UNINSURED EMPLOYERS'S FUND v. Lutter

676 A.2d 51, 342 Md. 334, 1996 Md. LEXIS 46

• Court: Court of Appeals of Maryland
• Decided: May 8, 1996
• Docket: 58, Sept. Term, 1995
• Status: Published

Opinions

CHASANOW, Judge.

This case presents the question of whether officers of Maryland close corporations, who decide not to purchase workers’ compensation insurance for themselves but fail to notify the State of their decision and are subsequently injured working for the corporation, may collect workers’ compensation benefits from the state-operated Uninsured Employers’ Fund. We hold that uninsured close corporation officers are not “covered employees” under the Workers’ Compensation Act when they decide, in their capacity as corporate officers, not to carry insurance for themselves and they fail to notify the Workers’ Compensation Commission of their decision. Hence, they are not entitled to benefits from the Fund.

I.

William Lutter, the respondent, was injured in a job-related accident in February, 1991 while working for Lutter Construction, Inc., a Maryland close corporation wholly owned by Lutter and his wife. The Lutters formed the corporation in 1988, and Lutter served as president, and his wife as vice president of the corporation. Although the corporation previously employed other workers, the record indicates that Lutter was the corporation’s only employee at the time he was injured.

Between 1988 and 1990, the corporation carried workers’ compensation insurance covering Lutter with State Farm Insurance. In 1990, after conversations with an agent for Aetna Insurance, Lutter decided to cancel the State Farm policy and switch to Aetna to save money. In making the switch, however, Lutter dropped the workers’ compensation insurance the corporation had been carrying on him. The record is unclear as to whether Lutter knew or understood that the workers’ compensation coverage had been dropped from his insurance package at the time his corporation switched insurers. But if Lutter was not aware of his lack of insurance at that time, he shortly became aware. Soon after he switched from State Farm to Aetna, Lutter himself called his agent to cancel the workers’ compensation insurance on a former employee and discovered that no such insurance had ever been purchased from Aetna. Lutter’s deposition, which was an exhibit in the trial court, indicates his decision-making process:

“[LUTTER:] I found out later on that I had cut State Farm for workman’s compensation] and they were providing me with liability. I didn’t find that out until July of that year.

Q. After the accident?

A. No, before the accident____

Q. What did you do then?

A. I called up to—the man that was working for me quit, so I called up to cancel my insurance on him. And, at that time is when I found out that I hadn’t had workman’s compensation] with them at all, at that time.

* * * ❖ * *

Q. When you found out that you had no worker’s compensation] insurance, did you ask them to place insurance for you?

A. No, because I didn’t have any work at the time, and the man told me until you hire somebody that you don’t really need insurance—

Q. Who told you that?

A. —as long as you have health insurance. Mr. Katz.

And then when I hired somebody, to call him up and then he would go ahead and sign me up again.”

After discovering that Lutter Construction, Inc., did not have workers’ compensation insurance, Lutter did not purchase it for the corporation, apparently taking the advice of his insurance agent that workers’ compensation insurance was not necessary as long as he was Lutter Construction’s only employee and had health insurance. Lutter acknowledged in his deposition that he was responsible for procuring workers’ compensation insurance for the corporation. Yet despite having a lawyer, accountants, and another insurance agent available, Lutter made no effort to consult with any of them in order to confirm the Aetna insurance agent’s advice.

In February of 1991, approximately six months after he decided not to purchase workers’ compensation insurance from Aetna, Lutter fell from the roof of a building while on the job and was seriously injured, remaining in the hospital for almost two months. He filed a claim with the Workers’ Compensation Commission (the Commission), seeking benefits from his close corporation pursuant to the Maryland Workers’ Compensation Act, Maryland Code (1991 Repl.Vol., 1995 Supp.), Labor and Employment Article, § 9-101 et seq.1 As the corporation had no insurance, Lutter sought benefits from the Uninsured Employers’ Fund (the Fund), which was established by the State to provide workers’ compensation benefits for injured workers whose employers fail to purchase workers’ compensation insurance for them. See § 9-1002; Richard P. Gilbert and Robert L. Humphreys, Jr., Maryland Workers’ Compensation Handbook § 14.3, at 300 (2nd ed. 1993).

