By Publius
Sometime before the end of the month, we will know what is going to happen with Senate Bill 189 (Bradford). What started as an attempt to clean up last year’s Assembly Bill 2883 dealing with corporate officer and director exemptions from workers’ comp policies, as well as exemptions for certain partners of general partnerships and managers of limited liability companies (LLCs), has mushroomed into a complicated assemblage of additions that will make dealing with this issue even more complex in the future.
Many states allow various corporate officers, partners, or managers to elect to exempt themselves from the benefits of workers’ compensation laws. Some of these exemptions are also in statute. California was no exception to that general rule prior to AB 2883. As can also be expected, states deal with the exemption issue for corporate officers, partners, and managers of LLCs very differently. One thing that is common among the various states, however, is that the application for insurance named an ACORD 130, requires the employer to list the name, title, and percentage of ownership of those being excluded from the policy.
Also, states require excluded corporate officers to be named on an endorsement to the policy, usually at the time of inception. The intent is to make it clear as between the employer and insurer that the insurance policy doesn’t extend to those individuals on the exclusion endorsement.
It would also appear from a cursory review of forms filed in other states, that most states include the following language on their corporate officer exclusion endorsement: “You will reimburse us for any payment we must make because of bodily injury to such persons.” In many states, this is language in a standard exclusion endorsement that is prepared by the National Council on Compensation Insurance, Inc. (NCCI) for use by insurers in many states. (See: Form WC 00 03 08) Independent rating bureaus contain similar language. (See: New York Form WC 31 03 05B). We have linked to copies of these forms in our resources section.
The California endorsement (WC 04 03 03 B) does not contain that language.
That is not inconsequential. In one analysis of AB 2883, it was stated:
“For example, after a policy period where no losses have occurred, some companies have claimed that numerous employees were not supposed to be covered, and thereby retroactively reduced the premium owed.”
While undoubtedly the case, this somewhat begs the question as to why the insurance industry hasn’t adopted language in its endorsements in California to provide the same recourse for payments made for improperly excluded employees used in most other states?
AB 2883 dramatically changed the already existing exemption for certain corporate officers. First, it made the exemption open to all corporations, not just those whose officers and directors owned all the stock. Second, it placed a stock ownership threshold of 15 percent for executing a waiver where one did not exist before.
Third, AB 2883 deleted references to ownership interests held in trust, whether for a corporation, partnership, or LLC. Fourth, the new law required individuals seeking a waiver to sign a waiver under penalty of perjury and give that waiver to his or her insurance carrier. The prior law created an exclusion but allowed an individual to elect to receive compensation, AB 2883 eliminated the exclusion and allows an individual to reject it.
Had AB 2883 been a new law then insurers and employers could have adapted to it. But it wasn’t a new law. Instead it significantly changed existing law allowing some who could never exempt themselves from workers’ compensation in the past to do so, and conversely, previously exempt officers and directors saw their premium increase because of losing their exemptions.
It put in limbo individuals who, over the past 20-plus years, had exempted themselves as trustees of the business interest they held in trust. It also created a compliance conundrum for those who did not have to buy workers’ compensation insurance in the past who now wondered what to do. And for insured employers, the changes occurred mid-term in many insurance policies.
These aren’t the type of problems that can be solved overnight with a call to a developer to write more code for an underwriting management system for an insurance company.
Now Comes SB 189
Now comes SB 189. As a “clean-up” effort that tries to address some of the problems AB 2883 created, it not only fails but drastically complicates matters. While ownership interests held in trust are now part of the bill, there have been some added wrinkles, especially for professional corporations (LLPs). If chaptered, LLP owners would now be required to have health insurance and notify all the other owners of the waiver for the waiver to be valid. The ownership threshold has been lowered to 10 percent for corporations and, after July 1, 2018, eliminated for LLPs. Whether the health insurance requirement for LLP owners would invalidate pre-existing waivers is unclear since a waiver is valid until withdrawn.
Another complication, as drafted, is the effort to try to make the next round of changes, for insured employers, applicable only on policy inception dates after July 1, 2018. To say that the amendments miss the mark is a remarkable understatement.
There is still no compliance avenue for businesses that, after all officers and directors execute waivers, legally have no employees. The law states the waiver must be received and accepted by the “insurance carrier.” Imagine a general liability insurer customer service representative who gets a packet of workers’ compensation waivers from its insured who legally has no employees. OK, now what?
The issue of misclassification as it relates to exemptions cannot be solely dealt with by adding language to an endorsement, but it would be a good start. The Workers’ Compensation Appeals Board (WCAB) has upheld properly executed exclusions in the past. See Fowlks v. Lube Pit Stop Inc. (Advantage Workers’ Compensation Insurance Co.) (2014) ADJ7793905/ADJ7793938. Beyond taking this from an “opt-in” to an “opt-out” process, however, the rest of AB 2883 and SB 189 should be consigned to the cutting room floor at the Legislative Counsel’s Office in Sacramento.