Archive for the ‘Guest Posts’ Category

Reducing the Conflict Between Bankruptcy and Workers’ Compensation

Tuesday, January 13th, 2009

Part two of a three-part guest post series on bankruptcy and workers compensation by Robert Aurbach, CEO of Uncommon Approach.
The last posting introduced Joe, the injured employee of a self-insured employer, and discussed the ways the workers’ compensation system failed him when the employer filed for Federal Bankruptcy protection. It’s important to understand the reasons why this happens to understand the current proposal for fixing the problem.
How the Law Victimizes Joe
First, it’s important to understand that Federal Bankruptcy law pre-empts any state law that conflicts with it. This makes the power of state regulators attempting to preserve the benefits of injured workers under state law extremely limited. In this context, it is necessary to understand that the Bankruptcy Code treats workers’ compensation claims as having fully accrued on the date of injury ― that is to say that the claim is treated as being fully defined the day it happens. Several things happen as a result. Workers’ compensation claims are then separated into “pre-petition” and “post-petition” claims, and the two groups are handled completely differently. Pre-petition claims are thrown into the bankruptcy proceedings, frozen for an indefinite time and then, when the bankruptcy proceedings are over, completely “discharged” by whatever distribution the Bankruptcy Court approves. Joe’s claim accrued before bankruptcy petition was filed and that’s why his benefits were frozen, his medical dispute “stayed” and his case delayed while the rest of the complicated bankruptcy case played out in front of a court in a distant city.
On the other hand, workers’ compensation claims that arise during the bankruptcy case do not face any of those disabilities. Thus, the date on which two similarly situated coworkers are disabled is critical to the determination of the way the current Bankruptcy Code will treat their claims, despite the fact that the states have promised all workers mandated to participate in the system that they will be treated the same, and the fact that both employees may be left with life-long injuries or illnesses.
Another factor affects Joe’s claim. When a Petition for protection is filed in Bankruptcy Court, it issues an “automatic stay” that freezes every other court proceeding, no matter where located, in which the debtor company is involved. This means that Joe can’t use state dispute resolution mechanisms, unless and until the Bankruptcy Court issues an order allowing it. This forces him to appear in front of a strange court, often in a distant city, with specialized rules and lawyer admission requirements, in front of a judge who is likely to be unfamiliar with state workers’ compensation law.
A Surgical Solution
The solution for this grim, and plausible scenario is simple and causes minimal disruption of the overall bankruptcy scheme. The most important change is to redefine when the workers’ compensation claim accrues. By making each wage or medical benefit accrue when it is due and payable in the normal course of workers’ compensation claims administration, the claimant will only have those benefits that are already delinquent at the time the bankruptcy petition is filed be caught up in the bankruptcy system. As new medical and indemnity benefits become due, they will arise “post-petition” and avoid both the court’s freeze and the wiping out of debts at the end of the case (assuming the debtor successfully reorganizes), because they will have the status of “new” debts, as they are accrued. This treatment is also consistent with the current treatment of medical and disability plan payments for ill, injured and disabled workers that were not hurt on the job.
In addition, explicit treatment of workers’ compensation benefits accruing postpetition as “administrative” expenses of the debtor during bankruptcy will ensure that they are paid during the case.
Finally, adjudication of determinations relating to such benefits should be exempted from the “automatic stay” so that they can be adjudicated as usual, avoiding the economic burden for the employee to appear in the bankruptcy court, while allowing for the agency and court with the specialized expertise under applicable state law to do its job.
By these small, surgical changes, the harsh and inequitable effects of bankruptcy on these involuntary workers’ compensation debtors can be avoided, and the need for more intrusive and burdensome regulatory oversight and security requirements to offset or forestall the effects of bankruptcy can be lessened.
The Effect of the Proposed Changes
Under the new proposed law, any of Joe’s unpaid benefits at the time the bankruptcy is filed will be thrown into the bankruptcy proceedings. But as soon as the bankruptcy is filed, his benefits can start again. The local administrative authority will decide the medical dispute in his claim, and he will not need a lawyer admitted to bankruptcy court to get the treatment he needs to return to work. Assuming that the company successfully reorganizes, any long-term medical benefit eligibility that he may get from permanent injury will be preserved. The state’s promise to Joe is fulfilled ― and the Company doesn’t have the option of walking away from its injured workers as if they were standard commercial debts.
The final chapter: Security deposits, guaranty funds and what the proposed solution doesn’t fix.

