Opinion
42018-0-II
02-12-2013
NW WALL & CEILING CONTRACTORS ASSOCIATION, Appellant, v. DEPARTMENT OF LABOR AND INDUSTRIES, Respondent.
UNPUBLISHED OPINION
Penoyar, J.
The Department of Labor and Industries (the Department) offers a retrospective rating program (retro) for workers' compensation insurance. Under the retro program, employers pay a standard premium up front and then receive a refund or assessment based on their actual claim experience for the plan year. In 1997, the Department began the drywall initiative that changed the way drywall employers' premium rates were calculated and offered discounted premium rates to employers who complied with the Department's reporting requirements. Northwest Wall and Ceiling Contractors Association (NWCCA) is a group of drywall employers who both enrolled in the retro program and qualified for the new discounted drywall rates. NWCCA received retro assessments for three of the first four years of the drywall initiative. NWCCA appealed these assessments to the Department, and the Department affirmed the assessments. The Board of Industrial Insurance Appeals and the superior court both affirmed the Department's decision. NWCCA appeals, arguing that the Department violated recognized insurance principles because it (1) failed to determine the adequacy of the new drywall rates before implementing them, (2) failed to inform NWCCA of a major change in the potential cost of coverage, and (3) failed to monitor the new rates after implementing them. It also argues that it is entitled to attorney fees. We hold that the Department did not violate recognized insurance principles because (1) it determines adequacy at the fund level, (2) NWCCA failed to prove that the Department owed a greater duty than it performed, and (3) the Department used the best available information in setting the drywall premium rates. Additionally, NWCCA is not entitled to attorney fees.
FACTS
I. Retrospective Rating
NWCCA is a group of union drywall employers. In 1983, the group entered the Department's retro program for workers' compensation insurance. The retro program provides incentives to employers to keep claim costs low by assessing or refunding premiums based on the actual claims the employers (or groups) incur during the coverage year. Every employer pays the standard premium for the coverage year. The Department then evaluates the retro program employers' actual claims at the end of the coverage year—and every 12 months thereafter for up to 5 years—to calculate the employers' retro premiums. Former WAC 296-17-916 (1997); former WAC 296-17-91216 (1999); former WAC 296-17-90445 (2000). If the employers' retro premiums are lower than the standard premiums, the employers receive a refund. If the employers' retro premiums are higher than the standard premiums, the employers are assessed the difference. The retro program thus encourages participating employers to increase workplace safety, which lowers claims and results in a possible refund for employers. Although the Department encourages participation in the retro program as a way to promote workplace safety, the decision to join is made solely by the employers.
Employers can form groups that the Department treats as a single entity for purposes of retrospective rating. Former WAC 296-17-910 (1997).
II. Drywall Initiative
The drywall initiative began in 1997 as an attempt to increase drywall employers' compliance with the Department's reporting requirements. Premiums for drywall employers were increasing because some employers were not accurately reporting the number of hours their employees worked. The Department made several changes to combat this problem. First, the Department changed the reporting medium for drywall employers from hours worked to square foot of drywall installed. The amount of drywall a contractor installs can be independently verified through building permits and supplier's records. The Department hoped that this reporting medium would be less susceptible to manipulation.
Second, the Department created two tiers of drywall premium rates: discounted and nondiscounted. The employers who qualified for the discounted rates received a 30 percent or 40 percent discount on their premium rates. Those who did not qualify paid a premium rate that was 50 percent higher. Employers had to follow the Department's reporting requirements in order to qualify for the discounted rate. The Department hoped that this would increase reporting and lead to more fair rates for all drywall employers.
The Department also created multiple classifications within each tier that relate to the type of drywall work done by employees. For example, there is a taping class and an installation class. The taping class received a 30 percent discount and the installation class received a 40 percent discount.
The new rates were set by Frank Romero, head of the Department's risk classification unit. Romero would often set the base premium rates for new classes, and the Department actuaries would monitor and evaluate the rates to determine if the rates were adequate and make adjustments if they were not. Generally, actuaries set the rates using data from the previous five years to adjust the rate from the prior year. For example, to set the 1990 rate, actuaries used data from 1984 to 1988 to adjust the 1989 rate. That was not done for the 1997 rates because the data from the previous years used a different reporting scheme—by the hour rather than by square foot of drywall installed. Instead, the Department converted the old hourly rate to a square footage rate using a conversion factor of 125 square feet per hour worked. This conversion factor was based on testimony from drywall employers. Romero then set a discount based on the Department's experience with the reforestation class, where the Department had success in combating a similar reporting problem. The discounted rate was "fairly close" to the rate used in the pilot program, which was set based on the rate that employers said they needed to be competitive. Administrative Record (AR) (Nov. 16, 2009) at 37. The 1997 rates were, in the words of Romero, "blessed" by the Department's senior actuary. AR (Nov. 16, 2009) at 17-18. The Department held public hearings to discuss the new rates and the switch to square footage reporting, and it published the new rates in compliance with rule-making procedures. The new rates went into effect in 1997.
Romero set the rates in 1996 as head of risk classification; he became manager of the retro program during 1997, when the Department was implementing the initiative.
The Department's senior actuary, Bill Vasek, set the premium rates for 1998. He used the same methodology as Romero to set the discounted and nondiscounted rates and ended up using the same percentages—a 30 percent or 40 percent discount for qualifying employers and a 50 percent increase for nondiscounted employers. Vasek testified that he did not use the data from 1997—the first year when square footage reporting was in effect—in computing the 1998 rates because it was not mature enough.
Vasek also set the 1999 and 2000 rates. This time, he used the normal rate-making process, where the prior year's rate is adjusted by looking at the previous five years—although in this case, there was not five years of square footage reporting data, so he used what was available. In setting the 1999 rate, he used data from 1997 to adjust the 1998 rate. In setting the 2000 rate, he used data from 1997 and 1998 to adjust the 1999 rate.
III. NWCCA's Retro Program Performance from 1997 to 2000
NWCCA's retro program coverage period ran from July 1 to June 30. It had to enroll for the upcoming coverage year two months in advance. It would usually receive the first retro adjustment in May of the following year. This meant that it would have to sign up for the next coverage year before it knew whether the previous year resulted in a refund or an assessment. In 1999, NWCCA received its first retro adjustment for the 1997/98 plan year—the first year of the drywall initiative. It owed an assessment for the first time during its participation in the retro program. It protested the assessment and ultimately came to an agreement with the Department to void its retro program contract for the 1997/98 plan year. The Department and NWCCA agreed that there had been no "meeting of the minds" for the 1997/98 plan year contract—because of the new drywall rates and reporting scheme—and, therefore, a retro program contract did not exist for that year. AR (Nov. 16, 2009) at 31. As a result, the Department treated NWCCA as a nonretro employer and charged it only the standard premium. This agreement was not reached until March 2000.
Meanwhile, NWCCA had to enroll for the 1998/99 plan year in June 1998, before the first adjustment for the 1997/98 plan year was available. The 1998/99 plan year also resulted in an assessment. By the time NWCCA learned of the $735, 149 assessment, it had already enrolled in the retro program for the 1999/2000 plan year. NWCCA settled the 1997/98 assessment with the Department during the 1999/2000 plan year. At that time, the Department suggested that NWCCA change its plan for 1999/2000. NWCCA took the suggestion and changed its retro plan mid-year. It received a $433, 848 refund that year. NWCCA enrolled for the 2000/01 plan year in June 2000 and received a $309, 528 assessment for that year in May 2002. It opted out of the retro program for the 2001/02 plan year.
The amounts for the refunds and assessments vary slightly throughout the record. We refer to the amounts listed in exhibit 11 for this opinion.
