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Commutation of Attorney Fee


By Warren Schneider, Esq.


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Before commutation is discussed it is helpful to review how indemnity payments are made to an injured employee. Besides medical treatment to cure or relieve from the effects of an injury1 an applicant is entitled to indemnity payments for permanent disability. The rate and span of the payments depends on the disability rating. For dates of injury before 2003 payments were very predictable.
 
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I. Indemnity Payments For Dates of Injury
before 2003

a. Rating Less Than 70%


In a workers' compensation case when an applicant becomes permanent and stationary he or she is entitled, in addition to medical treatment, to payments for a specific number of weeks at a specified payment rate. When the weeks of payments end the applicant is entitled to no more payments. The number of weeks and the payment rate depend on the rating.2

A graph of the payments would look something like that shown in Figure 1. The graph is not to scale. The vertical axis is the rate of payment and the horizontal axis is time from date of permanent and stationary.

For example, where the date of injury is in the year 2002 and the rating was 10% the number of weeks of payments is 30.25. The maximum rate of payment is $140 per week. The total payout would be $4,235.00.3


Figure 1. Rating less than 70% Permanent Disability Payments


b. Rating 70% to 99%


When the rating is 70% to 99% the applicant receives permanent disability payments for a specific number of weeks at a specified payment rate as described in the previous paragraph only there are more weeks and a higher rate of payment. Besides the permanent disability, the applicant is entitled to an additional benefit that is a payment for the rest of the individual's life, i.e. a life pension.4 The life pension does not begin until the total weeks of permanent disability have been paid. The life pension is paid at a lower rate than the rate for permanent disability.

For a rating of 70-99% the base weekly payment rate for the life pension is determined by using a formula 5 that is based on the value of the rating and the date of the injury.

The rate of the life pension payment is specified as a weekly rate, although the payment is actually made every two weeks.

figure 2

Figure 2. Rating 70-90% Permanent Disability and Life Pension



c. Rating 100% Total Disability Indemnity Payment

Where an injured employee becomes totally permanently disabled he or she is entitled to a payment for the remainder of his or her life. The rate of that payment is the same as the rate for total temporary disability.6 The rate is set based on the date of injury.7

figure 3

Figure 3. Rating 100% Payments at TTD Rate for Remainder of Life


1 LC §4600
2 LC §4658
3 Refer to yellow tables by Med-Legal, Inc.
4 LC §4659(a)
5 Formula: Weekly payment = (rating – 60) x .015 x Weekly Earnings
within max for year of DOI
6 LC §4453(a)
7 The increase in the weekly earnings limit to the current limit after two years
does not apply. LC §4661.5



II. Indemnity Payments For Dates of Injury after 2003

Where the date of injury is on or after 1/1/2003 the life pension and the total disability payment increase each year to account for the increase in the cost of living.8 The yearly cost-of-living increase is based on the percentage increase in the state average weekly wage (SAWW).9 This yearly increase is effective on January 1 of each year commencing the year following the start of the payments.10

The amount of each of these yearly increases in the future is unknown at the time of the award so the exact rates for payments in the future are unknown. The payment rate increase is based on the percentage increase of the state average weekly wage (SAWW) as reported in the previous year so this cannot be predicted.

The increases start on January 1 of the year following the start of payments. Baker v. WCAB Supreme Court (8/11/11 modified on 10/19/11) The legislature should amend LC §4659(c) to clear up any misunderstanding as to the legislative intent of the code section. The life pension payment rate should be based on the date of injury rather than when the pension starts.

The percentage increases since 2003 are shown in Table 1 below.

Applicable Year
SAWW
Percentage Increase
2003
794.95
n/a
2004
790.50
*
2005
806.11
1.97496
2006
838.42
4.00813
2007
880.00
4.95932
2008
914.60
3.93181
2009
956.20
4.54843
2010
984.83
2.99414
2011
979.90
*
2012
1003.55
2.41351

Table 1. SAWW Increases Since 2003.


a. Rating Less Than 70%

There is no provision in the code for cost-of-living increases for permanent disability less than 70%. There is a case on this. The graph of payments looks the same as Figure 1.

b. Rating 70% to 99%

The COLA increases do not apply to the permanent disability payments. The COLA increases only apply to the life pension payments and the increases only start when the life pension payments start. The life pension payments start after all of the weeks of permanent disability have been paid out. 11

The starting rate of payment is based on the date of injury.12 Future payment rates cannot be determined at the time of the award because the future increases in SAWW are unknown. A graph of payments is depicted in Figure 4. The graph is not to scale.


