This is a copy of a talk I gave in Florida in August 2011, dealing with applications for Special Fund Relief.
Special Fund Relief
Under the Longshore and Harbor Workers’ Compensation Act
“8(f) Relief and the Special Fund: To File or Not To File,
That is the Question”
John Chamberlain
President
John Chamberlain Consulting LLC
PO Box 987
Woodbury CT 06798-0987
203-405-1814
Introduction
This paper will address the basics of secondary fund relief available to employers under section 8(f) of the Longshore and Harbor Workers' Compensation Act (“LHWCA”). It will cover who may apply for relief, how to obtain relief, what relief is provided. It will then address the financial consequences of pursuing or not pursuing such an application.
Summary
In order to encourage employers to hire disabled workers, workers’ compensation statutes included provisions limiting an employer’s obligation where a previous injury combined with the second injury producing a disability greater than that of the second injury alone. Thus, a worker with a missing eye whose second eye is blinded in a subsequent accident is totally disabled, whereas loss of a single eye is a partial disability. The LHWCA adopted this model.
To obtain relief the employer must show that a worker under the LHWCA
1. has an existing permanent partial disability; and
2. Suffers a new injury, which
3. was manifest to the employer, prior to the new injury; and
4. the disability is not solely caused by the new injury; and
5. the resulting disability is materially and substantially greater than that of the second injury alone.
The employer’s liability for permanent disability limited as follows:
1. If the second injury is compensable under § 8(c)(1)-(12) and (14)-(20), the employer pays either the scheduled number of weeks or 104 weeks, which ever is greater.
2. If the second injury is compensable under § 8(c)(13), the employer pays either the scheduled number of weeks or 104 weeks, which ever is less.
3. In all other cases, the employer pays 104 weeks.
Sources
The Department of Labor maintains information on their various web sites.
10. The Special Fund is at
Who May Apply
The Applicant is the Employer/Carrier. Normally the carrier will make the application. The injured worker has no standing to apply for or contest the Special Fund relief. A state guaranty fund representing a carrier in receivership may apply. An uninsured employer may not. An employer whose “carrier” is not authorized by the Department of Labor is “uninsured”. Neither the employer nor the carrier is entitled to relief.
Defense of the Special Fund is the duty of the Secretary of Labor, who has delegated the responsibility to the Director of the Office of Workers’ Compensation Programs. The fund is normally not represented at OALJ level. If there is representation, it is usually the regional solicitor’s office who will appear for the Director. Before the Benefits Review Board and Circuit Courts of Appeal, Counsel for Longshore from the National Office will normally appear.
The Extensions to the Act
Employers and Carriers covered by the extensions to the Act, The Defense Base Act, The Outer Continental Shelf Lands Act and the Nonappropriated Fund Instrumentalities Act may apply for relief. Employers under the Defense Base Act may apply even if they anticipate other relief under the War Hazards Act.
When The Application Should Be Made
The 1984 amendments to the Act introduced a time bar for 8(f) relief. The employer must present an application to the District Director “prior to [his] consideration of the claim”; failure to do so is an “absolute defense” to the Special Fund’s liability.
In principle an application should be filed when the employer knows that permanent disability exists; when the employer is paying permanent disability; or before or at the first informal conference at which the issue of permanent disability is raised. An application means a fully documented application in accordance with the regulations set forth in 29 C.F.R. § 702.321.
If there is any doubt, or if a complete application cannot be immediately constructed, the Department should be asked for an extension of time. If a time limit is put on the grant of an extension, the employer should ensure that either the new time is met, or that a further extension is granted.
