed SEJA School District 802 whereby B&R would obtain workers' compensation insurance on their behalf. LM Insurance Corporation issued a policy that named B&R as the insured and extended coverage through policy endorsements to those employees of B&R's that had been leased to B&R's clients. LM subsequently cancelled the policy and retroactively removed B&R's clients from the policy's endorsements after B&R informed LM that none of its clients' employees were on B&R's payroll. Meanwhile, the individual defendants, all of whom were employees of B&R's clients, filed workers' compensation claims with the Workers' Compensation Commission alleging injuries suffered during the scope of their employment. B&R tendered the claims to LM, since the alleged injuries occurred during a time when the policy was still in effect. LM then filed this declaratory judgment action. The amended complaint sought a declaration that LM had no duty to defend or indemnify against the individual defendants' claims. The trial court denied LM's motion for summary judgment and granted summary judgment in favor of the defendants. LM timely appeals. For the following reasons, we affirm in part, reverse in part, and remand for further proceedings.

         ¶ 2 BACKGROUND

         ¶ 3 B&R Insurance Partners, LLC, is licensed by the State of Illinois to operate as an employee leasing company. B&R entered into separate, identical client agreements with Southern Illinois Workers, Inc. (SIW)[1] and Speed SEJA School District 802 (the School District), [2] which provided that B&R was a "co-employer" with SIW and the School District, respectively, and that B&R would "become the administrative employer and assume certain employer responsibilities, " while SIW and the School District (referred to in the contracts as "Co-Employers") "shall be the operational employer[s] with responsibility for directing the day to day operations of Co-Employer including work assignments." The agreements stated that "Co-Employer acknowledges that [B&R] employs the employees covered by agreement, with respect to workers compensation risk management and coverage only." B&R was responsible for obtaining workers' compensation insurance coverage for all verified employees, managing any claims, and for certain risk management responsibilities. All other employer responsibilities remained with SIW and the School District, including hiring, safety training, provision of safety equipment, and all payroll functions.

         ¶ 4 On or about October 3, 2013, pursuant to the client agreements, B&R applied for workers' compensation insurance coverage through the Illinois Workers' Compensation Insurance Plan (the Plan), which is administered by the National Council on Compensation Insurance (the NCCI). The Plan provides a method for employers to obtain workers' compensation insurance coverage through the residual market when they cannot obtain it on their own. The NCCI binds coverage and then assigns the risk to a servicing carrier. LM Insurance Corporation (LM) is a servicing carrier for the Plan. In its application, B&R represented that it was a professional employer organization (PEO) that had coemployment relationships with SIW and the School District, among others. The NCCI bound coverage and assigned the risk to LM, and LM issued a policy effective October 3, 2013, through October 3, 2014 (the policy). The policy lists B&R as the insured. Based on the representation that B&R was a PEO, several employee leasing endorsements (policy endorsements) were issued showing B&R's clients. The School District was listed in these policy endorsements, but for some unknown reason, SIW was omitted.

         ¶ 5 Each policy endorsement provides: "This endorsement applies only with respect to leased workers provided by you to the lessee (client) shown below under an employee leasing arrangement. This endorsement does not provide coverage for workers that you lease to other clients or for your employees that you do not lease to any client." The endorsement then defines certain words and phrases. "Employee leasing arrangement" is defined as "a contractual arrangement, including long-term temporary arrangements whereby a lessor obligates itself to perform specified employer responsibilities as to leased employees including the securing of workers' compensation insurance." "Long-term temporary arrangement" is defined as "an arrangement where 1 company leases all or a majority of workers from another for a period in excess of 6 months or consecutive periods equal to or greater than 1 year." The policy endorsements define "lessor (employee leasing company)" as "an entity that leases any of its workers to a lessee through an employment leasing arrangement. A lessor may also be referred to as a labor contractor." Finally, "lessee (client company)" is defined as "an entity that obtains any of its workforce from another entity through an employee leasing arrangement." The policy endorsement's definitions recite verbatim the definitions of those same terms set forth in section 15 of the Employee Leasing Company Act (215 ILCS 113/15 (West 2012)).[3]

         ¶ 6 Between October 10 and October 31, 2013, defendants Billy Sudduth and Christopher Conover both suffered injuries during the scope of their employment with SIW, and defendants John Lewis, Donyetta Jones, and Calvin Works each suffered injuries during the scope of their employment with the School District. All five individuals submitted applications for adjustment of claims with the Illinois Workers' Compensation Commission. B&R tendered each of the claims to LM.

         ¶ 7 On November 4, 2013, the NCCI informed LM that B&R was no longer eligible for coverage because of noncompliance with a prior carrier, [4] and LM cancelled the policy effective December 13, 2013. LM conducted an audit to determine B&R's final premium. The final premium is determined based on the actual payroll of the insured's employees and any uninsured subcontractors during the policy period. B&R did not file a payroll for any of its clients because the clients paid the payroll under their own federal Employer Identification Numbers. LM calculated B&R's payroll exposure as zero, since LM determined that B&R had no leased employees. LM then refunded B&R's deposit premium. Because LM determined that B&R had no lessor relationship with its clients' employees, the policy endorsements were retroactively amended to remove B&R's clients, including SIW, the School District, and the claimants, from coverage under the policy.

         ¶ 8 On March 3, 2014, LM filed this declaratory judgment action in the circuit court, seeking a declaration that it had no duty to defend or indemnify any of the individual claims against SIW or the School District because the individual claimants were not employees of B&R (counts I and II). LM also sought rescission of the policy based on B&R's misrepresentations that it was an employer that leased workers to SIW and the School District (count III).

         ¶ 9 LM moved for summary judgment on counts I and II, arguing that there was no coverage under the policy for the individual claims because B&R was not an employee leasing company that employed the claimants. LM therefore argued that it properly revised the policy endorsements to remove coverage for SIW and the School District's employees. LM argued that there should be no coverage where the policy endorsements were amended after LM's audit revealed that B&R had no payroll for the employees of SIW or the School District and that B&R had no employer-employee relationship with those employees. LM also argued that, in order to meet the terms of the policy endorsement, employees of SIW and the School District must actually be B&R's employees and B&R must have acted as a lessor by leasing its own employees to SIW and the School District. LM argued that the agreements between B&R and SIW or the School District did not describe their relationship as an "employee leasing agreement" and in fact did not even contain the word "lease." Because B&R only agreed to provide workers' compensation insurance and risk management guidance and undertook no other employer function, LM argued that B&R was not an employer of any of SIW or the School District's employees, including the claimants, and thus could not lease those employees to anyone.

         ¶ 10 B&R filed a cross-motion for summary judgment, which the School District joined, requesting that the trial court find coverage for all the individual claims. Defendants argued that the policy endorsements attached to the policy were forms prepared by the NCCI, which were modeled on the language of the Employee Leasing Company Act. Defendants argued that the client agreements between B&R and SIW and the School District were employee leasing arrangements as defined under section 15 of the Employee Leasing Company Act (215 ILCS 113/15 (West 2012)), which in turn would satisfy the policy endorsements and provide coverage.

         ¶ 11 The trial court requested additional briefing regarding the Employee Leasing Company Act's "requirement that the lessee 'obtain' workers from the lessor." LM's supplemental brief argued that the ordinary meaning of "obtain" is "to bring into one's possession; to procure, esp. through effort." Defendants argued that the term "lessee, " as used in the Employee Leasing Company Act, provides "context to understand an 'employee leasing arrangement.' " Defendants argued that because B&R was licensed under the Employee Leasing Company Act, it was a "lessor" and, as a co-employer, B&R was obligated to perform certain responsibilities in ...


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