Navigating Workers' Compensation Insurance Premium Disputes

In principle, workers compensation insurance premium disputes between insurers and employers should be both rare and easily resolved. Premium determination is seemingly straightforward. Insurers routinely audit payroll from the employer’s own records, and the rules determining “remuneration” are clear and well established. The National Council on Compensation Insurance (NCCI) and independent state rating bureaus publish explicit definitions for hundreds of industry and occupational classifications. They also calculate experience modifications according to detailed formulas using data submitted by insurers. Rates are established before policy inception, and in most cases are based, at least in part, upon published statewide figures rather than individual negotiation. Given all this, it would seem that while employers may consider their costs excessive, few disputes should arise about whether premiums are owed.

The reality is often different. Many employers do contest their workers compensation premium. They argue that their operations have been misclassified or that certain remuneration, such as payments to alleged independent contractors or stock distributions to executives, should not count as payroll. They allege that the insurer has paid fraudulent claims and overstated the amount (value) of others, resulting in excessive experience modifications, retrospective rating adjustments, or security requirements. The broker is sometimes blamed for errors or misconduct, such as failing to remit premium, or for placing the insured with a shaky carrier or “alternative market” such as a staffing or Indian “sovereign nation” program.

Employers may also claim that their insurer failed to adequately explain record keeping requirements (such as the need to maintain evidence of payees’ “independent contractors’” status), out-sourced audits to firms or individuals of questionable technical ability, and unreasonably relied upon the broker’s suggested classification until the auditor or rating bureau caught the mistake after policy expiration. Then, the employer argues, the insurer cannot collect the additional premium because the employer cannot recoup the cost from its customers.

A complicated, patchwork legal system has evolved to address these varieties of disputes. Depending upon the issues underlying the employer’s complaint, state statutes and regulations may require the involvement of insurers, rating bureaus (usually the NCCI), state Insurance Departments, and judicial courts. Each has its own jurisdictional scope, procedures, deadlines, and institutional interests. The result can be an expensive and lengthy dispute for both insurer and policyholder. The real cost of dispute resolution often exceeds the premium and, in any event, leads to cancellation or otherwise sours the relationship among the insurer, policyholder, and broker.

This article explores the overlapping factual and jurisdictional issues presented by workers compensation premium disputes. It suggests that insurers, brokers, and policyholders should look to alternative dispute resolution methods, such as mediation and arbitration, to cut the costs and preserve relationships.

Since California generates more workers compensation premium than any other state, has its own rating Bureau, and is the author’s home state, it will serve as the basis for example. Other state premium dispute systems follow generally analogous procedures, with NCCI involvement to a greater or lesser degree.

The Rating System and Types of Premium Disputes

California experienced a sea-change in its workers compensation premium system in 1995. Its “minimum rate law” requiring insurers to charge no less than uniform, published minimum rates was repealed. The state’s rating agency, operating independently of the NCCI, calculated and recommended minimum rates to the Insurance Commissioner. These were fully loaded for anticipated claims cost, overhead, and -- it was hoped – a reasonable profit. The rating agency, the Workers Compensation Insurance Rating Bureau of California (WCIRB), assigned classifications. It also checked every workers compensation policy and audited insurers’ own premium auditing practices in order to enforce the minimum rate law. In effect, the state (through the WCIRB, acting as its legal agent), ensured that insurers charged and policyholders paid no less than the required minimum rates.

California’s minimum rate law was replaced with the current “competitive” (often called “open”) rating system. An insurer may now charge any rate it chooses, so long as its solvency is not impaired and it has filed that rate with the Commissioner. The WCIRB calculates and the Commissioner approves advisory pure premium rates deemed adequate to cover loss costs. Each insurer then determines the amount by which to deviate up or down from the advisory rates in premium actually charged.

Each insurer must report payroll and loss data to the WCIRB using the uniform classification scheme (or one not inconsistent with that scheme) and must also use the employer’s experience modification promulgated by the WCIRB. However, insurers are otherwise largely on their own in setting premiums. The WCIRB and Insurance Commissioner enforce data reporting requirements but no longer have jurisdiction over determining premium.

