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Nursing Home Insurance: Are Your Policy Limits Wasting Away?

Over the last 15 years, the nursing home industry has seen substantial changes in the liability insurance markets. At one time, insurers looked at the elderly population in nursing homes using traditional measures of damages like lost income and concluded that the industry was a risk worth insuring. The tidal wave of elder abuse litigation that drove sky-high verdicts changed the insurance landscape dramatically, resulting in a dearth of available coverage and forcing many nursing home entities to become self-insured. Insurance carriers are once again writing policies for the nursing home industry, but with significant changes in how limits of insurance work under some new Nursing Home Liability forms.

Nursing home policies typically combine a Professional Liability policy with a Commercial General Liability policy with limits set for an individual case or claim and an aggregate limit for the facility or company. The policies are written in a way to make sure a claim is covered under either the professional liability side or the commercial general liability side of the policy, but never both. For example, a policy might have a $3M aggregate and a $1M per claim limit. This means that no claimant can ever recover more than $1M on the policy, but the company's overall coverage does not exhaust until all $3M has been paid out. Traditionally, Commercial General Liability policies paid for an insured's defense outside of the per claim or aggregate limit. In other words, a $1M limit could only be exhausted by paying out that sum to a claimant. There was no limit on defense costs at all, which frequently put pressure on carriers to settle cases.

Many of the newer policies for nursing homes are now being written on a “wasting” form where defense costs erode the stated limits of the policy. This means that the insurance company has now capped its liability at $1M per claim, which includes both defense costs and any money paid to settle the case or satisfy a judgment. The effects of this change are profound. Nursing home entities and their defense counsel need to reconsider their limits and how they choose to defend claims. The prospect of an expensive defense no longer concerns insurers the way it used to. Now insureds have to worry about that instead.

If you are involved in risk management for a nursing home entity, you need to know whether or not your liability policy includes defense costs within the stated per claim limit. If it does, you have what insurance lawyers refer to as a “wasting” policy. The following examples demonstrate the way a wasting policy is different from traditional Commercial General Liability policies.

Example 1:
Suit Filed — General Negligence. Taking the case to trial results in Defense Costs of $500,000 and a Verdict for $1,000,000 Standard Commercial General Liability Policy with $1M per claim limit pays all defense costs incurred and the jury verdict. Insured would be responsible for paying any deductible or self-insured retention.

Example 2:
Suit Filed — Professional Negligence. Taking the case to trial results in Defense Costs of $500,000 and a $1M Verdict Commercial General Liability “Wasting” Policy with defense costs eroding limits. Insurance carrier pays $500,000 in defense costs and $500,000 towards the jury verdict. Nursing home is liable for remaining $500,000, as well as any deductible or self-insured retention.

As Example 2 demonstrates, if you have a wasting policy, a $1M per claim limit will be reduced by costs incurred to defend the case. Under a traditional Commercial General Liability policy, the insured could afford to take an aggressive stand in litigation and try to wear down plaintiff's counsel through use of extensive discovery, filing motions for summary judgment and even taking an appropriate case through trial. After all, the aggressive defense was being paid for by the insurance carrier, not the insured nursing home. Under a wasting policy, this litigation strategy can be disastrous. A nursing home could end up spending almost its entire limit defending a serious case, only to end up funding a large settlement or verdict out of its own pocket.

A wasting policy also has significant implications for defense counsel. Normally, insurer-appointed defense attorneys never want to get involved in questions regarding insurance coverage. They cannot afford to alienate the insurers that hire them as panel counsel, so they only want to focus on defending the underlying case. When defense costs are outside of limits, avoiding all things insurance is a safe course for appointed defense counsel. All of this changes, however, when you have a wasting policy because every dollar the lawyer spends on defense will not be available for settlement. It is imperative to know at the outset of a case if you have a wasting policy. If it is, liability needs to be assessed quickly and realistically in order to preserve as much of the limits as possible for settlement. Failure to do so may result in unfortunate consequences.

