                         IN THE NEBRASKA COURT OF APPEALS

               MEMORANDUM OPINION AND JUDGMENT ON APPEAL

                         TRAVELERS INDEMNITY CO. V. T & S DRYWALL


  NOTICE: THIS OPINION IS NOT DESIGNATED FOR PERMANENT PUBLICATION
 AND MAY NOT BE CITED EXCEPT AS PROVIDED BY NEB. CT. R. APP. P. § 2-102(E).


                       THE TRAVELERS INDEMNITY COMPANY, APPELLEE,
                                            V.
                         T & S DRYWALL FINISHING, INC., APPELLANT.


                              Filed July 9, 2013.   No. A-12-833.


       Appeal from the District Court for Douglas County: LEIGH ANN RETELSDORF, Judge.
Affirmed.
       Josh Henningsen and Christopher A. Sievers, of Timmermier, Gross & Prentiss, for
appellant.
       Robert J. Wonnell, of McAnany, Van Cleave & Phillips, P.A., for appellee.


       INBODY, Chief Judge, and IRWIN and MOORE, Judges.
       MOORE, Judge.
        T & S Drywall Finishing, Inc. (T&S), acquired workers’ compensation insurance from
The Travelers Indemnity Company (Travelers). After the policy period terminated, Travelers
audited T&S to determine the actual premium as provided by the policy. During this audit and
the audit of the following policy period, Travelers concluded that T&S owed additional
premiums because it had hired subcontractors that did not have workers’ compensation insurance
covering their employees. T&S disputed the increased premiums, and Travelers brought an
action against T&S in the district court for Douglas County. Following a bench trial, the district
court entered judgment in favor of Travelers. T&S challenges the finding that it is liable for
additional premiums. Finding no error, we affirm the district court’s decision.
                                  FACTUAL BACKGROUND
       T&S is a company involved in the business of drywall installation and finishing.
However, it does not perform any of the actual installation or finishing work. Instead, T&S
submits bids to general contractors and, upon having a bid accepted, assigns the installation and


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finishing to various subcontractors. Other than its president and owner, Terry Winn, T&S has
one other employee, Julie Schafer, who manages the office and handles the bookkeeping.
        On February 17, 2005, T&S submitted an assigned risk application for workers’
compensation insurance to Travelers through one of Travelers’ agents. In its application, T&S
disclosed that it subcontracted 100 percent of its work and indicated that it did not sublet any
work without first having received a certificate of insurance from the subcontractor. Along with
the application, T&S paid $750 as prepayment of its premium. This prepayment was later
increased to $850. Upon receiving the application and premium, Travelers issued T&S a policy
with an effective policy period beginning on February 19, 2005, and terminating on February 19,
2006. When this initial policy period expired, a renewal policy was issued with an effective date
of February 19, 2006.
        As permitted by the policy, Travelers audited T&S’ records a few months after the first
policy period expired to determine the actual policy premium due. During this audit, Travelers
determined that T&S had contracted with a number of subcontractors that did not have their own
workers’ compensation insurance. Based on the information it received from the audit, Travelers
also concluded that these subcontractors employed additional workers. Because these
subcontractors did not have workers’ compensation insurance covering their own workers,
Travelers asserted that it had increased liability during the policy period because under Nebraska
law these subcontractors’ workers could have submitted claims under T&S’ policy. As a result of
this audit, Travelers adjusted T&S’ final premium to $103,544.
        Travelers also attempted to audit T&S’ records during the renewal policy period, but
T&S did not provide the necessary records. As a result, Travelers used the previous audit results
to estimate T&S’ premium for the partial renewal policy period. T&S continued to contest
Travelers’ revised policy premiums, and the policy was canceled on June 27, 2006. Travelers
adjusted T&S’ premium for the renewal period from February 19 to June 27, 2006, to $34,348.
When T&S refused to pay the adjusted premiums, Travelers filed suit in the district court for
Douglas County.
        At trial, Rhonda Byers, a Travelers’ premium auditor, testified to Travelers’ workers’
compensation premium audit process. She explained that the initial premium for a workers’
compensation policy is an estimate based upon an insured’s payroll projections for the policy
period. The final premium is based upon an insured’s actual payroll during the period. Because
the final premium is based upon an insured’s actual payroll, Travelers audits the insured’s
records after the policy has expired. To complete this audit and determine the final premium,
Byers testified that Travelers reviews payroll records, certificates of insurance for any
subcontractors, quarterly reports, federal 941 tax forms, and state unemployment quarterly
reports.
        Byers also described the process Travelers utilizes to calculate the final policy premium.
Byers stated that the governing body for workers’ compensation, the National Council on
Compensation Insurance (NCCI), assigns classification codes based upon the type of work
involved. According to Byers, each classification code has a different premium rate that is based
upon the loss history for that classification code within a particular state. To determine the final
premium, Travelers multiplies the insured’s actual payroll for the policy period by the specific
classification codes that pertain to the insured’s operation.


