Opinion
406073/2007.
Decided September 17, 2009.
Plaintiff was represented by Isaac N. Guy Okafor, Esq., of the State Insurance Fund, New York, NY, tel. no. 212-312-9813.
Defendant HR Healthcare was represented by Joseph I. Garland, Esq., of Lifshutz Lifshutz, PC, New York, NY, tel. no. 212-949-8484.
Plaintiff, The State Insurance Fund (SIF), suing through its commissioners, is an authorized agency of the State of New York that provides workers' compensation and disability insurance, for a premium, to its policyholders. Defendant, HR Healthcare Staffing Remedies LLC (Staffing), is in the business of providing home healthcare services in the New York metropolitan area. In its amended complaint SIF seeks a judgment against Staffing for unpaid insurance premiums in the sum of $657,350.93, plus interest, and the cost of collection. Staffing generally denies the allegations of the amended complaint, and asserts various defenses in its amended answer.
The original complaint, filed before SIF completed its audit of Staffing's books and records, sought judgment for unpaid premiums of $599,280.97. After the audit, SIF sought an additional $58,069.96.
This motion highlights a troubling practice of SIF whereby it bills for estimated premiums and then audits insureds well after the premium period has ended. SIF seeks summary judgment in its favor, pursuant to CPLR 3212, on the grounds that there are no triable issues of fact, and that there is no defense to the claim asserted in its amended complaint. Opposing SIF's motion, Staffing argues, among other things, that SIF's audit was flawed, so that SIF seeks a much higher sum than might be due. For the reasons stated herein, SIF's motion is denied.
Background
According to the affidavit of John Kung, an underwriter of SIF, upon Staffing's application for workers' compensation insurance SIF issued a policy bearing contract number 14091417 (the Policy), copies of which are annexed to the Okafor Affirmation as Exhibits E and F, respectively. Kung Affidavit, ¶ 6. The Kung Affidavit explains that the cost of insurance is dependent on several factors that are not finalized when a workers' compensation insurance policy is issued, such as the number of insured employees, their job classifications and the payroll amounts being insured by SIF. Id., ¶ 7. SIF has the right to audit a policyholder's books and records to determine the actual employee classifications and the payroll amount attributable to each job classification. Id., ¶ 8. To calculate the premium due, SIF multiplies the applicable rates by the actual payroll attributable to each classification to obtain a total premium amount for a policy period. Id. SIF's general practice is to conduct audits shortly after the expiration of each policy period, but if no audit has been conducted prior to policy renewal, SIF estimates the renewal premium based on the prior policy year's premium. Id., ¶ 9. The estimated premium will thereafter be adjusted based upon subsequently conducted audits. Id. SIF may conduct an audit up to three years after each policy period ends. Id.
SIF here seeks to recover a balance due under the Policy for three periods: January 13, 2005 to January 13, 2006; January 13, 2006 to January 13, 2007; and January 13, 2007 to February 7, 2007, on which date the Policy was cancelled because Staffing obtained insurance coverage elsewhere. Id., ¶ 10.
According to the affirmation of Isaac Okafor, senior in-house counsel of SIF, SIF conducted its audit of Staffing's books and records for each of the foregoing three periods on or about November 27, 2007. Okafor Affirmation, ¶ 6. The audit bills are annexed as Exhibits G, H, I and J, and the audit worksheets are annexed as Exhibits K, L and M, to the Okafor Affirmation. Also annexed to the Okafor Affirmation is the Statement of Account for Staffing, which shows SIF's transactions with Staffing since inception of the Policy, including Staffing's payments. Id., ¶ 13; Exhibit N. The Okafor Affirmation states that all of the annexed documents are official business records of SIF, which are maintained in the ordinary course of its business, as they are kept or made contemporaneously with its auditor's review of Staffing's books and records. Id., ¶ 14. A final invoice for the insurance premium due, in the sum of $657,350.93, was mailed to Staffing on or about January 14, 2008. Id., ¶ 16; Exhibit O. Thus, SIF's amended complaint alleges that the premium it seeks to recover from Staffing is $657,350.93, and that the recovery is based on Staffing's breach of the insurance contract. Id., ¶ 16. SIF also seeks to recover interest, as well as an additional award of $144,617.20, as collection costs pursuant to State Finance Law § 18 (5), which allegedly represents 22% of the principal sum due and owing to SIF. Id.
In opposition, Staffing submitted, inter alia, the affidavit of Rey Bello (Bello), its managing member. In his affidavit, Bello asserts that SIF's audit was defective in several respects: (1) SIF categorized almost all Staffing workers as "convalescent" for the purpose of determining the premium, even though many workers provide only administrative or marketing/recruiting services (as opposed to nursing or "convalescent" services); (2) a significant number of Staffing workers are not employees, but independent contractors; (3) even as to those Staffing workers who provided nursing care to patients, SIF did not distinguish the types of services they provided (e.g., registered nurses versus nurse aides); and (4) SIF did not identify those Staffing workers who provided services outside of New York (e.g., in Connecticut and New Jersey). Bello Affidavit, ¶ 14. Attached to the Bello Affidavit are copies of spreadsheets generated from Staffing's business records which identify Staffing workers who are employees or independent contractors, their primary job functions, and the locations where they work. Id., Exhibit B. Also attached is a schedule prepared by the New York Compensation Insurance Rating Board (NYCIRB) that shows the insurance premium rates (i.e., the "loss cost") applicable to certain job categories. Id., Exhibit D. Based on this data, Bello asserts that the assessed premiums are excessive and that Staffing should have an opportunity to challenge SIF's audit. Id., ¶ 15.
