Based on a bum steer from the National Council on Compensation Insurance, or NCCI, a trucking company called CAT Express asked the director of the Illinois Department of Insurance to rule on Liberty Mutual Insurance Co.’s demand for an additional $150,000 in premiums under a workers’ compensation policy after a payroll audit concluded that 40 owner-operators who worked for CAT were employees and not independent contractors.

On appeal from an order that affirmed the director’s decision for Liberty Mutual, the Illinois Appellate Court called for supplemental briefs — after spotting an unaddressed issue about administrative power — and decided the department didn’t have authority to resolve the premium dispute.

Vacating the circuit court and administrative orders — with an opinion that provides good primers on the department’s authority and the intricacies of workers’ compensation insurance — the 1st District explained that the correct remedy would have been a complaint for declaratory judgment. CAT Express v. Muriel, 2019 IL App (1st) 181851 (Dec. 16, 2019).

Here are brief highlights of Justice Daniel J. Pierce’s thorough analysis (with light editing and omissions not noted):

CAT matches freight with truck drivers available to transport the freight. In 2015, CAT applied for workers’ compensation insurance through the Illinois Assigned Risk Plan administered by the [National Council on Compensation Insurance] NCCI.

CAT’s application identified six clerical employees and did not disclose any truck drivers or any other employees. The plan bound coverage and randomly assigned Liberty as CAT’s workers’ compensation carrier.

Liberty issued an insurance policy effective November 7, 2015, with an estimated annual premium — which was subject to a final premium calculation — of $1,284.

In February 2016, Liberty conducted a premiums audit and determined that CAT contracted with numerous owner-operators, creating a policy exposure because they were employees of CAT.

Liberty issued an endorsement demanding an additional annual premium of $356,592 to cover the owner-operators. CAT canceled the policy, and Liberty adjusted the premium owed to $150,000.

CAT sought a determination from the NCCI as to the employment status of the owner-operators. The NCCI refused to resolve the dispute. In its letter, the NCCI also informed CAT that it could appeal the NCCI’s determination to the Illinois Department of Insurance under Section 462 of the Illinois Insurance Code.

Analysis

The parties, the department and the director acknowledge that the department does not have express authority to adjudicate employment status disputes. The department and the director, however, take the position that the department has implied authority to adjudicate employment status disputes under Sections 401, 402, 403 and 462 of the Insurance Code.

The department lacked authority under Section 401(c)

Section 401 of the code provides that “the director is charged with the rights, powers and duties appertaining to the enforcement and execution of all the insurance laws of this state.” Specifically, the director has the power:

“(a) to make reasonable rules and regulations as may be necessary for making effective such laws;

“(b) to conduct such investigations as may be necessary to determine whether any person has violated any provision of such insurance laws;

“(c) to conduct such examinations, investigations and hearings in addition to those specifically provided for, as may be necessary and proper for the efficient administration of the insurance laws of this state; and

“(d) to institute such actions or other lawful proceedings as he may deem necessary for the enforcement of the Illinois Insurance Code or of any order or action made or taken by him under this code. The Attorney General, upon request of the director, may proceed in the courts of this state to enforce an order or decision in any court proceeding or in any administrative proceeding before the director.” 215 ILCS 5/401.

Section 402 gives the director or his appointee the authority to personally conduct “all examinations, investigations and hearings provided for by this code.” Section 403 gives the director the power to subpoena and examine witness “in the conduct of any examination, investigation or hearing provided for by this code.”

Thus, Sections 401, 402 and 403 generally give the department and the director broad authority to make rules and regulations to effectuate insurance laws, to conduct hearings and investigations to identify violations to properly effectuate the administration of Illinois insurance laws and to institute enforcement actions of the Insurance Code or orders issued under the code.

We reject the parties’ arguments that Section 401(c) of the Insurance Code impliedly operates as a basis for the department’s authority in this matter.

