The decision is in and the employers won. Judge Richard McMonagle decided the Bureau of Workers’ Compensation (“BWC”) overcharged employers who did not participate in group rating from 2001 to 2009. Many of those could now receive refunds based upon the court’s future calculations. No damages have yet been determined, but the amount may range from $800,000 to $1.3 billion. Before spending the money, employers should know that this is subject to appeal. The checks are not, as they say, in the mail. 

Judge McMonagle’s 28-page Opinion is detailed and thorough. He rejects the employers’ constitutional equal protection argument because the group rating program did have an effect on encouraging safety in the workplace, which is a legitimate state interest. For constitutional purposes, that is the acid test. 

However, the Judge found the program violated two state statutes. First, the specific statute which enabled group rating said it should be “retrospective.” The group rating program adopted by the BWC clearly was prospective. The difference is that a retrospective program requires that the employer pay lower premiums but then pay actual claims or some portion of actual claims “retrospectively.” 

A prospective plan, on the other hand, uses the employers’ risk experience to determine what the rates are this year, and once those premiums are paid, that is the end of it. This was not a retrospective plan and the Judge ruled that as such it violated the statute. 

As an aside, when the statute was passed, I doubt the General Assembly or any of the commentators at the time thought seriously that the BWC was going to produce a group retrospective program in lieu of a prospective program. How the word “retrospective” crept into the statue is everyone’s guess. 

Second, the Judge found that the plan violated the statutory requirement that the BWC adopt “fixed and equitable rules controlling the rating system.” The Judge found that the rules were certainly fixed, which they were, but not equitable. 

In making this determination, he has unassailable testimony from the BWC’s own experts who said they were aware that the group rating program was producing inequitable results for non-group employers as far back as 1994, and certainly within the class period starting in 2001. Thus, the BWC acted inequitably. 

The issue then became whether or not the BWC is obligated to repay the employers. The answer is yes: the BWC is required to repay those employers who were, in one year or another, not in group rating from 2001 to 2009. There is a limit: only employers in certain hazard classifications whose premiums were off-balance more than 23% will receive reimbursement. 

So the question now is how much? In this regard, the Judge accepted the plaintiffs’ expert on damages, and essentially rejected the BWC’s expert. Their opinions differed, according to the Judge, in how they treated dividends, and that difference was “staggering.” 

Apparently, the expert for the plaintiffs determined that dividends were a discount and the application of the dividends to the non-group employers would only reduce the amount of damages. Indeed, according to the plaintiffs’ brief in this case, their expert determined that the damages should be $1.3 billion, taking into account the dividend treatment as he saw it. The BWC’s expert calculated dividends differently, resulting in little or no repayments to the non-group employers. The Judge entirely accepted the plaintiffs’ expert’s evaluation, and said damages would be determined using that calculation. 

The Judge was, however, unable to determine exactly what the amount should be because the BWC, on the eve of trial, produced additional information that needed to be factored into the expert’s calculation. For that reason, the decision on how much the repayment should be has been extended. 

Evidence as to the damages is to be submitted to the Court by January 28th, with the BWC’s calculations submitted a month later and a hearing to be held on March 14, 2013. The Court will decide subsequent to that. 

For employers in the group some of the time, the Judge rejected the BWC’s request that there be a “cross-subsidy.” The cross-subsidy would be a reduction of the amount of damages to a particular employer who participated in group for one year but did not participate in the following year (i.e., an employer subject to the unfair non-group treatment in the one year but then rewarded with group treatment the next). The Judge rejected the cross-subsidy argument. He said each rating year would stand on its own. Non-group employers will receive a refund for the years that they were not in group, if otherwise qualified. 

The damages are predicted by plaintiffs’ counsel to be $1 billion. That is essentially one half-year premium for the entire system. The employers could receive a fairly substantial premium refund if, in fact, the figures justify it. It all depends upon their payroll for the period in question and how many years they were actually excluded from group rating. 

As noted in my last legal update, the BWC has the money. As of the end of the last fiscal year, the BWC had $7 billion in net assets, essentially monies which are allocated to take care of contingencies such as this. For the BWC, the damages appear manageable. For the individual employers, and particularly those excluded from group for the entire eight-year period, the amount could certainly be material.