Workers’ Compensation Opt-Out; Court of Appeals Reverses Ruling on Failure to Defend; Two-Year Time Limit to Start Suit Tested; Carbon Monoxide is a Killer— Literally and Financially; Update on Improvements & Betterments
Workers’ Compensation Opt-Out; Court of Appeals Reverses Ruling on Failure to Defend; Two-Year Time Limit to Start Suit Tested; Carbon Monoxide is a Killer— Literally and Financially; Update on Improvements & Betterments
Workers Compensation Opt-Out
Prior to 1954, Maine elected its governor in September. From 1896 through 1932 whichever party won the gubernatorial race invariably captured the presidency the following November—the only exceptions were 1912 and 1916.¹ Republican domination of both the Maine State House and the White House in the 1920s gave birth to the slogan “As Maine goes, so goes the nation.” In response to FDR’s landslides in the 1930s, that changed to: “As Maine goes, so goes Vermont.”
Something similar may be said for Workers Compensation opt-out. At the height of the workers compensation insurance hard-market in the 1980s, Texas enacted laws permitting employers to opt-out of the WC system. Enthusiasts predicted that other states would quickly follow. Until now, that hasn’t happened. But last year, the Oklahoma legislature passed a WC opt-out law. So perhaps the slogan should now be: “As Texas goes, so goes Oklahoma.”
Whether or not it’s the beginning of a trend, Texas is seeing a continuing growth in the number of employers opting out, most recently adding Walmart to the list.
Texas employers have three WC options:
• Provide standard WC coverage and be protected from suits by employees alleging that the employer’s negligence was the cause of the injury—the so-called “sole-remedy” statutes.
• Opt-out and provide a form of accident insurance for employees.
• Opt-out and provide no coverage at all for their employees injured on the job.²
The plans are subject to ERISA, but if they opt-out of the WC system, whether they provide accident insurance or not, employers lose their sole-remedy protection.
The advantages claimed for the opt-out system, from an employer’s point of view, include:
• Control medical provider selection. Opt-out plans can limit coverage to employer-selected doctors and providers
• Use evidence-based medical practices. Opt-out plans can avoid questionable medical treatments and procedures.
• Control use of medicines, particularly excessive opioid use. Opioid problems are claimed to be virtually nonexistent among opt-out claimants in Texas. It’s a serious problem in many other workers compensation jurisdictions.
• More easily terminate temporary disability benefits when recovery is satisfactory or the injured worker has not complied with benefit guidelines.
• Eliminate permanent partial disability coverage. Opt-out plans typically don’t offer these controversial and expensive benefits.
• Avoid prolonged and expensive dispute resolution processes. ERISA appeal protocols are much more limited than those prescribed by state workers compensation laws and regulations.
• Mandatory arbitration can reduce exposure to claims for damages alleging employer negligence.³
The Texas Department of Insurance estimates that 113,000 companies—about a third of the state’s private sector employers— have opted out of the system.4
Oklahoma’s new opt-out plan, which was just upheld by the Oklahoma Supreme Court,5 differs in many respects from the Texas model. Most important, it requires an opt-out accident coverage plan that’s subject to ERISA.
Unlike Texas, an Oklahoma plan must include permanent total disability protection and death benefits equal to the current law. Temporary total disability coverage also continues, but is capped at 70 percent of state average weekly wage instead of 100 percent. Like Texas, it permits the use of arbitration agreements. The National Council on Compensation Insurance (NCCI) estimates that these and other changes in the law will reduce Oklahoma employers’ costs by $263 million.
I doubt that an opt-out system is coming to the New York metropolitan area anytime soon. Greg Krohm, a research consultant and former executive director of the International Association of Industrial Boards and Commissions, points out that “The Texas courts have tended to take a narrow view of the employer’s duties to provide a safe workplace. The Texas courts expect an employee—especially one who is seasoned in his job—to avoid risks that might cause injuries; for example, using a cutting knife carelessly or walking on a wet floor.”6 That makes the risk of successful lawsuits by employees much lower in Texas than in the Northeast. However, if the Oklahoma system achieves its cost reduction predictions, we’re sure to see it in other states and there will be pressure to change the laws in our area.
Court of Appeals Reverses Ruling on Failure to Defend
The Court of Appeals decision in K2- Investment Group v. American Guarantee and Liability last June threw insurance companies and the insurance defense bar into a dither. The court had ruled that an insurance company that wrongfully failed to defend its insured could not thereafter argue that the policy exclusions eliminated coverage. Insurers know that in New York as in most states, the duty-to-defend is broader than the duty-to-indemnify. Nevertheless, when they feel that a claim is clearly excluded, insurers prefer to deny coverage at the outset rather than provide a defense under a reservation of rights— defense is expensive.
What followed the insurer’s refusal of a defense in the K-2 case is a common ploy: the insured settled with the plaintiff for the policy limit and assigned its right to sue the insurance company to the plaintiff. In exchange, the plaintiff agreed to look only to the insurance company for payment. Because of the K-2 decision, insurers might defend cases they would otherwise have denied outright to avoid the risk of losing their chance to argue that the claim was excluded by the policy provisions.
If insurance companies lose on the issue of coverage when the claimant brings suit on the policy, the settlement can be very expensive. Insureds usually lack the skill to negotiate settlement and in a case like this, have little incentive to do so in any event—they have no skin-in-the-game.
Two-Year Time Limit to Start Suit Tested
Good News/Bad News: You’ve suffered a devastating fire; fortunately you have replacement cost coverage. Unfortunately, it will take more than two years to repair the damage no matter how fast you work and the policy says the time-limit to start suit is two years from the date of loss.
