Fraud allowed comp carrier to rescind policy

The South Carolina Uninsured Employers’ Fund is on the hook for providing coverage to an injured roofer, after it was revealed that his employer obtained its workers’ compensation policy through fraud, according to the state Court of Appeals.

The insurer, FirstComp, successfully argued that it could rescind a workers’ comp policy that it wrote for J&L Construction — essentially treating the policy as if it never existed — instead of following state law requirements for canceling a policy.

Judge Paula Thomas, who wrote the appellate panel’s unanimous decision, honed in on the fact that the statute in question, Section 38-75-730, does not address rescission, and so the court looked to common law precedent in deciding the case.

Thomas concluded that the statute “applies when a party wishes to cancel a policy already in existence at the time of the loss and not when a party seeks to rescind a policy procured by fraud to cover a pre-existing loss.”

After one of their workers fell from a roof, J&L’s operators, Emory Wilkie and John Loughery, allegedly headed to the Midlands Insurance Center in Lexington, told an agent that they had no knowledge of a prior injury or pending workers’ comp litigation, and paid for a policy from FirstComp.

When the worker attempted to file a claim with the agent the next day, she alerted FirstComp, which informed J&L that it was rescinding the policy due to fraud. The worker filed a claim and FirstComp and the Uninsured Employers’ Fund both denied him coverage.

A Workers’ Compensation Commission commissioner found in favor of FirstComp, determining that the policy cancellation statute did not alter an insurer’s right to rescind a policy induced by fraud. But the commission’s appellate panel vacated the commissioner’s decision, finding “good grounds” for the commission to reconsider the case. The panel’s finding lacked any “specific instructions or reasoning,” Thomas wrote.

On remand, the commissioner once again ruled for FirstComp and held that the policy was void because of fraud. The commissioner also drew a distinction between the cancellation statute and rescission based on fraud.

In affirming the commissioner’s finding, the Court of Appeals rejected the UEF’s argument that a worker cannot be denied benefits because of an employer’s fraudulent actions. The court based its decision, in part, on the Nevada Supreme Court’s 2006 opinion, Star Insurance Company v. Neighbors. In that case, an employer reinstated its lapsed worker’s comp policy after a workplace injury, and the insurer was allowed to rescind the policy.

Drawing a parallel between the matter at hand and Neighbors, Thomas wrote that in both cases “the insurance company was not assuming any risk or possibility of loss. Instead, the employer attempted to gain coverage for a known loss that had already occurred.”

The UEF was considering whether to challenge the decision, said its attorney, Amy Cofield of the Cofield Law Firm in Lexington.

“I understand the court not wanting to reward an employer for a fraudulent act, because the fraud is kind of blatant,” she said. “But the fact remains that the statute at issue specifically says for a workers’ comp case to be cancelled, one of the reasons is material misrepresentation and they would not have issued the policy if they’d known. And that was specifically what happened here.”

An attorney for FirstComp, Lee Dixon of Hedrick Gardner Kincheloe & Garofalo in Columbia, declined to discuss the case based on a request from his client.

FirstComp had taken issue with the remand order from the appellate panel for the Workers’ Compensation Commission, arguing that the panel had exceeded and failed to comply with its statutory authority. But the Court of Appeals found that First Comp’s appeal was moot and “merely academic” in light of its decision in favor of the insurer.

Columbia workers’ comp lawyer Robert Goings of the Goings Law Firm, who reviewed the opinion at Lawyers Weekly’s request, said the Court of Appeals made the right decision.

“A contract of insurance, just like any other contract, is voidable and may be subject to rescission if the contract is induced or procured by fraud,” he said.

Another workers’ comp attorney who read the opinion, Gary Christmas of Howell & Christmas in Mount Pleasant, noted that the appellate court could have required FirstComp to provide coverage if it was negligent in issuing the policy.

“There is an out where if the insurance company had been negligent in signing up this policy, if there’s evidence that they’d done something wrong, then I think the court would likely have reached a different result,” he said.

“But here you’ve got an employer just point blank trying to perpetrate fraud,” he added. “They were caught red-handed.”

The 12-page decision is Bessinger v. R-N-M Builders & Associates, LLC (Lawyers Weekly NO. 011-074-17). An opinion digest is available at sclawyersweekly.com.

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