ADMINISTRATIVE LUMP SUM SETTLEMENTS

M E M O R A N D U M

 

TO:                        Janice Young, Chief Claims Officer

 

FROM:                  Kevin R. Abrams, Assistant Law Director

 

SUBJECT:Administrative Lump Sum Settlements

 

DATE:                   April 6, 1995

 

I. INTRODUCTION

 

      This memorandum is intended to share with you some recent observations regarding "evolving" issues related to the administrative lump sum settlement of claims pursuant to the provisions of Ohio Revised Code {4123.65.  Most of the issues were specifically raised by claims representatives.  I will discuss the issues and, when appropriate, set out proposed resolutions in the following paragraphs.

 

II. INTERFERENCE WITH ATTORNEY-CLIENT RELATIONSHIP

 

      Perhaps the most sensitive area I have encountered over the past several months concerns allegations that the Bureau has in some cases improperly interfered with the attorney-client relationship.  More specifically, some claimants' attorneys have argued that BWC claims representatives have suggested, directly or indirectly, that claimants terminate the services of their  attorneys in order to maximize their recovery in a settlement proceeding.  While I initially dismissed the allegations as "sour grapes," there is some indication that they are not without merit. 

 

      As you are well aware, the statutes and rules which govern workers' compensation provide that all claimants may voluntarily choose to be represented by an attorney.  Once retained, the claimant's attorney is fully authorized to act on behalf of the claimant in all workers' compensation matters. 

 

      Attorney fees can be substantial, and however tempting it may be to view these fees as a windfall for the claimant's attorney, any suggestion that a represented claimant may not need an attorney to settle a claim is absolutely improper.  Notwithstanding the numerous arguments on behalf of the claimant's bar as to the benefits of legal representation, claims representatives must understand the attorney-client relationship is a special contractual agreement whereby the attorney is given the authority to act as an agent for the claimant.  As a general rule, claims representatives should not raise the subject of legal representation with claimants.  If asked, the claims representative need only make the claimant aware of a claimant's right to representation by counsel.

 

      The Bureau must strive to offer the best service possible to each individual claimant.  I do not believe, however, that "customer service" authorizes the Bureau to negotiate directly with a claimant who is represented.  Of course, claims representatives find themselves in an extremely difficult position when contacted by a represented claimant during settlement negotiations.  When contacted by a claimant, the first question a claims representative should ask is whether or not a claimant is represented.  If the answer to that question is yes, then the claims representative should encourage the claimant to contact the claimant's attorney, and further inform the claimant that negotiations must take place through the attorney.  This issue merits significant additional discussion, but for the sake of brevity, I will move to another issue.

 

III.  CLAIM VALUATION

 

A. NON-WORKING WAGE LOSS COMPENSATION

 

      One of the significant issues facing claims representatives settling claims is the uniform determination of the probability of payment, and the valuation of non-working wage loss compensation.  While the rate for potential non-working wage loss compensation is easily determined, the facts of each case determine the likelihood that such compensation will be paid. 

 

      As the settlement process has evolved, claims representatives have developed calculations assuming as much as four years of receipt of of non-working wage loss compensation.  I have discussed this matter with Bureau attorneys closely monitoring court cases, and for purposes of settlement evaluation, amounts considered for non-working wage loss compensation are generally limited to a one year period.  Moreover, I believe this limitation is consistent with the Industrial Commission's current practice of scrutinizing ongoing payment of non-working wage loss compensation.  While I realize some may argue otherwise, an initial entitlement to non-working wage loss should in no way be construed as a determination of entitlement to 200 weeks of such compensation.  I believe the implementation of wage loss guidelines will also support a more limited valuation for non-working wage loss compensation.

 

B. DISCOUNTED PRESENT VALUE

 

      It is impossible to accurately assess the settlement value of a claim without a clear understanding of the concept of "present value" and its applicability to the settlement process.  As you are aware, present value can be applied to any dollar amount which is expected to be paid over time.  Also, present value assumes more importance when the potential time period for payments is greater.  I am addressing this issue because of a number of inquiries received after recently extending settlement authority equal to approximately fifty percent of the present value of a claim.

 

      The procedure used to calculate present value appears to be fairly well-established.  In a typical permanent total disability scenario, for example, a claims representative multiplies the claimant’s rate times the number of weeks indicated in the annuity tables provided, based upon the claimant's life expectancy.  This calculation yields a figure substantially lower than the amount figured by simply multiplying the number of expected weeks of life times the claimant’s rate, as it represents the amount of principle the Bureau must set aside in order to adequately provide for the claim.  This figure is lower than the actual dollars paid over time because of the interest the principle will earn before it is exhausted.  Stated otherwise, the present value represents the current amount necessary to pay an annuity over a period of years.        

