Appropriate insurance coverage and the associated premium are calculated risks for both consumer and insurer. Life insurance is the best example. As a consumer, we try to determine what our family will need without knowing the critical variables of when the proceeds will be needed and what our financial condition will be at the time. The insurance company, on the other hand, needs to assess risk by considering factors such as life expectancy and pre-existing health, while also establishing a premium that is competitive. Workers’ compensation has comparable, but not identical considerations. Workers’ compensation is a legal requirement for many business owners and premium is based largely off of employee count and claims history. Therefore, the focus of a business owner is on managing premium based upon existing variables they can control.
…the focus of a business owner is on managing premium based upon existing variables they can control.”
In its basic form, the underwriting process for a workers’ compensation policy considers the number of employees, type of business, risks associated with the work performed and company claim history. A business owner may see the underwriting process as simple enough in that all they can control is the number of employees they have and the safety measures put in place. In a way this is true. Although not the subject of this article, safety measures are critical to avoiding injury, thereby keeping claims, and ultimately premiums, down. Employee count, however, is not quite as simple as it appears.
Michigan Compiled Law 418.171(1) requires any employer (or “principal”) who contracts with someone who is not subject to the Workers’ Disability Compensation Act (the “WDCA”) or is subject to the WDCA and fails to comply, to pay for an injury compensable under the Act as if that person was an employee. Stated differently, if you hire independent contractors (or their subcontractors) who are either not subject to the Act or not in compliance with it, and they suffer a workplace injury, you may be on the hook, the same as if they were your employee.
While this seems unfair, it is not without public policy value. It is important that those injured on the job are fairly compensated as the Act intended. Under the factual scenarios contemplated by the Act, the employer or principal, and their insurance company, have been determined to be the ones best in position to do so.
The employer does, however, receive some legal protection. MCL 418.171(2) provides that the employer is entitled to indemnification from the contractor (or subcontractor). While this provides a path to recovery, it can require costly litigation and you may be pursuing someone who is uncollectible.
Additionally, the employee cannot double dip and is barred from a common law action against the contractor if benefits are accepted from the principal. This leaves open the possibility that a suit against the contractor may be more inviting than workers’ compensation benefits.
With MCL 418.171 in play, your actual employee count becomes more difficult to ascertain. On a day-to-day basis, the number of contractors coming through most businesses can be significant and, if a claim is made pursuant to this statute, it will likely have a negative impact on your future premiums. A best practice to avoid this scenario is entering into agreements with contractors, prior to the start of the relationship, that include a provision on workers’ compensation coverage. Ideally, that agreement should include a copy of the declaration page of the contractor’s workers’ compensation policy.
If, for some reason, the declaration page cannot be provided, the contractor should be required to expressly affirm that they are subject to the WDCA and that they have coverage in place. In the event you do elect to hire a contractor without coverage, thereby exposing your business to additional risk, this should be disclosed to your insurer. While this may increase premium in the short term, your coverage will be based on actual risk and avoid future premium spikes due to unanticipated exposure.
Ensuring adequate coverage and managing premiums across various lines of insurance is complicated. Fortunately, the variables in workers’ compensation coverage are fairly straight forward. When it comes to independent contractors, however, it is not as cut and dry as it first appears. Determining workers’ compensation coverage status for independent contractors will help you to properly assess your risk exposure and manage premium in the long run.
