Cook's Roofing, Inc. v. Hartford Underwriters Ins. Co.

COOK'S ROOFING, INC. v. HARTFORD UNDERWRITERS INSURANCE COMPANY

No. W2019-00271-COA-R3-CV

COURT OF APPEALS OF TENNESSEE AT JACKSON

Assigned on Briefs April 15, 2020

July 20, 2020

Appeal from the Chancery Court for Shelby County

No. CH-07-1140-3

JoeDae L. Jenkins, Chancellor

This appeal involves retrospective insurance premiums for an assigned risk workers' compensation insurance policy. The insured employer is a roofing contractor. The insurance company conducted a retrospective premium audit and determined that the roofing contractor owed retrospective premiums based on the fact that its primary subcontractor was uninsured during a portion of the policy period. The roofing contractor refused to pay the increased premium, so the insurance company canceled the insurance policy. The roofing contractor filed this lawsuit against the insurance company, alleging negligence, promissory estoppel, and violation of the Tennessee Consumer Protection Act. The insurance company filed a counterclaim for the unpaid balance owed for the premiums under the policy. The insurance company filed a motion for summary judgment on all claims asserted by the roofing contractor and on its own counterclaim. The trial court granted the motion for summary judgment, dismissed the claims asserted by the roofing company, and entered judgment in favor of the insurance company and against the roofing contractor for $66,212 plus prejudgment interest. However, the trial court denied the insurance company's subsequent motion to enforce the judgment against the two individuals who operated the roofing company and served as the sole officers and shareholders of the corporation. Both parties raise issues on appeal. For the following reasons, we affirm the decision of the chancery court in part, we reverse in part, and we remand for further proceedings consistent with this opinion.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed in Part, Reversed in Part and Remanded

CARMA DENNIS MCGEE, J., delivered the opinion of the court, in which D. MICHAEL SWINEY, C.J., and FRANK G. CLEMENT, JR., P.J., M.S., joined.

Everett B. Gibson, Memphis, Tennessee, for the appellant, Cook's Roofing, Inc. Ben M. Rose, Brentwood, Tennessee, for the appellee, Hartford Underwriters Insurance Company.

OPINION

I. FACTS & PROCEDURAL HISTORY

Mike Cook was employed by a Memphis roofing company for three years before he and his wife, Rebecca, decided to go into business for themselves in 2003. The Cooks initially operated their roofing business as a sole proprietorship known as Cook's Roofing. Rebecca served as the company bookkeeper, while Mike worked as the "estimator," meeting with customers, collecting payments, and inspecting job sites. However, all of the actual construction work was performed by subcontractors. The sole subcontractor for their roof construction work was Mr. Augustine Chaidez. Mr. Chaidez had enough employees that Cook's Roofing could have crews working on two jobs simultaneously.

Pursuant to Tennessee's Workers' Compensation Law, the Cooks were required to maintain workers' compensation insurance. See Tenn. Code Ann. § 50-6-101, et seq. In Tennessee, employers are permitted to purchase workers' compensation insurance either in the voluntary market or in the residual assigned risk market. See Am. Zurich Ins. Co. v. MVT Servs., Inc., No. M2011-01266-COA-R3-CV, 2012 WL 3064650, at *2 n.6 (Tenn. Ct. App. July 27, 2012). "An assigned risk plan is insurance approved by the Commissioner of Commerce and Insurance as insurance 'of last resort,' available when an employer is unable to obtain coverage in the voluntary market." Id.

The Cooks purchased an assigned risk workers' compensation insurance policy through the Tennessee Workers' Compensation Insurance Plan ("TWCIP"). See Tenn. Code Ann. § 56-5-114(c)(1) (directing the commissioner to "implement a plan . . . for the equitable apportionment among insurers of applicants for workers' compensation insurance who are in good faith entitled to such insurance, but who are unable to procure it through ordinary methods"). The policy provided that the insurance premium would be calculated by the use of retrospective rating. As we explained in American Zurich,

