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LM Insurance Corporation v. Contingent Resource Solutions LLC

United States District Court, D. South Carolina, Spartanburg Division

February 24, 2016

LM INSURANCE CORPORATION, an Illinois corporation, Plaintiff,
v.
CONTINGENT RESOURCE SOLUTIONS, LLC, a South Carolina corporation, Defendant and Third-Party Plaintiff,
v.
GUARANTEE INSURANCE COMPANY, Third-Party Defendant.

OPINION AND ORDER

This matter is before the Court on Third-Party Defendant Guarantee Insurance Company’s (“GIC”) Motion to Dismiss (ECF No. 48) the Third-Party Complaint brought by Defendant and Third-Party Plaintiff Contingent Resource Solutions, LLC (“CRS”) for failure to state a claim upon which relief can be granted and GIC’s Motion to Stay Discovery, Disclosure, and Conference Deadlines (ECF No. 52). For the reasons set forth in this Order, GIC’s Motion to Dismiss is denied and GIC’s Motion to Stay is denied as moot.

BACKGROUND

By way of its Complaint filed September 12, 2014, LM Insurance Corporation (“LMIC”) seeks $533, 301 in damages from CRS for CRS’s alleged breach (failure to pay premium) of a workers compensation insurance contract. (ECF No. 1.) CRS filed an Answer and Counterclaim against LMIC (ECF No. 6), and later an Amended Counterclaim (ECF No. 21) and a Second Amended Counterclaim and Third-Party Complaint impleading GIC (ECF No. 40).

The State of South Carolina requires employers, subject to certain exceptions, to purchase workers compensation insurance coverage for their employees.[1] If a South Carolina employer is unable to find an insurance company that will voluntarily sell workers compensation insurance to that employer, the employer may apply to the Workers Compensation Insurance Plan (the “Plan”) for an assigned risk market insurance policy, also known as an “involuntary market policy” or “residual market policy.” The Plan is a set of rules governing the terms and conditions by which employers purchase and insurance companies sell assigned risk policies in South Carolina. An employer seeking an assigned risk policy makes an application on an approved form to the National Council on Compensation Insurance (“NCCI”). Once an application is made, NCCI assigns the employer to an insurance company participating in the Plan.

Premium for such involuntary market policies is determined by the employer’s payroll and the type of work performed by the insured employees, as categorized by various job classification codes. The employer discloses on the application the amount of its anticipated payroll and the classification of work performed by its employees. Premium rates vary based on the relative hazard associated with different job classifications, and such rates are set by the State of South Carolina for policies applicable to South Carolina employees.

On May 23, 2013, CRS applied for an assigned risk policy using the prescribed form and NCCI subsequently assigned LMIC to provide such a policy. LMIC issued a workers compensation policy (the “LMIC Policy”) to CRS with a projected coverage period of May 24, 2013 to May 24, 2014. LMIC alleges that pursuant to the terms of the LMIC Policy, CRS was to make its books and records available for audit in order that LMIC might determine the correct amount of payroll and job classifications and thereby calculate the proper premium due to LMIC.

LMIC contends that its audit revealed that the CRS payroll covered by the LMIC Policy was $9, 209, 552 per annum, rather than the $32, 000 per annum reflected on CRS’s application for the assigned risk policy. LMIC calculated the relevant premium as $973, 974, assuming the policy was to be in effect for the full one year term, and thereafter sought payment from CRS for the premium amount determined by the audit. LMIC avers that CRS failed to pay the amount due under the policy, and after sending a notice of pending cancellation if the premium was not paid, LMIC cancelled the policy effective January 14, 2014. LMIC subsequently conducted a cancellation audit of CRS’s business records and determined that the amount of payroll putatively covered by the policy from May 24, 2013 until January 14, 2014 was $5, 023, 475. Accordingly, LMIC sent CRS a final invoice seeking payment of $533, 301 in premium for the coverage it claims to have provided during the relevant time period. It is this amount that LMIC seeks in damages for CRS’s alleged breach of the assigned risk insurance contract.

CRS contends that when it applied to NCCI for the involuntary market policy, it only sought coverage for a limited subset of employees that were not already covered by its existing voluntary market policy provided by GIC. (Second Amend. Counterclaim and Third-Party Compl., ECF No. 40.) LMIC appears to dispute that it is possible to obtain an assigned risk policy to cover only a limited subset of employees. (See Compl. ¶ 15, ECF No. 1 (“An employer’s workers compensation assigned risk policy covers all of the employees for the employer.”).)

By way of its Second Amended Counterclaim and Third-Party Complaint, CRS asserts that the vast majority of its employees were already covered by a different workers compensation insurance policy and that LMIC is not entitled to the monies it now claims are damages for uncompensated insurance coverage. CRS alleges that from February 15, 2013 to September 1, 2013, CRS workers in Florida, North Carolina, South Carolina, and Virginia were covered by GIC Policy No. GWGC374000002-112 (the “First GIC Policy”). (ECF No. 40 at ¶¶ 6-7.) The First GIC Policy purportedly covered all CRS workers except those workers in North Carolina and Virginia classified under code 5183 (Plumbing Not Otherwise Classified and Drivers) for workers compensation insurance. (Id. at ¶ 8.) At the time, GIC allegedly would not provide voluntary coverage for CRS workers classified under code 5183 in North Carolina and Virginia but did cover code 5183 workers in South Carolina. (Id. at ¶ 9.) CRS asserts that GIC received $109, 420.58 in premium for the First GIC Policy, though it is nonspecific as to who paid this premium to GIC (i.e. CRS or some other entity). (Id. at ¶ 11.)

