Second Injury Funds: Are They Still Necessary or Just a Drain On the System?

Second (or subsequent) injury funds (SIFs) have been abolished in 20 states. Alabama and Maine began this movement in 1992, with South Carolina being the most recent convert; each ending its respective program in 2013. Further, the American Insurance Association has been at war against second injury funds since at least the mid-1990s, working to convince the remaining states to abolish or substantially alter the fund programs that still exist.

Has the time for second injury funds passed? Are these archaic social programs that have outlived their usefulness? It depends on who is being asked and that party’s agenda. Regardless of which side is making the argument, the focus is on money: the cost if the plan is kept intact or the cost if the plan is abolished. It is all about the money, regardless of the eloquence of any other presented reason.

In the search for answers to these questions, the next few paragraphs provide a bit of SIF program history, the threshold for protection, benefits offered, how the funds are financed and conclude with arguments for and against dismantling this decades-old employer safety net.

History of Second Injury Funds

New York created the nation’s first Second Injury Fund in 1916, just three years after creation of its workers’ compensation statute. Few states followed suit until World War II with most states adopting second injury funds in the early-to-mid 1940s, all based around a model national code.

The rush to provide this employer protection was created by the desire to clear the path for veterans who had sustained injury during the war. Injured veterans were not being hired because employers’ feared being held financially responsible for the cumulative effect of an on-the-job injury coupled with a pre-existing war injury. Second injury funds were designed to temper if not completely remove this fear.

Employers’ fears were cultivated by several court cases culminating in a 1925 Oklahoma Supreme Court ruling, Nease v. Hughes Stone Co. This proved to be a landmark case regarding an employer’s liability for an employee’s injuries which synergistically compound a pre-existed condition.

W.A. Nease was already blind in one eye when he began work for Hughes Stone Company. During his employment, an explosion destroyed Nease’s remaining eye, leaving him blind and permanently and totally disabled. The employer through the insurance carrier provided 100 weeks of indemnity payments as was required by statutory provisions governing the loss of one eye. Nease argued that since he was permanently disabled, not merely partially disabled, he was due lifetime benefits. The Oklahoma Supreme Court agreed, awarding him lifetime benefits and making the employer and the insurer responsible for total disability indemnity benefits.

A U.S. Labor Department report stated that between 7,000 and 8,000 one-eyed, one-legged and one-handed men in Oklahoma lost their jobs immediately following this ruling. Employers did not want to take the chance of being held financially responsible for an employee’s total disability. A mechanism to relieve employers of this responsibility was required. Second injury funds were created to remedy the problems and accomplish two goals:

1. Encourage employers to hire and retain workers with pre-existing injuries or conditions; and
2. Provide economic relief to employers for an employee’s subsequent injury.

Threshold Requirements to Receive Benefits

Not every injury suffered by an individual with a pre-existing injury or condition is compensable under the second injury funds still in operation. Specific requirements must be met before any SIF benefits are payable. States differ on the application of SIF compensability requirements, but each applies the following requirements to varying degrees:

• There must be a prior injury that is a hindrance or obstacle to employment. Some states allow the prior injury to emanate from any cause while others require the prior injury to be work-related. It is not necessary for successive injuries to be to the same or a similar body part to be eligible for SIF protection.
• There must be a pre-existing medical condition that affects employment such as epilepsy, diabetes, Parkinson’s disease, arthritis and others found in a list of 34 to 37 different conditions. Some states consider the list of conditions an “exclusive list,” meaning that only listed conditions are eligible for second injury fund protection; other states consider this a “presumptive list” meaning that those listed are the only ones presumed to require second injury protection, but compensable conditions are not limited to the list allowing others to be submitted for consideration.
• The prior injury or condition must be diagnosed and documented by the employer before the second injury occurs. Massachusetts is the only state that places a time limit as to when the employer must know about the pre-existing condition; employers must document the pre-existing condition within 30 days of hire before any subsequent injury is eligible for second injury fund protection. Other states only require that the condition be known and documented before the subsequent injury. This documentation can be as simple as a letter in the employee’s file noting the condition. This is a potentially tricky situation due to the Americans with Disabilities Act (ADA) and what employers can and cannot ask or do. These conditions can be discovered and documented as a result of a post-hire physical or a medical condition questionnaire completed by the employee. Attorneys should be consulted regarding the legalities surrounding this requirement and how the data can be gathered without violating ADA or other laws.
• A few states require the prior injury to be classified as a permanent partial disability.
• Some states require a certain percentage of impairment; and others only pay if the second injury results in permanent total disability.
• The fund must be put on notice when an employee with a pre-existing condition is injured; regardless if it is known whether or not benefits are going to be requested.
• A waiting period must be satisfied during which time the primary workers’ compensation carrier pays all disability/indemnity benefits. The waiting period can range between 52 and 104 weeks.

