Keefe, Campbell & Associates, LLC

Editor’s comment: We were asked this question by one of Illinois’ top risk managers. We want to make sure all of our readers know our thoughts as veteran defense attorneys in this difficult state.

It is our assumption some or all of the work the independent contractor will provide will be a dominant part of the business relationship and the person won’t be doing work for numerous other organizations. In such an instance, it is our legal opinion, in reliance on numerous years of practice at the Illinois Commission; every wise risk manager should require the independent contractor to obtain a policy of workers’ compensation insurance for the work they are going to provide for your organization. We urge you not to rely on “independent contractor” status as the sole defense to a serious workers’ compensation claim.

In fact, to insure the coverage is in place, you may want to consider actively shopping for coverage and buying it for them and passing that cost along to them as a deduction from the contractual price. Either way, be sure to put the concept into the written agreement. That way, you can be certain the policy is initially in place, you will know when it is renewed and you will always be sure premiums are continuously paid.

It is our understanding such insurance is not wildly expensive, particularly for one worker. Check with your broker.

The primary concern in not being absolutely certain independent contractors have full workers’ compensation coverage is the scenario in which the independent contractor is found dead of a heart attack surrounded by papers or other products upon which he or she was working for you. By the way, if the man or woman died of a heart attack doing anything at home, it would be possible for the surviving spouse to bring/drag the person to the area where they would typically work to then make a claim for 25 years of tax-free workers’ compensation benefits. While we understand that may be considered unusual, the members of this firm have seen many strange things happen in our years of defense practice.

For example, we know of an “independent contractor” who fell down at home. He made the claim for a broken wrist asserting he was carrying a box of files. The gossip at the office was the claim was totally bogus and he just wanted to profit from a broken wrist, having fallen in a bathtub. We have no idea if there is any truth to any part of that story other than to confirm claimant did get a settlement for an injury occurring at home.

In our view, such claims are virtually impossible to dispute on the issue of accidental injury. All claims involving accidents for “independent contractors” will be similarly hard to investigate and dispute.

We also want to insure all of our readers clearly understand there is no document you or I could draft to insure an independent contractor who later becomes a workers’ compensation claimant will be fully responsible for their own injuries, particularly if the injuries are severe. All such documentation will be admissible as evidence and may or may not be considered controlling in this state.

The Arbitrators and Commissioners do not consider such documents a “lock” as a defense. They look at the totality of the circumstances and will consider the documents in the context of all other facts presented. We agree with that approach—if they didn’t do so, every gas station attendant, retail clerk and paralegal would be forced to sign “independent contractor” agreements as a condition of employ.

Therefore, you still have to prepare and defend the claim filed by an allegedly independent contractor—the Commission doesn’t allow summary motions on such issues to avoid lengthy litigation. We always tell clients to assume a scenario in which the “independent contractor” is severely injured and leaves a destitute spouse and seven starving children. Assume the impoverished children are all pictured on the local TV news and front page of numerous newspapers and websites. When interviewed, the reporters could easily point to the fact all work being done at the time of the catastrophic injury was solely for your company.

So, why won’t your big company help out this starving family? The pressure on your organization and eventually on its risk managers, as the “evil big company” to pick up workers’ compensation coverage could potentially be enormous and very uncomfortable. You would be much, much better suited to simply say, “we thought of that” and insure the family has fully-paid for WC coverage.

The overall concern is exposure. The minimum cost of a death claim in Illinois is over $600,000. The maximum cost of a death claim in Illinois is over $1.6 million dollars. We have one claim in our office right now in which a worker “bent over” in 1993 and allegedly injured her back. She is still being treated today in “pain management.” She has undergone numerous and sundry surgeries. Medical bills exceed $2 million dollars. We took over the file six months ago. The matter hasn’t yet been tried but exposure is clearly several million more dollars.

Even “minor” files can be problematic, as you well know. It costs nothing to file a claim at the IWCC—if the independent contractor develops carpal tunnel syndrome and is fired for poor performance, they could readily find an attorney who might be willing to file and make the claim for them. Despite our claim of independent contractor status, you would still have to fight the matter and set reserves and expend legal fees to fight. We would project needed reserves for such a claim to be $50-75K. That money could be tied up for several years, even if you hire solid defense counsel and win. All of such concerns are eliminated if our recommendations above are followed.

