ISSUE – What Happens When a U.S. Department of Labor Authorized Self-insured Employer Defaults Due to Insolvency?

INSOLVENCY – PART FOUR

Upon default on the payment of benefits (not the filing of a petition in Bankruptcy Court), the U.S. Department of Labor (DOL) will seize the self-insurer’s security deposit.  The security will be in one of three types:

1. A bank issued Letter of Credit – upon default the DOL will send a sight draft to the bank for the entire proceeds of the Letter of Credit.  The money will be put into a sub-account of the Special Fund and DOL will take over administration and payment of open claims.
2. Treasury securities in a Federal Reserve Bank – upon default the DOL will transfer the entire amount on deposit into a sub-account of the Special Fund and DOL will take over administration and payment of open claims.
3. Surety bond – upon default DOL will advise the surety company of its obligation under all existing surety bonds and will transfer open claim files to the surety for administration and payment.

If the total security posted by the self-insured employer ultimately proves to be inadequate to pay all claims, then the injured workers have recourse to the Special Fund under the provisions of section 918(b) as discussed in previous postings.

The security requirement is designed so that total incurred obligations will be matched dollar for dollar by security, without regard to the typical indemnity style excess insurance coverage (with the possible exception for the instance where DOL is a named insured on the excess policy).

Of course, in my many years of administering the Special Fund for DOL I noticed that individual self-insurers seem to be poor at reserving workers’ compensation cases.  This may have been due to the inherent uncertainties of reserving, except that reserving “mistakes” ran 100% on the low side – improving the internal numbers for the self-insurer’s compensation program as well as offering low figures for the regular reports to DOL on which the company’s security deposit is based.  In other words, individual self-insureds seemed to uniformly be too optimistic in estimating their workers’ compensation unpaid incurred losses.

In the case of a large employer with primary exposure under the Longshore Act, I considered it to be almost impossible to set aside adequate collateral in the event of default.

Actually, there is a partial explanation for the individual self-insurers’ chronic low reserving.  The company’s reserves assume that the company will continue to be a viable concern, able to actively adjust and defend its claims.  Once the company has defaulted one of the consequences is likely to be deterioration in the development of claims, as well as an increase in the number of claims filed as future employment at the self-insured employer becomes threatened.

At any rate, the security requirement is imposed for the purpose of protecting the injured worker and the Special Fund in the event of the self-insured employer’s (or insurance carrier’s) default, and ultimately to protect the rest of the industry, which will pay higher assessments in the event there is insufficient security and cases go into the Special Fund under Section 18.

A final note:  the employer who decides to terminate its individual self-insurance program should not expect the immediate release of its security.  DOL will hold that security for as long as it is necessary to secure open claims.  And for anyone familiar with workers’ compensation claims, that could be a long time.

From the employer’s perspective, the collateral requirement is a serious impediment to individual self-insurance.  From the DOL’s perspective, you can never have enough security.

ISSUE: Director, Division of Longshore and Harbor Workers’ Compensation Act

Congratulations to Miranda Chiu.  She has just been officially appointed the Director, Division of Longshore and Harbor Workers’ Compensation, Office of Workers’ Compensation Programs, in the U.S. Department of Labor.  Miranda has been serving as Acting Director since the retirement of Mike Niss, and this announcement makes it official.

I worked with Miranda at DOL for years.  She is a no nonsense hard worker, and DOL could not have done better.  Based on my personal experience, she is very well qualified for and very deserving of this appointment.

On the down side, Carl Abildso in the Longshore Division’s National Office has just retired.  Anyone who’s ever paid a Special Fund assessment bill or put a case into the Special Fund knows Carl.  He’ll be missed, and I wish Carl a long and happy retirement.

ISSUES: Updates and Situs

Here is a collection of comments and notes that refer back to previous discussions.

