Friday, November 7, 2008

More on worker compensation insurance.

I’ve started questioning the worker compensation coverage I took out with my insurance company. I opted to take it out while I was applying for general liability coverage. My main reasoning was because my client said it was required in their contract. The thing is that I am the owner of my business, so I can’t technically have worker compensation on myself as far as I know. All of this is a nice big legal gray area, but I’ve done some research now and I can say that I probably do not need this coverage.

While doing some general searching on the internet I found this on the Illinois Workers Compensation Commission website FAQ:

Question: I am a sole proprietor/business partner/corporate officer/member of a limited liability company. Do I have to buy w.c. insurance?

Answer: The short answer is no, but the full answer is a bit longer.

Section 1(b)3 of the Act provides that sole proprietors* and business partners may elect to come under the Act or they may choose not to.

There is a twist, though, in Section 3. It provides that employees who engage in extra hazardous* occupations must be covered under the law–but then subsections 3(17) and 3(20) allow sole proprietors, corporate officers, business partners, and members of limited liability companies to opt out.

In summary, if you are a sole proprietor, business partner, corporate officer, or member of a limited liability company, and… you want to come under the Act, you must purchase insurance for yourself to be covered for a work-related injury or illness… you don’t want to be covered, you must choose to opt out, following the instructions in Section 3(17)(b). The Commission does not have an opt-out form. An insurance representative should provide a form if one is desired.

If your company is in the CONSTRUCTION business, TRUCKING business operating at a construction site, or other EXTRA HAZARDOUS occupations, you should be aware that new law (see 820 ILCS 185, Employee Classification Act) requires that, in almost all instances, you must obtain insurance.

Also, a recent decision by the Illinois Supreme Court, Roberson v. Industrial Commission, states that referring to a trucker as an independent contractor, even in a written lease agreement, does not remove the trucking company’s obligation to provide workers compensation insurance for those drivers.

In the ACT document it says:

Section 3 (17)(b):
“The corporate officers of any domestic or foreign corporation employed by the corporation may elect to withdraw themselves as individuals from the operation of this Act. Upon an election by the corporate officers to withdraw, written notice shall be provided to the insurance carrier of such election to withdraw, which election shall be effective upon receipt by the insurance carrier of such written notice. A corporate officer who thereafter elects to resume coverage under the Act as an individual shall provide written notice of such election to the insurance carrier which election shall be effective upon receipt by the insurance carrier of such written notice. For the purpose of this paragraph, a “corporate officer” is defined as a bona fide President, Vice President, Secretary or Treasurer of a corporation who voluntarily elects to withdraw.”

I sent an email to the general address on that site after reading that.

Hello,
I am the sole proprietor of an LLC which I started this year (taxed as an s-corporation). When purchasing liability insurance I elected to get worker compensation insurance as well. At the time I was unsure if it was required or not, so I just opted to get it (they did not allow me to cover myself). I see on your website that it is not required of business owners as long as the business is not a hazardous occupation.

So I would be allowed to cancel this unnecessary coverage? Are there any forms or legal issues I need to take into account before canceling the coverage?

My first response:
It depends on what kind of company you are. Construction etc. If you are being hired by someone for your services, you may be required to have WC insurance. Our Act does not define independent contractors, so any accident that comes to the Commission is on a case by case basis. If you are construction see the new Employee Classification Act @ Illinois Department of Labor www.state.il.us/agency/idol. If you are not construction, the employers WC insurance company may audit the business and determine that your are an employee. In either case we recommend that you obtain WC insurance. If you are a true independent contractor then you can look at our WC act on our website www.iwcc.il.gov Section 3 paragraph 17(b). This paragraph has the bona fide officer of a company electing to withdraw themselves as individuals from the operation of this Act by writing a letter to their insurance company. I hope this helps you.

My response to that email:
My business is software development (see my website, netnobi.com for details). I am the owner and sole proprietor.

> employers WC insurance company may audit the business and determine that your are an employee. I am currently working for a company in Illinois as a independent contractor.

The worker compensation I have through my insurance company does not cover me. They did not give me the option to cover myself, so I opted to get “coverage” that would come into effect if I ever took on employees. Chances are extremely slim that I will take on employees, so currently I am paying around $250 a year for coverage that I can never use. I just want to make sure that it is legal to not have this coverage, which is why I contacted you.

> This paragraph has the bona fide officer of a company electing to withdraw themselves as individuals from the operation of this Act by writing a letter to their insurance company.

I included section 3(17)(b) below. I am not sure I understand. Why would their insurance company come into play here? Reading 3 (17)(b) below, it sounds like it applies to my LLC and not companies that I provide my services to. So every company I take work on with, I would have to contact their insurance company stating that I am the owner of my own business?

…ACT text here…

I appreciate any more insight on this subject you may have. Of course, I want to stay completely legal, but I also don’t want to waste money on coverage that is useless to me.

And their next response:

I cannot give you any legal advice. The Insurance Company that you write would be your insurance company. If you do not have a WC Insurance company….then you write to your current insurance company (home, car, business liability etc), and keep a copy on hand for any company that you will be working for.

So after that mound of text above, it seems to me that I do not require workers’ compensation for myself as the owner of my company. Sure it’s confusing, but if I create a document stating that I am the owner of my company when I deal with clients, that should keep them legal and also the same goes for me. Obviously if I get hurt when I am on-site I have no recourse in any direction, but it looks to be how it works. The only other option is to find an insurance company that will cover me even though I am the owner… confusing stuff, but I think that I am legally safe to cancel that current *useless* coverage I have right now. Look forward to that in a future post! I’m going to send off an email right now to my insurance company and see how it goes.

References:
http://www.state.il.us/agency/IIC/insurance.htm#sole
http://www.state.il.us/agency/IIC/act.pdf

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