PITFALLS IN COLLECTING INSURANCE PREMIUMS

Most commercial attorneys love handling audit premium collections. It's not that these claims are any more collectible than other commercial claims, and it's certainly not true that insurance companies pay higher fees.

Rather, it's because these cases have a ring of familiarity about them. The National Counsel on Compensation Insurance ("NCCI") policy is the same in every case, so the creditor's attorney becomes familiar with all of its terms. It's also comforting the proper defendant is readily identified - most likely the named insured, which entity is usually correctly set forth on the Application for Coverage and the policy information sheet. So what can go wrong?

First of all, there may be additional named insureds, all of whom may be sued for the premium. The creditor's attorney can't know about additional insureds without first reviewing the application for the policy and any policy endorsements. Just because the first named insured is a defunct corporation, an attorney reviewing the claim cannot close the file without first making inquiry as to whether there are other named insureds, and then reviewing all of the endorsements.

Usually, the additional premium claimed is based upon an audit made of the insured's payroll after the close of the policy period. But if the insured did not cooperate with the auditor, we may have what is known as an "estimated audit" pegged, for example, at an additional 150% of the deposit premium. There really is no legal basis to estimate what is due from the insured - but we usually sue anyway, and then the debtor usually opens up its books so that an audit can be completed.

Over the past few years, carriers have been faced with counterclaims for negligent claim handling on retrospective policies in which the insured is required to contribute to the premium to pay losses. Now we are seeing counterclaims on non-retro cases, for negligent claim handling, alleging that the carrier's negligence caused an increase in the experience-modification factor, resulting in additional increased premiums on future years' policies.

In the past, when the insured complained about errors in employee classification resulting in higher ratings, we could often deflect this defense by claiming that the insured should have viewed the policy upon delivery and raised these issues at that time, or should have sought administrative review with the appropriate insurance department of the State.

While these are still valid objections to the erroneous classi-facation defense, we are now seeing that the Courts are becoming more and more lenient in allowing untimely administrative review.

What had been for most commercial attorneys, a "slam-dunk" lawsuit into a quick judgment has now become a more sophisticated piece of contested litigation. While we still see some easy judgments - more and more insureds are seeking to assert defenses that require time, effort and ingenuity to overcome.

The material contained herein is not to be relied upon as a substitute for consultation with your attorney.