Zurich Am. Ins. Co. v. Txex Energy Invs.

MEMORANDUM AND OPINION

Lee H. Rosenthal Chief United States District Judge

Zurich American Insurance Company issued three workers' compensation policies to TxEx Energy Investments, LLC between 2016 and 2019. At the beginning of each policy period, Zurich provided TxEx with an estimated premium amount based on a coding system used in Texas. The amounts varied depending on a business's operations and risk exposure to employees. TxEx was assigned code 4740 for the classification “Oil Refining-Petroleum & Drivers.” Under the policies, Zurich had three years after the policy periods ended to audit TxEx to determine the final premium amount and to request any additional premium payments resulting from the audit.

During the policy periods, TxEx brought a potential coding issue to Zurich's attention in May 2018. In April 2019, Zurich and TxEx met to discuss whether TxEx's initial code accurately reflected its business operations. Zurich investigated and determined that the TxEx code should be changed to 8350 for “Gasoline or Oil Dealer & Drivers.” TxEx agreed. Applying the new code resulted in an outstanding balance on TxEx's final premiums of $1,392,395.71.

TxEx refused to pay. Zurich sued for breach of contract to collect the outstanding balance. (Docket Entry No. 1). TxEx counterclaimed that Zurich had previously breached the contract by failing to timely assign the proper code. (Docket Entry No. 7 at ¶¶ 76-78).

2

Zurich has moved for summary judgment on the claim and the counterclaim. (Docket Entry Nos. 26 and 27). TxEx responded, moved for leave to file an amended answer, and requested a continuance of Zurich's motion for summary judgment under Rule 56(d) of the Federal Rules of Civil Procedure. (Docket Entry Nos. 33, 34, 35). Zurich replied to TxEx's response, responded to TxEx's motion for leave, and responded to TxEx's Rule 56(d) request. (Docket Entry Nos. 37, 38, 39). TxEx replied to Zurich's response to its motion for leave, and Zurich surreplied. (Docket Entry Nos. 40, 41, 42).

Based on the motions, responses, and replies; and the applicable law, the court grants the motion for summary judgment, for the reasons explained below. Zurich must submit a proposed final judgment no later than August 29, 2022.

I. Background

TxEx is the parent company of a portfolio of companies that have been involved in various oil-related operations over the last two decades, including oil refining, petroleum logistics, and crude oil transportation. (Docket Entry No. 35-1 at ¶ 5). Zurich issued six insurance policies to TxEx between 2016 and 2018. Three of the policies provided workers' compensation coverage, obligating Zurich to pay damages for covered bodily injuries to TxEx's employees. These policies were:

• workers' compensation policy no. WC 9819549-02 providing workers' compensation and employer's liability coverage from 4/27/16 to 4/27/17

• workers' compensation policy no. WC 9819549-03 providing workers' compensation and employer's liability coverage from 4/27/17 to 4/27/18; and

• workers' compensation policy no. WC 9819549-04 providing workers' compensation and employer's liability coverage from 4/27/18 to 4/27/19.

3

(Docket Entry No. 27-2 at 138-43; Docket Entry No. 27-3 at 75-80; Docket Entry NO. 27-4 at 114-19). Zurich also issued three commercial auto and general liability policies to TxEx, but those policies are not relevant to this dispute. (Docket Entry No. 1 at ¶ 6; Docket Entry No. 7 at ¶ 6).

The premiums in the workers' compensation policies were not fixed at a set rate or amount at the beginning of each policy period. The final premium provision in the policy stated:

E. Final Premium

The premium shown on the Information Page, schedules, and endorsements is an estimate. The final premium will be determined after this policy ends by using the actual, not the estimated, premium basis and the proper classifications and rates that lawfully apply to the business and work covered by this policy. If the final premium is more than the premium you paid to us, you must pay us the balance. If it is less, we will refund the balance to you. The final premium will not be less than the highest minimum premium for the classifications covered by this policy.

(Docket Entry No. 27-2 at 142; Docket Entry No. 27-3 at 79; Docket Entry No. 27-4 at 118).

The policies also stated that Zurich could audit TxEx's records relating to the policy within three years of the end date of that policy to determine the final premium. The policies stated:

G. Audit

You will let us examine and audit all your records that relate to this policy. These records include ledgers, journals, registers, vouchers, contracts, tax reports, payroll and disbursement records, and programs for storing and retrieving data. We may conduct the audits during regular business hours during the policy period and within three years after the policy period ends. Information developed by audit will be used to determine final premium. Insurance rate service organizations have the same rights we have under this provision.

(Docket Entry No. 27-2 at 142; Docket Entry No. 27-3 at 79; Docket Entry No. 27-4 at 118).

In Texas, employers are classified for workers' compensation purposes based on “the exposure common to those employers.” See Texas Workers' Compensation and Employers' Liability Manual, Rule IV (Dec. 3, 2012), available at

4

https://www.tdi.texas.gov/wc/regulation/documents/wcmanual.pdf. Insurance companies like Zurich must use these classifications to set premium rates or amounts. (Id., Rule VI). To determine the estimated amount of the premium, Zurich assigned four-digit codes set by the National Council on Compensation Insurance, referred to as “NCCI codes,” based on information provided by insureds. (Docket Entry No. 26 at 2). The codes reflect employer classifications based on their operations. (Id. at 7 n.1; see also Docket Entry No. 35-11 at ¶ 4). The classifications are based on risk exposure in a given business's operations. (Docket Entry No. 26 at 7 n.2 (citing NCCI, ABCS of Experience Rating, available at https://www.ncci.com/Articles/Documents/UWABCExpRating.pdf); see also Docket Entry No. 35-11 at ¶¶ 4-5)). They affect the experience modification factor, a rating element used in premium determination. This factor recognizes “the differences among individual insureds with respect to safety and loss prevention, by comparing the experience of the individual insured with that of the average insured in the same classification.” (Docket Entry No. 26 at 7 n.2; see also Docket Entry No. 35-11 at ¶¶ 4-5). A safer-than-average workplace will receive an experience modification rating below 1.00, while a more dangerous workplace will have a score above 1.00. NCCI, ABCS of Experience Rating 7, available at https://www.ncci.com/Articles/Documents/UWABCExpRating.pdf. Businesses use the experience modification factors to evaluate workplace risks. (Docket Entry No. 35-11 at ¶ 5).

The workers' compensation policies contained a “classifications” provision, stating as follows:

B. Classifications

Item 4 of the Information Page shows the rate and premium basis for certain business or work classifications. These classifications were assigned based on an estimate of the exposures you would have during the policy period. If