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Large deductible workers’ compensation programs and policies with large self-insured retentions (SIR) were first introduced to the American insurance industry in the late 1980s with limited deductible options for medical and death benefits. Over time they have grown to become a key player in the ongoing struggle to hold down skyrocketing workers’ compensation costs. A deductible is a limited amount of money an employer agrees to contribute toward a work-related workers’ compensation claim, usually per claim, per occurrence, per accident, or annual aggregate basis – or some combination thereof. With a deductible policy, the insurer pays for losses and then collects reimbursement from the employer afterward up to the deductible amount. With a SIR in place, the employer is required to make benefit payments first up to the limit of the SIR and the workers’ compensation carrier initiates payments after the SIR is satisfied or exhausted.
Large deductible insurance programs provide many advantages, particularly for large, financially secure employers. They simulate self-insurance, utilizing per occurrence deductibles that typically range between $100,000 and $1,000,000. At the same time, they provide the insurer financial backing in the event of a catastrophic loss. Finally, they allow for significantly reduced premiums. Most deductible policies practice first-dollar insurer liability to employees, requiring the insurer to pay the entire claim and only then seek reimbursement from the employer for all amounts not exceeding the deductible limit. There is a reason that the employer is willing to shoulder the risk that accompanies a large deductible workers’ compensation policy: a large deductible policy is significantly less expensive for the employer than a policy without such a deductible. It results in significantly lower premiums than first dollar (or guaranteed cost) insurance and creates a large incentive for insureds to develop safety and loss control measures. As shown by a Texas Department of Insurance report, employers saved nearly $342,000,000 in workers’ compensation premiums in just one quarter of the fiscal year by choosing policies with deductibles.
When a third-party tortfeasor is responsible in whole or in part for causing a work-related injury, the concept of workers’ compensation subrogation enters the picture, and everybody is suddenly interested in getting their losses paid back. When the employer—through either a large deductible or SIR—and the workers’ compensation carrier have both paid benefits and there is a subrogation recovery, there is often some legal wrangling over who gets paid back first. Especially when there is not enough of a subrogation recovery to go around.
States differ in their approaches to who gets paid back first. In 2020, the New Jersey Supreme Court decided the case of City of Asbury Park v. Star Ins. Co., 2020 WL 3493526 (N.J. 2020). It is typical of some of the decisions around the country which are deciding this issue. That court determined that the equitable Made Whole Doctrine does not apply to a first-dollar risk that is allocated to an insured under a workers’ compensation insurance policy, i.e., a self-insured retention or deductible. Both the plaintiff, the City of Asbury Park (the employer), and its workers’ compensation carrier, defendant Star Insurance Company (workers’ compensation carrier), sought reimbursement of monies paid toward an injured firefighter’s workers’ compensation claim from the subrogation recovery obtained from a third-party tortfeasor. The funds available for reimbursement did not cover the full lien paid collectively by the City and Star. The question on appeal was whether, under the equitable “made-whole” or “make-whole” doctrine, the City (employer) had priority to recover what it paid before Star could recover any of its losses.
Subrogation was pursued under N.J.S.A. § 34:15-40 and the policy contained typical workers’ compensation subrogation language. The trial court rejected the City’s contention that the Made Whole Doctrine governed and required that they be reimbursed first out of the limited funds. The case was appealed to the U.S. Third Circuit Court of Appeals, who, in turn, certified the question for the New Jersey Supreme Court. New Jersey’s highest court concluded that under equitable principles of New Jersey law, the Made Whole Doctrine did not apply to first-dollar risk, such as a SIR or deductible, which was allocated to the city insured under the workers’ compensation insurance policy. The Supreme Court correctly pointed out that a SIR or deductible is an amount of risk that the insured has agreed to assume in exchange for a lower premium cost for the insurance policy. Where the award from a subrogation action against a third party is insufficient to reimburse both the insured’s SIR and the carrier’s loss in excess of the SIR, to place priority of recovery with the insured would, in effect, convert the policy into one without a SIR. Such interference with the contract would essentially “write a better policy for the insured than the one purchased.”
The way in which this right of first subrogation reimbursement is handled differently from state to state, and in some states, has not been addressed at all. Some states provide that the employer is subrogated to the rights of the injured employee, while others provide that the insurer is subrogated to the rights of the injured employee. The standard workers’ compensation policy provides that the insurer is subrogated to the rights of the insured.
In Texas, Article § 5.55C of the Texas Insurance Code was adopted by the Texas Legislature in 1989 and requires workers’ compensation insurance carriers to offer a deductible plan that allows employers to self-insure for a certain deductible amount. Tex. Ins. Code Art. § 5.55C(a) (2000). This statute also provides that neither the employer nor the carrier is allowed to shift the responsibility for payment of this deductible to the worker in any way. Therefore, because this statute places the burden of reimbursing the deductible amount on the employer, the issue of whether or not a workers’ compensation carrier is entitled to recover the deductible amount on behalf of the employer eventually became the subject of a Texas Supreme Court opinion in 2002. Argonaut Ins. Co. v. Baker, 87 S.W.3d 526 (Tex. 2002). In Argonaut, the court held that the workers’ compensation carrier is entitled to be reimbursed from the proceeds of the employee’s settlement for benefits paid to and on behalf of the employee, including benefits paid in connection with the employer’s optional deductible plan. It should be pointed out that Texas law provides a workers’ compensation carrier with a direct right of subrogation but does not grant a similar right to a self-insured employer or an employer with a large SIR or high deductible. Unfortunately, Texas case law has pointed out that no direct subrogation rights are granted to employers under the Texas Labor Code – such rights are given only to their workers’ compensation carriers. In Argonaut, the court noted that § 5.55C mandates that:
A deductible policy must provide that the [carrier] will make all payments for benefits that are payable from the deductible amount and that reimbursement by the policyholder shall be made periodically, rather than at the time claim costs are incurred.
In Argonaut, the workers’ compensation carrier recovered the deductible directly from the tortfeasor, rather than the employer. However, in a more recent case in which the workers’ compensation policy had a $250,000 deductible and the carrier had already been reimbursed by the employer when it filed its subrogation claim, the Texas Court of Appeals created a subrogation conundrum by stating that if a carrier has already been reimbursed, it is not entitled to subrogation. Reliance Ins. Co. v. Hibdon, 333 S.W.3d 364 (Tex. Civ. App. – Houston [14th Dist.] 2010) (rev. denied, Oct. 21, 2011). In Hibdon, the workers’ compensation policy the employer purchased from Reliance had a $250,000 deductible in accordance with Texas law. The employer had already reimbursed Reliance and the defendants argued that because the carrier had been reimbursed, it had no right of subrogation. Amazingly, the court agreed. If the employer has no right of subrogation and a carrier who is reimbursed by the employer under the deductible policy has no subrogation, then Texas has effectively eliminated subrogation in all policies involving deductibles and has rewarded employers who do not repay the deductibles they owe their carriers.
With regard to deductible policies, the Texas Department of Insurance has promulgated rules which indicate that when the carrier recovers from the third-party subrogation recovery, the amount recovered should first be applied to the amount paid on the claim by the carrier, and only then will any money left over be applied to the amount of the deductible paid by the insured, with reimbursement being made to the insured, if necessary. Rule XIX, Texas Basic Manual of Rules, Classifications and Experience Rating Plan for Workers’ Compensation and Employers’ Liability Insurance (2nd Reprint). However, workers’ compensation is a little different and has many different variables to consider. Take the following hypothetical:
An employee is seriously injured while on the job and receives a workers’ compensation benefit in the amount of $1,000,000. The employer has a $250,000 deductible which it pays to the carrier. The injured employee sues a third party and recovers $3,000,000. However, the employee still is treating, and workers’ compensation benefits are continuing. Out of the $3,000,000 recovery, the employee’s attorney recovers attorney’s fees and the balance is used to reimburse the employer’s deductible payment and the amounts the insurer has paid out in benefits, with the excess paid to the employee and allotted as a future credit.
So far, this seems logical, but after the credit is exhausted, the insurance company claims that the employer, which has already been reimbursed its entire deductible, must pay future statutory benefits going forward until the deductible once again is eroded. The employer will claim that the deductible obligations are fulfilled. After all, the policy states that there is one deductible per accident and the employer fulfilled that obligation. Why would the employer be required to foot the deductible a second time after a successful recovery? Complicating an already complicated issue is the fact that there is very little case or statutory law from state to state dealing with the interplay between employer deductible plans and subrogation.
Indiana offers optional endorsements to workers’ compensation policies which may include deductible or coinsurance provisions for an insured. I.C. § 22-3-5-5.5(i) provides:
(1) This subsection applies to an employee of an employer that has paid a deductible or coinsurance under this section and to the employee’s dependents. If an employee or a dependent recovers damages against a third party under I.C. § 22-3-2-13, the insurer shall provide reimbursement to the insured equal to a pro-rata share of the net recovery by the insurer.
Therefore, regardless of policy provisions, Indiana provides for reimbursement of a deductible as many states do with auto insurance deductibles – on a pro-rata basis. However, far too many states do not address subrogation and/or reimbursement rights in the presence of large deductible workers’ compensation third-party cases, making the utilization of subrogation counsel a necessity in any such situation. Often, the only guidance available is buried deep within State Administrative Regulations or Administrative Decisions not available to the public.
In most states, laws and regulations governing the respective subrogation and/or reimbursement rights of a workers’ compensation carrier and its insured are virtually non-existent. Insurer claims for reimbursement from their insured and disputes over who gets reimbursed what, when there is a successful subrogation recovery, often hinge upon the parties’ rights under the policy. Because carriers file their individual deductible program with each state, no two Large Deductible Programs are alike, and these agreements become extremely important in determining recovery rights. Each deducible program requires careful review to fully understand the respective reimbursement/subrogation rights of the insured and insurer. However, because workers’ compensation is highly regulated, state laws and regulations often augment the rights and duties contained in the large deductible agreement.
For questions regarding the interplay between large deductibles/SIRs and workers’ compensation subrogation, please contact Gary Wickert at [email protected].