Chez Richard, Inc., is a successful, established
restaurant in the downtown area. It is incorporated, with all shares owned by
its president and head chef, Richard Alain. While Chez Richard is marginally
affected by a few holidays, for the most part, the restaurant is known for its
steady repeat clientele. Except for the occasional day or two of bad weather,
there is virtually no seasonal aspect to Chez Richard's operation.
& Stanovich Risk Managers, LLC
One problem that Richard (don't call me Richie) Alain constantly battles
is the turnover in his wait staff. Most of the personnel are part-time students
who too often fail to appear for work on time (if they appear at all), leaving
him shorthanded, and his customers annoyed. At wits' end, Richard decides to
use a temporary employment-staffing agency (Wait With Us, Inc.) to supply him
with his wait staff. Although this approach is decidedly more expensive—the
temporary staffing business, which specializes in restaurant staffing, guarantees
a reliable supply of personnel. This guarantee is an invaluable benefit to Richard.
After a month of using the wait staff supplied to him by Wait With Us, Richard
is very pleased. Customer satisfaction has never been higher, business is up,
and profits are actually increasing—all without the headache of continually
finding, hiring, and training new wait staff.
Chez Richard is insured under an Insurance Services Office, Inc. (ISO), commercial
general liability (CGL) policy (December 2004 edition) with a solid regional
insurance company with the highest financial ratings. While Wait With Us, the
staffing agency, does provide workers compensation benefits for the wait staff
personnel they supply, Chez Richard has kept its workers compensation and employers
liability coverage, as the restaurant does have a full-time assistant chef and
full-time restaurant manager who are not furnished by the staffing agency. The
workers compensation and employers liability policies for both Wait With Us
and Chez Richard are written on the latest National Council on Compensation
Insurance (NCCI) forms with no additional coverage endorsements, although both
policies include increased limits for Part Two—Employers' Liability Insurance.
In his haste to make the perfect entree for a VIP, Richard leaves a large
pot of boiled water precariously balanced on the counter where the wait staff
picks up their orders. Unfortunately, while reaching to pick up a dish for a
customer, a member of the wait staff, Lisa, who is a single mother, brushes
against the pot, causing it to tip, splashing and seriously burning her hands
The staffing agency pays for the statutory workers compensation benefits
now due Lisa. She does not file a claim for workers compensation benefits against
Because of the severity of her injuries and the need for others to care for
her child, Lisa feels compelled to bring a tort action against Chez Richard,
Inc., asserting that Chez Richard was negligent in causing her injuries. In
her lawsuit, she has demanded $500,000 damages for her pain and suffering and,
separately, $500,000 of damages on behalf of her child, because of loss of consortium.
Initial motions by Chez Richard to dismiss Lisa's lawsuits fail as the judge
rules the exclusive remedy of the state's workers compensation statute does
not apply between Chez Richard and Lisa.
Chez Richard sends the lawsuit to the CGL insurer right away, but is stunned
when the insurer flatly denies the claim—and asserts no coverage exists because
of Exclusion e: employers liability. The insurer goes on to explain that this
exclusion applies to bodily injury to an employee of the insured. Once Richard
receives the insurer's letter of denial, he is beside himself. How could his
broker have failed to provide him the right insurance?
After a review of the CGL policy in effect for Chez Richard, his broker finds
the answer and writes to the insurer to refute its claim denial: Lisa is a "temporary
worker" under the CGL policy and thus not an "employee." As the employers liability
exclusion applies only to an "employee" of the insured, the broker succinctly
points out the exclusion the insurer is relying on simply does not apply to
this claim. Along with the letter of refutation, the broker provides the insurer
the contract between Chez Richard and Wait With Us that clearly shows that Lisa
was furnished to Chez Richard and is thus a "temporary worker."
In response, the insurer first points to the definition of "employee" in
the CGL policy which states:
"Employee" includes a "leased worker." "Employee" does not include a "temporary
The insurer's letter goes on to assert that Lisa does not fit the definition
of "temporary worker" and the facts show Lisa's status with Chez Richard fits
more closely with that of a "leased worker," but in any case, an "employee."
What is the difference between a leased and temporary worker?
"Leased worker" means a person leased to you by a labor leasing firm under
an agreement between you and the labor leasing firm, to perform duties related
to the conduct of your business. "Leased worker" does not include "temporary
Contrast the above to "temporary worker":
"Temporary worker" means a person who is furnished to you to substitute for
a permanent "employee" on leave or to meet seasonal or short-term workload
The insurer argues that although Lisa may have been furnished to Chez Richard
by Wait With Us, she was not:
The insurer then concludes that since Lisa did not meet all aspects of the
definition of "temporary worker," she cannot be considered a "temporary worker."
A "temporary worker," in the opinion of the insurer, is a person who is furnished
for a finite period of time to support or supplement the insured's workforce—not
one who is to perform indefinitely as part of the insured's main workforce.
In the view of the insurer, Lisa can only be a "leased worker" and thus an
"employee." While the insurer's contention that Lisa can only be a "leased worker"
is far from a settled matter, the insurer is likely correct that Lisa is not
a "temporary worker."
While Chez Richard is obviously in a bind, there are ways to close this coverage
gap. These are discussed below.
