Tennessee: Appellate Court Says Compensation Paid to Independent Contractors Should Have Been Considered in Computing Insured’s Comp Premiums

A Tennessee Department of Commerce and Insurance ruling–later upheld by a state trial court–that a company was not liable for additional workers’ compensation insurance premiums related to the earnings of various physical therapists, with whom it had contracted, on the basis that the physical therapists were independent contractors rather than employees and, therefore, did not pose a risk of workers’ compensation liability to the company was error, held a state appellate court recently [Continental Cas. Co. v. Theraco, Inc., 2014 Tenn. App. LEXIS 16 (Jan. 14, 2014)]. The appellate court reasoned that it was the possibility that the physical therapists might file and maintain workers’ comp claims that would have to be defended by the carrier, not the reasonable likelihood of the claims’ success, that controlled. 

Background

Theraco contracted with home health agencies to provide physical therapy sessions to homebound patients. Typically, a physician sent an order for therapy to a home health agency. The agency then sent the communication to Theraco, who had contracts with more than 20 licensed physical therapists (“PTs”). Theraco would then offer the assignment to one of its PTs in the appropriate geographic area. In addition to the PTs, Theraco had four salaried employees–two officers and two clerical workers. Both of Theraco’s officers elected exemption from workers’ compensation coverage. Beginning in 2004, Theraco secured workers’ compensation insurance for the two clerical workers through CNA. Beginning in mid 2009, Travelers provided coverage. Each of the policies contained identical provisions with regards to calculating Theraco’s premium liability. Each policy created two categories of individuals for whom Theraco would be charged premiums: (1) “[a]ll your officers and employees engaged in work covered by this policy” (the “Employee Provision”); and (2) “[a]ll other persons engaged in work that could make us liable under Part One (Workers’ Compensation Insurance) of this policy” (the “Risk of Loss Provision”).

Carriers’ Claim for Additional Premiums

Reviewing the insured’s business records over a number of years, the carriers contended that Theraco owed premiums based on the earnings of the PTs, since any of them might file and maintain workers’ compensation claims that would have to be defended by the carriers.

Following a hearing, the Tennessee Department of Commerce and Insurance ruled that the insured was not liable for additional workers’ compensation insurance premiums on the basis that the physical therapists were independent contractors rather than employees and as such did not pose a risk of workers’ compensation liability to the insured. A state trial court affirmed, but the appellate court reversed. The court held that the Department had failed to consider the Risk of Loss Provision, that It was the possibility that the physical therapists might file and maintain workers’ comp claims that would have to be defended by the carrier, not the reasonable likelihood of the claims’ success, that mattered. The additional premiums were owed the carrier by the insured.