Bankruptcy and Workers' Compensation: Broken Promises, Broken Lives
With the difficult economy, the issue of "what happens to a workers' comp claim in the event of a bankruptcy" is on the minds of many of our readers. We’ve addressed the issue of bankruptcy in the past. Today, we are pleased to introduce a more detailed three-part guest post series on bankruptcy and workers compensation by Robert Aurbach, CEO of Uncommon Approach. Robert is former General Counsel for the N.M. Workers’ Compensation Administration and personally been involved in the evaluation and redesign of five separate workers' compensation programs. He has served as editor of the International Association of Industrial Accident Boards and Commissions (IAIABC) Journal since 2003. He is an expert on various issues that involve the intersection of workers' compensation and other programs, such as bankruptcy, tribal sovereignty and PEO-leasing arrangements.
Joe worked for Chryslord Moters, a large manufacturing concern with billions in assets and locations in many states. He never concerned himself with workers' compensation, and was unaware that his Company was self insured for workers' compensation in the state where he lived and worked. When he was injured on the assembly line, he set about the job of getting better and getting back to work, as his family could ill-afford the loss of his income in the midst of a full blown recession. When the Company sought Chapter 11 bankruptcy protection, Joe still wasn't particularly concerned, due to the assurances that had been provided to the active employees. But then the Company cut off his benefit payments, so he had no wage replacement income, and his minor dispute over the reasonableness and necessity of a medical treatment proposed by his doctor was taken off the administrative agency's hearing docket due to an "automatic stay" issued by the Bankruptcy Court. When he called to try to resolve these issues, he was told that he needed to file a claim in a Bankruptcy Court half way across the country, in front of a judge that had no idea what the law of workers' compensation was in his state. When he asked how long it would take to resolve the problems, he was told that it would likely be at least a year. Upon checking with a lawyer, he also was told that his claim would be paid only if there was money left after paying all the vendors, suppliers, utilities and others who had voluntarily entered into business relations with the company. If there was no money left, or only enough to pay pennies on the dollar, he had no other recourse against his employer. Moreover, his lawyer informed him, his claim would be considered resolved by the bankruptcy proceedings, and that no medical expenses after the bankruptcy case was done would be paid by the Company.
What About Recourse to a Guaranty Fund?
There are various forms of security used to prevent injury to employees of self-insured employers from being uncompensated. The state administrative agency usually demands a security deposit from the self-insurer, based on the size of the liability exposure. Unfortunately, these deposits are often inadequate, due to understated reserves, and may be tied up in court proceedings on their own, depending on the form of the security. State property/casualty insurance guaranty funds do not apply to the debts of self-insurers, but some states have separate guaranty funds for the self-insured employers. Unfortunately, those funds usually contain a small fraction of the total potential liability, and could be easily drained by prior calls on those resources. The promise of the workers' compensation system to Joe ― medical care and indemnity benefits to allow him to heal and return to work ― is more wishful thinking than a guaranty when his employer seeks bankruptcy protection.
Systems in Conflict
Bankruptcy is a system designed to give a "fresh start" to businesses and individuals who are in debt and cannot survive economically without intervention. Debts are collected and assets are divided and distributed at the end of the process in what is intended to be an equitable manner. The law freezes all claims during this process, to allow the presiding court an opportunity to get control and a global picture of the debtor's situation. At the end of the court administration period (which is of indefinite length), either the debtor ceases to exist, and its assets are distributed, or the emerging debtor, after negotiated resolution of past debts, is permanently absolved of all debts that arose before the process. The principals of equitable distribution are based on a commercial model where (presumably equally sophisticated) creditors have chosen to do business with the debtor before the bankruptcy and either have or have not availed themselves of certain legal protections for their transactions.
Workers' Compensation is based on an entirely different set of premises. The state demands that businesses and workers participate in the system, and in return guaranties that the worker will get certain benefits, and guaranties the employer that there will be no other kind of recovery against it for the injury.
Why Isn't the Worker Protected?
As demonstrated above, the interplay between the two systems can seriously compound the workers' injury. When the employer has a commercial insurance policy for workers' compensation, the policy pays independent of the policyholder's economic condition. But when the employer is illegally uninsured, or legally self-insured, the effect of bankruptcy can be devastating and unavoidable under current law. Medical treatment necessary for recovery is often withheld when the health care provider becomes informed that they will not be paid at all or will only be paid as a general unsecured creditor in a bankruptcy proceeding. Wage replacement for the worker during the period in which he or she is unable to work is cut off by automatic order of the bankruptcy court, causing immediate and substantial economic hardship. The delay in benefit provision can be years in length and can be adjudicated in a court in a remote state, where the worker is effectively cut off from representation by the very economic hardship that the court proceeding created. Moreover, when the bankruptcy court finally adjudicates the worker's claim, the distribution scheme places the injured worker in the lowest priority level for distribution of assets.
Joe never volunteered to be a creditor to the Company and he is the least able to protect himself in the process, yet the current Bankruptcy Code treats him as the least "worthy" creditor.
Next time: what can be done to fix this conflict between systems.