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When you drink and drive,death is no accident, court rulesLate one night, a driver in West Virginia lost control of his vehicle and crashed into the back of a tractor trailer that was parked eight feet off the edge of the highway. The driver was not wearing a seatbelt, and the impact of the crash threw him from his vehicle. He died of multiple traumatic injuries. The driver’s blood-alcohol level was 0.15%, which was 50% higher than the state’s legal limit of 0.1%.The driver’s widow filed for $86,000 of benefits under the driver’s employer-provided accidental death and dismemberment plan, which was subject to the provisions of the federal Employee Retirement Income Security Act of 1974. The insurer that issued the AD&D policy also acted as the plan’s claims administrator. The plan paid benefits to insureds who die “due to an accident.” The plan defined “accident” as “an unexpected and sudden event which the insured does not foresee.” The plan also provided that the carrier had final authority to determine all questions of eligibility and to interpret the terms of the policy.After analyzing the incident, the insurer’s claims handler denied the claim. He said since the driver’s blood-alcohol level was 50% higher than the legal limit, his injuries were not “unexpected,” as required by the plan’s definition of an accident. The insurer’s appeals committee affirmed, finding the driver had “put himself in a position in which he should have known serious injury or death could occur.”The driver’s widow sued the insurer in state court for wrongfully denying her benefits. Under the provisions of ERISA, the case was moved to a U.S. district court, which found in favor of the widow. It said the insurer’s interpretation of the term “accident” was unreasonable and ran afoul of the clear language of the policy, the federal common law definition of accident and the goals of the employer’s AD&D plan.The insurer appealed the ruling to the 4th U.S. Circuit Court of Appeals. Citing a number of precedents, the appeals court noted that where an ERISA plan vests the administrator with discretionary authority to determine eligibility for benefits or to construe the terms of the plan, courts review an administrator’s decision for abuse of discretion. When reviewing a decision, they will not disturb any reasonable interpretation. Where the administrator has a potential conflict of interest, however, a court’s deference to the plan administrator is lessened. Since the insurer in this case also acted as the plan administrator, the appeals court said it would review the case “under this modified abuse of discretion standard.”The plan defined “accident” as “an unexpected and sudden event which the insured does not foresee.” It did not, however, define “unexpected” or “foreseeable.” The appeals court noted that because those terms, as well as “accident,” are not always susceptible to easy application, many federal courts have adopted the framework laid out in Wickman v. Northwestern National Insurance Co., 908 F.2d 1077 (1st Cir. 1990). Initially, a court asks whether an insured expected his actions to result in injury or death. If the insured did not expect an injury, the fact-finder must examine whether that expectation was reasonable, doing so from the insured’s perspective. If the fact-finder finds the evidence insufficient to accurately determine the insured’s subjective expectation, the fact-finder should undertake an objective analysis of it. This analysis should consider whether a reasonable person, with background and characteristics similar to the insured’s, would have viewed the injury as highly likely to occur as a result of the insured’s intentional conduct. The appeals court noted that in a previous case, it suggested that it would apply Wickman’s test to drunk-driving collisions. Since there was no evidence from which the deceased driver’s subjective expectation could be accurately determined, the court said it would proceed with an objective analysis.In denying benefits to the insured’s widow, the insurer said the insured’s death was not unexpected because he “put himself in a position in which he should have known serious injury or death could occur.” The widow countered that drunk-driving injuries are not “highly likely” to occur and that the insurer’s interpretation of “accident” would “frustrate the purpose of AD&D insurance.”The appeals court disagreed. It said that whether the test is one of high likelihood or reasonable foreseeability, federal courts have found with near universal accord that alcohol-related injuries and deaths are not “accidental” under insurance contracts governed by ERISA. These courts, it continued, have applied the objective foreseeability test set forth in Wickman and reasoned that since the hazards of drinking and driving are widely known and widely publicized, those who drive while intoxicated should know that such action is highly likely to result in death or bodily harm.The simple fact that drunk driving occurred did not mean there was no accident under the policy, the court said. If the insurer did not intend to cover any injury to a drunk driver, then