With this general legal landscape in mind, it may be helpful to organize premium and related disputes into three general types. They are:

Dispute Type I: Premium Regulations (“WCIRB Rules”)

“Type I” disputes allege violations of premium regulations (sometimes referred to as “Bureau Rules” because the WCIRB administers them, although they are actually Insurance Department regulations). These include experience modifications, classification assignments, unit statistical reports, and other data reporting issues. From a legal perspective, these disputes principally concern alleged violations of matters contained in the WCIRB’s rate filing to the Insurance Commissioner, including the Uniform Statistical Reporting Plan (USRP), and the California Experience Rating Plan (CERP), whether that violation is purportedly by the WCIRB itself or by an insurer that has incorporated these plans into its rate filing.

Dispute Type II: Insurer Claims-Handling, “Bad Faith,” Improper Cancellation and Similar Conduct

“Type II” disputes allege insurer (or policyholder) bad faith, breach of contract, improper cancellation or non-renewal, or improper claims-handling or reserving. Such disputes concern conduct that is largely or entirely unrelated to matters in insurer rate filings. Premium may nonetheless be affected, or the dispute may involve the policy term, broker conduct, misrepresentation in an insurance application, etc.

Dispute Type III: Insurer Rate Filing Regulations

“Type III” disputes allege violations of the insurer’s rate filing (other than as incorporated from the WCIRB’s filing). These might include, for example, discriminatory pricing, improper application of debits and credits, or inconsistent determination of premium discount – any action purportedly contrary to the manner in which the insurer told the Insurance Commissioner it would conduct business.

These three “types” are not necessarily mutually exclusive; they may overlap if multiple issues are involved or if one issue has several aspects. Therefore, multiple dispute resolution “tracks,” discussed below, may be necessary.

Rules for Handling Disputes

Type I and Type III Disputes

The WCIRB is a private trade organization of insurers. It is also the California Insurance Commissioner’s exclusive statistical agent for accumulating workers compensation data, computing proposed advisory pure premium rates, and administering the Commissioner’s premium regulations. In performing this function, it drafts and administers those rules once adopted by the Commissioner.

California’s regulatory scheme contemplates that the WCIRB reviews disputes involving these regulations before they are heard by the Insurance Commissioner or courts. This also recognizes the legal principal of “administrative exhaustion,” by which courts respect the initial jurisdiction of administrative agency specialists and permit a record to be developed before the parties seek judicial involvement. If an employer believes that its rates, premium or related matter are or may be incorrect, it should submit a written inquiry to the insurer or the WCIRB. A verbal complaint or a letter to the broker is probably insufficient to meet regulatory requirements for initiating dispute procedures. Failure to meet these requirements may bar the employer from contesting the matter.

More specifically, California requires that every insurer and the WCIRB “provide within this state reasonable means whereby any person aggrieved by the application of its filings may be heard by the insurer or rating organization on written request to review the manner in which the rating system has been applied in connection with the insurance afforded or offered.”

To implement this statutory mandate, the California Code of Regulations contains initial rules for “Inquiries,” for “Complaints and Requests for Action,” for “Reconsideration,” and for “Appeals” on many issues affecting insurers and/or the WCIRB. The principal rules are summarized below; the full rules are accessible on-line at www.calregs.com, with parallel provisions in the USRP and CERP posted on the WCIRB’s website, www.wcirbonline.com. For other states, rules may be accessed on-line at the NCCI’s website, www.ncci.com, upon paying a registration fee. The bulk of payroll, classification, and experience rating rules in NCCI states are uniform, with various state exceptions. A state with a particularly highly developed industry may employ classifications that aren’t available in other states, such as certain oil-industry classifications in Texas.

The resolution of Type I and Type III disputes in California follows a five-step initial procedure before an appeal to the insurance commissioner and then to the courts may be taken. The steps are:

Step 1: Written Inquiry

For Type I disputes, the first step is to send an informal written inquiry to the WCIRB. This must normally be initiated within twelve months after the expiration date of the policy in question (or twelve months from the expiration of the experience modification in question).

