Workers' Comp Legal Trends

Lawyers Get Big Payouts by Exploiting This Workers’ Comp Loophole

The casualty market could see increasing aggregation risk as more courts find a way around the exclusive remedy provision.  
By: | June 1, 2018 • 8 min read

During the first waves of the Industrial Revolution, workers endured grueling labor in life-threatening conditions. No safety regulations were in place, and employers had no legal obligation to pay workers a “fair” wage.

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Men, women and children toiled in factories that contained primitive machinery prone to breaking down and causing fires. Workdays of 16 hours a day were not uncommon in temperatures that could reach 130 degrees Fahrenheit.

Workers injured on the job didn’t have access or the established right to protections. They could sue their employer — if they could afford to — and start the process of lengthy court battles and high-at-the-time payouts, but usually they were left disabled and jobless.

Something had to be done to both protect workers and employers from the cycle of injury and liability. Thus, workers’ compensation coverage was born. And with it came the exclusive remedy.

The arrangement provided workers with compensation in the event of injury or illness while protecting employers from being held liable by workers injured on the job. Workers’ compensation became the sole remedy to address workplace injury.

“It was the early 1900s when workers’ compensation laws were enacted, allowing workers’ compensation coverage to be the exclusive remedy for how injured workers would be compensated for their medical costs and lost wages,” said Tony Tam, managing director, U.S. casualty placement leader, Marsh.

Mark A. Lies, labor attorney, Seyfarth Shaw LLP

“Before that, the worker had to go through the legal process to prove the employer was responsible and negligent.

“As a result of the enactment of workers’ compensation laws in the 50 states, injured workers for the most part can be made whole through workers’ compensation and exclusive remedy, and on the rare occasion, through employers’ liability, which requires the injured employee to prove the employer’s negligence.”

And “employers would rather have workers’ compensation apply than have an employee injury claim go to jury trial,” added Mark A. Lies, labor attorney, Seyfarth Shaw LLP.

“An employer could spend a lot of money if their employee retains a lawyer and files a lawsuit,” said John Denton, managing director, Marsh. “The exclusive remedy doctrine avoids a lot of expensive litigation.”

In the event a civil suit is brought forward, added Lies, employers frequently seek a motion to dismiss the claim. Typically, he said, the motion is granted, because the claim in issue is deemed to be covered by workers’ compensation and the exclusive remedy applies.

When Exclusive Remedy Doesn’t Apply

However, there are instances when exclusive remedy may not apply and employers face lawsuits regarding personal injury or other liability claims.

Negligence on the side of the employer is the biggest culprit.

“If the employer’s conduct is particularly egregious, if they are proven to have been grossly negligent or intentionally [exhibit] bad behavior, and depending on the state, an employee can sue their employer,” said Denton.

Likewise, third parties often aren’t covered under workers’ compensation and are exposed to suits by employees.

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“Sometimes an employer agrees to indemnify a third party and thus may be responsible for the third party if an injured worker sues them, which is referred to as an ‘action over,’ ” Denton said.

“Workers’ compensation benefits are fixed. [A worker] might choose to sue if they think they might get more through litigation.”

“In some states, an employee can bring a civil action against the employer and not have to show that there was an intentional act by the employer to injure the employee, rather by demonstrating there was a substantial probability of injury to the employee,” Lies said.

State regulatory and judicial environments are always changing. Underwriters failing to keep an eye on regulatory change surrounding exclusive remedy can leave themselves open to aggregation risk.

When it comes to looking at work-related injury and litigation, however, Lies noted there are “very few exceptions” to exclusive remedy.

“In workers’ compensation, you have to look state by state,” he said.

For example, Texas employers can non-subscribe or opt out of the workers’ compensation system and instead set up their own administration and benefit system if an injury were to occur. Tam said Oklahoma also has this option to non-subscribe or opt out.

“I don’t know if this is a wave [for other states to follow]. Those who do opt out tend to be large manufacturing and retail companies with a sizeable payroll in either of those states,” he said.

“They look at what they pay for workers’ compensation versus their historical experience and determine if managing their own claims, contracting with their own medical providers, etc., is more cost effective and better for their employees. The companies are doing due diligence by weighing their options.

“It’s a different way of financing this risk. And they might say ‘I don’t want to deal with the volatility workers’ compensation might have and opt out,’ or they might not want to lose the benefits of workers’ compensation and exclusive remedy,” Tam said.

