Liberty Mutual Insurance Co. has won a case against a company that refused to pay $3.64 million in additional workers’ compensation premium after a payroll audit revealed it had more high risk employees than originally claimed.

Liberty Mutual and Servisair entered into a valid “guaranteed cost” insurance policy in which the final premium would be determined based on an audit of Servisair’s payroll classifications at the end of the policy period. An estimated premium was generated at the policy’s inception based on payroll numbers and classifications provided by Servisair’s payroll department.

After the policy period ended, the payroll audit revealed that Servisair’s actual payroll had a much greater exposure to the more expensive classifications and less exposure to the less expensive clerical classification. Based on the more expensive actual payroll numbers and the agreed-upon rates used for the estimated premium, Liberty Mutual billed Servisair for an additional $3,641,962. Servisair refused to pay the additional premium and this lawsuit ensued.

The U.S. District Court in Houston had granted Liberty Mutual a summary judgment and ordered the aircraft ground handling firm Servisair to pay the additional premium. On appeal, Servisair makes two primary arguments: (1) the policy is the product of a mutual mistake about the premium calculations, and (2) the policy’s premium calculation provisions are ambiguous. Mutual Mistake.

The U.S. Court of Appeals for the Fifth Circuit rejected these arguments in the unpublished case of LIberty Mutual Insurance Company v Servisair LLC.

The mutual mistake argument is easily dispatched. “The elements of mutual mistake (under Texas law) are: (1) a mistake of fact; (2) held mutually by the parties; (3) which materially affects the agreed-on exchange.” The mistake, if any, was Servisair’s alone. By its plain terms, the policy provides that Servisair is responsible for paying more than the estimated premium if the final premium exceeds the estimated premium. This is an open-ended obligation with no limit on the amount of additional premium Servisair might ultimately owe.

Turning to the issue of ambiguity, Servisair challenges the terms “guaranteed cost,” “rules,” and “rating plans” as ambiguous, particularly regarding their effect on the “schedule ratings” used to calculate the final premium after the audit. Servisair’s repeated efforts to create an ambiguity by relying on the profit motives expressed by Liberty Mutual employees at deposition do not work if the language itself is clear.

The term “guaranteed cost” refers to the type of insurance policy to which the parties agreed and is defined by the terms of the policy. The policy itself explains how premiums are initially calculated and then subject to modification as described above. No ambiguity is presented there.

“Servisair made a deal that, in retrospect, it did not like. That does not allow it to rewrite or avoid its obligations.”