Employers Fight Losing Battle Against Tortfeasors Who Cause Premium Increases
Workers’ compensation insurance premiums seem to know only one direction – up. On average, premiums rise approximately 5% annually; more, if an insured has experienced significant losses. For many corporate risk managers and claims professionals, the concepts of underwriting and experience ratings remain a clouded mystery, yet they directly affect the amount of annual premiums a company must pay. These premiums remain one of the most significant business expenses for any American employer.
When an employee’s on-the-job injury or death results from the negligence or fault of a third-party tortfeasor, the personal injuries sustained by the employee are not the only damages inflicted. Job-related injuries also cause significant and long-lasting damage to the employer in the form of an increased experience modification rate (experience mod), costs and repairs, loss in productivity, and additional time and expense to train new replacement employees. The increased experience mod can result in significantly increased workers’ compensation premiums, the effects of which could last longer than the employee’s injury itself.
Many employers are beginning to fight back by bringing claims against those at fault for the resulting increases in their experience modifiers and compensation premiums. Unfortunately, the ability of an employer/insured to bring such a claim is unclear in most states, and in those states in which there is case law on point, it isn’t favorable. This article will look at why courts are turning back employers trying to toe the line and keep expenses in check.
Experience ratings reward employers (insureds) who have a favorable loss history and penalize those who have a poor loss history. This is accomplished by the application of a credit (reduction) or a debit (increase) to premiums pre-determined by the National Counsel of Compensation Insurance (NCCI). NCCI is an insurance service entity which 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 different companies and employers. The NCCI calculates the Experience Rating Modifications (ERMs) for all but six states – California, Delaware, Massachusetts, New Jersey, New York, and Pennsylvania. The loss history is compiled on unit statistical cards which are available to insurers and insureds alike.
Efforts to Recover Cost of Increased Premiums From Wrongdoers
It makes sense that, if premiums rise as a direct result of the negligence and tortious act of a third-party (person or entity other than employee and employer), the tortfeasor should be responsible for the damages it causes, including the resulting increase in premiums for the innocent small business owner. Unfortunately, this is not how most courts have looked at this issue. Most states have held that an employer’s increased premiums that result from injuries to employees caused by a third party are damages that are either not foreseeable or not contemplated or allowed under a state’s Workers’ Compensation Act. Minnesota is an exception.
Minnesota is the only state that allows the employer to pursue the negligent tortfeasor for increased premiums, either because of retroactive assessments or because of a change affecting future rates. M.S.A. § 176.061(5)(b) specifically provides that an employer can enforce liability against a tortfeasor for increased premiums by joining a third-party suit or bringing a separate suit. This claim belongs solely to the employer and not the carrier. The claim is brought along with the subrogation claim. Hauser v. Mealey, 263 N.W.2d 803 (Minn. 1988). Any damages recovered by the employer for increased premiums are “for the benefit of the employer” and are not subject to the allocation formula set forth in § 176.061.
Prior Minnesota case law had held that an employer could not recover in tort for increased premiums resulting from an employee’s injury or death caused by a tortfeasor’s negligence. In a nutshell, the courts felt that such damages were too remote and an indirect result of the tortfeasor’s negligence. N. States Contracting Co. v. Oakes, 253 N.W. 371 (Minn. 1934). The Minnesota Legislature changed that when it amended § 176.061. Even when such a claim is allowed, there is no guarantee of success. An employer asserting such a claim would be required to prove its claim, usually through the use of underwriting expert testimony addressing the likelihood of future premiums and complicated ERM calculations. Sadly, other states have not followed Minnesota’s lead.
The California Court of Appeals prohibits an action by an employer against a third party for increased premiums or lost profits, stating that a negligent third party has no general duty to compensate an employer for expenses and lost profits incurred as a result of negligent injury to an employee. Fischl v. Paller & Goldstein, 231 Cal. App.3d 1299 (Cal. App. 1991). The employer also has no cause of action under Cal. Labor Code § 3852 to recover damages for which the employer has been held liable, including salaries, wages, pensions, or other emoluments. Id.
A Connecticut employer does not have a cause of action against a tortfeasor for the increased costs of premiums resulting from benefits paid by the compensation carrier to its employee for injuries sustained due to negligence of the third-party tortfeasor. RK Constructors, Inc. v. Fusco Corp., 650 A.2d 153 (Conn. 1994).
