Royal Insurance v. R & R Drywall and Tennessee Department of Commerce and Insurance

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
April 9, 2003 Session
ROYAL INSURANCE COMPANY v. R & R DRYWALL, INC. AND
TENNESSEE DEPARTMENT OF COMMERCE AND INSURANCE
Appeal from the Chancery Court for Davidson County
No. 01-1378-II Carol McCoy, Chancellor
No. M2002-00791-COA-R3-CV - Filed June 6, 2003
A workers’ compensation insurance carrier assessed a retrospective premium increase of over
$60,000 against a contractor after auditing the company’s books and finding evidence that its
subcontractors employed more workers than the contractor had declared. The contractor filed an
administrative appeal of the assessment, arguing that the additional workers were not actually
employees of its subcontractors, but members of de facto partnerships, and thus not covered under
the contractor’s policy. The administrative law judge agreed, and found that the contractor was not
liable for the additional premium. The Chancery Court of Davidson County reversed the
administrative law judge, finding that the insurance company was entitled to the additional premium,
because it had borne the risk of liability to those workers for on-the-job injuries. We affirm the
Chancery Court.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
Affirmed and Remanded
BEN H. CANTRELL, P.J., M.S., delivered the opinion of the court, in which PATRICIA J. COTTRELL ,
J. and RUSS HELDMAN, SP . J., joined.
Lawrence B. Hammett, II and H. Brent Patrick, Nashville, Tennessee, for the appellant R & R
Drywall, Inc.
Blakeley D. Matthews and Kristen Murphy Anderson, Nashville, Tennessee, for the appellee, Royal
Insurance Company.
OPINION
I. A RETROSPECTIVE PREMIUM
R & R Drywall (“R & R”) is a Middle Tennessee corporation that hangs, mounts and finishes
drywall on both commercial and residential projects. Royal Insurance Company (“Royal”) is R &
R’s workers’ compensation insurance carrier. The drywall contractor relies upon subcontractors to
perform the actual work. In the fall of 1998, the insurance carrier notified R & R that it wished to
audit the contractor’s payroll and employee records for the previous policy year.
The insurer determined from the audit that five of the forty subcontractors paid by R & R
earned too much for it to believe that they were operating by themselves. The insurer reasoned that
the excessive payments indicated that the five subcontractors were themselves paying employees,
and that if any of those employees was injured on the job, the insurer would be liable to pay
compensation, in accordance with the provisions of Tenn. Code Ann. § 50-6-113(a), which reads,
A principal, or intermediate contractor, or subcontractor shall be liable for
compensation to any employee injured while in the employ of any of the
subcontractors of the principal, intermediate contractor, or subcontractor and engaged
upon the subject matter of the contract to the same extent as the immediate employer.
Royal Insurance concluded that the premium it had previously assessed against R & R did
not adequately match its potential liability, and it assessed an additional premium of $61,802 to more
accurately reflect the risk it had been exposed to.
R & R filed an appeal of the assessment with the Tennessee Workers’ Compensation Appeals
Board. The Board upheld the assessment of the additional premium. The contractor then filed an
appeal with the Department of Commerce and Insurance, pursuant to the Uniform Administrative
Procedures Act, Tenn. Code Ann. § 4-5-101, et seq. An Administrative Law Judge (ALJ) heard the
case on stipulated facts. At the hearing, the contractor contended that the five subcontractors were
partnerships, and therefore that Tenn. Code Ann. § 50-6-113(a) did not apply and the additional
assessment was not valid.
Unlike employees, sole proprietors and partners are not subject to mandatory coverage under
the workers’ compensation statutes. See 50-6-113(f). R & R claimed that all those working under
the five subcontractors at issue were partners with that subcontractor, with all monies paid to the
subcontractors divided between the partners. The ALJ agreed. On February 15, 2001, he filed an
order which reversed the decision of the Appeals Board, and withdrew the additional premium.
Royal then filed a Petition for Reconsideration of the ALJ’s decision. There was no response to the
petition by the ALJ within twenty days, and so his order became final and subject to judicial review
pursuant to Tenn. Code Ann. § 4-5-322.
II. PROCEEDINGS IN THE TRIAL COURT
On April 30, 2001, Royal filed a petition in the Chancery Court of Davidson County to
review the final order of the ALJ. The insuror noted that the purported partners did not execute any
documents prior to the assessment of the additional premium to establish the existence of the alleged
partnerships, and contended that the assertion of partnership was a subterfuge to evade the mandatory
requirements of the workers’ compensation law. The contractor argued to the contrary that under
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general principles of partnership law, no particular form of contract is required to establish a legal
partnership, and that an informal “handshake agreement” between the drywall workers was
sufficient.
The Chancellor agreed with the insuror (and with the prior ruling of the Workers’
Compensation Appeals Board), and reversed the ALJ. In its Memorandum and Order, the trial court
held that the resolution of the case was controlled not by the general principles of partnership law
as the ALJ had ruled, but by the specific mandates of the workers’ compensation statutes in favor
of the broadest possible coverage for workers. R & R was ordered to pay the disputed premium.
The insuror subsequently filed a motion for the trial court to amend its order by awarding pre-
judgment interest. The trial court granted the motion. This appeal followed.
