It is said that good judgment comes from experience, but experience comes from bad judgment. This pithy aphorism is generally true in life but is particularly true when a company sees significantly increased workers’ compensation insurance premiums following a serious workers’ compensation claim. The same is true even if the claim was not the employer’s fault. Is it fair? Of course not, but neither is workers’ compensation. Over a century ago, our society and the legislatures that reflect it determined that the risk of employee injuries and deaths should fall on the shoulders of small businesses struggling to make a profit. The great social bargain we made over 100 years ago saddles American employers with potentially unlimited strict liability exposure for medical expenses and lost wage replacement benefits when an employee is injured on the job. In exchange, we gave these employers immunity from suit by the employee and granted the employer (or its workers’ compensation carrier) the right to reimbursement should the employee make a large tort recovery from a tortfeasor (third party other than the employer) responsible for the injury. Sadly, we’ve forgotten the last half of that bargain. The trend today, unfortunately, is bad judgment shown by insurance companies and self-insured employers who do not aggressively strive to recognize and pursue third-party reimbursement for the benefits they have paid.
Experience Modification = Actual Losses / Expected Losses
The Experience Modification Rate (a/k/a Mod Factor, Modification Factor, or Mod Rate, or “X-Mod”) is a numeric expression of an insured’s claims history and safety record as compared to other businesses in the same industry within the same state. It breaks down as follows:
- Insured is riskier than average (EMR > 1.00—results in a higher premium)
- Insured is no more or less risky than average (EMR = 1.00—results in no change to premium)
- Insured is safer than average (EMR < 1.00—results in a lower premium)
The X-Mod is calculated based on the job code, the payroll, the insured’s past losses, and the premium itself. From there, the X-Mod is used to determine your final workers’ compensation premium. If actual losses exceed expected losses, this is a bad thing, and the resulting modifier constitutes a debt or increase to an insured’s insurance premium. If actual losses are lower than expected losses, the modifier has the opposite result. For example, if actual losses total $150,000 and expected losses total only $100,000, the experience modifier is 1.5. The higher the experience modifier, the higher the premium is. It is easy to see how any control the insured or insurer has over the experience modifier may directly affect the premium an insured can expect to pay in subsequent years. When a retrospective rating program (retro policy) is in effect, the effect of a good loss history is even more immediate. Generally, an insured’s loss history is reviewed, and its experience rating is calculated over a three-year period. The experience modifier is then issued one year after the three-year period has expired. This gives the experience raters a set time during which to evaluate an insured’s loss history and an adequate period of time to digest and publish the information. A credit modifier is good and can lead to lower workers’ compensation insurance premiums; a debit modifier is bad and can result in the opposite.
Subrogation’s Role in Shaping the X‑Mod
So, how does subrogation fit into all of this? In theory, subrogation recoveries serve as a debit to actual loss totals and actual primary losses, thereby directly affecting the experience modifier. In short, one or two subrogation recoveries can mean the difference between a debt modifier and a credit modifier. Once an X-Mod is issued, it can be revised by the state’s rating organization under a limited number of circumstances. The X-Mod cannot be modified merely because a large claim changes in value. However, it can be revised if:
(1) a claim is declared non-compensable,
(2) there is a change in ownership of the company,
(3) the insured’s operations are reclassified, or
(4) an insurer reports a claim as “subrogated” after it receives a reimbursement through subrogation efforts.
While procedures from state to state vary somewhat, a handful of states have their own government-run rating bureaus that are separate from NCCI. For example, there are 11 Independent Rating Bureaus in the United States that provide actuarially-based information and research and premium rates that were created by their state-specific statutes. These states are California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, and Wisconsin. The rest of the country, with the exception of the monopolistic states, utilizes the services of the National Council on Compensation Insurance (NCCI), which acts as a national bureau.
Successful subrogation assists in avoiding a potential significant increase to what is already one of the most expensive overhead items in starting up or running a small business – workers’ compensation insurance premiums. Understanding how and why a company can save itself money in the future involves using good judgment.
