Workers' Compensation: Audit Trumps Oral Promise

A New Jersey federal court enforces a written insurance policy over an alleged phone-call agreement, with a workers' compensation payroll rule at the heart of the dispute.

In Starr Surplus Lines Insurance Co. v. Ziegenfuss Drilling, Inc., No. 24-8221, 2026 WL 1650935 (D.N.J. June 8, 2026), the United States District Court for the District of New Jersey granted summary judgment to two insurers seeking unpaid premiums from their insured, a commercial rock-and-boulder drilling company. The decision is a clean illustration of a recurring tension in insurance litigation, the conflict between what a contract says in writing and what a party claims was promised on a phone call. It also, in a meaningful way, turns on a workers' compensation payroll rule that was applied where it did not belong.

The Dispute

Starr Surplus issued the drilling company a one-year general liability surplus lines policy effective June 1, 2021, with an initial deposit premium of $310,000. The final premium was not fixed at the outset. Instead, the policy required an annual payroll audit, with the ultimate amount owed calculated from the insured's payroll at specified rates per $1,000, broken out between New York and all other states.

Starr's third-party vendor, Sedgwick, ran the first audits. After the insured flagged errors, including the improper inclusion of fringe benefits, per diem payments, and officer salaries, Sedgwick revised its numbers twice, ultimately resulting in an additional premium of $155,666.70 in a third revised audit. The parties then held a November 9, 2023, conference call. The insured claimed that on that call, Starr's senior premium auditor agreed to honor the third audit subject only to limited corrections. Starr denied making any such promise.

Starr brought the audit in-house and discovered something the prior audits had missed. Sedgwick had applied a New York State Payroll Limitation, a cap that applies only to workers' compensation policies issued in New York, not to general liability policies like this one. Removing the limitation drove the final premium up sharply, to $684,859, leaving $374,859 due after the deposit. The insured refused to pay. Two additional 2022 policies, a general liability policy and a workers' compensation policy, generated smaller unpaid balances of $13,160 and $8,047.

The Court's Rationale

Judge Robert Kirsch granted summary judgment for the insurers on all three counts. The reasoning rested on several independent grounds, each worth understanding on its own terms.

First, the unopposed counts were easy. The insured conceded that the real dispute concerned only the 2021 general liability policy. It offered no argument against the two 2022 policies, so the court granted summary judgment on those counts as unopposed and, in any event, well supported by the elements of a New Jersey breach-of-contract claim, the existence of a contract, a breach, resulting damages, and the insurer's own performance.

Second, the alleged oral modification failed for lack of proof. The 2021 policy contained an integration clause stating that it held all the agreements between the parties, and a provision that its terms could be amended or waived only by written endorsement. New Jersey law allows parties to orally modify even a contract that forbids oral modification, but only upon a showing of clear and convincing evidence. The insured's proof was two self-serving declarations describing the November 9 call. The court found these conclusory statements insufficient to meet that heightened standard, especially where contemporaneous emails after the call showed the auditor questioning fringe payments and planning to correct the very payroll limitation at issue, conduct flatly inconsistent with any promise to honor the third audit.

Third, the good-faith argument came too late. The insured argued that Starr breached the implied covenant of good faith and fair dealing. The court declined to consider it because the insured never raised the covenant in its answer, as either a counterclaim or an affirmative defense, and a party cannot inject a new claim for the first time at summary judgment. The court added that the argument would fail on the merits anyway, because the benefit of the bargain never included a payroll limitation that did not apply to a general liability policy.

Fourth, the affirmative defenses did not hold. The court rejected all three. Unclean hands is an equitable doctrine unavailable against claims for money damages, which sound in law. Unjust enrichment failed because the parties' relationship was governed by an express contract, and because the insured pointed only to a benefit the insurer would receive if it prevailed, not to a benefit already retained. Equitable estoppel failed for the most basic reason of all: the insured never changed its position in reliance on anything said on the call. It did not even pay the lower amount it claimed to owe.

Where Workers' Compensation Fits

For workers' compensation practitioners, the case is instructive less for its arbitration-style contract holding and more for the technical payroll mechanics at its core. The decisive error was the misapplication of the New York State Payroll Limitation, a feature of New York workers' compensation premium calculation, to a general liability policy. That limitation caps the payroll attributable to certain individuals for premium purposes in the workers' compensation context. It has no place in a general liability audit.

The lesson cuts across coverage lines. Premium audits for both workers' compensation and general liability policies turn on payroll classification, remuneration inclusions and exclusions, and state-specific rules drawn from rating manuals. An auditor who imports a workers' compensation limitation into a general liability calculation, or vice versa, can swing a premium by hundreds of thousands of dollars. Here, the insured actually conceded that the limitation should not have applied, which is precisely why its attempt to lock in the lower, erroneous number could not survive. The court was unwilling to grant what it called a windfall built on a vendor's mistake.

The case also directly addressed workers' compensation through Count III, the unpaid premium on the 2022 workers' compensation and employers' liability policy. That count proceeded on the same audit-based logic, and the insured's failure to contest it meant judgment followed as a matter of course.

Impact and Key Takeaways

The decision reinforces several principles that matter to anyone who litigates or advises on premium disputes.

•Written policies control. Integration and written-amendment clauses are not boilerplate to be brushed aside. An insured who wants to change a policy should insist on a written endorsement rather than rely on a phone call.
•Oral modification needs hard proof. Clear and convincing evidence is a demanding standard. Two declarations describing a disputed call, contradicted by contemporaneous emails, will not clear it at summary judgment.
•Plead defenses and counterclaims early. Good-faith and fair-dealing theories, like affirmative defenses, must appear in the answer. Raising them first at summary judgment forfeits them.
•Audit accuracy is everything. A single misapplied payroll rule, here a workers' compensation limitation dropped into a general liability audit, can move a premium dramatically. Scrutinize the rating basis, not just the bottom line.
•Surplus lines insurers have pricing latitude. A surplus lines insurer may charge what the market will bear for high-risk operations, and the absence of a surplus lines notice, an obligation that falls on the producer rather than the insurer, does not by itself suggest bad faith.

For insureds, the practical takeaway is sobering. The window to fix an audit error is during the audit and through written amendment, not after the fact through recollections of a call. For insurers, the case is a reminder that disciplined, well-documented audit corrections, supported by contemporaneous records, are what carry the day.

Sources

Starr Surplus Lines Insurance Co. v. Ziegenfuss Drilling, Inc., No. 24-8221, 2026 WL 1650935 (D.N.J. June 8, 2026)

About the Author

Jon L. Gelman of Wayne, NJ is the author of NJ Workers' Compensation Law (West-Thomson-Reuters) and co-author of Modern Workers' Compensation Law (West-Thomson-Reuters).

Blog: Workers' Compensation | LinkedIn: JonGelman | Substack: jongelman.substack.com | Blue Sky: jongelman@bsky.social

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