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Employees Must Be Protected

The Connecticut Court of Appeal was asked to resolve a dispute between a roofer and its insurer in National Fire Insurance Company of Hartford v. Beaulieu Company, LLC, No. (AC 33612) (Conn.App. 02/05/2013) that was more akin to an Abbot & Costello comedy routine known as “who’s on first.”

The case came to the court of appeal when Beaulieu Company, LLC (“Beaulieu”), appealed from the judgment of the trial court rendered in favor of the plaintiff, National Fire Insurance Company of Hartford, also known as the CNA Insurance Companies (“CNA”), in connection with the underlying civil action in which CNA sought from Beaulieu unpaid premiums for workers’ compensation insurance coverage. Beaulieu claimed that it was clearly erroneous for the trial court to find (1) that three workers who performed roofing work for Beaulieu were employees of Beaulieu rather than independent contractors, (2) that even if these three workers and two others were not employees, they engaged in work that could make CNA liable to provide workers’ compensation benefits under the relevant policies and (3) assuming the workers had employees, the employees were not independently insured because Beaulieu provided certificates of insurance during the hearing in damages showing that the workers and any of their employees were already insured.

FACTS

Beaulieu is a roofing contractor that performs work primarily for commercial construction projects. It uses its own employees, contract labor and subcontractors to conduct its work. CNA, a workers’ compensation insurance carrier, provided workers’ compensation coverage to Beaulieu under two policies for the periods of March 26, 2005, to March 26, 2006, and April 3, 2006, to June 26, 2006.

In its memorandum of decision, the trial court stated: “Because it is difficult to predict exactly how much labor will be needed during an upcoming policy period and because workers’ compensation insurance premiums are based on the type of labor and amount of time expended by various workers for a particular job, the insurer prepares an estimated bill at the beginning of the policy term. After the term expires, the insurer audits the insured’s payroll and expenditures to calculate the precise coverage which was provided and the appropriate premium for that coverage. Depending on whether the estimated premium was excessive or deficient, a refund or a supplemental bill issues.” “The audit determines the amount of compensation paid during the policy term for each occupation and uses a formula to arrive at the adjusted premium, retrospectively.” The insurer calculates the final premium using an insurance industry manual that assigns specific rates for different occupations, which vary based on the risk of injury associated with that occupation.

On June 24, 2009, CNA sued Beaulieu for unpaid premiums owed for workers’ compensation coverage it provided to Beaulieu under the previously mentioned policies. In its complaint, CNA alleged that Beaulieu breached its insurance contract with CNA by failing to pay the premiums for these policy periods. The dispute between the parties concerns whether certain workers to which the rate was applied ought to have been included in the premium recalculation. The parties stipulated that Beaulieu owed $49,807 in premiums, but disputed an additional $46,529 in premiums for workers’ compensation coverage provided to the roofers; and to Mike Rome, all of whom performed roofing work for Beaulieu.

THE TRIAL COURT DECISION

In a memorandum of decision issued on May 20, 2011, the court concluded that the coverage provided by CNA to Beaulieu embraced employees of Beaulieu, contract labor of Beaulieu and employees of subcontractors of Beaulieu, unless the sub-contractors provided workers’ compensation coverage for its employees. Beaulieu’s records showed that the workers did not have independent workers’ compensation insurance during the policy terms at issue. Beaulieu submitted to CNA certificates of insurance for the workers, but the certificates were silent as to who was covered under the independent insurance policies. An audit manager who oversaw Beaulieu’s account for CNA investigated each policy and determined that the policies failed to cover the workers or failed to provide coverage during the effective period of CNA’s policies that are the bases for its breach of contract claim.

ANALYSIS

In determining whether the terms of an insurance policy are clear and unambiguous, a court will not torture words to import ambiguity where the ordinary meaning leaves no room for ambiguity. Similarly, any ambiguity in a contract must emanate from the language used in the contract rather than from one party’s subjective perception of the terms.

Based upon review of the court’s memorandum of decision the court of appeal concluded that the court did not make an express finding that the workers were employees but, rather, found only that they “all fit within part five C 2 of the insurance policy in that they engaged in work that could make CNA liable to provide workers’ compensation benefits.” It was sufficient for the court to find that the workers fell under the policies because they engaged in work that could make CNA liable to provide workers’ compensation benefits.

Evidence of the following facts relevant to this claim was presented at the hearing in damages. The contested “independent contractors” did roofing work for Beaulieu and worked on a number of different jobs. They received individual payments by the hour or by square. Payment by the hour is indicative of employee status. Beaulieu would direct some of the workers on how they should do work at times so Beaulieu could ensure that the work was done according to its contract with the owner of a particular property. Beaulieu would verify that the work done by the workers was performed properly before issuing payment. One was paid in two different ways during the policy terms. During one portion of the term, Beaulieu paid him as an employee, and he received a W-2 form indicating his tax withholdings. During another portion of the term, Beaulieu paid him outside of the regular payroll on a 1099 basis.

Under the act, an employer must secure workers’ compensation for its employees.

The fundamental distinction between an employee and an independent contractor depends upon the existence or nonexistence of the right to control the means and methods of work. It is the totality of the evidence that determines whether a worker is an employee under the state statutes not subordinate factual findings that, if viewed in isolation, might have supported a different determination. The test of the relationship is the right to control. It is not the fact of actual interference with the control, but the right to interfere, that makes the difference between an independent contractor and a servant or agent.

Beaulieu’s entire claim is predicated on its conclusory contention that the workers were sole proprietors, and, therefore, were not subject to the act unless they affirmatively elected to be covered. Without more than Beaulieu’s bald assertion that these workers were sole proprietors, the court concluded that the trial court did not err in finding that CNA could have been exposed to liability under the policies, even in the absence of evidence demonstrating that the workers affirmatively elected to be covered under the act.

Last, Beaulieu claimed that, assuming the workers had employees, it was clearly erroneous for the court to find that the employees were not independently insured because it provided certificates of insurance during the hearing in damages showing that the workers and any of their employees were already insured. Beaulieu argues that, therefore, these workers should not have been included in the premium audit because, upon its showing of proof of coverage, it was exempt, per the terms of the policy, from having them included in the audit. See footnote 5 of this opinion.

The court was entitled, as the trier of fact, to credit the audit manager’s testimony and disregard other conflicting testimony from Beaulieu. As such, it was reasonable for the court to find that Beaulieu failed to provide proof that the workers in this case lawfully secured their workers’ compensation obligations for their employees, and, therefore, failed to exempt itself from having them included in the plain-tiff’s premium audit. Because the trial court was in the best position as the fact finder to assess the credibility of the witnesses at the hearing in damages and draw inferences therefrom, we, as the reviewing court, defer to the court’s finding in this regard and find no error.

ZALMA OPINION

Beaulieu should consider itself lucky that it was only required to pay the additional premium required for the employees and workers who were covered under the CNA policy. In states like California, avoiding premium by misclassifying or failing to report employees to a workers’ compensation is a felony that could result in the employer facing five years in state prison. Since the evidence in this case even included one person who was paid as an employee and received a W-2 at the end of the year it was clear that Beaulieu was attempting to avoid paying appropriate premium.

For example, it is a felony in California to “Make or cause to be made a knowingly false or fraudulent material statement or material representation for the purpose of obtaining or denying any compensation…”

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.