Figure 4. Rating 70-99% Permanent Disability and Life Pension with COLA.


c. Rating 100% Total Disability Indemnity Payment

The payment rate for total disability life payments is based on the date of injury and starts at the same rate as total temporary disability payments.13 Total permanent disability is also subject to COLA increases for dates of injury after 1/1/2003. A graph of possible payments is depicted in Figure 5.


Figure 5. Rating 100% Payments at TTD Rate for Remainder of Life.


For a date of injury occurring on or after 1/1/2007 the earnings limit used for setting the payment rate for total temporary disability is increased annually based on the increases in SAWW. So, for total disability the starting payment rate gets the benefit of a COLA increase and following that the payment rate gets COLA increases.

8 LC §4659(c)
9 http://www.oui.doleta.gov/unemploy/content/data.asp
10 Baker v. WCAB Supreme Court (8/11/11 modified on 10/19/11)
11 LC §4659(c)
12 LC §4659(a)
13 LC §4659(b)



III. Attorney Fee

The attorney fee is a percentage of applicant’s payments. Neither the insurance company nor the employer pays the applicant’s attorney fee. The Applicant pays the attorney fee. The percentage is usually 15% but can be lower such as 9% or can be higher such as 18%. In this article 15% will be used as an example.

No matter what the rating is the attorney fee is a percentage of each payment. If the rating is 70-99% an attorney fee is awarded on both the permanent disability part and the life pension part. If the award is for 100% a percentage of each of applicant’s payment is withheld and paid to the attorney.

So from every payment to the injured worker a percentage is deducted and paid to the attorney. The injured worker receives a check less the attorney fee and the attorney receives a check. The insurance company writes two checks every pay period - the pay period being two weeks.

The weekly rate for the applicant and attorney is: Applicant Weekly Rate = (weekly rate in current year) – 15% x (weekly rate in current year) Attorney Fee Weekly Rate = 15% x (weekly rate in current year)

As the rate in the current year increases for cost-of-living increases so does the amount deducted for attorney fee. This is a uniform increasing reduction. The reduction is uniform because it is always a fixed percentage (15%) of the payment. The deduction increases when the payment increases.

Future payments to the applicant and to the attorney are unknown at the time of the award.

That’s the way attorney fees are paid when there is no commutation.




IV. Commutation of Attorney Fee

The payment for the attorney is usually a small amount. The insurance company would rather pay off the attorney with one check for a lump sum rather than incur the administrative costs of issuing a check to the attorney each pay period. An added complication is that the payments are for the applicant’s life. If the attorney dies before the applicant the insurance company would have to pay the periodic fee to the attorney’s estate or heirs.

The attorney would also like to receive a lump sum rather than many small checks over a period of many years.

Both sides benefit if the attorney is paid off with a lump sum at the time of the award. Commutation is the process of substituting a lump sum for a stream of payments. The lump sum to substitute in place of the payments to the attorney is based on the present value of a string of payments. The present value of a fixed annuity, i.e. periodic payments for a period of years, can be thought of as what amount of money invested today at a certain interest rate will yield a string of payments for the term of the annuity. In other words the total of all the payments will be greater than the present value. There are published financial tables where the payment is constant and only interest is considered.

But in the case of a life pension or total permanent disability the payment increases by an unknown amount due to SAWW increases and the payments terminate upon the death of the applicant. A more complicated situation.

What is being commuted is the attorney fee. The injured worker's benefit is not being commuted. The applicant continues to receive periodic payments. The point is: the applicant’s payments do not have to be touched. The big issues arise because of the effect of commuting the attorney fee on the applicant’s payments. More on this point in section VI below. Where the commutation is for the benefit of the Applicant the calculation of the present value is similar but the amount deducted from each payment for the payback can be different.




