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Riverport Insurance Co. v. Countrywide Payroll & Hr Solutions Inc.

United States District Court, E.D. Tennessee, Knoxville

September 26, 2017




          REEVES JUDGE

         Riverport Insurance Company brings this action against the Countrywide defendants asserting claims for declaratory judgment, asking the court to declare the rights and other legal relations of the parties regarding policies of workers' compensation insurance issued to the Countrywide defendants by Riverport, as well as for breach of contract and rescission. Riverport contends Countrywide obtained policies from SUNZ Insurance Company effective during the policy periods of Riverport's assigned risk policies in many of the same states. Riverport also asks the court to declare and adjudicate the rights and obligations of the parties with respect to the Riverport and SUNZ insurance policies. Countrywide filed a counterclaim asserting that Riverport mishandled and denied claims in bad faith and in breach of contract.

         I. Background

         Riverport is a carrier that provides workers' compensation insurance policies in the residual markets for Tennessee, Indiana, Arkansas and Iowa. Residual markets exist to provide employers, who are unable to secure workers' compensation coverage on the voluntary market, with a means for insuring their operations through a designated carrier. These residual markets are established by statute and the states' insurance commissioners are given authority to administer the markets.

         Each state has its own detailed statutory and regulatory framework governing its respective assigned risk market. The states have similar requirements and procedures for determining employer eligibility in their assigned risk markets. When an employer first seeks coverage in the assigned risk market, it must submit an application to the state's workers' compensation insurance plan administrator. The plan administrator determines whether the employer is eligible to obtain a workers' compensation policy through the assigned risk market and binds coverage. Once a policy of workers'compensation insurance has been issued, the policy may not be cancelled by the carrier unless or until all of the statutory and regulatory requirements for cancellation have been met. Each state's statutory and regulatory framework includes mandatory dispute resolution processes and procedures designed to facilitate efficient resolution of disputes between employers and insurers.

         Riverport's claims involve disputes over whether the operations of the Countrywide defendants in each state were properly classified under each state's underwriting rules so proper premiums were paid. Riverport contends that the workers' compensation policies should be cancelled because Countrywide's operations should have been classified as those of a professional employer organization under its policy underwriting rules. Riverport further states the policies should have been issued as multiple coordinated policies in the assigned risk pool markets and premiums charged accordingly. Riverport contends Countrywide's failure to properly classify its clients resulted in materially increased risks of loss as well as insufficient premiums being collected for the policies.

         Countrywide contends that by filing this action without exhausting the administrative remedies available in the individual states, Riverport is attempting to circumvent the regulatory framework in each state. Countrywide asks the court to dismiss Riverport's claims based on Riverport's failure to exhaust its administrative remedies provided in the individual states. Countrywide further asks the court to dismiss Riverport's claim seeking rescission and cancellation of the workers' compensation policies Riverport issued to Countrywide on the grounds the requested relief is contrary to the applicable law in each state.

         Riverport moves to dismiss Countrywide's counterclaims and affirmative defenses because Countrywide has failed to exhaust its administrative remedies concerning any alleged improper handling of claims by Riverport, cancellation of the policies of insurance, and disputes regarding the premiums to be paid for workers' compensation insurance.

         II. Standard of Review

         Both Riverport and Countrywide have filed competing motions, arguing that the other party has failed to exhaust mandatory administrative remedies prior to bringing its claims in federal court. A motion to dismiss for failure to exhaust administrative remedies is a factual attack on the court's subject matter jurisdiction. Ohio Nat'l Life Ins. Co. v. United States, 922 F.2d 320, 325 (6th Cir. 1990); see also Valley Mechanical Inc. v. BB&T Ins. Servs. Inc., 2014 WL 2871475 at *2 (E.D.Tenn Jun. 24, 2014). In analyzing factual attacks, the court must weight conflicting evidence and determine whether subject matter jurisdiction exists. Id. Here, subject matter jurisdiction is alleged based on diversity of citizenship. As such, the court must determine if a party's failure to exhaust administrative remedies prevents the court from exercising jurisdiction over the claims. Id. at 3.

         III. Analysis

         Generally, in the applicable states, disputes under the workers' compensation insurance plan must exhaust two levels of administrative review: first, review by the Plan Administrator; and, second, review of the Plan Administrator's decision by the state's Insurance Commissioner. The Tennessee legislature has provided detailed rules for contesting workers' compensation insurance premiums. The relevant statute mandates that every insurer and rate service organization shall provide reasonable means whereby any person aggrieved by the application of its rating system may be heard on written request to review the manner in which the rating system has been applied in connection with the insurance afforded. Tenn. Code Ann. § 56-5-309(b). If the insurer fails to grant or reject the request within thirty (30) days, the applicant may proceed in the same manner as if the application had been rejected. Id. Any party affected by the action of the insurer on the request may, within thirty (30) days after written notice of the action, appeal to the Commissioner who, after a hearing may affirm, modify or reverse the action. Id. Each policy state has established the same framework. See Iowa Code §§ 515A.9 and 4-A-10-b(a); Ark. Code §§ 23-67-219(3)(B)(i)-(iii) and 054-00-054; and Ind. Code § 27-7-2-20.3(c)(2) and Ind. WCIP Art. VIII.

         Pursuant to § 56-5-309(d), the Tennessee Department of Commerce and Insurance promulgates administrative rules to implement § 309(b). The rules prescribe the procedures for requesting a rate review or audit and for appealing any decision. See Tenn. Comp. R. & Regs. 0780-1-82-.05 and 0780-1-82-.06. The rules also provide that a party aggrieved ...

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