Florida courts have announced that the Workers’ Compensation Act prohibits an employer from pursuing a claim against a tortfeasor for the increased costs of premiums resulting from benefits paid by the compensation carrier to its employee for injuries sustained due to negligence of the third-party tortfeasor. Florida courts explain that the Workers’ Compensation Act precludes an employer from recovering damages specific to it, such as lost profits or increased premiums, in a third-party action arising out of an accident which results in losing an employee’s services for a period of time. Southland Const., Inc. v. Greater Orlando Aviation, 860 So.2d 1031 (Fla. App. 2003).
Georgia does not allow a cause of action by an employer against a tortfeasor for the increased costs of premiums resulting from injuries caused by a third-party tortfeasor. Unique Paint Co. v. Wm. F. Newman Co., 411 S.E.2d 352 (Ga. App. 1991). Georgia believes that any such increase in the employer’s premiums is too remote a consequence to be recovered in a breach of contract claim against the manufacturer of defective scaffolding, the failure of which allegedly caused the plaintiff’s employee’s death. Sanford-Brown Co. v. Patent Scaffolding Co., 33 S.E.2d 422 (Ga. 1945). There is neither an indemnity right nor a legal duty owed by the tortfeasor to the employer to refrain from injuring the plaintiff’s employee. Any such premium increase also is too remote for recovery in tort. North Ga. EMC v. Thomason, etc., Co., 278 S.E.2d 433 (Ga. App. 1981).
The Supreme Court of Iowa has concluded that an employer’s claim in negligence for increased premiums resulting from injuries to its employees caused by a third-party tortfeasor was non-actionable. Anderson Plasterers v. Meinecke, 543 N.W.2d 612 (Iowa 1996). The employer has no cause of action based on the tort of interference with contractual relations where the interference is in the form of injuries to an employee caused by a third person thus resulting in a loss of services to the employer. Such a cause of action for tortious interference with contractual relations will lie only where the interference is intentional as opposed to negligent.
A Massachusetts’ employer cannot maintain a negligence action to recover increased premiums from a tortfeasor which has injured its employee because “purely economic losses are unrecoverable in tort … actions in the absence of personal injury or property damage.” R.L. Whipple Co. v. Pondview Excavation Corp., 887 N.E.2d 1095 (Mass. App. 2008).
An employer’s claims for increased premiums and any lost profits that arose therefrom are not recoverable from a third-party tortfeasor. Pro-Staffers, Inc. v. Premier Mfg. Support Servs., Inc., 651 N.W.2d 811 (Mich. App. 2002). Michigan believes that such damages are not recoverable under the statutory scheme established by the Legislature. A review of the subrogation provision of the Workers’ Disability Compensation Act clearly shows that the Legislature has not provided such a statutory remedy for an employer. The Workers’ Compensation Act contains the exclusive remedies that an employer may seek in an action against a third-party tortfeasor in which the employer seeks to recover the costs associated with the payment of workers’ compensation benefits. Because the Act provides a detailed procedure that, if utilized by the employer or carrier, will result in full reimbursement of the benefits paid to the injured employee, no additional remedies can be inferred. Had the Legislature intended for employers to recover damages in the form of increased premiums and lost profits, it would have provided for same within Mich. Comp. Laws § 418.827. Less appropriate common-law remedies cannot supplement those remedies placed into the statute by the Legislature.
An employer is not free to maintain a cause of action against tortfeasors for an increase in its premiums, since the employer, though not directly suing to recover on its employee’s rights, was improperly pursuing a cause of action arising out of its obligation established by law for the benefit of the employee. Multiplex Concrete Co. v. Besser Co., 380 A.2d 708 (N.J. App. 1977).
Absent any allegation that the tortfeasor intentionally and improperly interfered with contractual relations, an employer suffers neither physical injury nor property damage and an employer does not have a cause of action against a tortfeasor for the increased costs of premiums resulting from benefits paid by the compensation carrier to its employee for injuries sustained due to negligence of the third-party tortfeasor. Nat’l Roofing, Inc. v. Alstate Steel, Inc., 366 P.3d 276 (N.M. App. 2015), cert. denied (2016).
North Carolina strongly believes that an employer may not recover for increased premiums because it is not properly a party to the third-party action and is not allowed to present evidence of increased insurance costs. The evidence is limited to damages suffered by the employee. M.B. Haynes Corp. v. Strand Electro Controls, Inc., 487 S.E.2d 819 (N.C. App. 1997).
