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Ah, reserving: A basic foundation
for insuring against claims; a potential time-consuming activity
required from our clients; a dam preventing settlement.
Reserves
are the lifeline for costs and operations of an insurance carrier
or self-insured client. They affect operating margins, tail coverage
and retrospective rates. Loss experience is a fundamental factor
in determining workers’ compensation premiums.
My mentors taught
me over twenty years ago that a good file is a closed file. In order
to close a file, the adjuster needed to provide me with sufficient
authority for settlement. That settlement authority was primarily
based upon reserving, as well as several other factors. In this article,
we will discuss the factors of reserving in order to provide our
clients with sufficient information upon which their reserves may
be based.
This article is not intended to usurp the adjuster’s
or carrier’s rules concerning reserving. In many instances,
the carrier does not want their attorney to be directly involved
in the reserving process. This article is intended to provide a better
understanding of reserves in order to enhance the attorney’s
customer service for the client. By doing so, we may have a better
opportunity to obtain proper settlement authority without significant
delays, delays which could negatively impact settlement negotiations.
Is Reserving an Art or a Science?
Reserves require analyzing indemnity,
medical and other allocated and unallocated expense factors. The
analysis is based upon the adjuster’s experience, carrier’s
reserve guidelines, and legal requirements. Reserves take money out
of operations and profits. So, it is important that proper reserves
are set.
Most carriers require some form of Reserve Factor Worksheet.
The client will consider indemnity, age of the injured worker, work
injury history, prior lost time, return to work status, type of injury,
and the employer’s/employee’s willingness to return to
work and the treating physician’s willingness to order a return
to work.
Obviously, some of the factors are “hard”, number-based,
and easily identified. Others, such as “willingness” factors
and type of injury, require a high degree of experience and subjectiveness
on the part of the examiner.
Indemnity Benefits
The list for indemnity benefits includes temporary
partial disability (TPD), temporary total disability (TTD), permanent
partial disability (PPD), permanent total disability (PTD), supplemental
job displacement benefits, death benefits, dependent’s benefits.
When analyzing a file, the attorney should always consider the actual
and potential value of each of the indemnity factors and advise the
client of their opinion. By doing so, the adjuster should have notice
of the benefit amounts and will not claim any surprise when you seek
settlement authority.
Medical Factors
On a regular basis, the defense attorney should receive
an updated accounting of benefits. This accounting, when properly
analyzed with the medical information, will provide the attorney
with an opportunity to advise the client of the expected future medical
expenses.
Allocated medical factors include physicians, hospitals,
diagnostic testing, specialist costs, medications, transportation
expenses, attendant care.
Unallocated costs/expenses are typically
medical-legal reports, expert testimony, peer review, bill review,
attorneys, and investigators.
Depending upon the client, MSA costs
may be partially divided between the allocated and unallocated expenses.
Best Practices for Adjusters
For adjusters, the reserves should be
based upon the review of current medical reports. What is the nature
and extent of the injury? What is the probable ultimate value of
the claim? When MMI is achieved, are changes in the indemnity and
future medical analysis required?
The attorney should analyze the
costs and report his/her opinion concerning the injured worker’s
return to work status, medical treatment requirements (probable vs.
possible), PD rating, Almaraz/Guzman/Ogilvie issues, MSA
necessity.
The attorney should keep in mind that accuracy and flexibility are
required in order to obtain the proper settlement analysis. The attorney
must be able to explain the reasoning behind the expressed opinion.
By continuing to analyze all factors and reporting on them to the
adjuster, the attorney should be able to obtain proper settlement
authority without the need for delay in obtaining the necessary settlement
authority.
Self-Insured Plans [SIP]
Labor Code sections 3702 et seq. and 8 CCR
15300, 8 CCR 15400.2 provide SIP reserving requirements. They require
a realistic estimate of future liability listed on the annual SIP
report. The reserves must represent the probable total future cost
of estimated future medical liabilities. The reserves must include
estimates for 132a, LC 4553 and/or LC 5814 liability.
Section 15300 requires the use of a higher PD rating unless sufficient evidence
exists to support a lower estimate. If the injured worker is not
MMI, the reserves must be based upon projected costs for the total
anticipated period of treatment throughout the life of the claim.
Once MMI is achieved, the estimated reserves should be calculated
on the average annual cost of the past three years after MMI status,
or a lesser period (if less than three years). Those costs are to
be projected over the life expectancy of the injured worker and must
include additional reasonable medical procedures expected over the
life of the claim.
These factors may be utilized by an attorney to
assist in evaluating the cost of the claim. By reviewing the accounting
of benefits, subtracting the one time medical expenses and obtaining
an average of cost over a period of time, the attorney is in a good
position to advise the client of the future costs.
The law does not
allow the future medical reserves to be reduced on undocumented anticipated
reductions in frequency of treatment or lower cost of treatment.
PD estimates require documentation to support apportionment. U.S.
life expectancy tables are to be used to determine the worker’s
life expectancy.
Conclusion
Proper reserving is the life line of any insurance operation.
Reserves affect past, present and future costs, including tail coverage,
operating margins and profits. With an understanding of reserving,
a defense attorney’s analysis will provide better customer
service for the client. The client should not be surprised with unexpected
costs. By continually providing cost analysis, the defense attorney
should be able to obtain proper settlement authority without undue
delay.
A good file is a closed file. Period.
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