Defendant Sessions Payroll Management, Inc. (Sessions), appeals from a judgment entered after a court trial in which it was found to have breached a contract for workers' compensation insurance by failing to pay the premium. Defendant contends the trial court erred in finding that it, rather than its successor, was obliged to pay the premium and in finding that the premium was properly increased by application of a 121 percent experience modifier. We affirm.
The facts are taken from the reporter's and clerk's transcripts and trial exhibits lodged on appeal. There is no material dispute over the facts, only over their legal effect.
Sessions is a payroll company that contracts with motion picture production companies to provide administrative services. It issues payroll checks to movie extras, calculates and deducts appropriate withholding taxes, remits taxes to the appropriate agencies, obtains workers' compensation insurance
Sessions's employees fall under two classification codes for purposes of workers' compensation insurance underwriting: clerical personnel and motion picture personnel. Sessions is only a nominal employer of the motion picture personnel, as it does not meet with or hire or fire the movie extras, supervise them, visit their worksites, control their hours, wages, or working conditions, or maintain a continuing relationship with them postproduction.
Sessions was owned by its founder, Jim Knight, from its inception in 1979 to January 1, 2005, when Knight sold the corporation to John Heffernan, one if its officers. Heffernan subsequently formed Entertainment Production Services, Inc. (EPSI), and transferred Sessions to it. The payroll operations continued under the doing business as designation Sessions Payroll Management until 2008, at which time Heffernan returned Sessions to Knight's ownership.
The State Compensation Insurance Fund (SCIF), a public enterprise fund that provides workers' compensation insurance to employers (Ins. Code, §§ 11770, 11773),
On March 8, 2005, SCIF issued workers' compensation policy No. 1672784-05 to Sessions for the period January 1, 2005, through January 1, 2006 (the policy). The policy identified "Sessions Payroll Management, Inc.," as the insured, stated it covered Sessions's liability to its employees, not "the liability of any [other] employer," and obligated Sessions to inform SCIF immediately when the information contained in the declarations regarding Sessions's operations was no longer accurate.
The policy provided that the "estimated" premium would be calculated by multiplying pertinent base rates by the reported payroll of "all [Sessions's]
Part five of the policy provided that the premium thus calculated was only an estimate; the final premium would be calculated after a postterm audit was conducted to verify Sessions's payroll for the policy term. The final premium, like the estimated premium, would be reduced or enhanced by any "rates and rating plans that lawfully apply to the business and work covered by th[e] policy." The policy provided that Sessions would accept any increased final premium calculated under a rating plan approved by the Insurance Commissioner and would pay all premiums when due.
To determine the experience rating applicable to the policy, SCIF forwarded Sessions's payroll and operations information to the Workers' Compensation Insurance Rating Bureau (the Rating Bureau). After considering Sessions's estimated payroll, type of work, and workers' compensation claims experience for 2001, 2002 and 2003, in June 2005 the Rating Bureau directed that an experience modifier of 121 percent be applied to the policy premium. Accordingly, on June 28, 2005, SCIF issued an endorsement agreement that provided, "It is agreed that the policy contract premium earned at the base rates shall be modified by 121 [percent] in accordance with the Workers' Compensation Experience Rating Plan."
In a disclosure statement, Sessions was informed that it could request that the Rating Bureau reconsider any "decision, action, or omission to act" or review the manner in which its rating system was applied. If Sessions was dissatisfied with the results of any such request, it could appeal to the Insurance Commissioner within 30 days of receiving notice of SCIF's or the Rating Bureau's decision or 120 days after the request was made if no notice was given.
Sessions made monthly premium payments for most of 2005, calculating the premium due each month by multiplying the interim base rate for each of its two employee classifications—clerical and movie production—by that classification's payroll for the month. Beginning with the July payroll period, Sessions increased its payments by 21 percent in accordance with the experience rating issued by the Rating Bureau (i.e., Sessions multiplied the premium by the bureau's 121 percent experience rating).
