When coverage is denied under a workers’ compensation policy for an LLC, one can be almost certain that a finger will be pointed, rightly or wrongly, at the insurance broker. The more severe the injury, the more likely the potential for a civil suit. This was the situation in last month’s decision in Holm v. Purdy, New Jersey Supreme Court No. A-39-21 (Dec. 13, 2022). Brokers will be interested in this case because it is a case of first impression and will change procedures with respect to those who work with members of an LLC.
The case arose from the death of member of an LLC. As many know, an LLC must elect to obtain coverage for its members. Otherwise, there is no workers’ compensation coverage for the members of the LLC. The employees of an LLC, of course, are covered under workers’ compensation.
Holmdel Nurseries LLC had two members, Robert and Walter Friedauer, brothers in the business. Robert’s sons, Michael and Christopher, became full-time employees in the business after college.
When workers’ compensation coverage first became available in New Jersey for members of an LLC, Holmdel Nurseries elected to obtain coverage for Robert and Walter. Sometime later, the LLC decided against renewal of coverage due to the cost of workers’ compensation insurance.
For many years, the brothers retained Daniel Purdy as the broker for the LLC and for themselves personally. When the LLC decided against maintaining workers’ compensation coverage for themselves as members, the policy stated, “Workers’ Compensation Members Excluded.”
In the Spring of 2012, Michael Friedauer and Christopher Friedauer purchased Walter Friedauer’s 50% interest in Holmdel Nurseries. The sons were no longer employees in the business but now members of the LLC. On July 12, 2012, a company meeting took place. Purdy said he learned for the first time that Michael and Christopher were no longer employees and had become members of the LLC. He admitted that he did not tell the sons that they were no longer covered under workers’ compensation by changing status from employees to members. Nor did he tell the brothers that the LLC could elect to purchase workers’ compensation insurance for them.
On February 15, 2015, tragedy struck. Michael Friedauer encountered his brother at the nursery. He was covered in snow and appeared not to be himself. Christopher said he had fallen and hit his head. Christopher told his brother than he fell so hard that he saw stars. Michael later that day looked for his brother and found him sitting dead in a truck on work premises. Christopher’s wife filed a dependency claim petition on her behalf and on behalf of her two children asserting that her husband’s death arose from work. The workers’ compensation carrier denied coverage as the LLC had not elected to provide coverage for the members.
A civil suit was filed by Christopher Friedauer’s widow against the broker Purdy asserting an act of professional negligence. Robert and Michael Friedauer asserted that they did not know that they were not covered as members for workers’ compensation purposes and said that they would have elected coverage had they known it was available.
The trial court ruled against the widow and held that the broker had no duty to inform members of their right to elect workers’ compensation coverage. The Appellate Division reversed and the Supreme Court took certification.
The starting point for the Supreme Court was an analysis of N.J.S.A. 34:15-36:
Notwithstanding any other provision of law to the contrary, no insurer or insurance producer . . . shall be liable in an action for damages on account of the failure of a . . . limited liability company . . . to elect to obtain workers’ compensation coverage for a . . . limited liability company’s members . . . unless the insurer or insurance producer causes damage by a willful, wanton or grossly negligent act of commission or omission. . .
The Supreme agreed with the conclusion of the Appellate Division and held: “In accordance with N.J.S.A. 34:15-36, we hold 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 can 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’s dependents, the broker’s duty extends not only to the LLC, but also to LLC members eligible for workers’ compensation coverage under N.J.S.A. 34:15-36.”
The Supreme Court remanded the matter to the trial court to determine whether the defendant ‘caused damage by a willful, wanton, or grossly negligent act of commission or omission.’
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