Workers Comp Zone

The Penalty Box-Part One

You’re late on your mortgage payment. You owe a penalty.

You’re late on your credit card payment. You owe a penalty.

You’re late on your cell phone bill. Your service probably gets cut off.

But if you’re a California workers’ comp insurer and you are late on payments, what happens to you?

The answer? It depends.

The California Workers’ Comp Appeals Board issued a ruling last week clarifying penalty rules, Ramirez vs. Drive Financial Services and One Beacon Insurance. We’ll look at that. But first, some background.

For years, California law under Labor Code 5814 allowed penalties for unreasonably delayed payments of up to 10% of the “species” of benefits delayed.

Later, an automatic penalty for late payments was enacted, Labor Code 4650(d). Conceived as a “self-imposed penalty”, 4650(d) required the insurer to automatically add 10% to any late payment of temporary disability, permanent disability, or vocational rehab maintenance allowance. 4650(d) did not require a judicial finding of fault or “unreasonable delay”. Rather, 4650(d) was like the added payment you might make if you fail to pay your mortgage on time, sort of like an automatic late fee. This does provide some incentive for carriers to pay
benefits in a timely fashion.

The real kicker was the 5814 penalty. Insurers could be tagged with large penalties if there was “unreasonable delay”.

But the problem? Since the penalty amount was based on the “specie of benefits”, penalty amounts were tied to what amounts of a particular benefit had been paid out. In mature cases with large medical treatment and large indemnity costs, 10% of the specie of benefit might be a five-figure sum, or even more.

Some applicant attorneys went prospecting for penalty claims.

The unreasonable delays of medical treatment or temporary disability undoubtedly caused medical or financial suffering in many instances. The possibility of significant monetary penalties acted as an incentive for carriers to pay benefits and for attorneys to press aggressively on delay issues.

But in many other instances the imposition of a 10% penalty for a single delay created a windfall when the penalty was assessed against an entire specie of benefits. Moreover, there were penalties on penalties.

The remedy was at times excessive.

Frankly, the applicants bar was in denial over problems with the application of former 5814.

And thus The Golden Goose does sometimes get killed.

As part of the SB 899 reforms, Labor Code 5814 was amended. Penalties are now allowed at the discretion of the WCAB for unreasonable delay or denial of compensation up to 25% of the amount delayed or denied, or up to $10,000, whichever is less.

An employer can avoid the potential 25% penalty by paying a self-imposed 10% penalty along with the delayed payment if made within 90 days of discovery, if delay is discovered by the employer before the employee makes a claim for penalty.

Labor Code 5814 now provides that any 4650(d) automatic penalty is credited against the 5814 “unreasonable delay” 25% penalty.

Penalty litigation has slowed considerably, partly due to the automatic penalty offset and partly due to the imposition of ACOEM medical treatment guidelines, second surgical opinion procedures, medical provider networks and utilization review.

Moreover, collecting a 25% penalty on delay of a $1,000 MRI is simply not cost effective in the majority of cases from a litigation expense-standpoint.

Thus, penalty issues lack the urgency that they had several years ago.

But under what circumstances will the WCAB exercise its discretion to award 25% penalties?

What factors are relevant to the imposition of a penalty?

Is the impact of the delay on the disabled worker a relevant factor?

Does the worker’s attorney has a right to do discovery on defendant’s claims handling practices?

Ramirez vs. Drive Financial Services and One Beacon Insurance Co. answers some of these questions.

Here is a pdf copy of the WCAB en banc decision in Ramirez vs. Drive Financial Services and One Beacon Insurance Co.: … 8-EB-3.pdf

In my next post I’ll provide more commentary on Ramirez.

Stay tuned.

Julius Young
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Category: Understanding the CA WC system