V. Commutation of Applicant’s Payments for the Benefit of Applicant

The main purpose of this article is not a commutation of the injured worker’s payments. However, it helps to understand the whole process. The injured worker's entire benefit can be commuted or a specific sum can be commuted and paid in a lump sum to the applicant. This results in a reduction of the injured worker’s payments. It does not affect the attorney fee whether the fee has been commuted or not.

Keep in mind that this section only applies to commutation of applicant’s payments. Not the attorney fee. The commutation of the attorney fee will be discussed in Section VI of this article.

When the rating is less than 70% a portion or all of applicant’s permanent disability payments can be commuted to a lump sum.14 When a portion of applicant’s payments are commuted the payback amount can either be deducted from each payment15 or the rate of payment can remain the same but the payments would stop sooner. The latter method is often called commuted “off the far end”. The choice of method should be made by the applicant.

The commutation of the permanent disability payments does not take into consideration that the applicant may die before the payments are fully paid out 16 but does take into consideration a discount of 3%. 17

Example C in Workers’ Compensation Laws of California by Lexis-Nexis is an example of a commutation where each payment is reduced. Example B is an example of a commutation “off the far end”.

An example of commuting all remaining payments of permanent disability is given in Example A of Workers’ Compensation Laws of California by LexisNexis. The methods in these examples in the book are still valid.

When the rating is 70-99% there are permanent disability payments and when that ends life pension payments begin and continue for the life of the applicant. The permanent disability part can be commuted or the life pension part can be commuted or both parts can be commuted. These are two separate benefits.

The commutation of the permanent disability when the rating is 70-99% can be off-the-far-end method but this method results in the permanent disability payments stopping for a period of time before the life pension payments start. The attorney should expect a telephone call from the applicant that he or she did not get their check – even though the attorney may have explained this at the time of the commutation. The applicant may not be able to do without an income. This method is usually not desirable for the applicant and may not be in the best interest of the applicant.

All or a portion of the life pension can be commuted. An example of commuting a portion of a life pension is given in Examples E and F of Workers’ Compensation Laws of California by LexisNexis.18 The methods in these examples in the book are still valid.

The calculations for the commutation of the life pension are different from that of the permanent disability indemnity. The commutation of Applicant’s life pension payments must take into consideration the probability of the beneficiary dying.19 This is important because the payments to the attorney for the fee will terminate upon the death of the applicant. If the attorney fee were not commuted the payments to the attorney would stop.

The probability of the applicant living to collect a payment is based on the U.S. Life Tables 20 published following each decennial census.21 The tables in Workers’ Compensation Laws of California by LexisNexis are based on the 1989-91 life tables.22 Those tables are over 20 years old. The Administrative Director should update these tables.

The calculations to do a commutation are complicated. It is not done by multiplying the payment by the life expectancy of applicant.

There is no far end for a commutation of a portion of applicant’s life pension payments. The far end is when payments end. Payments end for a life pension when the applicant dies. This is unknown until it happens. By the time it is known (when the applicant dies) it is too late to start deductions. The insurance company should never agree to a commutation of a life pension off-the-far-end.

When a portion of the injured worker’s life pension payment is commuted the payment is typically reduced by a fixed amount. This is because the applicant has borrowed the money. The cost of the loan is born by the borrower. An analogy is borrowing from a life annuity.

Even though the payment may increase based on COLA the reduction is constant and does not increase. The insurance company or by analogy a bank does not get the benefit of a cost of living increase. The reduction is uniform but not increasing. The risk of varying COLA increases is on the applicant and not the insurance company.

It is interesting that Example E in the book is a commutation of all of life pension prior to the commencement of the life pension. According to the Baker decision the applicant is not “entitled” to the life pension before the commencement of payments.

The commutation of all or a portion of an injured worker's benefit requires a petition for commutation with review and approval based on the best interest of the applicant by a workers compensation judge. 23

14 LC §5100
15 Sometimes referred to as “off the side”
16 Reg §10169.1(b)
17 Reg §10169.1(a)
18 Thanks to James T. Stewart (Stew) for revising the tables.
19 LC §5101, Reg §10169.1(a)
20 http://www.cdc.gov/nchs/products/nvsr.htm
21 Reg §10169.1(c)
22 http://www.cdc.gov/nchs/data/lifetables/life89_1_3.pdf
23 LC §5100




VI. Calculating the Commutation of Attorney Fee

The main focus of this article is not with a commutation of any part of the injured worker’s benefits. It is only dealing with a commutation of the attorney fee. This section does not deal with the commutation of the applicant’s benefits.

