November 2007 - Highlight

November 2007 Highlight Article: Law Court Addresses Coordination of Benefits Issue

In two new cases, the Law Court has provided guidance on two important aspects of the coordination of benefits provisions of the Maine Workers' Compensation Act, section 221. This section addresses how workers' compensation benefits coordinate with receipt of other benefits, such as funds for disability, retirement and other payments. In Nichols v. S.D. Warren/Sappi (2007 ME 103, __A.2d__), the Law Court upheld a hearing officer's decision that the employer could reduce workers' compensation benefits on account of benefits received under a disability payment feature of an employer-funded group insurance policy.

In Foley v. Verizon (2007 ME 128, __A.2d__), the Law Court upheld a hearing officer's decision which had allowed the employer to immediately discontinue weekly workers' compensation benefits in coordination with an employee's lump-sum pension payment, basing the offset upon the amount he could have received under a periodic monthly payment option.

In Nichols, the legal issue in dispute was whether an employer-provided life insurance benefit (part of the group benefits package) was subject to set-off pursuant to section 221 of the Act, which provides for coordination in the case of disability insurance. The benefit in this case included a life insurance policy which could be converted into a disability benefit if the employee became permanently and totally disabled. The employee applied for benefits pursuant to the permanent and total disability benefit feature of the policy, was deemed eligible, and proceeded to accept a lump-sum payment in the amount of $58,000.

The employer filed a petition to determine its entitlement to offset the lump-sum payment, and the hearing officer determined that the benefit was paid out under a disability insurance policy within the meaning of section 221 of the Act. The hearing officer ruled that the employer was entitled to a "holiday" against future incapacity benefits until those benefits exceeded $58,000. The hearing officer later motioned the Court to correct his decree so that it reflected that the employer was entitled to a holiday until the after-tax amount of the $58,000 payment was exceeded.

On appeal, the Court grappled with whether the employee's receipt of $58,000 was, at its heart, a disability insurance payment made pursuant to a "disability insurance policy," as required under section 221, or instead a life insurance payment. Life insurance payments are not generally coordinated with workers' compensation benefits. Because "disability insurance policy" is not defined under the Workers' Compensation Act, the Court reviewed a number of authorities ranging from insurance treatises to provisions of the Maine Insurance Code. The Court ultimately concluded that the payment qualified as a disability payment, as it was payable upon a showing of permanent and total disability and was designed to replace lost income due to an inability to work. That the payment was made in one lump sum was of little consequence to the Court's analysis.

The Court further endorsed the reasoning behind the hearing officer's conclusion that the disability payment was made pursuant to a "disability insurance policy" as required by section 221. The hearing officer had reasoned that because the group insurance policy contained both life and disability features and payment was made to the employee on account of her disability, the payment arose under a "disability insurance policy" as required by section 221. The Court concluded that the hearing officer's reasoning not only "comports with common sense" but that the plain meaning of the term "disability insurance policy" includes payment of disability benefits under a policy which provides multiple coverages.

In Foley, the Court took up the task of another important coordination of benefits question: the means by which an employer may offset an employee's receipt of a lump-sum pension payment against payment of workers' compensation incapacity benefits. The employee was out of work on account of a 2003 injury, and then he retired in 2004. He chose to receive his accrued pension in one lump-sum payment in the amount of $355,000. In addition, he collected a $500 a month "social security" benefit paid by the employer. Without any notice or apparently any Board filing, the employer immediately stopped paying incapacity benefits. The employee contested the discontinuance and ultimately filed a petition for award. The parties presented various arguments addressing the propriety of the employer's unilateral discontinuance and the means of determining the appropriate weekly offset, if any.

In what was likely a surprise to many, the Court ruled that the employee's pension benefits were subject to an immediate offset, i.e. the employer did not need to file a 21-day letter (WCB-8) in this situation. The Court reasoned that because section 221(3) states that "[b]enefits . . . must be reduced" and prior case law had endorsed an "immediate" coordination of payments from a benefit plan, the typical requirements of section 205(9)(B)(1) (which sets forth the requirement of giving 21 days notice before reducing or discontinuing benefits when payments are being made voluntarily) does not apply.

As to the mechanism for calculating the weekly offset, the Court followed the hearing officer's lead in rejecting all methods proposed by the parties. Because the statute and Board's rules do not address the method for how to offset a benefit payment made in one lump sum, the Court was required to analyze the Legislature's intent in passing the coordination of benefits provisions of the Act. The Court noted, as it has many times in the past, that the historical purpose behind the coordination of benefits provisions was to prevent a double recovery or "stacking" of benefits while still allowing for "minimum income during the period of an employee's incapacity." In the end, the Court rejected the employee's argument that the employer was only entitled to offset the lump-sum payment in the week in which it was paid because such an approach was inconsistent with the intent to prevent double recoveries and would cause an "absurd or illogical" result.

The Court also rejected the employee's secondary argument of dividing the after-tax lump-sum payment by his life expectancy because the approach did not utilize the benefit tables. Last, the Court rejected the employer's suggestion that it was entitled to a payment holiday until the lump-sum was fully depleted by incapacity payments which were otherwise payable.

In the end, the Court followed the hearing officer's method of utilizing the monthly pension amount the employee could have received in lieu of the lump sum payment and proceeded to convert that theoretical monthly payment into a weekly figure before offsetting against incapacity benefits otherwise owed. The Court endorsed the hearing officer's use of the Workers' Compensation Board's benefit tables for these calculations, noting that it served the purpose of the coordination of benefits provisions, was not otherwise prohibited by rule or statute, and was "better than any of the alternatives offered by the parties."

I see two important questions that were left unanswered by the Foley decision. While it is clear that the section 221(3) benefit payments (pension, retirement, old-age and disability benefits), in addition to unemployment benefits under section 220, can be immediately coordinated when payments are being made voluntarily, will the same hold true for coordination when incapacity benefits are paid pursuant to a payment scheme, such as Board-ordered payments or payments made after formal acceptance of a claim "with prejudice"? Second, although the employer in Foley did not file any notice that it was discontinuing benefits, is it nonetheless appropriate to file a WCB-4, Discontinuance of Compensation? The prudent answer to the second question would appear to be a straightforward "yes," though the Court appears to have glossed over this important aspect of the discontinuance process.

The answer to the first question is a bit more uncertain. While the language of section 205(9)(B)(2) requires a party to file a petition before reducing or discontinuing benefits when a payment scheme is in place, the language of section 205(9)(B)(1) similarly requires the filing of a 21-day letter in a voluntary payment situation. Given that the Court has now allowed an exception to the 21-day notice requirement in a voluntary pay situation, there seems to be no principled reason why it would not conclude that the same exception would apply to coordinating benefits when a payment scheme is in place.

As the Foley and Nichols cases both evidence, however, determining how the offset is calculated can be subject to differing interpretations. If there appears to be a difference of opinion as to the amount of the weekly offset entitlement when a payment scheme is in place, the prudent course of action still may be to file a petition to ascertain the appropriate offset. The individual circumstances of the case will likely dictate how an employer should proceed.

Darby C. Urey, Esq.