The Commission denied Lutter’s claim for benefits on the ground that Lutter was not a “covered employee” within the meaning of the Workers’ Compensation Act. Lutter appealed to the Circuit Court for Prince George’s County, which affirmed the Commission’s ruling on a motion for summary judgment. Lutter then appealed to the Court of Special Appeals, which reversed the circuit court, holding that Lutter was a “covered employee” under the statute and thus entitled to benefits from the Fund. Lutter v. Lutter Construction, 103 Md.App. 292, 653 A.2d 517 (1995). We granted the Fund’s petition for certiorari.

II.

A.

Under the Maryland Workers’ Compensation Act (the Act), an employer is generally required to pay workers’ compensation benefits to an employee who suffers an accidental personal injury in the course of employment. See § 9-501. The Act requires all employers to obtain workers’ compensation insurance or to implement an approved self-insurance program to cover the cost of any benefits awarded to an injured worker. § 9-402(a). An employer’s failure to provide insurance for employees can result in criminal prosecution. § 9-1107(b). In the event that an employer does not purchase the required workers’ compensation insurance, an injured employee can still receive benefits by applying to the state-operated Fund.² § 9-1002(e).

As a general rule, employers are required under the Act to carry workers’ compensation insurance for all their workers that fit the Act’s definition of a “covered employee.” See § 9-402. Officers of corporations are considered covered employees under the Act if they provide services to the corporation in return for pay. § 9-206(a). Thus a corporation is ordinarily required to purchase workers’ compensation insurance for corporate officers who provide paid services to the corporation. An exception to this rule allows officers of close corporations³ to exclude themselves from the corporation’s insurance coverage by filing a notice of their decision to be exempt from coverage with both the corporation’s insurance carrier and with, the Commission. § 9-206(b). Section 9-206 provides in pertinent part:

“(a) In general.—Subject to subsection (b) of this section, an officer of a corporation ... is a covered employee if the officer ... provides a service for the corporation ... for monetary compensation.

(b) Election to be Exempt.—An individual who otherwise would be a covered employee under this section may elect to be exempt from coverage if:

(1) the individual is an officer of a close corporation....

* * * * * *

(c) Notice of election.—(1) A corporation ... shall submit to the Commission and to the insurer of the corporation ... a written notice that names the individual who has elected to be excluded from coverage.

(2) An election under subsection (b)(1) ... of this section is not effective until a corporation complies with this subsection.”

At first glance, Lutter appears to be a covered employee within the meaning of § 9-206. At the time of his injury, Lutter was president of Lutter Construction, Inc., and he performed construction work for the corporation. Hence, he was an officer who provided a service for the corporation for monetary remuneration. See § 9-206(a). The real question, however, is whether Lutter effectively exempted himself from his status as a covered employee under § 9-206(b) by deciding, in his capacity as corporate president, not to purchase workers’ compensation insurance for himself.

If Lutter did exempt himself under § 9-206(b), then he is not a covered employee and, therefore, not entitled to benefits from the Fund. See § 9-1002(e) (only covered employee or dependents of covered employee may apply for benefits from the Fund). Lutter contends that despite his decision not to purchase insurance for himself, he did not effectively exempt himself from coverage under the Act because he did not file written notice of his election to be exempt with the Commission as required by § 9-206(c). We disagree.

B.

Initially, we note that the requirement in § 9-206(c) that the corporation notify its insurance carrier of Lutter’s decision to exempt himself from coverage is inapplicable in this case because the corporation was not carrying any workers’ compensation insurance, and thus there was no workers’ compensation insurance carrier to notify.⁴ In addition, the corporation’s insurance agent obviously knew that the corporation was not carrying workers’ compensation insurance.