it could have specifically excluded coverage for such injuries. Rather, the appeals court appeared to agree with the insurer’s emphasis on expectation. It said that in the case at hand, the evidence gave considerable support to the insurer’s determination that the driver’s death was not unexpected because he put himself in a position in which he should have known serious injury or death could occur.The court noted that the local sheriff’s accident report made it clear that the crash was “perfectly consistent” with the insured’s inebriated state. Most critically, the driver’s blood-alcohol concentration was 50% higher than the legal limit. According to the medical examiner’s toxicology report, the typical effects of a blood-alcohol concentration of 0.15% include “blurred vision, loss of motor coordination and impaired judgment.”Every state criminalizes drunk-driving, the appeals court noted, with West Virginia’s statutes imposing increasingly stiff charges and jail sentences to repeat offenders. These graduated penalties, the court said, reflect a recognition of the seriousness of drunk driving, which is far beyond that of most other driving infractions.The court said that even if the insured did not intend to crash his car into a parked semi-truck, that lack of intention alone does not render a result “accidental.” To put it simply, the court said, unjustifiable optimism about one’s odds (or failure even to calculate them) does not relieve conduct such as the insured’s of foreseeable results.The court said the insurer’s denial of benefits was reasonable and that to characterize harm flowing from the insured’s behavior as merely accidental diminishes the personal responsibility that state laws and the rules of the road require.The widow also argued that the insurer’s interpretation of “accident” was contrary to the goals of the plan because it would frustrate the purpose of AD&D insurance. The appeals court disagreed: “While we are not unsympathetic to the fact that the claimant in this case may be denied recovery, an ERISA fiduciary must also provide for future applicants. Indeed, where a plan administrator denies an unmeritorious claim, the financial health of pooled plan assets is protected, not frustrated…. We cannot characterize as incompatible with the Plan, therefore, (the insurer’s) determination that the Plan’s best interests are served by limiting the Plan’s definition of ‘accident’ to ‘unexpected’ events that are not highly likely to occur. Nor can we say that it is unreasonable for plan administrators to acknowledge the difference between ultra-hazardous drunk-driving deaths and other tragedies which do not ‘involve such a significant assumption of a known risk by the insured.’”The court emphasized the boundaries of this holding. “We do not suggest that plan administrators can routinely deny coverage to insureds who engage in purely negligent conduct or, for example, to anyone that speeds. In fact, accident insurance is often purchased to cover negligence at its most typical: Insureds seek ‘protection from their own miscalculations and misjudgments (Wickman, 908 F.2d at 1088 (citations omitted).’”The federal district court that previously ruled in favor of the widow compared those who drive drunk to those who apply lipstick, fiddle with the radio dial or restrain children while driving. But the appeals court said such comparisons are inapt. “While these actions are hardly commendable driving habits, they do not generally rise to the level of crimes,” the circuit court said. “Indeed, even though acts like speeding and (in some jurisdictions) driving while talking on a cellular phone are illegal, none compare to driving while drunk,” which the court observed has been widely known and widely publicized to be both illegal and highly dangerous.The court concluded the insured put himself in a position in which he should have known serious injury or death could occur; therefore, his death was not “unexpected.” Therefore, it was no “accident.” Accordingly, the lower court’s decision was reversed.Eckelberry v. Reliastar Life Insurance Co., No. 06-1020 (4th Cir. 11/17/2006) 2006.C04.0003094 (www.versuslaw.com)Failure to document insurance statusof workers leads to audit premium(Those readers who deal with small contractors who use subcontractors will find the issues in this Tennessee case familiar. Readers should keep in mind, however, that the outcome of such a case might be different in another state.)A general contractor hired a subcontractor to install roofs in a subdivision. Before allowing him to work, however, he required the roofer to provide evidence of insurance. The roofer, who had been refused coverage by two insurance companies in the previous 60 days, contacted an insurance agent in July 2001. Based on the roofer’s answers to a series of questions, the agent filled out an application. The signed application stated that the roofer had no employees, did not use subcontractors and did not sublet work without obtaining certificates of insurance. The roofer paid the $750 minimum premium. The agent forwarded the application to Tennessee’s assigned risk program. A few weeks later, the roofer received a policy from