A California contractor can go forward with a suit against State Compensation Insurance Fund (SCIF) for breach of contract and failing to act in good faith, California’s First District Court of Appeal has ruled. The civil lawsuit was filed after the state’s largest workers’ comp carrier denied a claim, maintaining that the company’s workers’ comp policy had been canceled when the accident happened.

The unpublished opinion, Edward Carey Construction Company v. State Compensation Insurance Fund, overturns a lower-court ruling that sided with State Fund’s assertion that the company’s only remedy was through the Workers’ Compensation Appeals Board (WCAB). The case was muddied by the fact that the injured worker, Edward Carey, is also the owner of the insured company — Edward Carey Construction Company (CCC).

“[T]he insured employer has different and distinct rights against its workers’ compensation carrier, than does an employee claimant.”
— California’s First District Court of Appeal

After Carey suffered a workplace injury, the company notified State Fund of the injury, but the quasi-governmental agency asserted that the policy had been canceled and was not in effect. Without a workers’ comp policy, the company paid wages and covered the medical treatment that wasn’t paid for by Carey’s regular health insurer, which came to more than $250,000 out of the company’s pocket. It also retained counsel to challenge State Fund’s determination that the policy was not in effect at the time of injury, and it was successful through binding arbitration.

It then filed the civil action to recover compensatory and punitive damages as well as attorney fees and costs.

State Fund maintained that the dispute should be covered by the workers’ comp exclusive remedy provision and that the civil lawsuit was merely an attempt to circumvent the workers’ comp system. It argued that CCC was limited to a credit under Labor Code section 4909 for any benefits it voluntarily paid Carey as a result of the accident.

But the court of appeal pointed out the rules for injured workers and employers are not always the same. The court wrote that “the insured employer has different and distinct rights against its workers’ compensation carrier, than does an employee claimant.” It also held that as one of the two parties to the insurance contract, the employer can sue for breach of contract if the insurer fails to live up to its obligations.

It also noted that any recoveries emanating from this action would not necessarily interfere with the underlying workers’ comp claim. “CCC is not seeking here the workers’ compensation benefits to which Carey is entitled. It acknowledges Carey must recover any workers’ compensation benefits through the workers’ compensation system,” the court wrote. “Rather, CCC is seeking to recover economic damages it allegedly incurred because of SCIF’s failure to provide CCC the benefits to which it was entitled under the insurance policy. These alleged damages include the legal fees and costs CCC incurred in enforcing its rights under the policy…and premiums it was required to pay to another insurer to obtain health care benefits for Carey.”

The court left unresolved the question of whether CCC can recover damages for the medical benefits it paid on behalf of Carey, noting that it may have to file a lien in the workers’ comp proceeding to recover these costs. But that is an issue for another day.

A copy of the court’s opinion is available in our resources section or by clicking here. 

(Filed by Brad Cain in San Francisco)