I had originally planned to follow up my last blog on valuation with some additional thoughts. However, on March 5, there was an important event. IIANC provided another excellent E&O Symposium which addressed several very important subjects, one of which was workers’ compensation.
Over the last few years, I have received many phone calls from agents whose clients have received a letter from the North Carolina Industrial Commission assessing fines and penalties for non-compliance with the Workers’ Compensation Act. Some of the fines and penalties are quite large. We all know and have experienced small businesses that say they do not need or they cannot afford to buy workers’ compensation insurance. The Workers’ Compensation Act (Act) does not consider a business’ needs or wants. The Act governs the requirements which mandate which businesses are must purchase workers’ compensation insurance and stipulates several exceptions to the mandate. Failure to comply with the Act can have both civil and criminal consequences.
One important point on which we must agree is that most insurance agents are not attorneys. Only attorneys are licensed and permitted to interpret laws like the Act. In addition, the Act is a voluminous and complex law with hundreds of court cases interpreting the particulars of the Act. So, insurance agents should not provide advice on what the Act requires and who is exempt from the Act. Property and casualty insurance agents are licensed to sell, solicit and negotiate the purchase of insurance policies, including workers’ compensation insurance. There should be a clear line that separate the practice of law and selling insurance policies. That line, however, is not always as clear as it should be.
So, what can insurance agents say about workers’ compensation insurance that avoids the practice of law and reduces their E&O exposure?
First, insurance agents should realize that even businesses which are not required to buy workers’ compensation insurance still need the coverage. People that have homes with no mortgage need homeowners insurance. Just because the Act may not require the purchase of workers’ compensation insurance (a legal determination) does not mean that they do not need workers’ compensation insurance (an insurance recommendation). Every business or incorporated entity needs workers’ compensation insurance. Agents should convey this to clients and document their file as to the offer and acceptance or rejection of the offer. Second, if a business or incorporated entity does not think that they need workers’ compensation insurance, they should be advised to seek legal counsel. They may not do it, but the agent should have documentation of their recommendation that the client should seek legal advice. A wet signature on the rejection and recommendation documentation to seek legal counsel should be obtained. This is especially important if the client contends that its personnel are independent agents rather than employees. Distinguishing between employees and independent contractors is an issue that requires legal judgment, and the overwhelming majority of personnel who are characterized as “independent contractors” are really employees.
Third, every person involved in the business should be covered or offered coverage for work related injury or disease. Corporate officers are employee by operation of the Act but may exclude themselves from coverage. However, there must be a workers’ compensation policy in place in order to exclude any officers. It requires an endorsement to the workers’ compensation policy to exclude corporate officers which provides documentation of intent not to provide coverage for them. Sole proprietors, partners and member/managers of LLCs are not defined by the Act as employees and must affirmatively elect to be covered. Payroll must be included, and premiums must be charged for adding owners who are not corporate officers to the coverage. Again, documentation of the offer and acceptance or rejection should be obtained.
At the symposium, I shared that a number of years ago, IIANC worked with Chris Boggs, Executive Director of Virtual University, to create a sample letter that agents can use to send to clients that have new or renewing Worker’s Compensation policies conveying some of these important points. You can access that letter here.
Workers’ compensation claims can be financially catastrophic to workers and their families. If the appropriate coverage is not in place, the claimant and their attorneys will be looking in every direction for sources of compensation for injured client. We need to take every reasonable precaution to prevent our agency E&O insurance from being one of those sources.