Completing a controversial decade of reform designed to save a failing workers’ compensation system, Governor Joe Manchin achieved a stunning victory in his first special legislative session when the West Virginia Legislature passed sweeping changes to the Workers’ Compensation Act on January 29, 2005. The bill was signed into law by the Governor on February 16, 2005.

Senate Bill 1004 establishes a funding plan to pay off the current workers’ compensation debt and phases out the Workers’ Compensation Commission, paving the way for private insurance carriers and a successor to the Commission in the form of an Employers’ Mutual Insurance Company, to provide workers’ compensation insurance to employers. These changes, which are predicted to reduce future premiums for employers and make West Virginia’s system more competitive nationally, will occur over the next seven years. We are providing a brief outline of some of the significant provisions.

Paying Off the Current Debt

The Legislature authorized the issuance of special revenue bonds to eliminate the current workers’ compensation debt of over $3 billion. Finding that the West Virginia Supreme Court has prohibited the repayment of those bonds from general revenues, the Legislature also created new taxes, surcharges, and diverted other special revenue sources to repay the bonds over 30 years, creating an annual revenue stream estimated to be $230 million:

• $80 million ( 56¢ per ton coal severance tax beginning December 1, 2005)
• $8.5 million (4.7¢ per mcf natural gas severance tax beginning December 1, 2005)
• $2.5 million (2.7/8% timber severance tax beginning December 1, 2005)
• $30 million (diverted from the Tobacco Master Settlement beginning July 1, 2005, with an additional $16 million diverted annually beginning in 2008)
• $45 million (dedicated from personal income taxes beginning in January of 2006)
• $45 million (premium surcharges from employers who purchase workers’ compensation insurance from private insurance carriers)
• $9 million (surcharges from self-insured employers once the Commission is terminated)
• up to $11 million (racetrack video lottery terminal income)

The phase-in of these taxes and surcharges, many of which are authorized to be passed through to consumers, continues until the Governor proclaims that the current debt in the Workers’ Compensation Fund (the “Old Fund”) has been paid and that the special revenue bonds issued to pay the debt have been retired.

Termination of the Commission and Monopolistic Insurance System

In 2008, West Virginia will join 45 other states which permit private insurance carriers to offer workers’ compensation insurance to employers. The timeline to implement that goal includes the following deadlines:

6/1/05: The Employers’ Mutual Insurance Company (“Employers’ Mutual) is created to develop a plan to offer workers’ compensation insurance to employers from the termination of the Commission through July 1, 2008.

7/1/05: The Industrial Council is created to: (1) establish policies for the Insurance Commissioner to administer the West Virginia insurance market and (2) to submit budgets to the Legislature. The Commission’s Fraud Investigation and Prosecution Unit is also transferred to the Insurance Commissioner to administer.

12/31/05: The extended terms of the current members of the Workers’ Compensation Board of Managers terminate.

On or after 1/1/06: The Commission is terminated when the Governor proclaims that: (1) the workers’ compensation debt in the Old Fund is satisfied (or a sufficient revenue source secured); (2) a comprehensive financial plan has been accepted by the Insurance Commissioner; and (3) the state’s Employers’ Mutual qualifies to issue workers’ compensation insurance policies in West Virginia.

Once the Commission is terminated:

• The Executive Director of the Commission and the Insurance Commissioner have the sole authority to select which Commission employees are transferred to the Insurance Commissioner, with no grievance process provided. Those employees not transferred are placed on a preferential reemployment list and provided up to $2 million in training funds.
• The Health Care Advisory Panel and Interdisciplinary Examining Board terminate.
• The Occupational Pneumoconiosis Board, the Disabled Workers’ Relief Fund, the Board of Review, the Office of Judges, rate-making authority, regulation of self-insured employers, and other duties of the Commission are transferred to the Insurance Commissioner.

7/1/06: The Commission’s staff become at will employees, and are no longer classified state employees.

7/1/08: All employers who do not self-insure can purchase workers’ compensation insurance from the state’s Employers’ Mutual, and all employers, except state and local governments, can also purchase coverage from private insurance carriers.

7/1/12: State and local governments who do not self-insure can purchase workers’ compensation insurance from the state’s Employers’ Mutual and also from private insurance carriers.

Miscellaneous Provisions

In addition to the anticipated reduction in premiums and the new flexibility which Senate Bill 1004 gives to employers to buy workers’ compensation insurance, the bill contains other favorable provisions, including:

• The Commission has new authority to waive unpaid premiums, interest and penalties due by employers pursuant to final settlements in administrative or civil litigation.
• Employers’ subrogation rights are extended to all workers’ compensation benefits. (Employers were only reimbursed under prior law for a part of workers’ compensation benefits paid to injured workers who recovered money from the party actually causing a work-related injury.) Workers and their attorneys who fail to protect an employer’s subrogation rights lose the ability to deduct attorneys' fees and costs from the employer’s reimbursement.
• Since the state can refuse to sell insurance through the Employers’ Mutual to any applicant effective July 1, 2008, an employer who unsuccessfully attempts to buy workers’ compensation coverage from two private insurance carriers can qualify to buy insurance from an Assigned Risk Fund created for that purpose.
• Employers and claimants can settle workers’ compensation claims without Office of Judges approval. (The Commission’s approval is still required in claims involving subscriber employers until the creation of the Employers’ Mutual.)
• Employers subject to the same collective bargaining agreement can self-insure their workers’ compensation coverage as a group if permitted by the agreement.
• The Commission can enter into preferred provider and managed care agreements with medical fees different from the Commission’s current fee schedule. Once the Commission terminates, private insurance carriers and self-insured employers can enter into such agreements, and can also require injured workers to seek all but emergency medical care from providers approved by the employer.
• No civil law suits or causes of action can be filed by any injured worker against a private insurance carrier, third party administrator or their agents or employees.

Employers should be aware of the following provisions of Senate Bill 1004 which could impose further costs or liability:

• Previous provisions in the Workers’ Compensation Act related to the Commission’s right to collect unpaid premiums from employers remain in the law and are also extended to permit private insurance carriers to sue defaulting employers; to pursue personal liability for premiums due against owners, directors or officers; and to report defaults to government agencies which can revoke or block employer permits, certificates, and dissolution.
• If it is found by the Office of Judges that an order denying compensability, initially denying temporary total disability benefits, or denying an authorization for medical benefits is unreasonable because the Employers' Mutual, private carrier or self-insured employer is unable to demonstrate that there was relevant evidence or legal authority to support the denial, then the claimant is entitled to be reimbursed for reasonable attorney’s fees and costs in litigating the order, including all appeals.
• Private insurance carriers offering workers’ compensation insurance to employers can only contract with third party administrators who have an office in the state, although this requirement does not appear to apply to self-insured employers.

It will take years to determine the true impact of Senate Bill 1004, but the bill is a positive step in the ongoing reform process desperately needed in West Virginia’s workers’ compensation system. For further information about the law or to discuss any workers’ compensation matter, contact a member of our Workers’ Compensation Practice Group.

The author presents these materials with the understanding that the information provided is not legal advice. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using these materials should always research original sources of authority and update this information to ensure accuracy when dealing with a specific matter. No person should act or rely upon the information contained in this publication without seeking the advice of an attorney.