FECA Bulletin No. 13-01…and the Pending Decline in Lump Sum Settlements for DBA/WHCA Claims

On January 29, 2013, the Division of Federal Employees’ Compensation (“DFEC”) published FECA Bulletin No. 13-01.  This Bulletin will  change how we all administer or adjudicate Defense Base Act (“DBA”) claims with a War Hazards Compensation Act (“WHCA”) component (which I refer to as DBA/WHCA claims).  The Bulletin states:

Subject: Reimbursement of Unallocated Claims Expenses for Defense Base Act (DBA) settlements under the War Hazards Compensation Act (WHCA), and Allocating Payments in a DBA Settlement of Multiple Injuries for Purposes of Reimbursing only WHCA-Covered Injuries

Background: The DBA provides a workers’ compensation system for workers injured or killed while performing work for government contractors outside the United States. 42 U.S.C. 1651(a). Employers and carriers (E/Cs) are liable to pay periodic compensation and medical benefits to an injured employee or death benefits to his/her survivors. The DBA, by incorporating most provisions of the Longshore and Harbor Workers’ Compensation Act, 33 U.S.C. 901-950 (LHWCA), also permits the parties to enter into a settlement of DBA liability under LHWCA section 8(i), 33 U.S.C. 908(i). Section 8(i) settlements must be approved by either an LHWCA District Director or ALJ. Settlements may be consummated before or after a decision and order on the claim. The approval of a settlement constitutes a compensation order making an award as provided under the terms of the settlement. Section 8(i) settlements may discharge the E/C from future liability only, or from liability for both past due and future benefits.

Where the DBA-covered injury or death results from a war risk hazard, the E/C may seek reimbursement for its payments under the War Hazards Compensation Act (WHCA), 42 U.S.C. 1704(a). The WHCA, administered by the Division of Federal Employees’ Compensation (DFEC), provides a mechanism through which the United States reimburses an E/C for its payments under the DBA resulting from an injury or death caused by a “war risk hazard.”

The WHCA also provides that a carrier seeking reimbursement may recover “reasonable and necessary” claims expenses. See 42 U.S.C. 1704(a). Under the WHCA’s implementing regulations at 20 CFR Part 61, reasonable and necessary claims expenses are of two types, allocated and unallocated, incurred in connection with a case for which reimbursement is claimed. The regulations define “unallocated claims expenses” as costs that are incurred in processing a claim but cannot be specifically itemized or documented. 20CFR § 61.104(c). The regulations generally provide that “[a] carrier may receive reimbursement of unallocated claims expenses in the amount of 15% of the sum of the reimbursable payments” made under the DBA. See 20 CFR § 61.104(c).

References: 42 U.S.C. 1704; 20 CFR § 61.104

Purpose: To address the current practice under the WHCA of reimbursing carriers for unallocated claims expenses incurred in connection with DBA claims that are resolved by section 8(i) settlement.

Actions: In addition to providing a general rule for reimbursing unallocated claims expenses as described above, the regulations also grant authority to vary that calculation: “if this method of computing unallocated claims expenses [15% of total payments] would not result in reimbursement of reasonable and necessary claims expenses, the Office may, in its discretion, determine an amount that fairly represents the expenses incurred.” 20 CFR § 61.104(c). Thus, while the regulations provide a general rule of thumb, ultimately the payment of unallocated costs should be a reasonable measure of unallocated expenses incurred. Under its terms, this regulation may be applied to either increase or decrease the amount of unallocated expenses that would otherwise be reimbursable under the general rule.

Under current practices, if the E/C requests reimbursement for unallocated expenses, the DFEC generally applies the 15% figure to the E/C’s entire reimbursable payments, with the exception of an E/C’s payment on a commuted award (see FECA Bulletin 12-01). Such an allotment is reasonable in cases where the E/C is merely seeking reimbursement for past expenses. However, where the E/C settles its future DBA liability, the practice of routinely calculating unallocated claims expenses as 15% of all of the carrier’s payments merits modification, as it is not “reasonable.” An E/C’s payments under the terms of a settlement represent, at least in part, payment for future liability. The E/C should not have incurred any reasonable or necessary unallocated costs merely by settling such future liability (aside from the cost of putting together settlement documents). Yet, the current practice provides that in calculating unallocated claims expenses, all the payments are to be considered, including the payment in settlement of future liability.

The inclusion of those amounts in the calculation constitutes an unjustified payment to the E/C, because they are not reasonably related to the expenses in handling the DBA claim. Since the regulations grant considerable discretion in reimbursing unallocated costs, the DFEC will exercise this authority and use an alternative approach to calculating a reasonable and appropriate measure of unallocated costs subject to WHCA reimbursement in the case of DBA settlements. Accordingly, in circumstances where the E/C settles its future DBA liability and seeks reimbursement, the DFEC will reimburse unallocated costs equaling 15% of the payments it has made up until the time of settlement, together with those amounts paid in settlement of past due liability. The DFEC will exclude from the calculation payments that represent payment in settlement of future liability, as no unallocated costs will been reasonably incurred in the payment of these benefits.

A. Allocating between Payments for Past Due and Future Liability – Where an E/C has settled its DBA liability for a WHCA-covered injury, the calculation of unallocated claims expenses will now require that the E/C’s reimbursable payments be identified as payments for either past due or future liability. Toward that end, settlements should first be divided between those entered into following the entry of an award, and those entered into in lieu of an award.

