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Inc. v. HVAC Compensation Corp.

Superior Court of Massachusetts, Suffolk

July 27, 2017

O'Connor Constructors, Inc.
HVAC Compensation Corporation et al. [1]

          Filed August 1, 2017


          Mitchell H. Kaplan, Justice

         In this action, the plaintiff, O'Connor Constructors, Inc. (O'Connor), seeks to recover sums paid by the defendant HVAC Compensation Corporation (HVAC), a non-profit corporation established as a workers' compensation self-insurance group or SIG, to purchase a loss portfolio transfer (LPT) insurance policy. O'Connor withdrew from HVAC at the end of 2009. It asserts that a substantial portion of the surplus that HVAC used to purchase the LPT policy should have been distributed to it as dividend. O'Connor also seeks to set aside an assessment that HVAC issued against O'Connor for additional funds to cover a liquidity deficit created by the purchase of the LPT policy. The additional defendants are the trustee/directors of HVAC (hereafter referred to as the Directors), each of whom are representatives of the companies that comprise the SIG, as well as the member companies themselves. While O'Connor's complaint initially pled seven counts, four were previously dismissed. Three counts remain: breach of contract (Count I), breach of fiduciary duty (Count VI), and violation of G.L.c. 93A (Count VII). The case is now before the court on the defendants' motion for summary judgment. For the following reasons the motion is DENIED as to Counts I and VI and ALLOWED as to Count VII.


         The following facts are either undisputed or viewed in the light most favorable to O'Connor, the non-moving party.

         In 1992, HVAC was organized to operate as a workers' compensation SIG pursuant to G.L.c. 152, § § 25E-25U. Its members were companies principally engaged in the heating, ventilation, and air conditioning trades in Massachusetts. While a SIG is permitted to organize itself in various forms, HVAC was organized as a not-for-profit corporation under G.L.c. 180, § 4(n). Each HVAC member is required to enter into an Application and Indemnity Agreement (Indemnity Agreement) and is bound by HVAC's by laws. Material to this case is a provision in G.L.c. 180, § 3 which provides that not-for-profit corporations, like HVAC, may not through their articles of organization or bylaws eliminate the personal liability of its directors: " (i) for any breach of the . . . director's duty of loyalty to the corporation or its members, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) for any transaction from which the . . . director derived an improper personal benefit." HVAC's organizational documents do not purport to limit its Director's liabilities in a manner inconsistent with this statutory requirement.

         The Board of Directors of HVAC directs the management of its affairs including determining the contributions (i.e., premiums) to be paid by the members each year for their workers' compensation coverage in accordance with rates established by the Division of Insurance, administering and managing HVAC's funds, including its reserves, and, of note in this case, purchasing insurance and reinsurance. In practice, the Board retained a professional, third-party administrator, FutureComp, to manage its business and affairs.

         Of importance to this case is the manner in which HVAC distributed its surplus, i.e., funds maintained by HVAC in excess of the reserves that its actuaries determined would be needed to pay claims that have been asserted by covered employees, as well as claims that are estimated to be asserted for incidents occurring during a " fund year" but which have not yet been reported, so-called IBNR. To the extent that premiums collected from members for a given year exceed claims paid and actuarially estimated claims that will have to be paid in the future, plus expenses incurred in operating the SIG, that year has a surplus. If claims paid and estimated to be paid and operating expenses with respect to a fund year exceed the premium collected, that year is running a deficit. According to Section 12 of the Indemnity Agreement (as amended),

Any Positive Balance of the Group resulting from overall loss experience may be available as a policyholder dividend . . . or used as a reserve in accordance with a Positive Balance Provisions Plan as set forth in Schedule 3 or as adopted and amended from time to time by the Board of Directors of the Group in its sole discretion. In accordance with Section 25P of Chapter 152 of the Massachusetts General Laws, a refund for any Fund Year shall be paid only to those employers who remain participants in the group until December 31st of the Fund year. Payment of a refund based on a previous Fund Year shall not be contingent on continued membership in the group after that Fund Year.

          The Division of Insurance has issued regulations that create a formula pursuant to which a SIG may distribute surplus from any fund year to its members. In general, it permits the surplus to be distributed ratably in four installments over five years with the first distribution made two years after the close of the fund year. For a fund year with a surplus, each HVAC member receives a percentage of the surplus determined by the amount of the premium that it paid that year multiplied by that member's loss ratio for that year--this is referred to as the member's " combined ratio." In consequence, the amount, if any, that any member receives for a surplus year is dependent on that member's own premium amount and loss experience for that year.

         If a fund year has a deficit, HVAC assesses the deficit to its members for that year using the same statutory formula that is used to calculate distributions. As with distributions, deficits begin to be collected two years after the close of a fund year. Once a year, usually in November or December, HVAC members who are in a negative position receive an invoice for payment due; members who have a net surplus are issued a dividend check in January. The amount of surplus or deficit for any given fund year may change from year to year as claims develop and are paid and IBNR recalculated. Surplus calculations vary most in the first two years following the end of the fund year, but they may continue to change in subsequent years.

         HVAC has always calculated and paid dividends or assessed deficits based on individual fund year results. As noted above, a former member is entitled to the distribution of surplus for any year in which it was a member, if there is surplus available to distribute. Similarly, a former member could be required to contribute additional amounts to cover a deficit with respect to any period in which it was a member of the SIG. HVAC has also purchased reinsurance and charged its costs to its members on a fund year by fund year basis.

         O'Connor became a Member of HVAC in 1993, at that point HVAC had six members. By 2004, it had increased to ten members. Effective December 31, 2009, O'Connor withdrew from HVAC, at which point HVAC had only seven members. For the last several years that O'Connor was a member of HVAC, it paid significantly higher premiums than any other member. For example, in 2009 when HVAC had eight members, O'Connor's premium was almost four times that of the next highest premium and amounted to approximately 44% of all premiums paid that year. After 2009, O'Connor no longer had a representative on the HVAC Board of Directors and, therefore, no vote on any matter affecting HVAC's management or affairs.

         In the years 2007 through 2010, O'Connor was required to pay substantial deficit assessments in respect of earlier years, approximately $1 million in the aggregate. Thereafter, its accounts moved to surplus status, and it received a dividend in January 2012. An internal memorandum prepared in May 2012 suggested that O'Connor was in a surplus position of $450, 000, a number which is, in effect, a snapshot of surplus at a given moment and was principally based on favorable development for 2008 and 2009, although these fund years were not then fully available for distribution under the formula described above. At the same time, the 2010 and ...

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