That’s exactly the catch-22 that Executive Plaza, LLC faced when its Island Park, NY building suffered more than $1 million in fire damage. On February 7, 2014—almost seven years to the day after the fire and more that three years after the repairs were completed, the New York Court of Appeals (New York’s highest court) held that “such a contractual limitation period, applied to a case in which the property cannot reasonably be replaced in two years, is unreasonable and unenforceable.” 7
That’s good news/bad news in several ways. From Executive Plaza’s point of view, it was good that the case finally settled in its favor, but legal expenses probably devoured much of the $242,000 difference between ACV and replacement cost that it was entitled to.
For all insureds, it’s good that the court made a reasonable exception to an onerous rule, but it left the basic problem posed by the two-year time limit unchanged—the decision discussed several of its other decisions that enforced the limitation. And for the industry as a whole, it reinforced the public’s poor opinion of us. There may be issues with the claim that the court record doesn’t reveal; unless there were I think the insurance company should have paid the claim without forcing the insured to go to court.
My advice remains: as the two-year limit approaches, get a written extension from the insurance company. If you can’t get an extension, advise the insured to talk to a lawyer about filing suit. Remember that Sandy claims turn two years old this October.
An interesting sidelight: The case report notes that amici curiae (literally “friends of the court”) briefs were filed by the New York Public Adjusters Association and United Policyholders (a non-profit organization that works on behalf of insureds). Perhaps that lightened the insured’s legal-expense burden. I certainly hope so.
Carbon Monoxide is a Killer, Both Literally and Financially
On April 4, 2011, 24-year old Rosario Ferreras was found dead on her first night in her newly rented apartment. Investigations by the police and fire departments determined that the cause was a clogged vent pipe connected to the hot water heater. Sad to say, three weeks earlier the previous tenant was also asphyxiated in the apartment. The estates of both victims sued the building owner. The cases settled for $l million each.8 According to newspaper reports, the building owner will personally pay each estate $1 million, $500,000 each up front and the remainder in six months. He had no insurance. 9
Learning Points:
• Check heating appliances in your home, vehicles, boats, etc. and install CO detectors.
• Encourage your clients to do the same. Safety first, then insurance.
• Be sure that your clients have the latest version of the ISO CGL or equivalent. It includes coverage for fumes emitted by water heaters used to heat water for domestic purposes. Earlier versions of the ISO CGL, which are still used by some insurers, did not include this coverage nor do some non-ISO forms.
Some insurance people and attorneys think that the “water heater” exception to the exclusion provides cover for fumes from all water heaters. For example, here’s an excerpt from a client advisory sent out by a construction management firm:
“…[B]odily injury that results from smoke, fumes, vapor or soot from a building’s heating equipment or water heater are not excluded. Coverage is provided for carbon monoxide leaks from such equipment.”10
That’s not correct. The coverage only applies to fumes from an appliance used to heat domestic hot water. Firms that heat water for industrial use do not get this coverage. Nor do firms that use heaters for other purposes, e.g. drying or processing machines. The answer for them is a separate pollution policy.
Update on Improvements & Betterments
The building owner paid $700,000 for the build-out of our client’s new office. We recommended that our client cover the exposure of rebuilding I&B should they be damaged by an insured peril because the lease did not indicate that the building owner had that responsibility.
We told the client’s broker that we felt that this coverage could be written as I&B, but requested that he give all the facts to the underwriter. If the underwriter felt that I&B is not appropriate, the coverage could certainly be provided as building coverage. (I wrote about this issue in the Insurance Advocate on November 11, 2013.) The underwriter didn’t want to write the coverage as I&B, but did provide it as building coverage. Case closed.
Thanks to Jerry Trupin for this article and to the CPCU Society’s Risk Management Interest Group newsletter for letting us reprint it.
1 In 1912, Teddy Roosevelt’s Bull Moose third-party split the Republican vote. That enabled Wilson to gain the presidency, which he held onto in 1916.
2 “The Texas Model: https://www.sedgwick.com/NewsRelease/WCOpt-OutStudy.pdf (accessed 1/26/14)
3 Based on “The Texas Model” op. cit.
4 Nancy Grover “The Future of Workers Compensation: Is Opt-Out the Answer?” Workers Compensation Report http://www.ncci.com/Documents/IssuesRpt-2013-Grover.pdf (accessed 2/27/14)
5 Randy Ellis “Oklahoma Supreme Court upholds new workers’ compensation law” The dissents written by three judges portend future challenges when the administrative rules are adopted.http://newsok.com/oklahomasupreme- court-upholds-new-workerscompensation-law/article/3915151 (accessed 2/27/14)
6 Nancy Grover, op cit
7 Executive Plaza, LLC v Peerless Ins. Co. 2014 NY Slip Op 008 98 Decided on February 13, 2014 Court of Appeals (accessed 2/26/14)
8 Press release from Barry Epstein of the Epstein Law Firm of Rochelle Park, NJ, who represented one of the plaintiffs.
9 Michaelangelo Conte “Families Of Pair Who Died Of Carbon Monoxide Poisoning Receive $2 Million Lawsuit Settlement” The Jersey Journal January 10, 2014 http://www.nj.com/jjournal-news/index.ssf/2014/01/families_of_pair_who_died_of_c.html (accessed 2/26/14)
10 “Commercial General Liability Pollution Exclusion” Client Advisory, Construction Risk Management Specialists, July 2010 http://www.kpcom.com/newsletters/documents/NEW_CRMS_GL_Pollution_Exclusion_7_2010.pdf (accessed 2/28/14)
