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In Connecticut, a construction company obtained a workers’ compensation policy through an assigned risk plan that placed him with CNA Insurance Company (CNA) who determined premium based upon the contractor's representation that he had only one employee who was a carpenter when, in fact he was engaged in roofing and had many more than one employee.

CNA audited the construction company’s books and assessed a higher premium that was clearly material since on audit it increased from $750 to more than $51,000. The construction company failed to pay the additional premium and the policy was cancelled. A person claiming to be an employee was injured after the policy was cancelled and CNA refused to pay benefits. A suit resulted and after the trial court ruled in favor of the insurer an appeal was filed.

In Ed Construction, Inc. v. CNA Insurance, No. AC 31476 (Conn.App. 07/26/2011) the plaintiff, Ed Construction, Inc., appealed an adverse declaratory judgment concerning the interpretation of a workers’ compensation insurance policy (policy) that it purchased from CNA.

FACTS

Ed Devingo is the owner and president of the plaintiff. On August 26, 2002, Devingo met with Diane H. Silfen of the Haehl Agency, Inc., for the purpose of applying for workers’ compensation insurance coverage for the plaintiff through the assigned risk market. During this meeting, Devingo and Silfen completed and signed an “ACORD 130 worker’s compensation application form” and “ACORD 133 worker’s compensation insurance plan/assigned risk section form.” Devingo indicated on the application that the plaintiff had one employee and that it provided carpentry services. Silfen estimated the premium for the plaintiff’s policy to be $750, which was immediately paid by the plaintiff.

The National Council on Compensation Insurance, Inc. (council), assigned coverage of the plaintiff to CNA via a randomized assignment process from a pool of participating insurance companies. On September 20, 2002, the council issued a workers’ compensation and employer’s liability policy binder to the plaintiff, which had an effective date of August 27, 2002.

On October 28, 2002, after the policy period had commenced, CNA requested a detailed list of the plaintiff’s business operations and current certificates of insurance for all of its subcontractors. On December 18, 2002, CNA ordered a preliminary audit of the plaintiff’s policy because the plaintiff’s certificates of insurance failed to indicate current workers’ compensation coverage for the listed subcontractors and because the plaintiff submitted “forms for exclusion of coverage by workers’ compensation law” for individuals who appeared to be employees. On January 6, 2003, the preliminary audit was assigned to Suzanne Delvento, an employee in CNA’s audit department. On February 10, 2003, Delvento completed the audit survey and found that all of the workers whom the plaintiff had paid during the policy period had signed a sole proprietor exclusion form and were all carrying only general liability insurance. Delvento also found that the plaintiff performed roofing services rather than carpentry services.

On February 15, 2003, Delvento completed a premium audit analyst notification, which noted that the plaintiff’s estimated exposure of $1500 within the carpentry class was incorrect. The plaintiff’s exposure was increased to $114,802 pursuant to the roofing rate class. CNA also notified the plaintiff that its payroll was underestimated on its application and that the premium now reflected the new annualized payroll. On February 21, 2003, CNA issued a bill to the Haehl Agency that reflected a premium due of $51,718 by March 23, 2003.

On March 3, 2003, Silfen faxed a letter to CNA, stating that “[t]his letter is to appeal the enclosed $51,718 bill. The insured has no employees at all, how can he have a payroll of $114,802?” Stephanie Spellman, one of CNA’s employees, responded to Silfen’s letter on March 10, 2003, and explained the procedures that needed to be followed in order to place the audit in dispute. Specifically, Spellman wrote to Silfen that “[i]f insured wishes to dispute they need to provide proper documentation to show subs are independent. They need to fax [documentation] to audit dispute unit . . . .” She further stated that if “audit put in dispute, then billing will be suspended.”

On March 27, 2003, CNA issued a notice of cancellation for nonpayment of premium and notified the plaintiff that the policy cancellation would take effect on April 11, 2003, and that the plaintiff still owed the additional premium of $51,718. CNA did not receive any additional payments from the plaintiff and cancelled the policy on April 11, 2003. On June 13, 2003, CNA received a letter from Robert Vogler on behalf of the plaintiff, disputing the audit and requesting an abatement of the additional audit billing. On June 14, 2003, Rodriguez sustained “catastrophic injuries” while performing roofing services on behalf of the plaintiff and filed a claim for workers’ compensation benefits.

a judgment declaring that the policy covered the injuries sustained by Rodriguez, and that CNA either defend the plaintiff against Rodriguez’ claim or pay the plaintiff for all future costs and attorney’s fees in defending itself against the claim and award payment to the plaintiff for any costs and attorney’s fees already expended in defending itself against the claim. In its memorandum of decision, the court addressed the plaintiff’s complaint in three parts.

TRIAL COURT DECISION

In part one, the court noted that “[t]he gravamen of this action is whether the insurance policy entered into between the plaintiff and [CNA] was in effect at the time of the alleged injury such that coverage was mandatory.” The court concluded that the unambiguous language of the policy contemplates cancellation of the contract by either party prior to the end of the policy term. The court further concluded that pursuant to part five of the policy, the plaintiff was required to pay all premiums when due and that CNA properly could increase the premium prior to the completion of the policy period.