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        Byers further explained Travelers’ audit of T&S. Byers testified that Schafer informed
Travelers during the audit that the subcontractors hired by T&S had additional employees on the
jobsites. We also note that the interrogatory answers from T&S indicated that most of T&S’
subcontractors have employees. Byers stated that Travelers charged T&S the additional
premiums after the audits because T&S could not provide documentation showing that all
subcontractors were covered by workers’ compensation insurance policies. T&S only provided
certificates of insurance for 2 of its 10 subcontractors. If T&S had provided certificates of
insurance for all of its subcontractors, Byers testified that Travelers would not have charged the
additional premiums.
        Winn testified that he was instructed by Travelers’ agent not to supervise, direct, or
oversee any of its subcontractors. Because of these instructions, T&S intentionally did not
determine whether the subcontractors had employees at a jobsite and did not determine how the
subcontractors completed the work. T&S paid the subcontractors directly and did not issue
payment to any employees of the subcontractors. According to Winn, the only way T&S would
become aware that a subcontractor had employees was if the subcontractor submitted proof of
workers’ compensation insurance. However, there was no evidence presented to indicate that
T&S required certificates of insurance from all of its subcontractors who had employees before
subletting work.
        After a bench trial, the district court entered judgment in favor of Travelers. At the outset,
the court noted that the dispute is not whether the insurance agreement is an enforceable contract,
but whether Travelers is entitled to the premium as calculated. The district court concluded that
the policy language clearly provided Travelers the ability to conduct a postpolicy premium audit
and required T&S to preserve the records necessary for such an audit. Finding that T&S failed to
require its subcontractors to furnish proof of workers’ compensation coverage for their
employees, the court found that T&S became liable as an employer under Neb. Rev. Stat.
§ 48-116 (Reissue 2010). Because T&S intentionally failed to maintain the records necessary for
an audit, the district court accepted Travelers’ premium calculations. T&S was ordered to pay
$137,892, along with any applicable prejudgment and postjudgment interest. T&S appeals from
this order.
                                   ASSIGNMENTS OF ERROR
        T&S asserts, restated and renumbered, that the district court erred by (1) finding that
Travelers and T&S entered into a valid and enforceable contract, (2) concluding that Travelers
was permitted to increase the premium after conducting its audit, and (3) accepting Travelers’
retroactive premium calculation.
                                     STANDARD OF REVIEW
         A suit for damages arising from breach of a contract presents an action at law.
Dutton-Lainson Co. v. Continental Ins. Co., 279 Neb. 365, 778 N.W.2d 433 (2010). In a bench
trial of a law action, the trial court’s factual findings have the effect of a jury verdict and will not
be disturbed on appeal unless clearly wrong. City of Scottsbluff v. Waste Connections of Neb.,
282 Neb. 848, 809 N.W.2d 725 (2011). An appellate court does not reweigh the evidence but
considers the judgment in a light most favorable to the successful party and resolves evidentiary


