Payroll Zero? Not a Chance When Subs Are Unlicensed!

Yesterday we examined a case in Florida demonstrating an employer's folly in failing to report an alleged industrial claim timely.

Today's news (and blog post) concerns an employer's folly in failing to adequately estimate payroll obligation when applying for workers' compensation insurance.

Georgia is one of those states without an insurer of last resort and relies upon an "assigned risk pool" to cover those employers that carriers otherwise don't want to write. To be eligible to write the good business in Georgia a carrier must submit itself to the pool. Coverage obligations are randomly assigned.

James Smith, a contractor, enlisted the help of his general agent, Norris Strickland, which submitted an application on Smith's behalf to the Georgia Workers' Compensation Assigned Risk Insurance Plan because they couldn't find insurance on the open market.

After Smith's application was processed, his policy was randomly assigned to Amtrust North America. Based on Smith's representation that his estimated employee payroll was zero, Amtrust issued a one-year policy starting in January 2007 with an initial premium of $765. The carrier renewed the policy the following year.

Since workers' compensation premiums are based on the actual amount paid to workers, Amtrust could not determine the actual policy premium due to it until after the conclusion of the 2007 policy term. Amtrust conducted an audit of Smith's payroll records and calculated that an additional premium payment of $42,653 was owed, based on wages Smith had paid to uninsured contractors in 2007.

Amtrust then cancelled the renewed policy and demanded payment of $44,457 in premium owed for the period between January and May 2008.

When Smith refused to pay the additional premiums demanded by Amtrust, the company sued for their recovery.

Smith filed a motion for summary judgment, asserting that he was not obligated to pay because he did not sign a written contract with Amtrust, he did not authorize anyone to do so on his behalf and he did not otherwise assent to the terms of Amtrust's insurance policy.

In response, Amtrust moved for partial summary judgment, arguing that Smith was liable to pay additional premiums because Norris Strickland acted as Smith's agent when it submitted an insurance application on his behalf, the parties were bound to the terms of the policy once Smith's application was approved and Smith assented to terms of the policy by accepting coverage without objection.

State Court Judge Raymond S. Gordon Jr. denied Amtrust's partial summary judgment motion and granted Smith's motion for summary judgment, deciding that Smith was not liable for the additional premiums.

Amtrust appealed, reiterating the arguments it had made at trial. The Georgia Court of Appeals ruled in the carrier's favor on Monday.

The opinion by Judge M. Yvette Miller concluded that Norris Strickland was Smith's agent, not Amtrust's.

The court also said that Smith's express consent was not required for him to be bound by the terms of the assigned risk policy provided by Amtrust because state law obligated Amtrust to participate in the risk pool and determined the amount Amtrust could charge as premium for issuing policies to pool applicants.

Since the premium amount demanded by Amtrust in 2008 was admitted based on an estimate rather than a completed audit, a triable issue remained as to the amount owed by Smith.

Lessons for employers in assigned risk states:

1. Accurately estimate payroll;
2. Don't hire unlicensed contractors as subcontractors.

I sort of feel sorry for Smith. This decision likely put him out of business, at least doing business in the manner that got him in trouble with Amtrust.

But at the same time, this case sends an important message: don't gamble on insurance applications by falsifying or understating facts necessary for underwriting.

Smith's attorney told WorkCompCentral news that she felt that the insurance industry in the state was usurious. The reality is that her client attempted an illegal competitive advantage and got caught.

The case is Amtrust North America v. Smith, No. A11A1645.