Getting Tricked by the Kotecki Cap
“Kotecki” is a term that most contractors have heard of, but very few fully understand how it impacts their business. So what is “Kotecki”? In short, it’s a legal decision. “Kotecki” comes from a 1991 Illinois court decision involving a worker’s job-related injury. A contractor’s employee was hurt on the job and sued while working at a property owner’s location. After collecting workers’ compensation benefits, the worker sued the property owner for damages arising from his injury. The property owner then sued the worker’s employer for contribution. The suit resulted in the decision that an employer’s maximum liability for contribution is limited to the amount of the workers’ compensation claim. This is now referred to as the “Kotecki Cap”.
What did it do?
The decision laid out how the Workers’ Compensation Act impacts lawsuits involving the employee of company A, where that employee sues company B, and then company B sues company A. Let’s walk through an example to better illustrate what we’re talking about.
- John Smith is an employee of ABC Electric Co.
- ABC Electric Co. is a subcontractor of Patton General Contracting
- John Smith is injured on the job
Under the Workers’ Compensation Act, John Smith is prevented from suing ABC Electric Co. He only receives workers’ compensation payments for medical and lost time – “Sole Remedy” from ABC. John is, however, permitted to sue other entities or third parties that he believes caused or contributed to his injuries. The third party can be anyone except his employer, whose actions may have contributed to the cause of the injury.
A typical “Kotecki” lawsuit in construction cases goes like this: John Smith, employee of ABC Electric, sues Patton General Contracting for negligence relating to his injury. Under Illinois law (other states may differ), third parties (Patton General Contracting) that are held liable for work-related injuries may seek contribution from the injured worker’s employer, but such contribution may be capped by the amount of applicable workers’ compensation benefits. So, John is awarded a $2M verdict. The jury finds that ABC Electric and Patton GC were equally at fault (50/50). Patton files a third party or “action over” claim for contribution against ABC. If not for the Kotecki Cap, ABC would have to pay $1M of the $2M judgment in favor of Smith, and GC would pay the other $1M. With the Kotecki Cap, ABC would not have to contribute to the $2M judgment because its exposure is limited, under Kotecki, to the amount its workers’ compensation carrier paid in benefits.
What’s the problem?
In an effort to control exposures, owners and general contractors often require all subcontractors to “Waive the Kotecki Cap” in their contracts. The presence of “Kotecki Waivers” has become very common in construction contracts. This waiver allows the general contractor to reduce the amount of loss they could be held liable for. Also, the waiver increases the potential for damages against the employer of the injured worker.
This is demonstrated in our John Smith example when an injured worker sues the general contractor, who upon being sued, files an “action over” against the employer. To make matters more complicated, the contract provision itself is not simply noted as a “Kotecki Waiver”. Creative wording such as “subcontractor agrees to waive their right to cap a loss according to the amount payable under the Illinois Workers’ Compensation Act” are seen. This leaves the interpretation up to the contractor. In many cases, employers are not finding out about this wording until a loss occurs. To make matters worse, there’s even vaguer wording being used.
As this issue continues to evolve, insurance carriers are creating ways to deal with the need to waive the Kotecki Cap by policyholders. Many insurance carriers remain silent on the issue, meaning they refer to recent case law for a coverage determination. Others are adding exclusions to limit coverage or endorsements to offer an affirmative defense. The best way to protect your business is to ask your Assurance broker to help educate you on the issue.
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