Discussion
Without addressing the merits, SIF asserts that "improper classification is an issue that is not relevant in the instant case," because classification issues are to be determined by NYCIRB, and that this court "lacks jurisdiction" to hear issues on classification. Plaintiff's Reply Affirmation, ¶ 6. This assertion is unavailing under the facts of this case, as discussed below. Commissioners of State Insurance Fund v Kenneth Yesmont Associates, Inc., 226 AD2d 147 (1st Dept 1996); Commissioners of State Insurance Fund v Mascali-Robke Co., Inc., 208 Misc 316, 320 (Sup Ct, NY County 1955) (issue of employee classification mandates administrative review), affd 1 AD2d 945 (1st Dept 1956). Notably, SIF did not audit Staffing (for the years from January 13, 2005 through February 7, 2007) until November 27, 2007, and the results of were not communicated until January 16, 2008. Garland Affirmation, Exhibit E (letter from SIF to Staffing's counsel, dated January 16, 2008, attaching copies of audit worksheets and audit bills for the audited period). In light of the SIF letter, which required Staffing to pay a premium balance of $657,350.93, Staffing contacted NYCIRB, in November 2008, to challenge SIF's audit. In a letter dated January 29, 2009, NYCIRB wrote, inter alia, that it would not address the merits of the mis-classification issue because "the complaint [from Staffing] was not received until November 2008 and the [Staffing Policy] expired on February 7, 2007." Garland Affirmation, Exhibit G. NYCIRB's declination to consider the classification issue was apparently due to the following: "[N]o application to change a classification(s) for a risk on the ground that the risk has been improperly classified shall be considered by the Rating Board unless the application is filed . . . during the policy term or within twelve (12) months after the expiration thereof." NYCIRB Administrative Rules and Procedures, F.3; Garland Affirmation, Exhibit F.
In view of the undisputed chronology set forth above, there was no meaningful opportunity, under NYCIRB's rules and procedures, for Staffing to challenge the classifications used in the audit, particularly with respect to the first two terms of the Policy, which ended on January 13, 2006 and January 13, 2007, respectively. Nevertheless, according to SIF, because Staffing "did not challenge the issue of employee classification in the manner prescribed by law, it is therefore barred from raising that issue now." Plaintiff's Reply Affirmation, ¶ 7. SIF does not explain how Staffing could have challenged the audit in time when it did not occur until well after the expiration of the first two years. While employee classification issues should be determined, in the first instance, by an administrative agency (NYCIRB), any requirement for exhaustion of the administrative remedy is futile for Staffing in light of NYCIRB's position that it would not accept the review because it is too late. Community School Board Nine v Crew, 224 AD2d 8 (1st Dept 1996) (exception to law doctrine requiring exhaustion of administrative remedies prior to seeking judicial relief includes situations where the pursuit of administrative remedies appeared futile), citing Watergate II Apartments v Buffalo Sewer Authority, 46 NY2d 52, 57 (1978).
Moreover, it has been held that SIF is obligated to perform services in an "objectively reasonable manner under the circumstances." Commissioners of State Insurance Fund v Photocircuits Corp. , 20 AD3d 173 , 180-181 (1st Dept 2005) (citation omitted) (reversing summary judgment in favor of SIF, because issue of fact existed as to whether SIF failed to perform its duties in a reasonable manner, i.e., SIF paid benefit claims to a known imposter). Here, because of the one-year "look back" period under NYCIRB's rules, there is a factual issue as to whether SIF acted reasonably in auditing Staffing when it did.
There are other issues of fact precluding summary judgment. For example, while SIF argues, on the one hand, that Staffing "failed to identify or provide any documentation indicating which employees listed in the audit were independent contractors," it also argues, on the other hand, based on the affidavit of SIF's auditor Eduard Azayev (submitted in Reply), that the auditor had adjusted Staffing's payroll "to exclude the remuneration paid to those employees whom [Staffing] issued Forms 1099s." Plaintiff's Reply Affirmation, ¶ 9. Moreover, although the auditor also stated that certain adjustments or reconciliations had been made to account for casual laborers and independent contractors (Azyev Affidavit, ¶¶ 8-10), the record reflects that he made assumptions with respect to certain job classifications (allegedly pursuant to audit guidelines), as he indicated in the audit reports and his affidavit that his site visits to Staffing were unproductive. Bello Affidavit, Exhibit C (excerpted audit worksheets); Azayev Affidavit, ¶¶ 5-7. Because the validity and accuracy of the entire audit cannot be verified, although SIF attempts to offer "seemingly viable explanations," summary judgment cannot be granted in the amount claimed by SIF. Commissioners of State Insurance Fund v Fox Run Farms, Inc., 195 AD2d 372, 375 (1st Dept 1993) (summary judgment motion denied because "the papers submitted [by SIF] do not permit assessment of the validity of the entire audit," even though SIF "offers seemingly viable explanations").
Notably, the record in this case does not indicate that the parties have engaged in discovery in an attempt to resolve disputed issues of fact, such as job classifications, payroll amounts, and the resulting premium calculation. It also is noteworthy that this action was commenced before SIF completed its audit and that SIF immediately sought summary judgment. (The original grant of that motion on default subsequently was vacated; as a result, this motion is the third sequentially, but the first to address the merits.) Accordingly, the motion is denied, although it may be renewed after discovery is completed. See, e.g., Magee v County of Suffolk , 14 AD3d 664 (2d Dept 2005); Perroto Development Corp. v Sear-Brown Group, 269 AD2d 749 (4th Dept 2000). Accordingly, it is
ORDERED that plaintiff's motion for summary judgment is denied; and counsel shall appear in Part 55 for a preliminary conference on October 19, 2009, at 12 noon.