What Must The Applicant Prove
The Regulations require the following in the application: -
(i) “A specific description of the pre-existing condition relied upon as constituting an existing permanent partial disability;
(ii) the reasons for believing that the claimant's permanent disability after the injury would be less were it not for the pre-existing permanent partial disability or that the death would not have ensued but for that disability. These reasons must be supported by medical evidence as specified in paragraph (a)(1)(iv) of this section;
(iii) the basis for the assertion that the pre-existing condition relied upon was manifest in the employer; and
(iv) documentary medical evidence relied upon in support of the request for section 8(f) relief. This medical evidence shall include, but not be limited to,
a. a current medical report establishing the extent of all impairments and
b. the date of maximum medical improvement. If the claimant has already reached maximum medical improvement, a report prepared at that time will satisfy the requirement for a current medical report.
c. If the current disability is total, the medical report must explain why the disability is not due solely to the second injury.
d. If the current disability is partial, the medical report must explain why the disability is not due solely to the second injury and why the resulting disability is materially and substantially greater than that which would have resulted from the subsequent injury alone.
e. If the injury is loss of hearing, the pre-existing hearing loss must be documented by an audiogram which complies with the requirements of §702.441.
f. If the claim is for survivor's benefits, the medical report must establish that the death was not due solely to the second injury.
Any other evidence considered necessary for consideration of the request for section 8(f) relief must be submitted when requested by the district director or Director. “
It is the employer’s responsibility to prove each element. The special fund is an exception to liability, transferring the risk of permanency from the individual employer to entire covered industries. It is therefore important that the application be clear, reasoned and supported by evidence, from credible doctors, which supports the application. Under no circumstances should any element be presumed to be obvious or left to the District Directors to draw inferences or “figure it out” for themselves.
What Relief Is Available
In cases not covered under §8(c)(1)-(20), the relief is only in respect of permanent disability payable after 104 weeks from the date of maximum medical improvement. Temporary disability before that date is not payable by the fund. In addition an employer is entitled to recover from the Fund amounts paid by him to the worker in excess of 104 weeks. The employer, when relief is granted, should file an LS-208 showing the amounts he has paid the claimant. The Department of Labor will then compute the amount of the employer’s liability, and deduct it from the amount the employer has actually paid. The balance will then be returned to the employer with interest.
The case remains open and continues to be the responsibility of the employer. Although the special fund will monitor the wages reported annually by the injured workers, it is each carrier’s responsibility to monitor their cases and to apply for a modification of benefits if appropriate.
Medical benefits are not the liability of the fund and continue to be payable by the employer. If the worker is only partially disabled, and during the period of the Fund’s liability, further surgery is necessary the Fund is not liable for the temporary total disability during surgery and recovery. Burial expenses are not payable by the Fund.
For hearing loss cases under § 8(c)(13), the employer pays the lesser of the difference in weeks between the current audiogram and the previous one. Thus if the previous audiogram shows a 50% loss of hearing and the current one shows 75%, the Fund pays 50%, or 100 weeks. The employer pays 25% or 50 weeks.
For all other scheduled injuries under §8(c)(1)-(20) the reverse applies. The employer pays the greater of the difference between the previous injury or 104 weeks. Thus for an arm, 25% equates to 78 weeks. The employer would therefore pay 104 weeks and the fund would pay 234 weeks less 104 weeks, equal to 130 weeks.
In a scheduled case where there is a credit for a prior payment, the credit is due to the Fund in the first instance. The credit for prior payments is a dollar for dollar credit.
Financial Consequences – The Assessments
The relief of the employer comes with a price. Workers’ Compensation in general transfers the risk of injury from the worker to the employer. A second injury fund transfers limited relief from the employer to the industry as a whole. From 1927 to 1972 the Fund was financed by
(1) payments by employers for the work related death of an employee with no compensable dependents; and
(2) all amounts collected as fines and penalties; and
(3) any investment income on the unused balance.
In 1972 congress added an assessment based on the amount of compensation and medical benefits paid in the prior calendar. Each employer paid the amount of compensation and medical benefits he had paid in the prior year, divided by the total of the payments, multiplied by the amount needed to finance the Fund. This meant that there was no direct consequence to a user of the Fund. In 1984, the amendments added a second part to the assessment. Half of the assessment is financed by payments of compensation (but no longer medical benefits) as before, and the other half by the amounts paid by the Fund attributable to each employer divided by the total of such amounts.