ONE  - United States Circuit Courts of Appeal – We know that there are disagreements on Longshore Act issues among the various federal courts of appeal, and one of these days I may get ambitious enough to try to summarize the more prominent circuit conflicts.  In the meantime, keep in mind that the circuit in which the injury occurred determines which court will decide the appeal, and the U.S. Department of Labor’s Benefits Review Board usually applies the law of the appropriate federal circuit when adjudicating cases before it.  So here’s a breakdown of the U.S. Circuit Courts of Appeal:

First Circuit – Maine, New Hampshire, Rhode Island, Massachusetts, Puerto Rico

Second Circuit – New York, Connecticut, Vermont

Third Circuit – Pennsylvania, New Jersey, Delaware, U.S. Virgin Islands

Fourth Circuit – Maryland, Virginia, West Virginia, North Carolina, South Carolina

Fifth Circuit – Louisiana, Texas, Mississippi

Sixth Circuit – Ohio, Kentucky, Tennessee, Michigan

Seventh Circuit – Wisconsin, Illinois, Indiana

Eighth Circuit – Minnesota, Iowa, Missouri, Arkansas, Nebraska, South Dakota and North Dakota

Ninth Circuit – Washington, Oregon, Montana, Idaho, California, Nevada, Arizona, Alaska, Hawaii

Tenth Circuit – Wyoming, Utah, Colorado, Kansas, Oklahoma, New Mexico

Eleventh Circuit – Alabama, Georgia, Florida

The location of the injury can make a big difference in the outcome of a litigated Longshore case.

TWO – U.S. Department of Labor – I recently listed significant changes that have occurred in the management of the Office of Workers’ Compensation Programs in the U.S. Department of Labor.  Positions are starting to be filled, and people are moving around.  DOL has just announced that Eric Richardson, the District Director in the Longshore Division’s Long Beach district office is moving to Washington, DC to replace Miranda Chiu as Chief, Branch of Policies and Procedures.  As you may recall, Miranda had announced her retirement to be effective the end of March but then agreed to stay on temporarily in the position of Acting Director when Director Mike Niss retired at the end of February.  Stay tuned.

THREE – Jones Act – I think that the last word is now in with regard to the bogus issue of whether the Jones Act hindered the clean up effort in the aftermath of the Deepwater Horizon explosion and oil spill.  The President Obama appointed, non-partisan National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling confirmed in its final report that the Jones Act did not prevent foreign vessels from assisting with the clean-up.

FOUR – Medical Marijuana – Back on 09/08/2010 I expressed the opinion that the legalization of the medical use of marijuana appeared to be a developing trend among the various states.  At that time I found fourteen states where the medical use of marijuana is legal (Alaska, California, Colorado, Hawaii, Maine, Michigan, Montana, Nevada, New Jersey, New Mexico, Oregon, Rhode Island, Vermont, and Washington).  You can now add Arizona and the District of Columbia to the list, but subtract Montana, which is in the process of repealing its medical marijuana law.  Delaware and Florida appear to be getting close to legalization.  So we’ll see how it goes, since more than a dozen states still have bills aimed at legalization pending in their legislative processes.

FIVE – Situs – It seems that recently we have stressed “status” when discussing contested issues of Longshore Act coverage and neglected “situs”.  For example, the discussion of truck drivers on 01/20/2011, the discussion of the case involving the nurse on 12/22/2010, and recent references to the Caputo principle of part time maritime work equaling full time Longshore Act exposure all related to the issue of occupational status under the Act. 

So, now, just a brief reminder that you must separately satisfy both the “status” and the “situs” tests for Longshore Act coverage.  The injury must occur 1) over the navigable waters (discussed on 09/29/2009), or 2) on an enumerated site (pier, wharf, dry dock, terminal, building way, or marine railway), or 3) in an “other adjoining area” customarily used by an employer for maritime activity.

Unlike “status”, “situs” is determined at the moment of injury.

If the worker is not injured upon navigable waters or on an enumerated site, then the issue is whether the injury occurred on an “other adjoining area”.  So, what is an “other adjoining area”?

As usual, this is a case by case determination, but there are a few general principles that can help the analysis.

The situs does not have to be used exclusively or even primarily for maritime purposes, as long as it is customarily used for significant maritime activity.  And the maritime use does not have to be continuous, but under certain circumstances can be intermittent.

