by Curtis M. Pearsall, CPCU, AIAF, CPIA, President, Pearsall Associates Inc.Special Consultant to the Utica National Agents E&O program
If you asked most agents about the errors-and-omissions risk involving workers compensation, it is a good bet the vast majority would say it presents minimal, if any, real E&O claims potential. In reality, with a number of E&O carriers, E&O claims arising from the sales and service of workers compensation is in the top 5, generating upwards of 10% of all E&O claims every year. This is a line of business to which agents should be sensitive.
In most states, the legal standard of an agent is to provide the coverage the client specifically requests. In the early 1980s, the Massachusetts E&O case Rae vs. Air Speed put a slightly different spin on this. The case, which was eventually appealed to the Massachusetts Supreme Judicial Court, concluded that if the coverage at issue is compulsory, an injured third party can assert a negligence claim against the tortfeasor’s agent. As a result, it seems incumbent for agents to know the customers they are dealing with (or looking to deal with) and whether there is a workers compensation exposure that must be addressed.
A potential fraud issue
There are a variety of factors that go into calculating and determining the appropriate premium with workers compensation. These include job classification codes, experience modifications, payroll, SIC codes, etc. Insurance carriers expect the application to reflect correct information. The determination of these factors (or the intentional misclassification of these factors) has been a central issue for fraud. It is generally believed that when businessowners seek a lower premium through the misrepresentation of the nature or class of the business, employees’ specific duties, or under-reporting payroll, they are committing premium fraud. Agents must be aware of this to avoid becoming an unknowing participant in any fraud scenarios.
Does the subcontractor have workers compensation?
Most agents insure a contractor or two. This class of business poses a number of E&O issues. When an agent writes workers compensation for a contractor, the agent may believe his or her job is done. However, there is significant potential for problems to develop. While the contractor needs workers compensation, it is important the client knows whether any subcontractors he or she hires has workers compensation, too. It’s probably best to verify this via a certificate.
If an employee of the sub is injured on the job and the sub does not have workers compensation, the contractor that retained the sub could be deemed to be the employer and have to provide workers compensation benefits. This issue also presents auditing concerns because the payroll for the sub could now get factored in the development of the workers compensation audit, resulting in some significant additional premiums.
Clients with current/emerging multi-state exposures
It is not uncommon for a business to do business in other states. Many years ago, providing coverage for employees in these additional states was handled by the Broad Form All State Endorsement. This form no longer in exists and the industry has developed a new method for handling this exposure.
For states in which an employer actively conducts business operations, at the effective or renewal date of the policy the state must be listed in Item 3A of the policy. The remaining states where the employer may, at some time in the future, conduct business operations must be listed in Item 3C of the policy. If an employer begins operations in a 3C-listed state, the standard policy requires the employer to notify the insurance company as soon as work begins. That state should now be listed in Item 3A.
There are a handful of states, called “monopolistic fund states,” that require that workers compensation coverage be purchased from the state fund. Monopolistic fund states typically do not have a provision for providing an "all states" provision.
Agents must communicate this information to their clients and have a means to identify a change in the business operation, such as an expansion of states. This information should also be included on proposals.
Sole proprietor/partnership issues
If you have a client acting as a sole proprietor or partnership, oftentimes there have been issues as to whether the sole proprietor or partners are actually covered by their own workers compensation coverage. As the agent, you wrote a workers compensation policy for the business, but are the individual or partners covered by that policy? Unfortunately, the discovery of this matter seems to normally surface at claims time when it is difficult to do much about it.
Agents must know how their state handles this issue. Some states exclude “this class of employees” and they have to “opt in” if they want coverage. Other states include these employees and they have to “opt out.” Typically, such key decisions need to be made at the inception or renewal anniversary of the coverage. Bottom line, for those clients that you insure that operate as a sole proprietor or partnership, do the key executives know if they are covered? Documentation of discussions centering on this issue should be detailed and memorialized back to the client.
When certificates of insurance are completed and the objective is to show evidence of workers compensation coverage, there is a question on the certificate that agents must answer: Any proprietor/partner/executive officer/member excluded? Make sure it is answered correctly because the implications are significant.
Is the policy subject to audit?
There have been situations where the customer buys a workers compensation policy and receives a significant “additional premium” upon audit. The customer brings an E&O action against the agent claiming he or she was unaware of the audit provision. Agents should ensure that proposals/offerings of coverage include statements detailing any audit provisions. All discussions regarding this issue should be well documented.
Workers compensation presents more E&O issues than many agents think. Understand these issues and put procedures in place to avoid any part of E&O litigation.