Thursday, August 4, 2016

The Baby with the Bathwater

I have often heard of the perils of civil litigation. There are said to be many more variables there, compared to workers' compensation. The procedures are different, cases take much longer to reach trial, juries exert influence, and there is no real constraint on damages. That civil litigation presents these potential risks and challenges is regularly cited as the reason that workers' compensation is so valuable and so worthy of praise and protection.

The employee and employer make a contract. For decades, this employment contract has included workers' compensation  across America; for a century or more in some states. It is a "mutual renunciation" of common law rights and duties. Workers compensation changes the liabilities and responsibilities of both employers and employees. 

The protection that workers' compensation provides employers is not absolute. There are instances in which the "exclusive remedy" is waived. An interesting Florida example was detailed several years ago by David DePaolo in Florida Court's Hard Lesson. That was an instance in which the employer purchased workers' compensation coverage, and still faced a civil court proceeding brought by some employees. But there are other instances in which employers may face civil liability more voluntarily. 

Workers' compensation is mandatory in most states. However, there is a tendency for many states to exempt small employers from the requirement. It is not an absolute, some states require coverage regardless of the business size, an excellent summary is here. This exemption of small employers effects many people. The Bureau of Labor Statistics estimates that ten percent of Americans are self-employed. In addition, many work for very small, potentially exempt, businesses. It is likely therefore, that there is a significant population in various states that is not mandated to participate in workers' compensation. 

There has been a great deal written in recent years about states allowing employers to withdraw from workers' compensation laws. These recent efforts have been uniformly and inaccurately labelled singularly and generically with the title "opt-out." Oklahoma has been featured in many such discussions. Their "opt-out" law allowed employers to elect not to participate in workers' compensation, and instead to create their own compensation plans as a substitute, while retaining the "exclusive remedy" protection against civil lawsuit. Some referred to this as "having your cake and eating it too."

A fair number of states, at least 12 according the National Association of Workers' Compensation Judiciary, have "opt-out" provisions in their statutes. These are generally restricted to plans negotiated in a collective bargaining agreement, thus restricted to union employers. There are those who insist on calling these dozen programs "carve-outs" rather than "opt outs." But the effect is identical and the naming or labelling distinction is likely of little or not import or effect, except to excuse or explain one's personal sentiment accepting or supporting one ("carve out") while opposing others ("opt-out"). Remember "toe may toe," "toe mah toe;" or perhaps "a rose by any other name would wither and die?" (Alan Swan, My Favorite Year, 1982). But the fact is that these several states allow at least certain employers to elect not to participate in workers' compensation. 

Too often, Texas is lumped-in with these states in discussions of "opt-out." But Texas is not an "opt-out" state. At a recent conference, an attendee explained to me that "even so-called scholars seem to miss the point here." Texas is a "non-subscription" state. In Texas, workers compensation is simply not mandatory, and in fact it never has been. In Texas, companies that want the protection of "exclusive remedy" may elect that protection by electing to participate in workers' compensation. They are called "subscribers" and they subscribe to the combined legal requirements and protections of the workers' compensation alternative to civil liability. 

In the Oklahoma "opt-out" model, the employer opts to keep the protection from liability, and yet not to participate in statutory workers' compensation. The Oklahoma plan is designed to provide employer protection and near-complete employer control of the procedures and processes of providing benefits to substitute for that statutory workers' compensation. 

Contrary to that paradigm, those Texas businesses that do not subscribe remain potentially liable for the full range of damages that civil liability presents. Employees of these businesses may sue their employer. Those employees remain subject to a range of civil defenses that do not apply in workers' compensation, such as comparative negligence. Comparative negligence is a legal maxim by which the injured person cannot collect for the damages that she or he caused. In civil proceedings, juries are asked to figure out how much fault is attributable to each plaintiff and each defendant, and the awarded damages are ordered to be paid accordingly. 

So, for example, if the damages are $100 and the plaintiff is 50% responsible, the defendant is ordered to pay only $50. This is an important distinction, compared to workers' compensation. In workers' compensation, the worker generally recovers less workers' compensation benefits than would be expected in civil proceedings, but also generally recovers more rapidly and does not face defenses like comparative negligence. In workers' compensation, the employee can be 100% responsible for the accident/injury and generally still recover workers' compensation benefits. There is a point that so-called journalists have failed to stress in their criticisms of workers' compensation. 

