A workers compensation insurer cannot charge an employer an extra $1.7 million in premiums for the risk presented by employees who were exempt from coverage under Iowa’s workers’ compensation law, a federal appellate court ruled Monday.

The 8th Circuit Court of Appeals rejected LM Insurance Corp.’s argument that it is entitled to premiums for covering the Newt Marine Service employees because it had been forced to pay claims for other exempt workers. The extra premium had been billed for employees classified as seaman, who were covered by a separate Jones Act policy.

Both the district court and appellate court said in their decisions that the Liberty Mutual unit did not provide any clear explanation as to why it paid claims for the exempt workers. Attorney David J. Dutton, who represents the Dubuque-based dredging and marine construction company, said he believes LM voluntarily paid benefits under state only so that it could charge the company for extra premiums.

“They did not seek dismissal’ of the workers comp claims, Dutton said. “If they had, the Iowa Workers Compensation Commission would have said, ‘you’re right,’ and dismissed the case.”

LM insured Newt Marine from 2013 to 2016 through Iowa’s residual market plan, which assigns risks to carriers to ensure that coverage is available to employers who cannot purchase a policy in the voluntary market. Newton, based in Dubuque, Iowa, does most of its construction and dredging business from a barge that works the Mississippi River.

Most of Newt Marine’s employees are classified as seaman who are covered under the federal Jones Act. The policy issued by LM exempts any employee classified as a seamen. Newt Marine purchased a separate policy from American International Group to insure those workers.

Despite the exemption, Newt Marine filed state workers’ compensation claims on behalf of three injured workers who are classified as seamen. General Manager Marcus Murphy told the insurer that the workers had been reassigned and were working on land at the time they were injured, so the Jones Act coverage didn’t apply.

LM didn’t contest that argument. It paid the claims even though the workers were supposedly exempt from the policy. But the carrier got its revenge. LM conducted a premium audit for the 2013, 2014 and 2015 policy years and decided that premium was owed for all of the workers who had been classified as seamen because any of them could be reclassified at any time.

LM sent Newt Marine a bill for $1,675,260.94 in additional premiums and interest. The carrier filed a lawsuit to collect after Newt refused to pay.

LM’s central argument in the suit was that Section C2 in the insurance policy stated that premiums would be owed for “all other persons engaged in work that could make (the insurer) liable.” Newt Marine’s decision to file claims under the state workers compensation law showed that the insurer could be liable for injury claims even if they were classified as exempt seamen, the carrier argued.

U.S. District Court Judge Mark A. Roberts in Dubuque noted that LM did not seek to recover the claim payments that were made for the employees who were exempted from coverage, nor did it explain how it could have been held liable for their injuries.

Iowa’s workers compensation law clearly exempts workers who are covered under a federal work-injury plan, including the Jones Act, Roberts said. All of the case law that LM cited to support its argument related to independent contractors who were deemed eligible for coverage even though no premium had been collected for them. The judge said none of the cases involved employees who were specifically exempt from state workers’ compensation law and excluded from coverage by the policy in question.

“Because the premiums LM Insurance charged to Newt Marine were not merited, Newt Marine did not breach its obligations under the workers compensation insurance policies by refusing to pay,” the 8th Circuit panel concluded in its opinion. “Summary judgment was therefore appropriately granted to Newt Marine because LM Insurance’s breach claims fail as a matter of law.”

*This story ran prevously in our sister publication Claims Journal.

Topics Carriers Claims Commercial Lines Workers' Compensation Business Insurance Iowa