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June 27, 2006

Comp Insurers Go to the End of the Line

When is an employee benefit not a benefit? When it's workers comp.

Andrew Simpson, Jr outlines in the Insurance Journal a recent case before the US Supreme Court, which ruled in June that premiums for workers comp insurance, unlike those for health insurance, are not bargained benefits and therefore, comp insurers are out of luck when a company goes bankrupt. While health insurers have priority for payment out of bankruptcy filings, comp insurers do not.

The case is Howard Delivery Service, Inc., et al v. Zurich American Insurance Co. Howard contracted with Zurich to provide workers' compensation coverage for its operations in 10 states. After Howard filed a Chapter 11 bankruptcy petition, Zurich filed an unsecured creditor's claim for some $400,000 in premiums.

The high court reversed the Court of Appeals for the Fourth Circuit, which had held that payments for workers' compensation coverage were "contributions to an employee benefit plan ... arising from services rendered" and thus subject to the bankruptcy priority provision. The high court ruled instead that workers compensation premiums are more like liability premiums than employee benefit costs and as such do not fall under the section of bankruptcy code (11 U.S.C. section 507(a)(5)), which assigns priorities to unsecured creditors' claims for unpaid contributions to an employee benefit plan. In other words, comp is the benefit that is not really a benefit.

The court found it significant that comp is mandatory while other fringe benefits are not. But this distiction itself is changing, with some states moving aggressively toward mandating that employers provide health coverage for their employees (MA recently passed just such a law). I wonder if the court's thinking will change when health insurance is no longer optional.

Strange Bedfellows
Justice Ginsburg was joined in her majority opinion by Chief Justice John Roberts and Justices John Paul Stevens, Antonin Scalia, Clarence Thomas and Stephen Breyer. This has to be one of the more bizarre aggregations of concurring justices in recent court history, bringing together bits and pieces of the left and the far right wings. Similarly, the dissenters are an unlikely grouping of right, left and center, encompassing Justices Anthony Kennedy, David Souter and Samuel Alito.

Unrequited Claims
I hardly need add that the insurance industry is not happy with this ruling. In this particular case, Zurich American must cover all the Howard comp claims, even though they will not collect all the premium. Bruce Wood, an industry spokesman, says: "The court simply got it wrong. The majority's narrow focus on the priority provisions of the bankruptcy code overlooked that workers' compensation coverage is mandatory." [Actually, they didn't overlook the mandatory aspect - they concluded that because comp is mandatory, it's not a bargained benefit.]

"This decision means that an employer trying to reorganize its business will no longer be required to pay its workers' compensation premiums. This result will jeopardize continued coverage, because an insurer now has no legal authority to compel payment of premiums and doubtful incentive to continue coverage." [They may lack incentive to continue coverage, but they will have to provide it anyway.]

Wood also warns that self-insured employers will face similar problems. "Even though a self-insured employer is paying an on-going claim for a past injury, after a bankruptcy filing, ongoing medical treatment and cash benefits may stop because the lack of explicit priority for workers' compensation dumps injured workers into the same category as other unsecured creditors." [I would be surprised if a bankruptcy court allows a self-insured company to stop paying these benefits.]

Change that Law!
This court ruling places comp carriers at the end of the line for payment, not exactly where they are used to standing. The Court's goal is "equal distribution" - they see the need to severely limit the list of priority creditors and they have explicitly dropped comp carriers from this select list. As soon as the ruling hit the streets, the phones of industry lobbyists started ringing, the Gucci shoes were polished and the reservations were made at the finest restaurants in Washington. It will take a change in the bankruptcy law to re-arrange the creditor priorities established by this ruling of the Court. By any reasonable measure, that's a long shot, but I wouldn't underestimate the ability of the insurance lobby to mobilize Congress. The public might not have much sympathy for insurers, but your local Congressman knows a chunk of change when he or she sees it.


Posted by Jon Coppelman at 11:56 AM Link to, Comment (0), or E-mail this post
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