Such statutes, now legislated in all 50 states and the District of Columbia, provide essential medical, disability, rehabilitation and death benefits for employees' job related injuries and diseases, regardless of fault. Prior to the enactment of these statutes employers could assert a variety of defenses - e.g., contributory negligence and assumption of risk - to injured employees' claims. The difficulty in overcoming such defenses resulted in a majority of injured employees going without compensation. Workers Compensation statutes remove the employees ability to sue their employer in exchange for providing no fault protection and certain payment – but only if the statute applies.
It is essential that an agent procuring workers compensation coverage for a client know which persons and types of employment are covered by the applicable workers compensation statute. Some statutes exempt employers with employees under a specific number. Others exempt employers of a certain type, e.g., farm labor and domestic workers. An agent's knowledge regarding the type or classification of persons is essential to accurate reporting, in order to lessen or completely erase any additional premium that may be assessed after an audit.
Typically employers are not required to provide workers compensation insurance to contractors who receive a 1099 form at the end of the year. However, disputes frequently arise over whether a worker is an employee or an independent contractor. Employment status is a question of fact, not of law. Courts will decide the dispute on a case-by-case basis and consider a number of factors such as the duration of employment, the method of payment, the right to exercise control over the work, who supplies the tools and equipment necessary to complete tasks, and who sets the work schedule. Historically, the courts interpret the definition of employee broadly to err on the side of providing protection to injured workers.
Independent contractors may employee others. An insurance agent should remind his or her client to obtain proof of workers compensation insurance from the independent contractor for the independent contractor's own employees. Injuries aside, the business that uses the contractor's services may be found responsible for those workers. Similarly, the business' workers compensation carrier may require it to pay premiums based on the cost of the sub-contracted work.
Leased employees and temporary employees should also be considered by an insurance agent when procuring workers compensation coverage for a client, in order to avoid additional premium being assessed after audit. Temporary employees are hired for a short period of time during peak times or to replace employees on vacation or otherwise out of the office. The company providing the temporary employee usually provides workers compensation insurance. Leased employees, however, work continuously for the same business and are subject to control just like a regular employee. They are commonly referred to as 'co-employees' of the leasing contractor and the hiring contractor. In this type of arrangement a PEO ("professional employer organization") typically is responsible for providing workers compensation coverage. However, in order to avoid a dispute after an audit, the classification of these types of persons should be discussed with the agency client, and the agent should document that discussion.
An actual E&O claim arose in the situation where the agency's client had a written independent contractor agreement with the injured worker, but it was determined that the injured party was actually an employee of the agency's client. The injured party sued the client, which in turn filed a lawsuit against the agency asserting a general negligence claim. The damages the agency client claimed, along with additional premium, included expenses and monetary damages paid to the injured worker. The agency client also claimed business loss due to the entity, for whom the job was being completed at the time of the injury, cancelling a future contract with the agency client. The lost business claim significantly increased the settlement value of the case as it was claimed for the four years the cancelled contract would have been in effect.
This claim example highlights the possibility and likelihood that, if accurate information is not provided at the time of original application, the damages that may be claimed against the insurance agency are more than just the additional premium that will be assessed at audit.
President Taft keenly observed that, "Too many people don't care what happens so long as it doesn't happen to them." Well, in the growing arena of agents E&O claims, it is increasing likely that, sooner or later, an E&O claim will happen to you. For that reason, it bears remembering what the Boy Scouts have been preaching since 1910: 'Be prepared.'
In the workers compensation context this means doing your homework and ensuring that the information reported on the application accurately describes the customer's business operation. This includes ensuring that persons are accurately classified as employees and that an accurate number of employees is reported. The misclassification of employees when determining class codes and the understatement of payroll at the time of application can cause additional premium to be assessed after an audit. Avoiding the shock of having an additional premium assessed after an audit will, in turn, facilitate the retention of agency customers – something we all care about.
Cara Gates is an assistant vice president, claims specialist with Swiss Re Corporate Solutions and works out of the office in Overland Park, Kansas. Insurance products underwritten by Westport Insurance Corporation, Overland Park, Kansas, a member of Swiss Re Corporate Solutions.