Bankruptcy and Workers’ Compensation: Broken Promises, Broken Lives

Monday, January 12th, 2009

With the difficult economy, the issue of “what happens to a workers’ comp claim in the event of a bankruptcy” is on the minds of many of our readers. We’ve addressed the issue of bankruptcy in the past. Today, we are pleased to introduce a more detailed three-part guest post series on bankruptcy and workers compensation by Robert Aurbach, CEO of Uncommon Approach. Robert is former General Counsel for the N.M. Workers’ Compensation Administration and personally been involved in the evaluation and redesign of five separate workers’ compensation programs. He has served as editor of the International Association of Industrial Accident Boards and Commissions (IAIABC) Journal since 2003. He is an expert on various issues that involve the intersection of workers’ compensation and other programs, such as bankruptcy, tribal sovereignty and PEO-leasing arrangements.
Joe worked for Chryslord Moters, a large manufacturing concern with billions in assets and locations in many states. He never concerned himself with workers’ compensation, and was unaware that his Company was self insured for workers’ compensation in the state where he lived and worked. When he was injured on the assembly line, he set about the job of getting better and getting back to work, as his family could ill-afford the loss of his income in the midst of a full blown recession. When the Company sought Chapter 11 bankruptcy protection, Joe still wasn’t particularly concerned, due to the assurances that had been provided to the active employees. But then the Company cut off his benefit payments, so he had no wage replacement income, and his minor dispute over the reasonableness and necessity of a medical treatment proposed by his doctor was taken off the administrative agency’s hearing docket due to an “automatic stay” issued by the Bankruptcy Court. When he called to try to resolve these issues, he was told that he needed to file a claim in a Bankruptcy Court half way across the country, in front of a judge that had no idea what the law of workers’ compensation was in his state. When he asked how long it would take to resolve the problems, he was told that it would likely be at least a year. Upon checking with a lawyer, he also was told that his claim would be paid only if there was money left after paying all the vendors, suppliers, utilities and others who had voluntarily entered into business relations with the company. If there was no money left, or only enough to pay pennies on the dollar, he had no other recourse against his employer. Moreover, his lawyer informed him, his claim would be considered resolved by the bankruptcy proceedings, and that no medical expenses after the bankruptcy case was done would be paid by the Company.
What About Recourse to a Guaranty Fund?
There are various forms of security used to prevent injury to employees of self-insured employers from being uncompensated. The state administrative agency usually demands a security deposit from the self-insurer, based on the size of the liability exposure. Unfortunately, these deposits are often inadequate, due to understated reserves, and may be tied up in court proceedings on their own, depending on the form of the security. State property/casualty insurance guaranty funds do not apply to the debts of self-insurers, but some states have separate guaranty funds for the self-insured employers. Unfortunately, those funds usually contain a small fraction of the total potential liability, and could be easily drained by prior calls on those resources. The promise of the workers’ compensation system to Joe ― medical care and indemnity benefits to allow him to heal and return to work ― is more wishful thinking than a guaranty when his employer seeks bankruptcy protection.
Systems in Conflict
Bankruptcy is a system designed to give a “fresh start” to businesses and individuals who are in debt and cannot survive economically without intervention. Debts are collected and assets are divided and distributed at the end of the process in what is intended to be an equitable manner. The law freezes all claims during this process, to allow the presiding court an opportunity to get control and a global picture of the debtor’s situation. At the end of the court administration period (which is of indefinite length), either the debtor ceases to exist, and its assets are distributed, or the emerging debtor, after negotiated resolution of past debts, is permanently absolved of all debts that arose before the process. The principals of equitable distribution are based on a commercial model where (presumably equally sophisticated) creditors have chosen to do business with the debtor before the bankruptcy and either have or have not availed themselves of certain legal protections for their transactions.
Workers’ Compensation is based on an entirely different set of premises. The state demands that businesses and workers participate in the system, and in return guaranties that the worker will get certain benefits, and guaranties the employer that there will be no other kind of recovery against it for the injury.
Why Isn’t the Worker Protected?
As demonstrated above, the interplay between the two systems can seriously compound the workers’ injury. When the employer has a commercial insurance policy for workers’ compensation, the policy pays independent of the policyholder’s economic condition. But when the employer is illegally uninsured, or legally self-insured, the effect of bankruptcy can be devastating and unavoidable under current law. Medical treatment necessary for recovery is often withheld when the health care provider becomes informed that they will not be paid at all or will only be paid as a general unsecured creditor in a bankruptcy proceeding. Wage replacement for the worker during the period in which he or she is unable to work is cut off by automatic order of the bankruptcy court, causing immediate and substantial economic hardship. The delay in benefit provision can be years in length and can be adjudicated in a court in a remote state, where the worker is effectively cut off from representation by the very economic hardship that the court proceeding created. Moreover, when the bankruptcy court finally adjudicates the worker’s claim, the distribution scheme places the injured worker in the lowest priority level for distribution of assets.
Joe never volunteered to be a creditor to the Company and he is the least able to protect himself in the process, yet the current Bankruptcy Code treats him as the least “worthy” creditor.
Next time: what can be done to fix this conflict between systems.

