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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 digital producer and staff writer at Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]