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conflicts in favor of the successful party. Id. And that party is entitled to every reasonable
inference deducible from the evidence. Id.
        The interpretation of an insurance policy is a question of law. Dutton-Lainson Co., supra.
In reviewing questions of law, an appellate court resolves the question independently of the
lower court’s conclusion. Id.
                                           ANALYSIS
Did Travelers and T&S Enter Into
Valid and Enforceable Contract?
        T&S contends that the insurance policy does not constitute a valid and enforceable
contract. T&S argues that when it applied for insurance from Travelers, it never contemplated
having to cover its subcontractors’ workers under its own workers’ compensation policy. T&S
further claims that Travelers’ agent stated that T&S would not be charged a premium for the
subcontractors as long as they remained independent contractors. As a result, T&S contends
there was no mutual understanding between the parties about what T&S was purchasing from
Travelers and, therefore, no enforceable contract.
        An insurance policy is a contract. Rickerl v. Farmers Ins. Exchange, 277 Neb. 446, 763
N.W.2d 86 (2009). To create a contract, there must be both an offer and an acceptance; there
must also be a meeting of the minds or a binding mutual understanding between the parties to the
contract. Waste Connections of Neb., supra. A binding mutual understanding or meeting of the
minds sufficient to establish a contract requires no precise formality or express utterance from
the parties about the details of the proposed agreement; it may be implied from the parties’
conduct and the surrounding circumstances. Id.
        After our review of the record, we conclude that the insurance policies in question are
clearly enforceable contracts. Travelers agreed to provide workers’ compensation coverage for
T&S for the operative periods in exchange for T&S’ payment of the initial premiums. T&S
accepted the policies and was insured during the policy periods until cancellation. The fact that
T&S disputes its responsibility for additional premiums following the audits does not render the
contracts unenforceable. In fact, this point was effectively conceded at trial when Winn admitted
there was a policy in effect until T&S canceled its coverage after the audit. This assigned error is
without merit.
Is Travelers Permitted to Increase Premium
After Conducting Its Audit?
        Although providing little supporting argument for this assigned error, T&S asserts that
Travelers should not be permitted to apply premium changes retroactively. Focusing on the
Nebraska Supreme Court’s decision in Travelers Indemnity Co. v. International Nutrition, 273
Neb. 943, 734 N.W.2d 719 (2007), T&S argues that Travelers’ failure to introduce a copy of the
NCCI basic manual into evidence precludes it from retroactively changing the premium.
        In International Nutrition, Travelers performed a loss prevention and engineering survey
on International Nutrition, Inc., during the first 120 days of the policy term to gain a better
understanding of International Nutrition’s operations. After completing this survey, Travelers
changed International Nutrition’s classification code. Travelers also concluded that International
Nutrition had underestimated its payroll for the policy period. Id. These conclusions led


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Travelers to adjust International Nutrition’s policy premium. When International Nutrition
refused to pay the increased premium, Travelers filed suit for breach of contract and had
judgment awarded in its favor in the district court. Id.
        On appeal, International Nutrition contended that Travelers did not have the authority to
change International Nutrition’s classification code during the policy period and retroactively
apply the classification change to the premium. Id. The Nebraska Supreme Court rejected these
arguments, concluding that the language of the insurance policy and the application of the NCCI
basic manual provided Travelers with the authority to correct the classification code and
retroactively apply the change to International Nutrition’s premium. Id.
        We conclude that, contrary to T&S’ argument, International Nutrition actually supports
the district court’s decision that Travelers is permitted to make premium changes retroactively
after the policy has terminated. The clear and unambiguous language of the Travelers’ policy in
this case, as was the case in International Nutrition, gives Travelers the authority to perform
inspections and audits to determine the correct premium to be charged after the policy period
ends.
        As we noted above, an insurance policy is a contract. Rickerl v. Farmers Ins. Exch., 277
Neb. 446, 763 N.W.2d 86 (2009). Insurance contracts, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties have used. Id. When the terms
of a contract are clear, a court may not resort to rules of construction, and the terms are to be
accorded their plain and ordinary meaning as the ordinary or reasonable person would
understand them. Id.
        In this case, the materials T&S received from Travelers, including the final policy, clearly
explained that the initial premium was only an estimate. First, the section titled “Rating
Information” on T&S’ signed application specifies that the applicant is submitting an estimated
annual premium. Second, the information pages T&S received from Travelers after submitting
the application also clearly state that the initial premium is an estimate. Section 4 of the
information pages explains that “the premium for the policy will be determined by our
[Travelers’] Manuals of Rules, Classifications, Rates and Rating Plans. All required information
is subject to verification and change by audit to be made annually.”
        Finally, the plain language of the insurance policy further provided that the final premium
was to be determined after the policy ended. Specifically, paragraph E of part 5, under the title
“Final Premium,” provides:
        The premium shown on the Information Page, schedules, and endorsements is an
        estimate. The final premium will be determined after this policy ends by using the actual,
        not the estimated, premium basis and the proper classifications and rates that lawfully
        apply to the business and work covered by this policy.
        Paragraph G of part 5 permits Travelers to conduct an audit of an insured’s records in
order to determine the final premium up to 3 years after the policy period ends. Based on these
policy provisions, Travelers was clearly permitted to change T&S’ premium after conducting an
audit a few months after the policy terminated.
        The fact that Travelers did not produce the NCCI basic manual does not change the
analysis of this assigned error. The Supreme Court in Travelers Indemnity Co. v. International