It is elementary arithmetic that after 1984 an employer pays at least 50% of the special fund relief he obtained. The second half of the assessment is based on payments made in respect of § 8(f) claims, but the Special Fund under § 44 pays other amounts as well. These are half the amounts payable under §10(h), (pre-1972 claims), §8(g) (maintenance during rehabilitation), 18(b) (payments in respect of bankrupt employers or carriers), §39(c), (rehabilitation costs) and §7(e) (medical expenses). There are also cases paid under 8(f) attributable to carriers now liquidated. Therefore, the amount over 50% that individual carriers pay on their 8(f) claims depends on the difference between the total amount attributable to 8(f) cases of solvent carriers and the total amount needed to finance the Fund.
The amount payable under the first half of the assessment varies as the amount of compensation paid directly by carriers relates to the total paid by the Fund. If there is an increase in direct compensation with no corresponding increase in special fund payments, the percentage payable by each employer will drop.
The Calculation of the Assessment
The assessment calculation is set out in § 44(c)(2):
“At the beginning of each calendar year the Secretary shall estimate the probable expenses of the fund during that calendar year and the amount of payments required (and the schedule therefor) to maintain adequate reserves in the fund. Each carrier and self-insurer shall make payments into the fund on a prorated assessment by the Secretary determined by —
(A) computing the ratio (expressed as a percent) of (i) the carrier's or self-insured's workers' compensation payments under this Act during the preceding calendar year, to (ii) the total of such payments by all carriers and self-insureds under this Act during such year;
(B) computing the ratio (expressed as a percent) of (i) the payments under section 8(f) of this Act [33 USC § 908(f)] during the preceding calendar year which are attributable to the carrier or self-insured, to (ii) the total of such payments during such year attributable to all carriers and self-insureds;
(C) dividing the sum of the percentages computed under subparagraphs (A) and (B) for the carrier or self-insured by two; and
(D) multiplying the percent computed under subparagraph (C) by such probable expenses of the fund (as determined under the first sentence of this paragraph).”
(In §32(a)(2) defines a self-insured employer as a “self-insurer”. The first paragraph above uses that expression, as did the 1972 amendments. (A) and (B) use the expression “self-insureds” with no definition.)
Table 1 shows the calculation, at July 2011, for an employer or carrier who reported $10,000,000 in compensation payments for calendar year 2010, and $1,000,000 payments under §8(f) attributable to that company. The employer or carrier owes $1,527,656.
Table 1.
| Compensation | A | $10,000,000 |
| Total Compensation | B | $660,886,505 |
|
|
|
|
| 8(f) | C | $1,000,000 |
| Total 8(f) | D | $103,000,000 |
|
|
|
|
| Special Fund | E | $123,000,000 |
|
|
|
|
| Assessment | F | $1,527,656 |
The formula for computing the assessment is: -
(A/B + C/D)/2 X E = F
Table 2 shows the calculations.
Table 2.
| A/B |
| $0.0151 |
| C/D |
| $0.0097 |
| Total |
| $0.0248 |
| Total /2 |
| $0.0124 |
| Total /2* E |
| $1,527,656 |
The percentages of the amounts paid as an assessment are
Table 3.
| Compensation |
| 9.31% |
| Special Fund |
| 59.71% |
For every dollar of compensation the employer paid in the previous year, regardless of whether he had any cases in the fund he paid further 9.31 cents in an assessment. And for every dollar paid by the special fund, he paid back 59.71 cents.
Table 4 charts the two percentages since 1985, with an average to date, and a 6-year rolling average for each. The compensation average peaked at 19% in 1999 and in 2004. Since then the Defense Base Act cases have arrived, driving up the total reported compensation, and the percentage correspondingly down. The special fund percentages peaked in 1990 and are now coming down. The comparison between the overall and a relatively short term average. For calendar year 2010, the compensation reported under the Defense Base Act was $219,709,311; 33% of the total for all the acts of $660,886,505.
