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

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]