Nursing home insureds are also frequently defended under a reservation of rights from their insurer that may entitle them to hire independent counsel at the insurer's expense. Whether or not you are entitled to independent counsel based on a given reservation of rights is beyond the scope of this article, but risk managers for nursing homes need to know that insurers issuing wasting policies will take the position that the cost of independent counsel will also come out of the available limit. Therefore, requesting independent counsel who bills at a higher rate than counsel assigned by an insurer can have the unfortunate effect of depleting limits even faster.

Nursing home entities also need to consider the impact of wasting limits on the aggregate limit covering all claims in a given policy year. Where defense costs erode both individual claim and aggregate limits, a nursing home entity could successfully defend a number of cases and pay out no money whatsoever in liability, but still exhaust all available insurance coverage. For instance, a company with a $3M aggregate limit could successfully defend five cases to verdict at a cost of $600,000 per trial and have no remaining insurance whatsoever. While that example may seem unlikely, you have to look at your own company's claims experience to consider what type of limits are appropriate if you have liability coverage written on a wasting form.

Recommendations
Risk Managers should review all pending litigation and the policies that are covering those claims to determine whether or not defense costs are eroding limits. Talk with your broker about what types of liability coverage are currently available in the market. If you can purchase policies with defense costs outside of limits, that may be worth paying a higher premium. If your broker can only find insurers willing to write liability insurance on wasting forms, revisit your per claim and aggregate limits with your broker to determine if you are adequately covered.

If the thought of actually reading an insurance policy is too painful to contemplate, hire coverage counsel to do it for you. Of course, this assumes you have a copy of your policy. In many cases, brokers bind coverage and the policy is not issued for months. If you are about to purchase a new policy, make sure your broker confirms the type of policy form it will be issued on. Once the policy arrives, make sure it is what you were promised. Finally, if your liability insurance is written on a wasting form and you do get sued, have a frank discussion with your defense counsel at the outset of the case before significant defense costs are incurred. Get a budget and a liability assessment as soon as possible. If you don't, the financial consequences could be painful indeed.

The Healthcare Industry Is Ripe For Baseline Testing

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Workers in the healthcare industry face many risks, and one that consistently arises as a major cost driver is musculoskeletal disorders (MSDs), better known as soft tissue injuries. Because of the difficulty in objectively identifying and subsequently treating these conditions, employers must now consider new options when it comes to risk control.

Patient handling tasks are recognized as the primary cause of musculoskeletal disorders among the nursing workforce. A variety of patient handling tasks exist within the context of nursing care, such as lifting and transferring patients. Nursing personnel have been on the top-10 list of workers with the highest risk for musculoskeletal disorders since 1999, and although the numbers of injured health care workers has decreased, nurses, nurse’s aides, orderlies, and attendants have remained at the top of this list since then.

According to OSHA, in 2010 there were 27,020 cases, which equates to an incidence rate (IR) of 249 per 10,000 workers, more than seven times the average for all industries. In 2010 the average incidence rate for musculoskeletal disorder cases with days away from work increased 4 percent, while the musculoskeletal disorder incidence rate for nursing aides, orderlies, and attendants increased 10 percent. For musculoskeletal disorder cases involving patient handling, virtually all were the result of overexertion, sprain, strain, or tear.

Additionally, according to an American Nurses Association 2012 study, 52 percent of nurses complain of chronic back pain with a lifetime prevalence up to 80% and 38% report having occupational-related back pain severe enough to require leave from work. The same study revealed that 12% of nurses leaving the profession report back pain as a main contributory factor and 20% have reported changing to a different unit, position, or employment because of back pain. In fact, nursing personnel have the highest incidence rate of workers compensation claims for back injuries of any occupation.

Nursing aides, orderlies and attendants incurred occupational injuries or illnesses in 48% of the musculoskeletal disorder cases involving health care patients. Other occupations with musculoskeletal disorder cases involving health care patients included licensed practical and licensed vocational nurses, emergency medical technicians and paramedics, personal and home care aides, health care support workers, radiologic technologists and technicians, and medical and health services managers.

A significant challenge in the healthcare industry is nursing home workers. Providing care to residents is physically demanding work. While the cost of musculoskeletal disorders to the health care industry is staggering, it has an even greater impact in nursing homes. Caregivers often suffer physical pain from their injuries and subsequently lose time from work. Nursing home facilities lose stability from caregivers’ absences, and residents suffer the loss of caregivers who understand their individual needs.

