The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | August 1, 2013 • 6 min read

State Law Trumps Medicare Statute

Don’t mess with Texas. The U.S. 5th Circuit Court of Appeals ruled that a state law requiring preauthorization for workers’ compensation expenses cannot be preempted by the Medicare Secondary Payer (MSP) statute.

The Insurance Co. of the State of Pennsylvania (ICSP) initially paid workers’ comp benefits to Guadalupe Caldera, who injured his back at work in 1995. He obtained Medicare benefits in 1998, and underwent surgeries in 2005 and 2006.

Both surgeries were paid for by Medicare and Caldera did not seek preauthorization for either, although Texas workers’ comp law requires that as a prerequisite for payment. He later filed a $42,640 claim with the insurer to repay Medicare.

Although Caldera and the insurer eventually agreed that the surgeries were the result of a workplace injury, ICSP refused to reimburse the claim because the surgeries had not been preauthorized.

Caldera admitted he failed to obtain preauthorization, but argued the ICSP was a primary plan that “can reasonably be expected” to pay because the MSP preempted the Texas requirement. In his view, Medicare’s conclusion that the surgeries were medically necessary preempted “any independent consideration of medical necessity” by ICSP or by the state Division of Workers’ Compensation.

The court ruled the MSP was intended to “complement, not supplant, state workers’ compensation rules,” which Caldera failed to comply with by not requesting preauthorization. It also disagreed with Caldera’s argument that Medicare’s payment for the surgeries equated “to a determination that his surgeries were medically necessary.”


Scorecard: The Insurance Co. of the State of Pennsylvania did not have to pay a $42,640 workers’ compensation claim.

Takeaway: If the court had ruled differently, it could have prompted injured workers to ignore state laws, while collecting from Medicare.

Connecticut Denies Duty on Defend

The Connecticut Supreme Court upheld a ruling that Travelers Property Casualty Co. of America did not have to defend an “additional insured” on a commercial general liability insurance policy.

The issue was whether the insurer had a duty to defend when the underlying personal injury action was not directly connected to the insured’s premises and the woman’s injuries.

After eating and drinking at Church Hill Tavern in Sandy Hook, Conn., Sarah Middeleer took a short walk, and leaned against a wooden rail atop a 6-foot-high retaining wall overlooking a riverbed. The rail collapsed and she fell onto the rocks below.

She sued Misiti LLC, which owned the riverside park area and the commercial property that was leased to the tavern and adjoining commercial buildings. Middeleer did not directly sue the tavern or mention it in her complaint.

Travelers said it had no duty to defend Misiti because the injuries “did not arise out of the use of the leased premises because the underlying complaint made no mention of the tavern or otherwise alleged that the tavern’s negligence, rather than Misiti’s, caused Middeleer’s injuries,” according to the state Supreme Court opinion.

The policy had included an endorsement that named Misiti as an additional insured, “but only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to [the tavern] … ,” according to the opinion.

Prior to the action, Middeleer settled the claim for an undisclosed amount of money.

Scorecard: Travelers did not have reimburse Misiti’s insurer, the Netherlands Insurance Co., which provided a defense to Misiti, for all or part of the defense costs.

Takeaway: The decision may be overly narrow and leaves open the question of how much of a causal relationship is necessary between the liability of the additional insured and the business of the insured.

Criminal Defense Required

Mt. Hawley Insurance Co. lost its argument before a California appeals court and was ordered to help defend a doctor in a federal criminal case.

Mt. Hawley had argued that state law that denied a defense in cases involving unfair competition (UCL) and false advertising (FAL) actions brought by state and local prosecutors also applied to actions brought against insureds by federal authorities.

In this case, Dr. Richard Lopez, the medical director of St. Vincent’s Medical Center Comprehensive Liver Disease Center, was indicted for criminal conspiracy, false statements, and concealment and falsification of records by the U.S. Attorney’s office.

He was accused of transplanting a liver designated for one patient into a different patient more than 50 places down on the wait listing, and then lying about it in violation of regulations of the U.S. Department of Health and Human Services.

The federal indictment alleged that as a result of Dr. Lopez’s actions, the initial patient “was removed from the liver transplant wait list,” was “thereafter deprived of the opportunity to have this life-saving operation,” and subsequently died.

Dr. Lopez was eventually acquitted by a federal jury, and attorney’s fees were said to exceed $1 million.


In its decision, the state Court of Appeal in the Second Appellate District said, “The legislative history is bursting with manifestations of intent to bar indemnity and defense for UCL and FAL actions brought by state and local agencies, and devoid of any indications that the bar would apply to criminal actions brought by federal agencies.”

Scorecard: The ruling means Mt. Hawley will need to pay reportedly in excess of $1 million in defense costs.

Takeaway: This decision offers insureds more access to criminal defense coverage in California.

Fraud Allows Insurer to Keep the Premium

In May 2008, PHL Variable Insurance Co. issued a $5 million life-insurance policy to Peter Bowie, a self-employed real estate investor with an earned annual income of $250,000 and a net worth of $7.5 million. Or so he said.

In reality, he was a retired city employee, used car salesman and blackjack dealer, who was brought into a scheme by two brokers in an attempt to circumvent a Rhode Island law that prevents anyone from holding a life insurance policy on a life in which the policy owner has no insurable interest, according to a May 2013 opinion by the U.S. 1st Circuit Court of Appeals.

Once the policy was issued, it would be reissued into a trust, the P. Bowie 2008 Irrevocable Trust, whose trustee, Louis E. Baldi, was also part of the scheme, according to the opinion.

The brokers got the money to pay the $192,000 premium from Imperial Premium Finance, whose “business model consists of lending money to pay for life insurance policy premiums and, when borrowers default on those loans, taking possession of the policies as collateral,” according to the opinion.

When the premium was paid, broker Richard Rainone received a $172,370 commission. Of that amount, he paid $67,025 to Imperial.

Rainone, his business partner, Christopher Vianello, and Bowie all “invoked their Fifth Amendment privilege not to testify in this case,” according to the opinion.

The trust, which filed suit against PHL for return of the premium, argued the misrepresentations were irrelevant and that state law required return of premium. It also said the trust did not commit fraud.

The U.S. District Court for the District of Rhode Island granted a summary judgment in the case,  which allowed PHL to retain the policy premium “to offset PHL’s losses and to return the parties to the status quo ante.”

The appeals court upheld the lower court ruling that PHL was entitled to retain the premium “as special damages” for the fraud and its expenses in underwriting and administering the policy.

Scorecard: PHL Variable Insurance Co. was permitted to keep a $192,000 premium that was paid for a life-insurance policy based on a fraudulent scheme.

Takeaway: The ruling is consistent with opinions in some other federal and state courts that uphold the right of insurers to keep premiums when policies are issued based on fraud.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.


That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.


Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]