More thoughts on the need for workers’ compensation insurance for HOA’s

Ask the HOA ExpertsAn article written by two attorneys from Wilmington, NC and published in my Charlotte Observer column recently has caused a firestorm of controversy over whether HOAs can, should, or must have workers’ compensation insurance.  My friend and colleague  Jim Slaughter, a Greensboro attorney, fielded many calls from his clients on the issue, spoke to industry executives and state government leaders, and shared this thoughts on his firm’s blog.  Jim has given me permission to re-post his column here.

“An article from another law firm in the Charlotte Observer last week suggested that all North Carolina HOA and condominium associations must have Workers’ Compensation coverage or suffer the consequences.  The article can be found at this link, but here’s the short version:

  1. Employers with three or more employees must carry workers’ compensation insurance.
  2. State statute provides that “every executive officer elected or appointed and empowered in accordance with the charter and bylaws of a corporation shall be considered as an employee” under the Act.
  3. Therefore, incorporated associations with 3 or more volunteer officers (ALL!) must purchase workers’ comp insurance (or may be guilty of a Class H felony) without regard to whether there are paid employees.

Since the article appeared, we’ve been inundated with questions from managers and associations as to whether they must rush out and purchase Worker’s Comp coverage, and if so, what product and in what amount?  As you can imagine, both of these are complicated questions and could vary by association and circumstances.  (For instance, only NC planned communities created after January 1, 1999 must be incorporated, but most associations are incorporated for a variety of good reasons.)

Must North Carolina HOA and Condominium Associations Have Workers’ Compensation Insurance?

I’ve talked to Industrial Commission professionals as well as some of the best Workers Comp lawyers and insurance agents about this issue (including some from other states) and most all agree that the current law is “murky.”  The general consensus is that the article made an issue explode that likely didn’t need exploding, in that it brought a microscope to an issue that may get fixed before too long.  The Industrial Commission Advisory Council is looking at this specific issue and will likely propose legislation in the 2015 Session to address the issue of “employee misclassification” with nonprofits.  After all, if community association volunteer boards MUST have Workers’ Compensation, then so do volunteer boards for incorporated PTA’s, charities, book clubs, and historical organizations.  For now, however, the circumstances (and language in the statutes) are what they are.

There are two main concerns:

  1. Are community associations with volunteer boards (and no paid employees) violating the law or committing a crime by not having Workers’ Compensation coverage?
  2. Should an association have Workers’ Compensation coverage, and if so, what type?

None of the industry experts I spoke to think the concern of the Class H felony is likely, in that the statutes were written so that employees won’t be exempted from Workers’ Compensation by claiming they are executive officers (and not that any executive officer is immediately and automatically an employee).  However, the statute says what it says right now.  More than one person told me the Industrial Commission isn’t policing such coverage as they have larger fish to fry, so they would only likely find out about it accidentally or as the result of an accident brought to their attention.

Several excellent Workers’ Comp attorneys have told me that there are valid arguments why volunteer nonprofit executive officers should not count as employees for Worker’s Comp, but no one is certain how the Industrial Commission might rule on the question in a specific case.  Even insurance agents who regularly work with community associations were surprised by this issue because in North Carolina there is no history of recommending Workers’ Compensation coverage for volunteer nonprofit HOA and condo boards.  As of the date of this article, there is no case in North Carolina in which the Industrial Commission has held that community association boards MUST have Workers’ Comp coverage.

Should North Carolina HOA and Condominium Associations Have Workers’ Compensation Insurance?

