The Fog of Adequacy

By Stephen Embry, Embry and Neusner, Groton, Connecticut

The driving force of the law is fear, which promotes dispute resolution. In the ordinary course of human affairs disputes and controversies arise and are resolved informally. It is rare that the dispute leads to the formal procedures of litigation, and even then the fear and uncertainty regarding the fog of the future usually works to promote the compromise needed to settle the disputes. A matter that must be tried to conclusion and decided by a third party represents the failure of the system rather than its success.

In Ethel L. Richardson v. Huntington Ingalls, Inc., 2013-LHC-01317 (June 24, 2013), we find a rare case discussing and laying bare the internal structures of the law, and public discussion of how the system works,

In the Richardson ALJ Order Approving Settlement, the claimant suffered an injury and a dispute arose as to post-injury earning capacity. The employer argued that the claimant could return to regular work or could at least earn more. The limited record suggests that claimant's lack of credibility cast doubt and uncertainty on the outcome.

Against this backdrop the parties entered into routine negotiations and reached an arm’s length agreement to settle the claim for $140,000.00. An agreement memorializing the agreement was prepared pursuant to 33 U.S.C.S. § 908(i), and submitted to the District Director, OWCP. The District Director declined to approve the agreement, noting that if the claimant prevailed on all issues after lengthy litigation and lived her full life expectancy and invested the settlement amount at 8%, the present value of the claim would be $306,000.00.

The claimant felt that this formulaic approach failed to take into consideration her personal facts and needs, and did not reflect real life. The claimant felt that she would be better off with a present lump sum which was preferable to the delays and uncertainties of litigation, which if successful would result in weekly benefits being dribbled out over an unpredictable lifetime. She was also concerned that success would only leave her vulnerable to future motions for modification, if she was successful in improving her earnings.

In particular the claimant took a more sanguine view of litigation risks, understanding that there was at least the possibility that she would not be successful on all issues, and in fact might not be successful at all.

The clamant therefore requested a hearing before an Administrative Law Judge. 33 U.S.C.S. § 908(i)(2). The parties submitted a new agreement for an additional $500.00, bringing the consideration to $140,500.00, an increase which they acknowledged was not likely to affect the adequacy determination.

At the hearing before the Administrative Law Judge the Solicitor of the U.S. Department of Labor took the position that risks of litigation could not be taken into consideration in evaluating the adequacy of the settlement, and the ALJ lacked discretion to do more than simply make an actuarial determination of the present value of the claim based on speculations regarding future interest rates and general life expectancy.

Claimant responded that this approach was unrealistic and did not reflect reality. The claimant further noted that not only litigation risk should be considered, but also other personal factors including the risk that the specific claimant might not live the statistical life expectancy. The claimant also noted that collateral matters such as the ability to pay off debts or mortgages with a lump sum were relevant factors in determining whether the amount was adequate. The claimant also noted that a lump sum might be of more utility than period payments, since it would free the claimant to pursue higher wages, without a concomitant reduction in benefits.

The Solicitor argued that the risk of loss, or premature demise, or collateral financial opportunities produced by a lump sum settlement would not justify a departure from formulaic discount reduction to present value, or that if such factors were to be considered the claimant must at least discard concerns of privacy and make a soul searching revelation of all the details that led her to conclude that settlement was preferable to the risks of trial, and that ultimately the ALJ must make a de novo determination of what was in the claimant’s best interests.

The Solicitor’s arguments suggest that a review of the history of settlement procedures under the Act might shine some light on the adequacy issue (Longshore and Harbor Workers' Compensation Act, 33 U.S.C.S. § 901 et seq.). Originally workers’ compensation acts were viewed as a highly paternalistic scheme in which workers could not be trusted to run their own finances, and settlements were generally not allowed, including under the Longshore Act. This proved to be impractical and in Clefstad v. Perini North River Associates, 9 BRBS 217 (1978), the Benefits Review Board recognized the value of settlements and permitted them if the settlement was in the best interest of the claimant.

