April 21, 2014

Summary: In a business environment when exposures are global, workers compensation insurance, among other policies, becomes an important contract to understand. While the workers compensation policy is flexible, in terms of where coverage applies, there are some important conditions that have to be observed. One of these coverage features is the so-called “other states insurance” provision that is required for any business expanding beyond its state of domicile into other states.

This discussion explains what the other states insurance provision is, how it works, and how employers can get into trouble, if they do not understand the provision's requirements. Emphasis here is the coverage as it applies to the regular insurance market. Also discussed are the issues confronting employers who have no choice but to accept other states insurance provisions designed for the residual market, which can often be more problematic than with the regular market.

Topics covered:
Introduction
Section three—other states insurance
Other states insurance issues
Coverage under residual markets
Residual market limited other states insurance endorsement
A case of no coverage
An illegal alien issue
Another case where the employer lost
Are there any exceptions
Monopolistic fund states
Employers (stop gap) coverage
Summary–conclusion

Introduction

The latest standard workers compensation and employers liability policy has been in use since 1992 and, for the most part, is widely misunderstood. As a matter of interest, this 1992 edition replaced the one that was introduced in 1984 to replace the preceding one, the 1954 edition. The current 1992 edition brought with it the simplified easy-to-read language that is characteristic of the standard forms introduced by the Insurance Services Office in 1986. The standard WC policy referred to here is the one that the National Council on Compensation Insurance (NCCI) has filed in most, but not all, states.

One of the sections of this policy that generates questions from time-to-time has to do with what is commonly referred to as the other states coverage. (It is referred to in the standard workers compensation policy as “Part Three Other States Insurance.”) Briefly, this coverage, which has long been a feature of the standard workers compensation and employers liability policy (hereinafter referred to as the WC policy), is designed to provide insurance against work-related exposures in states where, at policy inception, no work is being performed but where an exposure arises during the policy period.

Other states insurance should not be confused with the extraterritorial feature of the WC policy. When, for example, an employer has WC insurance for its place of employment in, say, Connecticut, the extraterritorial feature of the policy also applies if an employee is injured while attending a conference in some other state having to do with employment necessary or incidental to the work in Connecticut. The benefits that would be payable would be those prescribed by statute for Connecticut.

In the 1954 WC policy, other states insurance was available by endorsement. In 1973, that endorsement was replaced with the broad form all states endorsement, which was optional. Interestingly, a flat charge of $25 was made for providing this latter endorsement. It was in 1983 that the other states insurance was built into the WC policy, thereby eliminating the need for the broad form all states endorsement. One of the reasons for the 1983 endorsement was to accommodate regional insurers that could list the states where they were licensed to operate in item 3.C. of the WC policy.

Section Three—Other States Insurance

To explain how other states insurance works, it is first necessary to discuss that part of the information page (the declarations page of the WC policy) concerning items 3.A. and 3.C. With reference to workers comp insurance, 3.A. consists of the states where the employer currently maintains business operations with employees. Or to say it another way, item 3.A. is the list of those states where exposures are known to exist and coverage is to apply (except with respect to monopolistic fund states). This part of the policy (3.A.) has nothing to do with other states insurance.

Item 3.C. of the information page, on the other hand, is directly related to the other states insurance provision because it is designed to activate coverage whenever an exposure arises during the policy period within one or more of the applicable states identified therein. The states can be specifically listed in item 3.C. or identified by designation. An example of this latter option is the following statement: “All states, other than monopolistic fund states.” (For a regional insurer, item 3.C. might have the following statement as an example: “All states, other than monopolistic fund states, and Illinois, New York and Texas.”)

Part three of the WC policy dealing with other states insurance consists of four sections, with sections one, two, and four pertinent here. To repeat, the first section states that the other states insurance applies only with respect to the states in item 3.C. The second section states that if the employer (you) begins work in one or more states, shown in item 3.C., after the effective date of the policy, and the employer is not insured or self-insured for such work, the WC policy will apply as though that state or states had been listed in item 3.A. of the information page. For purposes of illustration, assume the states of Maryland, Mississippi, Missouri, and Montana are listed under item 3.C. of the information page. This signifies that the employer has no known exposure in those states at policy inception, but it is possible an exposure may arise in any one or all of those four states during the policy period. Assume that after the policy inception, company operations are expanded in Maryland. The WC policy would cover operations in that state.

