Attention, Contractors! That Subcontractor You Are Thinking of Using Might Cost You Much More Than You Anticipate

By Linda L. Wilson, Esq.*

Contractors working in Delaware are likely aware that, if they use an independent contractor or subcontractor who does not have workers’ compensation insurance, they could be “on the hook” for workers’ compensation claims of the independent contractor/subcontractor or its employees. Contractors are likely also aware that the law provides a “safe harbor” from this liability. Pursuant to 19 Del. C. § 2311(a)(5), a contractor will not be deemed to insure workers’ compensation claims of its independent contractor/subcontractor or the employees of its independent contractor/subcontractor if the contractor obtains from the independent contractor/subcontractor and retains for three years from the date of the contract “a certification of insurance in force under this chapter.”

The Delaware Supreme Court, in Cordero v. Gulfstream Development Corp., 56 A.3d 1030 (Del. 2012), discusses the liability and protection found in § 2311. In Cordero, a sub-subcontractor provided a subcontractor with a certification of workers’ compensation insurance. However, by the time the work injury occurred, there was no policy in effect because it had been cancelled 21 days earlier. The claimant in Cordero sought to have his claim insured by the subcontractor and general contractor, arguing that § 2311 imposes an absolute obligation on contractors to insure the workers’ compensation claims of their subcontractors’ employees. The court disagreed, holding that a certification of insurance is “in force” if it is valid on its face at the time it is furnished to the contractor.

The Cordero court also discussed narrow circumstances where heightened scrutiny by the contractor might be required pursuant to an implied obligation of good faith. In Cordero, the subcontractor and general contractor avoided the financial responsibility of being deemed to insure the workers’ compensation claim because the subcontractor complied with the safe harbor provisions of § 2311(a)(5), had obtained/retained a certification of insurance that was valid on its face, and the facts of the case did not trigger an implied obligation for heightened scrutiny.

In Gregory S. Otter v. Green-Light Solutions, LLC., (Del. IAB) Hearing Nos. 1385184, 1390163, and 1392097 (June 3, 2013), the general contractor did not have a similarly good result. Despite taking steps like those taken by the subcontractor in Cordero to access the safe harbor protection of § 2311(a)(5), and despite no finding by the Board of facts that would trigger an obligation for heightened scrutiny, the general contractor in Otter was still held financially responsible for the workers’ compensation claim of its subcontractor’s employee.

The facts and procedural posture of Otter are somewhat complex. The claimant (Otter) was injured on July 3, 2012, while working for Green-Light Solutions, Inc. (Green-Light). At the time of the injury, Green-Light was a subcontractor for Neighborhood House, Inc. and had workers’ compensation insurance through New Jersey Casualty Insurance Company (NJ Casualty). A certification of insurance “that purported to show valid workers’ compensation coverage” was provided to Neighborhood House.

Upon receiving notice of the July 3, 2012, claim, NJ Casualty disputed coverage. A hearing on the coverage issue was held on October 18, 2012. After examining the insurance policy and hearing representations about where the claimant worked, the Board determined that the NJ Casualty policy did not cover Otter’s claim and dismissed NJ Casualty from the case.

Otter then filed petitions against Green-Light, East Wind Enterprises, LLC (East Wind) and Neighborhood House. He alleged that he was employed by either Green-Light or East Wind at the time of his injury and that Neighborhood House was responsible for insuring his claim because it was the general contractor on the job. The petitions were heard on April 26, 2013, and it was in this decision that the Board found Neighborhood House financially responsible for insuring Otter’s claim. The Board arrived at this decision because it determined that Neighborhood House “failed to perform the due diligence required by Section 2311.”

Although the Board in Otter discusses the Cordero decision, it appears that the Board in Otter imposed a greater burden on Neighborhood House than is required by § 2311, as interpreted by the court in Cordero. In Otter, a certification of insurance “that purported to show valid workers’ compensation coverage” was provided to Neighborhood House. There is no finding that the certification was not valid on its face. Also, there is no finding that Neighborhood House had knowledge of a problem with coverage, which the court in Cordero suggested would be sufficient to trigger heightened scrutiny. Despite this, instead of simply looking to see if Neighborhood House obtained and retained a certification of insurance valid on its face, the Board looked to see if Neighborhood House verified actual coverage. Holding that it failed “to obtain a COI valid for coverage in Delaware,” it held Neighborhood House financially liable for the claim.

In Otter, the Board focused on the fact that there was no actual coverage. It determined this by reviewing the actual policy. However, § 2311 does not require a contractor to obtain and interpret the actual policy or to actually confirm coverage. Rather, the contractor is only obligated to obtain a certification of insurance that is valid on its face.

The Otter decision is problematic. Contractors may justifiably rely on § 2311 and Cordero and then be hit with the higher expectations of the Board, as demonstrated by Otter. If this happens, a contractor could certainly appeal. However, litigation is expensive. A less costly and more immediate way to address this concern is to educate contractors about this issue. Steps they might take to avoid this somewhat hidden and unpredictable liability may possibly be to avoid contracting with subcontractors who have insurance through NJ Casualty (which is also the carrier on another case currently before the Board) and the Pennsylvania State Workers’ Insurance Fund (see Emily Estevam v. Silva, (Del. IAB) Hearing No. 1342877 (Jan. 7, 2010). Another step might be to refuse to contract with companies that are not principally located in Delaware. A representative of Neighborhood House testified that they now call the insurance agent to verify coverage. However, based on the facts of a case currently before the Board, it is not clear that such action would be sufficient.

The Board’s decision in Otter appears to have started a slippery slope situation that has taken from contractors the guidance of Cordero and replaced it with uncertainty and unpredictability. Until this is resolved through additional litigation or legislative action, contractors should be aware that the Board may require more than what § 2311 and the court in Cordero indicate, although what that may be is unclear.

*Linda is a shareholder in our Wilmington, Delaware office. She can be reached at 302.552.4327 or llwilson@mdwcg.com.

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_{Defense Digest, Vol. 22, No. 3, September 2016. Defense Digest is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2016 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}