an issuing carrier.The policy explained that the $750 premium was an estimate and that the final premium would be determined after the policy expired. That premium would be based on “the actual, not the estimated, premium basis and the proper classification and rates that lawfully apply to the business and work covered by this policy.” The policy further explained that the most common basis is remuneration paid to officers and employees engaged in work covered by the policy, and also to “all other persons engaged in work that could make us liable under Part One (Workers Compensation Insurance) of this policy.”The policy went on to explain that in the absence of payroll records, “the contract price for the services and materials furnished by such ‘other persons’ can be used as the premium basis.” It added that this section “will not apply if you give us proof that the employers of these persons lawfully secured their workers compensation obligation.” The policy set out the insurer’s right to examine and audit all the records relating to the policy in order to determine the final premium. The policy’s premium rate was $32.77 for each $100 of remuneration.On July 31, 2001, the insurer sent the roofer a questionnaire about the roofer’s use of any subcontractors. The letter underscored the aforementioned policy provisions: “Please note that the payroll for uninsured subcontractors will be included in your premium basis at audit unless you can provide evidence that the subcontractor is not subject to the state workers compensation statutes and that all appropriate forms have been completed and filed with the state and with our office.”On Nov. 20, the insurer informed the roofer that his policy had been cancelled because “requested underwriting information has not been provided.” The roofer apparently had failed to include any specific information about subcontractors in the questionnaire that he returned.Following a subsequent audit of the roofer’s records, the insurer assessed him for $14,790 in additional premium. The roofer refused to pay, and the insurer filed a collection suit. The matter went to trial three years later. Among those testifying were the auditor who had examined the roofer’s records and a second roofer who worked for the insured.The auditor testified that his examination showed that the insured contractor had two employees during the audit period. They had not signed workers compensation waivers used by subcontractors and had been paid $10,000.The aforementioned second roofer had been paid $40,488. He had filled out an I-18 form, but the amount he had been paid suggested to the auditor that the second roofer possibly was using some of it to pay other workers. This turned out to be true. (The title of the I-18 form is “Election of Non-Coverage by Sub-Contractor.” It must be signed by both the subcontractor and the general contractor. Although the form provides a mechanism whereby a subcontractor can waive his right to be covered by the state’s workers compensation law, it specifies that the subcontractor cannot waive the rights of his employees.)The second roofer explained that he had a continuing business relationship with the insured roofer. Rather than pay him an hourly wage, the insured paid him for each square of roofing he completed. The second roofer had helpers, whom he paid per completed square as well. Under questioning, the second roofer identified four persons who worked for him during the policy period; none had signed an I-18 form.The second roofer testified that the insured told him that he did not provide workers compensation insurance and that in his payments he did not withhold for income taxes or Social Security. The second roofer, in turn, told his helpers the same thing. He apparently did report their pay to the IRS, however. Part of the evidence introduced at the trial was five IRS 1099 forms, amounting to $84,500, on which the second roofer was named as the payer. The recipients included some of the people that the second roofer identified as his helpers on his job for the insured.When the insured was called to the stand, his testimony was consistent with that of the second roofer. His responses to questioning set out the basis for his argument that the insurer was not entitled to any additional premium from him:Q: You use laborers to do the work, the actual roofing work, correct?A: I use independent contractors.Q: And it’s your position that everyone who does work for you is a subcontractor, correct?A: Yes. Everybody that does work for me is an independent contractor.The insured was closely questioned about his involvement with the workers who actually did the roofing. He testified that he did not set their work hours, did not provide tools and did not tell them how to do their jobs. He did ask the workers to use safety equipment but did not require them to. Asked how often he visited the job site while the work was going on, he answered, “Almost never.”When the insured was shown his workers compensation insurance application, he admitted that the negative responses to the questions about the use of subcontractors and whether any work had been sublet without certificates of insurance were