If a particular area is associated with items used as part of the loading/unloading or shipbuilding/ship repair processes it need not itself be directly involved in loading/unloading a vessel or in shipbuilding or ship repair, or even physically connected to the point at which those processes take place.  For example, a shed used to store longshoremen’s gear located several blocks away from the nearest gate to the terminal and outside the property line of the port may be a covered site.  Also, a garage away from the water’s edge used to store and repair heavy equipment used in loading/unloading may also be a covered site.

Except for the federal Fourth Circuit Court of Appeals (states of Maryland, Virginia, West Virginia, North Carolina, and South Carolina), where “adjoining” literally means “lying next to”, the site does not have to touch navigable water.  It can be in the vicinity, or neighboring area of navigable waters, as long as it has a reasonable geographic and functional connection with customary maritime activity on those navigable waters.

The federal Ninth Circuit Court of Appeals (states of Washington, Oregon, Montana, Idaho, California, Nevada, Arizona, Alaska, and Hawaii) sometimes uses its so-called “Herron factors” to determine whether a particular site is an “other adjoining area”.  This involves an analysis of the particular suitability of the site for maritime use, whether adjoining properties are devoted primarily to use in maritime commerce, the proximity of the site to the water, and whether the site is as close to the water as is feasible given all of the circumstances.  Several other federal courts of appeal take a similar approach, combining an analysis of geography and function.

Multi-use facilities or manufacturing sites may include covered and non-covered areas and usually require a complex analysis to determine whether the site of the injury is in a covered area.

Finally, because of the occupational analysis under Caputo, walking in and out of coverage is usually not an issue in “status” cases.  A maritime employee, however, who leaves a maritime site during the course of his employment and is injured in a non-covered area is not covered by the Longshore Act.

I’m not sure how helpful this has been, but at least take it as a reminder that both “status” and “situs” must be satisfied for Longshore Act coverage.

ISSUE: United States Department of Labor

I have on previous occasions referred to the fact that the Longshore Act is administered by the U.S. Department of Labor; specifically by the Division of Longshore and Harbor Workers’ Compensation within the Office of Workers’ Compensation Programs. 

The Office of Workers’ Compensation Programs (OWCP) administers the Federal Employees, Longshore, Black Lung, and Energy Employees Occupational Illness Compensation programs.

There are significant changes underway in both OWCP and the Longshore Division with regard to Program management.

Shelby Hallmark, the long tenured Director of OWCP, has just retired.  Gary Steinberg is currently the Acting Director, OWCP.

The Director of the Longshore Division, Mike Niss, has announced that he is retiring at the end of this month (February 2011).

The Longshore Division’s Chief, Branch of Policies and Procedures, Miranda Chiu, had announced that she was retiring effective at the end of March 2011, but she will stay on temporarily as Acting Director of the Longshore Division until a replacement for Mike Niss can be brought onboard.  

And the Longshore Division’s Chief, Branch of Insurance, Financial Management, and Assessments, John Chamberlain, retired to private consulting at the end of calendar year 2010 and has been replaced by Brandon Miller.

So, the entire management staff at the Longshore Division’s National Office is changing, as well as the position of Director, OWCP.

For good measure, the Longshore District Director for the 13^th Compensation District in Seattle, Karen Staats, has just retired.  With a hiring freeze in effect for that position I’m not sure when a replacement will be named.

What all of this means for Program administration remains to be determined.  We’ll wait and see if there are any abrupt or significant departures from previous administration policies.

Review of administration under the Longshore Act –

The Longshore Division offers administration and regulation, medical management, and dispute resolution services under the Longshore Act and its extensions.  The personnel and locations for National Office and the district offices are available at dol.gov, then select Office of Workers’ Compensation Programs under Agencies, and DLHWC under OWCP.

If disputes cannot be resolved informally at the Longshore Division’s district office level, then referral is available to the Office of Administrative Law Judges (OALJ), for a formal hearing.

Appeals from Awards issued at the OALJ level are available to the Benefits Review Board within the Department of Labor.

Appeals from decisions of the Benefits Review Board are available to the various United States Circuit Courts of Appeals, and ultimately to the U.S. Supreme Court.

I will keep you posted as events develop.