This method of insurance premium calculation bases the premium on the total payroll of covered employees during the policy period. It is typically used where the exact composition of the employer's workforce is subject to substantial variation, or where the insured's risk is difficult to measure at the beginning of the policy period. See Lee R. Russ & Thomas F. Segalla, 5 Couch on Ins.3d § 69:15 (2008). Under the retrospective rating method, the employer deposits an estimated premium with the insurance company at the beginning of the policy period. Shortly after the policy period expires, theinsurance company conducts a routine retrospective premium audit, looking back at the workers who were actually on the insured's payroll during the policy period, utilizing records provided by the insured employer related to employee payroll and classification. The actual insurance premium due for the immediate past policy period is then determined based on the results of the audit. Depending on the audit result, the insured employer may either receive a refund on the premium paid or be required to pay additional premiums to the insurance company.¹

2012 WL 3064650, at *2.

Mike and Rebecca Cook admittedly knew from the outset that their company might have to pay additional insurance premiums for their workers' compensation insurance coverage if their subcontractor had no coverage of his own for subcontractor employees. The Cooks learned at the beginning of their contractor-subcontractor relationship with Mr. Chaidez that he had no workers' compensation insurance. Because of the possibility that they would be charged additional insurance premiums related to the employees of Mr. Chaidez, the Cooks deducted money from their payments to Mr. Chaidez and retained it for potential insurance premiums. In April 2004, Mr. Chaidez asked the Cooks to discontinue that practice. After consulting with an insurance agency, the Cooks drafted a "letter agreement" that they believed would protect them from liability for their subcontractor's employees. At the same time, they stopped deducting money from their payments to Mr. Chaidez related to the potential premium assessments. However, when their insurance company conducted an audit, the Cooks were informed that the letter agreement was not acceptable. Their insurer assessed an additional retrospective premium of around $30,000. Going forward, the Cooks required Mr. Chaidez to have his own workers' compensation insurance on his employees.

Mr. Chaidez applied for an assigned risk workers' compensation insurance policy utilizing Chenault Insurance Agency. Through the TWCIP, the plan administrator assigned policies to one of several member companies in the assigned risk pool for Tennessee. The insurance company that was assigned to issue the Chaidez policy was Hartford Underwriters Insurance Company.

The Cooks reluctantly paid the additional $30,000 premium assessed by their insurer. However, when the time came to renew their policy, they sought out a different insurance agency because of their dissatisfaction with the advice they were given. Around this time, the Cooks also decided to incorporate their business as Cook's Roofing, Inc.Around June 2005, Cook's Roofing submitted an application for an assigned risk policy using a different insurance agency. They calculated and paid an estimated annual premium of around $4,000.² The Cooks were listed as the sole officers of the corporation. Coincidentally, the plan administrator randomly assigned Hartford to issue the Cook's Roofing policy as well. Hartford issued the one-year policy effective from June 2, 2005, to June 2, 2006. The policy contained a standard premium adjustment clause providing that the initial premium paid by Cook's Roofing upon submission of its application was simply an estimate.

On September 9, 2005, Cook's Roofing requested and obtained a certificate of insurance from Chenault Insurance Agency, indicating that its subcontractor, Mr. Chaidez, had been issued a worker's compensation insurance policy of his own. In reliance on the certificate, Cook's Roofing continued to do business with Mr. Chaidez as its sole subcontractor. The Cooks believed that they were "fully protected from assessment of future audit premiums" once they obtained the certificate of insurance regarding the Chaidez policy. However, the certificate stated:

THIS CERTIFICATE IS ISSUED AS MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW.

. . . .

INSURED

Chaidez, Augustine

. . . .

THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY PERIOD INDICATED. NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. . . .

. . . .

CERTIFICATE HOLDER

Cook's Roofing . . . .

. . . .

CANCELLATION

SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE

CANCELLED BEFORE THE EXPIRATION DATE THEREOF, THE ISSUING INSURER WILL ENDEAVOR TO MAIL 10 DAYS WRITTEN NOTICE TO THE CERTIFICATE HOLDER NAMED . . . BUT FAILURE TO DO SO SHALL IMPOSE NO OBLIGATION OR LIABILITY OF ANY KIND UPON THE INSURED, ITS AGENTS, OR REPRESENTATIVES.

The policy binder provided that a copy of all certificates of insurance issued for the policy must be automatically sent to Hartford.³ However, Chenault Insurance Agency did not send Hartford a copy of the certificate of insurance it issued to Cook's Roofing.

Three months after the certificate of insurance was issued by Chenault...