The language of Section 401(c) is broad and authorizes the director “to conduct such examinations, investigations and hearings in addition to those specifically provided for, as may be necessary and proper for the efficient administration of the insurance laws of this state.” But despite its breadth, the parties here make no effort to describe, and do not explain, how an employment status and premium dispute between an insurer and an insured involves “the efficient administration of the insurance laws of this state” or whether the determination that someone is an employee for the purposes of workers’ compensation insurance coverage is regulated by the Insurance Code or by any regulation promulgated by the director.

“The stated purpose of the Insurance Code is to protect the public interest in the area of for-profit insurance.” Walsh v. Department of Insurance, 2016 IL App (1st) 150439. The department’s stated mission is: “To protect consumers by providing assistance and information, by efficiently regulating the insurance industry’s market behavior and financial solvency, and by fostering a competitive insurance marketplace.”

Here, the parties and the director have not provided any argument that the parties’ dispute involves any public interest, the administration of any insurance law or regulation, or the efficient regulation of the insurance industry’s market behavior or financial solvency.

Liberty’s determination that CAT owed additional premiums under the policy involves private interests — CAT’s interest in paying a correct premium based on the number of its employees, and Liberty’s interest in receiving the correct premium for underwriting CAT’s risks — and no claim is made that Liberty’s audit determination violated any insurance law or regulation. The parties fail to offer any rationale as to why such a dispute falls within the department’s implied authority under Section 401(c).

The Insurance Code does not vest the director with express or implied authority to make factual determinations regarding the scope of coverage under any contract of insurance. The department and the director administer the insurance laws of this state, not individual insurance contracts between an insurer and an insured.

Section 462 of the code is inapplicable to this dispute

Section 462 requires a rating agency, like the NCCI, to provide insureds, such as CAT, with information regarding any NCCI rate affecting an insured. If CAT was aggrieved by the NCCI’s rating system, CAT could request the NCCI to review the applied rating system under Section 462, and if the NCCI review was adverse to CAT, it could then appeal to the department.

Here, CAT was not aggrieved by application of the NCCI rating system; CAT was aggrieved by Liberty’s determination as to the number of workers to which the rating system applied when calculating the adjusted premium.

In addition to administering the residual insurance market in Illinois [the state program for employers that can’t obtain coverage through the open market], the NCCI “gathers data, analyzes industry trends and provides objective insurance rate and loss cost recommendations.” The NCCI uses this data and research to develop experience rating plans, classification codes and various rules that it publishes in its manuals. According to the NCCI:

“Experience rating recognizes the differences among qualifying employers with respect to safety and loss prevention. It does this by comparing the experience of individual employers with the average employer in the same classification. The differences are reflected by an experience rating modification (mod), based on individual payroll and loss records, which may result in an increase, decrease or no change in premium.”

In other words, the experience rating is a mechanism used to forecast the underwriter’s risk that, based on the nature of insured’s business, a workers’ compensation claim will be filed. The experience rating is used to calculate an appropriate premium.

The NCCI’s classification system is a set of codes that are used by insurers to classify the business operations of an employer in order to forecast risk of an injury and to calculate an appropriate premium.

The experience rating and classification system considers differences between industries and employee functions — a clerical worker’s wages and risk of injury are different than the wages and risks applicable to over-the-road truck drivers or a roofer — and those differences and risks of injury are reflected in the premiums charged. The experience rating and the classification system are then applied to the employer’s payroll to calculate the premium required for workers’ compensation insurance coverage, e.g., in this case, $1,200 per year for six clerical workers or $357,000 for an additional 40 over-the-road truck drivers.

After a final premiums audit, Liberty concluded that the 40 owner-operators CAT used to deliver third-party freight were CAT’s employees covered under the policy, not independent contractors, and therefore CAT owed additional premiums of $357,000. CAT objected and turned to the NCCI to resolve the dispute and to determine whether the owner-operators were CAT’s employees.

Section 462 of the Insurance Code vests the department with specific and limited authority that is not implicated here because CAT never disputed the application of an experience rating plan, a classification system, or any NCCI manual rules.

We find that the department lacked implied authority to resolve the employment status dispute between CAT and Liberty.