Opinion Mondays: States Shouldn’t Treat PTD Awards as Estate Planning Tools
Iowa Commutation Order Allows for Substantial Inheritable Estate
Illustrating just how far some states have moved away from the original workers’ compensation principle that indemnity benefits are not an inheritable property right, but rather a partial replacement of an injured worker’s lost wages, an Iowa appellate court has affirmed a decision in which the workers’ compensation commissioner allowed commutation of virtually all of the future PTD benefits payable to a 68-year-old injured worker, for a total lump sum payment in excess of $1 million dollars, based in pertinent part, on the worker’s concern that if he were to die, his monthly benefits would abate under Iowa law [United Fire & Cas. Co. v. Hessenius, 2020 Iowa App. LEXIS 1127 (Dec. 16, 2020)]. The court was apparently blind to the fact that its ruling means the worker’s heirs will enjoy a substantially greater inheritable estate than would have been the case if the worker had never been injured at all.
Background
In a prior arbitration decision, Hessenius was awarded PTD benefits resulting from a work-related shoulder injury on some unspecified date, in the amount of $1,300.00 per week. Hessenius later filed a petition for partial commutation, seeking to commute all but the final week of his benefits for a total payment of $1,052,187.50. Following a hearing, a deputy commissioner issued an arbitration decision awarding a partial commutation, but only for the amount needed to pay off the mortgage on Hessenius’s home—approximately $100,000.00—plus the attorney fees associated with the payoff amount. Hessenius appealed within the agency, and the commissioner awarded Hessenius the full amount of the commutation he had requested. The workers’ compensation insurer sought judicial review, and the district court affirmed the commissioner. The insurer appealed.
Factors to be Considered in Allowing Commutation
The appellate court initially observed that a person seeking commutation of future workers’ compensation benefits to a present worth lump sum payment must prove certain conditions to the commissioner, including “that such commutation will be for the best interest of the person” seeking commutation [Iowa Code § 85.45(1)(b) (2016)]. The court added that the Iowa Supreme Court had set forth four factors for the commissioner to consider in making the determination:
- The worker’s age, education, mental and physical condition, and actual life expectancy (as contrasted with information provided by actuarial tables).
- The worker’s family circumstances, living arrangements, and responsibilities to dependents.
- The worker’s financial condition, including all sources of income, debts and living expenses.
- The reasonableness of the worker’s plan for investing the lump sum proceeds and the worker’s ability to manage invested funds or arrange for management by others (for example, by a trustee or conservator) [see Dameron v. Neumann Bros., Inc., 339 N.W.2d 160, 164 (Iowa 1983). ” [C]ommutation turns on what is in the best interest of the worker.” Id. at 165].
Factors Considered in Instant Case
The appellate court noted that Hessenius had been born in 1952, was a high school graduate, and that following high school, he had completed a plumbing and pipefitting apprenticeship. It noted further that Hessenius experienced an injury working as a pipefitter, and that he used a resulting workers’ compensation settlement to go to college and earn a bachelor’s degree, enabling him to become certified as a prosthetics and orthotics technician.
Wife Would be “Left with Nothing”
Hessenius was working as a certified prosthetics and orthotics technician when he suffered the injury at issue. Hessenius lived with his wife, to whom he had been married for more than forty years. Hessenius has multiple children and grandchildren, but no one depends on him for financial support. The court observed that Hessenius and his wife had accumulated substantial retirement accounts. However, during the commutation hearing, Hessenius expressed concern that, upon his death, his weekly workers’ compensation benefits would end and his wife would be “left with nothing.”
Monthly Income and Expenses
Hessenius presented evidence at the commutation hearing showing a total monthly income of $8,545.68 and expenses of $7,637.52. Included within that total income flow was Hessenius’ monthly PTD benefits of $3,755.56 ($866.67 per week) after attorney fees. His monthly mortgage payment was $1,200. At the hearing, Hessenius also presented various “conservative” options for investing the lump sum payment that he had obtained from several investment advisors.
Substantial Evidence Supported the Commutation Order
The appellate court reviewed the law in Iowa and indicated the commissioner had found commutation in Hessenius’s best interest, stating:
Considering the factors set forth in Dameron, [339 N.W.2d at 164,] discussed above, and claimant’s stated desire to receive the partial commutation and his desire to provide financial security for his spouse, I note claimant’s age, education, family circumstances, living arrangements, and lack of debt beyond his mortgage, weigh in favor of granting the partial commutation. In addition, claimant’s demonstrated ability to handle money, including a prior lump sum workers’ compensation award which claimant used to obtain a bachelor’s degree and embark on a 25-year career as a certified prosthetist and orthotics technician, as well as his prior investments that have accumulated into substantial retirement accounts, all weigh heavily in favor of granting the requested partial commutation [Opinion, p. 7-8].
