Smalygo v. Green

Decision Date15 April 2008
Docket NumberNo. 102,950.,102,950.
Citation2008 OK 34,184 P.3d 554
PartiesMillard SMALYGO, Jr., d/b/a Smalygo Homes, Petitioner, v. David T. GREEN and The Workers' Compensation Court, Respondents.
CourtOklahoma Supreme Court

¶ 0 A three-judge panel of the Workers' Compensation Court determined that the claimant's principal employer had failed to meet the statutory requirement of "good faith" in his reliance on proof of workers' compensation coverage. Thus, the principal employer was determined to be secondarily liable for the injury sustained by the claimant as an employee of principal employer's uninsured subcontractor. The Court of Civil Appeals sustained that determination.

CERTIORARI PREVIOUSLY GRANTED; OPINION OF COURT OF CIVIL APPEALS VACATED; ORDER OF THREE-JUDGE PANEL OF WORKERS' COMPENSATION COURT SUSTAINED.

Aaron C. Peterson of Tulsa, Oklahoma, for Petitioner.

Bret A. Unterschuetz of Tulsa, Oklahoma, for Respondents.

COLBERT, J.

¶ 1 This matter presents this Court's first application of the "good faith reliance" exception to the long-standing rule of principal employer liability stated in section 11(B)(2) of the Workers' Compensation Act. Okla. Stat. tit. 85, §§ 1 through 211 (2001 & Supp.2007). The issue is whether competent evidence was presented to support the determination by a three-judge panel of the Workers' Compensation Court that a principal employer's reliance on proof of workers' compensation insurance did not meet the statutorily imposed standard of "good faith" necessary to exempt the principal employer from secondary liability in workers' compensation. This Court finds that there is competent evidence in the record to support that determination.

FACTS AND PROCEDURAL HISTORY

¶ 2 David Green (Claimant) suffered a work-related injury on October 10, 2002, while working as a construction laborer for Mark Murphy d/b/a Mark Murphy Construction, an independent contractor and subcontractor of the principal employer Millard Smalygo d/b/a Smalygo Homes. When Claimant learned that his immediate employer had no workers' compensation coverage, he amended his claim to add Smalygo as principal employer.

¶ 3 Smalygo contracted Murphy to perform construction work and requested proof of workers' compensation coverage. Although it is undisputed that Murphy provided written proof of valid current coverage, the content of that proof is unclear because apparently neither party retained the original or a copy. However Claimant's Exhibit # 3 is a document from Compsource Oklahoma, which reflects that insurance coverage was in effect from August 13, 2001, until April 1, 2002. This document was generated on May 20, 2004, apparently at the request of Claimant's lawyer in anticipation of trial. While the exhibit is evidence of the date coverage began, it does not identify the original expiration date of coverage listed on the proof of insurance Murphy provided to Smalygo.1 That is because on April 1, 2002, the insurance coverage lapsed, apparently due to Murphy's failure to pay his premium. Murphy admitted that he did not notify Smalygo of the termination of insurance coverage. Murphy testified that he was unsure whether the original term of the policy had been for six months or one year. Smalygo testified that coverage was in effect when he was presented with proof of insurance at the time he contracted with Murphy sometime between March and August of 2002. Therefore, for coverage to have been in effect during that time, the testimony indicates that the policy term stated on the proof of insurance shown to Smalygo was for one year with an expiration date of August 13, 2002.2

¶ 4 The trial court initially determined that Claimant was himself an independent contractor for Murphy and dismissed the claim with prejudice for lack of jurisdiction in August of 2004. A three-judge panel vacated that dismissal, found that Claimant was an employee of Murphy, and remanded the matter for a determination of the remaining issues.

¶ 5 On remand, Smalygo argued that he was insulated from secondary liability based upon his compliance with section 11(B)(2) which provides that "if a principal employer relies in good faith on proof of a valid workers' compensation insurance policy issued to an independent contractor of the employer or to a subcontractor of the independent contractor ... then the principal employer shall not be liable for injuries of any employees of the independent contractor or subcontractor." Okla. Stat. tit. 85 (Supp.2007). Smalygo testified that he had known Murphy for "quite a few years," he relied upon the fact that Murphy had given proof of coverage to him, and he trusted Murphy to maintain that coverage.