The fourth section of this policy states that if the employer has operations on the effective date of the policy in a state not listed in item 3.A. of the information page, coverage will not be provided for that state unless the insurer is notified within thirty days. The significance here may appear to be a little subtle, but whether that thirty days of grace applies depends on when the operations commence—on the effective date of the policy, or during the policy period. Referring to the previous illustration, the Maryland operation did not begin until after the policy inception. This means that the insurer would not have to be notified of the exposure in Maryland within thirty days. If, however, the Maryland operation commenced at renewal, notice would be required within that thirty-day period.

If there is likely to be any question here regarding sections two and four of the other states insurance, it is likely to be with part B, dealing with notice. This states that if the employer begins work in any state listed in item 3.C. of the information page, the employer is to tell the insurer at once. This notice provision probably refers to the fourth section of the other states insurance, rather than the second section. Recall that the second section deals with work in states that begins after the effective date of the policy and coverage applies to such state as though it were listed in item 3.A. It would be advisable for an employer to give notice when operations begin in a state listed in item 3.C., but it would not appear to serve to the detriment of the employer if notice were not given until renewal.

If the employer begins work in a state listed in item 3.C. on or before the effective date of the policy, notice would be crucial because coverage, as has been mentioned, is said to end within thirty days of the date on which operations commence. In fact, just to point out how serious the lack of observance of that time limit can be is the case of Bridgefield Casualty Ins. Co. v. River Oaks Management, Civil Action No. 12–2336, 2013 WL 5558091 (E.D. La. Oct. 8, 2013).

Until 2011, River Oaks, an apartment management firm, (hereinafter, the employer), operated exclusively in Louisiana. In 2006, the information page noted that the WC policies (for each year) included other states insurance for nine additional states, including Mississippi. Part three of the WC policies provided that if the employer began work during any policy year in a listed other state, that policy would provide workers compensation coverage for work performed in the other state during the same policy year. Part three of these policies also provided that, if the employer has work in a listed other state on the first day of a policy period, the policy will not provide workers compensation coverage for work performed in that state during that policy year, unless the insurer is notified within thirty days of the effective date of the policy. In other words, if the employer were to begin work in an other state any time after January 1 of the policy year, that work would be covered. If, on the other hand, the employer were to have ongoing work in another state on the inception date of coverage (January 1) of any policy year, the notification provision is activated.

On September 30, 2011, the employer contracted with an apartment complex in Mississippi to provide services. This firm also contracted with two other Mississippi apartment complexes in the fall of 2011. On June 8, 2012, an employee of the employer was injured at one of the Mississippi locations. Upon notification to the workers compensation insurer, a reservation of rights letter was issued signifying a potential problem with the policy coverage. The insurer subsequently filed a declaratory judgment action maintaining that coverage for this accident did not apply.

The insurer's rationale for maintaining that coverage did not apply was based on paragraph A.4 of part three of the other states insurance provision, which states: “4. If you have work on the effective date of this policy in any state not listed in 3. A. of the Information Page, coverage will not be afforded for that state unless we are notified within thirty days.”

The insurer alleged that the employer had work in Mississippi on the effective date of the policy (January 1, 2012) and that it failed to notify the insurer within thirty days (on or before January 31). The employer admitted it had work in Mississippi on the effective date of the policy, and that it failed to notify the insurer within thirty days. As a result, the insurer had met its burden, for purposes of this motion, to show there was no dispute of material fact. Having found that the insurer met its burden on its motion, the court turned to the employer's arguments in opposition to the insurer's motion. Although none of the three arguments was convincing, two of them are worth mentioning.

One of the arguments of the employer that was raised to show that the insurer was estopped from denying coverage was that the insurer accepted premiums calculated, in part, based on Mississippi salaries. In other words, the premiums for the policy were based on total payroll in a given year, following annual payroll audits. The court responded that for this argument to have had any merit, the employer would have had to demonstrate that the insurer had received information that gave it the right to cancel the policy and that the insurer continued to accept premiums after receiving that information. Based on the evidence submitted by both parties, however, it was disputed whether the insurer received information, following its audit, from which it could conclude that the employer was operating in Mississippi.

The second argument was that the insurer was estopped from denying coverage because it had already paid a portion of the claim under a reservation of rights. The court, in rejecting this argument, explained that it is a well-settled principle of insurance law that a timely reservation of rights does not operate to waive the insurer's coverage defenses.