Benefits Offered by Second Injury Funds

Second injury fund states operate as either “reimbursement funds” or “take-over funds” to pay benefits owed to qualifying employees. Reimbursement fund states operate on the principle that the best and most efficient mechanism for handling on-going injury claims is the continued involvement of the insurance carrier or self-insured employer’s third party administrator (TPA); these states reimburse the insurance carrier or self-insurer for all payments made to employees qualifying for protection. Take-over fund states, as the name suggests, remove the injured employee from the primary workers’ compensation system and take over payment of disability/benefits, removing the insurance carrier or self-insured employer from the process.

Every state SIF pays qualifying employees the difference between the injury suffered and the cumulative effect of the trauma. Using the Nease ruling presented above as an example, had a second injury fund existed the primary insurer would have only been required to pay the 100 weeks for the loss of an eye and the second injury fund would have taken over and paid all disability benefits due an individual with a permanent total disability.

Benefits offered by some but not all states include (not an all-inclusive list):

• Lost wages from a second job held by the employee. States providing this benefit reason that if the employee holds two jobs (presumably for needed extra money), then the permanent total disability not only prevents him from working his primary job but also prevents his working a second job, thus a percentage of those lost wages are also paid.
• Primary workers’ compensation benefits for uninsured workers. A few states extend their second injury fund to provide primary workers’ compensation benefits to injured employees of employers that did not purchase workers’ compensation coverage.
• Continued disability payments when state-mandated benefits end. Some states limit permanent total disability benefits to a specified number of weeks; second injury funds in a few of those states pick up and continue benefits for injured employees that “outlive” the benefit period. Indiana, for example, limits permanent total disability benefits to 500 weeks; if the injured employee is still alive, the second injury fund picks up and provides continued benefits in 150 week increments.

Financing Second Injury Funds

Second injury funds are most commonly financed by insurer assessments, employers and/or self-insured funds. These assessments can be in the form of a required dollar amount per claim or a percentage of each specified type of claim. These percentages generally range between 2.5 percent to 6 percent or more.

Statutes often specify the injuries that must be assessed. North Carolina, for example, requires a $250 assessment for all losses that result in the “loss, or loss of use, of each minor member in every case of a permanent partial disability where there is such loss;” and $750 “for 50 percent or more loss, or loss of use of each major member, defined as back, foot, leg, hand, arm, eye, or hearing.”

Funding is sometimes provided by death benefits owed to an employee with no legal heirs. The death benefit that was due to the employee is put into the second injury fund. In fact, this is Texas’ sole means of financing its second injury fund.

The Decline of Second Injury Funds

Second (subsequent) injury funds (SIFs) represent socialized care requiring that the large group of insurers, self-insurers and, in some states, employers subsidize the few. This is one bullet in the revolver used by the American Insurance Association (AIA) and other anti-SIF groups to shoot at the remaining second injury funds.

Two other charges leveled against the remaining funds by the anti-SIF groups are:

1. The Americans with Disabilities Act (ADA) makes these funds obsolete. SIFs are no longer necessary because the ADA prohibits discrimination against disabled workers provided: 1) the employer has 15 or more employees; 2) the job can be performed if only “reasonable accommodations” are made; and 3) the accommodations do not create an undue hardship on the employer; and
2. Second injury funds have failed to meet the objective of promoting the hiring of disabled workers.

This is an intriguing combination of charges. If ADA laws made the funds obsolete, then the SIFs no longer have to make promoting the hiring of disabled workers a priority. Now these funds can focus on the more important goal of being a safety net for employers now required by law to hire disabled workers.

