No. 86-368 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1987 

STATE COMPENSATION INSURANCE FUND, 

as subrogee for Workers' Compensation 

benefits paid or payable to or on behalf 

of TOM W. PUTNAM, and LEONARD D. NEILSEN 

d/b/a NEILSEN LOGGING, 

Petitioners and Appellants, 

-vsCASTLE MOUNTAIN CORPORATION, 

Employer, 

and 

UNITED PACIFIC/RELIANCE INSURANCE COMPANIES, 

Defendant and Respondent. 

APPEAL FROM: The Workers' Compensation Court, The Honorable 

Timothy Reardon, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Hughes, Kellner, Sullivan & Alke; Mike McCarter argued 

for State Comp., Helena, Montana 

Kelly & Halverson, P.C.; Patrick R. 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 

Clerk 
Mr. Justice Fred J. Weber delivered the Opinion of the Court. 

The State Compensation Fund (State Fund) appeals this 

decision of the Workers' Compensation Court, and the claimant 

Tom Putnam cross-appeals. The court held that claimant's 

employer was Nielsen Logging and that Nielson Logging was an 

employee of Castle Mountain Corporation (Castle Mountain) at 

the time claimant was injured. It also held that the State 

Fund, which insured Nielsen Logging, was not entitled to 

indemnification from Castle Mountain's insurer for workers' 

compensation payments made to Mr. Putnam. We affirm in part 

and vacate in part. 

One issue resolves this appeal. The issue is: 

Did the Workers' Compensation Court err in its application of § 39-71-405 (2), MCA? 

Mr. Putnam was injured in October 1981 while working on 

a slash clearing project in an area known as Indian Island in 

Meagher County. At the time of his injury, Mr. Putnam was 

working for a partnership known as Nielsen 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 insurance had 

been cancelled as of October 1, 1981. Mr. Putnam petitioned 

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 

relationship between Castle Mountain and Nielsen Logging was 

one of employer-employee, and that Mr. Putnam was an employee 
of 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 two employers and their insurers. 

In October 1984 the State Fund filed a petition with the 

Workers' Compensation Court, asserting a right to indemnity 

against Castle Mountain's insurer. The matter 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. It concluded that Mr. 

Putnam was an employee of Nielsen Logging. It concluded 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 Castle Mountain'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. 

Putnam was an employee of Nielsen 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 of 
Castle Mountain. He therefore urges that conclusion No. 2 

and judgment paragraph No. 2 be 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 indemnification from Castle Mountain for benefits 

paid to Mr. Putnam, under § 39-71-405(2), MCA. 

Section 39-71-405, MCA, provides: 

Liability of employer who contracts work out. (1) 

An employer who contracts with an independent 

contractor to have work performed of a kind which 

is a regular or a recurrent part of the work of the 

trade, business, occupation, or profession of such 

employer is liable for the payment of benefits 

under this chapter to the employees of 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 

benefits paid and to be paid and necessary expenses 

from the contractor primarily 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 contractor and the contractor's employees shall 

come under that plan of compensation adopted by the 

employer. 

(3) Where an employer contracts any work to be 

done, wholly or in part for the employer, by an 

independent contractor, where the work so 
contracted to be done is casual employment as to 

such employer, then the contractor shall become the 

employer for the purposes 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 for Mr. 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 claimant was 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, who 
has it within his power, in choosing subcontractors, to pass upon their responsibility and insist 

upon appropriate compensation protection for their 

workers. This being the rationale of the rule, in 

the increasingly common situation displaying a 

hierarchy of principal contractors upon subcontractors upon sub-subcontractors, if an 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 statement by 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 relationships was much less complex 

than it is today. Nothing in the statute suggests an intent 
to 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 subsection was not intended to address 

situations where the contractor is sufficiently independent 

to carry its own workers' 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 

Logging was an independent contractor or not, for purposes of 

Mr. Putnam's workers' compensation benefits. 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 of whether Mr. Putnam may bring a separate suit against 

Castle Mountain. 

We are reluctant to find fault with the failure of 

§ 39-71-405, MCA, to address concerns which have arisen over 

70 years later. However, we suggest that the legislature may 

wish to modify or replace the statute with a clearer 

provision. 

We affirm the Workers' Compensation Court's conclusion 

that Mr. Putnam was an employee of Nielsen Logging. We also 
affirm conclusion No. 4 that Mr. Putnam is entitled to workers' compensation benefits through Nielsen 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