untrue.The trial court found that the insured’s workers were independent contractors. The court added, however, that the issue was not clear-cut. It said that it would have taken a lawsuit to confirm the status of the workers, that the carrier would have been required to defend such a suit and that the suit could have gone either way.The court observed that the insured had not taken any steps to document his laborers’ workers compensation status. Consequently, the insurer was left exposed to the risks involved in covering those workers, the court said. Accordingly, it granted the insurer a judgment for the $14,790 in additional premium, as well as prejudgment interest. The insured appealed.The appeals court explained that under the state’s workers compensation law, a principal or intermediate contractor, or a subcontractor is liable for compensation to any employee injured on the job. Furthermore, any of those parties can be held liable to the same extent as the immediate employer. Quoting other cases, the court noted that the statute’s purpose is “to protect employees of irresponsible and uninsured subcontractors by imposing ultimate liability on the presumably responsible principal contractor, who has it within his power, in choosing subcontractors, to pass upon their responsibility and insist upon appropriate compensation for their workers.”The insured’s policy stated that the final premium amount would not be determined until the end of the policy period. The court noted that the reason for this provision, which is a standard feature of workers compensation policies, is that any number of employees may be hired or terminated while the policy is in effect, thus increasing or decreasing the amount of risk to which the insurer is exposed. Thus, the insured’s payment of the minimum premium and his declaration that he had no employees did not cut off the insurer’s right to assess a retrospective premium, the court said, based on the true degree of risk it faced.The policy stated that the premium was based on remuneration to the insured’s employees and to “all other persons engaged in work that could make (the insurer) liable” under the policy. The insured contended his workers were independent contractors and that their status rendered him exempt from any responsibility to insure them. In other words, he argued that they could not trigger a liability for the insurer.But the appeals court pointed out that when an injured worker files a claim for a workplace injury, the burden of proving the worker is an independent contractor, rather than an employee, rests on the employer. Where there is any doubt as to whether the worker is an employee or an independent contractor, the doubt must be resolved in favor of the former.The appeals court said it appeared that the insured wanted to avoid the expense of buying workers compensation insurance for roofers who worked on his jobs but that the contractor for which he was working required him to purchase it. To keep his premiums as low as possible, he stated on the app that he had no employees, did not use subcontractors and did not sublet without proof of insurance. He also tried to establish informal agreements with his own subcontractors that would give the appearance of a hands-off approach. The appeals court said it did not approve of such tactics for avoiding liability under the workers compensation law because they run contrary to the law’s purpose: to see to it that injured workers receive benefits.If any of the workers had been injured on the job, the appeals court said, they could have submitted a claim for workers compensation that the insured would have had to answer as the arguable employer or statutory employer of those workers.The court noted there were several ways in which the insured could have reduced his premiums. The policy itself allowed him to avoid paying a premium for subcontractors’ payroll or payment for services to workers “if you give us proof that the employers of these persons lawfully secured their workers compensation obligation.” He could have required that his subcontractors carry workers compensation insurance. He also could have asked everyone who worked for him or his subcontractors to execute I-18 forms, thereby strengthening the argument that no workers compensation insurance was required of them.Since he took none of these actions, the court said, the insurer was obligated to defend any claim against the insured arising from injury to those working for him or his subcontractors and pay benefits for those injuries, if such was required. The insurer based its audit premium on the potential magnitude of that obligation, which the appeals court found reasonable. It upheld the trial court’s ruling in favor of the insurer.CNA v. King, No. M2004-02911-COA-R3-CV (Tenn.App. 09/28/2006) 2006.TN.0001363 (www.versuslaw.com)

Don Renau is a retired agent and practicing attorney in Louisville, Ky. As an attorney, he consults on a variety of issues, including business formation and estate planning, for agencies and businesses in Kentucky. He can be reached at [email protected] or, by fax, at (502) 805-0702.

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