Since there was no dispute that the employer was doing work in Mississippi on the effective date of the policy, and that it failed to notify the insurer within thirty days of the effective date of the policy, no coverage applied for the claim at issue in this suit.

Depending on the nature and severity of the injury and the amount and duration of benefits prescribed by statute, this can be an expensive proposition for any employer. Proper notice, therefore, is an important part of the WC policy, just as it is with other policies.

The second section of the other states insurance provision states that if the insurer is not permitted to pay benefits prescribed by statute for work-related injuries to persons entitled to such benefits, the insurer will reimburse the employer instead. This could occur, for example, when an employer fails to take the necessary steps to comply with the workers compensation law of the jurisdiction where the injury occurs. Another example is where the operation is expanded and the number of employees makes the insurance compulsory.

Other States Insurance Issues

If there is any problem with the other states insurance feature of the WC policy, it deals with the residual market where a restricted endorsement usually applies. This is not to say that the other states insurance of the standard WC policy written for the regular market is not without its problems. The regular market coverage aspect does raise arguments, but not as frequent as with the residual risk market.

One such case is Woods Masonry v. Monumental General Casualty Insurance Company, 198 F. Supp.2d 1016 (N.D. Iowa 2002). Woods (the employer), an Arkansas corporation, purchased a WC policy limited to that state. The employer was hired by a general contractor to perform some work in Iowa. It therefore contacted its insurance agent to obtain a certificate of workers compensation insurance. It was disputed, however, whether the agent informed the employer that only employees hired in Arkansas would be covered. According to the insurer, the employer assured its agent that it would not be hiring out-of-state employees and that the employer would be utilizing all of its Arkansas employees to perform the work in Iowa. In any event, the certificate was issued. At some point after beginning work in Iowa, the employer hired an Iowa resident.

Tragically, both the owner of the corporation (the employer) and the Iowa resident were seriously injured at the construction site. When the employer notified its insurer of the accident, the insurer denied coverage, because the individual was an Iowa resident, hired in Iowa. Thus, the primary question the court was asked to decide was whether the coverage was limited in scope to provide coverage only to those employees who were Arkansas residents.

Turning to part three of the WC policy dealing with the other states insurance, the insurer contended that this provision was intended to cover the employer's Arkansas employees for temporary or incidental work performed outside the state of Arkansas. The insurer offered the example that if one of the employer's Arkansas employees were injured in Iowa, while on a temporary job in that state, the insurer would be obligated under the other states insurance to provide coverage for that claim. The other states insurance provision, the insurer argued, was not intended to obliterate the policy provisions relating to locations and turn an Arkansas policy into a nationwide WC policy. The employer argued that the policy provided coverage to all states included in the other states insurance provisions so long as the employer followed the notification procedure outlined in the policy.

The court stated that the insurer essentially contended that a latent ambiguity existed with regard to the meaning of items 3.A and 3.C, because the employer's interpretation would have rendered item 3.C. meaningless.

Now, insurers do not, as a rule, maintain that their insurance policies are ambiguous. The insurer in this case, however, apparently did this as a ploy so that it could introduce extrinsic evidence, namely the conflicting testimony of the employer and its insurance agent with respect as to whether the agent informed the employer that only employees hired in Arkansas would be covered by the policy, and whether the employer assured the agent that it would not be hiring any out-of-state employees for the Iowa job. As it turned out, however, the court viewed the policy as being clear and, therefore, not ambiguous.

The court also stated that, even though there was some indication in the record that the parties discussed the states from which the employer would hire its employees, these discussions “cannot alter the terms of the clearly unambiguous written agreement….”

Another question posed was whether the policy excluded employees hired outside of Arkansas. The court, in response to this question, stated that the policy was clear and unmistakable that if the employer was not self-insured or did not have another insurer when it traveled to do work out of state, its WC policy with the insurer provided coverage; there was absolutely no indication that the policy was restricted to employees hired in the state of Arkansas. In fact, the court added, an unpublished Kentucky court of appeals case cited by the insurer in this case was said to have supported the Iowa court's decision.

