How to Cover Temps for Work Comp

Insurance agents need to have a discussion with their clients about their use of staffing companies and temps, especially in California.

For many years now, risk exposures regarding the use of labor leasing companies have been in the forefront of concerns for insurance professionals. However, many businesses use temporary staffing agencies and look at this process as just a matter of course. Some companies sporadically use these services for one or two people, but others often use hundreds of temps for specific  periods and needs. Insurance agents need to have a discussion with their clients about their use of staffing companies, particularly with those businesses operating in California. There are some terms that need to be defined within this type of employment situation.
  • The general employer is the original employer and responsible for loaning the employee to another “employer.”
  • The special employer is the other party involved in the “borrowing” of that employee from the general employer.
  • The “borrowed servant rule” is a common law doctrine that applies in this type of situation but has typically applied when there is an express or implied contract of hire between the special employer and the employee, or the employee performs work primarily for the special employer and the special employer controls the details of the work.
Effective Jan. 1, 2015, California has revised the state’s labor law by creating joint liability for client companies when the general employer fails to secure workers' compensation coverage for, or pay wages to, workers who are supplied to clients (AB 1897). So, in California, the various obligations of the “borrowed servant rule” no longer need to exist. It is enough that the special employer is using employees supplied by the general employer. What does this really mean? It means that should the labor contractor (general employer) either not purchase workers’ compensation coverage or allow it to lapse, any employee not covered for their work-related injury or illness will be able to look to the special employer for recovery of benefits. The law does provide a number of exceptions, such as:
  • Small employers with fewer than 25 employees (which includes the temporary or leased employees)
  • An employer using five or fewer employees at any given time
  • Municipalities
No problem, right? Your client carries workers’ compensation coverage for their directly hired employees; if an injured temp employee needs benefits because the temporary agency does not have workers’ compensation coverage, then your client’s insurance will respond. That automatic coverage may well be changing. Insurance companies are paying closer attention to the underwriting of this type of risk exposure and are often adding an endorsement that purports to remove coverage. This is done by adding Employee Insured by General Employer Excluded Endorsement (WC 04 03 17), which states: "It is agreed that, anything in this policy to the contrary notwithstanding, this policy does not insure: Any liability you may have as the special employer of an employee who is not on your payroll at the time of injury, based upon your representation that: (1) you have entered into a valid and enforceable agreement pursuant to Labor Code Section 3602(d) with the employee's general employer under which the general employer agrees to secure the payment of compensation for such employee and (2) the general employer has obtained workers' compensation coverage for the employee. " Well, why not? After all, the staffing company is supposed to be insuring its employees for work-related injuries. However, this endorsement creates several issues for the special employer:
  • The special employer is automatically jointly liable in California for injury to the employee.
  • The special employer must have a valid and enforceable agreement with the staffing company that requires the staffing company to purchase the workers’ compensation coverage, and the staffing company has to obtain the coverage.
  • The special employer is required to state that the conditions are in place and sign the endorsement to this effect.
  • The special employer should obtain a Certificate of Liability Insurance (ACORD 25) that verifies that coverage has been obtained.
The real problem with this endorsement is that it does not make clear that the policy will respond if the staffing company allows its insurance to lapse and the temporary employee looks to the special employer for coverage. Is it the intent of this endorsement to remove all coverage? Certainly, an argument could be made that it does not, but the language has not yet been tested in court, and your client likely does not want to be the plaintiff in trying to determine whether coverage might apply. If coverage does not apply, what are the ramifications?
  • The temporary employee has no coverage available.
  • The special employer becomes an uninsured employer and subject to all of the penalties and fines that can be imposed by the state:
  • Pay all bills relating to the injury or illness.
  • Subject to civil litigation brought by the employee (not covered).
  • California Labor Code 3700.5 imposes a misdemeanor with fines not less than $10,000 and up to $100,000 maximum along with imprisonment up to one year.
  • The Division of Labor Standards Enforcement will also issue a stop order that prohibits use of employees until coverage is obtained. If this stop order is not observed, the division can seek a misdemeanor criminal action with imprisonment up to 60 days, $1,000 fine per employee, subject to a minimum fine of $10,000 up to $100,000 maximum.
There is a second endorsement that has been filed for use in California and amended specifically because of AB 1897, WC 04 03 60 B (1-15). WCIRB states that: "The form was amended to avoid potential duplicate workers’ compensation and employers’ liability claims as a result of the passage of AB 1897. The revised Employers’ Liability Coverage Amendatory Endorsement form excludes any liability arising from Labor Code Section 2810.3 from the Employers Liability Insurance portion of a California workers’ compensation policy." It appears that the WCIRB considers that coverage exists in the workers’ compensation policy and is simply attempting to remove duplication of coverage and thus, de facto, not creating a situation where the special employer uninsured. Action Items
  • Discuss use of temporary staff with your client
  • If that exposure exists:
  • Verify that there is a labor contract in place
  • Verify that the contract requires the staffing company to obtain and keep in force workers’ compensation coverage
  • Verify that your client has received a current ACORD 25 indicating workers’ compensation coverage exists
  • Verify that the contract includes an indemnification agreement as per AB 1897
  • If the underwriter questions the use of temps and adds WC 04 03 17, discuss with the underwriter and attempt to have it removed
  • If the underwriter is unwilling to do so, discuss ramifications with the client at the time that you are obtaining the signature on the endorsement
  • Your client should seek legal counsel before agreeing to this endorsement
  • Your client could attempt to insert a requirement for notification in the event of coverage cancellation into the contract.

Marjorie Segale

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Marjorie Segale

Marjorie Segale is the Founder and President of <a href="">Segale Consulting Services, LLC</a> and provides a wide variety of services to the insurance industry, including account review, agency audits, strategic planning, and forensic claims analysis. Ms. Segale is also a principal and founding member of the <a href="">Insurance Community Center, LLC</a>,  a web-based resource and education on-line site for the insurance industry.

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