In summary, if you are concerned about such exposures, the best way to avoid risk is to insure all independent contractors have their own coverage or coverage you force upon them. In that setting, they are truly “independent.” Anyone who tells you different doesn’t understand the Illinois Commission and the strange twists and turns of major, high-exposure workers’ compensation claims.

If you need additional research or case law on this issue, let us know. We appreciate your thoughts and comments.

Editor’s comment: When you offer STD and group health care, don’t “deny” WC claims—just drive them into the lower cost path. Our research indicates workers are continually analyzing and comparing disability benefit offerings against potential workers’ compensation payments to learn which of the two systems provides easier and more lucrative benefits. Then they are steering disability and injury claims into respective the work comp system or disability benefits area, depending on which would provide the greatest or possibly longest-running payments.

Our sources and research indicate “benefit shopping” is driving some employer’s severity and exposures higher and higher. The concept is being fueled by the biggest recession of our lives and workers who face layoffs and an uncertain future.

Our focus is to avoid fully and adequately investigating a claim and then “denying” it as workers’ compensation. We feel this practice unnecessarily acts like a “slap in the face” to someone who truly has a problem. We feel you are much better served to try to keep the employee happy by letting them know you have a system that is a viable alternative to workers’ compensation. The only significant difference between group health care and STD in relation to workers’ compensation is permanency—in Illinois, avoiding PPD is a win-win for Illinois business. And most health care and STD systems already implement UR and lost time in a way our Illinois WC system has not yet caught up to.

So when you get a new claim of injury, have everyone fill out your accident form and HIPAA-compliant release. If you fully investigate and learn there are questions about the compensability of the claim under WC, don’t “deny” it, just shift the employee’s focus to your STD and group health care systems.

If you have thoughts and comments about this approach, please send a reply.

Editor’s comment: In Illinois and most states, owners, officers and partners of a company can opt out of workers comp coverage. Section 1(b)(3) of the Illinois Act defines employers and says: “Every sole proprietor and every partner of a business may elect to be covered by this Act.” Case law interprets this to allow partners and owners to avoid ever-increasing workers’ comp premiums.

In some states, they are starting to see charlatans and neer-do-wells try to exploit this otherwise simple exemption into a scheme to avoid paying premiums. The Contractors Asset Protection Association (ConAPA), a company based in California, sought to help companies avoid workers’ comp premiums by designating employees in high rate occupations as “corporate officers.” The ConAPA company website seems to have gone down. The California exemption applies to company officers who are also the sole shareholders of a corporation. So the folks at ConAPA don’t just have employers give high wage workers inflated titles, they issue workers relatively worthless shares of stock. ConAPA focused on industries with high injury rates and expensive comp costs such as roofers, maintenance workers and cooks.

Using their strange business model, a housekeeper might become a “senior vice president, facilities.” A roofer became “VP for environmental protection.” A baker might be the “Vice-President of Dough-Making.”

California Attorney General Edmund G. “Jerry” Brown has filed a lawsuit to stop the Contractors Asset Protection Association, Inc. from engaging in a “sophisticated and fraudulent scheme” to cheat the state workers compensation system. “This company falsely promised its clients that if they gave their employees empty titles and worthless shares of stock they could avoid tens of thousands of dollars in workers compensation premiums,” Attorney General Brown said. “But you can’t simply call a security guard a vice president and avoid complying with the law through a sophisticated and fraudulent scheme.”

This lawsuit seeks a permanent injunction barring Contractors Asset Protection Association, Inc. (ConAPA) and its founder-president from engaging in unfair and deceptive business practices in violation of sections of the California code. The lawsuit also seeks restitution and civil penalties of no less than $300,000. The lawsuit alleges ConAPA sought to exploit a legal exception to the workers compensation law, where directors of a corporation who are also the sole shareholders can exempt themselves from workers’ compensation coverage. Under this scheme, ConAPA marketed and advertised an unlawful business plan urging employers to misclassify rank-and-file employees as “corporate officers” and issue them nominal shares of company stock so as to avoid paying workers’ compensation insurance premiums. Despite the titles, many workers were not assigned any managerial or administrative duties and performed the same rank-and-file duties for the same pay that they performed prior to their “promotion.” ConAPA ensured that its clients were able to prevent their new “officer-shareholders” from gaining control over the business. Employees were also required to sell their shares back to the company if they left the company. ConAPA apparently told its clients this business model was “legal” and implied the program had been scrutinized and approved by several state authorities, which it had not.