In that Kentucky case, two workers compensation insurers, AIK and Liberty Mutual, disputed which insurer was responsible for providing coverage of a work-related injury sustained by a Kentucky employee while performing work in Tennessee. (The other states insurance provision in the Kentucky case was virtually identical to the disputed provision in the Woods Masonry case.) The employer was insured in Kentucky through AIK. The employer procured additional coverage in Tennessee through Liberty Mutual. Liberty Mutual paid workers compensation benefits to the injured employee, but disputed that it was the liable insurer. Because the employer was self-insured through AIK in Kentucky, Liberty Mutual asserted that Kentucky should have been excluded under the other states insurance provision in Liberty Mutual's policy; it argued that it simply forgot to include Kentucky. Nevertheless, Liberty Mutual contended that a plain reading of the policy provided coverage to workplaces, not claims. Therefore, Liberty Mutual argued that, despite the omission of Kentucky in the other states insurance provision, because the employer had coverage in Tennessee through AIK, AIK, not Liberty Mutual, was responsible for providing benefits.

The state appeals court stated that there was nothing in the record indicating that AIK extended coverage to Tennessee. The court read the WC policy as extending coverage to work sites (in that case, Tennessee), and not to the residence of the employee or where the claim was filed (in that case, Kentucky). Had the accident occurred in Kentucky, the court explained, AIK would have been liable, but because the accident occurred in Tennessee, the plain language of the Liberty Mutual policy provided coverage.

This Kentucky case was said by the court in the Woods Masonry case, to be instructive, despite the fact that the issue before the Kentucky Court of Appeals was not actually relevant. This was so, the court explained, because the Kentucky opinion demonstrated that the other states insurance provision meant precisely what it said; that is, if an employer is not self-insured and has not procured outside insurance, the policy in question will cover accidents that occur out-of-state so long as the external state was included—or not explicitly excluded—from coverage. The court explained further that the insurer's WC policy here did not restrict in any manner the state of residency of an employer's employee. Given the case of including such a restriction, the court added, and given that insurance policies are liberally construed against the insurer, the conclusion was inescapable that the insurer was liable for coverage of the employee's claim. Nothing illustrated this conclusion better, the court added, than the plain language of the policy itself.

On that score, the court then referred to the other states insurance provision and particularly section 2., which states: “If you begin work in any one of those states after the effective date of this policy and are not insured or self-insured for such work, all provisions of the policy will apply as though that state was listed in Item 3.A of the Information Page.” Since Iowa was listed in item 3.C., it meant that coverage would apply to Iowa accidents as though Iowa were listed in item 3.A.

If one reads the WC policy carefully, particularly the other states insurance provision, it is difficult to understand why the insurer in the Woods Masonry case undoubtedly spent a lot of time and money to litigate an issue that was meant to be covered. Since the Iowa employment did not take effect until after the policy became effective, coverage applied in Iowa, or any state listed in item 3.C., without notice to the insurer until renewal—despite the notice provision informing the employers to notice the insurer at once.

The insurer in the Woods Masonry case might have had an argument if the Iowa resident were hired prior to issuance of the new policy or prior to a policy's renewal and the injury took place after thirty days of coverage. But such was not the case. Coverage, instead, applied just as the policy was written to apply.

In summary, insofar as the regular market is concerned, coverage provided by a standard WC policy is quite clear and liberal. If there are any problems, it will likely be with insurers and insureds who do not understand the mechanics of the standard policy. Another problem area, perhaps more so than with the standard policy, is when the insurance is written in the residual market.

Coverage under Residual Markets

Residual market limited other states insurance can be covered by an endorsement prescribed by NCCI for residual risks (WC 00 03 26 A). Despite this, there is a lack of uniformity among the coverage forms (but also more limited coverage). This stands to reason, given that businesses with no coverage alternative other than the residual market are not going to be accorded the same coverage that businesses in the regular or standard market are able to enjoy. Moreover, other states insurance endorsements are not always the solution, since there are exceptions. (One of these exceptions deals with workers compensation insurance provided by monopolistic fund states. This exception is discussed later in this article from the perspective of the nonresident employer who brings in its own out-of-state employees.)

Unfortunately, for a number of reasons, some businesses do not qualify for coverage in the regular market and must look to the residual market as the last resort. One reason is that the business, new or existing, engages in what can be termed a hazardous occupation, such as roofing. Other businesses in this category may have demonstrated a frequency and/or severity of claims.

