In an insurance transaction, the buyer trades the uncertainty of potential losses for the certainty of an insurance premium. The insurer accepts this trade in the hope that losses will either never happen or will amount to less than the premium amount. This deal falls apart, however, if the buyer is not trading uncertainty – that is, if the buyer has had a loss at the time the insurance is to take effect.
In the spring of 2016, a Bobcat S300 skid steer loader ran over the foot of a worker at a Florida construction site. A Bobcat S300 weighs more than four tons. The record does not describe the extent of the man’s injuries, but the medical expenses alone for a crushed foot must have run into six figures.
The worker’s employer, a subcontractor on the job, notified its insurance agent of the injury so that a Workers’ Compensation claim could be submitted. The subcontractor did not know that it was working without Workers’ Compensation coverage. The agent had “inquired” a month earlier about obtaining the coverage but had not bound it with any insurer.
Once the agent received the loss report, things got finalized in a hurry. He submitted an application to an insurer and had coverage bound effective the same day. He did so without informing the insurer of the injury that had occurred that morning. The claim was submitted later.
The insurer paid the worker’s medical bills and lost wages until it found out when the loss occurred. It then sought contribution from the general contractor for the job. Under Florida law, a general contractor is responsible for providing Workers’ Compensation benefits to employees of uninsured subcontractors.
The GC’s insurer sued, arguing that the subcontractor’s policy took effect at 12:01 am on the day of the injury. This was hours before the accident occurred, and the insurer argued that responsibility for the claim lay with the sub’s insurer. A Florida Judge of Compensation Claims sided with the GC’s insurer and ordered the sub’s insurer to resume payments on the claim. The sub’s insurer appealed.
The appeals court minced no words in reversing the decision and ruling in favor of the sub’s insurer. “(O)ur cases explicitly forbid insureds from saddling insurers with known losses, as opposed to covering for the risk of loss,” the judge wrote. “Insurance is meant to cover uncertainties, not certain losses.” He further stated that “extending insurer liability to cover known losses would undermine the concept of insurance and the stability of the insurance system.”
The result was that the GC’s insurer lost its challenge and was responsible for paying the claim. It is presently unknown if that insurer will appeal. It seems likely, however, that whichever side ultimately loses will attempt to recover its payments from the insurance agent, who was not a party to this lawsuit.
The record says that the agent had made “inquiries” about obtaining Workers’ Comp coverage for the contractor, but it does not go into detail about what specifically the agent did. It is noteworthy that, faced with the prospect of an uninsured loss, the agent was able to obtain coverage within one day. One thing is clear: The insured was unaware that they were operating without coverage. The agent made a significant error by keeping that information from the insured.
In many states, an insurance agent’s obligation is to obtain the coverage the insured requests or to inform the insured in a timely manner of the inability to do so. The agent failed to perform that second duty. If he was having difficulty finding a voluntary market, he and the insured could have discussed alternatives such as placement with a residual market. As it was, the insured was in the dark when a major injury occurred. In addition to the lack of insurance for the worker’s benefits, the employer may have been subject to fines and penalties from the state Workers’ Comp bureau.
The basic function of an insurance is agent is to arrange the transaction between the insurer and insured. If that is not possible, the agent must communicate that information promptly. This agent is likely facing litigation because he failed to do that.