The requirement in § 9—206(c) that the Commission be notified in writing of a corporate officer’s election to be exempt exists for the benefit of the State, not for the benefit of the corporate officer. The clear purpose of the provision is to ensure that the State, in the form of the Commission, is aware that a particular corporate officer is no longer a covered employee.⁵ The notice requirement does not exist for the protection of the corporate officer who is already aware of his or her decision to be uninsured.

Because the notice provision exists solely for the benefit of the State, the State has the right to waive the notice requirement. See Blaustein v. Aiello, 229 Md. 131, 138, 182 A.2d 353, 357 (1962) (“[T]he right to notification may be waived by the person for whose protection it is exactable .... ”), cert. denied and appeal dismissed, 371 U.S. 233, 83 S.Ct. 326, 9 L.Ed.2d 494 (1963); 2 Maurice H. Merrill, Merrill on Notice § 877, at 395 (1952) (“One may waive the advantage of a law providing for notice which is intended solely for his own benefit.”) (footnote omitted). By contesting Lutter’s claim for benefits, the State, in the form of the Fund, has waived the notice requirement.⁶ Hence, Lutter’s failure to notify the Commission of his decision not to purchase workers’ compensation insurance had no effect on Lutter’s status under § 9-206.

C.

By deciding to work as an employee of his close corporation without workers’ compensation insurance, we believe Lutter elected to be exempt from the State workers’ compensation system. The mere fact that he failed to notify the State of his election does not entitle him to workers’ compensation benefits from the Fund. Lutter’s own deposition makes clear that he knew exactly what he was doing when he decided to operate his corporation without purchasing workers’ compensation insurance coverage for himself. On the advice of his insurance agent, Lutter decided that the corporation didn’t “really need” the insurance as long as Lutter was the only employee and was covered by health insurance. As corporate president, Lutter was both the person who made the decision not to protect himself with workers’ compensation insurance, as well as the person with the corporate responsibility to notify the Commission of his decision. Hence, he cannot be permitted to receive benefits from the Fund merely because he neglected or refused to perform his duty to notify the Commission.

In fact, as the dissent suggests, Lutter may be criminally liable for failing to procure the required insurance for himself. See §§ 9-1107(c) and 9-1108(b) (making corporate officers who have the responsibility for the “general management of the corporation” criminally liable for failing to secure payment of workers’ compensation). Allowing him to collect workers’ compensation benefits, therefore, would violate the common law principle that one should not be permitted to benefit from his own criminal conduct. See Ford v. Ford, 307 Md. 105, 109, 512 A.2d 389, 391 (1986); Chase v. Jenifer, 219 Md. 564, 567, 150 A.2d 251, 253 (1959); Price v. Hitaffer, 164 Md. 505, 165 A. 470 (1933).

We agree with the Fund that the principle announced in Molony v. Shalom Et Benedictus, 46 Md.App. 96, 415 A.2d 648 (1980), applies in the instant case. Molony, a corporate president, was injured while working for the corporation. He then filed a claim for workers’ compensation benefits, but not until after the two-year limitation for a claim had expired. In an attempt to avoid the effect of the two-year limitation, Molony argued that the limitation did not apply because his employer, i.e., the corporation of which he was president, had not filed a report of employee injury within 10 days of receiving notice of the accident, as required by the Act. Hence, Molony contended, the two-year limitations period had not begun to run and he was eligible for benefits. Molony, 46 Md.App. at 97-98, 415 A.2d at 648. The Court of Special Appeals rejected this argument, noting that Molony, as corporate president, had a duty to see that the report of injury was filed. Hence, he could not invoke the corporation’s failure to file the report to preserve his rights as a claimant. Judge Wilner explained:

“[Wjhere the injured employee is himself responsible for seeing to it that the report is made—where, in effect, he is both the employer and claimant-employee—he cannot evade his responsibility as employer and thereby gain an unwarranted advantage as claimant-employee. As a matter of law, therefore, if appellant in fact occupied these dual roles, he is required to discharge the responsibilities of each or suffer the consequence of failing either one.”