As noted, the wording of the other states insurance endorsement(s) varies because not all of the insurance is written on National Council on Compensation Insurance forms. With the exception of the four monopolistic fund states of North Dakota, Ohio, Washington, and Wyoming, some of this residual insurance is written in competitive state funds, which compete with insurance companies. For example, in New York, workers compensation insurance can be written through a state-operated workers compensation fund or through private insurance companies that compete with the state fund. (It appears that New York does not honor the application of the other states provision and, instead, requires a statutory policy from that other state.) At last count, there are fourteen such competitive state funds: California, Colorado, Hawaii, Kentucky, Louisiana, Maine, Maryland, Montana, New York, Oklahoma, Pennsylvania, Rhode Island, Texas, and Utah.

Residual Market Limited Other States Insurance Endorsement

For purposes of this discussion, the NCCI form for residual risk is discussed.

The endorsement prescribed by NCCI for residual risks (WC 00 03 26 A) explains how coverage applies. If an employee of a business written subject to the residual market under an NCCI endorsement were injured in some state other than a state identified in 3.A. of the WC policy (which lists states with a known risk), the insurer will pay benefits prescribed by the applicable state statute where the injury occurred, to the extent the insurer is otherwise permitted, and subject to meeting the three following conditions:

The first condition is that the employee claiming benefits was either hired under a contract of employment in a state listed in 3.A. or, at the time of injury, was principally employed in a stated listed in item 3.A.

The second condition is that the employee seeking payment of statutory benefits is not seeking benefits where, at the time of injury, (a) the employer does not have a WC policy applicable in that state; (b) the employer was required to obtain a WC policy in that other jurisdiction; or (c) the employer is an authorized self-insurer, or involved in some self-insured group plan.

The third condition is that the work that was being performed by the employee seeking statutory benefits is temporary.

Any example of the NCCI endorsement's mechanics would be an oversimplification because of legal rules dealing with applicability of a particular compensation act following injury, and the conflict of laws involving the question of what law governs. So, instead of giving examples of how the residual market limited other states (RMLOS) endorsement might apply, it may be more beneficial to discuss some of the cases that have arisen involving this and other endorsements.

A Case of No Coverage

One case where an employer found itself without the proper workers compensation insurance is Tri-State Ins. Co. of Minn. v. Westway Construction Inc., No. 2:04CV00358 DS,

2006 WL 641470 (D. Utah March 9, 2006). Westway (the employer)], with its principal place of employment in the state of Washington, contracted to haul soil containing mine waste from South Dakota to Nevada. Because it did not have employees who lived in South Dakota, it hired six drivers who lived there. The employer then applied for workers compensation insurance, which was issued by Tri-State. In response to an application question, the employer noted that those six employees would travel outside of South Dakota. After the WC policy was issued, the employer changed from a system in which drivers based in South Dakota drove back and forth to Nevada, to a system of “switch drivers”, in which one set of drivers drove from South Dakota to Utah and another set of drivers drove from Utah to Nevada and back to Utah. The employer hired a Utah resident (employee) to be one of its Utah to Nevada drivers. During the course of his employment, the employee was involved in a semi-tractor accident in Nevada. He filed for and received benefits in Utah.

In this lawsuit, the insurer denied coverage under the residual market limited other states insurance endorsement because the three conditions (noted previously) had not been met. The policy, to which this endorsement had been attached, stated that it covered all of the employer's workplaces listed in items 1 to 4 of the information page, and also covered all other workplaces in item 3.A. states, unless the Westway had other insurance or self-insurance for such workplaces. Other than noting the corporate office in Washington, the only state identified in the information page or applicable schedules was South Dakota. Paragraph 3.A. of the information page provided that the policy applied only to the workers compensation law of the states listed under that paragraph. Only South Dakota was listed.

The insurer asserted that the injured employee was not a covered employee, because he was not employed in South Dakota, and that when the employer made the decision to employ switch drivers to drive from Utah to Nevada and back, it should have obtained a WC policy that complied with Utah's law. To support its position, the insurer relied on the residual market limited other states insurance endorsement, where the first two conditions were not met and the third one was inapplicable. In other words, the employee was hired in Utah, whereas South Dakota was the only state shown in item 3.A. of the policy. Also, the injured employee claimed benefits in Utah where a separate WC policy was required.

The obvious lesson here is that an employer who expands its work to include other states is to notify its insurer so that whatever new exposure is created can be handled before an employee is injured and makes a claim.

An Illegal Alien Issue

In Smigelski v. Potomac Ins. Co. of Illinois, 939 A.2d 189 (Md. App. Ct. 2008), Columbia Roofing Company (Columbia) could not obtain workers compensation insurance in the regular market and, therefore, had to purchase a policy subject to the residual market limited other states insurance endorsement. In this case, coverage applied to workers while employed in Virginia and with some limited coverage outside of that state.