So the employer has the choice in Texas. The employer may perceive benefit, but also faces risk, by not subscribing. Last December, WorkCompCentral published a story Series of Large Verdicts Against Non-Subscribers isn't Rattling Risk-Benefit Balance. The article uses confusing description regarding "opt-out" and "non-subscription," but it provides a good analysis of risks presented when employers remain in the civil system through "non-subscription." It is a subject that is worthy of discussion in Florida. 

The Florida workers' compensation system is currently being discussed by a great many system participants. There is a current proposal for an almost 20% workers' compensation insurance rate increase pending. The discussions are polarizing, and a few folks have already unfortunately descended into name-calling and hyperbole. Competing public relation campaigns appear to be underway, complete with talking points and finger pointing. Unfortunately, it appears that it is always easier to point fingers than to analyze, study and contemplate the various perspectives on issues. 

I have heard of at least four organizations forming "task forces" or "working groups" to "fix the problem" with Florida workers' compensation. Unfortunately, there seems little consensus on what "the problem" is or how significant it is. Some say the state needs to respond to recent judicial decisions specifically, and to do so rapidly and precisely. Others say that it is time for an overhaul of Florida workers' compensation, comprehensive and contemplative. The coverage recently has been extensive. Some good examples are Business Wants New Laws, and AIG Boosts Reserves $100 Million.

However you personally think Florida should proceed with revision or reform (or not), it may well be related to your perceptions of the way our current system is (or is not) working in your opinion. We are all perhaps tied to our perspectives. I have heard some lament the "expansion" of workers' compensation, others the "contraction." Many agree that the system is "unfair," but the examples they cite are often very different from others who complain. There seems a lack of consensus on "the problem."

One option that has been mentioned in Florida is the Texas concept of "non-subscription." It is possible that the "opt-out" is being discussed also, though I have not heard that mentioned lately. Florida already has an "opt-out" ("by any other name") for union employers; an "opt-out" that could easily and precisely be legislatively adapted to include more employers. However, the Oklahoma "opt-out" has suffered some judicial criticisms recently. See Another Constitutional Decision, and Statute Declared Unconstitutional. It seems those complications have perhaps given some proponents pause, but Texas and "non-subscription" is still discussed. 

So, what would "non-subscription" mean for Floridians? Such a structure would allow any employer, large or small, union or not, to elect not to have either the liability or protections of workers' compensation. That is the main distinction between "non-subscription and "opt-out." In "opt-out" lawmakers attempt to allow employers to keep the protection benefit and yet modify the liability burden. In the "non-subscriber" paradigm there is similar employer choice, but that choice is an "all or nothing" election, not a "pick and choose option."

The detractors of "non-subscription" point to the liability issues illustrated by WorkCompCentral's Series of Large Verdicts Against Non-Subscribers isn't Rattling Risk-Benefit Balance. The main point is that civil verdicts can be significantly expensive. A second point, that is generally of interest to risk managers and insurance companies is that jury verdicts can be very difficult to predict. Risk professionals generally like to be able to predict losses, and generally that is perhaps easier in a statutory framework like workers' compensation. 

It is important to remember that perspective is important. We have seen litigation across the country as some workers have sought to be included in workers' compensation, while others have litigated for the right to be excluded. It is important that no workers' compensation system can likely be sustained where such decisions of inclusion or exclusion are all made after the risk is a certainty (after the loss). When these decisions are made after the fact, the ability to assess risk, and therefore price risk, is strained. Those who handle risk become reluctant of uncertainty, and coverage markets may suffer. Decisions of inclusion before loss are more predictable and therefore foster more stable relationships and investments. 

"Non-subscription" in the Texas model presents issues for employers. But, it also presents issues for employees. Recently WorkCompCentral published Supreme Court Says Decapitated Worker's Parents Cannot Collect From Carriers. What a headline. One might understand it all without even reading the story. The worker in this case was severely injured and died. The story described the event as "gruesome," as if "decapitated" did not capture it sufficiently. 

The survivors sued and "secured a judgment entitling them to $71.7 million in damages." An appellate court reversed the judgment. That reversal was recently affirmed by the Texas Supreme Court. As an aside, the injury in this case occurred on back in 1992, and the recent 2016 Texas Supreme Court decision bringing closure is about 24 years in the making; as mentioned above, civil litigation can be time-consuming. 

This Texas employer had not subscribed, and so there was no workers' compensation. Instead, it had "comprehensive general liability insurance." Because liability risks can become large, and because insurance companies seek to spread risk across large pools of resources, this employer's policy was actually underwritten (they would pay certain percentages of loss at various levels of damage) by "15 different carriers." These agreements to spread loss are not at all uncommon in the world of insurance. 

