1990s work-comp laws attacked injured-worker costs on all fronts

If the Nevada workers’ comp pendulum in the 1980s swung too far into easy money for claimants — ultimately putting the system’s entire financial survival at risk — in the 1990s, that pendulum swung the other way, and frequently with a vengeance.

The force behind the movement of that pendulum, in each instance, was the changing politics around workers’ compensation. New information changed fundamental perceptions of the system — not only among business and Republicans, but even within labor unions and Democrats. It could well have been a factor in the elections that gave the GOP control of the state senate through 10 of the 11 legislative sessions that followed 1987.

With the State Industrial Insurance System in dire financial straits —facing a deficit sometimes reported as high as $2.2 billion — Nevada lawmakers in the 1991, 1993 and 1995 legislative sessions repeatedly carved into benefit rules that claimants, trial lawyers and unions had long thought sacrosanct.

One such change was the 1993 imposition of managed care, a system that deprived injured workers of the ability to choose their own physicians and gave that power instead to employers, claims administrators, managed care coordinators and insurers.

Because the new system focused more on costs, injured workers could easily find themselves wondering whether their full recovery was really the top priority of the doctor to whom they’d been sent.

“Is this doctor really mainly focused on my welfare,” a worker could wonder, “or on satisfying whoever it is who selected him and authorizes his paycheck?”

Before managed care was introduced, according to the late Jack Jeffrey, of the Southern Nevada Building and Construction Trades Council, no question had existed that the physician’s loyalty was to the patient.

That’s what he told lawmakers in 1997, four years after the big change.

Under managed care, however, “whether or not there has been open intimidation,” he said, “there is an underlying fear on the part of some in the medical community that their livelihood now depends on getting along with the insurer, where in the past it depended on doing a good job for the injured worker.

“There is a major change in mindset there,” said Jeffrey.

Two years later, he went further, telling lawmakers, according to hearing minutes, that full-duty work releases were being given by doctors to workers who clearly could not perform — which led, he said, to workers going back at work and attempting to comply, which then further aggravated their injuries.

Another major change legislators passed in 1993 was slashing — by about 23 percent, according to legislative testimony — the salary-replacement compensation available to workers whose injuries made them unable to work.

Simultaneously, lawmakers also overturned numerous Nevada Supreme Court precedents that had favored injured workers. It meant that, under the new state laws, cases that plaintiffs would have won before would now fail.

To deal with the perceived problem of overly generous hearing officers — such as those that had ordered SIIS to buy a commercial fishing boat for one claimant — lawmakers quietly changed such officers’ employment status. Now, rather than “classified” employees, which were difficult for governors to fire even when performance was deemed outrageous, they henceforth served “at the pleasure of the governor.”

And that hearing officer who’d ordered the fishing-boat purchase? Within 30 days, Nevada Journal was told, she was out of a job.

Perhaps the most controversial change in workers’ comp law, however, was in 1995. That is when Nevada legislators approved NRS 616D.030 — a statute that provides even outrageously corrupt insurers and TPAs with a legal shield against lawsuits, even when they explicitly violate Nevada’s workers’ comp laws.

For victims of such crimes, the only legal remedies potentially available are administrative fines that the state Division of Industrial Relations may choose to levy.

Despite multiple repeal attempts by trial-lawyer and organized-labor lobbyists over the years, that provision remains in statute. It states:

NRS 616D.030 Limitation of liability of insurer or third-party administrator; administrative fines are exclusive remedies.

1.  No cause of action may be brought or maintained against an insurer or a third-party administrator who violates any provision of this chapter or chapter 616A, 616B, 616C or 617 of NRS [encompassing Nevada’s workers’ compensation statutes].

2.  The administrative fines provided for in NRS 616B.318 and 616D.120 are the exclusive remedies for any violation of this chapter or chapter 616A, 616B, 616C or 617 of NRS committed by an insurer or a third-party administrator.

Trial attorneys see the provision as a huge political gift to corrupt insurers, managed care organizations and third-party administrators.

