Legal Question in Insurance Law in California

Workers Comp Insurer's Duty to Notify Insured of Corporate Exemption

Corporation is insured by WC Insurer. Corp changes two employees to officers in order to exempt them from coverage and sends notification to Insurer. Insurer ignores notification for three months while collecting premiums (in advance). After Corp makes a stink, insurer finally replies that Corp is an open corp and therefore officers cannot be exempt. Corp immediately changes to a closed corp and refuses to pay balance due. Corp claims that Insurer had a duty to notify them immediatly that they were not exempt and acted in bad faith by delaying. Corp claims it is not the law and is just an internal polciy of Insurer. Insurer claims it is the law and it has no duty to keep insured apprised of the law. Who is correct?


Asked on 10/13/06, 6:18 pm

2 Answers from Attorneys
Steven Murray Steven W. Murray, APC

Re: Workers Comp Insurer's Duty to Notify Insured of Corporate Exemption

For officers to be exempted from the scope of the wc laws, they must be the only shareholders of the private corporation they work for. (Lab. Code 3351(c).) If these two are the only shareholders, the insured is right. If there are other shareholders, the insurer is right. The insured should have asked someone who knew this area before it did this; there may have been other means to accomplish the objective.

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Answered on 10/20/06, 1:05 pm
Carl Starrett Law Offices of Carl H. Starrett II

Re: Workers Comp Insurer's Duty to Notify Insured of Corporate Exemption

It sounds like there is plenty of confusion on both sides of the equation here.

First of all, you are referring to a "close" corporation, not closed. A close corporation is normally a public corporation in which all of the voting stock is held by a few shareholders, for example, management or family members. It is usally not available for sale to the public. I close corporation can usually operate more informally than one that is not close.

There is no distinction between the two for the purposes of workers' comp exemptions. However, simply making someone an officer of a corporation does NOT exempt them from workers comp. You must be a shareholder AND either an officer or director to be exempt from workers' comp. If there was no ownership interest by the officer, then they are not exempt.

So it sounds like the corporation and the insurer are both wrong in some respects.

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Answered on 10/19/06, 4:59 pm


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