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• Title: Washington National Insurance Co. v. Administrators
• Author : United States Court of Appeals for the Seventh Circuit
• Release Date : January 04, 1993
• Genre: Law,Books,Professional & Technical,
• Pages : * pages
• Size : 76 KB

Description

EASTERBROOK, Circuit Judge. For more than two decades, Washington National Insurance Company (WNIC) underwrote group life and health insurance for members of the Iowa Grain and Feed Association (IGFA). The IGFA had many members and sub-groups. Each constituent unit of the IGFA had to be identified and its risks assessed. Shifting membership created difficulties in collecting the proper premium and handling claims. WNIC engaged The Administrators, a proprietorship through which Robert J. Hoefer does business, to handle all contact with the IGFA and its members. Hoefer and his staff were to negotiate with each unit, bill and collect premiums, establish the eligibility of claimants, pay valid claims, and keep records of all these activities. In exchange, Hoefer was to receive 6.5 percent of WNIC's gross premiums from the IGFA. (Because The Administrators is a proprietorship, we drop separate reference to it.) To make money, WNIC needed premiums sufficient to cover the costs of health and death benefits plus Hoefer's fees. Hoefer wanted to keep premiums low in order to maximize the number of persons who opted into the group plan. His compensation as a percentage of the gross led Hoefer to want higher aggregate billings, which could be accomplished by selling more policies at stable rates. Hoefer's desire to maximize gross revenues, contrasted with WNIC's desire to maximize net profits, put them on a collision course when the costs of medical care began to rise rapidly in the late 1980s and the IGFA business became unprofitable for WNIC. After a period of increasing friction about the appropriate level of premiums, characterized by an episode in which Hoefer stalked out of a meeting rather than discuss a possible increase in rates, the two parties reached an agreement in September 1989 to increase health insurance rates by 25 percent and life insurance premiums from 43? to 54? per $1,000 of coverage. WNIC's receipts rose by only 3 percent, which Hoefer attributed to a combination of price guarantees (the new rate could not go into effect until the guarantee periods expired) and some units' decisions to drop coverage rather than pay the additional premium. Because WNIC did not deal directly with the IGFA and its constituent groups, it took Hoefer's word. The business remained unprofitable, and WNIC concluded that rates had to be increased further. Discussions between WNIC and Hoefer produced an agreement in May 1990 to implement a new system of risk classifications. Units within the IGFA with a history of higher claims were to be assessed substantially higher premiums. Hoefer was responsible for classifying the units by risk and implementing the new rates effective June 1, 1990, for some units and July 1, 1990, for the rest.

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