Suing Yourself: A Sixty-Second Seminar in Workers’ Compensation Claims Handling

It never ceases to frustrate us when we see employers suing themselves in workers’ compensation. We are not talking about a few employers, but rather dozens of companies suing themselves, often without even realizing it.

Our readers are probably asking, “Why would a company sue itself and how could it do so without realizing it?” The answer involves events occurring after an employer changes coverage between two workers’ compensation insurers.

It is common for an employer to change insurance companies when a policy expires. Every employer naturally looks for a better deal, and competition between insurers is commonplace. Different types of work comp insurance programs are available depending on how high of a premium an employer is willing to pay. Smaller companies usually purchase a “guaranteed-cost” policy where for a flat annual fee the insurance company assumes all liability regardless of the number of claims filed, whether it be 10 or 100. Larger companies pay a reduced premium by purchasing what is known as a “retrospective rated” policy, which is another way of saying each claim comes with a high deductible. For example, in a retrospective rated policy an employer may choose to reimburse the insurance company the first $250,000 of each claim, plus a 15% surcharge for the carrier’s time and expenses. The insurance premium depends on the amount of the retention, whether it be $100,000, $250,000, $500,000 or some other figure. The higher the retention, the lower the premium.

Employers end up accidentally suing themselves when they change insurance companies from one retrospective rated plan to another. Allow us to demonstrate how this occurs by providing an example:

Presume an injured employee suffers a one-year cumulative trauma (CT) injury from 1/1/21 to 1/1/22 while working for Acme, Inc. On 7/1/21 Acme moves their workers’ compensation coverage from ABC Indemnity Company to XYZ Casualty Company. Therefore, for this cumulative trauma injury claim, each insurance company provided 6 months of coverage. All work comp benefits for this claim are paid by the last carrier, XYZ Insurance, including settlement with the injured worker. Thereafter, XYZ seeks 50% pro-rata reimbursement from ABC for their share of liability; however, ABC refuses to pay, asserting that XYZ poorly managed the claim, causing its value to needlessly increase by thousands of dollars. XYZ then initiates litigation at the Workers’ Compensation Appeals Board in the form of a “Contribution Action,” wherein they seek 50% reimbursement from ABC. Both sides hire attorneys, expert witnesses, and physicians as they arm for battle. The problem is that Acme has a retrospective insurance policy with both companies. Whatever money these insurance companies spend Acme must reimburse them for. In addition, whatever money these insurance companies recover is credited to Acme. Therefore, upon settlement, any money ABC pays to XYZ is reimbursed by Acme, and any money received by XYZ is credited to Acme. Ultimately, all Acme did was take money out of their right pocket to pay their left pocket, plus they had to reimburse each insurer for the litigation expenses!

This is just one example of several scenarios an employer should be concerned with. If this story sounds familiar, please contact Friedman + Bartoumian for assistance. We know how to resolve these matters efficiently, cheaply and without litigation.