“It is actually astounding when I show this to my clients,” longtime workers’ comp attorney Dean Hardy told lawmakers in 2009. “You cannot sue an insurer or a TPA for violating the law. There is nowhere in American jurisprudence where insurers or TPAs have that immunity. It does not exist except in Nevada’s workers’ compensation law.”

Hardy spoke of a wheelchair-bound woman who, before her injury, had worked for “a major property in Las Vegas.” After her injury, the property’s insurer and TPA had adamantly fought, at the different administrative and court levels, against any legal finding that the woman was permanently and totally disabled.

Finally, after five years, her case was heard by the Nevada Supreme Court, which ruled that, yes indeed, she was permanently and totally disabled.

However, said Hardy, within a month of the Nevada Supreme Court decision the insurer then — as state law allowed — “revisited” the total disability question and “sent her to a ‘so-called’ independent doctor” — who was not, in fact, independent. That doctor then obediently reported back that she was not permanently and totally disabled.

The insurer, according to Hardy, then sent the woman a letter citing the doctor’s report and stating that, because she was not now permanently and totally disabled, “her benefits were now terminated, and by the way, send us back the wheelchair. Then she killed herself.

“That is a true story,” continued Hardy. “Her adult son came to my office to ask me what we could do to the insurer and the administrator of the claim. I then pulled out the statute [reading] aloud, ‘No cause of action may be found or maintained against an insurer or TPA that violates the law.’”

The provision had been introduced in the 1995 legislature by Sam McMullen, a lobbyist for the Nevada Self-Insurers Association. NSIA is made up of major employers who the state allows to finance their workers’ comp programs by paying expenses as they are incurred, rather than paying a fixed premium to a traditional insurance company.

According to minutes of the Senate Committee on Commerce and Labor, Sen. Joe Neal immediately disagreed with McMullen’s proposed language, which, in its initial form, was quite candid — prohibiting “a cause of action … brought against an insurer or a third-party administrator who acted negligently or in bad faith.”

“The employee does not have any way to sue for bad faith,” observed Neal.

“Mr. McMullen stated that is not the intent of the language in Exhibit F,” according to the minutes of the session. “He emphasized he does not think the language excludes an employee from suing.”

[A draft version of “Exhibit F,” excerpted from the 1995 legislative record of the eventual Senate Bill 458, can be read here.]

Neal, however, continued to disagree, contending the new language would bias the law toward employers and reverse the Nevada Supreme Court’s 1991 Falline v. GNLV ruling. That decision had recognized a common law right of injured workers to bring bad-faith lawsuits in cases of egregious insurer or third-party administrator misbehavior.

Committee Chairman Randolph Townsend, however, “stressed the reason behind the fine is preventative,” according to committee minutes. “He stated the substantial fine should prevent ‘bad faith’ from happening.”

However, the then-administrator of the Division of Industrial Relations, Ron Swerczek, then pointed out “that administrative fines are not remedies. He stated remedies are a way to make a person whole, or an attempt to compensate for damages sustained by that person. He explained administrative fines have no relationship to compensation for damages.”

Similarly, Karlin Dunlop, the chief administrative officer of DIR’s Industrial Insurance Regulation Section, noted that fines are what lawbreakers are, under workers’ compensation law, supposed to pay.

“She explained that the language used in subsection 2 is not putting the money into the injured worker’s pocket,” and pointed out that even if the candidly impolitic language — “who, acting negligently or in bad faith” — was deleted, the amendment will still “not allow a person to pursue legal remedy against an employer who willfully conducts outrageous conduct …”

“That person will only be allowed to obtain redress through the administrative fine process of DIR. This money will not go into the injured worker’s pocket.”

“That is what is intended,” said Townsend immediately, according to the minutes, adding that “this is a no-fault system in which it is DIR’s job to see that companies comply with the rules.”

One insider present at the hearing in 1995, recently told Nevada Journal that while it was Sam McMullen who introduced the provision, the man who actually crafted it had been one-time Nevada mega-lobbyist Harvey Whittemore, currently in federal prison.

“I said to myself,” recounted the insider, “‘Are you kidding me? This will never pass. Hell, you’ll get it here in the Senate. But you get this in front of the Ds in the Assembly, this thing is DOA.’”

