Friday, October 24, 2014

Do NC Community Associations with No Employees Need to Buy Workers' Compensation Insurance?

Association Management Group, Inc. wants to bring a recent set of articles to the attention of our friends, clients and colleagues. The full articles appear below.

Paul Mengert President, AMG
An article was written by a North Carolina attorney appeared in the Charlotte Observer September 26, 2014 and indicates associations (even with no employees) should carry workmen's compensation insurance, under the NC Workers' Compensation Act, for its unpaid executive officers, board members and volunteers.
While this is an interesting perspective, over the last 25 years, it has been AMG's observation that this has not typically been recommended by the insurance and legal professionals. We are told the cost of buying such coverage is between $600 and $1200 per year, for most associations with no paid employees.
Jim Slaughter, the national president of the College of Community Association Lawyers and Tim Sellers, both partners in law firms that represent many community associations have written separate articles in response. Please read their articles below.
In quick summary (while AMG is not licensed to and does not make insurance recommendations) it is AMG's experience that workmen's compensation insurance has not normally been recommended by insurance advisors to associations without paid employees; however, as you can see from Mr. Adam M. Beaudoin's article there is statutory basis that associations should consider. We would also like to point out that most community associations (in this part of the country) have not purchased earthquake or flood insurance, for which there is some exposure even though neither are generally covered under standard policies. 
If your association would like to get more information we recommend you discuss these matters with your insurance professional or attorney.  AMG Executive Board Members, please ask your community association manager to arrange an appointment with your insurance professional or attorney, if you would like more information.

Note: Regulations vary by state. Please consult an appropriate legal advisor(s) in your state, if you have legal questions. This blog is intended only to provide general information. Association Management Group does not offer legal advice or a legal opinions. 


Original Article  
From the Charlotte Observer September 26, 2014: EDITOR’S NOTE: The following column is by Adam M. Beaudoin and Kyle R. Still, Ward and Smith, P.A., New Bern.

Adam Beaudoin
The N.C. Workers’ Compensation Act requires all employers with three or more employees to carry workers’ compensation insurance. The purpose is to ensure that employees injured by an accident while working have a safety net to cover lost wages and medical expenses.

The Act, however, has a very technical definition of “employer.” This leads to confusion as to whether non-profit owners associations are covered. In particular, many residential, commercial, and mixed-used property and condominium owners associations (collectively, “POAs”), which often consider themselves to have fewer than three employees, question whether they are covered by the Act and required to purchase insurance.
As explained here, there are good reasons to believe that all North Carolina POAs are subject to the Act, even if they may not have any traditional employees.

Who is an ‘employee’?
The Act specifically defines “employee” to include every “executive officer elected or appointed and empowered in accordance with the charter and bylaws of a corporation.” Because POAs have elected board members pursuant to a charter or bylaws, these board members meet the technical definition of an “employee” under the Act. 

Thus, all non-profit organizations, including POAs with three or more corporate officers or directors, even if the officers and directors are volunteers and unpaid, clearly need to obtain workers’ compensation insurance. 

The good news for North Carolina POAs is that workers’ compensation insurance rates are based on risk, which should be low for this type of entity. Furthermore, the Act allows corporate officers to opt out of coverage. 

Roll the dice?
So what’s the risk of not getting the insurance? First, there is the risk of the costs associated with a workers’ compensation injury. 

Without insurance, the POA would have to pay an injured “worker” for two-thirds of the “worker’s” average weekly wages, as well as all medical expenses related to any work injury. If the “worker” dies, the “worker’s” estate would receive certain payments. 

While the risk of injury to a POA board member may seem minimal, unexpected trips, falls, and other accidents occur frequently in the workplace. Furthermore, it is not uncommon for POAs to have a maintenance employee who would face a much more significant risk of injury on a day-to-day basis or for POAs to hire what they believe to be independent contractors, only to find out after an injury that the “contractor” is deemed to meet the technical legal requirements of an employee, with the POA then finding itself on the hook for any injury sustained.

Possible fines
North Carolina POA board members and officers should also take notice that the Act imposes a daily fine on employers for failing to purchase insurance. This fine varies from $50 to $100 per day, based on the size of the employer. Although the Industrial Commission generally does not assess such fines unless an uninsured claim is filed, these fines could reach back for years and become substantial.
Of greater concern to North Carolina POA board members and officers is the fact that “any person who, with the ability and authority to bring an employer in compliance” with the requirements of purchasing insurance and who “willfully fails” to do so is guilty of a Class H felony. 

Furthermore, the person would be personally liable for 100 percent of the benefits owed to an injured employee who otherwise would be paid by insurance. The POA employer itself also can be liable for a Class H felony and a Class 1 misdemeanor. 

Because of the criminal nature of these penalties, the POA’s Directors and Officers Insurance would not apply. Most POA board members confronted with this information will likely believe that responsibility for substantial workers’ compensation costs, fines, and even criminal liability is more than they signed up for. 