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Nutrition, 273 Neb. 943, 734 N.W.2d 719 (2007), found that Travelers’ failure to produce the
NCCI basic manual did not preclude it from adjusting its premium following its audit. Here, the
district court did not err in finding that Travelers was permitted to conduct an audit after the
policy period and adjust the premium based upon the audit’s results.
Did Travelers Properly Calculate
Retroactive Premium?
        T&S also argues that Travelers did not properly calculate the revised premium in this
case. T&S contends that none of its subcontractors are employees of T&S and that Travelers did
not provide any evidence to support its conclusion that these subcontractors had employees.
Finally, T&S claims that it would be inequitable to allow Travelers to change the premium as it
did because no claims were ever made under the policy.
        Travelers argues that it was permitted to increase T&S’ premium because it had increased
risk exposure during the policy period due to T&S’ having hired subcontractors with employees
that were not otherwise covered by workers’ compensation insurance. Travelers contends that
Nebraska law dictates that these subcontractors’ employees would have been covered under
T&S’ policy in the event of a workplace injury.
        We find that Travelers’ position regarding its exposure for these subcontractors’
employees is well-supported in Nebraska’s workers’ compensation law. Section 48-116
provides:
                 Any person, firm, or corporation creating or carrying into operation any scheme,
        artifice, or device to enable him or her, them, or it to execute work without being
        responsible to the workers for the provisions of the Nebraska Workers’ Compensation
        Act shall be included in the term employer, and with the immediate employer shall be
        jointly and severally liable to pay the compensation herein provided for and be subject to
        all the provisions of such act. This section, however, shall not be construed as applying to
        an owner who lets a contract to a contractor in good faith, or a contractor, who, in good
        faith, lets to a subcontractor a portion of his or her contract, if the owner or principal
        contractor, as the case may be, requires the contractor or subcontractor, respectively, to
        procure a policy or policies of insurance from an insurance company licensed to write
        such insurance in this state, which policy or policies of insurance shall guarantee payment
        of compensation according to the Nebraska Workers’ Compensation Act to injured
        workers.
        The Nebraska Supreme Court has long held that an employer who employs an
independent contractor to do work which is in the usual course of business of the owner, and
who fails to require the independent contractor to procure workers’ compensation insurance, is
liable as a statutory employer under § 48-116. Rogers v. Hansen, 211 Neb. 132, 317 N.W.2d 905
(1982); Keith v. Wilson, 165 Neb. 58, 84 N.W.2d 192 (1957); Sherlock v. Sherlock, 112 Neb.
797, 201 N.W. 645 (1924). The Supreme Court has also extended this rule to the
contractor/subcontractor relationship. When a contractor fails to require a subcontractor to carry
workers’ compensation insurance and a subcontractor’s employee sustains a job-related injury,
the contractor may be a liable statutory employer. Duffy Brothers Constr. Co. v. Pistone
Builders, Inc., 207 Neb. 360, 299 N.W.2d 170 (1980).