We caution the sharks in the insurance industry to stay out of Illinois waters with this silly scheme. We are pretty sure Illinois Attorney General Lisa Madigan would be on it faster than the ink dried on the policy. If you have thoughts or comments, please send a reply.

Editor’s comment: We were sent this concept by one of our readers and we read it with some chagrin. A silent PPO is not actually “silent” or a PPO; it is someone taking a medical discount to which they may not be entitled. We consider the concept an anomaly in the age of computers. It is sort of like “phone cloning” problem of about a decade ago—if you don’t want folks stealing phone service, make it hard for them to do so. The same thing should apply to medical payment discounts for both WC and group payments. We truly feel doctors, hospitals and other caregivers need to tighten security on their discounting and not worry about correcting it in the courts. We will have to watch and see how silent PPO class action litigation may affect workers’ compensation claim handling but we assure doctors, hospitals and everyone involved in selecting and paying for medical care, you need to watch this outcome as it may have dramatic consequences for your industry.

In tiny Madison County, IL, the land of big-shot Plaintiff lawyers, class actions and asbestos claims, a judge will consider during a February hearing whether to certify a class that would include all Illinois and Wisconsin medical providers in a lawsuit that targets so-called silent preferred provider organizations. A class action Plaintiff attorney filed the motion for class certification in the suit of Frank Bemis and Associates v. Employers Mutual Casualty Co., because the case is representative of the many others in Illinois and our sister states. The Madison County Circuit Court recently rescheduled the hearing for Feb. 11, where Plaintiff’s counsel will argue to create a class that could include all of Illinois’ 10,000 to 15,000 medical providers and all of the providers in Wisconsin as well. The chances for class certification are high because Illinois’ appellate courts have upheld smaller class certifications in similar silent PPO cases, such as Fischer v. General Casualty Ins. Co. of Wisconsin et al. which is currently ongoing. In that case, the Illinois Supreme Court declined to hear an appeal of an order granting class certification.

Plaintiffs in this case allege they have been underpaid by approximately 20% of their medical services/bills, and the time frame of each potential class participant would vary considerably. The Illinois Legislature’s approval of a workers’ compensation fee schedule in 2006 will also play a role in the amount of damages in the case.

The term ‘silent PPO’ refers to an unusual but somewhat common practice in which an entity responsible for paying medical claims takes a discount for which it has not bargained and to which it may not be entitled. The term originated in the early 1990s when preferred provider organizations were usually involved. Today, the practice extends into many forms of networks, including managed care networks, insurance companies, and third-party administrators for both group health and workers’ comp bill payers. The term ‘silent’ is used because the provider, when rendering services, either does not know that the payer will be taking a discount, may not care or may possibly be misled by the PPO that it is entitled to a discount when it is not. Only after the services have been rendered and the claim has been processed is the provider informed in the explanation of benefits form that a discount was taken. Even at this point, the payer that took the discount, or the network that arranged for it, usually continues to represent the discount was appropriate because it was taken under a “valid agreement.”

The American Medical Association believes silent PPO activity may be fraudulent. It has been estimated medical providers nationwide have lost between $750 million and $3 billion dollars annually since silent PPOs became common in the early 1990s. Again, we feel this problem points to a need for better computer controls and auditing of EOB’s by medical institutions, physicians and other healthcare providers.

Silent PPOs exist because some networks with direct, valid agreements with hospitals for negotiated rates sometimes “lease” or “rent” their rates to third parties or to third-party networks. In return, they may receive a fee from the uncontracted payers. This increases the volume of claims the networks discount, thereby allowing them to represent to their clients and potential clients they can save them substantial money. But these “savings” consist of unsuspecting providers’ lost revenue.