The Mystery of Premium Hikes and Experience Ratings
Workers’ compensation insurance and underwriting are not always logical. How can a company that did nothing to contribute to an employee’s injury be on the hook for increased insurance premiums just because its employee was a klutz – or worse? For many corporate personnel, the concepts of underwriting and experience ratings remain a mystery, yet they directly affect the amount of insurance premiums a company pays. Even more mysterious is what effect, if any, subrogation efforts have on premiums. Everyone can agree that “to get money back” is a good thing. Whether or not it affects the insured’s experience rating or will lead to reduced premiums for an insurance client is another issue altogether and remains shrouded in the hieroglyphics of modern insurance underwriting. Understanding the correlation between the goals of lower premiums and subrogation recoveries often stimulates subrogation efforts and allows corporate decision-makers an opportunity to shape subrogation opportunities that would otherwise be lost, directly affecting the company’s bottom line.
The concept of experience ratings shouldn’t be a mystery. Experience ratings reward insureds who have a favorable loss history and penalize insureds who do not. This is accomplished by the application of a credit (a reduction) or a debit (an increase) to premiums pre-determined by the National Counsel of Compensation Insurance (NCCI) or, in some cases, an independent state agency. The National Council on Compensation Insurance (NCCI) is a national, non-profit rating bureau owned by insurance companies that focuses on workers’ compensation insurance. The NCCI organizes and compiles information on insurance risk and losses and, depending on the state, keeps statistics on various insureds, thereby enabling it to calculate experience modifiers for companies and employers. A company’s loss history is compiled on unit statistical cards which are available to insurers and insureds. It is prudent for an employer to periodically check its unit statistical card to determine if any errors or miscalculations have been made that may detrimentally affect its premiums.
Can Employers Recover Higher Premiums from Third Parties?
Employers often face increased workers’ compensation insurance premiums due to the claims filed after an employee is injured. But can an employer can recover these increased premiums from a third-party tortfeasor whose negligence caused the employee’s injury in the first place. The ability to recover these costs varies across jurisdictions, as indicated in the 50-state chart provided by Matthiesen, Wickert & Lehrer, S.C.
Workers’ Compensation and Subrogation
When an employee is injured in the course of employment, the employer typically provides workers’ compensation benefits to cover medical expenses, wage loss, and disability benefits. Workers’ compensation operates on a no-fault basis, meaning the employer pays regardless of who caused the injury. However, in situations where a third-party tortfeasor is responsible, employers may seek to recover their outlays through subrogation, which allows them to step into the shoes of the injured employee to recover from the party at fault.
Workers’ compensation subrogation enables employers to recoup direct costs such as medical payments and indemnity benefits. However, an employer’s workers’ compensation premiums often increase after a claim is made. The question arises whether these premium increases can be recovered as part of a subrogation claim.
The Legal Landscape: Varying State Laws
States differ widely in their approach to allowing recovery of increased workers’ compensation premiums. The vast majority of states that have decided the issue have said that such a recovery is not possible. A few states allow recovery. But most states have not yet decided the issue, because it’s simply not a cost-saving tool that many employers, large or small, have woken up to yet. Simply put, it hasn’t been attempted in most states.
- In some states, such as Kentucky, courts have said that whether or not an employer is able to recover for increased workers’ compensation premiums as result of a manufacturer’s (tortfeasor’s) defective design of a car is a question for the jury, but the employer is “entitled to be heard” on such a claim. Sand Hill Energy, Inc. v. Ford Motor Co., 83 S.W.3d 483 (Ky. 2002), cert. granted, judgment vacated sub nom. Ford Motor Co. v. Smith, 123 S. Ct. 2072 (2003).
- In North Carolina, for example, there is case law suggesting that such a recovery might be possible where the employee has not yet settled his or her third-party tort action with the tortfeasor. M.B. Haynes Corp. v. Strand Electro Controls, Inc., 487 S.E.2d 819 (N.C. App. 1997).
- On the other hand, most states that have decided the issue do not allow such recovery, as the courts view increased premiums as speculative or too difficult to quantify. Ohio denies such a recovery because it says there is no duty owed to the employer regarding insurance premiums. Cincinnati Bell Tel. Co. v. Straley, 533 N.E.2d 764 (Ohio 1988).