One trade association attorney stated it best when she conceded that the ADA did effectively replace the first goal of second injury funds; she went on, however, to make the point that while the ADA created a legal requirement to assist the disabled, it did nothing to help employers bound by the law secure financing for any additional costs that may be created if and when an employee with a pre-existing medical condition is permanently and totally disabled because of the cumulative effects of a workplace injury. Should employers forced to hire disabled workers also be saddled with additional costs over which they have no control, such as higher costs resulting from an increased experience modification factor and/or the possible loss of premium credits due to more expensive claims?

Many view the experience modification factor argument as fallacious since experience mods are weighted more towards frequency than severity (with severe claims subject to a “stop loss” amount). Such a counter-argument is true, unless the insured is in a state’s assigned risk program, making the insured subject to an Assigned Risk Adjustment Program (ARAP) factor. ARAP factor calculations give greater weight to severity than do NCCI or state workers’ compensation rating bureaus. Short of being in the assigned risk plan, the lack of a second injury fund may be inconsequential in the effect on experience modification factors.

Other arguments for the dissolution of second injury funds made by anti-SIF groups include:

• They deviate from the principle that an employer’s costs should be internalized. All costs of doing business should be on the employer regardless of their part in creating the cost. Workers’ compensation itself is a cost of doing business and all costs associated with providing this social benefit, including the costs of cumulative traumas, should be paid by the employer; with the ultimate cost being passed to the consumer rather than other employers or insurers. Anti-SIF groups argue than any increase in the cost of coverage will be more than negated by lower premiums due to the absence of carrier assessments (ultimately paid as part of the premium anyway). This leads to the next objection to second injury funds:
• Most second injury funds have accumulated large unfunded deficits;
• Second injury funds carry a large administrative cost;
• SIF disputes promote attorney involvement, further increasing the cost of second injury funds specifically and workers’ compensation coverage in general;
• Some states extend benefits to employees whose employer failed to secure workers’ compensation coverage either because they were not required to by law or they violated the law mandating they buy it. This may be a misuse of assessed funds; employers who break the law should not be bailed out by every other employer and insurance carrier operating within the law. Certainly no one wants the injured employee to go without care or benefits, but this is not part of the original intent of these funds. The injured employee has the court system and other government social programs from which to garner benefits; and
• Most states require the employer to know about and have noted in the employee’s file any pre-existing condition in order to qualify for second injury fund protection. Due to modern employment law and privacy concerns, such questioning may be considered an invasion of the employee’s right to privacy regarding his health. Navigating these waters just to qualify for second injury fund protection could be hazardous.

Second injury funds are quickly losing favor and being legislated out of existence. Twenty have disappeared since 1992 (incidentally, the year that the ADA was passed). Have these funds outlived their usefulness? There appear to be more arguments for closing these funds than for their continuation.

Academy of Insurance Workers’ Comp Month

April 2015 is Workers’ Compensation Month for the Academy of Insurance. During the month the Academy hosts an in-depth, four-part webinar series focused on workers’ compensation. The topics are:

• The Course and Scope Rule and its Gray Areas (April 2)
• Employees, Independent Contractors, General Contractors and Contractual Risk Transfer in Work Comp (April 9)
• When to Add Additional States – Extraterritorial Jurisdiction Problems (April 16)
• The Surprising Importance of Employers’ Liability Protection (April 23)

Register now to assure a spot. Invite everyone in your office to attend (everyone in your office is welcome, only one registration required).

Workers’ Compensation Series

This is the third in a series of articles on workers’ compensation. The series is taken from the book, “The Insurance Professionals’ Practical Guide to Workers’ Compensation: From History through Audit.” The articles in this series are:

• Workers’ Compensation History: The Great Tradeoff
• Benefits Provided Under Workers’ Compensation Laws
• Second Injury Funds: Are They Still Necessary or Just a Drain On the System?
• Employees Exempt from Workers’ Compensation
• Nonemployee ‘Employees:’ The Borrowed Servant Doctrine
• Work Comp for PEOs and Their Client/ Employers
• Combinability of Insureds
• Audit Rules and Guidelines
• Audit Problems Leading to Additional Premiums

Topics Carriers Profit Loss Workers' Compensation Oklahoma