After the accident, the employer "stopped doing business," and was "involuntarily dissolved by the Secretary of State's office." Thus, the employer no longer existed. It went out of business, as companies do, literally every day. 

When an employer is covered by workers' compensation, and becomes insolvent, its workers' compensation insurance still covers its injured workers. If the employer is "self-insured" (no carrier involved) and ceases to do business there are usually other resources for paying benefits (most state workers' compensation regulators require self-insured employers to post collateral or security for future losses). There are also many states with "guaranty association" organizations that cover losses in the event of bankruptcy and dissolution. 

Similarly, if a workers' compensation insurance company ceases to exist, many states have insurance "guarantee funds" that exist precisely to insure against carrier bankruptcy; to provide benefits to injured workers. Workers' compensation generally is a significantly structured system. In short, a great deal of effort has been invested in assuring workers' compensation payments to injured workers when employers or carriers fail, as the employer did in this Texas decapitation case. 

But, remember that the Texas company was a "non-subscriber." There was liability insurance, but no workers' compensation insurance, no state-held collateral, no guarantee fund, no "safety net." Also, in this Texas case, two of the 15 carriers had become insolvent, or "bankrupt." There was no "insurance guaranty fund" to step in for them either. The insolvent employer ran out of money and stopped defending the survivor's lawsuit. The solvent general liability carriers stopped defending the lawsuit. And the survivors prosecuted the civil case with no one defending the employer. The survivors won. Thus, the significant verdict ($72 million) against the (bankrupt and dissolved) employer. Some would suggest winning against an empty chair is easier. 

The employer, of course, thought that the carriers should have defended it. When the carriers did not, the employer might have sued the carriers for breach of contract. Instead, the employer signed that right over to the survivors of the decapitated worker (called an "assignment of rights"), who then sued the carriers for bad faith breach of contract (failing to defend the employer and failing to settle when they reasonably could have). 

Some of the 15 carriers on the risk settled with the survivors. However, two carriers proceeded to trial, resulting in the award of damages from the original trial, "which had grown to $71,696,547 because of the continued accumulation of interest." That is a number that will make headlines and garner attention. Not the attention you might see from a half-billion dollar lottery draw or a natural disaster, but attention. But then the Texas appeals court concluded that the "one-sided" trial against the undefended employer was not fair and reversed the award. The Texas Supreme Court affirmed the denial of damages, but on different grounds. 

The Texas Supreme Court, after years of litigation, concluded instead that the decapitated victim was not actually an employee of this employer. The Court concluded he was actually employed by another company owned and operated by one of the employer's principals. the victim was therefore a "leased-in" worker, that was excluded from coverage under the pooled liability policies. The employer wins and the survivors receive nothing from their 24 years of litigation, except what they had already settled for with some of the pool carriers. 

Here again, workers' compensation has solutions that civil law may lack. In workers' compensation, the subtle and legalistic distinctions of subcontractors may be resolved by simple statutory concepts like the "statutory employer." The "subcontractor" distinction in workers' compensation might well have resulted in the employer remaining liable despite the technicality of who "actually" employed this person.  

The point is that jury verdicts may make headlines, and therefore the tort system may appear advantageous to employees. But this case illustrated that the tort system also presents obstacles and complications that perhaps are less common or are non-existent in workers' compensation. There is greater regulation and focus in workers' compensation. There are safety nets (guarantee funds, legal constructs, and coverage or collateral requirements). Workers' compensation is criticized by employers because of cost and complexity. But, these verdict cases support that Comp is likely still more predictable and stable, and it provides protections that civil law simply does not. 

If anyone thinks that there is a perfect world somewhere, I would encourage more reading and study. If you conclude utopia does exist, please tell me how and where. Provide me a route; I may decide to make a pilgrimage. But, it is unlikely that any perfect world exists. Despite our difference of perspective on what "perfect" would be, we might all agree that "perfect" is simply not practical. Thus, as I suggested recently, perhaps compromise is the only solution?

The relationships between employers, employees, insurance carriers, states and more can become complicated and can yield unexpected and sometimes unfortunate results. Perhaps the solution is to allow employers the "non-subscription" choice between complex and difficult systems?  Or, perhaps the solution is focused and reasoned discussion and compromise on workers' compensation. Perhaps there is a path to an improved program, through a collective agreement that such a system will be, despite everyone's best efforts and intentions, imperfect? Imperfect, but better than the likewise imperfect alternatives?

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