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Climate Control, Inc. v. Hill

Supreme Court of Arizona

July 21, 1959

CLIMATE CONTROL, INC., a corporation, in the right and on behalf of The Industrial Commission of Arizona, and the policyholders of the said The Industrial Commission of Arizona, Appellant,
v.
B. F. HILL, F. A. Nathan and A. R. Kleindienst, individually and as Commissioners of said The Industrial Commission of Arizona; and The Industrial Commission of Arizona, et al., Appellees.

Page 855

[86 Ariz. 182] John E. Madden, Phoenix, McCarty, Chandler & Udall, Tucson, Favour & Quail, Prescott, for appellant.

Shimmel, Hill & Cavanagh, Phoenix, for appellees B. F. Hill and F. A. Nathan, individually and as commissioners of The Industrial Commission of Arizona, and for appellee Fisher Contracting Co.

Jennings, Strouss, Salmon & Trask, Phoenix, for appellee A. R. Kleindienst individually and as a commissioner of The Industrial Commission of Arizona, and for appellee Salt River Valley Water Users' Ass'n.

John R. Franks, Phoenix, for appellee The Industrial Commission of Arizona.

Fennemore, Craig, Allen & McClennen, Phoenix, for appellees American Smelting and Refining Co., Kennecott Copper Corp., Mountain States Telephone and Telegraph Co., and The Pullman Co.

Edward W. Rice and G. H. Ladendorff, Globe, Attorneys for appellees Inspiration Consolidated Copper Co., Magma Copper Co., and International Smelting and Refinding Co.

Kramer, Roche & Perry, Phoenix, for appellees Garrett Corp. and Palmer Mfg. Corp.

McQuatters & Stevenson, Flagstaff, for appellees Southwest Lumber Mills Co. and Saginaw & Manistee Lumber Co.

Evans, Kitchel & Jenckes, Phoenix, for appellees Apache Powder Co., Phelps Dodge Corporation, Darr Aero Tech, Inc., Verde Tunnel and Smelter Railroad Co., Phelps Dodge Mercantile Co., and Upper Verde Public Utilities Co.

Morris & Malott, Globe, for appellees Miami Copper Co., Castle Dome Copper Co., Inc., and Copper Cities Mining Co.

[86 Ariz. 183] Snell & Wilmer, Phoenix, for appellees Reynolds Metals Co., Allison Steel Mfg. Co., and the Arizona Power Co.

Ryley, Carlock & Ralston, Phoenix, for appellee Standard Oil Co. of California.

Gust, Rosenfeld, Divelbess & Robinette, Phoenix, for Western Union Tel. Co.

Guynn, Twitty & Sievwright, Phoenix, for appellees San Manuel Copper Corp., Shattuck Denn Mining Corp., The Stearns

Page 856

Roger Mfg. Co., Utah Const. Co., St. Anthony Mining & Development Co., Ltd., United States Smelting, Refinding and Mining Co., and the Eagle-Picher Co.

STRUCKMEYER, Justice.

This consolidated appeal has as its primary objective the testing of the lawfulness of certain premium rates fixed by The Industrial Commission of Arizona for a class of policyholders hereinafter referred to as 'self-raters.' Appellant, in its complaint in the court below, Cause No. 6177, stated three claims for relief. All claims were dismissed in response to motions by appellees. Thereupon, appellant appeared before the Commission, asserting that the order establishing the rates for premiums for the self-raters was unreasonable and unlawful. From an adverse decision there, appellant filed a second complaint in the court below, Cause No. 6414, stating four claims for relief. Of these, all were dismissed as against the individual defendants Industrial Commissioners and former Industrial Commissioners. As to the corporate defendants, three of appellant's claims were dismissed, and part of the fourth. That part of the fourth which attacked the order of the Commission as unreasonable was not dimissed, it being the opinion of the lower court that a claim for relief was stated to review the administrative action of the Commission. These appeals question the correctness of the orders dismissing the claims in both actions.

