New Jersey Supreme Court Clarifies Insurance Brokers’ Duty to Inform

On December 13, 2022, in Nancy L. Holm v. Daniel M. Purdy (A-39-21) (086229), the Supreme Court of New Jersey addressed the unique circumstances surrounding workers’ compensation coverage of LLC members. In short, the court held that N.J.S.A. 34:15 imposes a non-waivable duty on insurance brokers to inform new LLC members of  (1) the availability of workers’ compensation coverage to members, and (2) the right to elect such coverage at the time of a workers’ compensation policy’s purchase or renewal. 

The term “employee” is typically construed broadly under the New Jersey Workers’ Compensation Act in order to support the spirit of the Act and cover as many workers as possible.[1] LLCs and their members are not considered “employees” under the Act, and unlike “employees,” LLC members must explicitly elect workers’ compensation coverage.[2]   

In recognition of the condition that LLC members expressly elect coverage, N.J.S.A. 34:15-36 requires that every application for workers’ compensation coverage include notice of the availability of such coverage for LLC members and notice that such coverage will not be provided unless specifically elected by LLC members.  

In Holm, the court considered whether the defendant insurance broker, Daniel Purdy, had a duty under N.J.S.A. 34:15-36 to inform members of an LLC that workers’ compensation coverage was available to them and that coverage would not be provided to them unless they specifically opted to obtain that coverage.  

The facts of the instant case are crucial. Robert and Walter Friedauer were brothers who each owned a fifty percent interest in their business, Holmdel Nurseries LLC. Daniel Purdy was their insurance broker. In 2002, Purdy notified the brothers that, as members of the LLC who actively perform services on behalf of the LLC, they could elect workers’ compensation coverage for all members of the LLC for an additional premium. The brothers determined that it would not be cost-effective and chose not to secure coverage. Michael and Christopher Friedauer, Robert’s two sons who worked for Holmdel Nurseries at that time, were employees of the LLC and not members. As such, both were covered under the company’s workers’ compensation policy.  

Thereafter, Michael and Christopher bought out their uncle Walter Friedauer and purchased his fifty percent interest in Holmdel Nurseries. Accordingly, as of January 1, 2012, Michael and Christopher were no longer employees of the business, but instead were members of the LLC, each owning a twenty-five percent interest.  

The parties met annually to discuss the LLC’s insurance needs. At their 2012 meeting, which took place on July 12, Purdy became aware that Walter Friedauer was no longer a member of the LLC and that Christopher and Michael Friedauer had joined their father Robert as members of the LLC. Purdy maintained that at that meeting, the three members of the LLC all knew that they were excluded from the workers’ compensation policy. The Friedauers maintained that they were unaware that Christopher and Michael were excluded from the policy. It is undisputed that at the meeting, Purdy did not explicitly advise the Friedauers that Michael and Christopher were no longer covered by Holmdel’s Nurseries’ workers’ compensation policy in light of their transition from employees of the LLC to members of the LLC. Holmdel Nurseries’ workers’ compensation policy continued to exclude the three members of the LLC for the years 2012, 2013, 2014, and 2015.  

On February 15, 2015, Christopher Friedauer was found dead in one of the company’s trucks. It was assumed that his death was caused by complications from a slip-and-fall that occurred while he was working earlier that day.  

Christopher’s wife, plaintiff Nancy Holm, brought the instant action against Purdy, alleging that his failure to provide notice as mandated by N.J.S.A. 34:15-36 resulted in Christopher being unaware that after his transition from employee to LLC member he no longer had workers’ compensation coverage. This alleged negligence and breach of duty, Holm argued, caused Christopher’s dependents to be deprived of a workers’ compensation death benefit to which they would have been entitled if Christopher had been covered by workers’ compensation insurance. 

The trial court granted Purdy’s motion for involuntary dismissal and his motion for judgement at trial. Considering Holmdel Nurseries’ previous decision not to purchase workers’ compensation coverage for its LLC members, the court ruled Purdy had no duty to inform the LLC members that such coverage was available to its members during the renewal process. The trial court also found that the plaintiff failed to present evidence that a breach of duty by the defendant was the proximate cause of the damages alleged.  

The Appellate Division reversed in part, holding that N.J.S.A. 34:15-36 imposes on an insurance broker a non-waivable duty to inform new members of an LLC that workers’ compensation coverage is available to them if all LLC members elect to obtain it. The Appellate Division did not require the plaintiff to prove that the defendant committed “a willful, wanton or grossly negligent act of commission or omission” in order to recover damages. It did determine, however, that the plaintiff had presented sufficient evidence to warrant a jury determination as to whether Purdy breached a duty to inform Christopher Friedauer and whether his death was therefore compensable.  

Purdy petitioned for certification, and the Supreme Court of New Jersey agreed with the Appellate Division, concluding that under N.J.S.A. 34:15-36, an insurance broker has a duty to inform new LLC members of the availability of workers’ compensation coverage and the right to elect such coverage at the time of the workers’ compensation policy’s purchase or renewal. The court further clarified that applications for workers’ compensation coverage for LLCs must include notice of the availability of such coverage along with notice that such coverage will not be provided unless specifically elected and “notice of election is executed and filed with the insurer or insurance producer.”[3] 

The court’s opinion is instructive from a practical standpoint as it clarifies the insurance broker’s duty in this context of workers’ compensation for LLC members. Here, because the LLC had only three members, all of whom were in contact with the defendant during the relevant period, the defendant had a duty to provide notice directly to all members. While the court did not address whether an insurance broker must provide direct notice to all LLC members eligible for workers’ compensation coverage in situations involving LLCs with a larger number of members, the Holm decision suggests that best practices moving forward will include providing such notice to all members of an LLC, regardless of size, in order to avoid any potential breaches of duty.