46 Md.App. at 102-03, 415 A.2d at 651.

We believe this reasoning applies in the instant case. As president of the corporation, Lutter was responsible for notifying the Commission that he had decided not to purchase insurance for himself and had therefore exempted himself from the Act under § 9-206(c). He cannot use his own failure to notify the Commission as the basis for his eligibility for benefits. By occupying the dual roles of employer/employee, Lutter was “required to discharge the responsibilities of each or suffer the consequence of failing either one.” Molony, 46 Md.App. at 103, 415 A.2d at 651.

It is obvious that the legislature’s purpose in creating the Fund was to protect injured workers whose employers failed, either willfully or negligently, to carry workers’ compensation insurance for them. See Maryland Workers’ Compensation Handbook § 14.3, at 300. It would be a gross distortion of this purpose to hold, as Lutter urges us to do, that the Fund must also pay benefits to individuals who knowingly and deliberately choose to operate their close corporation without purchasing workers’ compensation insurance for themselves solely because they did not notify the Commission of their decision.

We hold that when officers of close corporations make a conscious and deliberate decision not to purchase workers’ compensation insurance for themselves, they cannot claim the status of a covered employee for the purpose of collecting benefits from the Fund, regardless of whether they comply with the notice requirement in § 9-206(e).⁷ To hold otherwise would enable officers of close corporations to effectively get free workers’ compensation coverage from the Fund simply by not buying insurance for themselves and not notifying the Commission of their decision. Surely, the legislature did not intend such an absurd result. See Md. State Retirement v. Hughes, 340 Md. 1, 7, 664 A.2d 1250, 1253 (1995) (noting that statutory construction is approached from a commonsensical perspective, and that the Court should avoid constructions that are illogical, unreasonable or inconsistent with common sense).

D.

The history of the provisions allowing corporate officers to be covered under the Act supports our holding. The Act was originally designed to cover employees, not employers. See Maryland Workers’ Compensation Handbook § 4.2-2, at 63. Traditionally, although corporations were separate entities from those who worked for the corporation, cases and statutes in some states did not permit workers’ compensation coverage for corporate executives because they were considered employers rather than employees. See 1C Arthur Larson, The Law of Workmen’s Compensation § 54.21(d), at 9-232-33 (1986). As Professor Larson explains:

“At one time the majority rule appeared to rule out such coverage, on the ground that, even though the corporation is a separate entity in law, some human beings must exert the powers that belong to the employer-corporation, and those persons, the officers and directors, must, therefore, for compensation purposes, be identified with the employer while exercising those powers.” (Footnote omitted).

Id.

Later, workers’ compensation coverage became available to most employers. See Maryland Workers’ Compensation Handbook § 4.2-2, at 63-64. For example, in 1968 the legislature amended the Act to permit partners and sole proprietors devoting full time to the partnership or proprietorship business to elect to be “covered employees” under the Act. See Chapter 742 of the Acts of 1968. Similarly, in 1971, the legislature amended the Act to include as covered employees corporate officers providing paid services to the corporation. See Ch. 119 of the Acts of 1971.