An employer who has paid medical expenses and other related workers’ compensation benefits, or a state fund which has incurred increased premiums due to an injury suffered by an employee, may not recover damages against the third party who negligently caused the injury to the employee in the absence of any legal relationship based upon contract or warranty between the employer and the third party. Cincinnati Bell Tel. Co. v. Straley, 533 N.E.2d 764 (Ohio 1988).
Oregon has not specifically denied the employer a cause of action against the negligent third-party tortfeasor for the increased premiums it experiences as a result of a work-related accident caused by the tortfeasor. However, it does prohibit a plaintiff from recovering for economic loss resulting from negligent infliction of bodily harm to a third person. Ore-Ida Foods, Inc. v. Indian Head Cattle Co., 627 P.2d 469 (Or. 1981).
Pennsylvania uses a causation approach to the issue. Its courts have held that any increase in premiums is not reasonably foreseeable and results from a concurrence of circumstances which are too remote from the cause in fact. As a result, an employer does not have a cause of action for the increased costs of premiums. Whirley Indus., Inc. v. Segel, 462 A.2d 800 (Pa. Super. 1983).
The South Dakota workers’ compensation statute does not afford a cause of action to an employer to recover increases in premiums from a third-party tortfeasor. Schipke v. Grad, 562 N.W.2d 109 (N.D. 1997). The South Dakota Supreme Court agrees with courts that have denied recovery on the ground that the employer, having no more rights under the workers’ compensation statutes against a negligent third party than the employee injured by the third-party’s negligence, has no right to sue for increased premiums. Id.
Other jurisdictions have also denied the recovery of increased premiums, although based on different justifications and reasoning.
Texas believes that any increase in premiums is not a foreseeable consequence of an employee’s injury and, therefore, cannot be recovered in negligence, absent any duty to prevent that increase. Higbie Roth Const. Co. v. Houston Shell & Concrete, 1 S.W.3d 808 (Tex. App. 1999). The tortfeasor owes no such duty to the employer of an injured employee.
A few other states have held that the exclusivity provisions of the various Workers’ Compensation Acts impliedly forbid such recovery.
In an action brought by an employer against a tortfeasor to recover lost premium discounts and the amount of increased premiums resulting from a work-related injury caused by the tortfeasor, the Wisconsin Court of Appeals has held that denial of such a cause of action is justified on multiple levels. Vogel v. Liberty Mut. Ins. Co., 571 N.W.2d 704 (Wis. App. 1997). That Court said that the fact that the premiums may rise or discounts may be lost following a claim is simply the nature of the insurance industry. It found that the negligent act of the tortfeasor is simply too remote to impose liability on the defendant for the collateral consequence of increased premiums and lost discounts. If allowed to recover such damages, Wisconsin feels that it is a slippery slope, suggesting that heading down that road would have no sensible or just stopping point, and they held that such a claim was barred by public policy.
Pennsylvania (3rd Circuit)
The 3rd Circuit believes that there is an unmistakable trend to view the workmen’s compensation system as the exclusive source of recovery not only for employees against their employer but also for the employer against third parties. In each instance, the Act exacts trade-offs — benefits and detriments — that are balanced, perhaps not precisely, but at least in some rough approximation. Erie Castings Co. v. Grinding Supply, Inc., 736 F.2d 99 (3rd Cir. 1984). It concludes that the Pennsylvania’s Workmen’s Compensation Act provides an exclusive remedy for the employer to recover expenditures incurred as the result of an employee’s injury.
The 5th Circuit has stated that an employer cannot recover in admiralty for increased premiums resulting from injuries to employees because “economic damages are not recoverable in negligence untethered to an injury to a property interest.” Am. River Transp. Co. v. KAVO KALIAKRA SS, 206 F.3d 462 (5th Cir. 2000).
Perhaps it’s a lack of subrogation education, perhaps it’s something more. No matter the reason, disallowing an employer’s claim for increased premiums punishes the innocent employer and exonerates the wrongdoer. Workers’ Compensation premiums remain one of the most significant obstacles to the creation and continued existence of many small businesses. The insurance industry and businesses across the country should push their claims for increased premiums using the cogent example of Minnesota. Using the right underwriting expert and proving your case will be critical. These claims are worth pursuing – so they are worth pursuing well. Please contact Gary Wickert at [email protected] if you have any questions regarding this article or are interested in pursuing a claim in the many states which are still undecided on the issue.