Eliminating the periodic payment check to the attorney does not or should not affect the payments to the injured worker. The amount of the injured worker’s check is the same using the same percentage reduction discussed above. After the commutation of attorney fee the insurance company then issues only one periodic payment check – not two - each pay period. That check is to the injured worker. The attorney has been paid with the commutation.

The applicant should not have to pay for the commutation of the attorney fee. The applicant should not have any detriment because the attorney gets his or her fee in a lump sum. Each payment to the applicant is reduced by the same percentage of the attorney fee whether the attorney fee has been commuted or not. What that reduction will be in the future is unknown only because the changes in SAWW. The Applicant has no detriment as a result of the commutation of the attorney fee.24 Applicant’s payments are not affected by the commutation of the attorney fee. There will be no further adjustment of the applicant’s life payments for the remainder of this discussion.

As part of representing the applicant the attorney should see that applicant is not adversely affected by the commutation of the attorney fee.

The question then becomes what is the lump-sum amount to pay the attorney?

a. Rating Less Than 70%

For a rating of less than 70% the commutation method of the attorney fee is the same as the commutation of the applicant’s permanent disability. The only difference is that the payment used for the computation is the payment to the attorney. The attorney’s payment is the fee percentage times the applicant’s permanent disability payment.25 The applicant’s payment is reduced by the attorney’s percentage. This payment rate and the number of weeks of payments are used to calculate the lump sum value of the attorney fee.

Table 1 on page 1549 of the 2012 edition of Workers’ Compensation Laws of California by LexisNexis is used to commute permanent disability payments to the applicant and is also used to commute the attorney fee on permanent disability. The same method as used in Example A is used to commute attorney fee only the weekly payment is the attorney fee weekly payment and not the payment to the applicant.

For example, if rating is 65% and the date of injury was in 2010 and the applicant’s weekly earnings were over the maximum limit26 then the permanent disability weekly payment is $230.00 per week. The attorney fee would be 15% of that payment for $34.50. The number of weeks of disability is 391.25 weeks.

From Table 1 of Workers’ Compensation Laws of California by LexisNexis the present value of 391.25 weeks is 350.7252. Then the commuted value of the attorney fee is 34.50 x 350.7252 = $12,100.02. The commuted attorney fee is $12,100.02. The total payout of the attorney fee would have been $13,498.13. The cost of the commutation to the attorney is $1,398.11.

On the DWC website are Excel templates27 used by the Disability Evaluation Unit for commutation. Attachment 1 to this article is a printout of the above example using Ex. A template from the website.

An alternative method of calculation that would have rendered the same answer would have been to use the full permanent disability weekly payment before the attorney fee is deducted and to take 15% of that. The same answer is obtained but the method above was used to emphasize that it is the attorney fee that is being commuted and not a commutation of applicant’s payments.

The attorney fee on permanent disability is usually not reduced by commutation for lower ratings than 70% because the commuted value is close to the total payout value. However, when the rating is high the commuted value can be significantly lower than the total payout value. In the example above the total payout permanent disability is $89,987.50. The attorney fee without commutation would be $13,498.13.

b. Rating 70% to 99%

There are two different payment benefits to consider: the permanent disability part and the life pension part. To determine the total lump sum to be paid as attorney fee after commutation both the permanent disability part and the life pension part must be commuted and the two added.

The commutation of the permanent disability part is the same as in the previous section.

The commutation of the life pension part is more difficult. The amount of the lump sum for commutation of attorney fee depends on the present value of the total attorney fee payments. Determining the present value of the attorney fee payments is complicated – involving mathematical methods used by an actuary that are beyond the scope of this paper. Fortunately the attorney and the judge do not have to do the calculations. The calculations are done by an expert using a computer program.

The primary difference in commuting the attorney fee as opposed to applicant’s payments on a life pension or total disability payments is that the probability of collecting the payments is based on the applicant’s life and not on the attorney’s life. But this does not make it a commutation of the applicant’s payments. It is still a commutation of the attorney’s payments.

