California: Insurance Coverage Disputes Made Simple

Whether or not a workers’ compensation insurance policy covers a particular employee on the date of alleged injury should be a very straightforward matter because all workers’ compensation insurance policies provide coverage to all of an employer’s employees unless certain employees are specifically excluded from coverage. Nonetheless, “coverage disputes” continue to be vigorously litigated. A recent example is Nevarez v. American Choice Van Lines, 2021 Cal. Wrk. Comp. P.D. LEXIS 65 (Board Panel Decision) (Nevarez). In that case a unanimous panel rejected an insurer’s claim that a valid limiting and restricting endorsement was included in the policies issued to American Choice Van Lines and/or or Go East Movers (Go East Movers) during Efrain Nevarez’ (applicant’s) alleged cumulative trauma period. Not only is the panel’s decision instructive on insurance coverage and the regulations applicable to workers’ compensation insurance policies, but it also clarifies the role of the workers’ compensation arbitrator (WCA) and the process by which an insurer may seek rescission of an insurance policy.

Applicant, a mover, alleged a cumulative trauma injury through August 30, 2015, while employed by Go East Movers. American Casualty Insurance Company and Valley Forge Insurance Company (American) issued a policy of workers’ compensation insurance to Go East Movers for the period December 15, 2011 through December 11, 2015. According to American, the policy only covered two clerical employees. During a final audit conducted in 2016, American discovered, apparently for the first time, that Go East Movers actually employed movers. American disputed coverage, and the dispute was set for arbitration before an agreed WCA. During the arbitration, American sought to rescind its policy with Go East Movers on the basis that Go East Movers misrepresented the nature of its business and the classification of its employees. The WCA found insufficient evidence of fraudulent misrepresentation. He also found that the limiting endorsements in the insurance policies failed to comply with applicable regulations. The insurers were found liable for any workers’ compensation benefits that might be awarded to applicant, but the WCA’s order did not prohibit them from disputing the date of injury.

American sought reconsideration of that decision, contending that the WCA erred by finding insufficient evidence of fraudulent misrepresentation to warrant rescission of the insurance policy. American also claimed that the WCA should have found that the policy it issued to Go East Movers was a valid policy of workers’ compensation insurance with coverage only and exclusively for clerical employees.

In rejecting those claims, the panel begins its discussion with a review of the laws pertinent to workers’ compensation insurance. Foremost, it reminds us that all employers in the state of California are required to obtain workers’ compensation insurance through a duly authorized insurance company or receive approval to self-insure. (Lab. Code § 3700.) Next, it explains that all California workers’ compensation insurance policies are subject to regulation by the Department of Insurance. (See Ins. Code §§ 11651, 11657, 11658.) Insurance Code section 11651 makes the insurer directly and primarily liable to any proper claimant for payment of compensation for which the employer is liable, subject to provisions, conditions and limitations of the policy. In fact, each policy of workers’ compensation insurance is required to contain a clause to that effect. (Ins. Code §11651, supra.) An insurer may issue a workers’ compensation policy that insures only a part of an employer’s liability for compensation, provided the policy receives prior approval from the Insurance Commissioner and is consistent with applicable rules. (Lab. Code § 11657.) If such a limiting and restricting endorsement is not in compliance with the regulations adopted by the Insurance Commissioner, the policy is considered to be “unlimited,” meaning that the insurance policy provides coverage to all of an employer’s employees. (Ins. Code §§ 11657, 11659, 11660.)

Because the dispute in Nevarez was whether the policies of workers’ compensation insurance issued by American to Go East Movers provided coverage to applicant for the alleged injury it was required to be arbitrated before a WCA. (Lab. Code §5275(a).) The primary duty of the WCA is to determine whether an insurance policy and/or policies provide workers’ compensation insurance coverage for an applicant’s employer/alleged employer on applicant’s date of injury or alleged date of injury. Absent consent of all parties, the WCA cannot determine issues of employment or date of injury.

The panel affirmed the WCA’s finding that American provided workers’ compensation insurance coverage for Go East Movers. In its rejection of American’s claim that the workers’ compensation policies it issued to Go East Movers only covered clerical employees, the panel observed that it was incumbent upon American to provide evidence in the form of policy documents compliant with the requirements of the Insurance Commissioner to substantiate that contention. Because American failed to do so, the panel found a lack of sufficient evidence from which to conclude that the policies were limited. Without an endorsement explicitly limiting the policies to clerical employees, the policies issued by American were “unlimited,” meaning that they provided workers’ compensation insurance coverage to all of Go East Movers’ employees. And, assuming arguendo, Go East Movers failed to report their payroll to American, that would not be a basis for excluding employees from coverage the panel observed, citing Florists Mutual Ins, Co. v. Workers’ Comp. Appeals Bd. (2015) 80 Cal. Comp. Cases 582 (writ den.).

The panel also rebuffed American’s assertion of WCA error for failure to consider rescission of the insurance policy because of Go West Movers’ alleged misrepresentation with regard to its employees and their respective classifications. This aspect of the panel’s decision is particularly informative. The panel acknowledges that a workers’ compensation insurance policy can be rescinded based upon a material misrepresentation by the insured. (Southern Ins. Co. v. Workers' Comp. Appeals Bd. (Berrios) (2017) 11 Cal.App.5th 961.) Furthermore, when a defendant disputes coverage on the basis that it rescinded a workers’ compensation insurance policy, the WCA has jurisdiction to determine whether such a policy was validly rescinded. (Bankers Indem. Ins. Co. v. Ind. Acc. Com. (Merzoian) (1935) 4 Cal. 2d 89.) A contract of insurance may be rescinded in accordance with the procedure set forth in Civil Code section 1691. That statute requires the party to a contract, upon discovery of facts entitling them to rescind, to give prompt notice of rescission to the other party and restore or offer to restore everything of value obtained under the contract. Not only did American fail to raise rescission as an issue at the arbitration, it didn’t even claim that it had rescinded Go East Movers’ insurance policy. Thus, the panel observes, the issue of whether American rescinded Go East Movers’ policy is entirely hypothetical, and the WCA has no obligation to determine hypothetical questions.

Nevarez serves as a good reminder that an insured’s failure to include an employee (or employees) on payroll is not a valid basis to deny coverage unless the workers’ compensation insurance policy includes a specific limiting endorsement approved by the Insurance Commissioner to that effect. Absent an approved limiting endorsement, the policy extends coverage to all employees. A material misrepresentation by the insured can give rise to rescission of the insurance policy; however, the party seeking rescission must give notice of the rescission and restore or offer to restore everything of value received under the contract. If you find yourself involved in a coverage dispute, look back to Nevarez—it won’t steer you wrong.

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