Bankruptcy and Workers’ Compensation: A Silver-Plated Bullet

January 14th, 2009 by Julie Ferguson

Part three of a three-part guest post series on bankruptcy and workers compensation by Robert Aurbach, CEO of Uncommon Approach..
Part 1: Bankruptcy and Workers’ Compensation: Broken Promises, Broken Lives
Part 2: Reducing the Conflict Between Bankruptcy and Workers’ Compensation

Three changes are proposed to the Federal Bankruptcy Code:

  • changing the accrual of workers’ compensation claims for bankruptcy purposes
  • allowing them to be adjudicated in the applicable administrative court without delay
  • giving the payment of post-petition medical and indemnity benefits administrative priority for payment during the course of the bankruptcy

While these won’t fix every possible problem, they solve the most prominent incompatibilities between two regulatory systems while preserving the essential integrity of both.
What the Proposed Amendment Doesn’t Do
First of all, these changes only affect the self-insured or illegally uninsured employer. Since commercially insured claims continue to be paid by the insurer while the insured company is in bankruptcy, there should be no need for extra protection for such claims.
Second, the pre-petition claims of the workers are still treated like all other claims. This is not likely to be a significant issue in most cases. Regulators will hear quite quickly if the self-insured employer stops paying claims, and the usual response is to revoke the self-insured status and force the company into purchasing commercial insurance ― usually at a premium from the state assigned risk pool. Since this places additional economic stress on the self-insured company, the behavior is avoided. Self-insurers rarely are as much as one week behind in their benefit payments when they file for bankruptcy. In any event, a fix that included pre-petition arrearages in post-petition claims would fly in the face of the most basic bankruptcy philosophy and likely create opposition to the proposal. Since the worker’s position is still improved from what it would be under current law, that battle is left for another day.
Most importantly, the protection package fails if the self-insured employer decides, or is forced, to liquidate, instead of merely reorganizing. If that happens, the affairs of the company are concluded in an orderly way, and the assets are distributed as determined in the Bankruptcy Code ― and workers’ compensation claimants are still general unsecured creditors (the lowest priority classification). Why not give them a higher priority? The establishment of preferences for various kinds of secured claims is a sacred cow that will not be disturbed without opposition, and other claimants can be expected to seek preference for their claims as well. So what good is done under the proposal if the company eventually liquidates? During the administration of the bankruptcy estate in Chapter 11 reorganization (which is where almost all large company bankruptcies start out) the post-petition part of the claim continues to be paid. Medical treatment is not delayed, indemnity benefits are paid in a timely manner and the claim is adjudicated in the normal way. This administrative pay down will, in turn, reduce the ultimate drain on the security held by the self-insurance regulator, reducing or eliminating the ultimate call on the self-insurance guaranty fund (if any) and increasing the chances that the worker will get all the benefits that the law promised.
Who Benefits?
Self-insured employers benefit. Employers are generally amenable to this proposal because they do not, as a group, appreciate the idea that one of them would walk away from workers injured in their service. Moreover, since they are the contributors to funding self-insurance guaranty funds, where such funds exist, and they are the ones compelled to place security to cover liability exposures under the current law, they have an economic stake in ensuring that all self-insured employers do the right thing by their workers. If the probability of a call on security (or a guaranty fund) is diminished, there is no need to tie up business capital funding it to ultimate reserves. That’s why the National Council of Self-Insurers recently ratified their prior endorsement of this proposal.
The state benefits by avoiding the political cost of having administered a program that left workers uncompensated. It avoids the complication of the sometimes-inconsistent positions taken by state agencies in Bankruptcy Court in their efforts to collect obligations such as back taxes and environmental cleanup from the company. The state also avoids the drain caused by disabled workers ending up on public assistance rolls in the state. The proposal was endorsed by the Western Governor’s Association, the National Association of Attorneys General, and the International Association of Industrial Accident Boards and Commissions, (workers’ compensation regulators) in 2004.
And Joe benefits. He may lose most of the two weeks of indemnity payments that he was owed when his Company went down, but his “post-petition” payments were restarted in time for him to keep his house. His medical dispute is resolved through a local “mediation” proceeding instead of a formal trial in another state in front of a bankruptcy judge who doesn’t know his state’s workers’ compensation law. He receives the reasonable and appropriate medical care promised by law without delay caused by the bankruptcy. The long-term medical benefits for his permanent injury should continue to be available as promised in the law ― his “post-petition” claims will not be discharged by a reorganization plan if the Company successfully reorganizes, and the pay down of his total claim will help security and guaranty funds held by the state stretch to cover him if the Company ultimately folds. Hopefully, when he is able, there’s a job for him to return to.
This proposal goes a long way to eliminating the clash between the incompatible policies of bankruptcy and workers’ compensation, without disrupting the foundations of either system. The language is ready for Congress to consider. Perhaps it’s time for Mark Twain’s advice: “Always do right. It’ll gratify some people, and astound the rest.”