Additional Premium Due on Audit Can Be Difficult to Prove

Posted on April 7, 2021 by Barry Zalma

Evidence, or Clear Policy Wording About Audit Procedures, is Needed to Prove Right to Additional Premium

Arch Specialty Insurance Company (“Arch” or “Plaintiff”) sued TDL Restoration, Inc. (“TDL” or “Defendant”), asserting claims for breach of contract, unjust enrichment, and account stated. Currently before the USDC is Plaintiff’s Motion for Summary Judgment on its breach of contract and account stated claims. In Arch Specialty Insurance Company v. TDL Restoration, Inc., No. 18-CV-6712 (KMK), USDC, Southern District Of New York (March 31, 2021) the USDC found it difficult to deal with a motion for summary judgment where some parts were proved and some were not.

BACKGROUND

Arch Policy and Audit

Plaintiff issued an insurance policy that provided Defendant with commercial general liability coverage from March 28, 2016 to March 28, 2017 (the “Arch Policy” or the “Policy”). Under the Policy, Plaintiff agreed to provide this coverage in exchange for Defendant’s payment of policy premiums. Defendant’s initial premium payment (the “Initial Premium”) was based on its estimated exposure during the effective dates of coverage. But because the Initial Premium was based on estimated exposure, the Policy was also “subject to audit based on the actual exposure during the effective dates of coverage.” Depending on the results of the audit, Defendant would either owe additional premium to Plaintiff, or Plaintiff would owe a return of premium to Defendant.

It is undisputed that Plaintiff fulfilled its obligations under the Policy and provided insurance coverage to Defendant during the effective dates of coverage. After the coverage period had ended, and consistent with the terms of the Policy, an audit was performed on or about May 16, 2017. The audit found that Defendant owed Plaintiff $171,339.00 in additional premium (the “Additional Premium”). Although Defendant acknowledges this was the result of the audit, it has not conceded “the accuracy of the underlying determination.”

Pursuant to the Policy, Plaintiff sent Defendant an invoice for the Additional Premium on June 6, 2017. Plaintiff also asserts that “as a result of the Additional Premium[,]” Defendant owes an additional $6,476.61 in New York state taxes and fees (the “Taxes and Fees”), which consists of a New York Surplus Lines Tax and a New York State Stamping Fee. Thus, Defendant owes a total balance of $177,815.61.

Defendant’s Discovery of Purported Payment Records

After the close of discovery, Plaintiff filed a Motion for Summary Judgment. Defendant’s lawyer attached the document to an affirmation and submitted that it was a “true and accurate record from the Plaintiff’s records evidencing payment of the Audit Premium.”

However, after additional discovery Defendant admitted that, after conducting a “very diligent search” of its financial records, it was unable to locate any proof that it had paid the Additional Premium.

DISCUSSION

Plaintiff only moved for summary judgment on its breach of contract and account stated claims.

Defendant did not dispute the existence of an agreement, nor did it dispute that Plaintiff adequately performed its obligations under that agreement. Since Defendant concedes that after conducting a “very diligent search” of its financial records, it has located no proof that it paid the Additional Premium Defendant and there is no genuine dispute that Defendant has breached its agreement with Plaintiff under the Policy, Plaintiff has satisfied the third element of its breach of contract claim.

Even when a plaintiff provides documentation that purports to illustrate the computation of a premium amount, a court is under no obligation accept Plaintiff’s claims. Plaintiff submitted in response to the court’s order for additional information, the Guman Declaration, has served as a useful guide in making sense of Plaintiff’s methodology and calculations.

The Guman Declaration explained how Defendant’s estimated exposure for each type of service in a particular location was sometimes multiplied by two rates—one for contracted operations, and another for product-completed operations—to derive the Initial Premium amount. The Guman Declaration also explains how the May 2017 audit produced the actual exposure figures set forth in the Audit Report. The calculation of Defendant’s actual exposure during the coverage period is significant for a simple reason.

As the Guman Declaration explains, the Audit Endorsement takes the actual exposure figures from the Audit Report and compares them to the estimated exposure figures from the Arch Policy.

In sum, Plaintiff has not established that there is no genuine dispute of material fact regarding the amount of damages to which it is entitled. At the same time, however, it is clear that Plaintiff is entitled to some amount of damages.

ACCOUNT STATED

Under New York law, an ‘account stated’ refers to a promise by a debtor to pay a stated sum of money which the parties had agreed upon as the amount due. To establish its claim for account stated, Plaintiff must show that: (1) an account was presented; (2) it was accepted as correct; and (3) Defendant promised to pay the amount stated.

It is well-established, however, that an account stated claim may not be utilized simply as another means to attempt to collect under a disputed contract. As a matter of law, a defendant cannot be found liable on both an account stated claim and a breach of contract claim in connection with the same allegations of a failure to pay monies owed.

Plaintiff’s account stated claim is congruent with, and duplicative of, its claim for breach of contract. Because the Court has found Defendant liable under Plaintiff’s breach of contract claim, it may not be found liable on Plaintiff’s account stated claim “as a matter of law.” The Court therefore denied summary judgment with respect to Plaintiff’s account stated claim. Plaintiff’s Motion was granted in part and denied in part.

ZALMA OPINION

The methodology used by Arch to calculate the additional premium was complex and difficult for the court to understand and, even with additional information provided by a declaration from Arch, the issue of the true amount owed became unclear. The court concluded that Arch was owed additional premium and that the Defendant breached the contract but will need a trial to determine the total amount owed. This case teaches that with an audit policy where the full amount of premium is only determined after the policy expires, that the wording of the policy should contain a clear and unambiguous manner of determining the premium owed at audit.

? 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost

equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at https://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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