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Thursday, January 19, 2023

Insurance Agent's Conduct Determines Liability for Failure to Inform an Employer of Workers' Compensation Coverage Options

The NJ Supreme court held that the insurance agent's conduct must be a willful, wanton, or grossly negligent act of commission or omission for failure to advise an employer about workers' compensation coverage for a Limited Liability Corporation.

Informed by the Legislature’s expression of public policy in N.J.S.A. 34:15-36, the Court concurred with the Appellate Division that the defendant had a duty to advise the LLC members, at the time of the workers’ compensation policy’s purchase or renewal, that an LLC member actively performing services on the LLC’s behalf is eligible for workers’ compensation coverage, but that the LLC must elect to purchase such coverage to obtain it.

ISSUES ADDRESSED

1. Duty of an Insurance Broker
2. Evidence of causation in a workers' compensation case
3. Questions for a jury to consider in evaluating an insurance broker's liability

BENEFITS OF A LIMITED LIABILITY CORPORATION

A limited liability corporation (LLC) is a type of business structure that combines the liability protection of a corporation with the tax benefits of a partnership. LLCs are popular among small business owners because they offer a number of benefits, including:

  1. Limited liability: One of the main benefits of an LLC is that the owners (called "members") are not personally liable for the debts and obligations of the business. This means that if the LLC is sued or incurs debt, the members' personal assets, such as their homes and savings, are protected.

  2. Flexibility: LLCs offer flexibility in terms of management and ownership. Members can choose how they want to run the business and can have any number of members, including individuals, corporations, and other LLCs.

  3. Tax benefits: LLCs are taxed as partnerships, which means that the business itself is not taxed on its profits. Instead, the profits and losses are passed through to the individual members, who are then taxed on their personal tax returns. This can result in a lower overall tax burden for the business and its owners.

  4. Simplicity: Forming and operating an LLC is generally simpler and less expensive than starting a corporation. LLCs also have fewer formalities and reporting requirements, making them easier to manage.

  5. Professionalism: Forming an LLC can give small businesses a sense of professionalism and credibility, as it shows that the business is a separate legal entity from its owners.

In summary, the benefits of an LLC include limited liability, flexibility, tax benefits, simplicity, and a sense of professionalism. These advantages make LLCs an attractive option for small business owners who want to protect their personal assets and have the freedom to run their business as they see fit.

INSURANCE AGENT'S BREACH OF DUTY

Consistent with N.J.S.A. 34:15-36, however, the Court held that defendant may not be held liable for breach of that duty unless the damages alleged were caused by the defendant’s willful, wanton, or grossly negligent act of commission or omission. 

The Court disagrees with the trial court’s assessment of the evidence presented by the plaintiff on the question of proximate cause.

Holm v. Purdy, 252 N.J. 384, 285 D 3d. 857  - NJ: Supreme Court 2022

SYLLABUS

This syllabus is not part of the Court’s opinion. It has been prepared by the Office of the Clerk for the reader's convenience. It has been neither reviewed nor approved by the Court and may not summarize all portions of the opinion.

Nancy L. Holm v. Daniel M. Purdy (A-39-21) (086229) Argued September 12, 2022 -- Decided December 13, 2022

PATTERSON, J., writing for the Court.

In this appeal, the Court considers whether defendant Daniel Purdy, an insurance broker, had a duty under N.J.S.A. 34:15-36 to inform the members of Holmdel Nurseries, LLC that an LLC member actively performing services on the LLC’s behalf is eligible for workers’ compensation coverage, but that the LLC must elect to purchase such coverage in order to obtain it. The Court also considers the standard for finding a breach of any such duty, as well as the evidence presented to support the proximate cause in this case.

Robert Friedauer and his brother, Walter Friedauer, owned Holmdel Nurseries and formed an LLC in which they each owned a fifty percent interest. Robert Friedauer’s sons, Michael and Christopher Friedauer, were full-time employees.