Table 4.
| Year | Compensation | Special Fund | Six year Average | Average Compensation | Special Fund Average | Six year SF |
| 1985 | 0.08 | 0.76 | 0.08 | 0.08 | 0.76 | 0.76 |
| 1986 | 0.12 | 0.68 | 0.10 | 0.10 | 0.72 | 0.72 |
| 1987 | 0.11 | 0.54 | 0.10 | 0.10 | 0.66 | 0.66 |
| 1988 | 0.13 | 0.65 | 0.11 | 0.11 | 0.66 | 0.66 |
| 1989 | 0.13 | 0.68 | 0.11 | 0.11 | 0.66 | 0.66 |
| 1990 | 0.16 | 0.81 | 0.12 | 0.12 | 0.69 | 0.69 |
| 1991 | 0.14 | 0.75 | 0.12 | 0.13 | 0.70 | 0.69 |
| 1992 | 0.14 | 0.72 | 0.13 | 0.14 | 0.70 | 0.69 |
| 1993 | 0.15 | 0.65 | 0.13 | 0.14 | 0.69 | 0.71 |
| 1994 | 0.17 | 0.72 | 0.13 | 0.15 | 0.70 | 0.72 |
| 1995 | 0.16 | 0.68 | 0.14 | 0.15 | 0.69 | 0.72 |
| 1996 | 0.16 | 0.61 | 0.14 | 0.15 | 0.69 | 0.69 |
| 1997 | 0.16 | 0.56 | 0.14 | 0.16 | 0.68 | 0.66 |
| 1998 | 0.17 | 0.66 | 0.14 | 0.16 | 0.68 | 0.65 |
| 1999 | 0.19 | 0.64 | 0.14 | 0.17 | 0.67 | 0.65 |
| 2000 | 0.18 | 0.63 | 0.15 | 0.17 | 0.67 | 0.63 |
| 2001 | 0.19 | 0.62 | 0.15 | 0.18 | 0.67 | 0.62 |
| 2002 | 0.17 | 0.58 | 0.15 | 0.18 | 0.66 | 0.62 |
| 2003 | 0.14 | 0.59 | 0.15 | 0.17 | 0.66 | 0.62 |
| 2004 | 0.19 | 0.64 | 0.15 | 0.18 | 0.66 | 0.62 |
| 2005 | 0.18 | 0.63 | 0.15 | 0.18 | 0.66 | 0.62 |
| 2006 | 0.15 | 0.59 | 0.15 | 0.17 | 0.65 | 0.61 |
| 2007 | 0.13 | 0.59 | 0.15 | 0.16 | 0.65 | 0.60 |
| 2008 | 0.12 | 0.60 | 0.15 | 0.15 | 0.65 | 0.61 |
| 2009 | 0.11 | 0.62 | 0.15 | 0.15 | 0.65 | 0.61 |
| 2010 | 0.10 | 0.61 | 0.15 | 0.13 | 0.65 | 0.61 |
| 2011 | 0.09 | 0.60 | 0.15 | 0.12 | 0.64 | 0.60 |
To File or Not File
The calculation of any savings by applying for relief depends on the details in each case. The type of case, hearing loss, other scheduled losses and loss of earning capacity cases are all calculated differently.
1. Hearing Loss
Table 5 shows a claim for a current hearing loss of 50%, with a previous loss of 30%. If the employer pays, and does not claim relief, he pays the full 50% loss, plus the assessment on compensation paid. If the employer is granted relief, he pays difference between the current and previous loss, plus the assessment on the amount the Fund pays for him and the assessment on the amount for himself. In the example, if the employer is granted relief, for a worker with a $500 per week compensation rate the saving will be $ 15,900. The cost of applying for relief should be deducted from this figure to get the net saving.
Table 5.
| Item | Per Cent | Weeks | Rate | Amount |
| Previous Loss | 30% | 60 | $500 | $30,000 |
| Current Loss | 50% | 100 | $500 | $50,000 |
| Difference | 20% | 40 | $500 | $20,000 |
|
|
|
|
|
|
| Fund Pays |
| 60 |
| $30,000 |
| Employer Pays |
| 40 |
| $20,000 |
|
|
|
|
|
|
| Assessment |
|
|
|
|
| Fund Payments | 62% |
|
| $18,600 |
| Emp. Payments | 15% |
|
| $3,000 |
| Employer Total |
|
|
| $41,600 |
|
|
|
|
|
|
| Without 8(f) |
|
|
|
|
| Compensation | 50% | 100 | $500 | $50,000 |
| Assessment | 15% |
|
| $7,500 |
| Total |
|
|
| $57,500 |
| Difference |
|
|
| $15,900 |
The savings decrease as (a) the difference between the previous and current losses diminishes and (b) the compensation rate decreases.
