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Staffing Agency Nurse Deemed Hospital Employee for Professional Liability Coverage Despite Contract Provisions

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Many hospitals address staffing shortages (nurses and physicians) through staffing agencies. Standard staffing contracts provide that the nurses and/or physicians (locum tenens) are employees of the staffing agency and not the hospital. The staffing agency agrees that the nurses or physicians provided shall abide by the hospital's policies and bylaws. The hospital determines the work schedules and provides all necessary equipment and supplies. The hospital and staffing agency agree to purchase professional liability insurance and agree to terms of indemnification for the acts or omissions of their respective employees. All's well and good in the liability shifting arrangement, right? Not necessarily.

On December 6, 2016, the United States Fourth Circuit Court of Appeals published a decision, Interstate Fire and Casualty Company v. Dimensions Assurance, Ltd. (No. 15-1801), on the issue of whether a hospital's insurance policy extended coverage to a "staffing agency nurse" for professional liability claims arising from the alleged acts or omission of the nurse while providing care at the hospital.

The underlying declaratory judgment action, filed in the United States District Court of Maryland by the staffing agency insurance carrier, Interstate Fire and Casualty, sought a declaration that the hospital's insurance carrier, Dimensions Assurance Ltd., should be deemed the primary insurance carrier for a professional negligence claim against the nurse.

Staffing Agency Contract Deems Agency Nurses as Agency Employees

The Staffing Contract between the hospital and the staffing agency included the standard language that any nurses provided by the staffing agency were employees of the staffing agency and not the hospital. Both the hospital and the staffing agency carried separate liability insurance for their respective employees. Although the nurses were the "employees" of the staffing agency, the hospital retained the right to schedule the nurses, as needed, and direct them with respect to the duties they had to perform.

All was well until a claim was brought against one of the staffing agency nurses for care provided to a patient at the hospital. The staffing agency tendered the claim to its insurer, Interstate Fire and Casualty, to defend the nurse. Interstate Fire and Casualty incurred defense costs of approximately $500,000 defending the nurse and paid a settlement of approximately $2.5 million to resolve the claims. Interstate Fire and Casualty filed its declaratory judgment action to determine whether Dimensions Assurance should have provided coverage to the nurse as an employee of the hospital and, as primary carrier, shouldered the entire cost of defense and settlement.

The U.S. District Court of Maryland found that the hospital's insurance policy did not extend to the staffing agency nurse and granted the hospital's insurance carrier summary judgment. On appeal, the United States Fourth Circuit Court of Appeals disagreed.

Fourth Circuit Finds Staffing Agency Nurse a Shared or Borrowed Employee

The Court of Appeals was not persuaded in the least by the language in the Staffing Contract wherein the hospital and staffing agency "agreed" that the hospital was not the nurses' employer (for purposes of shifting liability). The Court looked at the amount of control that the hospital exercised over the staffing agency nurses and found that the nurses were, in effect, "shared" or "borrowed" employees. Further, the Court noted that the Staffing Contract was only between the hospital and the staffing agency. Neither the hospital's insurer, the staffing agency's insurer nor the nurse were parties to that Contract, so it was not binding on them with respect to insurance coverage.

The Court of Appeals then looked at the language of the hospital's insurance policy and found that there were no express exclusions for staffing agency nurses in the section providing coverage for "hospital professional liability." (In contrast, interns, externs, residents, dental, osteopathic and medical doctors were excluded in this section.) The Court of Appeals noted that the hospital's insurance policy "does not define 'employee,' or does it incorporate or otherwise refer to the Staffing Agreement between the Agency and the Hospital So, absent an express exclusion or its own definition of "employee," the hospital's insurer was obligated to provide coverage for the alleged professional liability of the nurse.

Best Practices in Staffing Agency Contracts

So, what are the implications of this decision for companies that use staffing agencies to augment their available personnel? First, understand that staffing contracts that attempt to shift liability are not foolproof and not always determinative regarding the identity of the "employer" on issues of liability. State law governs. Second, if a company contracts with a staffing agency for additional personnel, that company needs to be certain that its insurer is aware that temporary staff through a staffing agency are being used and also aware of any indemnification language in the staffing contract. Third, companies contracting for temporary staffing should carefully review their insurance policies to be certain whether they have coverage for temporary staff in the event that a court or administrative agency determines that the company exercises sufficient control over the temporary staff to be deemed their employer.

For insurers, it is important to review the definitions of terms such as "employee." If the insurer does not intend to extend coverage to individuals provided to an insured through a staffing agency or temporary agency, then such exclusion needs to be clear and unambiguous.

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