The Workmen's Compensation Law of this state requires an employer to insure his employees in one of three ways: (1) by insuring in the state compensation fund; (2) by insuring with a private corporation, or (3) by qualifying as a self-insurer. Subsection A, A.R.S. § 23-961. The corporate appellees named in appellant's complaint are employers in the first class; that is, they insure in the state compensation fund. However, they insure in a special category as self-raters, pursuant to the authority of subsection E, A.R.S. § 23-983, infra. Self-rating is the modification of premium dependent upon actual loss experience.

Appellant is one of some thirteen thousand policyholders insured by the Commission under the Workmen's Compensation Act, called 'general-class policyholders' as distinguished from the thiry-odd appellee 'self raters.' The Commission fixes rates of premium for the coverage afforded in the compensation fund for all policyholders. [86 Ariz. 184] The rates fixed are: A rate for primary losses; that is, losses up to a specified amount per accident (the catastrophe limit), and a rate for basic costs; that is, the rate for expenses of administration and for the creation and maintenance of specified reserves.

Claim On Basic Costs

The Arizona Workmen's Compensation Law was originally enacted in 1925. At that time, The Industrial Commission adopted a self-rating plan which was subsequently held by this court to be ultra vires for lack of legislative authority. Industrial Commission v. Arizona Power Co., 37 Ariz. 425, 295 P. 305. Two years later, in 1933, the legislature, undoubtedly in response to the holding in the Arizona Power Company case, adopted an amendment to the Workmen's Compnesation Law, empowering the Commission to write contracts of insurance embodying a self-rating plan. This amendment, now subsection E, A.R.S. § 23-983, hereinafter called the self-rating statute, provides:

'The commission may in its discretion endorse on any of its regularly issued policies a self-rating plan, and and may apply tentative rates, subject to modification in accordance with the loss experience of such risks, and shall provide for a carrying charge, premium tax and a rate for creation of a catastrophe reserve and reserves to meet anticipated and unexpected losses to be fixed by the commission.'

We have arrived at certain conclusions concerning the self-rating statute. First, and obviously, it authorizes the Commission to endorse on its policies of insurance a self-rating plan and permits tentative rates of premium to be modified in

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accordance with the loss experience of the assured. This does not mean that the endorsement is the self-rating plan. The self-rating plan is the modification of rates of premium in accordance with loss experience. The endorsement is merely the vehicle by which the Commission evidences its intention to be bound to the self-rating plan. It is the authority by which an assured may compel the Commission to compute premiums in accordance with the plan. Second, the language of the statute neither requires nor prohibits the Commission from modifying the rate of premium for basic costs upward or downward in accordance with loss experience. It is entirely discretionary as to whether any modification is to occur. Although carrying charges, etc., 'shall be provided for,' this is not to say that these items of basic costs are excluded from modification in accordance with loss experience. The Commission is simply directed to provide for the specified items in fixing a rate of premium. Third, no attempt has been made by the legislature to control the manner or provide a formula [86 Ariz. 185] by which tentative rates must be modified except only that the modification be in accordance with loss experience. Such modification may be on a 100 per cent or lesser basis as long as it has some relationship to loss experience.

The policy of insurance issued by the Commission is, of course, the contract between the Commission and the assured. It provides that the Commission is directly and primarily liable to the employees of the assured (or in the case of an employee's death, to his dependents) to pay the compensation and accident benefits established by the Workmen's Compensation Law. While the policy is specifically conditioned upon payment of premiums by the employer, there is nothing contained within it by which the amount of the premium can be ascertained or calculated. There is, however, this clause:

'Experience And Hazard Rating: Unless otherwise specified by endorsement hereon, the employer agrees to accept and abide by any experience rating plan and/or hazard rating schedule adopted and published by The Industrial Commission of Arizona; and the employer agrees to accept any increase or reduction in the rate or rates required by the application of such experience rating plan and/or hazard rating schedule and further agrees that the effective date of such changes shall be fixed by The Industrial Commission of Arizona.'

