Strict Statutory Interpretation - New Jersey Supreme Court Affirms Determination of Improper Cancellation of Workers' Compensation Insurance Coverage

New Jersey - Workers' Compensation

In a split decision in Sroczynski v. Milek, et al, 197 N.J. 36, 961 A.2d 704 (2008), the New Jersey Supreme Court has ruled that the cancellation of a workers' compensation insurance policy is ineffective when all of the technical requirements of Section 81 are not met. Section 81 of the New Jersey Workers' Compensation Act (Act) provides the requirements for effectively canceling an insurance policy. At issue in Sroczynski was the "certified statement" requirement of Section 81(b):

No such policy shall be deemed to be canceled until:

a. At least ten days notice in writing of the election to terminate such contract is given by registered mail by the party seeking cancellation thereof to the other party thereto; and

b. Until like notice shall be filed in the Office of the Commissioner of Banking and Insurance, together with a certified statement that the notice provided for by paragraph "a" of this section has been given; and

c. Until ten days have elapsed after the filing requirement by paragraph "b" of this section has been made.

In Sroczynski, the petitioner sustained a work-related injury while employed by Milek. NJM had issued an insurance policy for the time period covering the date of injury but canceled the policy prior to the injury based on Milek's failure to make premium payments. After a claim petition was filed, NJM filed a motion to be dismissed as the carrier based on the cancellation of the policy. NJM's motion was opposed by Sroczynski and the Uninsured Employers Fund (UEF). The Judge of Compensation bifurcated the case on the issue of insurance coverage.

The only witness to testify was Robert Murray, an assistant vice-president of NJM. He explained that initially NJM enters into its own computer system the data regarding the cancellation, including the employer's name, the policy number, the "reason code" for cancellation, the date of the actual cancellation, and the effective date of the cancellation. This data is then electronically transferred from NJM to the New Jersey Compensation and Rating and Insurance Bureau (CRIB), the agency charged with monitoring insurance coverage for employers. Murray further testified that this file transfer protocol (FTP) was expressly authorized by the New Jersey Workers' and Employer's Liability Insurance Compensation Manual (Manual) which was approved by the Commissioner.

In the reported opinion from the Appellate Division, it was noted that there was no dispute between the parties that NJM properly notified Milek that it was canceling its insurance policy or that such notice was sent by certified mail. It was also undisputed that the Commissioner received notification of the cancellation and that ten days elapsed from the time the notice was served prior to the cancellation date. The only issue was the legal effect of NJM's failure to file the "certified statement" with the Commissioner.

The Judge concluded that NJM failed to properly cancel the policy and, therefore, denied its motion to be dismissed as the carrier:

[The CRIB instruction page] outlines the manner in which the notice is to be filed and in no way relieves the carrier from its obligation to certify the information...(T)he [precedents] requires strict compliance with the cancellation statute. There is a public policy favoring...workers' compensation insurance, and failure to require strict compliance with the cancellation policy will allow a carrier to avoid these responsibilities and deny the insured worker the recovery promised to him by law...

[T]he CRIB acknowledgment is not sufficient to lift the mandate for certification as stated in the statute. I find that because of the failure of [NJM] to file a correct certification...or any certification when canceling the policy of John Milek Construction Company, that the policy is not properly or effectively canceled absent the correct procedure.

The Appellate Division affirmed, "Although there is no dispute that Milek was in fact provided with the notice of the cancellation by NJM, we agree with Sroczynski, [and] the UEF, ... that providing Milek with such notice of cancellation does not relieve NJM of its responsibility to comply with the 'certified statement' requirement of [Section] 81(b)." The Appellate Division also rejected NJM's argument that it substantially complied with the statute, "We reject NJM's argument that because it complied with the file transfer protocol set forth in the manual and approved by the Commissioner, it sufficiently complied with the statute. NJM's argument ignores one of the key provisions of the manual. In particular, the manual requires compliance with all sections of the workers' compensation statues." NJM then appealed to the New Jersey Supreme Court.

In a split decision, the Supreme Court also affirmed, "The language of N.J.S.A. 34:15-81 is clear and unambiguous, allowing for no interpretation other than that filing a certified statement with the Commissioner is a prerequisite to effectuating the cancellation of coverage..., the Appellate Division correctly concluded that the use of the FTP system to transmit data about policy cancellations, without any accompanying certification, cannot be effective in light of the clear and unambiguous demands of [Section] 81(b)."

The Supreme Court also rejected NJM's argument that it substantially complied with the statute:

Here, the Legislature did not simply require notice to the Commissioner but also commanded that the insurer provide a certification by an employee attesting the truthfulness of the fact that proper notice was afforded the insured. Although the legislative history of the Act is sparse, it seems obvious that the purpose of that provision was to place personal responsibility of an employee of the insurer to assure that proper notice of cancellation was given and to require that employee to certify to that fact, recognizing the legal implications of a false certification. The electronic provision of information to the Commissioner, without a certification, completely defeats the notion of personal responsibility that the certification provision was intended to secure. It was, thus, not simply a technical misstep.

Arguably, the Court's decision evidences an analysis of form over substance. Absent in the Supreme Court's decision were the multiple references in the Appellate Division's opinion to the fact that it was undisputed that NJM properly notified Milek of the cancellation and that the notice of cancellation was received by the Commissioner. At no time was there any indication that NJM provided false or misleading information concerning the cancellation to the Commissioner. Therefore, if these critical facts were specifically undisputed during the trial, then shouldn't that carry greater weight as to their truthfulness as opposed to a pre-litigation "certified statement"? There was no argument, nor even an indication, that had NJM provided the "certified statement," it would have contained any different information than what had already been provided. Had there been even an argument that NJM's cancellation was somehow inaccurate, not sent timely, etc., then the contents of the "certified statement" become critical. But, as in this case, when the parties stipulated at trial to the very facts that would have been contained in the "certified statement," then this determination seems harsh, particularly in light of the Appellate Division's more recent decisions in Ongaro v. Country Flooring Enterprises, 382 N.J. Super 359 (2006) (errors in cancellation notice to the effective dates of the policy and the cancellation date were not fatal to the cancellation because the errors were "purely clerical in nature") and Carreon v. Hospital Linen Servs., 386 N.J. Super 504 (2006) (notice of cancellation sent to insured's premium finance company and not to insured not fatal as notice was sent in compliance with provisions of an unrelated statute, N.J.S.A. 17:16D-13).

Regardless, insurance carriers are urged to strictly comply with all requirements of Section 81 when deciding to cancel workers' compensation coverage, even if they are still utilizing the CRIB FTP procedures. If you are unsure as to whether your workers' compensation cancellation procedures are in compliance, or have other questions concerning the New Jersey Workers' Compensation Act, contact your defense counsel immediately.

* Bob is an associate in our Cherry Hill, New Jersey, office and can be reached at (856) 414-6009 or rjfitzgerald@mdwcg.com.

Defense Digest, Vol. 15, No. 2, June 2009