Michael Hunter

Does your HOA need workers’ comp insurance?

EDITOR’S NOTE: The following column is By Adam M. Beaudoin and Kyle R. Still, Ward and Smith, P.A., New Bern.

The N.C. Workers’ Compensation Act requires all employers with three or more employees to carry workers’ compensation insurance. The purpose is to ensure that employees injured by an accident while working have a safety net to cover lost wages and medical expenses.

The Act, however, has a very technical definition of “employer.” This leads to confusion as to whether non-profit owners associations are covered. In particular, many residential, commercial, and mixed-used property and condominium owners associations (collectively, “POAs”), which often consider themselves to have fewer than three employees, question whether they are covered by the Act and required to purchase insurance.

As explained here, there are good reasons to believe that all North Carolina POAs are subject to the Act, even if they may not have any traditional employees.

Who is an ‘employee’?

The Act specifically defines “employee” to include every “executive officer elected or appointed and empowered in accordance with the charter and bylaws of a corporation.” Because POAs have elected board members pursuant to a charter or bylaws, these board members meet the technical definition of an “employee” under the Act.

Thus, all non-profit organizations, including POAs with three or more corporate officers or directors, even if the officers and directors are volunteers and unpaid, clearly need to obtain workers’ compensation insurance.

The good news for North Carolina POAs is that workers’ compensation insurance rates are based on risk, which should be low for this type of entity. Furthermore, the Act allows corporate officers to opt out of coverage.

Roll the dice?

So what’s the risk of not getting the insurance? First, there is the risk of the costs associated with a workers’ compensation injury.

Without insurance, the POA would have to pay an injured “worker” for two-thirds of the “worker’s” average weekly wages, as well as all medical expenses related to any work injury. If the “worker” dies, the “worker’s” estate would receive certain payments.

While the risk of injury to a POA board member may seem minimal, unexpected trips, falls, and other accidents occur frequently in the workplace. Furthermore, it is not uncommon for POAs to have a maintenance employee who would face a much more significant risk of injury on a day-to-day basis or for POAs to hire what they believe to be independent contractors, only to find out after an injury that the “contractor” is deemed to meet the technical legal requirements of an employee, with the POA then finding itself on the hook for any injury sustained.

Possible fines

North Carolina POA board members and officers should also take notice that the Act imposes a daily fine on employers for failing to purchase insurance. This fine varies from $50 to $100 per day, based on the size of the employer. Although the Industrial Commission generally does not assess such fines unless an uninsured claim is filed, these fines could reach back for years and become substantial.

Of greater concern to North Carolina POA board members and officers is the fact that “any person who, with the ability and authority to bring an employer in compliance” with the requirements of purchasing insurance and who “willfully fails” to do so is guilty of a Class H felony.

Furthermore, the person would be personally liable for 100 percent of the benefits owed to an injured employee who otherwise would be paid by insurance. The POA employer itself also can be liable for a Class H felony and a Class 1 misdemeanor.

Because of the criminal nature of these penalties, the POA’s Directors and Officers Insurance would not apply. Most POA board members confronted with this information will likely believe that responsibility for substantial workers’ compensation costs, fines, and even criminal liability is more than they signed up for.

Conclusion: In light of the substantial risk associated with not purchasing workers’ compensation insurance and the relative inexpensiveness of such coverage, it is prudent for all North Carolina POAs to verify that they have sufficient workers’ compensation programs in place.