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I. PROCEDURAL HISTORY
The parties to the proceeding are David Bourne, d/b/a Dave Bourne Building (“Bourne”) and Maine Employers’ Mutual Insurance Company (“MEMIC”). On January 21, 2011, Bourne asked that the Superintendent set a hearing to determine whether MEMIC properly charged premium based in part on payments to workers whom Bourne considered independent contractors. The purpose of the hearing is to determine whether MEMIC properly designated these workers to be employees and charged premium consistent with applicable legal standards and with the rating plan approved by the Superintendent.
The Hearing Officer1 held conferences with the parties on March 17 and 24 and April 15, 2011 to discuss various issues concerning this proceeding, including identifying the issues, resolving discovery matters, arranging for exchange of exhibits, identifying witnesses and discussing hearing procedures. In a March 28, 2011 Notice of Hearing, the Hearing Officer set the hearing for May 5th, with an intervention deadline of May 4th. The Hearing Officer did not receive any applications for intervention. On May 4th, the parties submitted pre-hearing briefs explaining their positions.
The hearing took place as scheduled at the Bureau’s Gardiner, Maine office, with a second day on May 9th. The Hearing Officer conducted the proceeding in accordance with the provisions of the Maine Administrative Procedure Act, 5 M.R.S. chapter 375, subchapter IV; 24-A M.R.S. §§ 229 to 236; Bureau of Insurance Rule Chapter 350; and the Notice of Hearing. The parties had, and exercised, the right to present evidence, to examine or cross-examine witnesses and to have counsel. The hearing was recorded and in public session.
Present at both hearing days were the Hearing Officer, David Bourne, Danielle Bourne and Attorney John Cole for Bourne, and Karen Schwartz, Daniel Montembeau and Attorney Allan Muir for MEMIC.2 The parties entered into a stipulation concerning the workers at issue in this case (“1st Stipulation”). The parties also agreed to 510 pages of exhibits, admitted as Joint Exhibit 1. Also offered and admitted into evidence were the transcript of Mr. Warren’s April 11, 2011 deposition (Joint Exhibit 2), Bourne Exhibits 1 through 3, and MEMIC Exhibits 1 and 2.3 Mr. Warren, Mrs. Bourne, Mr. Bourne, Michael Bourque, Ms. Schwartz and Mr. Montembeau testified under oath. After the hearing, the parties submitted a second stipulation concerning one worker’s predetermination, the November 2, 2010 courier delivery of a package from MEMIC to Bourne, the various predetermination forms, and the source of a facsimile version of the December 2, 2009 Construction Supplemental Questionnaire (“2nd Stipulation”).
The parties submitted post-hearing memoranda on June 16, 2011 and reply memoranda on June 23rd. In response to the Hearing Officer’s request for more information about one worker, Mr. Cole submitted an offer of proof on July 13, 2011. Two days later MEMIC indicated that it did not object to this offer. The Hearing Officer declared the record closed as of July 20, 2011.
II. POSITIONS OF THE PARTIES
Bourne argues that MEMIC improperly charged premium based on remuneration paid to workers whom the Petitioner considers independent contractors. Bourne says that neither its insurance policy nor Maine insurance law authorizes MEMIC to require that its insureds obtain certificates of workers’ compensation insurance or Workers’ Compensation Board subcontractor predeterminations in order to avoid paying premium on those workers. Bourne also says that MEMIC’s requirements as to proof were unreasonable and that MEMIC did not communicate its requirements adequately and breached its duty of good faith and fair dealing. Because of these failures, Bourne asks that the Hearing Officer bar MEMIC from assessing post-audit premium.
MEMIC says that its policy, at Part Five (C)(2), does authorize it to charge premium for workers whose work could make the insurer liable for workers’ compensation benefits, that MEMIC notified Bourne nine times of its requirements concerning subcontractors and that Bourne knowingly or recklessly disregarded those requirements. MEMIC also argues that each worker’s status should not be subject to fact review at audit or appeal of audit as this would be an impossible burden for an insurer’s auditors. MEMIC asks that the Hearing Officer order that Bourne pay the disputed premium of $22,603, less any adjustments for removing the cost of materials from the remuneration at issue.
