1. Subcontractors & Other Myths GL, WC w/ Some State Examples
04/10/2014
Subcontractors & Other Myths
GL, WC w/ Some State Examples
2018 Annual Regional Seminar
Marriott Spring Hill Suites
San Diego, CA
September 12 – 14, 2018
Presented by:
Richard Pope, Director, Premium Audit
Union Standard Insurance Group, a Berkley Company

2. Webster’s Definition of a Subcontractor
04/10/2014
Webster’s Definition of a Subcontractor
From Webster’s Dictionary
One who takes a portion of a contract,
as for work,
from the principal contractor!
How Simple is that?
Pretty Simple… Right?
Unfortunately, it’s not that simple.

3. GL Rule for Subcontractor Exposures
04/10/2014
GL Rule for Subcontractor Exposures
Insured versus Uninsured – Where is this addressed?
In the basic manual under classifications for & 91591
where each states:
from the Standard ISO Manual
“This classification applies to that portion of the operations performed
by adequately insured subcontractors of the insured. Operations performed
by subcontractors without adequate insurance shall be classified and rated
under the specific classification description for each operation.
Determination of the adequacy of insurance shall be made in
accordance with criteria established by the company prior to policy
inception.”
end of ISO Manual citing
No insurance always means classify to appropriate payroll classification.
Underinsured is defined by the insurance carrier.
Usually a set amount or the insured’s limits, whichever are less.
It better be an endorsement.

5. Payroll versus Total Cost!!
04/10/2014
Payroll versus Total Cost!!
Standard ISO Basic General Liability Underwriting Manual
Rule 24 Basis of Premium
E. Payroll
Determination of how payroll is determined for an uninsured/underinsured subcontractor is generally a carrier rule.
Most carriers will allow payroll if it can be identified in the records. Some carriers may allow a specific percentage if materials were provided. Others may allow a deduction if profit for the sub is clearly identified in the contract while others may require that the entire amount of payment to the subcontractor be considered payroll remuneration.
Ideally, this would reflect total payments to the sub less profit less materials which would equal the wages paid to the subcontractor’s employees.

6. Payroll versus Total Cost!! (cont.)
04/10/2014
Payroll versus Total Cost!! (cont.)
Standard ISO Basic General Liability Underwriting Manual
Rule 24 Basis of Premium
F. Total Cost
The total cost of all work let or sublet in connection with each specific project including:
The cost of all labor, materials & equipment furnished or delivered for use in the execution of the work, however, do not include the cost of finished equipment installed but not furnished by the subcontractor if the subcontractor does no other work on or in connection with such equipment and
All fees, bonuses or commissions made, paid or due.

7. WC Rule for Subcontractor Exposures
04/10/2014
WC Rule for Subcontractor Exposures
NCCI Basic Manual Rule 2
Premium Basis & Payroll Allocation
H. Subcontractors
(Additional Rules: AZ, ME) (Exceptions: CO, NC, MO, TX, UT )
In those states where workers compensation laws provide that a contractor is responsible for the payment of compensation benefits to employees of its uninsured subcontractors, the contractor must furnish satisfactory evidence that the subcontractor has workers compensation insurance in force covering the work performed for the contractor. The following documents may be used to provide satisfactory evidence:
Certificate of insurance for the subcontractor's workers compensation policy
Certificate of exemption
Copy of the subcontractor's workers compensation policy
For each subcontractor not providing such evidence of workers compensation insurance, additional premium must be charged on the contractor's policy for the uninsured subcontractor's employees according to Subcontractor Table 1 and 2 below.

8. WC Rule for Subcontractor Exposures
(Arizona Exception) Add the following to Rule 2-H:
H. Subcontractors
This information addresses the conditions necessary for the existence of an employer-employee or independent contractor relationship for purposes of establishing when such workers are to be included or excluded under the principal contractor's workers compensation policy. ARS § (B) and (C) are shown below to provide this clarification.
(B) When an employer procures work to be done for him by a contractor over whose work he retains supervision or control, and such work is a part or process in the trade or business of the employer, then such contractor and the persons employed by him, and his subcontractor and persons employed by the subcontractor, are, within the meaning of this section, employees of the original employer.
(C) A person engaged in work for another, and who while so engaged is independent of the employer in the execution of the work and not subject to the rule or control of the person for whom the work is done, but is engaged only in the performance of a definite job or piece of work, and is subordinate to the employer only in effecting a result in accordance with the employer's design, is an independent contractor, and an employer within the meaning of this section.