The twelve month deadline can catch the employer (and broker) by surprise. For example, an insurer's invoice following a customary "final audit" will generally not be issued until several months after policy expiration. The audit may result in the insurer’s reallocation of payroll among classifications or other action that gives rise to a premium dispute. At this point, the employer typically complains to the broker, who discusses the complaint to the insurer. The insurer might then request a reinspection by the WCIRB, without indicating that the request relates to a complaint by the policyholder. The reinspection will take additional time and perhaps begin a new round of discussions among the insurer, broker, and policyholder. Although equitable relief may be available if these activities extend beyond a year from policy expiration, none of them may be sufficient to “toll” (suspend or meet) the statute for initiating the required formal complaint.

Assuming that the inquiry is timely, the WCIRB reviews, investigates as necessary, and provides a decision. If it requests more information of the employer, such must be provided within sixty days or the inquiry will be considered closed. If the WCIRB serves the insurer with an inquiry, the insurer must answer it within sixty days.

The WCIRB's response to the inquiry will depend upon the nature of the dispute and the completeness of the information provided. If, for example, an experience modification is challenged due to ownership changes, the Bureau will write to the insurer and/or employer requesting detailed ownership information, including copies of stock certificates, explanation of stockholder relationships, etc.

If the issue is whether particular individuals are employees, for whom data should be included in unit statistical reports, or independent contractors, for whom it should not be, the Bureau will solicit both the employer's and the insurer's version of the facts. By far the most numerous employer complaints relate to classification assignments. In response to a classification complaint or appeal, a senior WCIRB classification representative will often visit the employer. The resulting inspection report becomes a key document for any subsequent appeal.

If the WCIRB does not respond within ninety days after receipt of the Inquiry, the employer may file a Complaint and Request for Action (See Step 2, below). Note: the regulation requires only that the WCIRB “respond” to the inquiry within ninety days, not that it reach a decision within this time.

Step 2: Complaint and Request for Action (CRA)

Within sixty days after the WCIRB's decision, the employer, insurer, or other aggrieved person may seek reconsideration of the WCIRB's decision, action, or omission to act. This is accomplished by filing a written Complaint and Request for Action (“CRA”). It is also at this point that the procedures for Type I disputes (for which an Inquiry to the WCIRB is a precursor) and Type III disputes (for which it is not) converge. All workers’ compensation insurers and the WCIRB must designate one or more offices within California for receipt of CRAs. Upon receipt of a CRA, the WCIRB or insurer must grant or reject the request within thirty days. If not, the applicant may proceed with an appeal to the Insurance Commissioner.

Step 3: WCIRB or Insurer Acknowledgment and Grant or Denial of CRA.

Within thirty days after service of a CRA, the insurer or WCIRB must serve the applicant with a written acknowledgment of receipt and either grant or deny review. Otherwise, the applicant may seek reconsideration or appeal directly to the Insurance Commissioner as if the CRA had been rejected. The time limitations for an appeal to the Commissioner do not begin to run until this acknowledgment and notice has been served, unless a decision has been properly served.

Step 4: Decision Upon Grant of Review

The WCIRB or insurer must serve a written decision on the CRA within sixty days after serving the notice granting review. The decision must provide the WCIRB or insurer's evaluation of the CRA and contain a recitation of the pertinent facts and a determination of the issues presented which grants the CRA or rejects it wholly or in part. The decision must also include a specific statement of the basis for the action taken. If the insurer or rating organization fails to grant or reject the CRA within sixty days after serving the notice granting review, the applicant may proceed as if the CRA had been rejected.

Step 5: Optional Reconsideration Request

Anyone aggrieved by a decision, action, or omission of the WCIRB or insurer may request reconsideration. Reconsideration might be advisable if, for example, it is clear that the insurer or WCIRB is in error regarding certain facts, if additional information has become available, or if the reason for the rejection was the regulatory deadline for a response, rather than a decision on the merits of the dispute.

