Friday, May 6, 2016

The Own-Occ/Any-Occ Disability Debate

Accidents happen. They can be minor (what some have come to call “first aid” cases), or can require more extensive care. The next level is often referred to as “medical only,” meaning some professional medical care is required, but work is not precluded. When a physician excuses the injured worker from work to some degree (total or partial), then the injury is often referred to as a “lost-time claim.” When time is lost from work, then a disability system will provide compensation for the time lost. 

Disability insurance is available in a variety of descriptions, statutory and contractual. There are those who see no distinction between these two, and certainly a number of courts over the years have described workers’ compensation as a (social) “contract.” Those cases hold that when a worker is hired by an employer, there are two contracts formed. One is the obvious “contract of employment,” and the other is a contract implied by law. This second contract is the “grand bargain” in which the employee gives up the right to sue her/his employer for a workplace injury and the employer gives up the right to a great many defenses regarding liability for such an injury. 

In most contracts, the parties have options and engage in negotiations. If you decide to purchase a vehicle, you have many choices. A buyer can shop prices, colors, types, sizes, capabilities, and more. A seller can offer incentives, advertise, distinguish their competition, and more. The buyer and the seller engage in a negotiation, ultimately reaching a deal with which each is at least satisfied, and if they fail to reach a deal each walks away from the negotiations and there is no deal. 

Workers' compensation as a statutory "contract" is different, and most people do not really even understand that it is a contract they have made. The vast majority are focused on the "employment contract" and are worried about the job, the responsibilities, the pay and the benefits. Workers' compensation really does not enter people's thoughts or considerations. 

Insurance is a product that few want to buy. In some instances, the last thing a purchaser wants is for the policy to become due. No one buys life insurance hoping to die or health insurance hoping to get sick or disability insurance hoping to get hurt. People buy these products to protect themselves or loved ones in the event something unfortunate does occur. I sold insurance for a short time years ago, and it is not an easy product to market, in part because if invokes thoughts of loss and hopes of never needing it. 

What can affect the price of insurance? Insurance companies have very intelligent and highly trained experts whose job it is to predict the losses that are likely when an insurance contract is sold. These experts consider probabilities and likelihoods of loss for particular people who wish to make a purchase. They consider statistical about people like the purchaser. For example there is evidence that teenage girls are involved in fewer motor vehicle accidents than teenage boys. There is also statistical proof that the likelihood of a eighty year-old suffering a stroke is more likely than a twenty-six year old. 

These experts also consider the potential loss from any claim. Regardless of the driver's age, it is likely to cost less to insure a ten year-old pickup truck than it is to insure a brand new Lamborghini Gallardo. In a total loss, the pickup will cost less to replace. In a partial loss, parts for the truck are likely to be less expensive and more easily obtained. More repair shops will be prepared and experienced to fix the truck than the Lamborghini and thus competition between body shops may also constrain the cost of loss. 

So, these insurance companies consider the potential of an event that a particular contract would cover, and then analyze the probabilities of the costs of those potential events with this particular customer/purchaser.

This is only a portion of their analysis. Another whole department of smart people study the economy generally and make predictions about how long the insurance company is likely to be able to hold on to the customer’s money (called a premium) and invest that money, before having to pay some medical bill, collision repair or other loss. 

Would it be prudent to agree to insure an automobile against loss by collision, without knowing what kind of car is insured? Would it be prudent to agree to insure a driver without knowing her or his driving record? 

Returning to disability insurance, there is contractual disability insurance, and statutory disability insurance that is part of what we call workers’ compensation. 

In contractual disability insurance, there are two sub-categories, which are described as “own occupation and any occupation,” according to some. In both types, benefits are payable when a disability prevents returning to work. The distinction between the types is a distinction between what type of work is prevented by the disability. 

An “any occupation” policy will pay benefits only if a disability precludes work in any occupation at all. Conversely, an “own occupation” policy will pay benefits if the policy holder can no longer perform the functions of their own, particular, job. For example, imagine there is a world-renowned athlete (soccer player) who purchases a disability policy. Then an accident or illness results in impairment of the athlete’s ability to work. 

An “own occupation” policy will pay benefits if that impairment or disability precludes the athlete from working in her/his chosen field, playing soccer. This policy will pay even though the athlete could still be employed in various other occupations. An “any occupation” policy would pay this athlete benefits only if the disability precluded the athlete from working in “any gainful occupation that the insured is reasonably suited for, based on his or her education, work experience, and other individualized factors.”

The insurance company selling the policy is in the position to analyze and predict its risk with either type of policy, and to charge a premium (price) that it wishes for the policies. The purchaser is free to likewise assess the benefits and costs of various policies and to make a choice regarding how much coverage to purchase. In some ways, this may be similar to deciding how much of a deductible to have on an auto insurance policy; should the purchaser insure the whole loss ($0 deductible) or insure only a major event ($5,000 deductible)? In this example the customer considers the cost/benefit analysis (if the insurance company charges the same for each deductible, who would select the high deductible?)

