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IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION II
NW WALL & CEILING CONTRACTORS ASSOCIATION, Appellant, v. DEPARTMENT OF LABOR AND INDUSTRIES, Respondent. Penoyar, J. -- The Department of Labor and Industries (the Department) offers a retrospective rating program (retro) for workers' compensation insurance. Under the retro UNPUBLISHED OPINION No. 42018-0-II

program, employers pay a standard premium up front and then receive a refund or assessment based on their actual claim experience for the plan year. In 1997, the Department began the drywall initiative that changed the way drywall employers' premium rates were calculated and offered discounted premium rates to employers who complied with the Department's reporting requirements. Northwest Wall and Ceiling Contractors Association (NWCCA) is a group of drywall employers who both enrolled in the retro program and qualified for the new discounted drywall rates. NWCCA received retro assessments for three of the first four years of the drywall initiative. NWCCA appealed these assessments to the Department, and the Department affirmed the assessments. The Board of Industrial Insurance Appeals and the superior court both affirmed the Department's decision. NWCCA appeals, arguing that the Department violated recognized insurance principles because it (1) failed to determine the adequacy of the new drywall rates before implementing them, (2) failed to inform NWCCA of a major change in the potential cost of

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coverage, and (3) failed to monitor the new rates after implementing them. It also argues that it is entitled to attorney fees. We hold that the Department did not violate recognized insurance principles because (1) it determines adequacy at the fund level, (2) NWCCA failed to prove that the Department owed a greater duty than it performed, and (3) the Department used the best available information in setting the drywall premium rates. Additionally, NWCCA is not entitled to attorney fees. FACTS I. Retrospective Rating NWCCA is a group of union drywall employers. In 1983, the group1 entered the

Department's retro program for workers' compensation insurance. The retro program provides incentives to employers to keep claim costs low by assessing or refunding premiums based on the actual claims the employers (or groups) incur during the coverage year. Every employer pays the standard premium for the coverage year. The Department then evaluates the retro program employers' actual claims at the end of the coverage year--and every 12 months thereafter for up to 5 years--to calculate the employers' retro premiums. Former WAC 296-17-916 (1997); former WAC 296-17-91216 (1999); former WAC 296-17-90445 (2000). If the employers' retro premiums are lower than the standard premiums, the employers receive a refund. If the

employers' retro premiums are higher than the standard premiums, the employers are assessed the difference. The retro program thus encourages participating employers to increase workplace safety, which lowers claims and results in a possible refund for employers. Although the

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Employers can form groups that the Department treats as a single entity for purposes of retrospective rating. Former WAC 296-17-910 (1997). 2

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Department encourages participation in the retro program as a way to promote workplace safety, the decision to join is made solely by the employers. II. Drywall Initiative The drywall initiative began in 1997 as an attempt to increase drywall employers' compliance with the Department's reporting requirements. Premiums for drywall employers were increasing because some employers were not accurately reporting the number of hours their employees worked. The Department made several changes to combat this problem. First, the Department changed the reporting medium for drywall employers from hours worked to square foot of drywall installed. The amount of drywall a contractor installs can be independently verified through building permits and supplier's records. reporting medium would be less susceptible to manipulation. Second, the Department created two tiers of drywall premium rates: discounted and nondiscounted. The employers who qualified for the discounted rates received a 30 percent or 40 percent discount on their premium rates.2 Those who did not qualify paid a premium rate that was 50 percent higher. Employers had to follow the Department's reporting requirements in order to qualify for the discounted rate. The Department hoped that this would increase reporting and lead to more fair rates for all drywall employers. The new rates were set by Frank Romero, head of the Department's risk classification unit.3 Romero would often set the base premium rates for new classes, and the Department The Department hoped that this

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The Department also created multiple classifications within each tier that relate to the type of drywall work done by employees. For example, there is a taping class and an installation class. The taping class received a 30 percent discount and the installation class received a 40 percent discount. 3

