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Travelers Indemnity Co. v. T & S Drywall Finishing, Inc.

Court of Appeals of Nebraska

July 9, 2013

The Travelers Indemnity Company, appellee,
T & S Drywall Finishing, Inc., appellant.


Appeal from the District Court for Douglas County: Leigh Ann Retelsdorf, Judge.

Josh Henningsen and Christopher A. Sievers, of Timmermier, Gross & Prentiss, for appellant.

Robert J. Wonnell, of McAnany, Van Cleave & Phillips, P.A., for appellee.

Inbody, Chief Judge, and Irwin and Moore, Judges.


Moore, Judge.

T & S Drywall Finishing, Inc. (T&S), acquired workers' compensation insurance from The Travelers Indemnity Company (Travelers). After the policy period terminated, Travelers audited T&S to determine the actual premium as provided by the policy. During this audit and the audit of the following policy period, Travelers concluded that T&S owed additional premiums because it had hired subcontractors that did not have workers' compensation insurance covering their employees. T&S disputed the increased premiums, and Travelers brought an action against T&S in the district court for Douglas County. Following a bench trial, the district court entered judgment in favor of Travelers. T&S challenges the finding that it is liable for additional premiums. Finding no error, we affirm the district court's decision.


T&S is a company involved in the business of drywall installation and finishing. However, it does not perform any of the actual installation or finishing work. Instead, T&S submits bids to general contractors and, upon having a bid accepted, assigns the installation and finishing to various subcontractors. Other than its president and owner, Terry Winn, T&S has one other employee, Julie Schafer, who manages the office and handles the bookkeeping.

On February 17, 2005, T&S submitted an assigned risk application for workers' compensation insurance to Travelers through one of Travelers' agents. In its application, T&S disclosed that it subcontracted 100 percent of its work and indicated that it did not sublet any work without first having received a certificate of insurance from the subcontractor. Along with the application, T&S paid $750 as prepayment of its premium. This prepayment was later increased to $850. Upon receiving the application and premium, Travelers issued T&S a policy with an effective policy period beginning on February 19, 2005, and terminating on February 19, 2006. When this initial policy period expired, a renewal policy was issued with an effective date of February 19, 2006.

As permitted by the policy, Travelers audited T&S' records a few months after the first policy period expired to determine the actual policy premium due. During this audit, Travelers determined that T&S had contracted with a number of subcontractors that did not have their own workers' compensation insurance. Based on the information it received from the audit, Travelers also concluded that these subcontractors employed additional workers. Because these subcontractors did not have workers' compensation insurance covering their own workers, Travelers asserted that it had increased liability during the policy period because under Nebraska law these subcontractors' workers could have submitted claims under T&S' policy. As a result of this audit, Travelers adjusted T&S' final premium to $103, 544.

Travelers also attempted to audit T&S' records during the renewal policy period, but T&S did not provide the necessary records. As a result, Travelers used the previous audit results to estimate T&S' premium for the partial renewal policy period. T&S continued to contest Travelers' revised policy premiums, and the policy was canceled on June 27, 2006. Travelers adjusted T&S' premium for the renewal period from February 19 to June 27, 2006, to $34, 348. When T&S refused to pay the adjusted premiums, Travelers filed suit in the district court for Douglas County.

At trial, Rhonda Byers, a Travelers' premium auditor, testified to Travelers' workers' compensation premium audit process. She explained that the initial premium for a workers' compensation policy is an estimate based upon an insured's payroll projections for the policy period. The final premium is based upon an insured's actual payroll during the period. Because the final premium is based upon an insured's actual payroll, Travelers audits the insured's records after the policy has expired. To complete this audit and determine the final premium, Byers testified that Travelers reviews payroll records, certificates of insurance for any subcontractors, quarterly reports, federal 941 tax forms, and state unemployment quarterly reports.

Byers also described the process Travelers utilizes to calculate the final policy premium. Byers stated that the governing body for workers' compensation, the National Council on Compensation Insurance (NCCI), assigns classification codes based upon the type of work involved. According to Byers, each classification code has a different premium rate that is based upon the loss history for that classification code within a particular state. To determine the final premium, Travelers multiplies the insured's actual payroll for the policy period by the specific classification codes that pertain to the insured's operation.

Byers further explained Travelers' audit of T&S. Byers testified that Schafer informed Travelers during the audit that the subcontractors hired by T&S had additional employees on the jobsites. We also note that the interrogatory answers from T&S indicated that most of T&S' subcontractors have employees. Byers stated that Travelers charged T&S the additional premiums after the audits because T&S could not provide documentation showing that all subcontractors were covered by workers' compensation insurance policies. T&S only provided certificates of insurance for 2 of its 10 subcontractors. If T&S had provided certificates of insurance for all of its subcontractors, Byers testified that Travelers would not have charged the additional premiums.

Winn testified that he was instructed by Travelers' agent not to supervise, direct, or oversee any of its subcontractors. Because of these instructions, T&S intentionally did not determine whether the subcontractors had employees at a jobsite and did not determine how the subcontractors completed the work. T&S paid the subcontractors directly and did not issue payment to any employees of the subcontractors. According to Winn, the only way T&S would become aware that a subcontractor had employees was if the subcontractor submitted proof of workers' compensation insurance. However, there was no evidence presented to indicate that T&S required certificates of insurance from all of its subcontractors who had employees before subletting work.

After a bench trial, the district court entered judgment in favor of Travelers. At the outset, the court noted that the dispute is not whether the insurance agreement is an enforceable contract, but whether Travelers is entitled to the premium as calculated. The district court concluded that the policy language clearly provided Travelers the ability to conduct a postpolicy premium audit and required T&S to preserve the records necessary for such an audit. Finding that T&S failed to require its subcontractors to furnish proof of workers' compensation coverage for their employees, the court found that T&S became liable as an employer under Neb. Rev. Stat. ยง 48-116 (Reissue 2010). Because T&S intentionally failed to maintain the records necessary for an audit, the district ...

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