In the second part of its decision, the court addressed the plaintiff’s claim that CNA failed to act on its appeal regarding the increased premium pursuant to the policy. The court noted that the plaintiff sent CNA a letter in response to the premium increase resulting from the audit. The court, however, also noted that CNA explained to the plaintiff the procedures that needed to be followed in order to place the audit in dispute but that the plaintiff did not even attempt to comply with those procedures.

Finally, the court addressed the plaintiff’s claim that public policy dictates that cancellation of an assigned risk workers’ compensation policy during the period of the policy defies the humanitarian purposes of the Workers’ Compensation Act (act), General Statutes § 31-275 et seq. The court concluded that CNA was entitled to cancel the policy for nonpayment of premium under both the policy’s terms and council guidelines. The court also noted that the plaintiff did not cite any authority supporting its claims that the humanitarian purpose of the act prohibits cancellation.

Accordingly, the court concluded that CNA properly cancelled the plaintiff’s insurance policy prior to the events of June 14, 2003, the day on which Rodriguez sustained catastrophic injuries, and, therefore, that CNA was under no obligation to defend the plaintiff against Rodriguez’ claim or pay for any expenses incurred by the plaintiff in defending itself against the claim. This appeal followed.

ANALYSIS

The plaintiff first claims that the court improperly determined that (1) the policy could be cancelled so long as notice was

provided to the plaintiff at least ten days prior to the date of cancellation, and (2) the final premium for the policy could be calculated and made due prior to the end of the policy period. The Court of Appeal disagreed.

Construction of a contract of insurance presents a question of law for the court which this court reviews de novo (as if it were the trial court). The interpretation of an insurance policy, like the interpretation of other written contracts, involves a determination of the intent of the parties as expressed by the language of the policy.

The language of the policy is unambiguous and permits cancellation of the policy by CNA at any time so long as it provides “not less than ten days advance written notice stating when the cancellation is to take effect.”

To conclude that the cancellation of a policy would violate the humanitarian purposes of the act would contradict the act’s own language, which contemplates the cancellation of insurance policies. The court concluded that, although the policy indicates that final premiums will be determined after the policy ends, it nonetheless contemplates changes in the premium during the policy period.

The Court of Appeal also agreed with the trial court’s conclusion that the policy permits the collection of the increased premium during the policy period. The policy permits a change in premium during the policy period if the exposures of the insured are not accurately estimated when the initial premium amount is calculated.

As noted, CNA issued a notice of cancellation for nonpayment of premium on March 27, 2003, and notified the plaintiff that the policy cancellation would take effect on April 11, 2003. CNA did not receive any additional payments from the plaintiff concerning the increased premium and cancelled the policy on April 11, 2003.

As to the premium increase, Devingo indicated in the plaintiff’s policy application that the plaintiff engaged in the business of providing carpentry services and only had one employee. CNA later completed a premium audit, which noted that the plaintiff’s estimated exposure within the carpentry rate class was incorrect, and adjusted the plaintiff’s premium to include exposure as paid with the roofing class. The audit also revealed that the plaintiff had more than one employee and that its previous annualized payroll was incorrect. CNA then issued a bill that reflected an endorsement to the policy resulting in an additional premium due of $51,718 by March 23, 2003.

At trial, the plaintiff argued that CNA failed to act on the plaintiff’s appeal regarding the increase in premium. CNA did initiate the process to resolve the plaintiff’s issue concerning the audit; however, the plaintiff made no attempt to comply with CNA’s request for supporting documentation and did not take any further action concerning the audit until after the policy was cancelled. Furthermore, the supplement requires that the plaintiff cooperate fully with CNA and provide all information requested by CNA for auditing and underwriting purposes. The plaintiff did not cooperate with CNA’s request for information and cannot now claim that it properly disputed the audit when it ignored CNA’s explicit instructions on how to initiate the dispute procedure and suspend billing.

LESSONS

When purchasing any type of insurance, even workers’ compensation insurance, it is the duty of the insured to be honest in the application for insurance. Failure to do so be grounds to declare the policy void and in many states it is a crime. In Connecticut “Employers commit fraud when they lie to the insurer about the number of employees covered, past injury claims or the type of work that is really performed, to obtain lower premium rates.” [See http://www.ct.gov/cid/cwp/view.asp?q=254434]

Ed, therefore, by its suit and the facts stipulated in this suit admitted to committing workers’ compensation premium fraud which could have resulted in a criminal complaint. Also, CNA could have, instead of cancelling the policy, rescinded it for misrepresentation of a material fact.

Barry Zalma, Esq.Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” “Zalma on California Claims Regulations,” “Murder and Insurance Fraud Don’t Mix” and others that are available at www.zalma.com/zalmabooks.htm.