On the life pension, the amount of the first payment to the applicant is known.28 So the amount of the first payment to the attorney is known. That is 15% of applicant’s first payment. Now the same methods that are used to determine the present value of a life payment to applicant can be applied to determine the present value of the attorney fee29 except that the starting payment is 15% of the starting life pension payment.

Nothing is changed for the injured worker after the commutation, only the insurance company issues one check per payment period. That is the check to the injured worker. The amount of that check is not changed by the commutation of the attorney fee. After computation of the fee the attorney already has the entire fee. After the lump sum is paid no further checks are issued to the attorney. Payments to the Applicant continue undisturbed.

An alternative method of the lump sum amount of commuted value of the attorney fee is by calculating the present value of the total life pension and multiplying that by the percentage of the attorney fee. The same answer results. This alternative method was not used in this discussion in order to emphasis that it is the attorney fee payments that are being commuted and not the applicant’s payments.

There are exceptions when the percentage reduction of applicant’s payments is not equal to the attorney fee percentage. This can happen when the deductions do not start when the payments start. The percentage reduction on the remainder must be higher to make up for the non-reduction period.

It would be unusual if the deduction percentage were different from the attorney fee percentage on a life pension. This is because the life pension payments do not begin until all of the permanent disability payments have been paid out. This could take years. Table 2 shows examples of permanent disability payout for several percentages. So, it is unlikely that a commutation of attorney fee would take place after the life pension payments have started.

Rating
Years30
70%
8.3
80%
11.4
90%
14.4

Table 2. Years of Permanent Disability Payments Before Life Pension Starts.



c. Rating 100%


The calculations for commuting a fee on a case where the rating is 100% are the same as the calculations for a life pension as described in the previous section. The only difference is that the payments begin at the time of permanent and stationary and start at a higher payment rate. Just like a life pension the payments continue for the life of the applicant and not the life of the attorney.

If the commutation is done sometime after the payments have started then the commutation is of the remainder. Only future payments are reduced for interest and the probability of living to collect the payment. Past payments, whether actually paid or owed, are not reduced. Amounts paid or due and payable are not reduced for interest or the probability of not living to collect the amounts because the applicant has already lived to the time when the payments were due.

In determining the value of the benefit in order to calculate the attorney fee the percentage of fee should be taken on the total of the amounts paid or immediately payable plus the present value of future payments.

24 Nor should the attorney fee be affected by a commutation of applicant’s benefits.
25 LC §4453
26 Maximum weekly earnings for injuries in that year was $345.00 for which the payment would be $230.00
27 http://www.dir.ca.gov/dwc/DEU.html See Commutation templates and instructions under Resources:
28 Because of the Baker case SAWW increases do not start until the first payment. LC 4659 for the rate of payment.
29 The date of birth and gender of applicant are used instead of the attorney’s because payments stop when the applicant dies and not when the attorney dies. Payments would be made to the attorney’s estate – another complication that an insurance company does not want.
30 For date of injury in or after 2005




VII. COLA Increases


A complication for the commutation expert is that the future payment rates to the applicant change every year and, therefore, the attorney fee is more difficult to determine. This is because the payments are subject to yearly COLA increases based on SAWW increases. Since the future SAWW percentage increases are not known at the time of the commutation an estimate has to be made when calculating a commutation.

What should be used as the future COLA increases? One way this can be done is to estimate expected COLA averaging over a number of past years. The DEU31 has done this by using 4.6%.32 This is the value that is commonly used but averaging over a different period can result in a different average percentage increase.

Why would a defendant care what this value is: because the higher the value, the higher the present value will be and, therefore, the higher the lump sum the defendant has to pay the attorney.

One option is for the parties to negotiate the average percentage increase in SAWW. The interest rate could also be negotiable. For a commutation of applicant’s benefits LC §5101(b) specifies that a 3% interest discount is to be used. But it should be kept in mind that the attorney fee is being commuted and not applicant’s payments.

A more reliable approach would be to have an economist render an opinion as to the number that should be used for the expected SAWW increases.

