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Minnieland Private Day School, Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc.

United States Court of Appeals, Fourth Circuit

January 14, 2019

MINNIELAND PRIVATE DAY SCHOOL, INC., a Virginia corporation, Plaintiff - Appellee,
v.
APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC., Defendant-Appellant.

          Argued: October 30, 2018

          Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. Anthony John Trenga, District Judge. (1:15-cv-01695-AJT-IDD)

         ARGUED:

          Daniel William Olivas, LEWIS, THOMASON, KING, KRIEG & WALDROP, P.C., Nashville, Tennessee, for Appellant.

          James Scott Krein, KREIN LAW FRIM, Prince William, Virginia, for Appellee.

         ON BRIEF:

          R. Dale Bay, Ryan N. Clark, LEWIS, THOMASON, KING, KRIEG & WALDROP, P.C., Nashville, Tennessee, for Appellant.

          Before GREGORY, Chief Judge, MOTZ, and WYNN, Circuit Judges.

          GREGORY, CHIEF JUDGE

         Appellant Applied Underwriters Captive Risk Assurance Company, Inc. ("AUCRA") comes to us for the second time in this case, appealing the district court's determination that a Reinsurance Participation Agreement ("RPA") executed by it and Appellee Minnieland Private Day School is an insurance contract under Virginia law. The RPA, executed in connection with Minnieland's purchase of workers' compensation insurance, contains an arbitration clause. In the district court, AUCRA moved to compel arbitration in accordance with the RPA's terms. In opposing arbitration, Minnieland asserted that the RPA is an insurance contract for purposes of Virginia Code § 38.2-312, which renders void arbitration clauses contained in insurance contracts. The district court denied AUCRA's motion to compel arbitration, finding that AUCRA was judicially estopped from arguing that the RPA is not an insurance contract. We reversed that determination, concluding that AUCRA was not estopped from making its argument, and remanded to allow the parties to brief fully the issue of whether the RPA is an insurance contract for purposes of Virginia Code § 38.2-312. On remand, the district court held that the RPA is indeed an insurance contract and that the RPA's arbitration clause is void as a matter of law. AUCRA now appeals that determination.

         For the reasons set forth below, we conclude that the RPA is an insurance contract for purposes of Virginia Code § 38.2-312. We therefore affirm.

         I.

         A.

         This case involves a workers' compensation insurance program that Minnieland purchased from AUCRA and its affiliated entities. Under Virginia law, workers' compensation insurance is "insurance against the legal liability of any employer for the death or disablement of, or injury to, his or its employee whether imposed by common law or by statute, or assumed by contract." Va. Code § 38.2-119. Workers' compensation insurance coverage is required of "[e]very employer subject to" Virginia's workers' compensation statute. Va. Code § 65.2-800(A); Redifer v. Chester, 720 S.E.2d 66, 67-68 (Va. 2012).

         In general, workers' compensation insurance is typically provided in one of two types of policies: a guaranteed cost policy or a retrospective rating plan. Under a guaranteed cost policy, the premiums are fixed and usually do not change over the term of the policy. Steven Plitt, Daniel Maldonado, Joshua D. Rogers, & Jordan R. Plitt, 2 Couch on Insurance § 69:10 (3d ed. 1995). In many states, these plans are the only plans lawfully available to small and mid-sized employers. Retrospective rating plans, on the other hand, usually require an advance premium deposit with the insurer and then provide that the insurer, at some specified time, will compute the actual premium based on the insured's actual loss experience or total payroll during a set period of time. Id. § 69:16; see Va. Code § 38.2-1901 (defining "retrospective rating plan" as "a rating plan that adjusts the premium for the insurance to which it applies on the basis of losses incurred during the period covered by that insurance"). The insured is then either issued a refund if the actual premium is lower than the premium deposit paid or required to pay the difference if the actual premium exceeds the deposited amount.