III. FINDINGS OF FACT
After considering the hearing testimony and exhibits and the parties’ respective arguments, I find that:
IV. ANALYSIS AND CONCLUSIONS OF LAW
This case arises from a premium audit relating to a policyholder’s workers whose status as employees or independent contractors is in dispute. The Petitioner is a residential construction contractor, operating as a sole proprietorship, in which Mr. Bourne manages its construction activities and Mrs. Bourne the bookkeeping and insurance. MEMIC is a private mutual insurer established in the early 1990s when the Legislature substantially reformed Maine’s workers’ compensation laws. One of MEMIC’s functions is to act as the insurer of last resort for “employers otherwise entitled to coverage, but not able or not electing to purchase coverage in the voluntary insurance market.” 24-A M.R.S. § 3711.
The parties’ dispute relates to $22,603 premium that MEMIC charged after an audit of Bourne’s payroll for the policy period in question. The disputed premium relates to remuneration paid to workers who Bourne says are independent contractors and MEMIC says are employees. Each party urges me to reach a very different conclusion to their dispute. Bourne says that MEMIC may not impose additional audit premium because it breached its insurance contract. MEMIC says that Bourne should pay the audit premium because he recklessly or knowingly violated its request for certificates showing workers’ compensation insurance for his independent contractors or Workers’ Compensation Board approved applications for predetermination of status. For the reasons set forth below, I reach a third outcome.
Determining workers’ compensation premium depends in part on analysis of the policyholder’s business activities. Workers’ compensation insurers in Maine must rate risks according to “a uniform classification system.” 24-A M.R.S. § 2382-B(1). NCCI promulgates this system in Maine. Because one purpose of this system is to treat like risks similarly, NCCI classifies risk based on the policyholder’s entire business. The insurer applies the basic classification that best describes the policyholder’s business.6 The basic classification applies to all of the policyholder’s activities, job duties and operations. Although standard exceptions exist for operations that are common to most businesses, such as clerical work, the insurer does not examine the activities of individual workers in establishing the applicable classification. Notwithstanding this system’s focus on the policyholder’s overall business, whether a specific worker’s remuneration is part of the policyholder’s payroll can affect the premium.
Determining a worker’s status as an employee or independent contractor depends on fact-specific analysis. In Maine, an employer or worker may apply to the Board for a predetermination of the worker’s status.7 Maine recognizes the uncertainty that goes with this determination by making the predetermination a rebuttable presumption. A worker’s status is not determined as a final matter until a worker files a claim for benefits under Title 39-A8 and the claim goes through the Board’s dispute resolution program, which might include a hearing. Title 39-A requires that the insurer refund premium attributable to the worker in question if the predetermination fails, and that the employer remit additional premium otherwise. 39-A M.R.S. § 105(2).
Before October 2006, MEMIC would accept a variety of evidence that a policyholder’s workers were independent contractors. This evidence included WCB-261 forms approved by the Board as well as such other information as certificates of general liability coverage. The problem with accepting the insurance certificates, for example, was that MEMIC wound up paying claims filed by workers whose employers had not paid workers’ compensation premium attributable to their pay. See Alley Builders, Inc. v. MEMIC, INS-08-104. MEMIC evaluated the position that it found itself in and, in an effort to align its premium base with its construction industry exposure, decided that it needed to change its approach to underwriting independent contractors. Gleason v. MEMIC, INS-08-102. In June 2006, MEMIC began sending its construction policyholders a one-page Alert notifying them of its new procedure, to be effective for policies issued on or after October 1, 2006.9 The Alert in part recommended that policyholders start obtaining approved WCB-261s from the Board. MEMIC would not accept as an independent contractor a worker in the same line of business as the policyholder unless the policyholder made one of three showings. The worker at issue had to have either a workers’ compensation policy, evidence of coverage as an employee under another party’s workers’ compensation policy, or an approved WCB-261. MEMIC has revised the Alert since then and has included it with new policies for several years. MEMIC also uses a Construction Supplemental Questionnaire (“CSQ”) as part of its application process in the construction industry. The CSQ has also gone through several revisions. In the version that MEMIC first used in this case, Question 3 asks whether the applicant, among other steps, obtains either a “current Certificate of Workers’ Compensation Insurance … or a current … Board approved Application for Predetermination of Independent Contractor Status (WCB-261) before any subcontractor begins work for you” (emphases in original).10
In the wake of MEMIC’s 2006 announcement, a number of policyholders filed requests for rating hearings with the Bureau of Insurance contesting MEMIC’s audit premiums. See, e.g., JMAC’s Custom Concrete, Inc. v. MEMIC, INS-09-104; Lexington Outdoors, Inc. v. MEMIC, INS-09-103; Young’s Building Contractors, Inc. v. MEMIC, INS-09-100; Jenkins, Inc. v. MEMIC y, INS-08-111; Crosswinds Air, Inc. v. MEMIC, INS-08-109; Bruce Fadden, dba Custom Building and Remodeling v. MEMIC, INS-08-105; Alley Builders, Inc., supra; Anthony Keefe Enterprises, Inc. v. MEMIC, INS-08-103; and Gleason, supra. Until now, as noted in Alley Builders, Inc., an employer has not called into question the procedures that MEMIC uses to resolve disputes over audit premium related to workers who have neither a WCB-261 nor a certificate of insurance that shows workers’ compensation coverage.
