What is the duty of an insurance broker in New Jersey to members of a limited liability corporation (LLC) when it comes to workers’ compensation coverage?
The New Jersey Supreme Court this week ruled that a broker has a “non-waivable” duty to tell LLC members that workers’ compensation coverage is available to them but the company must elect to include LLC members when the workers’ compensation policy is purchased or renewed.
At the same time, under New Jersey law, a broker is not liable for damages for breach of that duty to inform the LLC members unless the broker’s failure to inform was “willful, wanton or grossly negligent.”
“In this case, and in other cases premised on an alleged breach of an insurance broker’s duty to provide notice of the availability of workers’ compensation insurance for LLC members, a plaintiff must prove that the damage was caused by a willful, wanton, or grossly negligent act of commission or omission by the broker,” the high court ruled.
The company in the case before the court was a small company with only three LLC members. In such a case, the court said the broker must inform each LLC member directly. The court declined to say whether an insurance broker must provide direct notice to all LLC members in cases with numerous LLC members; rather it only suggested that in such larger firms, notice to the LLC’s managing member or other designated officer may satisfy the broker’s duty.
The high court disagreed with both the trial court and the appeals court in part. It sent the case back to the trial court to weigh the “willful, wanton or grossly negligent” standard in the case of the long-time broker for a nursery company who was sued after an LLC member died from a head injury that apparently happened on the job.
The case involves a New Jersey law that allows a member of an LLC who actively performs services on behalf of the LLC to be considered an employee for purposes of qualifying for workers’ compensation insurance if the LLC elects to obtain coverage for its LLC members when it purchases or renews its workers’ compensation policy.
The case developed after two employees, who were also sons of the owners of Holmdel Nurseries, bought shares and became LLC members and thus were no longer considered employees. The company, using the same broker, had in prior years (2013 to 2015) declined to buy workers’ compensation for its LLC members.
At the next meeting to discuss their insurance, Farm Family insurance broker Daniel M. Purdy did not tell the sons that because they were now LLC members rather than employees, they were no longer covered by the company’s workers’ compensation insurance. The broker also did not tell them the LLC could elect to purchase workers’ compensation that would cover them in case of a work-related accident.
The father/owner testified that following that meeting, he had “no reason to believe” that the sons were not covered by the company’s workers’ compensation policy. But the policy Purdy secured excluded the LLC members, as had been the case in recent years.
According to Purdy, all three LLC members of Holmdel Nurseries knew that they were excluded from workers’ compensation coverage and were satisfied “because they were saving premium dollars.”
On February 15, 2015, one of the sons, now an LLC member, told the other that while he was trying to get his truck running, he had slipped and fallen, hitting his head “so hard I saw stars.” Later that day, he died.
Shortly thereafter the insurance broker filed a workers’ compensation claim for death benefits on behalf of his wife and her two minor children, although the broker testified that he had no reason to expect that the claim would be paid because the LLC members had not opted for coverage.
His wife brought an action against Purdy, alleging that he failed to provide to the LLC the notice mandated by law and that her husband was unaware that he no longer had workers’ compensation coverage in his new role as an LLC member. She alleged that as a result of Purdy’s negligence and breach of fiduciary duty, the dependents were deprived of a workers’ compensation death benefit to which they would have been entitled had he been covered at the time of his death.
The trial court ruled that an LLC’s insurance broker has no duty to inform individual LLC members of their right to elect workers’ compensation coverage. The appeals court went in the other direction and held that an insurance broker has a non-waivable duty to advise new members of an LLC that workers’ compensation coverage is available to them. But the appeals court did not require the plaintiff to prove that the broker committed a “willful, wanton or grossly negligent act of commission or omission” in order to recover damages.
The court added that the Department of Banking and Insurance “may decide to adopt regulations” providing specific guidance to insurers and insurance producers regarding the notice requirement to LLCs.
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