Defendant became the insurance broker for Holmdel Nurseries in 2002; he also served as the personal insurance broker for each of the four Friedauers. For approximately a year after workers’ compensation coverage became available to LLC members in New Jersey, Holmdel Nurseries elected to obtain that coverage for Robert and Walter Friedauer. After determining that the coverage was not cost-effective for himself or Walter, Robert Friedauer informed the defendant of the LLC members’ decision not to purchase workers’ compensation coverage for themselves. From 2002 to 2012, Holmdel Nurseries’ workers’ compensation policies provided no coverage to the LLC members in accordance with those instructions. As employees, however, Christopher and Michael Friedauer were covered by Holmdel Nurseries’ workers’ compensation policy during that period.

Michael Friedauer and Christopher Friedauer eventually purchased Walter’s fifty percent interest in Holmdel Nurseries. As of January 1, 2012, they were no longer employees of the business but rather members of the LLC, each owning a twenty-five percent share.

On July 12, 2012, the defendant held his annual meeting with Holmdel Nurseries management to discuss the LLC’s insurance needs. He learned at the meeting that Walter Friedauer was no longer involved in the business, and Christopher Friedauer and Michael Friedauer had become members of the LLC. Defendant did not tell Christopher Friedauer or Michael Friedauer that because they were LLC members rather than employees, they were no longer covered by Holmdel Nurseries’ workers’ compensation insurance or that the LLC could elect to purchase workers’ compensation insurance that would cover them in case of a work-related accident.

Robert Friedauer testified that following the meeting, he had “no reason to believe” that his sons were not covered by Holmdel Nurseries’ workers’ compensation policy. According to the defendant, all three LLC members knew that they were excluded from workers’ compensation coverage and were satisfied. Like Holmdel Nurseries’ workers’ compensation policies for the period between 2002 and 2012, the policies that the defendant secured for the LLC for 2013, 2014, and 2015 excluded the LLC members from workers’ compensation coverage.

On the morning of February 15, 2015, Christopher Friedauer was at work at Holmdel Nurseries, preparing trucks for snowplowing. Michael Friedauer testified that he encountered Christopher, who told Michael that while he was trying to get his truck running, he had slipped and fallen on his head, hitting his head “so hard I saw stars.” Later that day, Michael Friedauer did not see his brother at Holmdel Nurseries and searched for him at another location where employees were snowplowing. He testified that he found Christopher Friedauer “dead in a truck.”

Shortly after Christopher Friedauer’s death, the defendant filed a workers’ compensation claim for death benefits on behalf of Christopher’s dependents, the plaintiff, and her two minor children. He testified that he had no reason to expect that Holmdel Nurseries’ workers’ compensation policy covered the dependents’ claim because the LLC members had not opted for coverage.

Plaintiff Nancy L. Holm, the administratrix of the estate of her husband, Christopher Friedauer, brought this action against the defendant, alleging that he failed to provide to the LLC the notice mandated by N.J.S.A. 34:15-36 and that Christopher was unaware that he no longer had workers’ compensation coverage in his new role as an LLC member. She alleges that as a result of the defendant’s negligence and breach of fiduciary duty, Christopher Friedauer’s dependents were deprived of a workers’ compensation death benefit to which they would have been entitled had he been covered at the time of his death.

The trial court rejected the plaintiff’s argument that an LLC’s insurance broker has a duty to inform individual LLC members of their right to elect workers’ compensation coverage and also found that plaintiff had not presented adequate evidence as to the proximate cause. The court accordingly granted the defendant’s motion for an involuntary dismissal and the defendant’s motion for judgment at trial.

