Dear David,
Finding good employees is tough. We use different ways to meet our labor needs. Sometimes we borrow and other times we use a temp-agency. Negotiating these agreements makes me wonder–How should an injury to their worker be addressed in our insurance?
Dear “Employee,”
The insurance coverage depends on how the parties want bodily injury liability issues to flow through the relationship. The agreement will be one of the first documents an adjuster will request following an incident. Two primary fundamentals to understand. First, the injured worker in the pursuit of your business is not a party to the agreement being negotiated. Second, insurance coverage is purchased to transfer the financial risk of loss. These two fundamentals should be at the center of the negotiations because the rest of the relationship will be built around these fundamentals.
Workers Compensation
Whomever is the statutory employer is the one responsible for the workers compensation coverage. A workers compensation insurance policy does not have a definitions section because it refers to the workers compensation law and occupational disease law of each state or territory named in the policy schedule. While I am using Wisconsin as an example in the hyperlinks please note that this means that each state or territory defines an employer or employee. Other relationships such as an independent contractor can also have a relationship test.
In a tight labor market, insurance brokers generally advise you to keep the employment relationship with the party providing the worker. The broker’s advice is premised on several ideas. One being that a workers compensation loss is factored into the rate your pay for years to come; Second, deals with the fact that you do not have an opportunity to qualify the worker—this is usually the value of the labor sourcing service; Third, is that a waiver of subrogation being added to the labor sourcing service workers compensation policy will reduce the exposure your company will face in the event of a loss. Be aware though that you could voluntarily elect to provide the workers compensation coverage, thus gaining the protection of those laws.
Either way, the worker’s injuries will need to be covered by someone’s workers compensation insurance. The one that provides this coverage typically will have protections against negligence claims made by the injured worker. The other will be exposed to liability and look for protection from two different general liability insurance policies. One policy will be that of your company, and the other policy will be that of labor sourcing service.
General Liability
We will assume that the labor sourcing service and you have the same general liability insurance coverage form. The general liability coverage form we are using is an Insurance Services Office, Inc. CG 00 01 04 13. We are also going to assume that the labor sourcing service provider is the statutory employer supplying the workers compensation coverage. This means that you are looking to protect your company with the two different general liability insurance policies—theirs and yours. To look at this situation we are going to explore the relevant policy definitions, the insuring agreement, and the exclusions. Insurance policies define certain words and a common way an insurance policy demonstrates a word is a defined term is by having that word appear in quotation marks. Other ways include bold or italics. This is an abridge version, but one should always read the full policy. We are not factoring in other endorsements that could modify the terms of the base policy. Sadly, this could be the closest some ever come to reading part of an insurance policy. Please do read this part before skipping to the end.
Section V – Definitions
5. “Employee” includes a “leased worker”. “Employee” does not include a “temporary worker”.
10. “Leased worker” means a person leased to you by a labor leasing firm under an agreement between you and the labor leasing firm, to perform duties related to the conduct of your business. “Leased worker” does not include a “temporary worker”.
19. “Temporary worker” means a person who is furnished to you to substitute for a permanent “employee” on leave or to meet seasonal or short-term workload conditions.
9. “Insured contract” means: f. That part of any other contract or agreement pertaining to your business under which you assume the tort liability of another party to pay for “bodily injury” to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.
Section I – Coverages
Coverage A-Bodily Injury and Property Damage Liability
1. Insuring Agreement
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” to which this insurance applies.
2. Exclusions; This insurance does not apply to:
b. Contractual liability – “Bodily injury” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages:
(1) That the insured would have in the absence of the contract or agreement; or
(2) Assumed in a contract or agreement that is an “insured contract”, provided the “bodily injury” occurs subsequent to the execution of the contract or agreement.
d. Workers’ Compensation and Similar Laws- Any obligation of the insured under a workers’ compensation, disability benefits or unemployment compensation law or any similar law.
e. Employer’s Liability – “Bodily injury” to:
(1) An “employee” of the insured arising out of and in the course of:
(a) Employment by the insured; or
(b) Performing duties related to the conduct of that “employee” as a consequence of Paragraph (1) above. Or
This exclusion applies whether the insured may be liable as an employer or in any other capacity and to any obligation to share damages with or repay someone else who must pay damages because of the injury.
This exclusion does not apply to liability assumed by the insured under an “insured contract”.
First, we will look at transferring the financial risk of loss to the labor sourcing service general liability policy. Hopefully, you have noted the exceptions to the exclusions. To transfer your financial risk of loss to their general liability insurance policy two things must occur. One is that the agreement you are completing must meet the definition of an “insured contract” in their general liability policy. These definitions can vary in real life, so make sure to get confirmation. The second is that your company must be listed as an additional insured on the labor sourcing service policy. This is accomplished in a lot of ways and attention to the details is a must. Performing these two things in your agreement with the labor sourcing service will put you on a path towards their policy responding on your behalf to a loss involving the labor sourcing service’s worker.
Next, we will look at transferring the financial risk of loss to your general liability insurance policy. This analysis gets a little more complicated. How often could it be said that a restoration contractor commonly uses a labor sourcing service to provide a worker for 90 days to meet a short-term need and then at the end of the 90 days, if they are a good worker, you might offer them direct employment. This type of common scenario is where the coverage problems exist. A way to avoid this is to make very clear in your “insured contract” with the labor sourcing service the nature of the relationship.
The answer to one question can determine whether your general liability will cover the bodily injury claim. Why did you need the workers from the labor sourcing service? An answer along the lines of the worker was furnished to you to substitute for a permanent “employee” on leave or to meet seasonal or short-term workload conditions means that “temporary worker” is not an “employee” and thus their injuries would be covered by your general liability insurance policy in a tort claim against your company. An answer along the lines of the worker leased to you by a labor leasing firm under an agreement between you and the labor leasing firm, to perform duties related to the conduct of your business means that you do not have coverage under your general liability insurance policy in a tort claim against your company. This is effectively an uninsured loss under your general liability policy.
A general liability insurance policy is not meant to cover bodily injuries to insureds under the policy. This means the policy protects insureds against liability sought by non-insureds. The labor sourcing service worker cannot be an insured under the policy for you to have coverage to protect the company under your general liability insurance policy.
So here is the best practice:
1) Always have an executed, written contract with a labor sourcing provider.
2) Always make sure that the contract meets the definition of an “insured contract” under the labor sourcing provider’s insurance policy.
3) Always make sure that someone’s workers compensation policy is covering the worker.
4) Decide how you want the exposure to flow through your business.
a. To their general liability policy then “insured contract” and Additional Insured status.
b. To your general liability policy then “temporary worker”
c. To your workers compensation policy then confirm this is permissible under state laws and schedule accordingly with your insurance company.
d. To their workers compensation policy then see a. and b.
Here is what you want to avoid:
A situation in which you have a “leased worker” and the labor sourcing service is providing the workers compensation coverage. This means you plausibly have no insurance protection. Protection would be left to the other terms of your agreement with labor sourcing provider.
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