If reconsideration is pursued, the request must be written and served within thirty days of service of the decision. The insurer or rating organization must then serve a decision on reconsideration within thirty days of service of the request. For a reconsideration request to the WCIRB, the CERP/USRP requires that the reasons for believing the WCIRB's decision to be in error be set forth in detail and include all available supporting evidence.

Alternatively, an applicant dissatisfied with the WCIRB's response to a Complaint and Request for Action or request for reconsideration, or failure to respond to a CRA or request for reconsideration may appeal to the Insurance Commissioner.

Appeals to the Insurance Commissioner

The WCIRB and all private insurers operating in California operate under state license granted by the Insurance Commissioner. Accordingly, it is not surprising that a quasi-judicial procedure exists by which parties may complain to the Commissioner about the actions and decisions of his/her licensees. Indeed, the right and practical opportunity to seek “redress of grievances” against perceived abuses of state authority, including actions of private persons or organizations acting pursuant to government authority, is a hallmark of American jurisprudence.

Once again, however, reality tempers ideals. The most important thing to know about appeals to the California Insurance Commissioner of dispute Types I and III is that they rarely succeed. There are several reasons for this, including these:

1. The Commissioner adopted the regulations following a public hearing. In principle, equitable considerations of fairness -- often the basis of employers’ appeals – were evaluated, competing interests balanced, and public input about the wisdom of the regulations was received as part of that hearing process. When adopted, the regulations became law. As such, they cannot be contested, disregarded, or amended based entirely upon subjective equities.

This point has another important practical implication; it makes compromise settlements rare, both at this appeal stage and at the earlier Inquiry/CRA complaint level. In Type I and III disputes, the complaining party challenges the application of a written regulation. Insurers and the WCIRB are bound to apply the regulations (as correctly interpreted) and cannot agree to pragmatic compromises to resolve disputes. For example, an insurer cannot agree to use a lower-rated classification on its unit statistical reports to the WCIRB simply to end a dispute with an employer; this would violate the uniform statistical reporting plan. On the other hand, an insurer may settle a legal dispute over premium which concerns the proper classification. This further illustrates the post-minimum rate law division between an insurer’s data reporting rule compliance on the one hand and actual premium determination on the other.

2. Given that the regulations are the Commissioner’s rules, the Commissioner is not neutral in either deciding challenges to them nor in how he/she (and his/her licensee, the WCIRB) interprets them. The fact that the WCIRB consistently administers a regulation based upon a certain interpretation of it carries significant weight in an appeal, even if other reasonable interpretations are possible.

3. The WCIRB has developed and administered the CERP and USRP over many decades. During this long period, many variations of challenges to the rules and to the WCIRB’s interpretation and administration of them have already occurred. When appellants have occasionally won appeals or drawn attention to “soft-spots” in the regulations, subsequent rule changes have resulted and closed “loop-holes” and/or clarifying ambiguities.

4. As the entity charged with drafting and administering the Commissioner’s regulations, the WCIRB has developed a great expertise concerning them. The Commissioner therefore assigns a high degree of deference to the WCIRB’s interpretation.

These factors do not mean that appeals to the Insurance Commissioner are futile. But if they are to have any realistic chance to succeed, they should be based upon careful review of the WCIRB or insurer’s position and its practice in analogous situations, the text of the regulations, and a complete analysis of the facts and hazards.

If a decision is made to appeal an insurer’s or WCIRB’s action to the Insurance Commissioner, specific procedures must be followed including required form and content. These are set forth in the California Code of Regulations. The time limitations for appeals are generally:

• If from a written decision of an insurer or the WCIRB, within thirty days after service of rejection of review of the Complaint and Request for Action (CRA) or service of rejection of the CRA.
• If the insurer or WCIRB has not served a written decision, within one hundred and twenty days after service of the CRA upon the insurer or WCIRB.
• If a request for reconsideration was made, within thirty days after service of the decision on reconsideration, or if the insurer or WCIRB fails to serve a written decision on reconsideration, within sixty business days after service of the request for reconsideration.