There appears to be no down turn to the use of the Fund, from an employer’s viewpoint for hearing loss claims. There is no long obligation for compensation and fund participation is short lived.
2. Other Scheduled losses
For other scheduled losses, the employer pays either the difference between the previous and current injury or 104 weeks, which ever is the greater. This means that if the total disability is less than 104 weeks, there is no advantage in pursuing relief. However, a prudent employer would probably have sought an extension of time to file a fully documented application. If the previous injury was one for which a payment had been made under a worker’s compensation statute, then credit for the actual amount paid is off set against the award. However, the credit is set off first against the liability of the Fund, and then against the employer’s contribution.
Table 6 shows, for the different scheduled body parts, the percentage representing the 104 weeks minimum employer payment.
Table 6.
| Body part | Total Weeks | 104 weeks |
| Arm | 312 | 33.33% |
| Leg | 288 | 36.11% |
| Hand | 244 | 42.62% |
| Foot | 205 | 50.73% |
| Eye | 160 | 65.00% |
| [Hearing Loss] | 200 | 52.00% |
The employer always pays a minimum of 104 weeks. If the total disability for a leg is less than 36% there will be no recovery from the Fund.
Table 7 shows the arithmetic for a leg injury to a worker with a Compensation Rate of $500 per week. The assessment rates are 15% for compensation and 62% for the special fund. The worker has a combined injury of 70% to the leg. 30% is due to a previous injury, 40% to the current injury. The employer will pay 115 weeks, and the special fund will pay 86 weeks. In addition the employer will pay the assessment for the compensation of 115 weeks, and the assessment on the 86 weeks.
Table 7.
| Max Weeks | 288 | C/R | $500 | | |
|
|
|
|
|
| Assessment |
|
|
| % | Weeks | Amount | Comp | SF | Total |
| Total of Injuries | 70% | 202 | $100,800 | $15,120 |
| $115,920 |
| Previous Injury | 30% | 86 | $43,200 |
| $26,784 | $26,784 |
| Employer | 40% | 115 | $57,600 | $8,640 |
| $66,240 |
|
|
|
|
|
| Total | $93,024 |
|
|
|
|
|
| Savings | $22,896 |
| | | | | | | | |
If there were no special fund relief the employer would pay a total of $155,920. With relief the total is $93,024, a net savings of $22,896. If the application for relief costs less than that, the employer is a “net winner”.
Tables 8 & 9 show a case where the 104 week minimum applies. This time the previous injury gave a 40% disability, and the second injury a 30% disability. If the 104 week minimum did not apply, the employer would pay only 86 weeks, and save $ 30,528.
Table 8.
|
|
|
|
| Assessment |
|
|
| % | Weeks | Amount | Comp | SF | Total |
| Total of Injuries | 70% | 202 | $100,800 | $15,120 |
| $115,920 |
| Previous Injury | 40% | 115 | $57,600 |
| $35,712 | $35,712 |
| Employer | 30% | 86 | $43,200 | $6,480 |
| $49,680 |
|
|
|
|
|
| Total | $85,392 |
|
|
|
|
|
| Savings | $30,528 |
However, when the 104 week minimum is applied, the Fund pays only 98 weeks of compensation and the employer’s net savings drops to $25,864. In every case the employer needs to verify the formula to avoid wasting money. Table 9 shows the formula at work.
Table 9.
|
|
|
|
| Assessment |
|
|
| % | Weeks | Amount | Comp | SF | Total |
| Total of Injuries | 70% | 202 | $100,800 | $15,120 |
| $115,920 |
| Employer pays | 36% | 104 | $52,000 | $7,800 |
| $59,800 |
| Fund Pays | 34% | 98 | $48,800 |
| $30,256 | $30,256 |
|
|
|
|
|
| Total | $90,056 |
|
|
|
|
|
| Savings | $25,864 |
There are two other considerations that affect net savings.
In some cases the employer will pay first, and recover from the fund later. There is nothing wrong with this procedure, but it tends to reduce the recovery, because the employer may be faced with an assessment on the full amount of the payment, and an assessment on the recovery.
Table 10 illustrates the problem.
