Cover Right is a roofing company. It held a workers’ compensation insurance policy with State Fund in 2017, which covered January 1, 2017 to December 31, 2017 (the 2017 policy). State Fund assigned the 2017 policy a dual wage classification relating to roofing operations.
The 2017 policy automatically renewed after lapsing. The renewed policy with State Fund covered January 1, 2018 to December 31, 2018. State Fund calculated the estimated premium for the 2018 policy under the assumption Cover Right would again be assigned the Class 5553-1 classification. In 2018, the base rate for Class 5553-1 was $26.92 per $100 of payroll, while the base rate for Class 5552-1 was $58.41 per $100 of payroll. Cover Right made $25,445.64 in estimated premium
State Fund performed an audit of the 2018 policy in early 2019. It found Cover Right had paid most of its employees $23 to $24 an hour in 2018, which was less than the new dual wage threshold of $25 an hour. Cover Right owed a final premium of $56,766.72 for the 2018 policy.
Cover Right maintains it did not know the dual wage threshold had changed until it received State Fund’s bill. It did not pay the bill, so State Fund assigned the debt to Creditors Adjustment Bureau who filed suit to collect it. Cover Right then filed a cross-complaint against State Fund, asserting negligence and equitable indemnity claims based on an alleged violation of section 11664, subdivision (e)(6)(A). Specifically, Cover Right contended State Fund failed to provide notice that its base rate would increase from $31.18 per $100 of payroll in 2017 to $58.41 per $100 of payroll in 2018, an increase of over 87 percent.
State Fund then moved for summary judgment on Cover Right’s claims. It argued there was no violation of section 11664, subdivision (e)(6)(A), because it did not increase the respective base rates for either Class 5552-1 or Class 5553-1 by more than 25 percent. Instead the WCIB changed the applicable dual wage threshold from $23 per hour in 2017 to $25 per hour in 2018. State Fund asserted the statute does not require notice for such changes.
The trial court agreed with State Fund and granted summary judgment. The court of appeal affirmed in the published case of Cover Right Roofing, Inc. v. State Compensation Ins. Fund -G060210 (November 2022).
This appeal asks the Court of Appeal to interpret Insurance Code section 11664, subdivision (e)(6)(A), which requires workers’ compensation insurers to provide their insureds with notice of certain premium rate increases: “[i]f the premium rate in the governing classification for the insured is to be increased 25 percent or greater and the insurer intends to renew the policy, the insurer shall provide a written notice of a renewal offer not less than 30 days prior to the policy renewal date.”
State Fund assigns base rates to its insureds using industry classifications from the Uniform Statistical Rating Plan – 1995 (the USRP). The USRP industry classifications are established by the Workers’ Compensation Insurance Rating Bureau and are codified in the California Code of Regulations, title 10, section 2318.6. The WCIRB also determines the dual wage threshold amount.
It argued there was no violation of section 11664, subdivision (e)(6)(A), because it did not increase the respective base rates for either Class 5552-1 or Class 5553-1 by more than 25 percent. Rather, Cover Right’s classification changed in 2018, which resulted in a higher corresponding base rate. State Fund asserted the statute does not require notice for such changes.
The court of appeal concluded that “in 2017, State Fund did not know the average wage Cover Right would pay its workers in 2018. It could only estimate what that average rate would be. Accordingly, prior to the effective date of the 2018 policy, State Fund could only speculate as to whether Cover Right would be assigned the Class 5552-1 or Class 5553-1 classification for 2018. Given the information it had, at best, State Fund could have provided Cover Right with notice of a potential change to its base rate for the 2018 policy. But the statute does not require notice of potential increases. It only requires notice if premium rate “is to be increased 25 percent or greater.”
“We sympathize with Cover Right’s situation. Given all the responsibilities facing small businesses, we do not fault Cover Right for missing the Bureau’s increase of the dual wage threshold. Cover Right likely would have avoided the higher base rate had it known of this change. Nonetheless, as set forth above, section 11664, subdivision (e)(6)(A), does not require an insurer to provide notice in the circumstances at issue here. Further, as a matter of public policy, it would be unreasonable to compel insurers to monitor the Bureau’s changes to the various industry classifications.”