New Overtime Regulations Impact Workers Compensation

Monday, October 4th, 2004

[We are pleased to welcome as a guest blogger today our favorite actuary, Don Bashline of Bashline & Associates, based in Watertown, MA. Don has some interesting thoughts on the federal government’s new regulations pertaining to overtime, which have a direct impact on workers compensation.]
On August 23, 2004, the U.S. Department of Labor’s new regulations defining worker eligibility for overtime pay went into effect. In a possible attempt at subliminal spin, the program is called “Fairpay.” Let’s say it’s “fair” for some and not so fair for others. For a critical view of the regs, see the white paper at the Economic Policy Institute. Although the net effect of the new regulations won’t be totally clear for a while, no one disputes that some low-wage workers (earning less than $23,660 per year) will gain overtime protection, while many others will lose it. Among the apparent losers: sous chefs, childcare workers and a very large number of supervisors…
The regulations are complex and employers will have some flexibility in implementing them. There have already been cases where employers have given raises (good news?) to employees near the $23,660 threshold, resulting in those workers losing eligibility for overtime (bad news!). Others have chosen to preserve overtime eligibility for workers in high-demand occupations (for example, nurses) that theoretically could have been exempted under the new regulations.
What does this mean for workers compensation? The net effect of the new regulations is to lower the wages of many workers. This will impact workers compensation in two ways: First, overtime wages are included in the calculation of an injured worker’s average weekly wage. With changes in eligibility for overtime, average weekly wages for many workers will decline. As a result, the weekly workers comp indemnity payments for these “exempt” injured workers will also decline.
In addition, these changes will impact workers compensation premiums, which are calculated based on a rate per $100 of payroll. With payrolls declining due to the new regulations, insurance premiums will also decline. Insurers, particularly those who have a high percentage of premiums in affected classifications, will need to think about calculating the estimated impact of these changes on both premium income and claim costs. Employers, especially those who are self-insured, might also need to assess the impact of the new rules on their projected workers compensation costs.
The impact of these new regulations on workers comp calls for careful scrutiny in the coming months. LynchRyan will keep you posted.