The Appellate Division reversed, holding that N.J.S.A. 34:15-36 imposes on an insurance broker a non-waivable duty to advise new members of an LLC that workers’ compensation coverage is available to them if all LLC members elect to obtain such coverage. The Appellate Division did not require the plaintiff to prove that defendant committed “a willful, wanton or grossly negligent act of commission or omission” in order to recover damages, as N.J.S.A. 34:15-36 prescribes. Instead, the appellate court concluded that the plaintiff presented sufficient evidence to warrant a jury determination of whether the defendant breached a duty to inform Christopher Friedauer and whether Christopher Friedauer’s death was compensable.

The Court granted certification. 250 N.J. 14 (2022).

HELD: Informed by the Legislature’s expression of public policy in N.J.S.A. 34:15-36, the Court concurs with the Appellate Division that the defendant had a duty to advise the LLC members, at the time of the workers’ compensation policy’s purchase or renewal, that an LLC member actively performing services on the LLC’s behalf is eligible for workers’ compensation coverage, but that the LLC must elect to purchase such coverage in order to obtain it. Consistent with N.J.S.A. 34:15-36; however, the Court holds that defendant may not be held liable for breach of that duty unless the damages alleged were caused by the defendant’s willful, wanton, or grossly negligent act of commission or omission. The Court disagrees with the trial court’s assessment of the evidence presented by the plaintiff on the question of proximate cause.

1. N.J.S.A. 34:15-36 provides that a member of an LLC who actively performs services on behalf of the LLC shall be deemed an employee of the LLC for purposes of receipt of benefits and payment of premiums under the Workers’ Compensation Act if the LLC elects, when it purchases or renews its workers’ compensation policy, to obtain coverage for the LLC members. The Legislature imposed notice obligations on insurers and insurance producers, including brokers. N.J.S.A. 34:15- 36 mandates that every application for workers’ compensation includes “notice, as approved by the Commissioner of Banking and Insurance, concerning the availability of workers’ compensation coverage” for limited liability company members. The law further requires that the application contain a notice of election of coverage and clearly states that coverage for LLC members “shall not be provided under the policy unless the application containing the notice of election is executed and filed with the insurer or insurance producer.” Ibid. N.J.S.A. 34:15-36, however, does not create a statutory remedy for violating its provision. Indeed, it limits the liability of insurers and insurance producers in the event of a common-law claim, providing that they shall not be liable for an LLC’s failure to obtain workers’ compensation coverage for its members “unless the insurer or insurance producer causes damage by a willful, wanton or grossly negligent act of commission or omission.” Ibid. (pp. 18-20)

2. To determine whether a duty of care should be imposed in a given context, a court must first consider the foreseeability of harm to a potential plaintiff and then analyze whether accepted fairness and policy considerations support the imposition of a duty by weighing the (1) relationship of the parties, (2) nature of the risk, (3) opportunity and ability to exercise care, and (4) public interest. See Hopkins v. Fox & Lazo Realtors, 132 N.J. 426, 439 (1993). In certain settings, the determination of whether to impose a duty may be informed by a statute, even when the statute creates no civil cause of action for a violation. Ultimately, courts strive for solutions that properly and fairly resolve the specific case and generate intelligible and sensible rules to govern future conduct. (pp. 21-23)

3. The Court reviews duties that insurance brokers owe as fiduciaries to their clients and notes that its jurisprudence constrains the fiduciary duty of an insurance broker to the categories of insurance coverage that the broker undertakes to obtain for the insured or the coverage necessitated by a particular peril known to the broker -- the Court has not imposed a general duty on brokers to advise an insured about the myriad varieties of insurance available on the market. In the unusual setting in which a broker is held to have a duty to a third party, that duty is premised on the broker’s obligation to provide the insured with a type of coverage that the insured has requested, as well as considerations of foreseeability and fairness. (pp. 23-27)