The problem began here when Columbia was hired for a job and subcontracted the work to a subcontractor who assigned his nephew to a crew of approximately five others. While the subcontractor's nephew was working on a job in Maryland, he slipped and fell. It was learned after the accident that the nephew, who was a resident of Virginia, also was an illegal alien. When the nephew filed for benefits with the Maryland Commission, the Commission also issued an order finding that Columbia Roofing Company was the statutory employer. Its insurer, however, denied coverage because of the injured employee's status as an illegal alien. Columbia's position was that injured employee was performing temporary or incidental work in Maryland and, therefore, was covered under the residual market limited other states insurance endorsement.

Unfortunately for Columbia, under Virginia law in effect at the time of injury, the injured nephew was not considered to be an employee eligible for benefits because of his status as an illegal alien. In addition, since the jury found that the injured employee was regularly employed in Maryland, separate workers compensation insurance was required for the work performed in Maryland. Columbia's insurer, therefore, was not obligated to provide any coverage. The conclusion here is that workers compensation policies and endorsements are important, but so, too, is the law, the latter being the controlling factor. Thus, knowing how a state views and treats illegal aliens for purposes of workers compensation is of obvious importance, as this case illustrates.

Another Case Where the Employer Lost

Another case where the employer lost (but apparently not involving the standard NCCI endorsement) is Travelers Commercial Cas. Co. v. Morales, No. A06-621, 2007 WL 331129(Minn. App. 2007), an unpublished opinion.

Railroad Salvage and Restoration, Inc. (RR Salvage) was a Missouri entity that built, maintained, removed and salvaged railroad tracks in several states. Its only office was in Missouri. Morales was hired by the foreman at a RR Salvage jobsite in Arkansas, and became part of a roving crew that went from jobsite to jobsite. Morales worked in Arkansas, Illinois and Minnesota. The payroll records of RR Salvage revealed that Morales was in Missouri for no more than four days (or 3 percent of the time) while he worked for this employer.

Morales was allegedly injured while working in Minnesota. At the time of injury, RR Salvage was covered by a WC policy issued by the Travelers (insurer). When RR Salvage filed a claim for Morales' injuries, the insurer brought a declaratory judgment action maintaining it had no duty to defend or indemnify RR Salvage for the alleged injury. The WC policy contained a Missouri limited other states endorsement providing limited coverage to a Missouri employee who was entitled to benefits of a state, other than Missouri. The policy defined a Missouri employee as an “individual who is an employee of a Missouri employer and who physically works at or out of a physical Missouri location on a regular basis”. The policy, in relevant part, excluded coverage for “any employee unless his/her employment was principally localized in Missouri; or…any out of state employees who are hired to perform work in a state other than Missouri….” The district court granted the insurer's motion, concluding that both exclusions applied to exclude coverage.

On appeal, the court of appeals disagreed with the arguments made by RR Salvage that Morales was a Missouri employee, as defined in the policy. RR Salvage's argument rested in part on its assertion that Morales was hired in Missouri. The court, however, stated that it found no merit in the RR Salvage argument that the location of the contract formation was determinative of whether Morales was a Missouri employee under the policy. Even if Morales' employment contract was formed in Missouri, the appeals court said, Morales did not meet the policy definition of Missouri employee if he did not work at or out of a physical Missouri location on a regular basis.

In the final analysis, the court held that Morales, who had never been a resident of Missouri, was not in Missouri when he was hired, and he also was hired to work in a state other than Missouri. Therefore, the appeals court stated that the district court had correctly concluded that coverage was excluded by the WC policy under the exclusion that precluded coverage for any out of state employees who are hired to perform work in a state other than Missouri.

Are There Any Exceptions?

With fifty states and the same number of workers compensation statutes, it is often difficult to get a handle on which state law applies in a given work-related injury or death. Even when a WC policy has been issued, there is no guarantee that it will apply for a work-related injury or death. In fact, one good example of this is Matter of Estate of Velasquez v. NGA Construct. Co., Inc., 112 A.D.3d 1051 (N. Y. Sup. Ct. 2013). This involved a WC policy dispute between a worker from New Jersey who was killed while performing work in New York.