The better question is when “should” a community association have Workers’ Comp insurance?  Most in the industry say (no surprise here) that it is better to have WC coverage than not, even if there are only volunteer officers.  That is likely a different answer than they would have given several years ago.  Here are some of the main concerns:

  1. Claiming that someone working at the association is an independent contractor may be of little relevance (although important) if the injured contractor files a workers’ comp claim and the Industrial Commission has to determine if they are an employee instead of an independent contractor.
  2. If a contractor (with Workers’ Comp insurance) lets the coverage lapse or be cancelled for non-payment, an injured party will look to any possible source of money, including the Association. If the Industrial Commission finds the person to be an employee (because they want to find coverage somewhere), the Association could be on the hook for ongoing partial or permanent disability payments.  In one California case (following that state’s laws) the Court of Appeals held that an association and its management company were liable to pay Workers Comp benefits to an injured worker employed by an uninsured and unlicensed contractor.
  3. Typically, association Commercial General Liability (CGL) policies exclude from coverage anyone that should otherwise be insured under Workers’ Comp, so bodily injury to an individual who is later found to be an employee would have to come from Worker’s Comp coverage or association funds (and not other insurance).
  4. The CGL policy contains other exclusions actions arising from dual capacity situations such as third-party actions, actions by spouses, etc. These types of CGL exclusions can be insured in the Employers Liability (EL) part of the WC policy.
  5. While it is a state issue based on statutes and interpretation by the Commission, volunteers could be classified in a specific case as being an employee of an entity.
  6. State administrative bodies that administer Workers’ Comp lean towards finding employment status, especially if there is no other available insurance.

Based on this, associations in other states even without true “employees” often carry an “if any employee” rated Workers’ Comp policy (or an “if any employee WC+EL policy” or “ghost policy”).  An attorney in another state that got surprised by this awhile back told me that “It would almost be malpractice for an insurance agent not to suggest an association buy an ‘if any’ WC policy.  There’s too much danger the Industrial Board will find the association to be the employer just to find a pocket.  I think it’s a great idea for all associations to have at least an ‘if any’ WC policy.”

In calling around to several NC agents, I was repeatedly told that there is no specific, readily-available product that would cover this issue for associations.  As a result, the association might have to go to the Assigned Risk Pool for a Workers’ Comp policy and the cost would be somewhere around $1,250 per year.  (FYI, this is significantly higher than similar insurance in some other states, where I have been told rates range from $300 to $800.  This may be due in part to the lack of history in NC with Workers’ Compensation coverage for volunteer nonprofit boards.  Without getting too complicated here, if the minimum premium for associations without any employees was treated by the Rate Bureau as the “Clerical Class Code” for directors and officers, the minimum premium would be significantly lower than $1,250, and perhaps only several hundred dollars.)  Obviously, you should speak with your association’s insurance advisor about available options.

Another option, once an association board carefully evaluates the risk versus its ability to pay such a premium, is for the executive officers to “opt out” of Workers’ Compensation. Such a decision should not be made lightly, and should be the result of discussions with both the association’s insurance agent and legal counsel.  To effect such a decision, the board would adopt a resolution (preferably prepared with the assistance of an attorney).  Such a decision by the Association would reduce the likelihood that the association is violating the law or committing a crime by not having Workers’ Comp coverage (although it would not fully address the issue of how the Industrial Commission may later treat an injured contractor who claims to be an employee).

Bottom line?  The 2015 session of the NC General Assembly should enact a legislative change to the effect that volunteer nonprofit boards without paid employees should be exempt from the requirement of Workers’ Comp insurance.  Until such a change is adopted, it is highly unlikely that an association and its executive officers will be tracked down and charged criminally for failing to have Workers’ Comp insurance.  Even so, the safest course is for association boards to consider whether they need such coverage, both because of the possible requirement to have it, but more importantly because of the potential issues it will cover in the event of an injury or death.  If the association decides otherwise, it should be the result of a reasoned board decision that weighs the benefits of purchasing Workers’ Compensation coverage against the costs (and even availability) of a specific insurance product as well as potential risks the association faces.”

Reprinted with permission from Rosabbi Black Slaughter, PA

“Ask The Experts” Articles have been Reprinted with permission from the Charlotte Observer and Mike Hunter.

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