SC Workers’ Comp Insurance Policy Procured After Injury is Void

Where owners of a roofing business rushed to an insurance agent and procured a workers’ compensation insurance policy just after an employee was taken to a hospital for treatment of serious injuries sustained in a work-related incident, the policy was void ab initio; cancellation under S.C. Code Ann. § 38-75-730 (2015) was, therefore, not required [Bessinger v. R-N-M Builders & Assocs., LLC, 2017 S.C. App. LEXIS 83 (Oct. 25, 2017)]. Stressing that insurance, by its very nature, is meant to protect against the unknown or the possibility of a loss, the court noted that here the employer attempted to gain coverage for a known loss that had already occurred.

Background

On January 4, 2012, the employee fell from a roof, sustaining injuries to his left hip, right arm, ribs, and back. He was immediately taken to a hospital. While the employee was at the hospital, the owners of the company proceeded to an insurance agent to secure a workers’ compensation policy. One of them signed a representation that he had no knowledge of a prior injury or pending litigation resulting from the company’s work. The owners made a cash payment and the policy was issued as of 12:01 a.m., a time that was technically before the accident had occurred. Several days later, the injured employee filed a claim and the agent notified the carrier of possible fraud in the procurement of the policy.

Following various hearings, the Single Commissioner found that, due to the owners’ fraudulent activity, the policy was void ab initio, and that the Uninsured Employers’ Fund was liable for the loss. As to UEF’s argument the issue was controlled by § 38-75-730, the Single Commissioner found it did not alter the right of a party to rescind a contract induced by fraud. The Appellate Panel ultimately agreed.

Appellate Court Agrees with Appellate Panel

The UEF asserted that a workers’ compensation policy must be cancelled according to § 38-75-730 in order for the cancellation to be effective and could never be void ab initio. The court of appeals disagreed, noting that the state’s Supreme Court had earlier recognized the difference between rescission and cancellation of a contract. It distinguished the facts in the present case from those in Oxendine v. TWL, Inc., 184 N.C. App. 162, 645 S.E.2d 864 (N.C. App. 2007), noting that in Oxendine, cited by the UEF, the injury occurred after the procurement of the policy and not before, as was the case here.

The appellate court found Star Insurance Co. v. Neighbors, 122 Nev. 773, 138 P.3d 507 (Nev. 2006), more instructive. Quoting Larson’s Workers’ Compensation Law, § 150.02[4], the South Carolina court indicated that the only situation in which the insurance should be defeated for all purposes by act of the employer is a circumstance in which the insurance is absolutely void ab initio, rather than voidable. The appellate court acknowledged that, by its plain language, § 38-75-730 applied when a party wished to cancel a policy already in existence at the time of a loss. It did not, however, apply when a party sought to rescind a policy procured by fraud to cover a pre-existing loss. Here, the employer attempted to gain coverage for a known loss that had already occurred. The court concluded that, contrary to UEF’s assertions, § 38-75-730 did not contemplate such a scenario.

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