State regulation of work comp proceeded on tilted playing field
When Nevada legislators outlawed lawsuits by injured workers against work-comp insurers and administrators in 1995, the lawmakers essentially made a promise.
In the absence of such lawsuits, they pledged, vigorous and vigilant state regulation would protect injured workers from bad actors who broke faith and violated work-comp rules.
Fines would suffice, the lawmakers told each other — fines levied by the state’s Division of Industrial Relations (DIR).
“[T]he substantial fine should prevent ‘bad faith’ from happening,” argued then-senator Randolph J. Townsend, according to legislative minutes.
So how “substantial” were the fines written into law to keep bad actors from misbehaving?
Under Assembly Bill 61, the penalties measure passed that same session, the fines were limited to “not more than $250 for each initial violation which was not intentional, or a fine of not more than $1,000 for each intentional or repeated violation.”
Of course, medical bills and wage-indemnity costs for injured workers quite frequently far exceed a mere thousand dollars. Thus, the 1995 legislation arguably incentivized bad behavior by insurers and claims administrators: Even if caught, they were far ahead, financially, just paying the fine.
In subsequent legislative sessions, lawmakers increased the fines to keep up with inflation. Currently fines stand at $1,500 for the initial noncompliance and $15,000 for additional ones. The maximum “benefit” penalty — the sum that the company must pay to the injured worker if DIR orders it — is $50,000.
Thus Nevada employers, insurance carriers and third-party administrators (TPAs) are still presented with what might be termed an “injured-worker mistreatment incentive.”
Its calculation involves at least two variables:
- The expected cost of the injured worker’s benefits, and
- How easily the company — should it get caught ignoring state law — can absorb a $50,000 fine.
If the cumulative lifetime costs of a claim appear likely to be in the millions, the financial incentive to flout state law increases significantly.
But carriers and TPAs, under the umbrella of their state-granted privileges, also have additional incentives to frustrate injured workers.
For one thing, studies have repeatedly shown that the great majority of denied claims never get appealed. Insurers know this, and thus have a big monetary incentive to automatically deny all claims, legitimate or not.
Injured workers quickly understand — especially after talking to lawyers — that if they persist in pursuing their benefits, they’re in for long, drawn-out fights. Thus, it’s only the most resolute workers who persist in appealing those initial denials.
Also tilting the playing field is the fact that DIR, by the very nature of its work, is subject to intense political pressures. Well-informed insiders tell Nevada Journal, for example, that no administrator of DIR is foolish enough to ever seek to revoke some major Strip casino’s self-insured certificate, no matter how egregious its abuses.
In 1995, AFL-CIO Political Director Danny Thompson obliquely highlighted this problem, telling lawmakers it was “improper that a political appointee [in the DIR office] should decide what a fine should be.”
State Senator Joe Neal brought up that same issue when he introduced an amendment to save injured workers’ common-law rights to bring lawsuits. Exhibit number one for Neal, a former personnel administrator, was a previous well-documented failure of discretion by the state’s politically appointed insurance commissioner.
“We have a situation,” he told fellow lawmakers, where “people who are appointed to assure [that] these decisions are carried out are subject to political pressure” and “might not make the decision for the benefit of the injured worker.”
As an example, Neal then referred to the Nevada Supreme Court’s 1991 Falline decision, where an injured worker had won multiple times on the appeal level, but Steve Wynn’s Golden Nugget had again and again simply refused to pay — ignoring first the doctor’s report and then decisions by hearing and appeal officers, plus multiple rulings by both the district court and the Supreme Court.
Ultimately, after another five years, when the Fallines returned to the high court with a damage suit against the Nugget and its third-party work-comp administrator — charging negligence and bad faith — the couple won.
“We got the Falline decision,” said Neal, “because the insurance commissioner did not act in lifting the certificate from the self-insured [employer].”
Sen. Townsend — at that time and for the next 13 years chairman of the state Senate’s Commerce & Labor Committee — agreed on that point with Neal.
“I think it is important to understand that there is not anything that my friend and colleague from the committee has said that is not true,” acknowledged Townsend.
He also agreed that state regulation had failed:
Once the behavior of the self-insured employer was discovered, it should have been dealt with in an administrative way. This is simply to have the Department of Industrial Relations find the violation and turn it over to the insurance commissioner and the self-insurance certificate should have been yanked at that time. You would never have had a Falline decision and never had the problem that was faced. The individual, in that case, should never have had to go to court and face four years of litigation.
Nevertheless, Townsend continued to argue that, because “the worker should not have to go to court,” he should not be allowed to do so. Instead, workers must be made to rely entirely on state bureaucrats.
