When Insurance Companies Are Wrong: The Co-Employee Exclusion in an Auto Insurance Policy

For a small family business (sometimes qualified as a “closely held corporation”), an injury to the owner can be devasting. One of ow clients, who we will call, “Doug” was faced with this situation.1 Doug was the sole owner of a closely held corporation. By law he was one of the employees, receiving a W-2, paying taxes, unemployment, and disability. As owner, he  also paid  himself when he made a profit, in addition to his wages. As is typical for such owners, he was excluded from workers compensation benefits by choice.

While riding as a passenger in a company vehicle on the job, Doug’s driver, another employee, fell asleep and crashed causing Doug serious, life-changing injuries. Doug opened a claim for his injuries with the commercial automobile liability policy he had purchased for his business. His insurance company denied the claim, citing the co-employee exclusion. The Insurance Code allowed them to exclude employees under the “Co-Employee Exclusion”. Insurance Code Section 11580(c) allows insurance companies to exclude coverage for several different kinds of claims. For Doug’s claim, his insurance company cited Insurance Code Section 11580(c)(4) which reads:

“(c) In addition to any exclusion provided in paragraph (3) of subdivision (b), the insurance afforded by any policy of automobile liability insurance to which subdivision (a) applies, including the insurer’s obligation to defend, may, by appropriate policy provision, be made inapplicable to any or all of the following:

(4) Liability for bodily injury to any employee of the insured arising out of and in the course of his or her employment.”

This exclusion is commonly known as the “Co-Employee Exclusion”. It was intended so that someone protected under a business’ auto insurance liability policy could not make a claim as an employee under workers’ compensation and then also collect under the company’s automotive liability policy due to injury caused by a fellow employee.

In notifying Doug of the rejection of his claim, his insurance company stated that he was an employee in the course of his employment of his closely held corporation so that his damages caused by a fellow employee were excluded.

‘ Doug is a fictional name to protect privacy

To support their claim that he was an employee, his insurance company quoted Labor Code Section 3351 which provides that:

“Employee means every person in the service of an employer under any appointment or contract of hire or apprenticeship, expressed or implied, oral or written, whether lawfully or unlawfully employed…”

However, Doug’s insurance company did not inform him of the very next section of the Labor Code, Section 3352, which states who, a s a matter of law, is not an employee.

Under Labor Code Section 3352 (a)(l6)Q):

“… an officer or director of a private corporation who is the sole shareholder of the private corporation” is not an employee unless he or she “has elected to be subject to liability for workers’ compensation.”

Doug was the sole owner of his closely held corporation. As stated, like many owners of such corporations, he chose not to cover himself under his workers compensation policy and therefore was not an employee under the Labor Code.

Labor Code Section 3352(a)(16)(B) (buried deep in the text of Section3352) provides that owner employees working for their closely held corporations, and not covered under workers’ compensation, are, by law, not employees. Thus the Co- Employee Exclusion did not apply and he successfully prosecuted his claim. The ability to prosecute this claim meant a seven-figure difference for Doug.

Most small business owners simply believe that their insurance company will treat them fairly and take care of them if they are hurt or in a car crash. Some brokers who sell automobile liability insurance policies or workers’ compensation policies are not aware of the legal exclusions and exceptions under Labor Code. Therefore, they cannot explain when an insurance company is legally required to provide coverage. Doug’s didn’t. Most business owners do not even think to ask their insurance agents about such specific situations and just trust that there will be a remedy under the insurance they have paid for. It is therefore important to consult with a personal injury attorney after you have been injured in a collision, even if the insurance company insists they do not have to pay for your injuries.

Freedman Law