Traveling employees can create workers compensation coverage nightmares—and many agents are unaware of these traveling landmines until after the injury.

The problems arise at the junction of two key concepts:

Extraterritoriality. How does the sending state’s workers comp policy respond when one or several workers leave the state to perform operations for or conduct duties on behalf of the employer? More simplistically, does the workers comp coverage follow the employee when they leave the state to work? And are there any limitations on the extraterritorial benefits?

Answering the first question is easy. Every state provides extraterritorial work comp benefits to employees who travel to another state for business purposes. However, some states limit the applicability of these traveling benefits in one of two ways:

1. Extraterritorial benefits end after a specified number of days. Some states limit the number of days coverage follows the worker to another state.
2. The worker must qualify for in-state benefits based on a multipart test. Many test-based states apply Larson’s four-part test to determine whether an employee working in another state qualifies for in-state protection and benefits. Larson’s four-part test extends in-state benefits to traveling employees if they meet one of the following four qualifications:

• Their employment is principally localized in the sending state.
• They are working under a contract of hire made in the sending state for employment not principally localized in any state.
• They are working under a contract of hire made in the sending state for employment principally localized in another state whose workers comp law is not applicable to the employer, such as a state that has a number threshold.
• They are working under a contract of hire made in the sending state for employment outside the U.S.

Test-based states that do not directly apply the Larson test generally use a similar variation. If the worker does not qualify under the state’s test, benefits do not follow the worker and there is no extraterritoriality.

Reciprocity. How does the receiving state—the state to which the worker travels to work—view the workers comp coverage from the sending state? This question involves two issues: Does the receiving state’s workers comp law have jurisdiction over the out-of-state workers traveling into the state? And does the workers comp policy from the sending state satisfy the receiving state’s workers comp statutes?

Reciprocity is more frustrating than extraterritoriality. While every state provides extraterritorial benefits to qualified employees for some period of time, extraterritorial laws don’t consider the receiving state. In practicality, extraterritorial benefits apply only when the receiving state recognizes the coverage. So the important question becomes, what are the receiving state’s reciprocity rules?

Some states simply don’t care about another state’s extraterritorial coverage. Employees working in non-reciprocating circumstances or non-reciprocal states must abide by and are subject to the workers comp law of the receiving state. These statutes vary widely and fall into one of three levels of reciprocity:

1. No reciprocity: These states are not concerned with the laws of any other state. Employees who work in these states must abide by their workers comp laws.
2. Full reciprocity: These states generally maintain a list of states with which they have a reciprocity agreement, fully recognizing the other jurisdiction’s laws without limitation.
3. Limited reciprocity: These states reciprocate, but not in full. Four common reasons for non-reciprocity are:

• Business class: Construction is the most common business class excluded from reciprocity. States that otherwise reciprocate may refuse to recognize the sending state’s workers comp coverage when the insured is in a construction class.
• Employee count: Some states reciprocate when the out-of-state employer sends only a limited number of workers into the state. These are generally states that have a number threshold greater than one for even an in-state employer to have workers comp. Once the number of out-of-state workers eclipses a certain number, these states no longer reciprocate.
• Time in state: A few states recognize the sending state’s coverage for a limited amount of time. Once the time limit is eclipsed, reciprocity ends.
• Lack of mutual reciprocity: Quid pro quo—mutual reciprocity states recognize the sending state’s benefits only if the sending state recognizes the receiving state’s benefits when the roles are reversed.

Out of Sync?

Knowing the states to which employees might travel for work is essential when developing an insured’s workers comp plan. If you miss or ignore the extraterritorial and reciprocal exposures, you risk complete loss of protection. If the sending state’s workers comp does not respond, the insured is responsible for paying out of its own pocket all benefits required by law for a work-related injury.

No self-funding threat exists when the sending and receiving states’ extraterritorial and reciprocity provisions align. The sending state’s workers comp follows the worker, and the receiving state recognizes the coverage. Benefits are paid under the sending state’s laws and the receiving state asserts no authority over the situation.

But when extraterritorial and reciprocal laws do not dovetail, coverage for travelling employees requires specific action on your part. Depending on the situation, workers comp protection can be extended in one of two ways.

When the sending state’s benefits do not apply in the receiving state, list the receiving state as an additional “Primary” state, also known as a 3.A. state. Use this approach anytime there are known or suspected extraterritoriality or reciprocity issues. States that may require 3.A. status include:

• The employer’s home office and branch office states.
• The employer’s state of incorporation, if other than a home or branch office state.
• Any state where the employer hires temporary employees solely to perform operations in that state of hire.
• Any state where a subcontractor is hired to perform work on behalf of a general contractor if proof of workers comp is not provided.
• Any state that has significant contact with an employee.
• The state in which the contract of hire was executed, even if the employee moves.
• Any state that does not reciprocate with any listed state.
• States with limited reciprocity provisions.
• Monopolistic states, which require a separate policy.

These are merely recommendations and not rules. Keep in mind, underwriters may be unwilling to extend 3.A. status, even when you make a good case.

Uh-Oh Protection

You may also extend “Other State,” also known as secondary or 3.C., status to the receiving state, but this is intended only as a safety net. Use this approach only in situations where there is no indication that the receiving state can or will assert authority over the worker, or when an insured begins new temporary operations during the policy period.

Part Three – Other States Insurance dictates how the workers comp policy responds if an employee is injured in a non-3.A. state, but—due to unexpected extraterritorial or reciprocity problems—receives the option to choose the benefits mandated by the state of injury rather than a listed 3.A. state.

Benefits extended to workers in 3.C. states comply with the statutory benefits required by the state where the employee is injured. The workers comp policy responds and pays benefits in listed 3.C. states, just as if the state was scheduled under 3.A.

3.C. protection should be structured to include any state to which the underwriter is willing to extend coverage. Most errors & omissions carriers recommend garnering 3.C. status with the phrase, “All states, territories and possessions other than 3.A. states and monopolistic states.” However, some carriers refuse to allow this breadth of protection due either to license status or a desire for greater information regarding the location and activities of the employees.

If the underwriter is unwilling to apply the overt “All states…” wording, build the “other states” coverage as broad as possible by taking the following steps:

1. Specifically schedule those states that qualify for 3.A. as per the previous recommendations but which the underwriter would not allow.
2. If not included in 3.A., specifically list all bordering states.
3. List all states to which employees regularly travel for training or meetings.
4. Complete the schedule by adding the terminology, “All remaining states, territories and possession other than 3.A. states, listed states and monopolistic states.”

Note that an underwriter might argue, “We can’t list State as a 3.C. state because we are not licensed there.” This is a bogus claim. Paragraph A.3. under Part Three – Other States Insurance reads: “We will reimburse you for the benefits required by the workers’ compensation law of that state if we are not permitted to pay the benefits directly to persons entitled to them.”

Other than not being licensed in the state, why would the carrier not be allowed to pay the injured worker directly? Just because they don’t want to list a state doesn’t mean they can’t.

Chris Boggs is executive director of the Big “I” Virtual University and an IA contributor.