- Texas prohibits recovery on the grounds that the increase in premiums is an indirect consequence of the injury, rather than a direct cost that the employer can attribute solely to the tortfeasor. West Virginia says no. Crab Orchard Improvement Co. v. Chesapeake & O. Ry. Co., 115 F.2d 277, 282–83 (4th Cir.1940) (applying West Virginia law).
- Minnesota has old case law that says increased premiums cannot be recovered, but subsequent legislation appears to allow employers to make such a recovery. M.S.A. § 176.061(5)(c); N. States Contracting Co. v. Oakes, 253 N.W. 371 (Minn. 1934). The Supreme Court in 1934 wrote:
“Contractor could not recover from subcontractor for increased workmen’s compensation insurance premiums which contractor was compelled to pay in consequence of employee’s death caused by subcontractor’s negligence; increase being too remote and indirect result of wrongful act.”
Later, passage of Section 176.051(5)(c) appears to allow such recovery:
(c) If an employer, being then insured, sustains damages due to a change in workers’ compensation insurance premiums, whether by a failure to achieve a decrease or by a retroactive or prospective increase, as a result of the injury or death of an employee which was caused under circumstances which created a legal liability for damages on the part of a party other than the employer, the employer, notwithstanding other remedies provided, may maintain an action against the other party for recovery of the premiums. This cause of action may be brought either by joining in an action described in paragraph (b) or by a separate action. Damages recovered under this clause are for the benefit of the employer and the provisions of subdivision 6 are not applicable to the damages. M.S.A. § 176.061(5)(c).
- States With Mixed or Unclear Stances: In states like Delaware, Arizona, and Illinois, the ability to recover increased premiums is not fully settled, with courts addressing the issue on a case-by-case basis. Some jurisdictions may allow recovery under specific circumstances, while others reject it as not being an ordinary element of general tort damages.
Legal Rationale
The states that allow for recovery typically do so on the basis that the increased premiums are a foreseeable consequence of the tortfeasor’s actions. In this view, just as an employer can recover medical expenses and lost wages, they should also be able to recover additional premiums caused by the accident.
However, many jurisdictions reject this argument. These states often rely on the fact that insurance premiums are determined by various factors, many of which are not solely attributable to a single claim or accident. As a result, courts in these states argue that the increase in premiums is not a direct damage stemming from the tortfeasor’s negligence but rather a general business cost that the employer must bear.
For example, in Texas, the courts have held that increased insurance premiums are too speculative to be included in damages. They argue that multiple factors contribute to premium calculations, including an employer’s claims history, the nature of the business, and broader industry risk trends. As such, it becomes difficult to link a specific premium increase directly to a particular tortfeasor’s negligence.
Practical Considerations for Employers
Given the split in state laws, employers seeking to recover increased premiums must be mindful of their jurisdiction’s stance. In states where recovery is permitted, employers must be prepared to provide detailed evidence demonstrating that the increase in premiums is directly attributable to the specific work-related injury. This often involves presenting actuarial evidence or testimony from insurance professionals regarding how the accident influenced the employer’s premiums.
In states where recovery is not permitted, employers must absorb the increased premiums as a business cost. However, these employers can still pursue recovery of other compensable damages through subrogation, such as medical expenses, indemnity payments, and legal fees.
Conclusion
The ability of employers to recover increased workers’ compensation premiums following a work-related accident involving a negligent third party depends heavily on the legal framework of the state in question. While some states allow such recovery as a direct financial loss, others view premium increases as too speculative or indirect to be included in recoverable damages. Employers must carefully assess the laws in their jurisdiction and gather appropriate evidence if they wish to pursue recovery for these additional costs. For specific advice on this issue, it is recommended to consult subrogation counsel familiar with the latest developments in state case law and statutory provisions.
For a comprehensive overview of the laws in all 50 states, the chart provided by Matthiesen, Wickert & Lehrer, S.C. offers a detailed resource for understanding whether increased workers’ compensation premiums can be recovered from tortfeasors can be found HERE. For questions on workers’ compensation subrogation in any state, contact Lee Wickert at leewickert@mwl-law.com.