In 2002 and 2003, NWCCA noticed what it considered significant increases in drywall premium rates. The increased rates, coupled with its recent assessments, caused NWCCA to investigate the recent changes to the drywall rates. NWCCA hired the Department's former senior actuary, Bill White, to analyze drywall rates since the initiative. AR (11/20/09) at 48. White's 2005 report showed that the Department had set rates too low during the first few years of the drywall initiative. By assuming that the proposed 2006 rates were adequate—meaning that the premiums would cover expected losses—he worked backward to discover what the Department should have set the rates at in the early years of the drywall initiative. He discovered that the discounted rate should have been discounted only 7 percent rather than 35 percent and that the nondiscounted rate should have been increased by 22 or 23 percent. He also discovered that the initiative did not increase compliance and that the increase in rates in 2003 and 2004 was a delayed reaction to the initiative's failure.
Witnesses occasionally referred to the discount as 35 percent—the average of the two discounted classes. See AR (Nov. 16, 2009) at 43.
IV. NWCCA's Appeals
NWCCA appealed its retro adjustments for the 1998/99, 1999/2000, and 2000/01 plan years. The Department denied the appeal, and NWCCA appealed the decision to an Industrial Appeals Judge (IAJ). The IAJ reversed the Department and ordered a refund for NWCCA. The Department then appealed to the Board of Industrial Insurance Appeals, which affirmed the Department's order upholding the assessments. NWCCA appealed to the superior court, which affirmed the Board and adopted its findings of fact and conclusions of law. NWCCA appeals.
ANALYSIS
I. Standard of Review
Our review of a superior court's decision on an appeal from the Board of Industrial Insurance Appeals is limited to examining the record to see whether substantial evidence supports the superior court's findings of fact and whether the conclusions of law flow from the findings. Young v. Dep't of Labor & Indus., 81 Wn.App. 123, 128, 913 P.2d 402 (1996). "Substantial evidence exists where the record contains a sufficient quantity of evidence to persuade a fair-minded, rational person of the truth of the allegation." State v. Halstien, 122 Wn.2d 109, 129, 857 P.2d 270 (1993). We review the record in the light most favorable to the party who prevailed in superior court. Rogers v. Dep't of Labor & Indus., 151 Wn.App. 174, 180, 210 P.3d 355 (2009) (quoting Harrison Mem'l Hosp. v. Gagnon, 110 Wn.App. 475, 485, 40 P.3d 1221 (2002)). We give substantial weight to an agency's interpretation of the law within its expertise. Hill v. Dep't of Labor & Indus., 161 Wn.App. 286, 293, 253 P.3d 430, review denied, 172 Wn.2d 1008, 259 P.3d 1108 (2011). Unchallenged findings are verities on appeal. Robel v. Roundup Corp., 148 Wn.2d 35, 42, 59 P.3d 611 (2002). II. NWCCA Did Not Waive Its Challenge
The Department first argues that NWCCA waived its challenge to the assessments because it never challenged the rules setting the rates. NWCCA responds that it is not challenging the rates, it is arguing that the Department failed to run the retro program consistent with recognized insurance principles. We agree with NWCCA that waiver does not apply here where NWCCA is not challenging the validity of the rules.
III. Failure to Follow Recognized Insurance Principles
NWCCA argues that the Department should be ordered to refund the assessments because it failed to run the retro program consistent with recognized insurance principles. Specifically, it argues that the Department failed to determine the adequacy of the new drywall rates, failed to inform NWCCA of major changes in the potential cost of coverage, and failed to monitor the new rates for adequacy.
The legislature requires the Department to act according to recognized insurance principles. RCW 51.18.010(2) states "[t]he retrospective rating plan shall be consistent with recognized insurance principles and shall be administered according to rules adopted by the department." Similarly, RCW 51.16.035 requires the Department to set rates according to recognized insurance principles.
This section was added in 1999. Laws of 1999, ch. 7, § 2.
A. Rate Adequacy
NWCCA contends that the Department violated recognized insurance principles when it failed to determine the adequacy of the new drywall rates. This argument is based on Romero's testimony that he did not consider adequacy when he set the new drywall rates. Because the Department does not evaluate rate adequacy at the class level, we hold that the Department did not violate recognized insurance principles when it formulated the new drywall rates.
The parties agree that it is a recognized insurance principle that rates must be adequate. They disagree as to how this principle applies. Both the Department's senior actuary and the manager of the retro program testified that rates must be adequate. Premium rates are "adequate" if they are sufficient to cover expected losses. AR (Nov. 17, 2009) at 120. NWCCA argues that rate adequacy should be determined at the class level, meaning that the premiums should be sufficient to cover the expected claims of the individual drywall classes. The Department argues that rate adequacy is assessed at the fund level, meaning that it looks at the combined expected claims of all classes and sets a rate that is sufficient to keep the state funds solvent. RCW 51.16.035(1)(a) supports the Department's view, stating that the Department shall fix rates that are the lowest necessary to maintain solvency of the accident and medical aid funds. Additionally, the Supreme Court has held that the Department's fund-based approach to rate setting is consistent with recognized insurance principles. WR Enters., Inc. v. Dep't of Labor & Indus., 147 Wn.2d 213, 228, 53 P.3d 504 (2002). NWCCA has not argued that the Department failed to determine adequacy at the fund level. Therefore, Romero's failure to consider adequacy at the class level is not a violation of recognized insurance principles.
NWCCA also argues that the Department violated recognized insurance principles by allowing Romero, a non-actuary, to determine the new rates. First, it is not clear from the record that recognized insurance principles require rates to be actuarially determined. The Department's retro program manager agreed that it is a recognized insurance principle that base rates need to be adequate and actuarially determined, but former senior actuary White testified that it was not a violation of insurance principles for Romero to set the initial drywall rates. Second, while Romero did set the initial rates, the rates were "blessed" by the Department's actuaries. AR (Nov. 16, 2009) at 17-18. Finally, both the Department's former and current senior actuaries agreed that Romero's approach—taking the rates from the old hours worked system and converting them to a square footage system based on industry estimates and basing the discount on the Department's experience with the reforestation class—was reasonable. It was not a violation of insurance principles for Romero to set the initial drywall rates.
NWCCA additionally argues that the Department's conduct is indistinguishable from the private insurer's conduct in Woodworker's Supply, Inc. v. Principal Mutual Life Insurance Co., 170 F.3d 985 (10th Cir. 1999). Because that case is distinguishable from the facts at issue here, NWCCA's argument fails.
B. Failure to Inform
NWCCA next argues that the Department violated recognized insurance principles when it failed to inform NWCCA of a major change in the potential cost of coverage. NWCCA contends that the Department had a duty to inform retro program drywall employers that the drywall initiative would impact their retro program coverage. The Department responds that it properly informed NWCCA about changes in the drywall rates through the rule-making and public hearing process. Because NWCCA failed to establish that the Department owed a greater duty than it performed, its argument fails.
Department members testified that it is a recognized insurance principle that insurers have a duty to inform insureds of major changes in the potential cost of coverage. The superior court found that NWCCA was informed of the changes in coverage caused by the drywall initiative. Specifically, it found that NWCCA was involved with the Department in formulating the drywall initiative through the Drywall Technical Advisory Committee and that the Department conducted public hearings discussing the initiative and the change to square footage reporting. NWCCA does not challenge these findings; rather, it argues that the Department owed NWCCA a higher duty than merely informing it of the changes to the drywall rates. NWCCA appears to argue that the Department should have warned drywall employers to reconsider their participation in the retro program. However, NWCCA has failed to cite to any authority stating that the Department owed such a duty. Cowiche Canyon Conservancy v. Bosley, 118 Wn.2d 801, 809, 828 P.2d 549 (1992) (stating that this court does not consider arguments that are not supported by authority).
C. Failure to Monitor Rates
Finally, NWCCA argues that the Department violated recognized insurance principles when it failed to monitor the new drywall rates for adequacy after implementing them. This argument appears to be based on the Department's failure to use information from 1997 in setting the 1998/99 plan year rates. The superior court found that the Department used the best available information in setting the rates. NWCCA argues that this finding is not supported by substantial evidence. We hold that there is substantial evidence to support the finding that the Department used the best available information in setting the rates and the Department did not violate recognized insurance principles.
Although NWCCA uses the word "monitor, " it cites to parts of the record discussing the use of the 1997 rates in computing the 1998 rates. It also argues in an earlier section of its brief that the Department should have "used"—rather than "monitored"—the 1997 rates. To the extent that NWCCA is arguing that the Department should have monitored the rates independent of their use and passed that information on to NWCCA, we address that argument above.
As we discussed above, the Department set the 1998 rates using the same methodology as the 1997 rates—it converted the hours worked rates to square footage rates using an industry-generated conversion factor, then it applied a discount equal to the 1997 discount. The Department did not use the standard actuarial approach—which involves looking at the previous five years of rates—in setting the 1998 rates because the previous rates were set under a different reporting system. NWCCA's argument is that the Department should have considered the 1997 rates—which used the new reporting system—in setting the 1998 rates.
The Department's current senior actuary, Vasek, testified that he did not consider the 1997rates because the data was too immature to use for rate setting. Vasek said that actuaries wait for the data to mature because claim costs—which are considered in the rate-making formula—change as the claim ages. He also explained that the seasonal nature of the drywall industry and the fact that the Department expects underreporting at the outset of a new program affected the small amount of data available from 1997.
The Department's former senior actuary, White—the author of the report that exposed the drywall rate inadequacies—agreed that the 1997 data was not mature enough to use in setting the
1998rates. He testified that it was not unreasonable for the Department to use the same method of rate setting in 1998 as in 1997. Given the testimony of both senior actuaries that the 1997 data was not mature enough to use in setting the 1998 rates and their agreement that the process for setting the 1998 rates was reasonable, there is substantial evidence to support the superior court's finding that the Department used the best available information in setting the drywall rates.
V. Attorney Fees
NWCCA asks for prejudgment interest on its refunded assessments. Since we hold that NWCCA is not entitled to a refund, it is likewise not entitled to interest. NWCCA also asks for trial and appellate attorney fees under RCW 51.52.130(1). Because RCW 51.52.130(1) applies to employees and not employers and requires the party to prevail, NWCCA is not entitled to attorney fees under that provision.
Affirmed.
A majority of the panel having determined that this opinion will not be printed in the Washington Appellate Reports, but will be filed for public record in accordance with RCW 2.06.040, it is so ordered.
We concur: Quinn-Brintnall, J. Worswick, C.J.
In Woodworker's, the employer purchased insurance for its employees from Principal, a private insurer. 170 F.3d at 988. Woodworker's and Principal entered into a retrospective premium agreement. Woodworker's, 170 F.3d at 988. Before Woodworker's entered the agreement, Principal learned from the underwriter of the plan that the preliminary premium rates were inadequate. Woodworker's, 170 F.3d at 988. Principal did not inform Woodworker's of the inadequate rates, and Woodworker's was charged an assessment at the end of the plan year. Woodworker's, 170 F.3d at 988-89. The Tenth Circuit upheld the jury's findings that Principal's failure to disclose that it knew the rates were inadequate violated the New Mexico Unfair Practices Act and constituted fraudulent inducement. Woodworker's, 170 F.3d at 994. The Department's behavior is distinguishable from Principal's. Principal knew that the rates were inadequate before it began insuring Woodworker's. By contrast, the Department did not know that the rates were inadequate. Additionally, the Woodworker's court found that Principal acted with intent to deceive. 170 F.3d at 994. NWCCA did not present evidence that the Department violated its "duty [as a government agency] to act in good faith, abstain from deception, and practice honesty and equity." Appellant's Br. at 33. The Department set the premium rates in accordance with Department rules, and NWCCA does not challenge the validity of the rules. The method for calculating the rates was published according to rule-making procedures and, through the Drywall Technical Advisory Committee and public hearings, NWCCA was aware of the changes to the rates.