The legislative history of the provisions allowing corporate officers to be covered under the Act indicates that in 1978 the General Assembly amended the statute so that officers of close corporations were excluded from coverage unless they specifically opted into coverage by filing written notice with the Commission. See Ch. 634 of the Acts of 1978. As a result of the amendment, the number of notices filed with the Commission by close corporation officers seeking to opt into coverage increased so dramatically that the Commission needed an additional clerk to handle the added work. In response, the legislature in 1979 amended the provision to provide that officers of close corporations were automatically covered unless they filed a notice opting out of coverage. See Ch. 582 of the Acts of 1979. A memorandum prepared for the legislature by the State Department of Fiscal Services on the fiscal impact of the 1979 amendment states:

“Last year the number of inquiries and notices received by the Commission was so great concerning close corporation officers that the Commission believes it needs a Typist-Clerk II for this purpose. This would entail $9,014 in additional expenditures in the first year for the Commission, funded by general fund appropriations that are reimbursed to the State Treasury.

The Department of Fiscal Services doubts that this much activity will result with respect to close corporation officers who elect to be exempt.”

Hence, the legislature’s primary purpose in amending the statute to automatically cover officers of close corporations unless they filed written notice opting out was to save the State the added expense of hiring an additional clerk. The fiscal memorandum indicates that “State revenues and expenditures are not affected” by the legislation. Clearly, then, the legislature’s purpose in adopting the amendment was not to provide free coverage from the Uninsured Employers’ Fund for officers of close corporations who decide not to purchase insurance and fail to notify the Commission of their decision.

E.

In concluding that Lutter’s failure to notify the Commission of his decision not to purchase insurance meant that he was still a covered employee under the Act, the Court of Special Appeals relied on Inner Harbor v. Myers, 321 Md. 363, 582 A.2d 1244 (1990). In Inner Harbor, this Court held that the failure of a corporate officer/employee to purchase workers’ compensation insurance for the employees of his close corporation did not prevent the officer/employee from collecting benefits under a workers’ compensation policy purchased by his statutory employer. 321 Md. at 377, 582 A.2d at 1251. The Court of Special Appeals applied this reasoning to the instant case, and concluded that Lutter had not exempted himself from coverage under the Act by failing to procure workers’ compensation insurance. See Lutter, 103 Md.App. at 296-98, 653 A.2d at 519-20.

Inner Harbor, however, is distinguishable from the instant case. In Inner Harbor, the corporate officer/employee was seeking benefits from an insured statutory employer, not from the Uninsured Employers’ Fund. Hence, it was not in the State’s interest in Inner Harbor to waive the statutory notice requirement now codified in § 9-206(c). Had the State waived the notice requirement in Inner Harbor, the insured statutory employer would have escaped liability, and the injured corporate officer/employee would have received nothing even though an insurance policy existed that covered the officer as a statutory employee. As we noted, this result would have contravened the remedial purpose of the workers’ compensation statute. See Inner Harbor, 321 Md. at 378, 582 A.2d at 1251.

In the instant case, on the other hand, it was clearly in the interest of the State to waive the notice requirement set out in § 9-206(c). By not waiving the notice requirement, the State would have made itself liable to pay Lutter more than $100,-000 in benefits from its own Fund,⁸ even though Lutter elected not to carry workers’ compensation insurance. It was clearly in the State’s interest to waive the notice requirement. By contesting Lutter’s claim, the State did just that.

III.

Our holding in the instant case is a limited one. We hold that a corporate president who knowingly and deliberately decided to operate his close corporation without workers’ compensation insurance for himself cannot collect benefits from the Fund solely because he did not notify the Commission of his decision to be uninsured. We stress that our holding applies only to cases where, as here, the corporate officer seeking to claim benefits from the Fund also had the responsibility to ensure that the corporation carried workers’ compensation insurance. It does not apply in cases where the corporation fails to obtain insurance but the injured corporate officer/employee was not responsible for, and played no role in, the decision not to procure workers’ compensation insurance.

JUDGMENT OF THE COURT OF SPECIAL APPEALS REVERSED. CASE REMANDED TO THAT COURT WITH INSTRUCTIONS TO AFFIRM THE JUDGMENT OF THE CIRCUIT COURT. COSTS IN THIS COURT AND IN THE COURT OF SPECIAL APPEALS TO BE PAID BY RESPONDENTS.

