Read Before You Sign: The Danger of Not Electing Workers’ Compensation Coverage in Limited Liability Companies

01.28.22

Category: New Jersey

In a decision handed down by the Appellate Division on January 27, 2022, the court addressed the compensability of an injury sustained by a member of a limited liability company (LLC) in the course of his employment.

The facts of Kearton v. E.W. Millwork, are straightforward. Mr. Kearton formed an LLC, E.W. Millwork, with co-owner Edward Brigante in early 2003. The LLC obtained coverage through Zurich Insurance. On the application, the LLC members twice declined coverage for themselves. Mr. Kearton was injured in the course of his employment on August 27, 2003. He filed a Claim Petition and Motion for Medical and Temporary Disability Benefits. Zurich filed a Motion to Dismiss for lack of coverage arguing Mr. Kearton failed to elect coverage for himself on the application for workers’ compensation insurance. 

The Motion was tried. The insurance broker, as well as, Mr. Kearton and Mr. Brigante testified. Mr. Brigante and Mr. Kearton testified they were supposed to be covered. The insurance broker, however, testified that he informed Mr. Brigante of the consequences of failing to elect coverage and Mr. Brigante nonetheless instructed him to not elect coverage. The Judge ruled in Mr. Kearton’s favor. The Judge found that the insurance broker made a mistake in not electing coverage for Mr. Kearton and Mr. Brigante. The Judge also found Zurich negligent for failing to review the policy and ensuring coverage was provided to both members of the LLC. 

Mr. Kearton sustained a second work injury in 2009. That claim was consolidated with the 2003 claim. The procedural history thereafter became complex due to the retirement of several Judges who had handled the matter. However, the case finally made its way to the Appellate Division after the trial court eventually found the claims compensable. Zurich appealed on the basis that no coverage was provided.

The Appellate Court agreed with Zurich and overturned the trial court’s decision. The court cited N.J.S.A. 34:15-36, which states that members of an LLC who perform work for the company are employees so long as the company elects coverage for its members when applying for workers’ compensation insurance. The Appellate Court noted that E.W. Millwork’s policy did not include a coverage election by either Mr. Kearton or Mr. Brigante. In fact, a section of the policy indicating, “COVERAGE IS REJECTED” was marked with an “X”. The court noted the policy was clear and unambiguous concerning electing coverage and Mr. Kearton and Mr. Brigante failed to do so. The court further noted that even if the insurance broker made a mistake, there is no statutory provision by which the Workers' Compensation Judge could then impute coverage to Zurich. (Mr. Kearton’s remedy would be to sue the insurance broker in Superior Court.) Lastly, the court denied Kearton’s argument that coverage should be imputed because he was listed as an employee in the application section listing the wages of employees upon which the premium was based. The court reiterated its earlier finding that the only way for a member of an LLC to obtain coverage is by specifically electing such in the appropriate sections of the application.

Comment: This decision impacts a rather narrow area of the New Jersey Workers’ Compensation statute and simply reinforces the plain language of the statute. It is, however, a warning to members of LLCs that they must specifically elect coverage for themselves on the appropriate sections of the insurance policy application or they will be left without coverage should they be injured at work.

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Ralph Richardson
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rrichardson@wglaw.com

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