31 Blair Megowan
32 Currently the value used by DEU. Wilson v. Piedmont Lumber & Mill Company (4/1/11) 2011 Cal. Wrk. Comp. P.D. LEXIS 196; Melissa J. Munson (Deceased) v. City of Los Angeles Police Department, Wrk. Comp. P.D. LEXIS 387




VIII. Attorney Fee Percentage vs Deduction Percentage


There is a situation where there is an attorney fee award at one percentage but another percentage must be deducted from applicant’s payments. The deduction percentage can be different from the attorney fee percentage.

This situation can arise where payments to the applicant have already been started by the time of the commutation and no deductions have been made for attorney fee. This can also happen where an attorney fee is awarded on temporary disability and all of the temporary disability payments have been paid to the applicant and no amounts have been withheld. In these situations a higher percentage must be deducted from the remainder of payments in order to make up for the unpaid amounts. The attorney fee percentage is based on the fee that has been awarded but a higher percentage must be deducted from the remainder to achieve that fee. This is to make up for periods where no deductions have been made.

Where all other attorney fees have been withheld and either paid or will be paid to the attorney and only the attorney fee on the remainder is to be paid, the percentage deduction from applicant’s payments are the same as the attorney fee percentage.


This fee percentage would be the percentage that is deducted from each benefit payment and would be the same as the attorney fee percentage if the correct fee amounts were deducted from previous payments and awarded to the attorney. If an additional amount must be commuted from the remainder of the benefit payments then a higher deduction percentage must be used in the calculation of each deduction. The new deduction percentage would be:


IX. Calculating Applicant’s New Payment Each Year

After the award, whether or not the attorney fee has be commuted, the claims administrator must recalculate a new payment rate each new year. This must be done for the life pension or total permanent disability weekly payment rate for each case where the date of injury is on or after January 1, 2003. Getting this wrong could be costly to the insurance industry.

If the attorney fee has been commuted the initial payment for a life pension or total disability payment is set based on the attorney fee percentage or the deduction percentage as discussed in the previous section. Once that has been set the yearly calculations are straightforward.

Each year the DWC determines the COLA increase for life pensions and total disability payments.33 The same percentage increase applies to total permanent disability and life pension payments.

The payment increase is the payment weekly rate for the previous year multiplied by the percentage increase in SAWW or COLA:
Where: Pincrease is the increase in the payment for this case; Pold is the previous year’s weekly payment; COLA is the percentage increase in SAWW expressed in decimal rather than percentage. For example, a 4% increase expressed in decimal is .04.

The weekly payment for the new year is then:
Then by substituting the payment increase in above formula gives:
Which simplifies further to:
For example, if the COLA increase is 4% and the previous weekly payment was $150 then:
The new weekly payment for the next year is $156.

Once the new payment rate has been calculated that is reduced by the reduction rate for the attorney fee. If that rate were 15% then the new payment is reduced to 85%.
If the payment period has a portion before and a portion after January 1 the insurance company has to recalculate the last and first payment of the year considering that some of the payment is at the old rate and some at the new rate. The formula would be:
The reason for the 2 is because payments are made every two weeks.


33 http://www.dir.ca.gov/dwc/dwc_newslines/2011/Newsline_44-11.pdf



X. The Judge’s Role


The judge is concerned with the percentage attorney fee and what is deducted from the applicant’s benefits. As discussed above the commutation of the attorney fee should not result in any detriment to the applicant. The attorney's receiving a lump sum should not result in a cost to the applicant. And it does not have to.

Once the percentage of attorney fee is fixed then the deduction from applicant’s initial payment is fixed. If the commutation is done on or before the start of the payments and only the fee on the benefit is to be deducted then the percentage deducted is the same as the percentage attorney fee. The commutation of that attorney fee using the above method does not change the amount of reduction of applicant’s life payments.

A judge should make sure that the reduction of applicant’s life payment is only reduced by the percentage of attorney fee. If any method of calculating the deduction depends upon a fixed future increase of the SAWW such as 4.6% then the attorney and the defendant are asking for the applicant to guarantee a COLA rate for the repayment rate of the attorney fee. That may not be in the best interest of the applicant and may be difficult for the applicant to comprehend.

   
 
Attachment 1