Why Workers Comp is So Critical in Construction

Workers compensation insurance may be the proverbial red-headed step-child of insurance policies, but they are very important in construction projects. Here’s a good illustration that came along in 2004.

Clark Construction Group was hired as the general contractor on the Enron #2 high-rise office tower project. Clark Construction then hired Way Engineering Company to work on the project. Clark Construction also purchased a single workers compensation insurance policy from Travelers Property & Casualty that covered all subcontractors and employees who worked at the building site.

Sheldon Etie worked for Way Engineering on the Enron project. Way Engineering hired Walsh & Albert, Ltd., to perform some sheet metal work on the building. Way Engineering and its employees were covered by the Travelers workers comp policy, as were W&A and its employees.

Unfortunately, an employee of Walsh & Albert improperly attached a plenum to the ceiling, and Etie was in the wrong place at the wrong time, sustaining a serious but non-fatal injury. Etie filed for, and received, workers comp benefits under Clark Construction’s policy. But then he filed a negligence lawsuit against Walsh & Albert, seeking to collect more money for his injuries.

No one disputed any of the material facts, and so the case revolved completely around a point of law. One of the most valuable provisions of Texas’ workers compensation law is the so-called “exclusive remedy” provision, which is as follows:

Recovery of workers’ compensation benefits is the exclusive remedy of an employee covered by workers’ compensation insurance coverage or a legal beneficiary against the employer or an agent or employee of the employer for the death of or a work-related injury sustained by the employee. (Texas Labor Code, Section 408.001(a).)

So, if an employer takes out a workers’ compensation insurance policy, any covered employee cannot sue the employer once they recover workers’ comp benefits. This is a very important asset protection feature of construction law.

Now, in this case one can see why Etie thought he could get W&A with negligence. His “employer” was Way Engineering. But the negligence wasn’t committed by Way Engineering, nor anyone higher up the employment food chain. It was committed by a sub-contractor’s employee. How could W&A, a sub-contractor of Etie’s company, possibly be an “employer” for purposes of workers compensation laws?

Well, the court correctly realized that the Texas workers’ comp statutes are silent on that point. But the court rather quickly brushed aside the more obvious reasoning which would have allowed Etie to sue W&A.

Now here’s the Court’s logic: Clark Construction and Way Engineering had a written contract that included the requirement that Clark Construction would take out a workers comp policy to cover Way Engineering, and all of its employees working at the job site. These employees of Way Engineering were “deemed employees” of Clark Construction for purposes of the exclusive remedy restriction and other provisions of the Texas workers comp statute. While Way Engineering was a sub-contractor in relation to Clark Construction, it was a general contractor of W&A. The written contract between Way Engineering and W&A incorporated by reference all of the provisions of the contract between Clark Construction and Way Engineering. As a result, W&A employees were “deemed employees” of Way Engineering, which themselves were “deemed employees” of Clark Construction. Therefore, the employees of W&A were “deemed employees” of Clark Construction, and covered by the exclusive remedy provision of the workers’ comp law. Got that? It’s the old “A=B, B=C therefore A=C” logic from the Law School Admission Test. You just gotta know when to use it, apparently.

Here’s the bottom line effect of the ruling in this case:

“…the statutory employer/employee relationship extends throughout all tiers of subcontractors and…all covered employees are fellow servants who are equally entitled to workers’ compensation benefits and equally immune from suit…”

And so you can see there is real value in having a workers’ comp policy. It may be an expensive proposition, and the system may be less than perfect, but if you are a subcontractor, make sure you structure your written agreements with the general contractor, and other subcontractors, so that you are protected by the exclusive remedy provisions of the Texas workers’ comp statute. For general contractors, you will add value to your subs if you purchase a workers’ comp policy that covers an entire job site, like the one in effect in this case.

Finally, from a practical perspective, get several bids from different insurance companies when it comes time to purchase a workers’ comp policy, and pay careful attention to how you classify your employees for purposes of that quote. These will help you reduce your insurance costs as much as possible.

Etie v. Walsh & Albert Company, Ltd., et al., Case No. 01-02-01007, 1st District Court of Appeals (Houston), January 22, 2004.

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