State high court rules against homebuilder by Janice Francis-Smith The Journal Record April 17, 2008 OKLAHOMA CITY – “Good faith” and “good business judgment” are not synonymous terms, justices of the Oklahoma Supreme Court agreed in finding a homebuilder made a bad business decision when he trusted a subcontractor to provide workers’ compensation insurance coverage for workers. The court record shows that Millard Smalygo, doing business as Smalygo Homes, had known subcontractor Mark Murphy for “quite a few years” and that he trusted Murphy to maintain his workers’ compensation insurance policy. Murphy had provided proof of coverage to Smalygo when the two men contracted for a job in 2002. However, Murphy did not notify Smalygo when his policy was canceled a few months later for failure to pay premiums, and Smalygo did not inquire at a later date whether Murphy’s policy was still current. The court examined Oklahoma’s laws regarding the “good faith reliance” exception to the long-standing rule of “principal employer liability” found in the state’s Workers’ Compensation Act to decide that Smalygo should be held responsible to pay workers’ compensation benefits for one of Murphy’s employees who was injured on the job. Oklahoma is one of 43 states that allow 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 aim of the statute is to prevent contractors from evading the intent of the law simply by hiring subcontractors. In 1993, Oklahoma became the first state to enact an exception to the rule of principal employer, secondary liability. State law allows the principal employer to avoid liability if the employer relied in good faith on proof of workers’ compensation insurance provided by its subcontractor. The majority of justices on the state Supreme Court sided with a three-judge panel of the Workers’ Compensation Court, which found that Smalygo is not protected by the good faith exception. Smalygo should have checked back with Murphy at the time the policy he was shown was scheduled to expire, the court found. The worker in question was injured two months after that policy would have expired, even if Murphy had kept up with his premiums. “The duty of the good faith statutorily imposed on the contractor extends beyond a mere one time determination that the subcontractor is covered when the proof of coverage is first examined by the contractor,” the court found, adding that “reasonable diligence” would have required Smalygo to obtain proof of current coverage. Justice James Winchester dissented from the majority opinion, finding that the law does not explicitly direct principal employers to “continually supervise and monitor their subcontractors’ insurance coverage and payment of insurance premiums and/or periodically re-confirm coverage in order to enjoy immunity from suit.” Reprinted by CompSource Oklahoma with permission from the Journal Record