Don't Overlook Second-Injury Funds

​It began with a noble idea: provide state workers’ compensation funds to encourage the hiring of employees with disabilities—especially disabled veterans—who might be rejected because their pre-existing conditions increase the risk of future medical and cash benefits payments.

Such "second-injury" funds were once nearly universal. Begun in the early 1900s and expanded after World War II to cover nearly all states, these supplemental workers’ compensation funds pay the portion of claims caused by pre-existing conditions. Now they are under fire, challenged by what critics allege is a system with a faulty premise, fiscal and bureaucratic shortcomings and an overlap with the Americans with Disabilities Act (ADA).

Since 1992, 19 states and the District of Columbia have passed legislation to abolish or phase out second-injury funds, including Alabama, Colorado, Connecticut, Florida, Georgia, Kansas, Kentucky, Maine, Minnesota, Nebraska, New Mexico, Rhode Island, South Dakota, Utah, Vermont, West Virginia and, most recently, in 2007, Arkansas, New York and South Carolina, according to the American Insurance Association (AIA).

Despite the trend toward abolition, second-injury funds remain of interest to multi-state employers because claims on such funds tend to be for permanent disabilities that can amount to enormous taps on experience-based insurance policies.

The percentage of employees who have pre-existing conditions is higher than many employers realize, says Frederick Uehlein, chairman of Framingham, Mass.-based Insurance Recovery Group. His organization assists insurers, third-party administrators and large self-insured employers in identifying and processing potential second-injury fund claims to obtain recoveries. "For every 100 cases we look at, we find half have pre-existing conditions," he says. And, employers should be aware that even some states repealing or phasing out funds continue to accept new claims related to periods before the legislative action or another specified date.

Self-insured employers often identify and process potential second-injury fund claims themselves. But even employers served by insurance carriers, who usually perform this function for policyholders, should have such funds on their radar, experts say. Under an experience-based policy, a single eligible claim missed by an employer or its insurer could result in a hefty premium increase. And while insurers say they look for such claims, their expertise and interest in doing so varies, some experts say.

Margaret Spence, chief executive of Boca Raton, Fla.-based Douglas Claims & Risk Consultants Inc. says, "The average smaller employer is not getting its share of benefits from the second-injury funds."

Spence, a member of the Society for Human Resource Management’s Employee Health, Safety and Security Special Expertise Panel, insists, "If the employer’s policy is not a guaranteed-cost policy and is experience-based, it could be impacted because the insurance companies are often not good about pursuing fund recoveries and will pay a settlement and end a claim rather than waiting four to five years to be able to access the funds."

How They Work

Second-injury funds collect assessments on employers and carriers. They generally pay the difference in health and disability benefits costs between a workplace injury incurred by a healthy employee and the added cost resulting from a pre-existing condition. Thus, a worker who starts employment with a bad back and, after a workplace accident, becomes permanently bedridden, is compensated for some or all of the long-term components of the disability claim. A healthier co-worker would merely have needed reassignment to a less physically challenging job.

Most state second-injury fund statutes skirt the difficult issue of determining precisely when a disability became "substantially greater" due to a second injury by applying thresholds for application of the fund, such as 104 weeks of indemnity coverage before the funds are applied. Thus, a potential second-injury fund claimant typically needs to show both of the following:

• The disability was "substantially greater" than it would have been without the prior injury.
• It has met the statutory threshold of time on indemnity coverage.

Back, knee and shoulder problems are the most common pre-existing conditions, notes Letitia Tigue, workers’ compensation technical director at the Novato, Calif.-based Fireman’s Fund Insurance Co.

Carriers’ and self-insured employers’ recoveries generally apply to long-term claims, usually do not reimburse the entire cost of the claim, and often kick in only after a long period of initial payments by employers or insurers. In most states, the employer must present evidence demonstrating awareness and knowledge of the prior impairment to receive reimbursements from the second-injury funds.

Uehlein says some of the funds with the most recovery potential for employers include Alaska, Arizona, Louisiana, Massachusetts, Nevada and New Hampshire, which have major second-injury funds still open to new dates of injury.

The self-insured Bethesda, Md.-based hotelier Marriott International Inc. used New York’s second-injury fund after an employee received a leg injury in the Sept. 11 terrorist attacks, claimed post-traumatic stress disorder and never returned to work, says Steve Perroots, senior director of Marriott Claims Services’ Mid-Atlantic Region. "We filed for second-injury fund relief due to the associate’s pre-existing physical disability as well as a pre-existing hepatitis condition. The New York fund accepted the claim and took over paying 100 percent of the claim amount after we paid the initial 260 weeks of disability, as is required by the state before relief commences."

Pros and Cons

Critics of second-injury funds, and there are many, contend that there are no formal studies or even anecdotal evidence that the funds have led to increased hiring of workers with disabilities. Critics also argue that the need for the funds has been supplanted by the ADA’s prohibition of discrimination against workers with disabilities and the mandate to make reasonable accommodations for them. They note that many funds are severely underfunded, largely because they run on a pay-as-you-go basis that allows accrual of large, unfunded future obligations. They claim that employers should be responsible for costs occurring in their workplaces and that such costs should not be pooled. The funds also involve administrative costs and disputes that critics say should not be part of a no-fault system such as workers’ compensation.

Employers oppose these funds for three reasons, says Bruce Wood, associate general counsel of the AIA: The funds are an additional tax on employment, many incur enormous deficits and "the premise that second-injury fund recoveries, or lack thereof, affect employers’ experience ratings is specious."

On the other hand, defenders say problems with the second-injury funds are exaggerated by opponents and reflect a need for better administration rather than abolishing them.

Insurers’ rationale for getting rid of these funds is not persuasive, adds John F. Burton Jr., professor emeritus of the School of Management and Labor Relations at Rutgers University and a member of the New Jersey Advisory Council on Workers’ Compensation. "Socialization of risk is the purpose of insurance funds, so I’m not sure why insurers would object to employers pooling their risk." With respect to the deficits, "the funds have not been particularly well-administered. And, as for the idea that the ADA takes care of this problem, most studies have concluded that the employment situation for disabled workers has grown worse since the ADA."

A flood of injured Afghanistan and Iraq war veterans may justify the funds, says workers’ compensation and disability consultant Richard Pimentel, a Vietnam veteran who suffered hearing loss and brain trauma from his tour of duty. Says Pimentel: "If I had my druthers, I’d go to every state legislature and say, ‘Let’s create a new second-injury fund and target the returning veterans from the two wars, cover them for a specific period of time—say, 12 or 18 months—and grandfather some workers who came earlier.’ "

The Finer Points

The nuts and bolts of perfecting and obtaining recoveries from such funds varies from state to state, given differences in statutory language and fund administration. There are two types: