6th Circuit: Insurer’s Hefty Penalty on Employer’s Audit Non-Compliance Will Stand

A workers’ compensation insurance company’s hefty penalty against its non-compliant insured will likely stand, after a federal appeals court found that the matter was governed by state insurance regulators, not by the courts.

In Granite State Insurance Co. vs. Star Mine Services, the U.S. 6^th Circuit Court of Appeals upheld a district court and found that Granite State’s $1.5 million charge against its client was considered a “filed rate” or tariff approved by the Kentucky agency that reviews insurance rates.

“The filed-rate doctrine ‘provides that tariffs duly adopted by a regulatory agency are not subject to collateral attack in court,'” Judge Amul Thapar wrote in the March 15 opinion, quoting from a 1999 Kentucky state appellate court ruling.

“The judicial role is limited when legislatures vest agencies with the authority to approve rates,” the court concluded. “That’s true in the insurance industry, and it’s true of this policy’s audit noncompliance charge. So the filed-rate doctrine bars Star Mine’s challenge. And Star Mine points to nothing that disputes the damages amount.”

The decision appears to expand the reach of the filed-rate doctrine and could give new support to insurers who impose stiff penalties on noncompliant employers. In this case, the penalty was inappropriate and should be considered unenforceable, said Star Mine’s attorney, Thomas Springer.

The decision “is very disappointing,” he said Friday.

Springer, of Madisonville, may be best known for representing injured workers and for securing the landmark 2010 Kentucky appeals court decision in Gardner vs. Vision Mining. That court found that part of the state’s workers’ compensation law was unconstitutional because it treated mine workers’ black-lung claims differently from other workers’ pneumoconiosis claims. He said he came to represent Star Mine Services in the Granite State matter because he knows the principals of the firm, which had long been part of the mining operations around Madisonville.

The Granite State litigation began in 2018. Star Mine provided staffing to Kentucky coal mines and it purchased a workers’ comp insurance policy from Granite State, an AIG company. The insurer billed the staffing company in two annual installments, the court opinion explained. At the start of each policy year, Star would estimate its total payroll. At the end of the year, Granite State would audit the firm’s books to determine the exact payroll and charge additional premiums or make reconciliation payments to the employer.

In 2018, an audit revealed that Star Mine had significantly underestimated its 2017 and 2016 payrolls. To recoup premiums and avoid another shortfall, Granite State adjusted the estimated premium for 2018 and gave Star four weeks to comply. The staffing company never paid up, and Granite State canceled the policy three months early.

Without insurance, Star Mine closed its business, the court said.

To determine Star Mine’s final premium, Granite State still needed to complete a year-end audit. But the employer wouldn’t comply and it never paid the updated premium. Granite State sent one final bill, for almost $1.5 million, which included the audit noncompliance charge.

Star Mine never responded and Granite State sued for breach of contract.

The appeals court noted that the policy and an industry manual filed with state regulators details the noncompliance charge, which can be twice the annual premium if an employer flouts the audit.

Star Mine and Springer argued that the charge should be considered unenforceable. The penalty is based on the insurer’s estimated premium, which already gives the insurance company an unfair advantage, Springer said.

“They were already made whole by estimating the premium owed,” he said.

Kentucky state courts also have a long history of ruling that penalty provisions in contracts are unenforceable, Springer said.

The federal appeals court disagreed, contending that the penalty was part of the insurance rate structure: “The district court found that the filed-rate doctrine bars judicial review of the claim. The district court is correct: We can’t review the merits of Star Mine’s challenge.”

The filed-rate doctrine is rooted in the idea of separation of powers, and keeps the judicial branch from second-guessing a state agency’s rate-making authority. It also helps ensure that ratemaking is non-discriminatory, in that companies that sue in court won’t be able to win lower rates than those that don’t litigate, the court noted.

The mine staffing company argued that the penalty was not part of a filed tariff or rate because the insurer had discretion in applying it. The policy and the carrier’s regulatory filings limit the charge to twice the estimated annual premium.

“True, Granite State’s discretion to apply the audit noncompliance charge means it has some room to discriminate among its customers,” the judge wrote in the opinion. “But that discretion is limited because the charge is filed. Though Granite State may choose not to apply the charge, it also may not charge anything beyond the fixed cap of twice the estimated annual premium.”

The opinion did not address whether the insurer will now be able to collect from a defunct staffing company. Springer declined to speculate on that, and said his client is still considering if it will ask the U.S. Supreme Court to review the decision.

Attorneys for Granite State Insurance could not be reached for comment.

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