No. 86-368
IN THE SUPREMECOURT OF THE STATE OF MONTANA 1987

STATE COMPENSATION INSURANCE FUND, as subrogee forWorkers' Compensation benefits paid orpayable to or on behalf of TOMW. PUTNAM,and LEONARD D. NEILSEN d/b/a NEILSEN LOGGING, Petitioners and Appellants,-vsCASTLEMOUNTAIN CORPORATION, Employer, and
UNITED PACIFIC/RELIANCEINSURANCE COMPANIES, Defendant and Respondent.

APPEAL FROM: TheWorkers' CompensationCourt, The Honorable Timothy Reardon, Judgepresiding.
COUNSELOF RECORD:
ForAppellant: Hughes,Kellner, Sullivan & Alke; Mike McCarter argued for State Comp., Helena,Montana Kelly & Halverson, P.C.; PatrickR. Sheehy argued for Putnam, Billings,Montana (Cross-Appellant)
For Respondent: Neil S. Keefer argued for Castle Mountain & United Pacific, Billings,Montana

Submitted: April 27, 1987 Decided: June 23, 1987

ClerkMr. Justice Fred J. Weber delivered the Opinion of the Court.
The State Compensation Fund (State Fund) appeals this decision of theWorkers' CompensationCourt,and the claimant Tom Putnam cross-appeals. The court held that claimant's employer was Nielsen Logging and thatNielson Loggingwas an employee of Castle Mountain Corporation (Castle Mountain) at the time claimantwas injured. It also held that the State Fund, which insured Nielsen Logging, was not entitled to indemnification from Castle Mountain's insurer for workers' compensationpayments made toMr. Putnam. We affirm in part and vacate inpart. One issue resolves this appeal. The issue is: Did the Workers' Compensation Court err in its application of § 39-71-405(2), MCA? Mr. Putnamwas injured in October 1981while working on a slash clearingproject inan area known as Indian Island in Meagher County. At the time of his injury,Mr. Putnam was working for a partnership known asNielsen Logging,which in turn had contracted to do the slash clearing for Castle Mountain. Mr. Putnam filed a workers' compensation claim with Nielsen Logging's insurer, the State Fund. His claim
was denied on the basis that Nielsen Logging's insurancehad been cancelled as of October 1, 1981. Mr. Putnampetitioned for an investigation of the denial,and also sought benefits from Castle Mountain's insurer, in the event Nielsen Logging
was indeed uninsured at the time of the injury. The State Fund determined that a mistake had been made and that Nielsen Logging was insured at the time of the injury. The State Fund also took the position that the relationshipbetween Castle Mountain and Nielsen Loggingwas one of employer-employee,and thatMr. Putnamwas an employeeof Castle Mountain and eligible for benefits through its insurer. However, State Fund accepted liability while the issues of employment and liability were straightened out between the twoemployersand their insurers. In October 1984 the StateFund filed apetitionwith the Workers' Compensation Court, asserting a right to indemnity against Castle Mountain's insurer. Thematter was submitted
on extensive stipulated facts and stipulated issues to be determined by the court. The court concluded that the relationship between Castle Mountain and Nielsen Logging at the time of Mr. Putnam's injury was that of employer-employee, not contractor-independent contractor. Itconcluded thatMr. Putnamwas an employee ofNielsen Logging. Itconcluded that the State Fund was not entitled to indemnification from Castle Mountain's insurer under 

### 5 39-71-405(2)

## , MCA, for benefits paid as a result of Mr. Putnam's injury. It reasoned that to require CastleMountain's insurer to pay workers' compensation benefits to Nielsen Logging's injured employee would run contrary to the public policy of having all subcontractors maintain their own workers' compensation insurance coverage. Both the State Fund and Mr. Putnam appeal.

Did the Workers' Compensation Court err in its application of 

### 5 39-71-405(2),MCA? The Workers' Compensation Court determined that Mr. Putnamwas an employee ofNielsen Logging,which had workers' compensation insurance coverage through the State Fund. No
one argues against that conclusion. Mr. Putnam says that once that determination was made, the court had no jurisdiction to decide whether Nielsen Logging was an employee ofCastle Mountain. He therefore urges that conclusion No. 2 and judgmentparagraph No. 2be stricken. Castle Mountain and the State Fund both take the position that the court properly determined that Nielsen Logging
was Castle Mountain's employee. That conclusion, if affirmed,may shield Castle Mountain from liability in a separate tort action which Mr. Putnam has brought against it. The State Fund desires the additional conclusion that it is entitled to indemnificationfromCastle Mountain for benefits paid toMr. Putnam,under § 39-71-405(2), MCA. Section 39-71-405,MCA,provides: Liability of employer who contractswork out. (1) An employer who contracts with an independent contractor to have work performed of a kind which is a regularor a recurrent part of thework of the trade,business, occupation, or profession of such employer is liable for the payment of benefits under this chapter to the employeesof the contractor if the contractor has not properly complied with the coverage requirements of the Worker's Compensation Act. Any insurer who becomes liable for payment of benefits may recover the amount of benefitspaid and tobe paid and necessary expenses from the contractorprimarily liable therein. (2) Where an employer contracts to have any work to be done by a contractor other than an independent contractor,and the work so contracted to be done is a part or process in the trade or business of the employer, then the employer is liable to pay all benefits under this chapter to the same extent as if the work were done without the intervention of the contractor,and the work so contracted to be done shall not be construed to be casual employment. Where an employer contracts work to be done as specified in this subsection, the contractorand the contractor's employees shall come under thatplan of compensationadoptedby the employer. (3)Where an employer contractsanywork to be done, wholly or in part for the employer, by an independent contractor, where the work socontracted to be done is casual employment as to such employer, then the contractor shallbecome the employer for thepurposes of this chapter. The Workers