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actuaries would monitor and evaluate the rates to determine if the rates were adequate and make adjustments if they were not. Generally, actuaries set the rates using data from the previous five years to adjust the rate from the prior year. For example, to set the 1990 rate, actuaries used data from 1984 to 1988 to adjust the 1989 rate. That was not done for the 1997 rates because the data from the previous years used a different reporting scheme--by the hour rather than by square foot of drywall installed. Instead, the Department converted the old hourly rate to a square footage rate using a conversion factor of 125 square feet per hour worked. This conversion factor was based on testimony from drywall employers. Romero then set a discount based on the Department's experience with the reforestation class, where the Department had success in combating a similar reporting problem. The discounted rate was "fairly close" to the rate used in the pilot program, which was set based on the rate that employers said they needed to be competitive. Administrative Record (AR) (Nov. 16, 2009) at 37. The 1997 rates were, in the words of Romero, "blessed" by the Department's senior actuary. AR (Nov. 16, 2009) at 17-18. The Department held public hearings to discuss the new rates and the switch to square footage reporting, and it published the new rates in compliance with rule-making procedures. The new rates went into effect in 1997. The Department's senior actuary, Bill Vasek, set the premium rates for 1998. He used the same methodology as Romero to set the discounted and nondiscounted rates and ended up using the same percentages--a 30 percent or 40 percent discount for qualifying employers and a 50 percent increase for nondiscounted employers. Vasek testified that he did not use the data from

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Romero set the rates in 1996 as head of risk classification; he became manager of the retro program during 1997, when the Department was implementing the initiative. 4

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1997--the first year when square footage reporting was in effect--in computing the 1998 rates because it was not mature enough. Vasek also set the 1999 and 2000 rates. This time, he used the normal rate-making process, where the prior year's rate is adjusted by looking at the previous five years--although in this case, there was not five years of square footage reporting data, so he used what was available. In setting the 1999 rate, he used data from 1997 to adjust the 1998 rate. In setting the 2000 rate, he used data from 1997 and 1998 to adjust the 1999 rate. III. NWCCA's Retro Program Performance from 1997 to 2000 NWCCA's retro program coverage period ran from July 1 to June 30. It had to enroll for the upcoming coverage year two months in advance. It would usually receive the first retro adjustment in May of the following year. This meant that it would have to sign up for the next coverage year before it knew whether the previous year resulted in a refund or an assessment. In 1999, NWCCA received its first retro adjustment for the 1997/98 plan year--the first year of the drywall initiative. It owed an assessment for the first time during its participation in the retro program. It protested the assessment and ultimately came to an agreement with the Department to void its retro program contract for the 1997/98 plan year. The Department and NWCCA agreed that there had been no "meeting of the minds" for the 1997/98 plan year contract--because of the new drywall rates and reporting scheme--and, therefore, a retro program contract did not exist for that year. AR (Nov. 16, 2009) at 31. As a result, the Department treated NWCCA as a nonretro employer and charged it only the standard premium. This agreement was not reached until March 2000. Meanwhile, NWCCA had to enroll for the 1998/99 plan year in June 1998, before the first 5

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adjustment for the 1997/98 plan year was available. The 1998/99 plan year also resulted in an assessment. By the time NWCCA learned of the $735,1494 assessment, it had already enrolled in the retro program for the 1999/2000 plan year. NWCCA settled the 1997/98 assessment with the Department during the 1999/2000 plan year. At that time, the Department suggested that