The question is whether MEMIC may require its policyholder who has not obtained certificates of workers’ compensation insurance or WCB-261s to pay premium attributable to their remuneration without further inquiry into the circumstances surrounding those workers’ activities for the policyholder. On one hand, the company has made a diligent effort through the Alert since 2006 to address the independent contractor issues outlined above. On the other hand, the WCB-261 process is voluntary, and MEMIC has not made any form filings with the Bureau that make the practice outlined in the Alert part of its standard insurance policy. As MEMIC testified, the Alert is “a stuffer or a notice … [that] does not change the policy.” Tr.-I, p. 326. Indeed, after reminding the policyholder that it is “responsible for safe working conditions on all your projects,” the Alert’s introductory paragraph goes on to “recommend review and/or action” in four areas concerning the policyholder’s subcontracts (emphasis added). Simply put, although the Alert does spell out MEMIC’s intentions should the policyholder not follow the recommendations, the Alert does not amend the actual insurance policy that MEMIC issued and therefore does not as a final matter determine the parties’ contractual relationship with each other.
MEMIC’s policy covers premium at Part Five C. This defines premium as the product of “a rate times a premium basis,” most commonly remuneration. Remuneration, in turn, is payroll paid to two categories of workers employed by the policyholder. The first is officers and employees. Their remuneration is included because these workers have a direct employment relationship with the policyholder. The second category is “other persons engaged in work that could make us liable.” However remuneration paid to workers in this category is not part of premium basis if the policyholder “give[s MEMIC] proof that the employers of these persons lawfully secured their workers’ compensation obligations.”
The policy does not define the phrase “persons engaged in work that could make us liable.” MEMIC says that “it means just what it says,” citing a Wisconsin case to the effect that the phrase indicates “less than certainty” as to the insurer’s liability. MEMIC 06-16-11 Position Letter, p. 9. However, MEMIC’s liability depends on the worker’s status as an employee, and that phrase is not an open invitation for an insurer to charge premium for any worker whose status could conceivably come into question. The Bureau has never interpreted it so broadly. To the contrary, the Bureau held in Alley Builders, that this language “must be understood as meaning a significant risk that the worker is an employee, since the insurer may not charge premium disproportionate to the exposure.”
This interpretation is consistent with the Insurance Code’s requirement, which neither party raised in its final arguments, that “[e]very … insurer shall provide within this State reasonable means whereby any person aggrieved by the application of its rating system may be heard, in person or through an authorized representative, on written request to review the manner in which such rating system has been applied in connection with the insurance afforded that person.” 24-A M.R.S. § 2320(2). An aggrieved policyholder need not exercise its subsection 2320(2) option. Campbell v. First Am. Title Ins. Co., 644 F. Supp. 2d 126 (D. Me. 2009). Once it does, however, the insurer must follow through.
This requirement applies even when an employer has not obtained either WCB-216s or certificates of workers’ compensation Insurance as to workers whose status is legitimately in question. The insurer must follow section 2320 and honor its contractual commitment to allow the policyholder an adequate opportunity to give the company proof that those workers’ Title 39-A obligations were lawfully secured. In this case, MEMIC did not do so, although to its credit it had accepted during the audit that the specially licensed workers, such as electricians and plumbers, were independent of Bourne. That decision did benefit Bourne to some extent. However, the company’s refusal to consider the matter further, despite Bourne’s several requests through MEMIC’s appointed agent, did not give Bourne a chance to explain how the other workers might have been independent contractors.
MEMIC did testify that it would have reviewed information relating to the materials portion of the remuneration paid to the workers at issue. Tr.-II, 104. However, even had it done so, this review would still have begged the more important question concerning those workers’ employment status. The last question is what to do about this failure.
