What is Commutation and How is it Calculated?

Commutation is a procedural remedy whereby an insurance carrier may reduce specific Longshore and Harbor Workers Compensation Act (“LHWCA”) or Defense Base Act (“DBA”) benefits owed to a foreign national by one-half.  Although death benefits owed a foreign national under the LHWCA may be commuted (see 33 U.S.C. § 909(g) and 20 C.F.R. § 702.142), commutations typically arise in situations involving Defense Base Act claimants who are “nonnationals of the United States not residents of the United States or Canada…”  See 42 U.S.C. § 1652(b).  For LHWCA purposes, commutations only apply to Section 9 death benefits, but for the DBA, commutations are available for both death benefits and Section 8(c)(21) indemnity benefits.

Calculating a commutation value of a death benefits claim requires knowledge of the current National Average Weekly Wage (“NAWW”) percent increase, the current interest rate for a one-year constant maturity, the claimant’s life expectancy, and the claimant’s current compensation rate.  For death benefits claims, an “increase value” is applied to each year of benefits to satisfy the LHWCA’s cost of living adjustment requirement.  See 33 U.S.C. § 910(f).  To determine the percent increase applied to each year of death benefits, one subtracts the one-year constant maturity from the NAWW percent increase.  The difference is the “increase value” applied to the claim.  For instance, the NAWW is presently 2.0%, and as of September 10, 2010, the one-year constant maturity rate is 0.27%.  When the Department of Labor calculates the commutation, it will apply a 1.73% increase value to each year of benefits.  Although an increase value is applied to each year of benefits for a Section 9 death benefits claim, this increase does not apply to a Section 8(c)(21) indemnity benefits claim because Section 10(f) adjustments are not applicable to Section 8(c)(21).

Commutation is an efficient remedy for death benefits claims, but there are limitations to the commutation of a Section 8(c)(21) claim.  The most glaring limitation is that commutation does not resolve a claim for medical benefits.  The commutation remedy applies only to indemnity benefits.  As such, a practitioner may prefer to resolve a Section 8(c)(21) claim through a Section 8(i) Settlement Agreement, which can resolve any claim for future medical benefits.  See, e.g., 20 C.F.R. § 702.243(d).