The Legal Landscape

While few exceptions exist, state regulatory and judicial environments are always changing. Underwriters failing to keep an eye on regulatory change surrounding exclusive remedy can leave themselves open to aggregation risk.

The exclusive remedy provision holds firm in most cases, yet there are a handful of claims that bypass the provision all together and leave an employer vulnerable to general liability exposures.

In one instance, a California Supreme Court decision ruled that a workplace injury can be the source of a claim alleging unfair business practices. After a family member died on the job, a Wisconsin family pursued a tort claim against an employer instead of accepting death benefits.

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In Illinois, two teenagers were granted the right to pursue a civil suit against their father’s place of work. The teenagers suffered from birth defects caused by their father’s prolonged exposure to toxins at work. While the employer argued for exclusive remedy through workers’ compensation, the court ruled it didn’t apply.

Another case, this time in Texas, saw four workers injured while driving to work. The employer paid the workers to drive their personal vehicles for work-related transport, and while the driver pursued workers’ comp benefits, his passengers chose to file for personal liability.

“If we didn’t have the Workers’ Compensation Act, I don’t think the civil courts have sufficient resources to handle all of these workplace injury claims,” Lies said.

It’s the construction industry that seems to face the bulk of the of exclusive-remedy-turned-liability cases. One notable example, New York’s Scaffold Law, enacted in the 1990s, created a huge chink in the exclusive remedy armor.

Tony Tam, managing director, U.S. casualty placement leader, Marsh

“Employers’ liability claims in New York have increased in frequency,” due in part to the Scaffold Law, said Denton.

He described it as a “law that makes it very easy for employees to sue regardless of negligence if they fall even from a nominal height, with the claims ultimately borne by their employers as an ‘action over.’ ”

And although other states may flirt with statutes that alter the premise of an exclusive remedy, no state comes close to New York’s Scaffold Law in terms of the general liability exposures employers in the construction industry face.

“There is nothing like New York’s [Scaffold] Law, it is an absolute liability situation,” said David Perez, an executive vice president, chief underwriting officer, Liberty Mutual Insurance Group. “There is no contributory negligence whatsoever.”

“New York is alone in that approach,” he said. “In fact, similar regulations have been repealed in every other state where they existed.”

The law holds owners, general contractors and other third parties potentially liable for fault liability or personal injury claims arising from injury. No amount of safety equipment, training or workplace controls will reduce a builder’s liability in the event an employee falls and pursues legal action.

Construction losses such as those exacerbated by New York’s Scaffold Law are part of a formula that sees pricing in casualty lines increasing in some areas.

“There are signs that the casualty market is turning,” said Tam.  “There are three or four areas we find difficult right now: auto and trucking, wildfires, opioids and New York construction.”

Outside of New York, third parties in the construction industry can take the brunt of liability actions.

Sometimes it comes down to the wording in a contract drawn up between a subcontractor and a general contractor. The language may state that the subcontractor waives its right to the exclusive remedy protections of the Workers’ Compensation Act, which would expose the subcontractor to a personal injury claim by its own employee.

In many of these cases, the subcontractor does not realize they waived their exclusive remedy protection until an employee injury occurs.

“We see potential waivers all the time,” Lies said.

One Step Ahead

In the event that an employee does pursue civil litigation, in some jurisdictions they still need to “prove the employer either had an intent to injure them or that there was substantial probability of injury. In many jurisdictions, employees are unable to meet this burden of proof and the employer has a good defense,” said Lies.

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In any case, there are ways to stay ahead of a workers’ comp claim turning into a personal injury or fault liability claim. “Make sure you have a very competent and enforced safety and health program to start,” Lies said.

“In addition, have people who are highly trained who can investigate such claims to see if they are valid and, if so, to provide all necessary medical treatment to the injured employee to limit the potential liability.

“To minimize losses, also have a diligent claims person monitoring the claim. Purchase workers’ compensation insurance from reputable insurers and closely follow the premium setting process.  Carefully review all contracts when dealing with third parties to avoid waiving your right to an exclusive workers’ compensation remedy.”

“Carefully follow developments with your own state legislature regarding changes to the state workers’ compensation law,” added Lies.

“Work with legislators and lobbyists to prevent revisions to the exclusive remedy provisions of the law.” &

Autumn Heisler is the digital producer and a staff writer at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.