By law, all employers are required to carry workers' compensation insurance. Workers' compensation is a "no fault" system in which injured workers receive medical benefits no matter who causes the job-related accident. If an illness or injury is job-related, the injured worker is guaranteed medical care and may receive monetary awards for disability and job retraining. In exchange for these guarantees, injured employees are barred from suing their employers and co-workers. Boards are exposed to potential liability if they fail to carry workers' compensation insurance.
Purpose of Workers' Compensation Insurance
Workers' compensation insurance provides lost wages, medical benefits, and rehabilitation costs to employees injured "in the course and scope" of their jobs. By carrying the insurance, general pain and suffering damages, as well as punitive damages, are not available to employees. With the insurance in place, employees do not have to sue to receive medical benefits. California mandates the insurance for all employers, even if the company only has one employee. Sole proprietors are generally exempt unless they are roofers. If an employer provides a safe work environment for employees so that employees do not suffer injuries, “experience rating” allows for lower insurance premiums. Those employers with high injury rates pay higher premiums. It provides an incentive for employers to provide safe working conditions.
Vendors Without Employees. The State Compensation Insurance Fund (State Fund) will write coverage for a sole proprietor (with no employees). It's called a zero-payroll workers' compensation policy. We recommend that boards require sole proprietors to obtain coverage.
Failure to Carry WC Insurance. If an association has employees and is sued for failing to purchase workers' compensation insurance, many D&O policies exclude claims for being under-insured. They use a "failure to maintain insurance" provision within their D&O policy--but consistent in every Directors & Officers Liability policy is a specific exclusion for any claim "arising out of, directly or indirectly resulting from or in consequence of, or in any way involving" . . . bodily injury or sickness. This would include bodily injury or sickness, whether workplace related or not.
That is because the pricing of the D&O coverage does not contemplate being the ultimate catch-all policy ("safety net") for every instance where the board failed to purchase coverage. If the D&O were to provide such coverage, there would be no way for the actuaries to price the coverage. Moreover, the board would have no reason to purchase insurance--they could just maintain the best D&O policy possible (with the highest limits) and hope for the best.
As a result, the carrier would probably not provide the board with a defense because the underlying matter was specifically excluded. However, there might be exceptions, and the carrier might provide defense costs.
Board and Committee Members
Although most Directors and Officers (D&O Insurance) policies protect committee members who might be sued for negligence, they do not cover injuries sustained by committee members. D&O policies typically contain an exclusion for bodily injury so they do not duplicate the bodily injury coverage in the association's underlying general liability policy. There are at least three other avenues where the committee member's injury could be covered under the association's insurance: (i) guest medical, (ii) commercial general liability, and (iii) workers' compensation.
Guest Medical Payments. If the association has "Guest Medical Payments" coverage, it covers injuries in the common areas “regardless of fault.” The committee member would not have to prove the association was negligent in order to have his medical expenses considered. However, coverage is typically low ($5,000 per person), and the policy does not cover injuries that occur on the premises the “person normally occupies.” If the slip and fall happened on the walkway leading to his unit or a portion of the Common Area the owner frequently used (parking garage, swimming pool, tennis court, etc.), the carrier might deny coverage.
Commercial General Liability. If the association does not have "guest medical" or the injuries exceed limits, the claim could be covered under the CGL policy. If the association's negligent maintenance of the premises caused the injury, the medical expenses should be covered.
Specially Endorsed Workers’ Compensation. If a board member or committee member is injured while carrying out his/her duties, most insurance carriers will not cover the injuries because volunteers are not considered employees under Labor Code § 3352(i).
Any person performing voluntary service for a public agency or a private, nonprofit organization who receives no remuneration for the services other than meals, transportation, lodging, or reimbursement for incidental expenses" is excluded from the definition of "employee."
A small number of workers’ compensation insurance carriers have begun issuing policies with an endorsement that broadens the definition of “employee” to include the board of directors, officers and “appointed committee members.” If an association has this coverage, the committee member is covered if he was acting on behalf of the association in his "official capacity" at the time of injury. As a prerequisite to coverage, the board's minutes must clearly reflect the appointment of the person to a committee. Boards should check with their insurance broker and, if available, extend coverage to volunteers.
Other Ways to Reduce Risk.
- Hold Harmless Agreement. Boards can require volunteers to sign a hold harmless agreement releasing the association from liability if the volunteer is injured. However, this may discourage volunteers if they have no protection in the event of an injury.
- Safety. Another way to reduce risk is to ensure volunteers have safe working conditions. This means no faulty ladders or damaged tools. Another is to only allow low-risk tasks (clerical work, picking up trash, sweeping sidewalks, planting flowers, etc.). Boards should avoid high-risk tasks—anything involving heights (cleaning gutters, replacing roof tiles) or power tools (chainsaws, lawnmowers, and so on).
Self-Insurance
Workers' compensation insurance can be costly, and some associations wonder about self-insurance as a way to save money. Self-insurance is permissible under Labor Code § 3700 if an association obtains a certificate of consent from the Director of Industrial Relations. The certificate will only be awarded upon proof of ability to pay any compensation that may become due to the association's employees. If approved, the association must file a self-insured employer's annual report and make a security deposit of the greater of $220,000 or 125% of the estimated future liability for compensation plus 10% of future liability for administrative and legal costs (Labor Code § 3701). The security must be in the form of cash, securities, surety bonds, or irrevocable letters of credit. Because of these requirements, only a small percentage of corporations statewide self-insure.
Recommendation: Boards should have their association's insurance reviewed by an agent specializing in homeowners associations. Insurance coverage is too important to leave to inexperienced agents.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.