After Commonwealth Court’s Parrish Decision, Workers’ Compensation Insurer Insolvencies Will Likely Hit Injured Workers Especially Hard

Half a decade ago, in its monumental decision in Lorino v. Workers’ Compensation Appeal Board (Commonwealth of Pennsylvania), 266 A.3d 487 (Pa. 2021), the Pennsylvania Supreme Court ruled that even when an employer or insurer established the reasonableness of its challenge to a workers’ compensation claim, a Workers’ Compensation Judge (“WCJ”) still had discretion under the Pennsylvania Workers’ Compensation Act (“the Act”) to award attorneys’ fees to the worker under Section 440 of the Act. Lorino was a boon to injured workers, deterring employers and insurers from lodging reasonable but unnecessary or malicious challenges to their workers’ compensation claims.

In its recent decision in Parrish v. Yeager Supply, Inc. (Workers’ Compensation Appeal Board), No. 443 C.D. 2024, the Pennsylvania Commonwealth Court clarified that the Pennsylvania Workers’ Compensation Security Fund (“the Security Fund”) cannot be assessed attorneys’ fees under the Act and Lorino, regardless of whether an insurer on whose behalf the Security Fund pays workers’ compensation benefits reasonably contests an injured worker’s claim.

The Commonwealth Court’s ruling will affect a relatively small number of workers’ compensation cases moving forward—but in a big way—because it’s limited to rare instances when the Security Fund has to step in for an insolvent insurer to pay workers’ compensation benefits.

Understanding the Pennsylvania Workers’ Compensation Security Fund and attorneys’ fees under the Act

Under Pennsylvania’s workers’ compensation system, employers must carry insurance coverage for their workers’ compensation obligations to injured employees. However, insurance companies that issue workers’ compensation policies to employers could themselves face financial difficulties, including liquidation or bankruptcy.

As a backstop against these outcomes preventing injured workers from receiving the workers’ compensation benefits they’re legally entitled to, Pennsylvania established the Workers’ Compensation Security Fund. This guaranty fund provides workers’ compensation benefits to injured workers of employers whose insurers have gone into liquidation. The Security Fund’s funding comes from three sources: assessments levied on member insurers, distributions from insolvent insurers’ estates, and investment income.

Turning to attorneys’ fees under the Act, Section 440(a) of the Act states that

In any contested case where the insurer has contested liability in whole or in part . . . the employe or his dependent, as the case may be, in whose favor the matter at issue has been finally determined in whole or in part shall be awarded, in addition to the award for compensation, a reasonable sum for costs incurred for attorney’s fee, witnesses, necessary medical examination, and the value of unreimbursed lost time to attend the proceedings: Provided, That cost for attorney fees may be excluded when a reasonable basis for the contest has been established by the employer or the insurer.

In Lorino, the Pa. Supreme Court interpreted Section 440 of the Act in a way that upended the misperception spread by employers and workers’ compensation insurers that when an employer or insurer established a reasonable basis to contest a worker’s injury claim, Section 440 would not entitle an injured worker to an award of attorneys’ fees. In the decision, the court noted that Section 440 of the Act used both “shall” and “may” in the same section, indicating that those words had different meanings (with “shall” indicating a mandatory obligation and “may” indicating a permissive action).

The court explained that when an employee prevails in a contested workers’ compensation case, “a reasonable sum for [attorneys’ fees] shall be awarded to the claimant. Such an award is mandatory. Where, however, the employer has established a reasonable basis for the contest, an award of [attorneys’ fees] may be excluded.” Meaning that a WCJ “is permitted, but not required, to exclude” an award of attorneys’ fees. Thus, even if an employer or insurer established the reasonableness of its challenge to a worker’s claim, a WCJ still had discretion under the Act to award attorneys’ fees to the worker.

Must the Security Fund pay Section 440 attorneys’ fees assessed against an employer?

In Parrish v. Yeager Supply Co., a Workers’ Compensation Judge granted Randall Parrish’s Petition for Review of Utilization Review concerning treatment for a work injury he suffered in August 1998, and ordered Parrish’s employer, Yeager Supply, Inc., to pay Parrish’s attorneys’ fees under Section 440 of the Act and Lorino. The WCJ ruled that although Yeager Supply had reasonably contested the treatment, it failed to sustain its burden of proof to succeed because it did not “present credible, persuasive medical evidence that the treatment provided by [a chiropractor] to [Parrish] . . . was neither reasonable nor necessary.”

The Security Fund, which was responsible for paying the workers’ compensation benefits in the case, appealed the WCJ’s decision to the Workers’ Compensation Appeal Board, arguing that the Act barred the assessment of attorneys’ fees against the Security Fund. The Board agreed, citing the Commonwealth Court’s 2008 decision in Lebanon Valley Brethren Home v. Workers’ Compensation Appeal Board (Flammer), 948 A2d 185. The Board reasoned that because the Security Fund was not an “insurer” under the Act, it could not be assessed attorneys’ fees. The Board accordingly vacated the attorneys’ fees award.

Parrish then appealed the Board’s order to the Commonwealth Court, arguing that Lorino granted WCJs “full discretion” to assess attorneys’ fees even when an employer reasonably contested a claim, and thus a WCJ could assess such fees against the Security Fund, as the fees were a subset of litigation costs. He also argued that Flammer only established that the Security Fund could not be assessed penalties or attorneys’ fees based on an unreasonable contest; thus, his case was distinguishable.

The Commonwealth Court rejected Parrish’s arguments and affirmed the Board’s decision. Although the court acknowledged that the Act gave WCJs discretion to refuse or award attorneys’ fees in cases where employers established a reasonable basis to contest a claim, it ruled that the Security Fund was not an “insurer” under the Act. The court noted that the Act only authorized an award of attorneys’ fees against an employer or insurer. Furthermore, the Act defined an insurer as “the State Workmen’s Insurance Fund or other insurance carrier which has insured the employer’s liability under the Act, or the employer in cases of self-insurance.” Because the Security Fund did not fall under that definition, it could not have attorneys’ fees assessed against it under Section 440 and Lorino.

An infrequent but impactful occurrence

Although Lorino established that injured workers can recover attorneys’ fees regardless of the reasonableness of an employer’s or insurer’s contest of their claim, Parrish forecloses recovering such fees from the Security Fund when an employer’s workers’ compensation insurance carrier is insolvent.

Workers’ compensation insurer insolvencies occur infrequently. According to the Pennsylvania Insurance Department, six workers’ compensation insurers were liquidated within the last decade: Arrowood Insurance Co (2023), Alliance National Insurance Company (2020), Northwestern National Insurance Company (2019), Guarantee Insurance Company (2017), Castlepoint Insurance Company (2017), and Lumbermen’s Underwriting Alliance (2016).

That said, an insurer’s liquidation can affect multiple workers’ compensation claims, as the insurer may have many claims pending in Pennsylvania at the time of its liquidation. As a result, Parrish may result in significant consequences for injured workers who receive workers’ compensation benefits through the Security Fund, since they will be unable to recover the legal fees they incur to fight back when an employer or insurer contests their claim.