Create Jobs through Regulatory Reform

by Cranfill Sumner & Hartzog LLP

In light of the fact that the NC Senate is preparing to vote on a recently-passed House bill, it is appropriate to revisit one topic that may be addressed by the Senate in the coming days.  The House passed Senate Bill 112 (H94), which is called “Create Jobs through Regulatory Reform” and it is expected to pass in the Senate as well.  Although the bill addresses a host of issues, this article will focus primarily on Sec. 18 affecting WC Insurance Cancelation as provided in N.C.G.S. 58-36-105(b) and (c) and its impact on WC liability in the Construction Industry.

Currently, the law affected by the statute starts with the general rule that Workers’ Compensation (“WC”) insurance cannot be cancelled without the insured’s consent unless certain exceptions are met.  The most common is for non-payment of premiums in accordance with the policy terms.  As a General Contractor, whether or not your subcontractors have paid for their WC premiums is not the first issue on the mind; however, you may already know that if a subcontractors’ WC insurance becomes invalid due to cancelation of the policy resulting from non-payment of premiums, the General Contractor could potentially be “on the hook” for any WC injuries that occur to employees of the subcontractor.

This is not just an issue for General Contractors, but rather for any “principal contractor” with subcontractors “down the line,” as it is sometimes called.  Under N.C. G.S. §97-19, If a principal contractor does not obtain a certificate of insurance (“COI”) for a subcontractor for the specific job, the principal contractor will be liable to the same extent as the subcontractor for the WC injury, even if the subcontractor had WC insurance.

This law is in conformity with the policy for the Industrial Commission to find insurance coverage for the employee’s injuries even if it has to go “up the chain” to find coverage.

Consistent with the policy, in the 2012 case, Gonzalez v. Worrell, 728 S.E.2d  13 (2012), the NC Court of Appeals held that both the WC carriers for the General Contractor and the Subcontractor were both liable due to the fact that the Subcontractor’s policy had not been canceled and the General Contractor had failed to obtain a new COI for the subcontractor.  These are the two provisions addressed by Senate Bill 112 in Sec. 18.

The plaintiff, Gonzales, was working for Worrell Construction (Worrell”) as a “crew leader” or “lead man” when he sustained serious injuries in a motor vehicle accident on March 29, 2009 leaving him a quadriplegic.  There was no dispute that he was permanently and totally disabled under the NC Workers’ Compensation Act, but there was question of which carrier was liable for the claim, the General Contractor’s or the Subcontractor’s WC carrier.

On the date of injury, the plaintiff’s Employer (Worrell) was a Subcontractor for Patrick Lamm and Co. (“Lamm”), the General Contractor.  Cincinnati Insurance had (previously) insured Worrell, while Builders Mutual insured Lamm covering the date of injury.  Plaintiff’s WC claim was initially against Worrell and Cincinnati Insurance, but Cincinnati Insurance reported that the WC insurance policy had been canceled on November 21, 2007, and it does not appear that Worrell had obtained any other valid WC insurance thereafter.

The Opinion and Award at the Deputy Commissioner level held both Cincinnati and Builders Mutual jointly and severally liable,” and ordered both carriers to pay the required WC benefits.  Defendants appealed to the Full Commission, which affirmed the Opinion and Award, which resulted in an appeal to the NC Court of Appeals (“Court”).  The Court affirmed the Industrial Commission’s decision that the WC policy had actually not been cancelled and therefore, Cincinnati was liable; and, because the General Contractor failed to obtain a new COI from Worrell , instead relying on a old one from a previous job, the Court held that Lamm was also liable for the WC benefits to the same extent as the Subcontractor’s insurance company.  The NC Supreme Court affirmed the decision based on a split vote.

Cancelation of a WC Policy

As to the cancelation of the policy issue, the Court’s ruling meant that unless the insurance carrier could provide the green return receipt card showing that the certified mail was claimed by the insured (the “green card”), cancelation was not effective.  This holding was despite the fact that green cards can often go “unclaimed” if the insured refuses to sign for it and despite the fact that other evidence and testimony could have confirmed actual receipt.

If Senate Bill 112 passes, it would reverse the Gonzalez decision on this issue because Worrell and Cincinnati would have been able to show cancelation of the policy.  The new law specifically strikes the requirement for registered or certified mail, return receipt requested.  Instead it allows any method under Rule 4 (Service of Process) to be sufficient for service of the cancelation of a WC insurance policy.  Had this law been enacted at the time, Cincinnati likely would have avoided being jointly liable with Builders Mutual for the plaintiff’s WC benefits.

Certificates of Insurance from a Subcontractor

As to the COI issue, the Court’s ruling in Gonzalez meant that Lamm had to get a new COI from the Subcontractor on each and every specific job regardless of whether there was an ongoing business relationship.  In that case, the COI produced for a prior job actually reflected WC coverage for Worrell although Cincinnati had attempted to cancel the policy (and thought they had canceled it), and in fact money was refunded to Worrell. [1]

Had the new law been in place, the General Contractor would not be liable if the subcontractor had insurance at the time of the injury regardless of whether they obtained a COI, OR if the WC policy provided to the General Contractor was canceled prior to the date of injury, unless they became aware of the policy being canceled.  Under this case’s set of facts, it is arguable that Lamm and its insurance company would not have been held liable because the Subcontractor’s COI, which they provided to the General Contractor prior to the job, was canceled prior to the date of injury. 

                The key language in the proposed bill is as follows:

If the principal contractor, intermediate contractor or subcontractor shall obtain such certificate at any time before subletting such contract to the subcontractor, he shall not thereafter be held liable to any employee of such subcontractor for compensation or other benefits under this Article ad within the term specified by the certificate.

Notwithstanding the provisions of this section, any principal contractor, intermediate  contractor, or subcontractor who shall sublet any contract for the performance of work shall not be held liable to any employee of such subcontractor if either

  1. the subcontractor has a workers' compensation insurance policy in compliance with G.S. 97-93 in effect on the date of injury regardless of whether the principal contractor, intermediate contractor, or subcontractor failed to timely obtain a certificate from the subcontractor; or
  2. the policy expired or was cancelled prior to the date of injury provided the principal contractor, intermediate contractor, or subcontractor obtained a certificate at any time before subletting such contract to the subcontractor and was unaware of the expiration or cancellation.

Consequently, it appears the NC legislature has attempted to reverse the Court’s decision in Gonzalez v Worrell in its entirety.  This new language can assist General Contractors and other contractors in their businesses, and thereby arguably create more jobs, as the requirement to obtain a new COI in each and every job appears now to be less relevant.  However, for best practices to avoid the risk of potential WC liability when a lower tier subcontractor’s policy has expired, please consult your construction law attorney regarding the specific circumstances.

[1] As a side note, Worrell attempted to make his employees “independent contractors” as to not have to cover their WC insurance.  In fact, Worrell had his employees sign a “rejection of coverage” when he decided not to get WC coverage thereafter; Worrell bought “ghost policies” for them, but paid them on a 1099 and required them to list themselves as a sole proprietors.  The Industrial Commission and the Court correctly applied the factors in Hayes v Elon College, 24 NC 11 (1944) to determine Plaintiff was in fact an employee of Worrell.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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