         At issue in this appeal is Applied Underwriters, Inc.'s EquityComp program, an innovative program of workers' compensation insurance that offers small and mid-sized employers the benefits of both a guaranteed cost policy and a retrospective rating plan in one insurance program. The EquityComp program provides employers with guaranteed cost workers' compensation insurance at the same time that they enjoy the benefits-and are subject to the risks-of a retrospective rating plan. See J.A. 404 (explaining that this RPA allows small and mid-sized employers to "in effect, have a retrospective rating plan . . . even though, in fact, the insured has Guaranteed Cost insurance coverage with the insurance carrier").[1] The program is so novel that it has been patented.

         Under the program, various insurance companies affiliated with Applied Underwriters, Inc. have entered into a reinsurance pooling agreement. The pooled companies provide workers' compensation insurance coverage to employers and also mutually reinsure each other's insurance business. A layer of reinsurance is also provided by AUCRA, a wholly owned subsidiary of Applied Underwriters, Inc. AUCRA in turn enters into RPAs with EquityComp customers, under the terms of which each customer pays into a segregated "cell" or account that is then used to fund AUCRA's liabilities. In essence, EquityComp customers participate in underwriting the risk of their own workers' compensation insurance policies.

         In theory, an EquityComp customer can save costs on its workers' compensation insurance through a refund of monies deposited into its segregated cell if its workers' compensation insurance claims are kept low during the term of the RPA. As detailed below, however, Minnieland was unable to reap this benefit.

         B.

         Minnieland provides education and childcare services in Virginia and is subject to the workers' compensation laws and requirements of the state. Va. Code § 65.2-800(A).

         On January 14, 2013, Minnieland bought into the EquityComp program. Minnieland executed a Request to Bind Coverages and Services ("Binder"), by which Minnieland "request[ed] that Applied Underwriters, Inc. through its affiliates and/or subsidiaries . . . cause to be issued to [Minnieland] one or more workers' compensation insurance policies . . . subject to [Minnieland] executing the . . . [RPA]." J.A. 40. At the same time, Minnieland executed an RPA. The RPA had a term of three years and provided that one or more "Issuing Insurers"-all of which were entities affiliated with Applied Underwriters, Inc.-would issue workers' compensation insurance policies to Minnieland. The RPA also established that Minnieland would share in the profits and losses associated with its policies through its "segregated protected cell." Applied Risk Services, Inc. ("ARS"), another subsidiary of Applied Underwriters, Inc., was designated as the billing agent for both AUCRA and the Issuing Insurers. Schedule 1 of the RPA sets forth various formulae for calculating premiums and losses under the RPA and insurance policies.

         The day after Minnieland executed the EquityComp documents, the RPA went into effect, as did the first of what would become three consecutive one-year Virginia workers' compensation insurance policies, the last of which was to expire on January 15, 2016. The first policy listed the estimated annual premium as $589, 163. The second and third policies listed the estimated annual premiums as $642, 333 and $706, 160, respectively. The policies were produced by ARS and insured by Continental Indemnity Company ("CNI"), another affiliate of Applied Underwriters, Inc.

         According to the complaint, at no time was AUCRA licensed to sell insurance in Virginia, and the RPA has not been approved by the Virginia Workers' Compensation Commission.

         For the first 33 of the 36 months during which the RPA was active, AUCRA charged, and Minnieland paid, an average of $58, 810 per month in premiums. In November 2015, however, the premium charged to Minnieland increased drastically to $471, 213, a 1167% increase from the October 2015 premium and a 801% increase over the first 33 months' average. Despite Minnieland's requests, AUCRA refused to disclose the basis on which it assessed the November 2015 premium. Minnieland nonetheless paid the November premium.

         AUCRA billed Minnieland a similarly high premium of $414, 604 for December 2015. AUCRA once again refused to disclose the basis for the increased premium, and Minnieland did not pay the December premium.

         On December 16, 2015, AUCRA[2] faxed Minnieland notice that it was terminating Minnieland's EquityComp program, including the RPA and insurance coverage, effective December 27, 2015. The reason provided for the termination of coverage was ...


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