A Warning to Employers and Insurance Agents About Workers Compensation LLC Rejection Forms

It’s been a strange year in the workers compensation consulting world. We’ve worked more cases this year involving LLC Member Rejection Forms than any before. Here’s some helpful hints for all involved…

It’s not the first time I’ve written about this but the problem persists! Workers compensation LLC Member Rejection/Inclusion forms continue to cause trouble for employers. In most of the cases we’ve worked it’s about the automatic inclusion of a LLC member in coverage. You see it’s individual state statutes that provide guidance as to how any given state’s workers compensation act will respond to member/officer or owners of a business.

Most states will automatically exclude sole proprietors and partners from coverage but will include corporate officers. When LLC’s became popular, more confusion developed between individual states as to how they would handle LLC Members under their state workers compensation act. Some states treat LLC Members the same as Partnerships while others treat them as Corporate Officers.

So to clarify the confusion about how to handle LLC Members, most states developed some form of “Notice of Election or Rejection” to be completed. Some states already had a form like this so they just added a section for LLC Members. Others developed a specific form to be used for LLC Members. Some states require the form to be completed by the employer and filed with the state while others only require the form to be filed with the insurance company. Requirements as to the proper completion and filing of these forms is usally found within an individual states workers compensation statute.

Here’s where the problem comes. For a state where LLC Members are automatically included in coverage the failure to properly file a rejection form means payroll for the LLC Members are then picked up at audit and included in the premium calculation! Depending on the class of business involved this act may cause a serious, unexpected increase in premium for the employer.

One problem that’s come up more than once this years is where an employer changes the business entity and fails to notify his insurance company. Remember, workers compensation insurance companies follow the rules, at least they’re supposed to, and when statute tells them they must automatically provide coverage for an LLC Member believe me they will collect the premium due! As a matter of fact in yesterdays post I wrote about a Georgia employer who was effected to the tune of $26,000 by this very problem. No joke! This can be a serious problem!

Another problem related to rejection forms is where the form is not returned in a timely manner. Some insurance companies may show more lienency, but don’t count on it. We’ve worked cases this year where the employer was insured through a state assigned risk plan, the pool, and shortly after securing their policy was sent a rejection form by the plan with instructions to complete and return by a certain date. When the rejection form was not received by the cut off date, the insurance company went back to the policy inception date and endorsed the policy to include the LLC Member payroll causing the premium to significantly increase. Once the employer sent the signed rejection form back, the insurance company would not go back to the inception date of the policy but rather endorsed the policy on the date they received the form. So here we have a LLC Member, owner of the company, who did not want to have coverage on himself, but because he didn’t return the form directly to the insurance company as directed before their cut off date, was included in coverage and charged for it! A costly mistake! 

Key Factors To Help Avoid Rejection Form Problems:

  • Look to your state workers compensation statutes for inclusion/exclusion guidance;
  • Ask your insurance agent to explain ownership and entity issues;
  • Notify your workers compensation insurance company and agent in writing when you make any changes in ownership of your business;
  • As a matter of fact, be sure to talk with your insurance agent when you make any changes!
  • And if you find you’re having a problem contact a workers comp consultant for help!

Hope this has been helpful!