There is a growing trend among courts of Workers’ Compensation to find insurance coverage where once none existed. A recent Appellate decision highlights the issue.
In Urena v. A&D Freight Logistics, LLC, an insurance company appealed the denial of its motion to dismiss petitioner’s workers’ compensation claim for lack of coverage and a freight distribution company cross-appealed the finding that it was liable for dependency benefits as decedent’s employer. The decedent was the owner-operator of an LLC and was assigned to transport materials through a container company and the freight company. He was involved in a fatal accident. The LLC and container company were insured by different carriers. The decedent’s wife filed claims against the LLC, container company, freight company and their insurers. The LLC insurer claimed its policy was canceled before the accident, while the container company and the freight company disputed employment liability.
The specifics matter: The LLC’s carrier issued a policy to cover the LLC from May 5, 2016, to May 5, 2017. The carrier asserted the LLC failed to cooperate with a required audit and sent the notice of cancellation with an effective cancellation date of January 20, 2017.
The workers’ compensation court Judge consolidated the claims, held hearings, and found the LLC carrier failed to prove it properly canceled the policy, and that decedent was an employee of freight company at the time of his death. The court determined the LLC carrier, freight company, and container company were equally liable for dependency benefits.
On appeal, the LLC carrier argued that the trial court held it to an unreasonably high standard, erred in concluding it had not met the notice requirement, and failed to recognize that the burden of proof applicable to the cancellation claim was merely that of a preponderance of the evidence. The Appellate Division found that the trial court did not err in finding that the LLC carrier failed to comply with N.J.S.A. 34:15-81(b). Even though the carrier produced an employee who testified to signing the required certification, the Court found that the employee was not competent to satisfy N.J.S.A. 34:15-81(b); he lacked the requisite knowledge of the legal implications of the certification, nor did he know if the notice was sent to the employer. Additionally, the Court found that there was ample evidence in the record to support the trial court’s finding that the decedent was a special employee of the freight company.
N.J.S.A. 34:15-81(b) holds that “any contract of [insurance] … arising under this chapter may be canceled by either the employer or the insurance carrier within the time limited by such contract for its expiration.” However, the rules for a valid cancellation are highly specific under the well-established legal principle of finding coverage where possible.
The cancellation rules are that:
- The carrier must provide at least 10 days’ notice, in writing, by registered mail, that the carrier intends to terminate the contract;
- The carrier must also send notice “to the office of the Commissioner of Banking and Insurance, together with a certified statement that the notice provided for by paragraph “A” of this section has been given[;]”
- Once notice has been provided to the Commissioner, there is a 10-day waiting period before the cancellation becomes valid.
N.J.S.A. 34:15-81.
On its face, the Statute does not seem to place a terribly high burden on carriers to properly cancel an insurance contract. In practice, insurance cancellations are routinely voided by Judges of workers’ compensation. This is due to the holding in Bright v. T & W Suffolk, 268 N.J. Super. 220, 633 (App. Div. 1993), where the cancellation was deemed ineffective because it was sent via regular mail and via billing statements, but not via registered mail. The Court held that strict compliance with N.J.S.A. 34:15-81 was required. Similarly, in Sroczynski v. Milek, 197 N.J. 36 (2008), the carriers’ cancellation was ineffective because it relied on transmitting an electronic notice of cancellation of coverage to B&I by way of file transfer protocol. As the carrier did not also file a statement certified by an employee that the required notice was provided to its insured, the purported cancellation of the policy was ineffective.
Following those two decisions, the New Jersey Supreme Court issued guidance that a Judge’s ability to invalidate a cancellation was more expansive than expected because courts can fashion a case-specific equitable remedy for a technical violation of a notice requirement:
Sroczynski arose from a workers’ compensation insurer’s decision to substitute electronic notice of its policy cancellation for the notice by registered mail mandated by N.J.S.A. 34:15-81, in reliance on ‘confusing advice’ from the [New Jersey Compensation Rating and Inspection Bureau] . . . [t]he Court rejected the insurer’s contention that the electronic notice constituted substantial compliance with the statute, and its assertion that the statutory requirements should be enforced only prospectively . . . [h]olding that only insureds who had challenged the adequacy of notice could be granted relief from nonconforming cancellations, the Court noted: “That outcome is not perfect, but it rewards those who pursued their legal options; leaves those who waived a challenge with the results of their waiver; and does not throw into chaos an industry that adopted a mistaken plan of action in good faith reliance on official misinformation.”
US Bank Nat. Ass’n v. Guillaume, 209 N.J. 449, 476-77 (2012) (internal citations omitted).
In practice, the ability of a court to fashion an equitable remedy to resolve a cancellation dispute results in some surprising findings of coverage. Take a decision preceding US Bank. In American Millennium Ins. Co. v. Berganza, 386 N.J. Super. 485, 902 (App. Div. 2006), the Court held that an “[i]nsurer had no right to deny its obligation to an injured employee based on fraud committed by the employer until it cancelled the policy under [N.J.S.A.] 34:15-81, as an insurer that issued a backdated policy generally remained liable to an insured’s employee even if the employer committed fraud in the application for the insurance.”
For a sense of how pervasive the trend of rejecting cancellations is, take note of the following: Urena is the sixth cancellation case to reach the Appellate Division in the past ten years, and five out of six of those cases held that cancellation had been improper. Many of those decisions relied on the requirement that the certification sent to the Commissioner must be made by an employee of the carrier who has personal knowledge that the proper notice of cancellation was given to the employer, pursuant to the Statute’s requirements. This high burden, as exemplified in Urena, represents public policy that favors continuation of coverage unless the insurer strictly complies with the statutory requirements.
The bottom line: Carriers should not rely on an insurance cancellation being held valid unless and until the carrier has strictly complied with the Statute.
By: Shealtiel “Sean” Weinberg, Associate at Brown & Connery, LLP