III. ANALYSIS
There was no dispute as to the facts in this case, but only as to the legal conclusions to be
drawn from those facts. We review those conclusions de novo, with no presumption of their
correctness. See Memphis Publishing Co. v. Cherokee Children & Family Services, Inc., 87 S.W.3d
67 (Tenn. 2002); Brown v. Birman Managed Care, Inc., 42 S.W.3d 62 (Tenn. 2001). Since the trial
court did an excellent job of summarizing the undisputed facts, we quote the following from its
Memorandum and Order:
Five persons working on R & R Drywall projects each signed and filed a form
“I-18" captioned “Election of Non-Coverage by Sub-Contractor.” The five I-18
forms were filed before the policy period started. These five workers are (1) Jose
Alcazar Aguilar, (2) Lauro Alcazar Aguilar, (3) Eric Putnam Boone, Jr., (4) Silva
Garcia Ramiro and (5) Humberto Alvardora. Four of the five indicated they were
partners, and had “0" employees, or the number of employees was left blank. One
of the five indicated he was a sole proprietor with an unstated number of employees.
The five non-covered men were not partners together, but worked separately on R &
R Drywall projects with groups of other workers. These five non-covered
subcontractors received payment from R & R Drywall for the work done by their
group of workers and took responsibility for paying the men in his separate group.
Royal Insurance deducted revenue for each of the five contractors who filed
I-18 forms from its workers’ compensation insurance premium calculations.
However, there were no I-18 forms from men who worked with or for J. Aguilar, L.
Aguilar, Bone, Ramiro and Alvardora, until the policy period ended and the audit
was being prepared. None of the five partners filed an insurance claim and none of
the men working with or for them filed a claim alleging disability or injury related
to their work.
The Tennessee Workers’ Compensation Appeals Board (the Appeals Board)
found that most of the five non-covered partners and workers in their group were
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composed of Mexican-American family members, in which only one person reads
or speaks English. The English speaking person acts as the lead partner and receives
payment from R & R Drywall, then divides the funds among the men with whom he
works. The Appeals Board found these groups of Mexican-American workers had
no other workers’ compensation coverage and that Royal Insurance would in most
probability have to pay any claim they filed if they did suffer a work related injury.
The Appeals Board found R & R Drywall owed Royal Insurance the additional
premium because the workers (but not the five men who signed the I-18 forms)
should be characterized as employees and because there was no written
documentation of the existence of a partnership arrangement before the policy
inception.
After the audit, the other workers executed I-18 forms electing non-coverage, and hand-
written statements to the effect that they were all partners who split the proceeds the lead partner
received from R & R. Appellant notes that Royal relied upon these documents to exclude the
workers from its premium calculations for coverage after the policy period in dispute. The drywall
company argues that if the nineteen or twenty workers are partners now, they were surely partners
during the policy period as well, and thus not subject to Tenn. Code Ann. § 56-6-113(a).
Appellant relies upon a number of cases where our courts have denied workers’
compensation coverage to an injured worker after determining that the claimant should be considered
a partner rather than an employee of the insured entity. Roberts v. Lebanon Appliance Service Co.,
779 S.W.2d 793 (Tenn. 1989); Lindsey v. Smith and Johnson, Inc., 601 S.W.2d 923 (Tenn. 1980).
Appellant insists that these cases indicate that if a claim had been asserted against it for an on-the-job
injury, the court would have been obligated to find the workers’ compensation carrier not liable. The
hidden implication in this argument is that since the ALJ found the workers to be partners, no other
conclusion was possible.
The administrative record shows, however, that the ALJ relied on documents that were not
in existence during the policy period to reach his conclusion. It appears to us that if one of the
subcontractor’s workers had filed a claim for an on-the-job injury during the disputed period, he
would not have been motivated to execute documents that would have the effect of renouncing his
rights to compensation. Despite the appellant’s arguments, there is no doubt that the insuror bore
the risk of defending R & R against and/or indemnifying it for liability arising from injuries to the
subcontractors’ workers.
We thus see the contractor as trying to have it both ways. During the disputed policy period,
when it was still possible that one of the drywall “partners” could have injured himself on the job,
R & R could have invoked the protections of the workers’ compensation law and of its policy. Now
that the policy period has passed with no claims having been filed, the contractor argues that the
workers had no coverage under its policy, and therefore that it should not have to pay an additional
premium. As the trial court points out, “[t]he audit to determine the current premium was intended
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to examine the actual risk which Royal insurance undertook during the policy period, not a risk
which was defined only after the policy period ended.”
Tenn. Code Ann. § 50-6-114(a) reads, “No contract or agreement, written or implied, or rule,
regulation or other device, shall in any manner operate to relieve any employer in whole or in part
of any obligation created by this chapter, except as herein provided.” The obligations imposed upon
contractors by Tenn. Code Ann. § 50-6-113 were designed to extend the benefits of workers’
compensation to employees of irresponsible subcontractors, and to motivate principal contractors
to hire insured, responsible subcontractors. Posey v. Union Carbide Corp, 705 F.2d 833 (6th Cir.
1983).
We agree with the appellee that the appellant used the late-filed I-18s and hand-written
partnership statements as devices to avoid a premium associated with a risk that has now closed. If
we were to reverse the trial court as appellant urges, we would be encouraging the use of such
devices to undermine the primary purpose of workers’ compensation, which is to secure benefits for
injured workers. See Wheeler v. Glens Falls Insurance Co., 513 S.W.2d 179 (Tenn. 1979); Shubert
v. Steelman, 377 S.W.2d 940 (Tenn. 1964).
IV.
The order of the trial court is affirmed. Remand this cause to the Chancery Court of
Davidson County for further proceedings consistent with this opinion. Tax the costs on appeal to
the appellant, R & R Drywall.
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BEN H. CANTRELL, PRESIDING JUDGE, M.S.
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