While it might seem self-evident that one of the factors affecting the best interest of the claimant was the litigation risk that she would be less than fully successful, the ghosts of paternalism and distrust of workers to run their own lives continued to infest the process, and agreements would be rejected unless they were simply commutations of future benefits, rather than settlements of disputes.

Congress addressed this approach in the 1984 amendments to the Act which widened the test for approval of a settlement to a simple determination of adequacy, and which provided that if the claimant was represented by counsel the adequacy would be presumed and the settlement would be deemed approved as a matter of law, unless rejected within 30 days from submission to the District Director or ALJ.

The Solicitor in Richardson is suggesting a return to the paternalism that infused the system prior to 1984, and seeks to substitute a de novo evaluation by the District Director or ALJ of a determination of the best interests of the claimant, for the worker's own conclusions. This is despite the fact that the claimant and her counsel will have a much better understanding of the facts and risks involved in rolling the litigation dice. As Congress noted in 1984, this is particularly true where the claimant is represented by counsel who has a duty to zealously represent the client, and to advise and evaluate risks while sheltered by the attorney-client privilege.

The Solicitor argues that such factors were not relevant, but if they were not relevant the District Director or ALJ should still make a de novo evaluation of those risks, after the claimant was required to make a full and complete disclosure of all the warts of the claim and health infirmities of the claimant. In short, the claimant bore the burden of proving why she might lose the claim.

The ALJ noted that such disclosures were unlikely to be in the best interests of the claimant and would likely have the effect of encouraging the respondent to lower the offer or scuttle the settlement.

The ALJ also noted that Congress specifically differentiated situations in which the claimant is per se and represented, presumably since the attorney will be in a better position to zealously advise the client regarding risks and rewards in a private setting protected by attorney client privilege.

The evaluation of life and litigation risk is subjective and personal, and not subject to precise formulas. The future is more difficult to predict than the past, and the past alone is rife with unknowns. It is the existence of these uncertainties that leads to controversies. Even if the claimant was forced to reveal facts that undermined the value of her claim, it is unlikely that this would lead to an agreement based on a formula.

Risk evaluation is also highly personalized and specific. The individual parties must not only evaluate the potential rewards and risks, but also the emotional cost of making the litigation bet. The compensation system should not be an emotional trauma multiplier.

In Richardson the ALJ approved the settlement. This has provoked some controversy based in part on others' evaluation of whether they think the settlement offer was adequate. This is something about which one may disagree, but the fact remains that the parties felt that it was adequate. Others wonder whether it will encourage respondents to set low settlement amounts. It is true that many respondents have set low levels of authority for settlement, but the claimant preserves the power of “NO,” and can always proceed to trial if the offer is deemed by the claimant to be unreasonable.

It is helpful to recall the difference between a commutation and settlement. A commutation simply represents a calculation of the present value of future cash flow, and uncertainties are lower, although not non-existent. A settlement is a sale of risk. Before the settlement there is a risk of loss, and the probabilities of that are almost always speculative. If a case has a commutation value of $100,000.00 present dollars and a risk of loss of 50% then an adequate settlement is $50,000.00, a figure which may be affected by the present need for money. A worker whose daughter needs a $40,000.00 surgery now may find that figure adequate.

A more useful discourse might focus on the extent of the benefits provided by workers’ compensation systems. Richardson involved a shoulder injury and loss of wage earning capacity. Had chance intruded so that the injury involved the arm it would have been scheduled and likely worth significantly less than $140,500.00, even if the wage loss was the same. Perhaps the schedules should be revised to simply set a floor on the adequacy of specific awards. However, workers’ compensation systems have their own peculiar value systems. One of those values should be empowerment of workers to run their own lives, including settling their litigation.

Ultimately the unstated seems to have governed the outcome of Richardson: Individual cases are about specific facts and issues and are not subject to generic solutions and the parties to the claim are in the best position to evaluate the risks and make decisions regarding their claims and lives. The presumption is that they did their job well.

© Copyright 2013 Embry and Neusner. All rights reserved. Reprinted by permission. This article will appear in an upcoming issue of Benefits Review Board Service Longshore Reporter (LexisNexis).

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