NWCCA change its plan for 1999/2000. NWCCA took the suggestion and changed its retro plan mid-year. It received a $433,848 refund that year. NWCCA enrolled for the 2000/01 plan year in June 2000 and received a $309,528 assessment for that year in May 2002. It opted out of the retro program for the 2001/02 plan year. In 2002 and 2003, NWCCA noticed what it considered significant increases in drywall premium rates. The increased rates, coupled with its recent assessments, caused NWCCA to investigate the recent changes to the drywall rates. NWCCA hired the Department's former senior actuary, Bill White, to analyze drywall rates since the initiative. AR (11/20/09) at 48. White's 2005 report showed that the Department had set rates too low during the first few years of the drywall initiative. By assuming that the proposed 2006 rates were adequate--meaning that the premiums would cover expected losses--he worked backward to discover what the Department should have set the rates at in the early years of the drywall initiative. He discovered that the discounted rate should have been discounted only 7 percent rather than 35 percent5 and that the nondiscounted rate should have been increased by 22 or 23 percent. He also discovered that the initiative did not increase compliance and that the increase in rates in 2003 and 2004 was

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The amounts for the refunds and assessments vary slightly throughout the record. We refer to the amounts listed in exhibit 11 for this opinion. 5 Witnesses occasionally referred to the discount as 35 percent--the average of the two discounted classes. See AR (Nov. 16, 2009) at 43. 6

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a delayed reaction to the initiative's failure. IV. NWCCA's Appeals NWCCA appealed its retro adjustments for the 1998/99, 1999/2000, and 2000/01 plan years. The Department denied the appeal, and NWCCA appealed the decision to an Industrial Appeals Judge (IAJ). The IAJ reversed the Department and ordered a refund for NWCCA. The Department then appealed to the Board of Industrial Insurance Appeals, which affirmed the Department's order upholding the assessments. NWCCA appealed to the superior court, which affirmed the Board and adopted its findings of fact and conclusions of law. NWCCA appeals. ANALYSIS I. Standard of Review Our review of a superior court's decision on an appeal from the Board of Industrial Insurance Appeals is limited to examining the record to see whether substantial evidence supports the superior court's findings of fact and whether the conclusions of law flow from the findings. Young v. Dep't of Labor & Indus., 81 Wn. App. 123, 128, 913 P.2d 402 (1996). "Substantial evidence exists where the record contains a sufficient quantity of evidence to persuade a fairminded, rational person of the truth of the allegation." State v. Halstien, 122 Wn.2d 109, 129, 857 P.2d 270 (1993). We review the record in the light most favorable to the party who prevailed in superior court. Rogers v. Dep't of Labor & Indus., 151 Wn. App. 174, 180, 210 P.3d 355 (2009) (quoting Harrison Mem'l Hosp. v. Gagnon, 110 Wn. App. 475, 485, 40 P.3d 1221 (2002)). We give substantial weight to an agency's interpretation of the law within its expertise. Hill v. Dep't of Labor & Indus., 161 Wn. App. 286, 293, 253 P.3d 430, review denied, 172 Wn.2d 1008, 259 P.3d 1108 (2011). Unchallenged findings are verities on appeal. Robel v. 7

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Roundup Corp., 148 Wn.2d 35, 42, 59 P.3d 611 (2002). II. NWCCA Did Not Waive Its Challenge The Department first argues that NWCCA waived its challenge to the assessments because it never challenged the rules setting the rates. NWCCA responds that it is not challenging the rates, it is arguing that the Department failed to run the retro program consistent with recognized insurance principles. We agree with NWCCA that waiver does not apply here where NWCCA is not challenging the validity of the rules. III. Failure to Follow Recognized Insurance Principles NWCCA argues that the Department should be ordered to refund the assessments because it failed to run the retro program consistent with recognized insurance principles. Specifically, it argues that the Department failed to determine the adequacy of the new drywall rates, failed to inform NWCCA of major changes in the potential cost of coverage, and failed to monitor the new rates for adequacy. The legislature requires the Department to act according to recognized insurance principles. RCW 51.18.010(2) states "[t]he retrospective rating plan shall be consistent with recognized insurance principles and shall be administered according to rules adopted by the department."6 Similarly, RCW 51.16.035 requires the Department to set rates according to recognized insurance principles. A. Rate Adequacy

NWCCA contends that the Department violated recognized insurance principles when it failed to determine the adequacy of the new drywall rates. This argument is based on Romero's

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This section was added in 1999. Laws of 1999, ch. 7,

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