Hospitals enter into agreements with entities responsible for paying for health benefits, or with networks that represent these payers. By means of these agreements, hospitals agree to provide services for negotiated rates that are less than billed charges for covered services, in exchange for the contracting party’s promise that it will require its constituency to encourage its members (patients) to use the hospital’s services. This encouragement, called “direction” or “steerage,” is usually in the form of financial incentives to patients, such as lower copayments or deductibles. Patients are told they will receive economic benefits by going to a preferred hospital. The entities represented by the contracting party are required to offer direction to the hospital by, for example, including the hospital’s name in their plan benefit documents, marketing materials, and telephone contacts as a “preferred” hospital. The exchange of increased patient volume for lower rates is the very basis of the agreement for the hospital. Thus, entities that take discounts without such direction may violate the hospital’s intent. Well-written agreements expressly provide direction is the basis of this bargain, explain that it is a material term to the contact, and require discounted rates be granted only where there has been prior patient direction.

Our point about all of it looks to computer capabilities in the 21^st Century—we truly feel hospitals, doctors and other medical providers should have a duty to watch out for yourselves, just like any retailer. If you give me a discount for a specific reason, you should have to keep track of it. If you don’t, please don’t go to the courts crying about it. For example, if I “lease” a retail discount to a relative and you let my cousin have the same discount because he says we are related, the doctor or health care provider should have to know they are now extending their largesse to someone else.

We thank the reader for the topic and her input. If you have thoughts and comments about the issue, please send a reply.

Editor’s comment: Here is a little-known Illinois legislative provision for your consideration. In this very tough economy, please read carefully and save every penny you can. Please understand Illinois death benefits are wildly high—we understand they are the second or third highest of the fifty United States. While we feel bad for widow(er)s and children, we truly feel death benefits have to be reasonably brought into line with our sister states, particularly when you remember this is a no-fault system and the worker may be part of the cause of his/her passing and benefits will still be due. It is also very unusual to see someone making $150 per week whose widow(er)s and dependents then get tax-free death benefits at a rate triple what their spouse/parent was making at the time of their passing.

The current Illinois death benefit minimum is $456.28 times 52 weeks times 25 years or $593,164.00. The current maximum is $1,216.75 times 52 weeks times 25 years or a cool $1,581,125.00.

If you already have a policy of life insurance for your associates, you can get credit for such benefits against workers’ comp death benefits that may also be due. The life insurance policy has to state the benefits will be paid in lieu of workers’ compensation death benefits. We are confident very few health, risk and safety managers know this little-known facet of Illinois WC law and practice. If the life insurance policy clearly states the insurance benefits are to be paid in lieu of workers’ comp death benefits, your organization saves the full value of the policy in the event of the untimely passing of an employee in a work-related accident. Please note the worker’s family and dependents will still get the full WC death benefit outlined above. The money will either be paid completely from your WC program (with the life insurance paid on top of that benefit) or it will be paid by both your WC program and the life insurance policy.

Please understand claimant lawyers typically don’t want such credits to be allowed. If there is a dispute about coverage and they win WC benefits for their clients, they don’t get a fee on the life insurance policy credit. You have to make certain the credit is very clear in the policy language. We ask all of you to take a look at the coverages afforded to insure you know whether you are going to get a credit or not. If you want a KC&A lawyer to review the policy provision, send it along and we will give you our opinion at no charge.

For one of our insurance client’s accounts, we were advised there was a $500K life insurance policy paid for by the account on their workers. The account would immediately save $500K on any death claim for their workers if you simply have the account or its insurer make the life insurance benefits payable in lieu of workers’ compensation death benefits due under the Act. The account could also save on the workers’ compensation premiums. If the life insurance policy doesn’t say the benefits are to be paid in lieu of workers’ comp benefits, the widow(er) gets both the full WC death benefit and the life insurance proceeds.

If you want the savings, please, please, please have your life insurance policies changed or let us review it at no charge.

The Illinois WC Act says:

Section 4(I): If an employer elects to obtain a life insurance policy on his employees, he may also elect to apply such benefits in satisfaction of all or a portion of the death benefits payable under this Act, in which case, the employer’s compensation premium shall be reduced accordingly.

We are certain the “election” has to be made prior to the passing of the employee. Please reply or call if you have further questions.