On May 2, 2006, Jeri Garcia, SCIF's auditor, conducted an audit of Sessions's operations for the 2005 policy term. Garcia met with Heffernan and Guido Dito, Sessions's risk manager, examined the company's payroll, employment, and insurance records, and reported her findings to SCIF. SCIF used Sessions's payroll information and the 121 percent experience modifier provided by the Rating Bureau to calculate the final policy premium: $874,595.44.
On June 5, 2006, Knight contacted SCIF to dispute, among other things, application of the 121 percent experience modifier. He argued the movie production companies, not Sessions, were the movie extras' actual employers. Because each movie company was established specifically to make each new motion picture, Knight argued, each company should be afforded a "New Employer" rate, i.e., should be given an experience rating of 100 percent. SCIF disagreed, maintaining it did not have new employer rates for temporary staffing agencies that provided employees to new-in-business clients.
On April 23, 2008, Sessions's attorney complained to the Rating Bureau, contending the 121 percent experience rating derived from Sessions's workers' compensation experience should not apply to the 2005 policy because the business was operated by EPSI, not Sessions. The Rating Bureau disagreed, finding that the transfer of Sessions from Knight to Heffernan and the subsequent formation of EPSI did not result in a material change in operations or employees. Accordingly, the Rating Bureau could not disregard Sessions's experience rating in favor either of EPSI's rating or that of its movie production clients. The Rating Bureau also noted that Sessions's request for a revision of its experience rating was untimely. It refused to review the matter further and notified Sessions that if it disagreed with the decision it had 60 days to serve the Rating Bureau with a written complaint and request for action. Sessions took no further action.
Sessions refused to pay $184,093.30 of the final premium.
SCIF demanded payment and, when Sessions refused, assigned its claims to plaintiff Allied Interstate Incorporated (Allied), which filed a complaint for breach of contract and the common counts of account stated and open book account.
At trial, Sessions argued it did not owe the disputed premium amount for two reasons: (1) Sessions had been sold to EPSI effective January 1, 2005,
Daniel Koppenheffer, an underwriter for SCIF, testified that the Rating Bureau derives an experience rating for a particular insured by considering the industry in which the covered employees work, the insured's operations, and the history of workers' compensation claims, including open and closed claims. To calculate the experience rating of an employee leasing agency, where employees are often sent to a single location on a long-term basis, the Rating Bureau assesses the work record of the client's operations. To calculate the experience rating of a temporary agency, whose employees may be sent to many different locations on short-term assignments, the Rating Bureau uses the insured's claims experience to evaluate the risk.
Sessions functioned like both a temporary agency and an employee leasing agency because its nominal employees—the movie extras—worked at offsite locations for several different clients. At the same time, it was unlike either type of agency because it could not hire or fire the movie employees or control where they worked. When underwriting the policy here, Koppenheffer himself had concluded that Sessions's operations were more akin to those of a temporary agency than a leasing agency because the movie extras worked at many different locations for short periods of time. Using criteria established by the Rating Bureau, he assessed the policy risk based on Sessions's claims experience, not the experience of the movie production companies.
Koppenheffer explained that Sessions had an estimated payroll of $7 million for movie personnel and $500,000 for clerical personnel. It had presented 16 workers' compensation claims in 2002, 11 in 2003, and 20 in 2004, all involving movie personnel, none involving clerical personnel. Sessions was given experience modifiers of 202 and 165 percent in 2000 and 2001, respectively, when it was insured by Kemper Insurance, and 100, 114 and 109 percent in 2002, 2003 and 2004, respectively, when it was insured by SCIF. Based on this history, Koppenheffer concluded Sessions's experience rating was appropriately derived from its own operations, not from the operations of its clients.
Sessions disagreed, repeating its argument that SCIF should have applied a "carryover" rating to the movie personnel, i.e., one derived from the operations and claims history of the movie production companies, the movie extras' actual employers. Because each movie production company was newly formed for each new motion picture, it would have no claims history, and thus its experience rating would be 100 percent. Sessions also continued to argue that because operations had been taken over by EPSI early in the policy period, EPSI, not Sessions, owed the unpaid premium.
Sessions filed a timely appeal.