9. WC Rule for Subcontractor Exposures
(Colorado Rule) Change Rule 2-H as follows:
H. Subcontractors
The contractor must provide satisfactory evidence that the subcontractor has workers compensation insurance in force covering the work performed for the contractor. If evidence is not provided, additional premium is charged on the contractor's policy as follows:
Include payroll for each contractor, subcontractor, lessee and sublessee up to an annual maximum of $5,200 each.
Include the entire payroll of all employees of such contractors, subcontractors, lessees and sub-lessees.
If the principal or general contractor cannot provide an actual record of the payroll of the employees, the entire contract price of the subcontracted piecework is considered the payroll.
The above rule does not apply to contracts for piecework in manufacturing plants or to messengers, drivers, or chauffeurs of automobiles. For piecework, the entire amount paid must be included as payroll. For drivers or chauffeurs of hired vehicles, refer to the rules of this manual under Standard Exceptions.

10. WC Rule for Subcontractor Exposures
(Utah Rule) Change Rule 2-H-2 as follows
H. Subcontractors
In those states where workers compensation laws provide that a contractor is responsible for the payment of compensation benefits to employees of its uninsured subcontractors, the contractor must furnish satisfactory evidence that the subcontractor has workers compensation insurance in force covering the work performed for the contractor. The following documents may be used to provide satisfactory evidence:
Certificate of insurance for the subcontractor's workers compensation policy
Certificate of exemption
Copy of the subcontractor's workers compensation policy
If the contractor does not supply the payroll records of its subcontractor, 50% of the subcontract price of the work performed during the policy period by the subcontractor must be established as the payroll of the subcontractor's employees. The additional premium must be charged on that amount as payroll.

11. (Exceptions: LA, OR, MN, RI)
04/10/2014
Subcontractor Table 1
(Exceptions: FL, TN)
If the contractor has not furnished evidence of workers compensation insurance and . . .
Then to calculate the additional premium . . .
Furnishes complete payroll records of the subcontractor’s employees . . .
Use the payroll detailed in the records
Does not furnish complete payroll records and the subcontract price does not reflect a definite payroll amount . . .
Use the full subcontract price of the work performed during the policy period by the subcontractor as payroll
Does not furnish complete payroll records, but documentation of a specific job discloses that a definite amount of the subcontract price represents payroll . . .
Use the payroll amount indicated by the documentation as the payroll, subject to the minimums in Subcontractor Table 2 below
Subcontractor Table 2
(Exceptions: FL, TN)
If the job involves:
Then the minimum to calculate additional premium is:
Mobile equipment with operators (such as but not limited to earth movers, graders, bulldozers, or log skidders)
Not less than 33 1/3% of the subcontract price
Labor and material
Not less than 50% of the subcontract price
Labor only
Not less than 90% of the subcontract price
Piecework
Not less than 100% of the subcontract price (The entire amount paid to pieceworkers must be the payroll.)
3. Vehicles with drivers, chauffeurs, messengers, or helpers entitled to benefits under workers compensation insurance law may be engaged under verbal or written contract. The amount used to calculate the premium is determined in the following manner:
Subcontractor Table 3
(Exceptions: LA, OR, MN, RI)
If the owner of such vehicles has not furnished evidence of workers compensation insurance and . . .
Then . . .
Payroll can be obtained
The total payroll of these drivers must be included as payroll of the insured employer that contracted for the vehicles.
Payroll cannot be obtained or the driver is an owner-operator and does not receive a set payroll
1/3 of the total contract price for the vehicles must be included as payroll of the drivers.
The contract price does not include the cost of fuel, maintenance, or other services provided to the owner or the owner-operator of a vehicle under contract
The value of these goods and services must be added to the contract price before determining the 1/3 amount.
4. In all cases, the payroll determined for subcontractors is assigned to the classification that would have applied if the individuals had been employees of the contractor.
5. In all cases, if an experience modification has been established for the contractor, this experience modification must be applied to the premium developed for the uninsured subcontractor.

