California Workers’ Comp Directors and Officers Cleanup Law Takes Effect July 1

By | June 4, 2018

A new law that enables corporate directors and officers owning at least 10 percent of a business to opt out of workers’ compensation coverage goes into effect on July 1.

The law is intended to reduce the threshold of ownership, and is part of an effort to help eliminate workers’ comp fraud. Under the new law, directors and officers who want to opt out of workers’ comp must sign a waiver stating they are covered by a health insurance plan.

Senate Bill 189, authored state Sen. Steven Bradford, D-Gardena, changes the 10 percent threshold from the 15 percent threshold previously established by Assembly Bill 2883.

AB 2883 raised a stir when it passed in 2016, but not so much because of the 15 percent threshold, although some brokers did believe that mark would hurt some middle-market business.

When it passed it prompted California Insurance Commissioner Dave Jones to issue a special notification to insurers, because it had the unintended consequence of exempting in-force policies.

“AB 2883 is going to cause significant disruption for workers’ compensation insurers and employers,” Jones said at the time. “We have issued a notice today to workers’ compensation insurers so that they know what the new law requires of them and we directed insurers to provide notice to employers so they are made aware of the new law. Unfortunately, AB 2883 did not include any language exempting in-force policies or delaying its effective date so as not to impact in-force policies.”

AB 2883 provided that all workers’ comp policies were required to cover certain officers and directors of private corporations and working members of partnerships and limited liability companies that may have been previously excluded from coverage.

That law took effect on Jan. 1, 2017, but since then some businesses have had issues with the 15 percent threshold.

After SB 189 passed Bradford said the new law will ease the burden on businesses placed on them by AB 2883, which was intended to curb fraud from companies that were wrongly reporting workers as directors and officers to reduce or eliminate their premiums.

He said the law balances the goals of easing “the regulatory burdens on small businesses, while preserving safeguards against workers’ compensation insurance premium fraud.”

Mark Walls, vice president of communications and strategic analysis for carrier Safety National, said the two laws help close loopholes being exploited by bad actors trying to game the worker’s comp system.

“States typically allow directors and officers of companies to be exempt from workers’ compensation coverage,” Walls said. “Unfortunately, some businesses looked to take advantage of that exception and designated most of their employees as ‘directors or officers,’ even though they had no ownership interest in the company.”

However, Walls believes SB 189 should have a minimal impact on the industry as a whole as these changes will only impact a small number of companies, he said.

Under the new law, corporate officers can also be eligible for exclusion if they own at least 1 percent of the stock and if their parent, grandparent, sibling, spouse, or child owns at least 10 percent of stock.

The law would also expand the scope of the exception to apply to an owner of a professional corporation who is a practitioner rendering the professional services for which the corporation is organized, and who waives their rights under the laws governing workers’ comp and stating they are covered by a health insurance policy.

The law provides that an insurance carrier, agent or broker is not required to investigate, verify or confirm the accuracy of the facts contained in the waiver. The bill would make other changes relating to the execution and acceptance of waivers.

Sole shareholders of corporations (private or professional) are automatically excluded. No waiver is necessary, but they can be included for coverage.

Topics California Legislation Workers' Compensation Directors Officers

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