Table 10.
|
| Compensation | Assessment | Total |
| Employer pays | $100,800 | $15,120 | $115,920 |
| Reimbursed | $48,800 | $30,256 |
|
| Net Payment | $52,000 |
|
|
| Totals | $52,000 | $45,376 | $97,376 |
| Net Saving |
|
| $18,544 |
The employer pays the full amount, and the 15% assessment thereon. Then the special fund reimburses the $48,800, but the employer pays the assessment on that number as well. This reduces the net savings to $18,544. To avoid the drop in savings, an employer needs to ensure that the application is made timely.
In other cases, there is a credit for a previous payment. Using the first example above, there is a previous injury of 40%. There was a payment for that injury of $40,000. This payment is deducted from the Fund’s obligation first, reducing its contribution to $3,200. This in turn drops the savings to the employer to $ 18,256.
Table 11.
|
|
|
|
| Assessment |
|
|
| % | Weeks | Amount | Comp | SF | Total |
| Total of Injuries | 70% | 202 | $100,800 |
|
|
|
| Credit |
|
| $40,000 |
|
|
|
| Net Payment |
|
| $60,800 | $9,120 |
| $69,920 |
| SF pays |
|
| $3,200 |
| $1,984 | $1,984 |
| Employer | 30% | 86 | $43,200 | $6,480 |
| $49,680 |
|
|
|
|
|
| Total | $51,664 |
|
|
|
|
|
| Savings | $18,256 |
There appears to be no down turn in the use of the fund for scheduled injuries, although the savings may not always be as great as they might first appear.
3. Non-Scheduled Injuries
(a) Introduction
The schedule limits an employer’s liability to a number of weeks, at a fixed rate. A loss of wage earning capacity claim lasts until the disability ends. This means an open-ended liability subject to modification and the life span of the claimant. If the injury hastens the claimant’s death the obligation ends with the widow’s remarriage or death. Life expectancy tends to increase.
Permanent total claims are subject to annual wage increases under § 6 of the act. The increases are limited by statute to a maximum of 5% per annum.
Table 12 shows the percentage increase, the overall average and the average since the 1984 amendments came into effect. This indicates a roughly 3.00% average over recent years.
Table 12.
(b) Quantifying the case – loss of wage earning capacity
The worker has a permanent disability with an initial compensation rate of $ 500 and a life expectancy of 30 years. The straightforward maximum (ignoring any possible widower or widow’s benefits in the future) is a straightforward calculation of life expectancy multiplied by the rate. In this case, total payments would be $ 780,000. To this must be added the 15% for the assessment, a total of $ 897,000. If the case goes to the Special Fund, the employer pays the first two years, and the Special Fund pays the next 28. So the employer will pay $52,000 plus the $ 7,800 assessment, plus the assessment for the 28 years, $451,360 a total of $ 511,160, a saving of $385,840.
Table 13.
|
| Comp | Assessment | Total |
| Employer | $52,000 | $7,800 | $59,800 |
| Special Fund | $728,000 | $451,360 | $451,360 |
| Total |
|
| $511,160 |
Hidden dangers include a deterioration in the worker’s earning capacity, with a consequent increase in rate or a longer than expected life expectancy.
(c) Quantifying the case – permanent total disability
A permanent and total case requires an annual increase each year from the start of permanent disability. Using the same example of a worker with a life expectancy of 30 years and an initial permanency rate of $ 500 per week with the initial increase at the beginning of the second year, assuming a 3% increase each year, the employer will pay without relief, $ 1,236,961 in compensation, $ 185,544 in assessments for a total of $ 1,422,505. With relief, the employer pays the first 104 weeks with the compensation assessment, $60,697 plus the 28 years of assessments, $743,192 for a total of $794.889; a saving of $627,616.
Table 14.
|
| Comp | Assessment | Total |
| Employer | $52,780 | $7,917 | $60,697 |
| Special Fund | $1,184,181 | $734,192 | $734,192 |
| Total |
|
| $794,889 |
| Saving |
|
| $627,616 |
(d) Quantifying the cases -Death claim
A death case works in the same way as a permanent total claims. The rate differs, if there is only a spouse. If there are children the rate will not differ until the last child reaches either 18 or 23. It is often assumed that widows will never remarry because they wish to keep their compensation. However, there appear to be no recent statistical studies to verify or cast doubt this hypothesis.