Sessions contends the 121 percent rating was not "duly authorized," as required by the policy, because a 100 percent experience rating carried over from its clients' claims experience applied. It also contends EPSI was liable for premiums incurred after SCIF learned Knight had sold Sessions to Heffernan. The appeal presents questions of law and contract interpretation, both of which are subject to de novo review. (Topanga and Victory Partners v. Toghia (2002) 103 Cal.App.4th 775, 779-780 [127 Cal.Rptr.2d 104]; Winet v. Price (1992) 4 Cal.App.4th 1159, 1166 [6 Cal.Rptr.2d 554].)
Pursuant to the policy, Sessions agreed to pay a premium that would be based on Sessions's payroll and "any duly authorized experience modification."
Experience rating is performed by rating organizations that have as their "primary object or purpose the collecting of loss and expense statistics and other statistical information and data [and] the making of pure premium rates and those rating plans authorized by Section 11734 for workers' compensation insurance ...." (§ 11750.1, subd. (b).) A rating organization must be licensed by the Insurance Commissioner (§§ 11751-11751.2) and, subject to the approval of the commissioner, "may make reasonable rules for the regulation of its members and the conduct of its business" (§ 11751.3, subd. (a)). Each workers' compensation insurer must belong to a rating organization. (§ 11750, subd. (a).) The Rating Bureau is the commissioner's designated rating organization and statistical agent. (Simi Corp. v. Garamendi (2003) 109 Cal.App.4th 1496, 1500 [1 Cal.Rptr.3d 207].) SCIF is a member of the Rating Bureau.
Every workers' compensation insurer must adhere to the Experience Rating Plan. (§ 11734, subd. (a).)
The data reported by workers' compensation insurers to the Rating Bureau "provide the raw material with which to develop an `experience modification factor' for each qualified employer. That factor plays a part in calculating the employer's workers' compensation insurance premium." (Simi Corp. v. Garamendi, supra, 109 Cal.App.4th at p. 1501; see P. W. Stephens, Inc. v. State Compensation Ins. Fund (1994) 21 Cal.App.4th 1833, 1838 [27 Cal.Rptr.2d 107] ["It is well settled that the experience of a particular insured may be used as a factor in setting the premium."].)
The experience rating derived from the insured's workers' compensation claims "shall be applied to the base premium developed in connection with the coverage provided during the effective period of the experience modification." (Experience Rating Plan, § I, rule 4.)
Sessions argues the 121 experience rating was nevertheless incorrect for a number of reasons: (1) Labor Code section 3602 contemplates that a "carryover" experience modifier will be applied to workers' compensation policies issued to nominal employers; (2) a carryover rating is also applied in the context of employee leasing arrangements; (3) other states have applied carryover ratings to nominal employers such as payroll companies; and (4) application of a carryover experience modifier here would promote equity and consistency. The argument is without merit. Under the policy, Sessions agreed to pay any premium that was "duly authorized." The issue at trial was whether the 121 percent experience modifier was duly authorized. As discussed above, it was. Nothing more was required or permitted.
A trial judge should be called upon to assess the validity or reasonableness of an experience modifier mandated by the Rating Bureau "[o]nly after an administrative record is created in which comparative data is provided, analyzed and rationalized by the experts familiar with the methodologies involved." (P.W. Stephens, Inc. v. State Compensation Ins. Fund, supra, 21 Cal.App.4th at p. 1842.) Here, the record would not permit the trial court to make the broad-ranging and technical determination that workers' compensation insurance issued to a payroll company should reflect a carryover experience rating.
Finally, Sessions contends that once SCIF discovered that operational control of the payroll business had been transferred from Sessions to EPSI, it should have canceled Sessions's policy and issued a new policy to EPSI. We disagree.
Effective January 1, 2005, Knight sold Sessions to Heffernan, who continued Sessions's operations. Other than the change in ownership, no evidence suggested Sessions discontinued or materially changed its operations. For example, though Knight testified Sessions had contracts with various movie production companies, he did not state those contracts had changed after Sessions was sold to Heffernan and later transferred to EPSI. Therefore, it
The judgment is affirmed.
Rothschild, Acting P. J., and Johnson, J., concurred.