In rather cursory fashion, the appellate court indicated that Hessenius’s testimony and exhibits provided substantial evidence to support this decision. The bottom line: the insurer writes Hessenius a check for more than $1 Million.
Commentary: Is This Really the Way Workers’ Compensation is Supposed to Work?
I welcome your push-back here [either comment in the space below or send me an email to tom@workcompwriter.com], but is this really the way the workers’ compensation system is supposed to work? By that I mean, like it or not, one of the core principles of “our” system is that indemnity benefits are to replace a portion of a worker’s lost wages due to injury; they are not to be treated as retribution for industrial injury [see the discussion in Larson’s Workers’ Compensation Law, § 132.07].
That is to say that the injured employee shouldn’t have it both ways: enjoy the fact that his or her indemnity benefits are not ordinarily characterized as “property” and, therefore, are exempt from the claims of creditors, on the one hand, and yet are “property” and, therefore, inheritable by his or her family, on the other. In the case at bar, the commissioner (and the appellate court) acknowledged that the injured worker and his spouse had been able to accumulate “substantial retirement accounts” [Opinion, p. 5]. At 68 years old, the worker was entitled to significant social security benefits. His weekly workers’ compensation indemnity benefits were paid to him free from taxation. While the commissioner may have been swayed by the worker’s lament that, at his death, his spouse would be “left with nothing,” in point of fact, that statement seems far from accurate.
First, of course, it might be entirely possible for his spouse to predecease the worker. Second, had the deputy commissioner’s partial lump-sum order been allowed to stand, he and his wife would have enjoyed a mortgage-free residence. That’s hardly “nothing” (not counting the already-mentioned retirement accounts). According to the worker’s testimony, with the mortgage paid, he and his wife would have enjoyed positive cash flow of some $2,500 per month—again, hardly “nothing.”
Note also, that while in some states the PTD benefits of a 68-year-old injured worker would be reduced by some percentage of his or her monthly Social Security retirement benefits, that is not apparently the case in Iowa —my research fails to show any Iowa offset statute [see Larson, § 157.03]. Social security retirement benefits are designed to replace lost wages. Those benefits are not, of course, subject to commutation. The same rule should be applied to workers’ compensation benefits.
Lump-Summing Has Become Widespread
Lump-summing was originally considered to be an exception to the normal rules. Its use, however, has proliferated in some states based on the fact that it is no one’s interest to complain. As noted in Larson, practically everyone associated with the system has an incentive—at least a highly visible short-term incentive—to resort to lump-summing. The employer and the carrier close the claim. The claimant has, in one check, perhaps the largest sum of money he or she has ever seen. The claimant’s lawyer finds it much more convenient to get his or her full fee promptly out of a lump sum than protractedly out of small weekly payments. The claimant’s creditors approve; if the funds are not carefully segregated by the claimant, they may be subject to the claimant’s debts. Finally, the claimant’s spouse and family have a nest egg to which they otherwise would not be entitled.
As my mentor, Arthur Larson, posited some years ago:
Who then is to hold the line against turning the entire income-protection system into a mere mechanism for handing over cash damages as retribution for industrial injury? It should be the administrator, but even the administrator all too often is relieved to get the case completely removed from the docket. With all these pressures pushing in the direction of lump-summing, it is perhaps surprising that the practice has not become even more prevalent than it already has [Larson, § 132.07].
Hypothetical
Consider another hypothetical Iowa worker in the same situation as that of the claimant in this case, save for one difference: the other Iowa worker did not suffer a debilitating work-related injury. He and his spouse might also have accumulated “substantial retirement savings.” At 68 years of age, he would be entitled to federal Social Security retirement benefits. He’d have a residence with a monthly mortgage payment of $1,200. But he would not have $1 million in extra cash to invest and leave to his wife and children. And so, while the Iowa workers’ compensation system is designed to lessen the economic difference between the worker who enjoys an injury-free work experience and the worker who, unfortunately, becomes an injured veteran of the workplace, it actually can exacerbate the difference, but in a direction that was not originally intended.