B. Settlement Following Entry of a DBA Award – Where an E/C enters into a settlement following the entry of a DBA award, it will be presumed that the E/C has paid all compensation due and owing up until entry of the settlement, as it is generally required to do under law. Therefore, where an E/C enters into a settlement following entry of a DBA award, amounts paid under the terms of the settlement will be presumed to be amounts paid in settlement of future liability and excluded from the unallocated cost calculation. It is the E/C’s burden to demonstrate that any portion of post-award settlement payments were made in satisfaction of past due liability.

C. Settlement in Lieu of a DBA Award – Where an E/C enters into a settlement in lieu of an award, the E/C has the burden of demonstrating what portion, if any, of its payments are payment of past due compensation and thus included in the unallocated costs calculation (together with any payments made prior to settlement).

As an aid in making this allocation, the DFEC will give presumptive weight to the allocation of payments set forth in Form LS 208, “Notice of Final Payment or Suspension of Compensation Payments,” which each E/C must file with the Division of Longshore and Harbor Workers Compensation (DLHWC) upon final payment of its DBA liability. The LS 208 requires an E/C to list all DBA payments it has made on account of disability or death together with all other payments, including payments made pursuant to a section 8(i) settlement. Those payments which the E/C records on the LS 208 as payment pursuant to a section 8(i) settlement will be presumed to be payments in settlement of future liability which will be excluded from the unallocated expenses calculation, unless the E/C reasonably demonstrates that a portion of its settlement payments were paid on past due liability.

D. Submission of Form LS 208 – Each E/C who seeks reimbursement for its payments on a DBA 8(i) settlement is required to submit with its reimbursement request the Form LS 208 which it previously filed with the DLWHC.

E. Preparation of Settlement Documents – An E/C will be reimbursed the sum of $1,000 for unallocated expenses incurred in putting together settlement documents. This will be in addition to the amount calculated for unallocated expenses based upon the portion of the settlement that has been established to be for payments of past due compensation.

F. Effective Date – Because the authority for exercising this discretion in reimbursing unallocated claims expenses already exists in the regulations, this approach to reimbursing an E/C its unallocated claims expenses in DBA settlement cases applies to all pending and future claims for reimbursement under the WHCA.

DBA Settlements Encompassing both WHCA Covered and Non-Covered Injuries

An E/C may enter into a single settlement of its DBA liability for multiple injuries. However, only those payments made in settlement of liability for injuries resulting from a war risk hazard are subject to potential reimbursement under the WHCA. Therefore, where a single DBA settlement satisfies an E/C’s liability for both WHCA covered and non-covered injuries, an allocation between an E/C’s payments for each type injury is also necessary.

The E/C, in meeting its burden of proving entitlement to WHCA reimbursement, must provide adequate documentation of a reasonable allocation between settlement payments for injuries that arise from a war risk hazard and those injuries that do not. Only the former payments will be subject to potential WHCA reimbursement. Failure to provide an adequate allocation of such payments will result in a denial of a reimbursement request for the settlement payments in their entirety

Applicability: All National Office staff and District Office claims personnel.

Disposition: This bulletin is to be retained until the FECA PM has been updated.

DOUGLAS C. FITZGERALD Director for Federal Employees’ Compensation

So what does all of this mean?  Most likely, it means that employers and carriers will refrain from entering into lump sum settlements pursuant to Section 8(i) of the Longshore and Harbor Workers’ Compensation Act (“LHCWA”).  Instead of settling a DBA claim, employers and carriers can seek the direct payment of future benefits.  This means that the claimant will continue receiving indemnity benefits and medical benefits, but DFEC will write the checks instead of the employer and carrier.  The claimant will never receive a large payout of future benefits because the employer and carrier will simply transfer liability to DFEC.  Further, the claimant lacks a basis to challenge the transfer of liability from the employer and carrier to DFEC.  See Cathey v. Service Employees Int’l, Inc., BRB No. 12-0228 (2012).

Who will be affected most by this Bulletin?  Obviously employers and carriers will feel an immediate effect.  FECA Bulletin No. 13-01 went into effect immediately, and it applies to claims that are still being processed.  Employers and carriers will have to adjust their balance sheets because the unallocated expense formula has now changed…even for cases that may have been submitted to DFEC months or years ago.

More likely than not, DBA/WHCA claimants who reside in the United States or Canada will also feel an immediate effect.  It is an unwritten rule that the direct payment provisions of the WHCA  apply to claimants residing in the United States or Canada, but not elsewhere.  Because the direct payment provisions are available for U.S. or Canada-based claimants, employers and carriers will likely refrain from settling claims involving those claimants.  Settlements will likely remain a possibility for DBA/WHCA claimants residing outside the United States or Canada.

The Division of Longshore and Harbor Workers’ Compensation (“DLHWC”) and the Office of Administrative Law Judges (“OALJ”) will likely see more litigation.  For undisputed claims, the DLHWC will have more Stipulations to approve and more informal conferences to conduct.  For disputed claims, the OALJ will have more cases to hear and decide.  Without settlements, DBA/WHCA claims will resolve either through they entry of a compensation order based on Stipulations negotiated by the parties or the entry of an ALJ’s compensation order.

In closing, FECA Bulletin No. 13-01 is a big deal.  It is a game changer that affects everyone.  Hopefully there will be lively discussion about the Bulletin at Loyola’s Annual Longshore Conference in April 2013.