According to the CDC, the financial burden of back injuries in the healthcare industry is estimated to add up to $20 billion annually. These costs include higher employer costs due to medical expenses, disability compensation, and litigation. Nurse injuries also are costly in terms of chronic pain and functional disability, absenteeism, and turnover. Furthermore, this is an aging workforce (average age is 46.8 years), and there is an expected 20% shortage of personnel by 2015 and 30% by 2020. The indirect consequence is that back claims will likely increase as the workforce ages and new, inexperienced workers are hired to fill the shortage.

This is such a problem that as of April 2012 the following states — California, Illinois, Hawaii, Maryland, Minnesota, New Jersey, New York, Ohio, Rhode Island, Texas, and Washington — have enacted safe patient handling legislation. However, prevention may not always work for this industry. The teaching of manual lifting techniques has not been successful in affecting injury rates for nurses. This is largely due to the fact that patient characteristics and workplace environment may make it difficult to employ correct techniques. In addition, even if proper techniques are used, patient weight may exceed National Institute for Occupational Safety and Health lifting guidelines.

Why Baseline Testing Is The Solution For Employers
Employers are only responsible for work-related injuries that arise out of the course and scope of employment. The employer needs only to return the injured worker to pre-injury status, but it is virtually impossible for employers to objectively document an employee’s pre-injury status. The only way the Healthcare industry can manage their musculoskeletal disorder cases is by adopting the the EFA-STM baseline test, which is an objective, evidence-based tool designed to measure the functional status of an injured worker and to identify return-to-work opportunities.

The EFA-STM Program is specifically customized for an employer’s current workforce as well as new hires and complies with all ADAAA and EEOC regulations.

It begins by providing baseline soft-tissue injury testing for existing employees, as well as new hires. The data is maintained off-site and only interpreted when and if there is a soft tissue claim. After a claim, the injured worker is required to undergo the post-loss testing, thereby granting control of claim when this is often not the case. The subsequent comparison objectively demonstrates whether or not an acute injury exists. If so, the claim is accepted for the exact injury, or aggravation delta between the post-loss and baseline tests, thereby limiting liability to only what the employer owes and eliminating the issue of paying for existing or degenerative issues. If no acute pathology is found, then the claim is never accepted. The utilization of this book end strategy allows for unprecedented access to information and allows for better treatment.

What Features Of Long-Term Care Policies Should I Focus On?

Where May Care Occur?
The best policies pay for care in a nursing home, assisted living facility, or at home. Benefits are typically expressed in daily amounts, with a lifetime maximum. Some policies pay half as much per day for at-home care as for nursing home care. Others pay the same amount, or have a “pool of benefits” that can be used as needed.

Under What Conditions Will The Policy Begin Paying Benefits?
The policy should state the various conditions that must be met.

  • The inability to perform two or three specific “activities of daily living” without help. These include bathing, dressing, eating, toileting and “transferring” or being able to move from place to place or between a bed and a chair.
  • Cognitive impairment. Most policies cover stroke and Alzheimer’s and Parkinson’s disease, but other forms of mental incapacity may be excluded.
  • Medical necessity, or certification by a doctor that long-term care is necessary.

What Events Must Occur Before The Policy Begins Paying Benefits?

  • Some older policies require a hospital stay of at least three days before benefits can be paid. This requirement is very restrictive — you should avoid it.
  • Most policies have a “waiting period” or “elimination” period. This is a period that begins when you first need long-term care and lasts as long as the policy provides. During the waiting period, the policy will not pay benefits. If you recover before the waiting period ends, the policy doesn’t pay for expenses you incur during the waiting period. The policy pays only for expenses that occur after the waiting period is over, if you continue to need care. In general, the longer the waiting period, the lower the premium for the long-term care policy.

How Long Will Benefits Last?
A benefit period may range from two years to lifetime. You can keep premiums down by electing coverage for three to four years — longer than the average nursing home stay — instead of lifetime.