The Insurance Commissioner’s appeal proceedings are informal. “Discovery,” such as depositions and required answers to written questions, is only permitted by permission of the hearing officer. At the hearing itself, typical court rules such as restrictions on hearsay evidence are not necessarily followed. Nevertheless, there is a definite “courtroom” feel, with the WCIRB represented by legal counsel, opening and closing statements, testimony under oath presented via direct and cross examination, a court reporter creating a verbatim transcript, and so forth. Although the employer may be represented by an employee or insurance broker, the difficulty of succeeding usually warrants the retention of legal counsel experienced in this forum.

Workers compensation insurance premium appeals to the California Insurance Commissioner are heard by the Administrative Hearing Bureau (AHB). The AHB hears a wide variety of administrative matters relating to the transaction of insurance in the state. The Insurance Commissioner is an elected position, and therefore inevitably a political office. To a degree, however, AHB administrative law judges are insulated from politics both through internal practices and administrative regulations. After conducting a hearing on the appeal, the administrative law judge submits a written proposed decision to the Commissioner. The Commissioner may adopt the proposed decision as submitted or may make technical or other minor changes, such as those which limit or clarify, but not changes that affect the proposed decision’s factual or legal basis.

If the Commissioner does not adopt the proposed decision as submitted or with minor changes, the Commissioner may in effect, reject or ignore the hearing officer’s decision and decide the case anew. If so, the decision must be made upon the record, including the transcript, or an agreed statement of the parties, with or without taking additional evidence. The Commissioner may also refer the case to the same hearing officer if reasonably available, otherwise to another hearing officer, to take additional evidence.

As with court decisions, the majority of decisions by the Commissioner on appeal from the WCIRB or an insurer are not published. They therefore may not be cited as binding precedent. A minority of decisions, however, are published and do serve as precedent. These are accessible at http://www.insurance.ca.gov/PREDEC/PrecedentialDecisions.htm

When the Insurance Commissioner has ruled and his/her ruling has become effective (normally thirty days after issued), administrative remedies for Type I and III disputes are now "exhausted." Redress may be appealed in the courts, as discussed below.

Type II Disputes

Some issues that directly affect workers compensation premium do not concern either the WCIRB’s or insurer’s rate filings. Rather, they involve insurer business practices and conduct. Most claims-handling and valuation issues fall within this category. For all but the smallest policyholders, an insurer’s claims handling directly affects premium through experience rating, loss sensitive rating plans (high deductible, retrospective, and others), and subsequent year subjective premium determination by underwriters, such as “loss picks,” schedule rating, and security requirements. The insurer’s claims handling and valuation, including “loss development,” will also affect its willingness to release security after policy expiration.

Not infrequently, policyholders come to believe that their insurer has paid fraudulent claims, failed to conduct proper investigations, over-reserved claims, or committed similar errors or misconduct. In a small percentage of such instances, these allegations constitute Type I or III disputes because the issue concerns a regulatory reporting element of the Uniform Statistical Reporting Plan (USRP). As examples, if the insurer has not reported a subrogation recovery or has failed to notify the WCIRB that a claim was adjudicated as non-compensable, the USRP will have been violated. This affects the policyholder’s experience modification.

However, the large majority of claim handling disputes do not allege mere reporting errors but substantive impropriety or misjudgment by the insurer. Even though the policyholder’s allege damage is increased premium through increased experience modifications and otherwise, this is not a dispute within the jurisdiction of the WCIRB or Insurance Commissioner.

The same is true when the policyholder alleges that the insurer cancelled the policy in violation of insurance statutes. Likewise, it applies when the policyholder claims that the broker erroneously interpreted a rating regulation or misrepresented the policyholder’s operations to the insurer to obtain a lower rated classification (such as clerical) or favorable payroll allocation. Strictly speaking, there is no administrative remedy for such disputes, and the policyholder and insurer (and/or broker) must contest them in court or through mediation or arbitration. The rules governing civil litigation apply.