4. Wider Considerations
(a) Claimants
Claimants have no standing to contest 8(f) relief directly, since they have no interest in the source of their funds. Since the issue of relief is heard at the same time as the issue of permanency, the claimant’s testimony is likely to be important to the employer.
(b) Insured Employers
Insured employers have an interest in whether or not relief is sought, if the decision affects their experience modification, their retrospective rating or their deductible. Whether or not it does is a matter of the individual contract.
The experience modification, which raises or lowers employer’s rates from the rate published for the payroll class of the employee, operates on a three- year cycle, from payments and reserves declared by the carrier. A case in the fund would therefore reflect not the true cost. It would reflect only the 104 weeks, (2 years), of permanency regardless of the length of the claimant’s disability.
Before the 1984 amendments insured employers who paid no assessment might claim that failure to seek relief affected their experience modification. Since there was no assessment directly attributable to the individual cases, the claim might have had some merit. The cost of the claim beyond 104 weeks was transferred to the industry as a whole; after 1984 only about 35-40% is directly attributable to the individual claim.
(c) The Department of Labor
The Department of Labor, through the District Director, will consider the application, and may approve or deny it. Appeal from a denial is to the Administrative Law Judge. The Department, represented by the Solicitor’s offices may appear, either in person or by written brief. The regional solicitor’s office will normally be the representative at ALJ level. The Solicitor will defend the fund. This does not include joining forces with the defense to attack the claimant’s allegations of permanency. Nor is the Solicitor bound by the stipulations of the parties, especially if those seek to pre-empt an inquiry into the facts necessary to prove relief. And the fund is precluded from participation in settlement by 8(i)(4).
(d) Self-Insurers and carriers
(i) General
The 1972 amendments increased the costs of claims under the Longshore Act because they: -
(a) removed the combined limit for total and permanent partial disability of $24,000 in §14 (m);
(b) removed the unseaworthiness action against the vessel; and
(c) increased the maximum rate of compensation from $70 per week to 200% of the National Average Weekly Wage;
(d) extended cover to workers on land.
This left employers’ interest with only one real source of relief – the second injury fund. They used it. A carrier or self-insurer, confronted with a serious claim might wish to trade with a claimant, along the path: “You give me 8(f) relief, and I will concede permanent total disability”. No notice had to be given to the Department of Labor, so there was often no possibility of contesting the claim. Carriers and self-insurers took the view that the Department had no legitimate interest in contesting relief, and should confine themselves to paying, and levying the assessments.
In 1984, rejecting the proposal of the Department for a “conservator” of the Fund, Congress made two changes to relief. It: -
(i) imposed a time limit for submission of a fully documented petition, so the District Director could consider it; and
(ii) added a second part to the assessment, to charge users a proportion of their relief.
These changes created unforeseen problems.
The time limit means that any adjuster or attorney will need to file for relief as early as possible, seeking an extension of time to perfect the application, if necessary. This protects them against a possible professional negligence claim. As a way of discouraging filing unnecessary or unmeritorious applications the amendment failed. The regulations spell out what constitutes a proper application – but no form has ever been authorized for this collection of information.
(ii) Reserves and Security
The change in the assessment meant that a carrier or self-insurer had an incurred on-going quantifiable obligation, an “outstanding” expense. It is not clear that in the event of bankruptcy the security required can be used to pay the assessment on behalf of the defunct carrier. The self-insurer or carrier is required by the accounting rules to reserve for this expense. This can be a significant item on a company’s balance sheet; and for a self-insurer there is no immediate deduction for tax purposes.
If relief is denied, the carrier and self-insurer will have a direct obligation that requires a reserve – which is higher than the one with relief. A self-insurer will have to: -
(a) report the outstanding the amount of the claim with the Department of Labor, on Form LS 274; and
(b) secure that amount by depositing Treasuries, posting a security bond or a letter of credit with the Department of Labor; and
(c) reserve the amount of the claim, with an additional amount for the future assessments.