¶ 6 In its July 2005 order on remand, the trial court determined that Claimant was an employee of Murphy at the time of his injury. It also determined that Smalygo was not secondarily liable because he had required proof of workers' compensation coverage before he allowed Murphy to perform work as a subcontractor and he did not know that Murphy had allowed that coverage to lapse. Smalygo was again dismissed from the matter with prejudice.

¶ 7 A three-judge panel sustained in part and modified in part. It sustained the determination that Claimant was an employee of Murphy. However, the divided panel expressly vacated the trial court's determination that Smalygo was not secondarily liable.

¶ 8 The issue of Claimant's status as Murphy's employee was not raised in this appeal and the Court of Civil Appeals sustained the three-judge panel's determination that Smalygo was secondarily liable. Thus, this matter presents the sole issue of Smalygo's secondary liability as principal employer.

ANALYSIS

¶ 9 The Workers' Compensation Act is designed to encourage employers to secure compensation so that injured workers will be compensated for "loss of earning power and disability to work." Strong v. Laubach, 2004 OK 21, ¶ 10, 89 P.3d 1066, 1070. In order to prevent evasion of compensation coverage by the subcontracting of the employer's normal work, most states impose the compensation liability of an uninsured subcontractor onto the general contractor. "The purpose of this legislation [is] to protect employees of irresponsible and uninsured subcontractors by imposing ultimate liability on the presumably responsible principal contractor, which has it within its power, in choosing subcontractors, to pass upon their responsibility and insist upon appropriate compensation protection for their workers." 4 Arthur Larson & Lex K. Larson, Larson's Workers' Compensation Law § 70.04 (Math.Bend.2004)(footnotes omitted). These statutes aim to "forestall evasion of the [workers' compensation] act by those who might be tempted to subdivide their regular operations among subcontractors, thus escaping direct employment relations with the workers and relegating them for compensation protection to small contractors who fail to carry (and, if small enough, may not even be required to carry) compensation insurance." Id. § 70.05.

¶ 10 Oklahoma is one of forty-three states that have enacted such a provision. Id. § 70.01. Since 1923, section 11 of Oklahoma's Workers' Compensation Act has allowed an injured employee of an uninsured independent contractor to pursue a workers' compensation claim against the general contractor, or an intermediate contractor, without regard to the liability of the independent contractor. The injured worker may proceed up the chain of independent contractors to reach an intermediate or a general contractor which maintains compensation coverage through insurance or through one of the other means enumerated in section 61 of the Act for securing compensation. Section 11 refers to that entity as a "principal employer."

¶ 11 In 1993, Oklahoma became apparently the first state, and to date the only state, to enact an exception to the general rule of principal employer secondary liability. Section 11(B)(2) permits a principal employer to avoid liability if it "relies in good faith" on proof of workers' compensation insurance by an independent contractor or its subcontractor.3 Thus, the text of the exception requires both "reliance" on the proof of insurance and "good faith" in doing so. Mere reliance will not satisfy the exception.4

¶ 12 By requiring good faith, the Legislature did not create an ambiguity nor did it render the provision vague. Rather, it employed a well-known legal concept that applies to a variety of situations and transactions. For example, the Uniform Commercial Code defines "good faith" as "honesty in fact and the observance of reasonable commercial standards of fair dealing." It applies the definition to each article of that code. Okla. Stat. tit. 12A, § 1-201(20) (Supp.2007). Similarly, the concept of subjective honesty combined with objective reasonableness is found in an insurer's "implied-in-law duty to act in good faith and deal fairly with the insured to ensure that the policy benefits are received." Christian v. Am. Home Assurance Co., 1977 OK 141, ¶ 8, 577 P.2d 899, 901. These are just two examples. Definitions, descriptions, and applications of the good faith standard can be found in both statutory and common law in the areas of commercial law, as well as tort, property, criminal, and other areas of law. In each of these areas due diligence is the hallmark of good faith.

¶ 13 "Good faith is generally regarded as requiring the exercise of reasonable diligence to learn the truth, and ... [h]e who claims ... that he has been misled through the conduct of another must not have been misled through his own want of reasonable care." Hillers v. Local Fed. Sav. & Loan Ass'n, 1951 OK 57, ¶ 14, 232 P.2d 626, 630. While "[g]ood faith is the opposite or antithesis of bad faith," Goodwin v. Old Republic Ins. Co., 1992 OK 34, ¶ 11 n. 12, 828 P.2d 431, 434 n. 12, it does not follow that good faith is merely the lack of bad faith. One may act in a...

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