This was because, said the senator, he and his colleagues were applying “an exclusive remedy philosophy.”
Tort lawsuits were the last thing Townsend thought advisable, he told Nevada Journal last week, because it would “open this up to more trial lawyers — [becoming] a boon to them and not necessarily to the employee.
“We had to figure out a way to, number one, not let [employees] get hurt, and number two, if they did by accident, that they got treated not only immediately, but more importantly, appropriately — whatever that took. And if it was costly, then it was costly. But it had to be done, because that’s the right thing to do.”
However, although work comp’s “exclusive remedy” had for over a century protected employers — who have a clear interest in keeping their employees healthy and satisfied — from those employees’ lawsuits, it was something else entirely to extend that protection from lawsuits to non-employers, simply because they’ve contracted to perform a service for the employer.
Neal’s amendment went down to defeat, and the 1995 Nevada Legislature gave insurers and third-party administrators — despite their large financial interests in not paying out work-comp benefits — a legal shield against any injured employee who might want to enforce those company’s legal obligations in court.
Today, after 20 years of state experience, legislative records now appear to provide much fuller answers two of the key questions lawmakers faced back in 1995:
- How real a problem was or is bad-faith abuse and foot-dragging by insurance companies and TPAs?
- How adequate a solution, really, was or is state regulation?
Scope of the bad-faith problem
As the Nevada Supreme Court’s 1991 Falline decision made clear, bad-faith administration of work-comp benefits was a problem well before lawmakers made changes to Nevada’s industrial insurance system in the early 1990s.
Still, while wrongful conduct will arguably always exist, when the state deprives injured workers of their common-law right to pursue justice before an independent legal tribunal, it almost certainly tilts the system in favor of prospective wrongdoers and against their victims.
Thus, hearings of the Nevada Legislature throughout the 1990s and up through the present on workers’ compensation have been full of anecdotal reports — coming from union representatives, trial lawyers and private individuals — of outrageous abuses of injured workers by TPAs, insurers and others.
Usually, the purpose of putting those reports on the legislative record has been to illustrate the need for lawmakers to return work-comp law to its pre-1995 stance, which allowed bad-faith lawsuits against bad actors.
However, the defenders of the 1995 ban on bad-faith lawsuits have long had an effective rejoinder: While the accounts, if true, are certainly horrendous, they remain mere unverified anecdotes, and thus do not provide a sound foundation for legislation to modify state policy.
By the 2005 session, however, that excuse seemed to be wearing thin. Thus, that year — in the back-room negotiations on workers’ comp regulation that mark virtually every session — an agreement emerged to finally require the state Division of Industrial Relations to annually report important, relevant information.
Specifically, lawmakers mandated reporting of:
- The total number of complaints filed with DIR that alleged violations of state work-comp law;
- The total number of investigations DIR conducted of those alleged violations;
- What resulted in each of those investigations, including:
° Did DIR impose or refuse to impose a fine or a benefit penalty, and,
° If DIR imposed a fine or benefit penalty, how much was it?
- Finally, if a decision by DIR’s administrator was challenged by an administrative appeal or in court, what eventually resulted?
The legislation — AB 58, now in statute as NRS 616A.403 — was a significant mandate for the new level of transparency that both lawmakers and the general public need if the performance of Nevada’s work-comp system is ever to be accurately assessed.
Unfortunately, as Nevada Journal reported earlier, after 10 years that reporting system is still not in place.
Nevertheless, in 2009 one of the questions such reporting was intended to illuminate did receive at least a partial answer. Lawmakers and lobbyists at that year’s legislative session not only agreed that bad-faith treatment of injured workers was real — and not merely “anecdotal” — but they also passed Senate Bill 195 to target several known instances of it.
Reporting the achieved consensus to Assembly and Senate hearings, Nevada Resort Association lobbyist Robert Ostrovsky described the bad-faith practices that new provisions of SB195 were intended to counter:
- Certain insurers and third-party administrators were using acceptances for one claim as a way to deny other, future, claims, he said. If, for example, both an arm and a hip were injured in the same accident, and initially a claim was made for only the arm injury, TPAs were asserting that the acceptance letter regarding the arm also legally excluded any future claim for the hip injury. SB195 now made clear that a letter of acceptance is not an automatic denial for other body parts.
- Injured workers going before work-comp hearing and appeal officers were being prohibited from presenting medical evidence or testimony from “unauthorized” physicians who had not been selected by the insurers and TPAs to treat the claimants. SB195 now states that judges may consider an examining physician’s report for medical issues at both the hearing and appeals levels.