By the foregoing clause, the employer is bound to the rates of premium to be determined from the two documents, the 'Experience Rating Plan' and the 'Hazard Rating Schedule' and at least in so far as the contract is concerned, the Commission may compute the premium from either or both, in its discretion. The discretion of the Commission in determining to be bound solely by the rating plan is evidenced by issuing its endorsement in compliance with the self-rating statute. It should be stressed that under the express terms of the policy, independent of any endorsement, the assured is committed to the payment of rates of premium predicated on the two methods provided therein, but the Commission can only be compelled to charge the rates of premium in accordance with the self-rating plan if it binds itself by endorsement.

The endorsement which the Commission issued pursuant to the authority of the self-rating statute in its material part reads:

'Except as regards the loading for expense of administration and for catastrophe and excess losses, the rate or rates of premium for this policy shall be subject to the experience rating plan of The Industrial Commission of [86 Ariz. 186] Arizona on a 100 percent self-rating basis, i. e., the rate or rates shall be modified upward or downward in direct proportion to the ratio of actual loss experience (exclusive of catastrophe and excess losses) to the expected loss

Page 858

experience (exclusive of catastrophe and excess losses).'

It is appellant's position that the language of the endorsement clearly and unambiguously subjects the rates of premium for the policy to the rating plan of the Commission except the rate of premium for basic costs. It is argued, in effect, that the rate of premium for basic costs is excepted from the experience rating plan of the Commission and hence must be computed from the rate or rates of the regularly issued policy--presumably from the hazard rating schedule. We cannot agree with appellant's conclusions for several reasons.

First, as has been pointed out, the policy is the contract between the parties. By the express provision thereof, the employer has agreed to abide by the experience rating plan and/or hazard rating schedule, but the Commission has not agreed to compute rates of premium in accordance with either. If the Commission's obligations under the contract are to be changed, then it must be because of the promises contained within the endorsement.

Clearly, the Commission, by the endorsement, has promised to compute the rates of premium subject to the experience rating plan on a 100 per cent self-rating basis. The question then becomes, what else, if anything, has the Commission promised? An examination of the exception discloses that it, itself, is not a promise by the Commission and hence no promise can be implied therefrom. Stated another way, by the endorsement the Commission has agreed to a modification of the rates of premium on a 100 per cent basis as established in the rating plan, and the exclusion by the exception is no more than a statement that the Commission does not bind itself to charge a rate of premium for basic costs subject to modification on a 100 per cent basis. Clearly, the Commission has not promised how the rates of premium for basic costs shall be computed. Therefore, the exception is simply an exclusion of basic costs from the promise of the Commission to compute all rates of premium subject to the rating plan on a 100 per cent basis. In this sense, the exception in the endorsement is not a true exclusionary clause as is commonly found in insurance policies. The excepted items of basic costs are not excluded from the operation of the policy or the coverage thereof. They are excluded from the operation of the Commission's promise as to how rates of premium shall be computed.

A simple illustration will point out the significance of the language used. Assume that A is hired by B to work by the week. [86 Ariz. 187] If B promises that the hours of labor shall be from 9 to 5 except as regards Saturdays and Sundays, it cannot be concluded that this promise means that A is not to work for B on Saturdays and Sundays. Similarly, the assured, by the express terms of the policy, has agreed to be bound to a computation of premiums, all the premiums, in accordance with the experience rating plan. The Commission, by agreeing that the rate of premium for primary losses shall be modified on a 100 per cent self-rating basis subject to [the formula in] the self-rating plan, has not agreed or promised anything at all regarding the computation of the rates of premium for basic costs. The assured is still liable under its promise to abide by the rating plan, and the Commission is at liberty in its discretion to charge in conformity therewith. Accordingly, we conclude that the self-rating endorsement does not prohibit the computation of premium for basic costs in accordance with the self-rating plan.

Second, the conclusions stated are sufficient to dispose of appellant's contention concerning basic costs. However, if we assume that the exception can be construed as a promise regarding the computation of the rate of premium ...


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