4. Here, it was foreseeable that if the defendant did not inform Holmdel Nurseries’ LLC members that the LLC could obtain workers’ compensation coverage for Christopher Friedauer, his dependents could be harmed if Christopher were to die in a work-related accident without such coverage. The threshold inquiry is thus satisfied. Turning to fairness and policy considerations, the Court explains in detail why each of the four Hopkins factors favors the recognition of a duty here. Following N.J.S.A. 34:15-36, the Court holds that an insurance broker for an LLC, charged by the LLC to obtain workers’ compensation coverage on its behalf, has a non-waivable duty to provide notice that such coverage is available to LLC members who actively perform services on behalf of the LLC -- but that such coverage is available only if the LLC elects the coverage when the policy is purchased or renewed. Because it is foreseeable that the failure to provide such notice may harm an LLC member or the member’s dependents, the broker’s duty may extend not only to the LLC, but also to LLC members eligible for workers’ compensation coverage under N.J.S.A. 34:15-36. In the circumstances here, in which the LLC had only three members -- all working at Holmdel Nurseries and all in contact with the defendant during the relevant period -- the defendant had a duty to provide notice directly to the members. The Court does not address whether an insurance broker must provide direct notice to all LLC members eligible for workers’ compensation coverage in cases involving LLCs with numerous members. Because the trial court based its judgment mainly on its finding that the defendant owed no duty to the LLC members, it erred in granting the defendant’s motions. (pp. 27-32)

5. N.J.S.A. 34:15-36 precludes imposition of liability on an insurance broker absent proof of “a willful, wanton or grossly negligent act of commission or omission.” That standard should govern any common-law claim based on a failure to provide the notice mandated by the statute. In this case, and in other cases premised on an alleged breach of an insurance broker’s duty to provide notice of the availability of workers’ compensation insurance for LLC members, a plaintiff must prove that the damage was caused by a willful, wanton or grossly negligent act of commission or omission by the broker. Ibid. (pp. 32-33)

6. The Court next addresses the trial court’s ruling on proximate cause. First, accepting the testimony of Robert and Michael Friedauer as true for purposes of the motion and according to that evidence all reasonable inferences, a rational juror could conclude that all three LLC members -- all part of the same family -- wanted to maximize insurance coverage for Christopher Friedauer, a parent of young children whose work for Holmdel Nurseries was sometimes dangerous. Although the jury may have been persuaded by the defendant’s testimony that the LLC would have opted against such coverage given its longstanding decision to decline it, the Court cannot conclude that no rational juror would decide in the plaintiff’s favor on that issue. Second, to award a death benefit to Christopher Friedauer’s dependents, a workers’ compensation court would have to find that his death resulted from an “accident arising out of and in the course of his employment.” N.J.S.A. 34:15-1. In the procedural posture of this appeal, in which there was no workers’ compensation proceeding, the Court expresses no view as to what evidence a workers’ compensation judge would have required to make that finding but explains why it disagrees with the trial court’s conclusion that plaintiff presented no evidence that Christopher Friedauer died in a work-related accident and that it, therefore, did not need to reach the question of proximate cause. The trial court should have reached whether the plaintiff’s proofs on the question of proximate cause concerning Christopher Friedauer’s injury were sufficient to warrant the denial of the defendant’s motions for involuntary dismissal and for judgment at trial. (pp. 33-37)

7. Because it recognized no duty on the part of an insurance broker to an LLC member to provide notice of the availability of workers’ compensation coverage, the trial court did not consider whether the evidence supported a finding that defendant “cause[d] damage by a willful, wanton or grossly negligent act of commission or omission” under N.J.S.A. 34:15-36. The Court remands to the trial court for that determination and provides guidance for the remand proceedings. (p. 37)

Holm v. Purdy, 252 N.J. 384, 285 D 3d. 857  - NJ: Supreme Court 2022

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Jon L. Gelman of Wayne, NJ, is the author of NJ Workers’ Compensation Law (Thomson-Reuters) and co-author of the national treatise Modern Workers’ Compensation Law (Thomson-Reuters). For over five decades, the Law Offices of Jon L Gelman 1.973.696.7900 jon@gelmans.com have represented injured workers and their families who have suffered occupational accidents and illnesses.


Update 19 Jan 2023