In practice, disputes are often multi-faceted and involve some issues for which an administrative remedy exists and others for which none exists. Say that a policyholder disputes a classification assignment but also maintains that, even if it is correct, it should not be retroactive because the broker (or insurer) assigned the wrong code and the policyholder cannot now recoup the additional premium. The validity of the classification is a WCIRB (administrative) issue, whereas the broker and/or insurer’s culpability is not.

Or, say that an employer alleges that its insurer acted in bad faith by paying a claim that it should have denied. Had it been denied, the employer’s experience modification(s) and therefore premiums would have been lower, and OSHA penalties would not have been incurred. The compensability of the claim must be determined through litigation, either civil or before the Workers Compensation Appeals Board (in states other than California, the equivalent may be the Industrial Commission). The propriety of the insurer’s conduct (and whether additional premium or a premium refund is due) is a matter for civil court. Only the WCIRB can actually revise the experience modifications in order to (under this hypothetical) remove the OSHA penalties.

To further complicate matters, California insurers are increasingly reporting suspected premium fraud to their local district attorney for criminal investigation and prosecution. Such fraud may involve intentional misreporting of payroll under a lower-rated classification or other issue normally within administrative jurisdiction. In such cases, it may be necessary to involve WCIRB, Insurance Department, or other administrative experts in criminal proceedings.

As these few examples show, any number of convoluted factual and legal scenarios can be easily imagined, especially with the increasing incidence of employee leasing, rental captives, group self-insurance and various other types of workers compensation rating programs and “alternatives,” both clearly legal and otherwise. Appellate court cases that clarify the proper procedures to follow are few, and courts often have difficulty understanding the technical issues and custom and practices involved.

Non-California Disputes

Most states do not have an independent workers compensation insurance rating bureau (such as California’s WCIRB). They rely upon the National Council on Compensation Insurance (NCCI) to administer their premium rules, including, in many states, dispute resolution processes. It is therefore necessary to check the rules applicable in each state by contacting the NCCI and, if appropriate, the state agency such as the insurance department, insurance division, or industrial commission.

NCCI’s basic manual instructs employers in states within its jurisdiction to submit a written request to NCCI’s Customer Service Center (CSC) with details of the dispute. The CSC will research the matter and furnish a written explanation as to what it considers the correct application of the rule or classification in dispute. If the employer is not satisfied, it may forward the matter to NCCI’s Regulatory Assurance Department, which conducts a further review. If still dissatisfied, the employer may institute a formal appeal using the appropriate state mechanism.

At the state level, a board or committee constituted primarily of insurance industry representatives hears the complaint, with NCCI providing technical expertise. Before California repealed its minimum rate law, it also used this model. The WCIRB’s Classification and Rating Committee, composed of a panel of insurer underwriting specialists, determined whether the WCIRB or insurer had applied the correct classification or experience modification data (excluding claims valuation). The usual procedure was for the employer to informally present its case to the Committee, with WCIRB staff and an Insurance Department representative present. Following its presentation, the employer was then excused without the WCIRB presenting its case to the Committee in the employer’s presence.

With exceedingly rare exceptions, the employer shortly thereafter received a letter sustaining the WCIRB’s position. This model was abandoned and the C&R Committee no longer hears complaints. The change most likely reflected concerns about disclosure of confidential insurer pricing strategies and potential allegations of anti-trust behavior in the new “competitive” rating environment. The administrative appeals procedure described earlier in this article now applies, with only WCIRB staff or the individual insurer making a determination below the Commissioner appeal level.

As in California, decisions of each state’s dispute resolution board or committee can be appealed to the state’s insurance agency and then to the courts.

Court Appeals

Appeals from the state’s insurance agency involving Type I and III disputes, and Type II disputes from their inception, are judicial matters. The latter follow the usual path of litigation. The insurer or its collection agent sends increasingly strident dunning letters, followed if necessary by a collection lawsuit. The insured may counter-sue for claims mishandling or bad faith. Discovery follows, along with pre-trial procedures that lawyers call “law and motion.” If no settlement is reached, the matter is ultimately tried by a judge or jury.