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        On appeal, T&S does not dispute the above-cited law, but argues that Travelers did not
prove that T&S was a statutory employer. In other words, T&S maintains that Travelers should
have been required to affirmatively prove that the subcontractors had employees before charging
the additional premium. This argument, however, also contradicts the policy’s terms.
        Part 5 of the policy, titled “Premium,” contains the provisions utilized to determine the
premium. Paragraph A, titled “Our Manuals,” states that the premium for the policy is
determined by Travelers’ manuals for rates, rating plans, and classifications. Byers testified at
trial that Travelers utilized the NCCI basic manual as one of its manuals to calculate the
premium. Paragraph B, titled “Classifications,” states that the rate and premium basis listed on
the information page of the policy is determined based on an estimate of the insured’s exposure
during the policy. This paragraph also states that Travelers may adjust the classifications from
the original estimates. Paragraph C, titled “Remuneration,” explains that the policy premium is
determined by multiplying a rate times a premium basis. The most common premium basis is
remuneration. Remuneration consists of payroll and all other compensation paid or payable
during the policy period for the services of:
                1. All officers and employees engaged in work covered by this policy; and
                2. All other persons engaged in work that could make [Travelers] liable under
        [provision of policy requiring Travelers to pay benefits required of T&S by workers’
        compensation law]. If you do not have payroll records for these persons, the contract
        price for their services and materials may be used as the premium basis. This paragraph 2
        will not apply if you give us proof that the employers of these persons lawfully secured
        their workers compensation obligations.
        As stated above, Byers testified that Travelers utilized remuneration as the premium
basis.
        Because the remuneration premium basis requires the insurer to examine an insured’s
financial records, section 5 of the policy obligates the insured to maintain the necessary records.
Paragraph F, under the title “Records,” required T&S to maintain and provide the necessary
information for Travelers to calculate the premium. Paragraph G, under the title “Audit,” allowed
Travelers to examine and audit “all [T&S’] records that relate to the policy.” This paragraph
continued:
        These records include ledgers, journals, registers, vouchers, contracts, tax reports, payroll
        and disbursement records, and programs for storing and retrieving data. We may conduct
        the audits during regular business hours during the policy period and within three years
        after the policy period ends. Information developed by audit will be used to determine
        final premium.
Based on this language, the policy clearly required T&S to maintain the necessary records to
avoid incurring premium charges for its subcontractors, i.e., certificates of insurance from the
subcontractors. Because T&S intentionally did not determine whether its subcontractors had
employees working T&S’ contract jobs and did not require all of its subcontractors to submit the
insurance certificates, Travelers increased the premium based upon T&S’ payroll and
compensation records as permitted by the policy. Contrary to the assertion by T&S in its
insurance application, T&S did not receive certificates of insurance for all of its subcontractors


                                                -7-
before subletting work. Further, T&S admitted that its subcontractors had employees, both
through its interrogatory answers and statements made by Schafer during the audit process. T&S
in fact had certificates of insurance from two of its subcontractors, but failed to require such
certificates from its remaining subcontractors.
        T&S’ position that Travelers should have to produce evidence that the subcontractors had
employees not only ignores the policy language, but also the realities of workers’ compensation
insurance. Because of the ever-changing nature of a business, the policy premium for a workers’
compensation policy usually cannot be determined until after the policy has expired. See 5
Steven Plitt et al., Couch on Insurance 3d § 69:16 (2012). For this reason, the insurer relies on
the insured to maintain the necessary documentation for calculating the premium. If the insured
does not maintain these records, the insurer cannot accurately determine its exposure during the
policy. Therefore, T&S, not Travelers, bore the burden to establish that its subcontractors were
adequately insured.
        Finally, we find no support for T&S’ argument that the premium adjustment is
inequitable because no claim was ever filed against the policy, particularly since this is an action
at law. As discussed above, and as is clear from the policy language, the final premium for T&S’
workers’ compensation insurance policy is determined by its payroll for these periods and was
not affected by the amount of claims for this period. This assignment of error is without merit.
                                         CONCLUSION
        In summary, we conclude that T&S and Travelers created a valid contract. The resulting
insurance policy permitted Travelers to retroactively adjust the premium, and the district court
did not err when it accepted Travelers’ calculations for the judgment amount.
                                                                                    AFFIRMED.




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