Briefly, the facts are as follows: M&L Enterprises, LLC subcontracted with NGA Construction Company, a New Jersey company, to install siding on a building in Brooklyn, New York. During the project, an employee of NGA fell from a scaffold and suffered severe blunt impact injuries from which he died soon thereafter. An application for workers compensation death benefits was filed. Following a hearing, the judge determined that the decedent had suffered a work-related injury resulting in his death and that the WC policy issued to NGA Construction by its insurer, New Jersey Casualty Insurance Company did not provide coverage in New York. As a result, the insurer of M&L Enterprises, Continental Indemnity Company, was liable for the workers compensation benefits. While the insurer did not like this decision and appealed, the decision nonetheless was affirmed.

The reason the court affirmed this decision was because in 2009, a section [50(2)] of the New York workers compensation law was amended to provide that an employer must secure workers compensation insurance through a policy issued under the law of this state. It also was stated that the WC Board, in 2007, clarified that requirement, under Subject Number 046-198, by explaining that “all out-of-state employers with employees working in New York State will be required to carry a full, statutory New York State workers compensation insurance policy.” Such a policy was defined as “one where New York is listed in Item 3A of the Information Page of the employers workers compensation insurance policy.”

In this particular case, the information page of the WC policy issued to NGA Construction by its insurer listed only New Jersey under item 3A. Also, even though this policy had a New Jersey limited other states insurance endorsement attached to it, it did not apply when the employer was, by virtue of the nature of its operations in a state not listed in item 3A, required by that state's law to have obtained separate workers compensation insurance coverage. Thus, where the policy issued by NGA's New Jersey insurer did not list New York in item 3A, NGA was required to obtain a full statutory New York State workers compensation insurance policy that listed New York in item 3A.

Neither the court nor anyone else involved in case mentioned whether the New Jersey policy would have applied if New York were listed in the item 3C of the policy, assuming, of course, that the exposure in New York occurred during the policy period and not before policy inception. The apparent reason why the other states insurance provision of the WC policy was not mentioned was that New York only permits coverage in that state if it were listed in item 3C of the WC policy or a separate policy were to be issued. This is important for any employers performing work in New York State.

Monopolistic Fund States

Employers also should be well-informed when working out-of-state where there are monopolistic state funds, since these funds can be categorized as being within the exceptions of other states insurance provisions. With monopolistic state workers compensation funds operated by state agencies, it is sometimes difficult for businesses located outside of those states to understand fully whether workers compensation insurance may be necessary. It is also difficult to determine the extent to which employers liability coverage should be maintained, if nonresident businesses are going to conduct operations in one or more of the monopolistic states.

There are currently four monopolistic fund states: North Dakota, Ohio, Washington, and Wyoming. Puerto Rico and the U.S. Virgin Islands also operate these funds. Whether workers compensation may be required by an out-of-state business depends on the monopolistic state fund laws in question. While the appropriate state agency may need to be contacted before work commences, most such states exempt the purchase of statutory coverage by nonresident employers and employees, for a limited duration, by certifying the existence of statutory coverage, or when there is a reciprocity agreement between the states.

In North Dakota, Chapter 65-08-01 Extraterritorial Coverage states that an employer whose employment results in significant contacts with this state shall acquire workforce insurance coverage in this state, unless a reciprocal agreement between the states is entered. This reciprocal agreement, however, needs to provide that the other state will likewise recognize that an employment relationship entered into in this state is exempt from the application of the workers compensation law of the other state. It is also stated that an employment has significant contacts in this state when (a) any employee earns or would have expected to earn 25 percent or more of the employee's gross annual wage or income from that employer from the services rendered in this state, or (b) 25 percent of the employer's gross annual payroll is payable to employees for services rendered in this state.

Under Ohio Revised Code 4123.54, if an employee is a resident of a state other than Ohio, and is insured under workers compensation law or similar laws of a state other than Ohio, the employee and the employee's dependents are said not to be entitled to receive compensation or benefits for injury or death while working temporarily in Ohio. The rights of the employee and his dependents under the law of the other state are said to be the exclusive remedy against the employer in the event of injury or death. What the term temporarily means, as used in the foregoing paragraph, is uncertain. At one time, the law stated that nonresident employees were exempt from the provisions of the Ohio law for a maximum of ninety days.