12. 04/10/2014
From Attorney Mark White’s Wesbite
Independent Contractors
Some employers try to avoid carrying workers' comp insurance by calling their employees "independent contractors". If you were hurt on
the job but denied benefits because you were supposedly an "independent contractor", talk to a lawyer before you give up on your claim.
The reality is that in many cases, these employers are just scam artists -- they are cheating their employees out of legally-required
benefits, and they are cheating the government by not paying their taxes. There are basically three ways these employers try to avoid
their responsibilities:
Some will require their employees to sign a written contract that says the employee is an independent contractor and not entitled to any
benefits or tax withholding.
Or, some will have their employees sign a waiver or other document that claims to waive the employee's right to workers' comp. 
Especially in the construction industry, some will require the employee to get a “Certificate of Non-Coverage” from the Workers' Compensation Commission. 
The good news is that the law doesn't recognize any of these schemes. It doesn't matter if you signed a contract or a waiver, and it
doesn't matter if you obtained a Certificate of Non-Coverage -- if you meet the law's definition of an "employee", you are entitled to
benefits regardless of what the employer calls you. 
Posted by Mark White
(Used with permission of Mark White)

13. 04/10/2014
Per a Prominent Arkansas Defense Attorney Concerning the Arkansas Certificate of Non-Coverage
I always warn people that they are not worth the paper written on it
I have lost cases where the Claimant knew what he was signing and held
Himself out as an Independent Contractor. It does not matter if the person
executing it says they understand they are a sub, at the end of the day – if
they can come in and prove they were an "employee" rather than an
independent contractor, then the form is no good. It all is determined on a
case by case basis, depending on the "Franklin" factors from case law.”
Remember an employee cannot “sign away” his or her right to workers’
compensation insurance.

14. Some of the Franklin Factors
04/10/2014
Some of the Franklin Factors
There are numerous factors which may be considered in determining
whether an injured person is an employee or an independent
contractor for purposes of workers' compensation coverage.
Obviously, the relative weight to be given the various factors must be
determined by the Commission. Some of the factors which might be
considered, depending on the facts of a given case, are:
The right to control the means and the method by which the work is done;
The right to set hours as opposed to deadlines;
The right to terminate the employment without liability;
The method of payment, whether by time, job, piece or other unit of measurement;
The furnishing or the obligation to furnish the necessary tools, equipment and materials;
Whether the person employed is engaged in a distinct occupation or business;
The skill required in a particular occupation;
Whether the employer is in business;
Whether the work is an integral part of the regular business of the employer; and
The length of time the person is working for “the Contractor”.
These are not all the factors which may conceivably be considered in
a given case, and it may not be necessary in some cases for the
Commission to consider all of these factors. Traditionally, the "right to
control" test has been sufficient to decide most of the cases, although
many variations of “control” have probably been squeezed into that
test.

15. From California Department of Industrial Relations
04/10/2014
From California Department of Industrial Relations
Contractor.htmIndependent contractor versus employee
Not all workers are employees as they may be volunteers or independent contractors. Employers oftentimes improperly classify their employees as independent contractors so that they, the employer, do not have to pay payroll taxes, the minimum wage or overtime, comply with other wage and hour law requirements such as providing meal periods and rest breaks, or reimburse their workers for business expenses incurred in performing their jobs. Additionally, employers do not have to cover independent contractors under workers' compensation insurance, and are not liable for payments under unemployment insurance, disability insurance, or social security.
The state agencies most involved with the determination of independent contractor status are the Employment Development Department (EDD), which is concerned with employment-related taxes, and the Division of Labor Standards Enforcement (DLSE), which is concerned with whether the wage, hour and workers' compensation insurance laws apply. There are other agencies, such as the Franchise Tax Board (FTB), Division of Workers' Compensation (DWC), and the Contractors State Licensing Board (CSLB), that also have regulations or requirements concerning independent contractors. Since different laws may be involved in a particular situation such as a termination of employment, it is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law. Because the potential liabilities and penalties are significant if an individual is treated as an independent contractor and later found to be an employee, each working relationship should be thoroughly researched and analyzed before it is established.
There is a rebuttable presumption that where a worker performs services that require a license pursuant to Business and Professions Code Section 7000, et seq., or performs services for a person who is required to obtain such a license, the worker is an employee and not an independent contractor. Labor Code Section