Sometime after the First GIC Policy was already in place, CRS anticipated new operations in South Carolina requiring workers to perform services classified under codes 5190 (Electrical Wiring - Within Buildings and Drivers) and 6325 (Conduit Construction - For Cables and Wires and Drivers). (Id. at ¶10.) CRS states that its May 23, 2013 application to NCCI for assigned risk coverage was limited to code 5183 workers in North Carolina and Virginia, and codes 5190 and 6325 workers in South Carolina. (Id. at ¶ 12-13.) CRS asserts that its application explicitly indicated as much, relying on the following language typed in all capital letters: “THIS POLICY IS BEING OBTAINED TO COVER DIRECT EMPLOYEES WORKING IN RISKS THAT THE PEO’S CARRIER WILL NOT APPROVE.” (Id. at ¶ 15; Ex. A, Compl., ECF No. 1 at 13.) According to CRS, the business requiring services under codes 5190 and 6325 did not materialize, and CRS workers never performed services or activities under those codes in South Carolina. (ECF No. 40 at ¶ 14.)

CRS states that it intended and understood the coverage provided by the LMIC Policy to be limited to those locations and class codes specifically itemized in its application to NCCI. (Id. at ¶ 15.) CRS avers that LMIC received $5, 127 in premium for the LMIC Policy, which was in effect from May 24, 2013 to January 14, 2014. (Id. at ¶¶ 16, 19.) LMIC acknowledges that CRS paid that amount. (See Ex. D, Compl., ECF No. 1 at 94-95.)

CRS further alleges that from September 1, 2013 to September 1, 2014, all CRS workers were insured under GIC Policy No. WCP00000402GIC (the “Second GIC Policy”). (ECF No. 40 at ¶ 20.) Coverage under the Second GIC Policy purportedly extended to all CRS workers in all states and for all class codes. (Id. at ¶ 21.) CRS asserts that GIC received premium for the Second GIC Policy, though it is non-specific as to who paid this premium and in what amount. (Id. at ¶ 22.) CRS indicates that it has declined to pay LMIC the $533, 301 premium LMIC claims as a result of the cancellation audit because such an amount “does not comport with the limited coverage of the LMIC Policy as applied for by CRS and issued by LMIC and purports to include amounts for coverages on or after September 1, 2013, when all CRS workers were covered by the Second GIC Policy.” (Id. at ¶ 27.) Ultimately, CRS and LMIC do not agree as to whether worker classification codes can be split among and between markets and workers compensation insurance policies, i.e. whether CRS could have insured some workers in the voluntary market through GIC and other workers through an assigned risk plan with LMIC. (See Id. at ¶ 26.)

By way of relief, CRS first seeks a declaratory judgment that LMIC covered only those CRS workers in North Carolina and Virginia classified under code 5183 until September 1, 2013, and GIC covered all other CRS workers during the disputed time period of May 24, 2013 to January 14, 2014. (Id. at ¶ 31, Count I.) In the alternative, CRS seeks a declaratory judgment that: (a) the LMIC Policy was void as to all workers in North Carolina and South Carolina and the First GIC Policy covered all CRS workers in those states; or (b) if LMIC is deemed to have covered all CRS workers in North Carolina, South Carolina, and Virginia during the disputed period, then a declaration that the GIC policies are reformed to eliminate overlapping and duplicative coverage provided by LMIC during the disputed period.[2] (Id. at ¶¶ 32-33, Count I.) CRS next seeks rescission of the LMIC Policy based on alleged mutual mistakes of fact regarding the coverage as applied for and as bound. (Id. at ¶¶ 39-40, Count II.) In the alternative, CRS seeks rescission of the LMIC Policy due to CRS’s unilateral mistake of fact regarding the scope of coverage, about which LMIC allegedly had knowledge yet remained silent. (Id. at ¶¶ 41-42, Count II.)

In the event the LMIC Policy is not rescinded due to either a mutual or unilateral mistake of fact, CRS seeks to reform the LMIC Policy to cover only those CRS workers in North Carolina and Virginia classified under code 5183 for a minimum period of May 24, 2013 to September 1, 2013, or a maximum period of May 24, 2013 to January 14, 2014. (Id. at ¶ 47, Count III.) Finally, if the Court determines that LMIC covered all CRS workers in North Carolina and South Carolina during the disputed period, CRS seeks reformation (by way of separate Count than the declaratory judgment) of: (a) the First GIC Policy to cover CRS workers in North Carolina and South Carolina for only that period of time from February 15, 2013 to May 23, 2013, based upon a mutual mistake as to the scope of coverage; and (b) the Second GIC Policy to cover CRS workers in North Carolina, South Carolina, and Virginia for only that period of time from January 15, 2014 to September 1, 2014, based upon a mutual mistake as to the scope of coverage. (Id. at ΒΆΒΆ 49-50, Count IV.) In conjunction with the ...


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