Conclusion: In light of the substantial risk associated with not purchasing workers’ compensation insurance and the relative inexpensiveness of such coverage, it is prudent for all North Carolina POAs to verify that they have sufficient workers’ compensation programs in place.
Article from Jim Slaughter's law firm (Rossabi Black Slaughter, PA):

James H. Slaughter
Jim Slaughter

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

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’ Compensationcoverage 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.


Article from Tim Seller's law firm (Sellers, Hinshaw, Ayers, Dortch & Lyons, P.A):

Tim Sellers
Stephen C. Sellers and Christopher P. Gelwicks

In recent weeks there has been an increase in chatter in the local media, as well as other information outlets, regarding the application of the North Carolina Workers' Compensation Act to homeowners associations in North Carolina. This activity has prompted a flood of inquiries as to whether associations must, or should, obtain worker's compensation insurance.

After discussing this issue at length with John Ayers - a member of our firm with nearly three decades of experience dedicated to workers' compensation claims - we've developed two color-coded risk-assessment categories, Yellow and Red, that we believe cover the landscape in this corner of the law where workers' compensation and community association management overlap. Your association falls within our Yellow risk-assessment category if your only "workers" are members of an executive board comprised of at least three unpaid members or officers. This category represents a relatively low level of risk in this area. Our Red risk-assessment category, however, involves a higher level of potential exposure and reaches any association that hires one or more paid employees to perform services for or on behalf of the association.

This update is intended to help you first determine which risk assessment category applies to your association and then give you the practical information you need to better understand the effect of the North Carolina Workers' Compensation Act on your particular association.

Yellow: Proceed with Caution

The North Carolina Workers' Compensation Act applies to all employers within the State with at least three statutory "employees," which - under the Act - includes unpaid executive officers of non-profit corporations organized in North Carolina.  If your association, like most, is managed by a group of three of more executive officers, you are an "employer" under the Workers' Compensation Act and your association is exposed to potential liability when an employee is injured on the job.  However, for associations in our Yellow risk assessment category, exposure to a worker's compensation claim brought by an injured executive officer presents an almost inconsequential risk.  This is tied to one of the basic principles of workers' compensation law:  An employee's ability to recover under the Act is tied to his or her earning capacity in whatever position the employee held at the time of the injury.  That earning capacity is measured in terms of the employee's average weekly wage.  Since the executive officers of non-profit homeowner's associations are almost always unpaid volunteers, they have no average weekly wage and therefore cannot recover under the Act.
However, even if your association's only workers are the unpaid members of your executive board, there are other considerations that may justify the expense of maintaining workers' compensation insurance despite the low risk of a payout. The Act requires all statutory "employers" to maintain workers' compensation insurance and establishes civil and even criminal penalties for employers who fail to do as the Act requires.  With that said, we believe that there may be legal avenues available to circumvent application of the Act to associations that fall within our Yellow risk assessment category ("ghost policies," etc.), and we are unaware of any enforcement action having been undertaken against a community association in North Carolina for its failure to maintain workers' compensation insurance.  However, the penalties do exist under the statute and your association should consider whether an absolute safeguard against the possible imposition of those penalties is enough to justify the cost of insurance premiums.

Red: Stop and Get Insured

If your association maintains even one paid employee on the association's payroll, the association falls within our Red risk-assessment category and we strongly recommend that your association obtain adequate workers' compensation insurance.  Even if you only pay one or two employees, keep in mind that your executive officers still qualify as statutory "employees" for purposes of satisfying the Act's three employee threshold.  If the threshold is met and one of your paid employees is injured on the job, your association is exposed to significant liability under the Act and, in the absence of insurance, may be required to pay an injured employee's claim directly from association funds.  This alone justifies obtaining workers' compensation insurance if you fall into the Red category.  In addition, your association's failure to maintain adequate workers' compensation insurance under these circumstances is precisely the sort of scenario in which we expect the Act's civil and criminal penalties may be brought to bear.


If your association has hired paid workers to provide services to or on behalf of the association, then we need to discuss your potential exposure under the North Carolina Worker's Compensation Act and encourage you to contact your association's insurance professionals. This article has only scratched the surface of this hot-button issue, and the details of your association's employment arrangements will determine the full impact that the Act has on your community. For example, some of your association's paid workers may qualify as independent contractors who do not qualify as "employees" under the Workers' Compensation Act. Since they're not "employees" under the Act, independent contractors do not count toward the three employee threshold that will determine whether or not the Act applies to your association. In addition, since independent contractors don't come within the Act's definition of an "employee," independent contractors can't bring a successful workers' compensation claim against your association in the event they become injured in the course of their work. However, some paid workers who you think of as independent contractors may actually qualify as statutory "employees" based upon a number of different factors including the degree of control your association maintains over their on-the-job activities. An additional consideration that warrants careful thought is the fact that even an ill-founded and ultimately unsuccessful workers' compensation claim against your association will require some form of legal defense, the cost of which might alone justify the expense of annual insurance premiums. 

Our firm is ready to help you analyze your unique situation and better understand whether you should obtain worker's compensation insurance. Our community association attorneys will work in conjunction with our worker's compensation colleagues and your insurance professionals to provide the specific guidance your association needs to navigate this potentially murky area of the law and minimize your costs.

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