Sole Owner and Member as an Employee

 

July 1, 2013

The insured under a commercial garage liability policy brought an action against the insurer, alleging bad faith refusal to settle the underlying personal injury action. This case is Gear Automotive v. Acceptance Indemnity Insurance Company, 709 F.3d 1259 (2013). 

Robert Gear is the sole owner and member of Gear Automotive, L.L.C., an automobile dealership. In 2008, Gear Automotive hired Darrell Gear as an employee. Gear Automotive did not purchase workers compensation insurance. 

In 2008, unidentified persons vandalized and stole items from Gear Automotive. In order to protect the business from additional thefts, Robert and Darrell devised a plan in which Darrell would monitor the property from the inside and Robert would monitor the outside of the property. To aid in monitoring the inside of the business, Robert hired Posner for $100. 

One night, Robert observed individuals quickly leaving the business and he chased them, but could not catch the individuals. When Robert returned to the building, he started to approach the building and an individual came running out. Posner was in pursuit of the individual and fire a gunshot. Robert was struck in the leg. Robert made a demand for personal injury damages under his garage liability policy. 

Robert alleged that he was an employee of Gear Automotive and was entitled to damage without regard to Gear Automotive's negligence since Gear had failed to procure workers compensation insurance. The insurer denied the claim. Gear sued and the court entered judgment in favor of the insurer. Gear appealed.

The Eighth Circuit Court of Appeals noted that the insurer argued that two policy exclusions barred coverage, the employer's liability exclusion and the fellow employee exclusion. The insurer said that because Robert was an employee of Gear Automotive and suffered injury while in the course of employment, the employee exclusion prevented coverage. Moreover, since both Robert and Posner were employees of Gear Automotive, the fellow employee exclusion applied because Robert was injured by Posner during the course of their employment. 

The court said that the employee exclusion requires that the injured party be an employee of the insured and that the injury arise out of and in the course of that employment. Since the policy language did not define the term “employee”, the court looked to the workers compensation law of Missouri. That act defined “employee” as “every person in the service of any employer”. Gear argued that Robert was not an employee because he was a member of Gear Automotive, L.L.C. The court said that the state workers comp law recognizes that members of limited liability companies may also operate as employees, and Robert's role within the company was a prime example of how a member may also serve in an employee capacity. 

The facts showed that Robert was the manager and controlled the day-to-day operations of the business. Moreover, Robert testified that when Gear Automotive opened, he was the only employee. When the shooting occurred, Robert was approaching the building to investigate suspicious activity and when he was shot, he was engaged in the same type of duties as Darrell, a Gear Automotive employee. Under these circumstances, the court concluded that Robert was an employee for purposes of applying the employee exclusion. 

Having concluded that Robert was an employee, the court then turned to the question of whether the injury occurred in the course of employment. The court looked again to the state workers comp law and found that “an injury arises out of the employment if it is a natural and reasonable incident thereof, and it is in the course of employment if the accident occurs within the period of employment at a place where the employee may reasonably be fulfilling the duties of employment”. 

The court found a sufficient causal connection between Robert's employment and his injury. He was shot as a direct result of his monitoring duties for Gear Automotive and he was injured on the premises at a time reasonably related to his monitoring duties. The court concluded that Robert's injury arose out of and in the course of his employment with Gear Automotive. 

Because the undisputed facts established both elements of the employee exclusion, Gear Automotive was not entitled to coverage. The ruling of the trial court was affirmed. 

Editor's Note: The U.S. Court of Appeals, Eighth Circuit, handled a question that often arises: can an owner or a member of a limited liability company also be an employee? Under the facts of this situation and the wording of the Missouri workers compensation act, the owner and member of Gear Automotive was also an employee and so, could not be covered for a personal injury claim under the garage liability policy.