Argument Report: What Happens When a Workers' Comp Excess Insurer Goes Bankrupt?

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Our reports on the civil oral arguments of the Illinois Supreme Court's November term continue with Skokie Castings, Inc. v. Illinois Insurance Guaranty Fund. Our pre-argument preview of Skokie Castings is here. Watch the oral argument here.

Skokie Castings begins with a worker's on-the-job injury. The worker's employer was self-insured with respect to workers' compensation insurance, but held an excess policy. The employer paid the retention on the worker's award, at which point the excess insurer started paying.

But then the excess insurer went into receivership. The Illinois Insurance Guaranty Fund took over when the excess insurer stopped, paying until its total outlays reached $300,000. At that point, the Fund stopped paying, arguing that its payments on the file were subject to the $300K payment ceiling under 215 ILCS 5/537.2. The plaintiff, the successor-in-interest to the worker's employer, sued the Fund, seeking a declaratory judgment that the Fund was not entitled to stop paying, and owed the employer for all obligations over $300,000.

Based on the Supreme Court's questions, it seems fairly likely that the Court will affirm the Appellate Court's holding that the Fund is liable without limit. Counsel for the Fund began by arguing that the case turned on what were "workers compensation claims" under the Insurance Guaranty Fund Act. Certainly the injured employee's claim was a workers' comp claim; but the case turned on what the employer's claim for reimbursement was. Justice Thomas asked whether counsel's position was that the New Mexico Supreme Court erred in In re Delinquency Proceedings Against Mission Insurance Co., the case principally relied upon by the Appellate Court -- or was Mission Insurance distinguishable? Counsel responded that the case was distinguishable. In Mission Insurance, the issue was whether reinsurance was covered at all, a point not in controversy in Skokie Castings. Chief Justice Kilbride asked whether the worker's employer or the worker herself received the Fund's payments. Counsel answered that the record was silent on the matter, but the Fund's understanding was that its payments had ultimately gone to the worker. Justice Burke asked why it was fair to impose the remaining liability on a self-insuring employer; counsel responded that the Self-Insurers Advisory Board took over liability once a self-insuring employer was no longer able to respond. Justice Burke asked whether the Board responded only for self-insurers without an excess policy, but counsel answered that he believed that a bankrupt excess insurer would trigger the Board's liability. Justice Thomas asked whether the fact that the Fund had stopped paying, and the employer had then paid the employee for a time, suggested that the underlying claim was for workers comp. Counsel responded that the employer was certainly paying a workers comp claim, but reimbursement by the Fund to the employer was not such a claim. Justice Karmeier asked whether, if the employer had neither primary nor excess insurance, it could have a claim for reimbursement against the Fund, and counsel responded that under such circumstances, the employer's sole remedy was the Self-Insurers Advisory Board. Chief Justice Kilbride asked why the employer's claim wasn't a "covered claim" under the statute. Counsel responded that the issue wasn't whether it was a "covered claim" -- it was. The question was whether or not it was a workers comp claim within the meaning of the statute.

The plaintiff employer opened by arguing that the mechanism of payment - direct payment to the employee or reimbursement - wasn't relevant since the legislature hadn't made it relevant. Justice Theis asked counsel to respond to the Fund's claim that the employer's only remedy was the Self-Insured Advisory Board. Counsel responded that the Board was a merely theoretical possibility if the employer had gone bankrupt - which it hadn't here. Justice Burke wondered whether reversing might encourage Illinois employers not to carry excess insurance, if making that choice could subject the employer to unlimited liability. Counsel responded that excess insurance was still probably the best risk management tool available to an employer. Justice Thomas asked whether the employer's declaratory judgment action, seeking a declaration that the Fund was liable for the employee's claim, was analogous to an insurer's dec action challenging its duty to pay for a tort claim -- surely no one would ever call that a personal injury claim? Counsel responded that there was no coverage issue here, as in a personal injury dec action. Justice Thomas pressed his question: wasn't a personal injury dec action about who was going to pay, just like this case? Counsel responded that the Fund shouldn't benefit by cutting off owed benefits. Justice Karmeier asked whether, rather than being self-insured, an employer could buy primary insurance with a high deductible? Counsel responded that there was likely no distinction in effect between primary insurance with a high deductible and an excess policy.

On rebuttal, Justice Thomas asked counsel for the Fund whether the plaintiff had a public policy argument -- equal to the Fund's argument that it was a source of funds of last resort -- that workers comp awards should be paid without limit? Counsel agreed that this was public policy, but argued that the issue was who should bear the financial burden of the award. Following up on earlier questions, counsel argued that the employer could have bought a primary policy, but premiums would have been higher, and it chose not to take that option. Justice Burke pointed out that the argument necessarily meant that if the excess insurer hadn't gone bankrupt, the employer would be paying forever, despite opting for the lower-cost policy. Counsel repeated that if the employer had paid for a primary policy, the case wouldn't be before the Court. Justice Karmeier asked what the difference was for the Fund's purposes between a primary insurer with a high deductible and an excess carrier; counsel responded that since insurers pay in proportion to premiums, both categories pay into the Fund, but primary carriers pay more.

Skokie Castings should be decided in the next two to four months.