Neither party’s proposed outcome is attractive for various reasons. Bourne’s outcome—do not allow MEMIC to collect the disputed premium because of the breach of contract—would make sense if the parties were litigating this as a contract case in civil court. It might also be supportable were this an enforcement action based on a pattern of violations of law which might merit a punitive outcome. However, we are in an administrative proceeding whose focus is whether the company has properly applied its rating system. MEMIC’s outcome—let it collect the disputed premium—is unsatisfactory because we do not have a good answer yet to the question of these workers’ status. Premium is based on risk, and risk should be based on a thorough analysis of the insured’s operations. Workers’ compensation in Maine relies on a uniform classification system and rating plan. 24-A M.R.S. § 2382-B(1). One purpose of this system is to match premium with exposure. This ensures that each policyholder pays the premium that its risk presents. This also prevents, within the confines of a pooled risk system, other policyholders from subsidizing risks that they do not present. Because we do not know whether the workers at issue in this case are employees or independent contractors, neither party’s proposed outcome advances this purpose.
I HEREBY ORDER that the Petition is denied to the extent that it seeks to avoid paying the audit premium altogether. I further ORDER that MEMIC promptly provide, consistent with 24-A M.R.S. § 2320(2), a reasonable means by which Bourne, who has the burden, may present proof that the workers in question have secured their Title 39-A obligations. The parties should focus on the 12-part test in 39-A M.R.S. § 105-A(1)(B). The parties may return to the Bureau for further proceedings in this case, if necessary, after they have completed this process.
VI. NOTICE OF APPEAL RIGHTS
This Decision and Order is final agency action of the Superintendent of Insurance within the meaning of the Maine Administrative Procedure Act. Any party may appeal this Decision and Order to the Superior Court as provided by 24-A M.R.S. § 236, 5 M.R.S. § 11001, et seq. and M.R.Civ.P. 80C. Any such party must initiate an appeal within thirty days after receiving this notice. Any aggrieved non-party whose interests are substantially and directly affected by this Decision and Order may initiate an appeal within forty days after the issuance of this Decision and Order. There is no automatic stay pending appeal; applications for stay may be made as provided in 5 M.R.S. § 11004.
1 Former Superintendent Mila Kofman delegated all legal authority to Bureau of Insurance (“Bureau”) attorney Benjamin Yardley to act in the Superintendent’s name as the hearing officer in this proceeding.
2 Witness Robert Warren and his Attorney Bernard Kubetz also attended part of the first hearing day.
3 The Hearing Officer entered two items into the record over Bourne’s objection as part of MEMIC 2. They were Governor Baldacci’s Executive Order establishing the Joint Enforcement Task Force on Employee Misclassification and the Annual Report of the Joint Enforcement Task Force.
4 References to the transcript will be Tr.-I, [page] or Tr.-II, [page].
5 I use Mid-Coast’s name as it appears on the Bureau’s records— “Mid-Coast Insurance Agency LLC”—however I note that the agency’s name appears on Mr. Warren’s business card and e-mail signature line as “Midcoast Insurance Agency.”
6 NCCI’s Basic Manual allows the assignment of more than one basic classification in a construction business if the policyholder maintains separate payroll records for each operation. NCCI Basic Manual, Rule 1(D)(3).
7 Application for Predetermination of Independent Contractor Status to Establish Rebuttable Presumption (Form WCB-261).
8 The Board must consider the eight-part balancing test, none of whose elements are determinative, set out in 39-A M.R.S. § 102(13) in deciding if a worker meets the definition, unless the worker is a construction subcontractor, as of January 1, 2010, as defined in 39-A M.R.S. § 105-A. In that case, a 12-part cumulative test applies, the result of which is to raise the likelihood that the worker will be an employee.
9 On December 9, 2010, Mr. Montembeau sent an e-mail to three other MEMIC employees saying in part that the Bourne audit “was a new policy so there was no sub-contractor alert letter which would have been sent. I believe however their [sic] is a subcontractor questionnaire in the file which supports our position.” Joint Exhibit 1, p. 436.
10 The parties spent considerable time on Mr. Warren’s involvement in preparing the application and responding to MEMIC’s requests that it have an answer to question 3 of the Questionnaire. Mr. Warren’s testimony generally consisted of a failure of memory. Tr.-I, 47 – 54. The Bournes testified in essence that they did not know until after the premium audit about the resubmitted form. According to the parties’ 2nd Stipulation, MEMIC’s facsimile records do not show the December 2, 2009 transmission’s source. Tr-I, 124, 136; Tr-II, 151 – 152; 2nd Stipulation, 2. On this mixed record, I make no findings concerning Mr. Warren’s role other than that the transmission came from his office. Tr.-I, 52 – 53.
PER ORDER OF THE SUPERINTENDENT OF INSURANCE
Last Updated: August 22, 2012
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