16. From California Department of Industrial Relations
(continued)
Q. How do I know if I am an employee or an independent contractor?
A. There is no set definition of the term "independent contractor" and as such, one must look to the interpretations of the courts and enforcement agencies to decide if in a particular situation a worker is an employee or independent contractor. In handling a matter where employment status is an issue, that is, employee or independent contractor, DLSE starts with the presumption that the worker is an employee. Labor Code Section This is a rebuttable presumption however, and the actual determination of whether a worker is an employee or independent contractor depends upon a number of factors, all of which must be considered, and none of which is controlling by itself. Consequently, it is necessary to closely examine the facts of each service relationship and then apply the law to those facts. For most matters before the Division of Labor Standards Enforcement (DLSE), depending on the remedial nature of the legislation at issue, this means applying the "multi-factor" or the "economic realities" test adopted by the California Supreme Court in the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. In applying the economic realities test, the most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. Additional factors that may be considered depending on the issue involved are:
1) Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
2) Whether or not the work is a part of the regular business of the principal or alleged employer;
3) Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
4) The alleged employee's investment in the equipment or materials required by his or her task or his or her employment of helpers;
5) Whether the service rendered requires a special skill;
6) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
7) The alleged employee's opportunity for profit or loss depending on his or her managerial skill;
8) The length of time for which the services are to be performed;
9) The degree of permanence of the working relationship;
10) The method of payment, whether by time or by the job; and
11) Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
Even where there is an absence of control over work details, an employer-employee relationship will be found if (1) the principal retains pervasive control over the operation as a whole, (2) the worker's duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary. (Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288)
Other points to remember in determining whether a worker is an employee or independent contractor are that the existence of a written agreement purporting to establish an independent contractor relationship is not determinative (Borello, Id.at 349), and the fact that a worker is issued a 1099 form rather than a W-2 form is also not determinative with respect to independent contractor status. (Toyota Motor Sales v. Superior Court (1990) 220 Cal.App.3d 864, 877)

17. An Actual Real Life Example
04/10/2014
An Actual Real Life Example
In this instance the carrier insures ABC LLC (general contractor) for worker’s compensation. ABC used a subcontractor, Temp Tech on their project at XYZ Apartments.  ABC provided a CNC for Temp Tech for their exclusion from WC coverage per the CNC. The carrier requested verification the subs entitlement to use the CNC form since Temp Tech was paid $69,834 for the short lived job that was performed.
The insured initially indicated that the sub had indeed brought someone on the job site with him as the work he performed was not easily done alone (verbally communicated).  The sub then also provided a CNC for the person he brought onto the job site; however, the sub subsequently denied he ever brought any employee, contract employee or subcontractor on the jobsite and stated he had provided the additional CNC in error.
Ironically, USIC also insured the sub for GL. It turns out that the sub does have contract labor exposure via payment as 1099 labor. The CNC provided by the sub to the general contractor on the worker’s compensation policy was not valid.

21. 04/10/2014
In Summary
Generally, no form or “agreement” between the employer and “contractor” can overcome a bona-fide employer/employee relationship as defined by the Franklin Factors, U S Labor Law and established legal precedents.
In most states, a worker or contract employee may not abrogate their right to workers compensation contractually.
Some states allows an employee to file a form with the state to be excluded from WC.
Arizona
Are there others?

22. What is an OCIP? Owner Controlled Insurance Program
A policy issued to cover all operations involved in a specific project owned and operated by a specific legal entity
Normally utilized by municipalities or large corporations
Usually encompasses all insurance operations including WC, GL and Umbrella

23. What does an OCIP accomplish?
Places all insurance control (coverage & cost) in the hands of the project owner
Normalizes/equalizes the expected contractor cost by taking out the insurance component of the subcontractor quote
Its primary purpose is to protect the owner by assuring/assuming insurance coverage for all contractors and minimize costs to the project owner

24. Potential Problems by not excluding:
Why is an exclusion needed for project subcontractors?
Isn’t other coverage for the project subcontractor enough?
Potential Problems by not excluding:
Policy deductibles
What if OCIP deductibles are much higher than sub’s deductible?
Who pays?
The court will determine who pays!
Products/Completed Operations Tail
Is our insured a named insured on the OCIP?
Our policy still has a duty to defend
Remember, if we allow the exclusion of our subcontractor’s OCIP exposures without an exclusionary endorsement on the policy, then we are collecting no premium at all and have unknown claims potential

25. Exclusion Procedure – GL & WC
In order to exclude exposure the specific OCIP (project and/or location) must be excluded on the policy using:
GL ISO OCIP (Wrap Up) Exclusion CG 2154 (blanket language may be used).
WC (TX WC ) specific operation exclusion
No exclusion = No reduction in premium
Why?
Subcontractor’s carrier is not a party to the OCIP Policy and has no knowledge of the terms and conditions of the policy

26. Research, validate and confirm your risk!
In Conclusion:
Trust your insured!
Trust your agent!
BUT
Research, validate and confirm your risk!

27. 04/10/2014
Notes

28. 04/10/2014
Notes