In Illinois (as in every other state), when an insurance company becomes insolvent and an order of liquidation is entered, the Illinois Insurance Guaranty Fund steps in and pays claims that the insolvent carrier could not pay. The Fund’s liability is capped at $300,000, but that cap isn’t applicable to “workers compensation claims.” Skokie Castings, Inc. v. Illinois Insurance Guaranty Fund presented an interesting variation on that rule. What happens when the insolvent carrier is the excess insurer, and the Fund’s liability is for contractual indemnity to the employer, rather than making direct payments to the injured employee? On Friday morning, a divided Illinois Supreme Court held that the result was the same – the claim was still one for workers’ compensation, and the statutory cap didn’t apply.
In Skokie Castings, the employer had chosen to partially self-insure against its workers compensation exposure, carrying excess coverage only in case of major losses. According to the excess policy, the insurer was obligated to indemnify the employer for any sums paid above a $200,000 threshold.
One of the employer’s employees was seriously injured in 1985; she was ultimately declared permanently disabled by the Commission and awarded lifetime workers’ comp benefits. The employer paid up to the $200,000 self-insured threshold, at which point the insurer began paying under the policy. It did so until it became insolvent, went into receivership and was liquidated. The Fund then took over, but once it had paid about $250,000 on the claim, it notified the employer that it believed that the liability was subject to the $300,000 statutory cap set on Fund obligations by Section 537.2 of the Illinois Insurance Code (215 ILCS 5/537.2).
When the Fund reached the $300,000 cap and refused to make further payments, the employer filed suit, seeking a declaratory judgment that the statutory cap was inapplicable and that the Fund had improperly terminated payments. The Circuit Court entered summary judgment in the employer’s favor, finding that the Fund’s liability to the employer was a “workers’ compensation claim,” making the cap inapplicable. The Appellate Court affirmed.
The Supreme Court agreed. Writing for a five-Justice majority, Justice Lloyd A. Karmeier found that it was “indisputable” that the covered claims at issue “arose out of and were within the coverage of policies which had been purchased to help insure” the employer “against liability for workers’ compensation awards.” The claim at issue was therefore a “workers’ compensation claim” under the statute, and was exempt from the statutory cap.
The Fund had argued on appeal that a “workers’ compensation claim” was limited to a claim for benefits brought directly by an injured employee. The Court disagreed. A workers’ compensation claim did not arise under an insurance policy, the Court pointed out, but rather under the Workers’ Compensation Act; it was made to the Workers’ Compensation Commission, not the employer or the employer’s insurer. Since the Fund’s obligations only extended to covered claims arising under insurance policies issued by insolvent insurers, the term “workers compensation claim” in the statute could not refer to claims for benefits directly made by workers. Nor did it matter, the majority found, that the policy at issue was for excess only, or that the excess carrier might be reimbursing the employer, rather than paying the employee.
The majority was unconcerned that potentially unlimited liability in similar situations might “place an undue burden on the Fund’s resources.” The majority pointed out that an insurer’s maximum assessment for any given year was subject to a 2% cap. If the Fund’s obligations for a given year could not be satisfied out of the total funds available through assessments, payment was simply delayed until enough money became available.
Chief Justice Kilbride dissented. The Chief Justice agreed with the majority’s initial steps: the case involved two distinct claims, the employee’s statutory claim for benefits filed with the Commission, and the employer’s contract-based claim, first against its excess carrier, and later against the Fund. Only the latter could possibly be a “covered claim” within the meaning of the statute. Therefore, the issue was the nature of that contractual claim by the employer against the Fund.
That claim, the Chief Justice found, was clearly one for indemnity only. The policy required that the employer submit a periodic statement to the excess insurer showing payments actually made by the employer, and the insurer would then reimburse the employer for those payments. The excess insurer never took on the obligation to pay the employee’s workers’ compensation claim, so the Fund didn’t have that obligation either. Therefore, the “covered claim” at issue wasn’t a workers’ compensation claim, and the statutory cap applied.
The Chief Justice disputed the majority’s view that any burden on the Fund was unimportant as well. First, the Chief predicted that the majority’s holding would likely increase demand for cheaper excess-only workers’ compensation coverage, placing a greater potential burden on the Fund’s resources. Second, the Fund would be required to increase annual assessments, a cost increase which would be passed along to insureds in the form of higher premiums. Once the Fund’s obligations reached the 2% limit on annual assessments, payments on policy obligations would have to be stretched out (a fact the majority acknowledged). But if the Fund’s payments were “workers’ compensation,” such delays were contrary to the legislative purpose of securing prompt compensation for workers’ injuries, the Chief Justice noted.
Justice Robert R. Thomas filed a separate dissent. According to Justice Thomas, the purpose of exempting workers compensation claims from the statutory cap for Fund obligations was to ensure that injured workers receive all of the benefits to which they are entitled. “I simply cannot see how that public policy purpose is implicated in this case,” Justice Thomas wrote. Like the Chief Justice, Justice Thomas concluded that the key point in resolving the case was that the excess carrier’s liability – inherited by the Fund – was one to indemnify the employer, not to directly pay the employee. If the employer simply stopped making the payments, it would have no claim against the insolvent insurer or the Fund, since the policy was limited to payments actually made.