Washington Revised Code 51.12.120 deals with extraterritorial coverage. This states that if a worker or beneficiary is entitled to compensation by reason of an injury sustained in this state while in the employ of an employer domiciled in another state or Canadian province, and the employer is not subject to subsection (3) of this law, dealing with the hiring of resident employees, or is not a self-insurer, the employer or his or her insurer shall file with the director a certificate issued by the agency that administers the workers compensation in the state of the employer's domicile. This certificate is to certify that the employer has secured the payment of compensation under the workers compensation law of the other state, and that with respect to the injury, the worker or beneficiary is entitled to the benefits provided under the other state's law.

Wyoming law, Section 27-14-306 states that it does not apply to a nonresident employee and his otherwise qualifying nonresident employer at any time the nonresident employee is temporarily engaged in work in Wyoming. This law also states that a certificate certifying that an employer of another state is bound by the workers compensation law of that state and will apply to employees while in this state is prima facie evidence of the application of the workers compensation law of the certifying state. The benefits payable under the law of such other state are also deemed to be the exclusive remedy against the employer and co-employees while acting within the scope of their employment. What the term temporarily means, as used in this law, also is uncertain.

Since all of the four statutes were paraphrased, it is recommended that readers refer specifically to the laws to more closely determine what they mandate. The purpose of this discussion is to simply show what workers compensation insurance is required when a nonresident employer performs work in one of these monopolistic states with its own nonresident employees. If a nonresident employer hires a resident employee of a monopolistic state, rest assured that the nonresident employer will be required to obtain workers compensation from the state fund.

Employers Liability (Stop Gap) Coverage

The fact that workers compensation insurance may not be necessary for a nonresident employer and its employees who are performing work temporarily within a monopolistic state fund does not necessarily rule out the need for employers liability coverage. The reason is that based on item 3A of the WC policy's declarations page, employers liability coverage applies only in those states where workers compensation insurance is stated to apply under item 3A of the declarations. The fact that monopolistic state funds are usually listed herein as being excepted from the coverage should serve as a warning as to the necessity for additional coverage in the area of employers liability.

It is not the purpose of this article to provide a full-blown discussion of employers liability coverage. However, with the exception of monopolistic fund states, workers compensation policies encompass both statutory coverage and nonstatutory employers liability coverage, also referred to by the policy as Part One and Part Two, respectively. Monopolistic state funds do not offer employers liability coverage, which must be purchased from a private insurer, if desired. (Employers liability coverage for monopolistic states also is referred to as stop gap coverage because it plugs a potential gap in the protection of employers who purchase only the statutory workers compensation coverage.)

While workers compensation insurance generally encompasses most work-related injuries, employers liability (including stop gap) coverage might still be viewed as necessary to cover a number of other exposures. Among the common exposures are suits brought by spouses and family members of an injured worker against the employer alleging loss of consortium, love, affection; the affliction of an occupational disease transmitted to family members by the breadwinner; and to a greater degree, so-called third party over actions. These actions arise when an employee is injured by, say, a machine and files suit against the machine's manufacturer alleging negligent design. The manufacturer, in turn, files suit against the employer of the injured employee for failing to properly maintain the machine. (If the employer had agreed to hold harmless and indemnify the manufacturer, it would be the employer's contractual liability coverage under the CGL form, and not its employers liability coverage under the WC policy that would be applicable. In the absence of a contractual agreement, however, a suit in tort involving a third party over action against the employer would not be the subject of a CGL coverage form in light of the employers liability exclusion.)

Summary—Conclusion

If more cases involving the residual market limited other states (RMLOS) endorsement were to be examined, it would lead to the same conclusions as those reached by the cases previously discussed. In other words, those cases are sufficient to provide the following messages:

1. The word limited in the RMLOS endorsement means what it says.

2.The law of the states where an employer's operations are likely to be must be understood since the laws control, not the policy and endorsements. (This also applies to employers in the regular market.).

3.The endorsement may be trumped by a requirement, in some states, that a separate WC policy be purchased, no matter how limited the work may be.

4.If there is any change in operations, such as when an employer expands its operations into other state, the WC insurer should be notified.

5.If an employer represents that its operations are limited to one state, it should not assume that the policy will cover employees hired in other states. In fact, the RMLOS endorsement will not pick up such an exposure.

6.A common thread found in the cases dealing with the residual market limited other states endorsement (and other cases as well) is that where employers declare one or two states where operations are to be conducted, they run afoul of the law by hiring out-of-state employees to work in the described states or the employees' resident states. This is because those resident states have not been declared. Once an out-of-state employee is injured and seeks benefits from his resident state, the employer can be confronted with a serious problem of being without proper insurance.