Each and every year, the workers’ compensation class of business results in upwards of 10% of all E&O claims. While this may not seem like a lot, it is a class of business that agents need to be sensitive to for a variety of reasons.
In most, if not all states, the legal standard of an agent is to provide the coverage that the client specifically asked for. When dealing with the issue of workers’ compensation, there was a court case in Massachusetts back in the 80’s that seemed to put a slightly different spin on this. The case was called Rae vs. Air Speed.
This case involved the death of an agency customer’s employee and a resultant claim for workers’ compensation benefits. The problem was that there was no workers compensation coverage in effect. The estate of the deceased made a claim against the agent for failing to procure the workers’ compensation coverage for the agency customer. Back in the 80’s, there were some significant legal questions whether an estate could bring this type of legal action as it was felt that the agency technically owed no legal duty to the estate. Their legal duty was only to the agency business customer.
When the Estate attempted to make a claim directly against the agency, pursuing claims in negligence and breach of contract, the trial court dismissed the claim on the grounds of “lack of legal duty”. This case was then appealed to the Massachusetts Supreme Judicial Court who reversed the decision, setting forth two critical rulings.
1) that the Estate could bring a direct action in contract against the agency as a third-party beneficiary of the agreement between the agency and its customer to procure workers’ compensation coverage; and
2) that the Estate could also bring an action in tort, because of the mandatory nature of workers’ compensation
While this case was in Massachusetts, it no doubt has been referenced in court decisions in other states. Thus, the essence of this case is that if the coverage at issue is compulsory, an injured third party can assert a negligence claim against the tortfeasor’s agent.
What does this mean for insurance agents? Probably that the agent should know the customer that they are dealing with (or looking to deal with) and whether there is a workers’ compensation exposure that needs to be addressed.