A carrier will have to: -
(a) report the outstanding the amount of the claim with the Department of Labor, on Form LS 274; and
(b) secure that amount by depositing Treasuries, posting a security bond or a letter of credit with the Department of Labor, unless the claim is in a state which in the opinion of the Department guarantees the carrier in whole or in part in the event of insolvency; and
(c) reserve the amount of the claim, with an additional amount for the future assessments.
The cost of maintaining letters of credit or the premiums for bonds will be less for cases for which relief has been granted.
(iii) Recovery from excess or reinsurance policies
The amount of the assessment may be recoverable under the self-insurer’s excess policy or the carrier’s reinsurance policy. This will depend upon the wording of the policy itself. A policy issued before the 1984 amendments would probably not be required to contribute, since the assessment was charged on claims other than the one on which relief was sought. Since that date some policies have been issued which specifically address the issue; others have been less clear. Since some of the older claims may be reaching the retention limit, if assessments are included, attempts to recover under older policies may become frequent. Current policies should be examined to ensure that they are clear.
(iv) To Settle or Not To Settle
The first decision for a carrier or self-insurer is whether to settle or not to settle. If the claimant is not interested in settlement then there is no decision. A self-insurer or carrier may wish to settle, always assuming that the settlement makes sense. This requires weighing the cost of the settlement, (including “soft costs” such as the precedential consequences of the settlement within the work place) against the costs of keeping the claim open. The financial cost of settlement is the rate times life expectancy or a “present value” factor, with a deduction or enhancement for the “uncertainty” of litigation, the chances of future changes in the claimant’s condition and changes in the future investment returns. The key is likely to be the “present value”.
Table 15 shows a graph of the comparative amounts to fund claims at present value rates from 1% on the top line to 10% on the bottom line over a life expectancy from 1 to 50 years. A present value rate of 5% for 50 years translates to a rate of 18.26. A 5% rate in effect reduces the “life expectancy” from 50 years to 18.3 years.
A glance at Table 16, the yields for corporate bonds since 1984, suggests that a 5% rate is the best that can currently be expected.
Table 15.
Table 16.
The regulation at 20 C.F.R. 702.243 (g) states: -
“In cases being paid pursuant to a final compensation order, where no substantive issues are in dispute, a settlement amount which does not equal the present value of future compensation payments commuted, computed at the discount rate specified below, shall be considered inadequate unless the parties to the settlement show that the amount is adequate..…The discount rate shall be equal to the coupon issue yield equivalent (as determined by the Secretary of the Treasury) of the average accepted auction price for the last auction of 52 weeks U.S. Treasury Bills settled immediately prior to the date of the submission of the settlement application.”
Between 2000 and 2008 the auctions of 52 week bills ceased. When they resumed rate had dropped from 4.25 % to 2.105%. At the end of 2008 the rate dropped below 1% and continued to fall.
Table 17.
The rate at June 30,2011 was 0.2%. This equates, for a 50 year life expectancy, to a discount of only three years. Any settlement will therefore require a showing by the parties that a higher present value is adequate. A carrier or self-insurer might decide that they can fund the continuing benefits with all the attendant long term uncertainties at a lower cost to the company than the settlement would reflect.
A carrier or self-insurer entitled to relief may also argue that any settlement should reflect the savings to it. The claimant must therefore weigh his wish or need to settle the claim for a lump sum, escaping the on-going friction with the carrier, at a reduced rate against the guarantee of payments over time, giving an aggregate total superior to the settlement offer.
(v) The Fund or Not the Fund
If the case cannot be settled for an amount that both sides can agree and justify as adequate, then it is probably in the carrier or self-insurer’s best interests to apply for relief. The alternative is to pay the full amount of compensation and the assessment.
The claimant will continue to get paid, but risks an application for modification in the future.
The carrier or self-insurer will have to decide whether to agree on the extent of disability or to contest it, with the risk that a higher disability will be found, but relief awarded. It will be able to monitor the case, and seek modification if the claimant’s disability improves. It can, with the claimant’s agreement, settle at any time at a later date.
In summary, where there is no currently available advantageous settlement, and the choice is therefore between fund relief or retaining the full risk of the case, there appears to be a financial advantage to the carrier or self-insurer to apply for relief.
