Terrorism and the continued debacle on Wall Street were driving forces in state workers’ compensation programs during 2002. After winning significant cuts in benefits during the first half of the 1990’s, workers’ compensation insurers were so flush with cash from ballooning stock prices, they cut premiums to attract new customers. New companies entered a market where it seemed anyone could make money. When the bubble burst, however, all property and casualty insurers were faced with the need to increase reserves to meet anticipated claims. Indeed, many workers’ compensation insurers were forced into bankruptcy. Arriving as they did in the midst of a recession, premium increases were a significant burden to businesses coping with declining orders and sales.

California is a case in point. Governor Grey Davis, running for re-election, finally signed a the following benefit increases into law at the behest of the AFL-CIO:

* Increases the maximum weekly temporary disability and permanent total disability benefits to $602 from $490 for injuries occurring on or after Jan. 1, 2003. It would further increase them to $728 for injuries occurring after Jan. 1, 2004, and to $840 for injuries occurring on or after Jan. 1, 2005. Then, starting in 2006, the amounts will rise in accordance with the percentage increase in the state average weekly wage.

* Increases the minimum permanent total disability benefits to $126 per week from $112 per week.

* Increases the maximum weekly permanent partial disability benefit—which is currently between $140 and $230 per week—to $230 in 2006 for all partial disability ratings under 70 percent, and $270 for those above 70 percent.

* Increases death benefits, effective Jan. 1, 2006, to $250,000, $290,000 or $320,000—from $125,000, $145,000 or $160,000—depending on the number of surviving dependents.[1]

Yet almost simultaneously, businesses began receiving premium increase notices form their workers compensation insurers of 50-80 percent. Private insurance carriers were exiting the market in droves. In solvencies in 2002, included insurers that as recently as 1994 accounted for one-third of the market. These firms were either "being liquidated or in some form of regulatory supervision," according to the Workers' Compensation Insurance Rating Bureau of California (WCIRB).[2] So the state’s workers’ compensation fund—the insurer of last resort—soon found itself insuring more than half of all California businesses. Charging rates that reflect market conditions and reserving claims accordingly, the California State Compensation Insurance Fund was close to announcing its inability to accept any new businesses.[3]

Business and insurance interest were quick to cite the benefit increases as the sole source of California’s workers’ compensation problems.

West Virginia, one of; five states[4] with a single state fund, although opt-outs are permitted for companies that wish to self-insure, found its workers’ compensation plan teetering on the verge of bankruptcy. The state’s problems center on its declining coal industry. Many West Virginia coal companies self-insured and, when they hit hard times, declared bankruptcy, dumping their workers compensation liabilities on to the state plan. According to the National Council on Compensation Insurance (NCCI), West Virginia led the nation in claims payments for permanent and total disability. Most states now pay the majority of their workers’ compensation claims for medical care. Some suggest this may be another feature of West Virginia’s difficult economic climate.

In any event, Gov. Bob Wise and the leaders of West Virginia’s Legislature have agreed to convene a special session by June 2003 to reform the state’s workers’ compensation system.

Florida, like West Virginia, is another example of the dangers of spiraling costs caused by poorly designed structure and administration. The Florida governor’s race was bracketed by twin crises of malpractice insurance and workers’ compensation. Each system cost too much, according to insurers, because greedy lawyers had filed too many claims on behalf of patients and injured workers. No mention was made, of the role played by insurers as they willingly cut premiums during the stock market boom.

Moreover, according to the Palm Beach Post,[5] in the construction industry, contractors spend as much as half their payroll on workers' comp. A roofing company that pays a roofer $30,000 a year in wages typically pays about $15,000 for workers' comp coverage on that employee. Florida also suffered from coverage exemptions and employer fraud. A loophole in the Florida law lets a contractor classify all of his employees as independent contractors and legally avoid buying workers' comp coverage for them. The Florida Department of Financial Services estimates that construction exemptions and employer fraud (classifying employees as less risky than they are) costs the system $1.3 billion a year.

Insurers repeatedly have pushed to end the exemptions, but the influential Florida Home Builders has successfully fought off challenges to the loophole. Construction industry exemptions were also granted to firms on contracts costing less than $250,000. The problem became acute as employers misstated their contracts and exempted greater numbers of employees, whose injuries had to be paid from the rest of the state system. Action is expected in the current session.

Iowa and Maine provided contrasting accounts of the backlash generated by rising workers compensation premiums. In each state, supreme court decisions in 2002 reached similar results on the issue of employer responsibility for employees whose prior injuries were aggravated by new, on the job injuries. Each court found that the traditional rule—the employer takes the employee as is—ought to be applied and the employer should pay for the employee’s total workplace injuries, regardless of the prior injuries.

Both states immediately faced a barrage of claims from employers and insurers, apparently supplied with analyses supplied by the National Council for Compensation Insurance, stating that these court decisions represented new law that would cause workers’ compensation costs to skyrocket. In Iowa, both house of the legislature passed legislation attempting to overturn the state Supreme Court’s decision. After a review of the NCCI analysis, which erroneously claimed that the decision represented new law and added medical costs, the governor vetoed the bill. In Maine, however, the decision was reversed, as both the legislature and the Governor feared businesses’ claims of increased workers’ compensation costs would lead to an unfavorable business climate.

[1] Business Insurance, Feb. 11, 2002.
[2]“S&P Report Spotlights California Workers' Comp Market,” Business Wire, April 11, 2003.
[3] Los Angeles Times, March 20, 2003.
[4] Ohio, North Dakota, Washington, West Virginia and Wyoming.
[5] March 16, 2003.