Robert J. Fitzgerald

Key Points:

• In New Jersey, business owners can elect to be covered as employees for purposes of workers’ compensation coverage.
• A workers’ compensation carrier is not required to ensure that business owners be included on a policy. 
• Even if an insurance producer errs in failing to select insurance coverage for a business owner, the carrier is not required to cover the loss.

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The New Jersey Superior Court addressed the latest attempt to expand workers’ compensation insurance coverage for business owners in Kearton v. E. W. Millwork, LLC, 2022 WL 244043 (N.J. App. Div. Jan. 27, 2022). The underlying facts of the case were undisputed. On August 27, 2003, the petitioner, Kearton, sustained injuries while working at E.W. Millwork, a manufacturer of wooden railings and moldings. Kearton had formed E.W. Millwork, a limited liability company, with his equal owner, Brigante. 

In March 2005, Kearton filed both a claim petition and a motion for medical and temporary disability benefits. Almost eight months later, E.W. Millwork’s carrier, Zurich American Insurance, filed a motion to deny the claim petition for lack of insurance coverage. Specifically, Zurich argued that coverage was not provided to the two owners, Kearton and Brigante, because the application for coverage did not request coverage for the owners. In January 2008, the Workers’ Compensation Judge issued a bench decision denying the motion. The judge determined that the insurance producer, Pawlak, made a mistake on E.W. Millwork’s workers’ compensation insurance application and should have elected coverage for the owners. The court also somehow found that Zurich was negligent and should have ensured that coverage was provided to the owners.    

Zurich filed a timely motion for reconsideration, arguing that the policy “clearly and unambiguously” did not provide coverage for the owners and that there was no such endorsement listed on the declaration page. Since there was no affirmative choice for members’ coverage––such coverage having been declined twice on the application—Zurich argued that Kearton was not covered as an employee. A different Workers’ Compensation Judge denied reconsideration, stating in his bench decision that he was “taking the coward’s way out” by not deciding the merits and that, for him to do so, would require retrying the matter.

Kearton suffered a second workplace injury in April 2009, resulting in an additional claim petition that was consolidated for trial on the nature and extent of permanency. In May 2017, a third Workers’ Compensation Judge presided over the trial. In December 2020, the matter was concluded by a fourth Workers’ Compensation Judge, who issued a final order of judgment regarding the 2003 work-related accident, awarding 46.5% of partial total.

On appeal, Zurich made several arguments, including that the compensation court erred in not granting its motion to dismiss Kearton’s claim for lack of workers’ compensation coverage. In a very detailed opinion, the court found that the Workers’ Compensation Judge’s findings were not supported by credible evidence in the record and that, therefore, the legal finding of insurance coverage was void. Under Section 36 of the Workers’ Compensation Act: 

…members of a limited liability company, ‘who actively perform services on behalf of the’ company, ‘shall be deemed an ‘employee’ of the’ company ‘for purposes of receipt of benefits and payment of workers’ compensation insurance premiums pursuant to the [Workers’ Compensation Act], if the ’company ‘elects, when [its] workers’ compensation policy … is purchased or renewed, to obtain coverage for the’ company’s members. ‘[T]he election may only be made at purchase or at renewal and may not be withdrawn during the policy term.’ Ibid. For any member of a limited liability company to opt in for workers’ compensation coverage, all members must do so. 

The court went into further detail on the lack of credible evidence given the insurance application process and testimony of the insurance producer, Pawlak:

Based on the record before us, we conclude E.W. Millwork did not obtain workers’ compensation coverage for Kearton. Both Brigante and Kearton testified that they were supposed to be covered under their company’s workers’ compensation coverage. Nevertheless, it is undisputed that E.W. Millwork’s application did not request such coverage. Pawlak testified he informed Brigante, who was responsible for securing insurance coverage for the company, of the consequences of not electing coverage for the company’s members. He told Brigante that without coverage for members, if there was an ‘on[]the[]job or occupational injury, illness, sickness[,] or disease, there would be no coverage for neither he nor []Kearton.’ Notwithstanding that advice, he stated Brigante chose not to select coverage for the members.

The court also thoroughly analyzed the insurance application process and the applicable waivers:

A separate document to the insurance application titled ‘NOTICE OF ELECTION - PROPRIETORS AND PARTNERS,’ included an ‘x’ within a box stating that ‘COVERAGE IS REJECTED.’ In addition, a section titled ‘COMPLETE THIS SECTION ONLY WHEN COVERAGE IS ELECTED’ had Kearton’s and Brigante’s names filled in underneath, but the sections for ‘ESTIMATED ANNUAL WAGE[S]’ and ‘DUTIES,’ which was required to provide coverage for them, was not completed. Although the application listed E.W. Millwork having six employees for a total wage of $155,000, it did not specify the amount of the members’ wages. According to Pawlack, the member’s names were only included in the section in case Brigante chose to elect coverage prior to signing, and if he did so, the form could be completed––which it was not.

The Appellate Division also addressed the lack of validity of the Workers’ Compensation Judge’s rational for extending coverage based on the alleged mistakes of Pawlek and Zurich Insurance.

Despite the clear fact that E.W. Millwork’s application did not request workers’ compensation coverage for its members, the judge justified finding there was coverage based on Pawlack’s mistake in not selecting coverage for members. The judge also found that Zurich was negligent and should have looked at the policy to make sure coverage was provided for the members. Without further explanation, the judge determined that Kearton was a covered employee. This was error. 

Even accepting Pawlack erred, there was no legal basis cited by the judge for imputing liability on Zurich—by finding coverage that was not requested—based on that error. Any mistake by the producer should be borne by him. There is no evidence to support the finding that Zurich was responsible for Brigante’s failure to secure workers’ compensation coverage for Kearton and himself. Contrary to the judge’s finding, there is nothing ambiguous about the application that warrants imposing coverage for Kearton. It clearly provided how the company’s members had to obtain workers’ compensation, and the completed application plainly showed coverage for the members was not requested.

Finally, the court even went on to address any public policy arguments which are sometimes used to inappropriately extend insurance coverage:

We recognize the Workers’ Compensation Act is social legislation that is liberally construed ‘to implement the legislative policy of affording coverage to as many workers as possible.’ Nevertheless, we cannot authorize coverage where there is a clear disregard of a statutory requirement as was the case here.

Following its opinion, the Appellate Division reversed the Workers’ Compensation Judge’s award of benefits and remanded the case for entry of an order finding a lack of insurance coverage for Kearton’s claim petitions. 

While this decision does not change the current state of the law, it is helpful in reminding us that, when it comes to issuing insurance policies, there are specific procedures that business owners and insurance carriers must go through in confirming coverage for the business owners/employees. As indicated here, it is not the responsibility of the carrier and/or broker to require business owners elect workers’ compensation coverage for themselves. However, carriers/brokers must make it clear when coverage is being rejected in response to the pubic policy position of finding coverage exists as much as possible. 

If you are a business owner, or an insurance broker/carrier, and you have questions about whether there is proper workers’ compensation coverage, it is recommended that you contact your counsel as soon as possible. Business owners who fail to provide proper workers’ compensation coverage can be subject to both civil and even criminal penalties in New Jersey. Complete your due diligence before it is too late.

*Bob is a shareholder in our Mount Laurel, New Jersey, office. He can be reached at RJFitzgerald@mdwcg.com or 856.414.6009.

 

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