Arguably the most effective way to close the coverage gap described above
is the Alternate Employer Endorsement. Chez Richard could have required Wait
With Us to include the Alternate Employer Endorsement on the workers compensation
and employers liability policy of Wait With Us, specifically scheduling Chez
Richard, Inc., as the alternate employer. While not a CGL solution, the Alternate
Employer Endorsement would have provided coverage to Chez Richard as an alternate
employer for Lisa's tort suit. Specifically, the endorsement states:
Part One (Workers Compensation Insurance) and Part Two (Employers Liability Insurance) will apply as though the alternate
employer is insured. [Emphasis added.]
Based on the facts as described, the employers liability portion of Wait
With Us workers compensation policy would defend and pay on behalf of Chez Richard
for its liability for Lisa's damages. However, as the employers liability limits
on the Wait With Us policy may have been inadequate for the $1 million of total
damages being demanded, Chez Richard may wish to consider amending its own insurance
to fill this coverage gap.
Chez Richard should also consider adding to its own CGL policy the Coverage
for Injury to Leased Workers (CG 04 24) endorsement. This endorsement simply
states that the term "employee" does not include a "leased worker" or "temporary
worker." The effect of this is that the employers liability exclusion of the
CGL no longer applies to the claims for injuries to a leased or temporary worker—neither
is considered an employee of the insured for the purposes of applying this exclusion.
Leased Workers. The above coverage endorsement
is usually used in situations that are a bit different than described in the
Chez Richard case. Typically, there is no dispute as to the status of the workers—everyone
agrees the workers fit squarely in the definition of "leased worker." The coverage
problem arises because the state's laws are such that the "leased workers" are
considered solely the employees of the leasing company and not of the named
insured client company. The result is that the "leased worker" is not barred
by exclusive remedy from bringing an action in tort against the named insured.
Coverage for the potential tort claims by such personnel is then provided through
the CGL by this endorsement.
In the Chez Richard case, the coverage gap is not at all obvious. Richard's
decision to use a temporary staffing agency would, on the surface, give the
impression that he is using "temporary workers." However, it is only after examining
the details of the arrangement and a careful review of the definition of "temporary
worker" that it becomes apparent Lisa may not be considered a "temporary worker."
Even if the law of the state in which Chez Richard does business considers
"leased workers" to be employees of the named insured client company, the issue
here is whether Lisa (1) is a "leased worker" and thus considered to be an employee
of Chez Richard or (2) a "temporary worker" and thus considered to be an employee
of the temporary staffing firm.
It is the arrangement for providing the workforce itself that is the source
of the uncertainty. Put another way, businesses may strike deals with staffing
firms to furnish a workforce in such a manner that the workers provided do not
fit neatly into either the "leased worker" or "temporary worker" category.
Not Available. As a practical matter, the
Coverage for Injury to Leased Workers (CG 04 24) endorsement may be difficult
to obtain for Chez Richard. Insurers can and do refuse as they may perceive
they are eliminating the CGL's employers liability exclusion—something they
would rather avoid. While this concern has merit, it should be tempered by the
recognition that if Lisa had instead sued Richard Alain personally, as it was
his personal act of negligence that was the cause of Lisa's injuries, the CGL
insurer would have been obligated to defend and pay on behalf of Richard Alain.
This is because he is an executive officer (and thus an insured), and Lisa is
not an employee of Richard Alain (she would be an employee of the corporation—Chez
Richard, Inc.). In other words, the insurer is not really giving away that much
In the absence of either of the above solutions, one question that might
be pursued is whether the tort claim by Lisa would be covered under Chez Richard's
workers compensation and employers liability policy, specifically Part Two—Employers
Employee by WC Statute. While Lisa may
not fall within the workers compensation statute's definition of "employee,"
it is important to recognize that employers liability insurance is a coverage
part separate and distinct from Part One—Workers Compensation. Thus, the statutory
definition of "employee" applicable under Part One—Workers Compensation should
not be presumed to apply to Part Two—Employers Liability. In fact, the term
"employee" is not defined in the employers liability portion of the policy.
Common-Law Employment. If common-law tests
for employees, such as the right to control the details of Lisa's work, which
Chez Richard has retained, indicate Lisa might be a common-law employee, should
the employers liability insurer have at least defended the tort action brought
by Lisa against Chez Richard? While the general tendency seems to be to dismiss
this notion out of hand, considering that undefined terms (such as employee)
are generally understood to take their ordinary meaning, this position seems
hasty and may be without sufficient basis. If the details of the arrangement
between Chez Richard and Wait With Us raises questions as to Lisa's status,
as they have in the above illustration, how can the employers liability insurer
reject with certainty any possibility of
coverage for Chez Richard for the tort claim filed by Lisa?
While it is possible for the CGL insurer to consider a person an employee
for the purposes of invoking an exclusion and the employers liability insurer
to consider the same person to not be an employee to avoid providing coverage,
this approach may be perceived as an insurer wanting to have it both ways. A
rejection of coverage by Chez Richard's employers liability insurer should be
done only after careful consideration is given to the uncertain employment status
of the person bringing the tort suit.
When an organization uses a workforce that is furnished on a short-term basis,
such as from a temporary staffing agency, or on a longer-term basis, such as
from an employee leasing company, careful review of the details of the arrangement
are necessary. The insured needs a solid understanding of the difference between
the CGL definition of "temporary worker" and "leased worker," and the implications
of each. The insured must obtain the proper documentation from the company providing
the personnel, including documentation that the leasing/staffing company has
the alternate employer endorsement, scheduling the organization as an insured.
The insured should also consider the possibility of adding the coverage for
injury to leased worker endorsement to the organization's own CGL policy.
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