### ' Compensation Court applied § 39-71-405(2)

## ,MCA. The State Fund cites Carlson v. Cain (Mont. 1983), 664 P.2d 913, 40 St.Rep. 865, as support for requiring Castle Mountain to indemnify it forMr. Putnam's workers' compensation benefits. In Carlson, the claimant ran a newspaper delivery route for Jerry Cain, who had contracted with the Billings Gazette to deliver newspapers to drop-off points in eastern Montana. Mr. Cain was ostensibly an independent contractor. However, when the claimant was injured on the delivery route and Mr. Cain had no workers' compensation coverage, this Court determined that the claimant was an employee of Mr. Cain and Mr. Cain was an employee of the Billings Gazette. The Court held that claimantwas entitled to benefits under the Gazette's workers' compensation coverage, under § 39-71-405(2), MCA. The State Fund argues that under the same type of factual analysis as was used in Carlson, Nielsen Logging is an employee of Castle Mountain and Castle Mountain must indemnify it. The critical fact distinguishing Carlson from the present case is that Jerry Cain was uninsured. In contrast, Nielsen Logging had workers' compensation insurance. The State Fund cites other
cases on this issue. They are distinguishable on the same basis. 1C Larson,Workmen's Compensation Law, § 49.11 at 9-21 and 9-22,states:

The purpose of this ["contractor-under" statutes like $ 39-71-405, MCA] legislation was to protect employees of irresponsible and uninsured subcontractors by imposing ultimate liability on the presumably responsible principal contractor, whohas it within his power, in choosing subcontractors, to pass upon their responsibility and insist upon appropriate compensation protection for their workers. This being the rationaleof the rule, in the increasingly common situation displaying a hierarchy ofprincipal contractors upon subcontractorsupon sub-subcontractors,ifan employee of the lowest subcontractor on the totem pole is injured, there is no practical reason for reaching up the hierarchy any further than the first insured contractor. The above statementby Larson expresses a rule which reflects the general purpose of Montana's workers' compensation laws, to provide for the protection of workers. We interpret the three subsections of S 39-71-405, MCA, with that general purpose in mind. Subsection (1)applies to the employer of an independent contractor performing work which is a regular or recurring part of the employer's trade or business. It holds that employer liable for workers' compensation benefits paid to the contractor's employees, if the contractor is uninsured. Subsection (3) states that the employer of an independent contractor hired for "casual employment" is not liable for benefits. Subsection (2) holds liable for benefits the employer of a non-independent contractor engaged in work which is a part or process in the business of the employer. It is unclear how this is different from a general statement of the obligation of any employer to pay benefits. Subsection (2) does not refer to whether the contractor carries insurance. This was a critical factor in subsection (1). Section 39-71-405,MCA, was drafted over 70 years ago, near the beginning of the workers' compensation system in Montana. At that time, the law and practice of contractor-subcontractor relationshipswas much less complex than it is today. Nothing in the statute suggests an intentto shift responsibility from one insured employer to another. We conclude that subsection (2)was intended to grant workers' compensation coverage to each non-independent contractor employee, when the work was in the regular course of business. It essentially grants workers' compensation insurance coverage to a non-independent contractor employee in the same manner as if there were no intervening non-independent contractor. While we recognize that subsection (2) could be read to require Castle Mountain to provide benefits for Mr. Putnam if Nielsen Logging was a non-independent contractor,
we conclude that the subsectionwas not intended to address situations where the contractor is sufficiently independent to carry its ownworkers' compensation insurance. We hold that § 39-71-405(2), MCA,does not cover a claim for indemnity by one insurance carrier against another. Since Mr. Putnam's injury is covered by Nielsen Logging's workers1 compensation insurance, § 39-71-405, MCA, does not apply. It is not necessary to determine whether Nielsen Loggingwas an independent contractoror not, forpurposes of Mr. Putnam'sworkers' compensationbenefits. This is consistent with the rule expressed in Larson, and in harmony with the general purpose of Montana's workers' compensation law. In so holding, we emphasize that we do not rule upon the issue ofwhetherMr. Putnam may bring a separate suit against CastleMountain. We are reluctant to find fault with the failure of § 39-71-405,MCA, to address concerns which have arisen over 70years later. However,we suggest that the legislaturemay wish to modify or replace the statute with a clearer provision. We affirm the Workers' Compensation Court's conclusion that Mr. Putnamwas an employee ofNielsen Logging. We alsoaffirm conclusion No. 4 that Mr. Putnam is entitled toworkers' compensation benefits throughNielsen Logging's insurer, the State Fund. We vacate the lower court's conclusion No. 2 and judgment paragraph No. 2 that Nielsen Logging was an

We Concur: /7