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Workers' Comp Settlements in the Age of Mediation
The Legal Intelligencer
In 2006, the Pennsylvania Legislature passed a series of workers' compensation reforms known as Act 147. Perhaps the most significant aspect of Act 147 was the provision that created the mandatory mediation program. Until Act 147 was passed, mediations were strictly voluntary. Moreover, there were only a handful of judges who performed voluntary mediations because there was no incentive for a judge to mediate the cases of other judges beyond good will. Nonetheless, the mediations that did take place were overwhelmingly successful.
Sensing a good thing, the legislature attempted to foster a culture of cooperation by instituting mandatory mediation, which would take place in all cases unless it would be deemed "futile" at the discretion of the workers' compensation judge on a case-by-case basis. It was initially unclear whether the mandatory mediation would be accepted by all involved. While perhaps the majority of mediations were dismissed as futile immediately following the enactment of Act 147, sometimes based only on the unwillingness of the employer to provide authority, they are now more universally implemented and more successful.
It is important to understand that the mandatory mediation provision of the act was supported by both the claimants bar and the Chamber of Commerce. Therefore, the focus of a settlement in the context of a mediation from the claimant's perspective must be convincing the insurance company (and the mediating judge) that it will save money in the long run by settling. After all, isn't saving money the only reason an employer would pay a lump sum?
Tragically, it is all too common for both sides to come to a mediation and discuss settlement in terms of how many years of temporary total disability a case is worth. Other than conforming with some sort of ostensible statewide average, the number of years an injured worker should receive in a lump-sum settlement has precisely nothing to do with the value of the case.
In an effort to expose the real value of a case, it bears recalling the settlement formulas, still contained in the act, routinely used before the passage of Act 57 in 1996. Prior to Act 57, parties were limited to settling cases via "commutation of benefits" under Section 316 or 412 of the act. Essentially, the parties would have to agree on a fictitious earning capacity, sometimes derived from a vocational workup, and thereby figure out an approximate weekly partial disability rate. The parties would then execute a supplemental agreement along with a stipulation of fact, which would be approved by a workers' compensation judge. The stipulation would provide a lump-sum payment to the injured worker equivalent to 500 weeks of the fictitious partial disability rate as provided by the act. The entire construct was essentially an advance on weekly compensation payments.
Now, settlements are all implemented through the compromise-and-release agreement (C&R) of Section 449. Perhaps the most glaring difference between a compromise-and-release resolution and the pre-Act 57 settlement was the fact that the medical aspect of the claim could not be resolved with any degree of finality, as future medical expenses always remained the responsibility of the carrier. The very fact that modern settlement discussions focus on how many years of indemnity benefits a case is worth demonstrates that the medical piece of a settlement is not being considered at all. The overwhelming difference, of course, is that claimants no longer get their future medical expenses paid.
Now that the C&R is the only viable settlement tool for the workers' compensation practitioner, some return to traditional settlement valuations is warranted. This is particularly true when going into a mediation. The more prepared you are, the better the result will be.
The claimant's attorney should appeal to the actual costs an insurer will be required to pay out in lobbying for a departure from the "number of years" method. Quite frankly, even the commutation formula, with its contrived residual average weekly wage, sometimes is incapable of capturing an accurate picture of the true cost of the claim. Anyone who has settled a case older than five or six years just has to look at the "compensation paid to date" portions of the C&R agreement to see how much money the insurer has wasted. In fact, how many times do we see that space on the form left blank because the attorney "could not get that information in time"? It seems more likely that the adjuster is embarrassed to have that lopsided number in print.
Somehow it has become generally accepted that the average settlement in Pennsylvania (or at least in the East) is equivalent to three to four years of temporary total disability benefits. Future medical expenses, if considered at all, might warrant an additional $5,000 to $10,000 being added to the lump sum. That is if the claimant's attorney even raises the issue. Certainly, the adjuster is not going to unilaterally offer anything. While medical benefits were previously incapable of being settled, they are now expected to be discarded for nothing.
Because a carrier is likely to be liable to pay compensation benefits for 500 weeks once the injured worker either returns to work or achieves less than 50 percent on an impairment rating evaluation, that is where the settlement valuation for a mediation should begin. While it may be 30 years since you have taken an algebra course, each demand should seek to justify the amount of the demand with the algebraic commutation formula: (AWW - RWW) x 2/3 x 500 = X. The AWW is simply the claimant's pre-injury average weekly wage. The RWW represents the fictitious residual weekly wage that is needed to ascertain the settlement value. Given that this is the only variable in the formula, it is important to be able to justify the figure. As indicated above, the most compelling way to do this is with the defendant's own vocational counselor. Finally, X corresponds to the actual settlement value after doing the math.
Just as a point of illustration, we will assume a claimant has a pre-injury average weekly wage of $500 and a residual earning capacity of $200. In this scenario, the settlement value would be $100,000. In this same example, three years of temporary total disability benefits would equate to $69,000. Therefore, a pre-Act 57 settlement of $100,000, which by definition left the employer responsible for unlimited future medical expenses, is now valued at $60,000 or so, with no future medicals.
In order to address the value of medical care, it is sometimes incumbent upon the practitioner to dismiss the "$5,000 to $10,000" concept out of hand. The only true way to gauge future medical care is through the creation of a life care plan. These days, a Medicare set-aside can be prepared to arrive at the same number. Either report seeks to assess the dollar value of future medical needs. The meager investment in an expert report of this nature will reap a significant benefit at a mediation.
If you are devoting the time to attend a mediation, it is prudent to maximize the benefit. Appealing to the commutation formula and a life care plan will give you an advantage with the mediating judge, who will have a solid basis to accept the claimant's version of the value of the case. Acceptance of the mantra that "cases settle for three to four years of comp" will only serve to limit the recovery.
Christian Petrucci is a solo practitioner and past co-chairman of the Philadelphia Bar Association's workers' compensation section. He concentrates his practice in workers' compensation litigation and Social Security disability. He can be reached at 215-592-1120 or via email at firstname.lastname@example.org.
This article originally appeared in The Legal Intelligencer.