Indemnity vs. Reimbursement
Most long-term care policies pay on a reimbursement (or expense-incurred) basis, up to the policy limits. In other words, if you have a $150 per day benefit but spend only $130 per day for a home long-term care provider, the policy will pay only $130. The “extra” $20 each day will, in some policies, go into a “pool” of unused funds that can be used to extend the length of time for which the policy will pay benefits. Other policies pay on an indemnity basis. Using the same example as above, an indemnity policy would pay $150 per day as long as the insured needs and receives long-term care services, regardless of the actual outlay.

Inflation Protection
Inflation protection is an important feature, especially if you are under 65, when you buy benefits that you may not use for 20 years or more. A good inflation provision compounds benefits at 5 percent a year. Without inflation protection, even 3 percent annual inflation will, over 24 years, reduce the purchasing power of a $150 daily benefit to the equivalent of $75.

Six Other Important Policy Provisions

  1. 1=7 Elimination period. Under some policies, if the insured has qualifying long-term care expenses on one day during a seven-day period, he or she will be credited with having satisfied seven days toward the elimination period. This type of provision reflects the way home care is often delivered — some days by professionals and some days by family members.
  2. Guaranteed renewable policies must be renewed by the insurance company, although premiums can go up if they are increased for an entire class of policyholders.
  3. Waiver of premium, so that no further premiums are due once you start to receive benefits.
  4. Third-party notification, so that a relative, friend or professional adviser will be notified if you forget to pay a premium.
  5. Nonforfeiture benefits keep a lesser amount of insurance in force if you let the policy lapse. This provision is required by some states.
  6. Restoration of benefits, which ensures that maximum benefits are put back in place if you receive benefits for a time, then recover and go for a specified period (typically six months) without receiving benefits.

$1.25M Backpay Highlights Risks of Mismanaging Union Risks In Merger & Acquisition Deals

September’s National Labor Relations Board (NLRB) order requiring the buyer of a California nursing home to pay approximately $1.25 million in backpay and interest, rehire 50 employees and recognize the seller’s union reminds buyers of union-organized businesses of some of the significant risks of mishandling union-related obligations in merger and acquisition, bankruptcy and other corporate transactions under the National Labor Relations Act (NLRA) and other federal labor laws.

Buyer’s Obligations To Honor Seller’s Collective Bargaining Obligations
Under the National Labor Relations Act, new owners of a union facility that are “successors” of the seller generally must recognize and bargain with the existing union if “the bargaining unit remains unchanged and a majority of employees hired by the new employer were represented by a recently certified bargaining agent.” See National Labor Relations Board v. Burns Sec. Servs., 406 U.S. 272, 281 (1972).

In assembling its workforce, a successor employer also generally “may not refuse to hire the predecessor’s employees solely because they were represented by a union or to avoid having to recognize a union.” U.S. Marine Corp., 293 National Labor Relations Board 669, 670 (1989), enfd., 944 F.2d 1305 (7th Cir. 1991).

Nasaky, Inc. National Labor Relations Board Order
September’s National Labor Relations Board Order requires Nasaky, Inc., the buyer of the Yuba Skilled Nursing Center in Yuba City, California, to recognize and honor collective bargaining obligations that the seller Nazareth Enterprises owed before the sale and rehire and pay backpay and interest to make whole 50 of the seller’s former employees who the National Labor Relations Board determined Nasaky, Inc. wrongfully refused to hire when it took over the facility from the prior owner, Nazareth Enterprises.

Before Nasaky, Inc. bought the nursing home, many of the employees at the nursing home were represented by the Service Employees International Union, United Healthcare Workers West (Union). After Nasaky, Inc. agreed to buy the facility but before it took control of its operations, Nasaky, Inc. advertised in the media for new workers to staff the facility and told existing employees at the facility that they must reapply to have a chance of keeping their jobs under the new ownership.

When Nasaky, Inc. took operating control of the facility, facility operations continued as before with the same patients receiving the same services. The main difference was the workforce. The new staff included 90 employees in erstwhile bargaining unit positions, of which forty were former employees of the predecessor employer and fifty were newcomers. Nasaky, Inc. then took the position that the change in the workforce excused it from responsibility for recognizing or bargaining with the union or honoring the collective bargaining agreement between the union and seller Nazareth Enterprises.