 

      This "period of years," of course, is not fixed because it is generally for the life of the claimant.  The actuarial tables provide an estimate of the life expectancy of all permanently and totally disabled claimants, but such estimate does not rise to the level of a guarantee or a "right" to a certain number of years of payment.  There is no financial incentive for the Bureau to pay the full present value of a claim, because payment of the full amount is essentially a guarantee to the claimant of a full life expectancy.  Furthermore, the Bureau assumes great risk of another claim in the event the former permanently and totally disabled claimant returns to work.  In addition, because the claimant receives the settlement dollars "up front," the claimant will have the benefit of those dollars to invest and earn interest.  These  reasons provide the basis for settling a claim for a discounted present value.

 

      As with other aspects of the settlement process, I encourage a case-by-case review, thereby preventing claims representatives from applying a rigid formula.  Generally speaking, however, when the claimant is not of particularly advanced years, the Settlement Committees I chair extend fifty to sixty percent of the present value in settlement authority in permanent total disability claims.

 

IV. NOTICE OF COURT-ORDERED CHILD SUPPORT

 

      Another potentially problematic area concerns the determination of the existence of a child support order pertaining to the claimant.  Unfortunately, I have encountered several instances where the Bureau has approved a settlement agreement, but the claimant's attorney was unaware of the existence of any child support order.  In some cases, the claimant's attorney does not learn of the child support order until after the claimant has received his "portion" of the settlement amount, which is substantially smaller than the agreed settlement amount.  The claimant then desires to withdraw from the settlement agreement, after the thirty-day cooling-off period has expired.

 

      I believe the problems encountered with this situation may be remedied by having claims representatives routinely determine whether a child support order exists in any claim considered for settlement.  The claims representatives should make the court order a topic of conversation in any settlement negotiations conducted with the claimant's attorney.  Moreover, I believe that the thirty-day notice required by the child support order should coincide with the Bureau's approval of any settlement agreement, thereby affording the parties the thirty-day "cooling-off" period set forth in Ohio Revised Code {4123.65.  More specifically, on the date the Bureau approves a settlement agreement, I suggest that both claimants and their representatives be provided copies of any notices sent to the courts indicating a lump-sum payment is pending, in order to afford the parties the opportunity to withdraw from the settlement during the time period set forth in Ohio Revised Code {4123.65.

 

V.  RE-NEGOTIATING AGREED SETTLEMENTS

 

      You may recall that I addressed this subject in a previous memorandum dated May 9, 1994, a copy of which is attached for your review.  In that memorandum, I suggested that we give "great deference" to the settlement amounts agreed to by the parties, when both the claimant and the employer are represented, and the claim remains within the employer's experience period.  As I suggested previously, claims representatives have developed sufficient expertise in evaluating claims to determine that a settlement agreement is excessive.  On the other hand, while a settlement may appear excessive, in a claim that remains within the employer's experience, because of the reserve amounts assigned to that claim for purposes of establishing premiums, the settlement amount will cost the employer less than the reserve assigned to that claim.  The basis  for suggesting we give great deference to the agreement is that to refuse to approve the agreement is tantamount to telling the employer that the Bureau believes the amount of the settlement is excessive, but will nevertheless charge premiums that will cost the employer more than the settlement--clearly sending conflicting messages.

 

      As suggested in my previous correspondence, I believe the remedy for the problems encountered in those circumstances where the employer and the claimant have agreed to what appears to be an excessive settlement amount rests in the development of a claims reserve methodology that accurately reflects the future value of a specific claim.  While I claim no particular expertise in the actuarial realm, it is my understanding that the current reserve methodology is one primarily used for determining rates, and not the actual value of a claim.  I believe we will continue to struggle with "excessive" settlements as long as established reserves exceed even the "excessive" agreed settlements.  I suppose one other methodology for addressing these kinds of settlements would be to alter the impact of a settlement value on the premiums charged for a claim that is in the employer's experience.  Any such decision, of course, is one to be made by appropriate representatives from the Actuarial Department.

 

VI.  CONCLUSION

 

      Claims representatives should aim to achieve as much consistency as possible when valuing claims during the settlement process.  Yet, it is essential to recognize that each case must be independently reviewed and evaluated.  I do not believe there  is any "formula" that can be applied to evaluate a claim, especially in view of current reserving methodology.  Claims representatives must be flexible and visualize the parameters used to value settlements, and apply these principles to individual claims.  Meanwhile, I will continue to keep you informed of the procedures for resolving recurring problems I encounter in the settlement process. 

 

      I trust that you find this information helpful.  Please do not hesitate to contact me with any questions or comments you may have on any of these or other issues related to settlements.