- “We have discovered,” reported Ostrovsky, “that we have certain administrators, insurance companies, or their administrators who consistently have been making late claims payments, either for an individual claimant or for a number of claimants. If they engage in that pattern of practice, it will now be subject to both a benefit penalty and a fine.”
- In the past, certain TPAs, rather than pay fines levied by DIR would instead file bankruptcy and escape payment. Yet those same TPAs had already been required to post bonds with the state Division of Insurance, to protect the state against fraud. SB195 amended the bond requirement so that the bond also covers “all fines and penalties assessed by the DIR.” Now, said Ostrovsky, “the DIR will not find itself in a situation of not being able to collect the fines or penalties.”
- Finally, SB195 introduced what Ostrovsky called “a big change in the way TPAs are licensed.” Previously, TPAs only were required to be licensed to operate by the Division of Insurance. Now, those licenses must also be approved by the Division of Industrial Relations — the agency most likely to know the actual track record of the company and its key employees.
Whether or not these five changes in state regulatory law actually accomplish anything real for Nevada’s injured workers and their employers remains to be seen. DIR’s administrator still has wide discretion, and the office, as currently structured, is the subject of political pressure.
Nevertheless, SB195 represents something quite significant — an institutional admission by state lawmakers and, indeed, the state’s work-comp “stakeholder” establishment, that Nevada’s industrial insurance system has long countenanced the presence within it of bad-faith actors.
Adequacy of state regulation
The 10-year failure of DIR to provide lawmakers with the reports they mandated in 2005 leads directly into the second question raised earlier: How adequate a solution to bad actors of any sort is a regulatory approach embodied in the state Division of Industrial Relations?
After all, when lawmakers in 2005 asked whether either additional money or staff would be required for DIR to do the reporting, the division administrator at the time, Roger Bremner, assured them the answer was no.
“We are prepared to do this now,” he said. “We have been collecting data… I see no expense related to this bill.”
A similar answer was given by Don Jayne, at the time a lobbyist for the Nevada Self Insurers Association and later, for five years, himself the DIR administrator. During the existence of the State Industrial Insurance System (SIIS), he had been its general manager.
“We are prepared to do this now,” he said. “We have been collecting data… I see no expense related to this bill.”
Personnel from the state Department of Administration also, according to testimony in the same hearing by labor’s late Jack Jeffrey, had forecast no additional expense.
By September of 2006, however, Bremner was telling lawmakers sitting on an audit subcommittee that DIR was actually not ready to do the report and, indeed, had never caught up with all the new responsibilities lawmakers had given the division in the 1990s.
He said, according to audit-subcommittee minutes:
…the Division presently had databases spread out in many directions. He explained when the Division went from a two-way system to a different two-way system, the Division picked up new functions including enforcement, proof of coverage, a new collection system that was much more complicated, and a claims indexing system that they had never done before. He stated the Division had been through an evolutionary development process ever since then. He noted the Division needs to pull this all together. (Emphasis added.)
Then, another eight years later in January 2014, different DIR staffers speaking to yet another audit subcommittee explained in yet more detail why the 2005 reporting system was still not in place.
By this point DIR had spent well over a half-million dollars with information-technology vendors. Auditors from the Legislative Counsel Bureau — whose 2012 report the audit subcommittee was following up on — said that DIR had not provided “adequate oversight during implementation” of the information system, resulting in a system that “lacks sufficient reporting capabilities” and has “critical shortcomings.”
DIR also “did not have a prioritized approach for ensuring” those shortcomings were corrected, said the auditors, and “didn’t enforce contract terms during the implementation process such as comprehensive end-user testing and holding back final payments until corrections had been made.”
So, the division has gone back to the public well. The executive budget for the 2015-17 fiscal biennium requested, and lawmakers approved, a $2.6 million allocation “to fund a software system to replace several aging databases used for claim indexing, licensing and enforcement.”
According to DIR staffers, this system should finally allow the division to produce the reports mandated by lawmakers in 2005.
The division’s audit problems weren’t limited to the report fiasco. The LCB auditors also found in 2012 that DIR was still ignoring state law regarding multiple statutory deadlines that auditors had earlier found it ignoring in 2004.
Although state law requires outstanding debt to be turned over to the Controller’s Office within 60 days — so that debt can be sent to collection — the workers’ comp section of DIR was still following its own 95-day rule. Moreover, because DIR’s timeline kicked in 35 days after the first notice had been sent out, it actually meant, effectively, a 130-day rule.
Of 42 workers’ comp cases with outstanding debt reviewed by auditors in 2012, 35 cases that should have been turned over to the Controller’s Office were either late or not sent at all.
Steven Miller is the managing editor of Nevada Journal.