But, he says, he had underestimated something: “This was backed by the gamers and the miners — all of the big, powerful, money interests in the state. They wanted this. And it got through the Assembly, too, because everybody needs money when you run a campaign, and Democrats need money too, and there are some people you can’t afford to tell ‘No,’ when they really want something.”

While immunizing employers from injured-worker lawsuits has always been at the core of the workers’ comp “grand bargain” — the other side of which was a pledge of quick, guaranteed medical care and modest financial compensation for injured workers — such immunity from civil lawsuits for workers’ comp insurers and third-party administrators is much more controversial.

On the one hand, insurers and TPAs have powerful financial and other incentives to deny as many significant payouts as possible, and Nevada reports of bad faith in this area are legion.

On the other hand, argues Arizona attorney Donald L. Myles Jr., allowing claimants to sue insurance carriers for their claims-handling creates “an irresolvable conflict” for the carriers. An insurance carrier simply can’t owe “a duty of good faith and fair dealing to both an employer and employee when their positions are in inherent conflict with one another,” he observes.

According to Steven Plitt, an adjunct professor at the University of Arizona, U.S. state courts split almost evenly on this question.  

In 2012, Plitt, also an insurance law attorney with Kunz Plitt Hyland & Demlong in Phoenix, completed a survey of the states to undergird his argument for a “unified statutory remedy.”

In a February online story on the topic of whether injured workers should be able to sue workers’ comp insurers and third-party administrators for bad faith, WorkCompCentral Legal Editor Sherri Okamoto recently reported a similarly split picture.

But when WorkCompCentral President David DePaolo asked readers of his blog to weigh in on the matter, initial responses emphatically favored bad-faith lawsuits against misbehaving TPAs and insurers.

Wrote DePaolo:

…I was still surprised that every single response, regardless of perceived orientation, was that exclusive remedy should NOT protect the payer, and that if egregious behavior was committed then liability for bad faith claims administration should be applied.

A risk manager said: “Not only should they be held accountable for clear violations of Law but publicly announced. I will also suggest that directors of (Police, Fire etc) make sure that Risk Management is not buying their legal failures in their budgets and claiming that Workers Comp cost are too high for (Police/Fire) departments.”

A California Qualified Medical Examiner stated: “It is a sensitive question because what some of these carriers are doing to the [injured workers] is horrible! They routinely DENY straightforward claims with no legitimate reason. You fall off a ladder in front of your boss, get taken to the ER in full spinal precaution and they very well may deny your claim! (My example isn’t hyperbole, I have cases similar to that!) It’s like, are you kidding me? Obviously, they must not even be getting a slap on the wrist…more like high fives and slaps on the back.”

An injured worker’s advocate (not an attorney) commented: “Workers’ compensation insurers routinely controvert claims in a manner that cannot be described in any other way — they are clearly acts of legal ‘bad faith.’”

A Senior Claims Examiner noted: “Sometimes in some companies the bad faith does exist. They should be able to bring a civil law suit against the carrier or TPA. They bring class action law suits. Why not?”

A Georgia injured worker’s attorney said: “If state statutes (like in GA) are not going to have any meaningful ‘teeth’ then yes, bad faith actions should be allowed. Perhaps it would encourage more ethical behavior from insurance companies.”

And a Wisconsin defense attorney agreed: “In Wisconsin bad faith claims are part of the workers compensation statute and allow recovery of the lesser of $30,000 or a 200 percent increase in benefits to be paid. Seems to be among the better equitable ways to deal with such situations.”

Later responses to DePaolo’s request for continuing comment included more opposition to such lawsuits, but the number of responders in favor remained significantly disproportionate.

No doubt much of that support reflects the presence in DePaolo’s readership of claimant attorneys mentally licking their chops over anticipated awards from such lawsuits.

However, the fact that even risk managers, defense lawyers and claims administrators see the need for bad-faith challenges says volumes.

These individuals are intimately acquainted with what actually goes on behind the scenes in state workers’ compensation systems.

And behind the scenes — in state workers’ comp agencies — the political disincentives to holding big insurers and employers to account are both real and large.

In its next installment, this series will address that issue.

Steven Miller is the managing editor of Nevada Journal.

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