An employer might provide workers’ compensation benefits itself, typically called a “self-insured” employer. Alternatively, the employer might purchase a policy of insurance, in which the insurance company becomes responsible for the benefits due following a work accident. That decision will define who is responsible for payment of workers' compensation benefits following a compensable injury or illness. 

Workers’ compensation coverage in either event is a program that combines two forms of coverage or insurance, health and disability, into one integrated protection for workers. And its parameters are statutory, not really negotiated between the buyer and seller, employer and employee. The law dictates the extent of coverage and in many states dictates the price that an insurance company can charge (premium) to provide that coverage. 

For this premium (or with the money saved by the self-insured not paying premium), the insurance company (or employer) is responsible for payment of medical bills and lost wages (“disability”). 

Different states have various methods for defining the duration and description of benefits for lost wages that are permanent, but partial. And there remains debate as to the best method for calculating and paying these indemnity benefits. There are two major schools of thought on permanent partial, the “disability” and the “impairment” schools. Some states compensate workers if they lose body function. Others if the loss of function results in loss of wages. But permanent disability that is total in nature is more likely to be based on disability from  employment than on impairment to function. 

Workers’ compensation is a social insurance. It is a statutory vehicle by which a great many workers are forced by government to underwrite the costs of injury to a few. This is discussed in greater detail in State Line Disputes. Of course, in its current form, workers’ compensation collects premiums for a great many workers, but by no means all. And there has been debate regarding whether system woes would be ameliorated if all workers were both covered and funds were therefore collected regarding each worker. 

So, accordingly, there is debate as to what degree of permanent disability society ("social insurance") should underwrite in this regard? If a pro athlete making $2 million dollars per year suffers an injury and is disabled, what is society’s interest? Should the workers’ compensation system provide disability benefits on an “own occupation” basis and pay because she/he can no longer play soccer? Or, should social insurance benefits be payable only if the pro athlete cannot work in “any occupation.” Certainly there are implications for the athlete, and the conundrum of obligations perhaps bears consideration.

At the NCCI Annual Issues Symposium yesterday in Orlando, the constraint on indemnity was also raised. The panel noted that states have a maximum compensation rate. I have discussed this in What is the Maximum Rate Payable, What is Comp Worth, and most recently in State Line Disputes - Is Federalization the Answer. Because of this maximum, a workers total wages may not be replaced by workers' compensation. Some of the bloggers advocated for elimination on such caps, noting that it is unfair to someone earning a million dollars a year if workers' compensation does not provide replacement income of a million dollars per year after a work accident. Others think this is not the purpose of workers' compensation, and recognize that the greater the risk of loss (Lamborgini, million dollar salary), the greater the cost of the insurance to cover that risk.

What is the public interest? Does the public interest require a system that provides compensation when disability precludes earnings in “any occupation,” or merely in “own occupation?” If an athlete earning $1 million annually is disabled from soccer, but returns to work (or could) as an insurance broker earning $100,000, should workers’ compensation pay benefits for permanent loss? Is the answer dependent upon the election of “impairment” or “disability” as a standard?  

If the athlete concludes that work in some other, “any occupation,” is "beneath" her/him, should she/he be provided permanent indemnity benefits by social insurance? Some might argue that this is a choice, and a choice for which the athlete and not society should be liable. Others might argue that the athlete either paid the premium for this coverage, or it was paid for her/him, and therefore she/he should collect regardless of the role her/his personal decisions play in the outcome.

One element to this debate, which was also raised yesterday in the blogger panel, is that there is inconsistency between states regarding a variety of issues. a worker in one state may be an employee while someone identically situated in neighboring state might instead be an independent contractor. Whether a particular event is compensable might also be different state to state. In this same context, it is possible that the was a state interprets "disability" could be perceived variously as "own occ" or "any occ." In this context alone, the variation of state program context, the issue of "own occ" or "any occ" is interesting. 

But in the grander analysis, some think that workers' compensation should provide livelihood, not luxury (replacing a $2 million annual income). Some believe it should only provide livelihood when employment is precluded ("any occ") not when a worker elects not to work because to do so would be different that her/his work before. As a social construct, these decisions will be made by legislatures, and states will essentially set the price for those coverages. Some question whether society should pay the costs (premiums) in broad contexts ("own occ") or only more limited ("any occ").

Whatever the outcome of these debates, this is an intriguing debate. The national blogger panel at NCCI was led by Peter Burton of NCCI. His panelists were Joe Paduda, Mark Walls, and Robert Wilson. It was entertaining and interesting on a spectrum of issues, and merited mention in the contexts above. 

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