When the union demanded that Nasaky, Inc. recognize the union and honor the union’s collective bargaining agreement with Nazareth Enterprises, Nasaky, Inc. refused. Instead, Nasaky, Inc. notified the union that it would not allow the union on its premises, would not honor the union’s collective bargaining agreement with the seller, and did not accept any of the predecessor’s terms and conditions of employment. The union then filed charges with the National Labor Relations Board, charging that Nazareth Enterprises had breached its obligations as a successor under the National Labor Relations Act.

After National Labor Relations Board Regional Director Joseph F. Frankl agreed and issued a complaint, California Administrative Law Judge Gerald Etchingham found all the allegations true based on a two-day hearing. He rejected all of Nasaky’s explanations for why it declined to hire most of those who had worked for the previous employer. See the Administrative Law Judge Decision. Since Nasaky, Inc did not file exceptions, the National Labor Relations Board ordered Nasaky, Inc. immediately to recognize and bargain with the union, hire the former employees and make them whole. The amount of backpay and interest is expected to approximate $1.25 million.

Managing Labor Exposures In Business Transactions
The National Labor Relations Board’s order against Nasaky, Inc. highlights some of the business and operational risks that buyers and sellers can face if labor-management relations are misperceived or mismanaged in connection with business transactions. Because the existence of collective bargaining agreements or other labor obligations can substantially affect the operational flexibility of a buyer, buyers need to investigate and carefully evaluate the potential existence and nature of their obligations as part of their due diligence strategy before the transaction. A well-considered understanding of whether the structure of the transaction is likely to result in the buyer being considered a successor for purposes of union organizing and collective bargaining obligations also is very important so that the buyer and seller can properly appreciate and deal with any resulting responsibilities.

Beyond the potential duty to recognize a seller’s collective bargaining obligations, buyers and sellers also should consider the potential consequences of the proposed transaction on severance, pension, health, layoff and recall and other rights and obligations that may arise. At minimum, the existence of these responsibilities and their attendant costs are likely to impact the course of the negotiations.

When a worksite is union-organized, for instance, additional obligations may arise in the handling of reductions in force or other transactions as a result of the union presence. For example, in addition to otherwise applicable responsibilities applicable to non-union affected transaction, the Worker Adjustment Retraining Act (WARN) and other plant-closing laws and/or collective bargaining agreements may impose special notification or other requirements before a reduction in force or other transaction related activities.

Similarly, the existence of collective bargaining agreements also may trigger obligations for one or both parties to engage in collective bargaining over contemplated changes in terms and conditions of employment, to provide severance, to accelerate or fund severance, benefits or other obligations, to provide continued health or other coverage, to honor seniority, recall or other rights or deal with a host of other special contractual obligations.

Where the collective bargaining arrangements of the seller currently or in the past have included obligations to contribute to a multiemployer, collectively-bargained pension or welfare plan, the buyer and seller also need to consider both the potential for withdrawal liability or other obligations and any opportunities to minimize these exposures in structuring the allocation of the arrangement. In this case, both parties need to recognize that differences exist between the federals for determining when successor liability results under the withdrawal liability rules than typically apply to other labor and employment law purposes.

While buyers and sellers often presume that the stock versus assets sale distinction that typically applies for many other legal purposes will apply, this can be an expensive mistake in the case of determining a buyer’s obligation to honor the seller’s collective bargaining obligations post deal. Likewise, buyers can be exposed to multiemployer successor liability from asset transactions, although it may be possible to mitigate or avoid such liabilities by incorporating appropriate representations in the sale documents or through other steps. Since these multiemployer withdrawal and contribution liabilities generally attach on a controlled group basis, both parties need to properly appreciate and address these concerns early in the transaction to mitigate their risks and properly value the transaction.

In light of these and other potential labor-related risks that may affect corporate and other business transactions, parties contemplating or participating in these transactions are urged to engage and consult with competent legal counsel with specific experience in such labor-management relations and multiemployer benefit plan matters early in the process.