For these Type II matters, the general laws of contracts, torts, and equity apply. Hence, the insured may be able to argue that the insurer should be “estopped” or prevented from collecting audit premium following a classification change if the insurer approved a classification at policy inception and the insured relied upon this in pricing bids. Or, the insured might argue that higher experience modifications caused by claims-mishandling offsets the insurer’s claim for additional premium and perhaps warrants the award of punitive damages. Alleged violations of state insurance statutes, such as improper policy cancellation, are also normally court issues.

Court appeals from Type I and III administrative decisions are quite different. The complaining party argues that the state agency failed to follow the law, failed to make necessary factual findings, or that the evidence was legally insufficient to support the decision. The court’s task in these appeals is to review the administrative record and make a legal determination as to whether the agency acted properly.

In California, for example, a court may issue a Writ of Administrative Mandamus (Mandate) ordering the agency to withdraw its decision. These are unusual, however, and unlike a conventional trial. There is no discovery, no jury, and no expert testimony. As a practical matter, judges are not experts in rating matters and may neither understand nor be interested in the nuances of esoteric -- and dry-- administrative regulations. In any event, Courts usually afford the agency great deference in interpreting their own premium regulations (such as, for example, a classification determination), although less so in interpreting statutes.

Thus, as with pre-court procedures, the precise issues in a premium dispute largely determine which procedures must be followed and how the law will apply. Decisions of first-level (trial) courts in issuing or denying petitions for a Writ of Administrative Mandamus or in awarding or denying a judgment for premium at trial may be appealed to higher courts.

Mediation and Arbitration

As the cost and complexity of business litigation has continued to increase, so has the popularity of “ADR” – alternative dispute resolution methods. Perhaps due to conservatism, however, insurers have lagged behind most other financial service providers in making use of mediation and arbitration. This is regrettable since these resolution techniques offer substantial benefits for all parties.

The conventional premium dispute resolution methods described so far in this article are often lengthy, expensive, and detrimental to business relationships among the insurer, broker, and insured. Litigation may be unavoidable, of course, but it should be the last recourse rather than the inevitable result of unsuccessful direct settlement negotiations.

When any premium dispute arises that cannot be resolved through discussions between the parties (perhaps with the broker acting as intermediary), they should immediately consider informal mediation. Mediation occurs when a neutral third party attempts to help the parties arrive at a settlement, usually through a form of settlement conference “shuttle diplomacy.” Mediators do not impose a resolution; they help the parties reach a voluntary settlement.

Mediation typically begins with both parties presenting their positions to the mediator in the presence of the other party. The parties then adjourn to separate conference rooms. The mediator meets in turn with each, providing opinions regarding the strengths and weaknesses of each position and communicating the other’s responses to suggested settlement offers. He or she works to bridge the gap toward settlement. The parties often begin with polar opposite demands, but in very many cases mediators overcome this. The parties are motivated by the desire to end the dispute and avoid expense and uncertain outcome of more formal proceedings.

Mediation also works because it offers major advantages:

1. Flexibility to reach compromise. As discussed above, the usual administrative appeals process affords little opportunity for compromise. Insurers and rating bureaus must apply the regulations and are thus “locked into” their positions. However, mediation may reveal opportunities for creative solutions within the discretion of the parties, such as the insurer offering favorable payment terms, a guaranteed renewal, claims adjuster access, or advantageous pricing on allied lines.
2. Speed. Mediated disputes can be resolved within weeks or a few months – possibly before policies are cancelled or non-renewed -- rather than taking a year or years.
3. Economy. Both parties save substantially on both legal fees and lost productivity.
4. Continuity of relationship. If the dispute itself has not put the insurer-broker-policyholder relationship beyond saving, mediation can enable the parties to continue an otherwise beneficial relationship by settling the dispute and putting it in the past. The costs of ending established relationships and forming new ones may easily exceed the value compromised to reach settlement. In fact, an agreement to extend the relationship may become a basis for settlement.
5. Privacy. Insurance department appeals and court proceedings are open to competitors, clients, news organizations, and other members of the public. Mediation is private and, if successful, results in confidential settlements. During the mediation itself, ethical mediators disclose nothing to the other side that they are asked to keep confidential.
6. Expertise. The parties can choose their mediator on whatever basis they desire, including technical expertise (classification, experience rating, claims handling, etc.), litigation experience (“what are our chances if we go to trial?”), or proven settlement skills. Rather than paying lawyers to learn and then explain esoteric rating concepts to judges and juries, a mediator can be selected who already understands them.
7. Preservation of Legal Rights. So long as the parties have concurrently acted to preserve their rights by, for example, filing a CRA (see above) or an appeal, they lose nothing by attempting to resolve the dispute informally. It is true that they may have to reveal their positions early on, but this is rarely a concern as the same would be true in administrative proceedings and/or litigation.
8. Finality. When the parties agree to resolve their premium dispute, they create an enforceable contract that ends their ability to litigate the matter. There need be no apprehension that the incorrect legal forum was approached. As discussed earlier, this often is – or would be, if the parties realized the legal complexities -- a genuine concern.

If the parties cannot resolve their dispute through mediation, arbitration (binding or non-binding) can be the next step. Mediation and arbitration are very different. Whereas a mediator’s goal is to facilitate settlement, an arbitrator’s (or arbitration panel) job is to render a decision about the dispute. It may be non-binding. Most commonly, however, the parties want resolution and agree, either in their original contract or after the dispute arises, to be bound by the decision. In so agreeing, they substitute a private forum for court resolution of their dispute.

Just as the parties may select anyone to mediate their dispute, they are entirely free to agree upon one or more arbitrators. Since a decision on the merits will result, more care is usually taken in selecting arbitrators than mediators. Local courts often have lists of arbitrators, and national organizations such as the American Arbitration Association have developed their own detailed procedures for arbitrating disputes.

While arbitration also affords many advantages over litigation, it lacks the protections of formal judicial proceedings. For example, arbitrators need not follow the law; they are free to use equity, judgment, their own experience, and/or any other considerations in reaching their decisions. Their sympathies may tend toward insurers, who they may hope will select them again for future arbitrations. Even if scrupulously neutral, business-minded arbitrators are far less likely than judges, or, especially, than juries, to base their decision upon passion or prejudice. Thus, the arbitration forum offers insurers the additional important advantage of financial safety, not only in individual case results, but from the risk of adverse legal precedent.

Under the Federal Arbitration Act, which preempts any contrary state law, the decisions of arbitrators are enforceable but generally not reviewable by courts. Courts will disturb or decline to enforce arbitration awards only in egregious circumstances, such as an arbitrator’s “evident partiality.” For all these reasons, arbitration is usually the best means of resolving premium disputes if the parties cannot reach a voluntary settlement with the assistance of a mediator.

Conclusion

Abraham Lincoln was a highly experienced and successful litigator of business disputes. Nevertheless, he counseled: “Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often the real loser — in fees, expenses, and waste of time.” Workers compensation insurers should add to this “and in lost business through alienation of clients and producers.”

As this article has suggested, workers compensation insurance premium disputes are often complicated, protracted, expensive, and harmful to business relationships. By looking for opportunities to mediate and arbitrate premium disputes rather than litigating them, insurers, brokers, and employers can improve their financial results and reduce conflict between themselves and their key business partners. That’s a win-win scenario that all parties should embrace sooner rather than later.

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Note: This article, in slightly edited format, first appeared in The Journal of Workers Compensation, Spring, 2005, pp. 9-26.

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ABOUT THE AUTHOR: Arthur J. Levine, Ph.D., J.D., CPCU, ARM
Arthur J. Levine, Ph.D., J.D., CPCU is an workers compensation insurance premium attorney and insurance expert witness based in Fullerton, California. A former workers compensation underwriter, he is the author of Levine on California Workers Compensation Premium and Insurance published by International Risk Management Institute, Inc.

Copyright Arthur J. Levine, Ph.D., J.D., CPCU, ARM

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.