The insurance industry finds itself in an unusual situation of late: low premium levels and low interest rates. Normally, when premiums are low, interest rates are high and visa versa. The insurance industry looks to obtain a profit on premiums or interest rates for their capital, or both. But over the last several years of turmoil in the economy, the industry has found itself in an unenviable position. Although pressure is starting to yield slowly increasing premiums, it is safe to say that premium levels are far below what combined ratios in various lines would yield in "normal" economic times.
As a result of exceedingly low interest rates, open reserves are now anathema. For many insurance carriers and employers, it is desirable to resolve the claims and have the reserves closed. This is particularly true in the workers' compensation line of insurance where the combined loss ratio has been deteriorating over the last several years. However, settlements in the workers' comp area can be anything but easy.
Workers Compensation claims have often been characterized as the claims with the "longest tail" (besides toxic tort cases). Comp is the most highly regulated of all lines of insurance. Workers' comp coverage is statutory and, in the vast majority of instances, mandatory. State laws dictate the claims and litigation process, the amount of benefit payments, the manner in which way medical care is assigned and maintained, and the way that claims may be formally settled.
As any claims person (or employer) will tell you, the only good claim is a closed claim. That's a wonderful maxim, but far more difficult to realize in the world of workers' comp, particularly with long-term claims. In these cases, one is often faced with dreadful combinations of employee entrenched disability syndrome, an employer who does not want the injured employee back, workers experiencing prolonged pain (fibromyalgia or otherwise) involving extended opioid use, hostility of the injured worker toward the employer and an overall adversarial situation that would try the patience of Mother Teresa. So what is one to do to make these claims "go away" at the right price in an expeditious fashion?
A Precision Decision
The objective of the Claims Department is to resolve every case as soon as possible, subject to sound analysis. The key is recognizing the proper moment to initiate settlement discussions. Premature settlement initiatives can result in inflated demands and drive additional treatment, while tardy settlement strategy consequences often result in lost opportunities and higher resolution costs.
Of course, there is no workers' comp law that mandates claim settlement. Some jurisdictions even statutorily prohibit settling future medical exposure. There is always the option of simply continuing to pay benefits and ongoing medical care. But if one is trying to negotiate a settlement in indemnity and medical, or either, there are some things that must be taken into consideration.
The items that, at minimum, should be delineated on every case before making a decision to pursue settlement include:
* The investigation should be completed.
* Compensability should be established.
* The manifestation of disability should be causally related to the alleged injury.
* The medical condition of the injured worker should be relatively stable, with any permanent partial disability determined.
* The "return to work" capacity of the injured employee should be well established. Are you dealing with a person who is already back to work, who can be gainfully employed post settlement, or has the potential of a permanent total disability award which usually increases the financial exposure exponentially?
* If there is an issue regarding compensability and/or medical causality, it should be decided if the claim is worth offering a compromise amount to resolve.
* If the claim is litigated (and most of the large ones are), taking into consideration the jurisdiction, hearing officer or judge, and the expertise of the injured worker's legal representative, what type of award or judgment can be expected if the case goes to hearing/trial?
* The reserves are adequate to support the anticipated settlement amount.
* The employer/carrier stakeholders have been made aware of the settlement analysis and reasons for valuation.
Lack of clarity in any of the above areas may lead to the abject failure of settlement negotiations, "inflated" disposition costs and inadequate reserves to accommodate the anticipated resolution. None of these scenarios can be considered "career builders" for the handling claims adjuster.
Settle or Litigate
In some instances a claims adjuster's settlement options may be restricted by customer service agreements with the employer. Many adjusters have been the recipient of employer wrath over a suggested settlement amount. "Millions for defense, but not a cent for tribute," may have been the watchword before litigation, but after receiving a verdict or award well in excess of the pre-trial suggested settlement value, the criticism can evolve into, "You failed to persuade us that your position was correct, so it is still your fault we have to pay this outrageous amount!" Many will recognize this as the famous game of "heads I win, tails you lose."
Barring the above situation, there is really no reason to allow a case to go to trial if the odds are heavily in the injured worker's favor and it is possible to resolve the claim for an amount that is reasonable in view of the probable outcome of the judicial process.
One thing a case always does is take the ability to influence the judgment or award out of the adjuster's hands, which is not a salutary development. "Bad" case law can also result.
If the case presents a situation where the demand far exceeds the amount that the carrier/employer is willing to pay, there is little option. Try the case. If, however, you have a claim with a fact pattern where there is little chance of victory, exposure to statutory penalties, and high allocated expense costs for defense, a reassessment of the settlement authorization amount should be completed.
Cash or Carry
Even in these days of infinitesimally low interest rates, the use of an annuity to fund some or all of the settlement should not be ignored. Using a structured settlement gives you the advantage of the time value of money over the disbursement period.
Annuity quotes should generally be secured for all prospective settlements over $20,000, if nothing else than to find out what type of savings can be realized over a straight cash "lump sum" amount. There is no reason to spend more on settlement using a lump sum cash amount if you can substitute an annuity in place of the up-front cash.
Settlements Are Not Always Settlements
In other types of insurance, the term "settlement" refers to a legally binding resolution that precludes any potential of further legal action. This is not necessarily so in workers' comp. For instance, many state workers' comp laws allow claims that are "settled" to be opened by the injured worker for new and further disability, otherwise known as a "change of condition" claim.
In some situations, compromise settlements with Board or Commission approval may also be re-opened for myriad reasons. Cases may be re-opened in some states for "commutation" of the previously agreed upon settlement amount. This where the injured worker wishes to have his/her bi-weekly court approved pay out paid in one lump sum.
Obviously, workers' comp "settlements" sometimes have the capacity to be the "gift that keeps giving," to the chagrin of employers and insurance carriers.
It is difficult to even scratch the surface of such complex subject in the space of a column. I hope that this overview successfully outlined some of the key issues that should be considered when taking workers' comp case settlements into consideration.
Complicated case negotiations can be as much fun as a bout of Legionnaires' Disease. However, claim resolution is as ancient as the insurance industry itself, so settlement opportunities must be approached timely, carefully and analytically. Doing so will result in superior results. Ignoring this approach will cause you to warp your mind, curl your spine and lose the war for the Allies.
D'Alusio has over 30 years experience in
property casualty claims. He holds ARM and SCLA designations, as well as BA and MA degrees.
January 26, 2012
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