1 . Unless otherwise indicated, all statutory references are to Maryland Code (1991 Repl.Vol., 1995 Supp.), Labor and Employment Article.

The accident that caused Lutter’s injuries occurred before the Workers’ Compensation Act was recodified from Md.Code (1957, 1985 Repl. Vol., 1990 Cum.Supp.), Art. 101, § 1 et seq. to title 9 of the Labor and Employment Article. Since the relevant provisions of the Act were not substantively changed in this recodification, we will cite the sections of the Act as they are now codified.

2 . All funds received by the Uninsured Employer’s Fund are held, managed and disbursed by the State Treasurer. §§ 10-315, 10-318 and 10-319. The Fund is administered by a board appointed by the Governor with the advice and consent of the Senate. § 10-308. The board and staff are paid in accordance with the State budget. See § 10-309. In Workmen’s Comp. Comm. v. P. & C. Ins., 319 Md. 1, 570 A.2d 323 (1990), we said:

‘‘[T]he assessment proceeds which fund the ... [Uninsured Employers’ Fund] constitute government revenue raised by legally required payments to be expended for public purposes. As such, they are ‘taxes.’ ”

319 Md. at 6, 570 A.2d at 325.

3 . Close corporations are governed by Md.Code (1975, 1993 Repl.Vol.), Corporations and Associations Article, § 4-101 et seq. A close corporation is one in which the stock is subject to certain transfer restrictions, and which has elected close corporation status by a unanimous vote of its stockholders. William G. Hall, Jr., The New Maryland Close Corporation Law, 27 Md. L. Rev. 341, 341-42 (1967). Generally, a close corporation has a limited number of stockholders who actively participate in the business, a close personal relationship among the stockholders, and does not have an established market for the corporation’s stock. The New Maryland Close Corporation Law, 27 Md. L. Rev. at 341.

4 . The dissent urges a mandatory requirement in § 9-206(c) that the Commission be notified of an uninsured close corporation officer’s decision to be exempt from coverage, and concludes that an uninsured close corporation officer remains a covered employee until such notice is provided. The dissent does not explain, however, how an officer of a close corporation electing to carry no insurance could comply with the requirement in § 9-206(c) to notify the corporation’s insurer where the corporation has no insurance.

5 . The dissent contends that the notice requirement also exists to protect "innocent” close corporation officers by ensuring that they will be covered employees until the corporation files a written notice of exemption. 342 Md. at 358, 676 A.2d at 63. This protection, the dissent argues, is ”destroy[ed]” by our holding in the instant case. The dissent’s construction of our holding is simply incorrect. As we plainly point out in Section III, infra, our holding applies only in cases where the close corporation officer seeking to claim benefits from the Fund also had the responsibility to ensure that the corporation carried workers’ compensation insurance. Hence, an “innocent” officer who was not responsible for the decision not to purchase insurance would still be a covered employee, even if the corporation did not purchase insurance for the officer and did not notify the Commission.

6 . Although § 9-206 requires that the Commission, not the Fund, be notified of a corporate officer's decision to be exempt from coverage, both the Commission and the Fund are instruments of the State. Thus, the State, acting through the Fund, can waive the requirement that it be notified. Lutter should not be able to receive what this Court has characterized as "government revenue,” see note 2, supra, solely because he failed to notify a state agency of his decision not to purchase workers’ compensation insurance.

7 . We pause to point out that our holding today has no effect on the eligibility of close corporation officers who seek to collect benefits under an insurance policy purchased by a statutory employer. See Inner Harbor v. Myers, 321 Md. 363, 582 A.2d 1244 (1990). As we explain in Section II(E), infra, Inner Harbor is distinguishable from the instant case. Hence, its holding is not affected by our decision today.

8 . The record does not indicate the total value of the benefits that Lutter would have received under the holding of the Court of Special Appeals. It does indicate that Lutter’s medical expenses totaled more than $108,000.