Missouri's section 287.865.5 proof of claim filing requirement: are injured employees getting a fair shake?

• Author: Williamson, Carrie B.

1. INTRODUCTION

   Most employers in Missouri must provide workers' compensation coverage for their employees. (2) Many opt to fulfill this requirement by taking out commercial insurance policies. (3) Certain qualified employers, however, may elect to self-insure their workers' compensation obligations. (4) To protect injured workers in the event that a self-insured employer becomes insolvent, the state has a guaranty fund in place to cover the insolvent company's workers' compensation liabilities. (5) This protection, however, is subject to a prerequisite: to be eligible for benefit payments from the guaranty fund, the injured worker must file "a timely claim ... according to [the] procedures set forth by a court of competent jurisdiction over the ... bankruptcy proceedings of the insolvent [employer]." (6)

   In the event that a self-insured company files a bankruptcy case, this requirement theoretically makes sense. It utilizes bankruptcy law to compel insolvent self-insured employers to disgorge remaining assets to pay workers' compensation benefits before the state takes over the payments. However, for two reasons the mechanism (the proof of claim filing requirement) for achieving this objective does not make sense. First, the proof of claim filing requirement addresses only a narrow aspect of company insolvency--full liquidation in a bankruptcy court proceeding. It does not appear to anticipate at least two other possible insolvency contingencies: the insolvent company that voluntarily ceases operations and the financially troubled but solvent company that seeks to reorganize in a Chapter 11 bankruptcy proceeding. Second, the proof of claim filing requirement compels the most vulnerable party in the game, the worker, who is likely unfamiliar with the complexities of corporate bankruptcy law, to file a proof of claim in bankruptcy court or lose the ability to claim workers' compensation benefits. This treatment deprives the worker of his fair shake under state workers' compensation law.

   This Article argues that Section 287.865.5's bankruptcy proof of claim filing requirement is bad law because it runs counter to the purposes of Missouri's workers' compensation system. It also reveals significant gaps found at the confluence of workers' compensation law and bankruptcy law and exacerbates cracks in the systems. The cracks in turn become traps for the unwary injured worker. Because of these problems, the Section 287.865.5 proof of claim filing requirement should be amended so that it operates more in harmony with federal bankruptcy law. This Article proposes several amendments to the statutory provisions pertaining to the proof of claim filing requirement and the guaranty fund for insolvent self-insured employers in Missouri. If implemented, the proposed amendments would foster a more effective nexus between Missouri workers' compensation law and federal bankruptcy law, heighten protections of the injured worker, and conserve more of the state's limited resources.

2. LEGAL BACKGROUND

   Missouri Revised Statute Section 287.865.5 of The Missouri Workers' Compensation Law (7) contains a bankruptcy proof of claim filing requirement. The statute requires an injured worker of an insolvent, self-insured employer, as a prerequisite to receiving benefits from a state guaranty fund, to file "a timely claim ... according to [the] procedures set forth by a court of competent jurisdiction over the delinquency or bankruptcy proceedings of the insolvent [employer]." (8) To understand the issues surrounding this provision, it is first necessary to understand the basic scheme of workers' compensation law in Missouri. (9) Key aspects of that scheme are the provisions governing employers who self-insure workers' compensation liability and the process for the filing and adjudication of workers' claims.

   After outlining Missouri's workers' compensation law, this Part will address the two primary forms of bankruptcy that insolvent employers are likely to file--Chapter 7 and Chapter 11. Additionally, it will consider the purpose of and process for filing a proof of claim in a bankruptcy court and will discuss three significant cases that applied these laws. In each of the three cases, the central issue was whether certain workers were required to file proof of claims in bankruptcy court before receiving benefits from the state guaranty fund. (10)

   1. Missouri Workers' Compensation Law

      1. Provisions Governing Employers Who Self-Insure

         The State of Missouri protects Missouri workers who are injured on the job through a statutory workers' compensation system entitled "The Workers' Compensation Law." (11) Administered by the Division of Workers' Compensation (the Division) of the Missouri Department of Labor and Industrial Relations, (12) the system holds each employer responsible, "irrespective of negligence, to furnish compensation ... for [the] personal injury or death of [an] employee by accident arising out of and in the course of the employee's employment." (13) As to the coverage of this statutory obligation, certain qualified employers may opt to self-insure. (14) However, qualification to self-insure is subject to Division approval, and such approval may be obtained only after the employer's successful completion of a detailed application process. (15)

         Once the Division approves an application to self-insure, the newly qualified company must post a security deposit of at least $200,000 with the Division or, if so required, a greater amount. (16) In addition to the minimum security requirement, employers qualified to self-insure must obtain and retain membership in the Missouri Private Sector Individuals Self-Insurers Guaranty Corporation (Guaranty Corporation). (17) Member employers are first subject to a "new" member monetary assessment and thereafter may be levied with additional annual assessments. (18) The membership assessments are pooled in an "insolvency fund" and are utilized to pay workers' compensation benefits on behalf of insolvent member employers. (19)

         However, Guaranty Corporation is not automatically liable for all workers' compensation claims that are made against insolvent member employers. For example, the employer's $200,000 security deposit, held by the Division, is first utilized and depleted to meet outstanding workers' compensation obligations, and only after this amount is depleted does Guaranty Corporation become liable for any remaining claims. (20) Additionally, Guaranty Corporation's obligations are limited to those employee claims that arise from incidents and injuries occurring while the employer was a member of Guaranty Corporation and therefore subject to its annual assessment. (21) Furthermore, Guaranty Corporation is not responsible for covering any claim that arises after a company has been judicially liquidated. (22) Finally, a claimant employee of a bankrupt member employer is required to file a proof of claim in the bankruptcy proceeding before he may gain access to the insolvency fund. (23)

         The creation of Guaranty Corporation and its insolvency fund necessitated the establishment of a process by which a member employer is determined to be insolvent. (24) The statutes and regulations pertaining to Guaranty Corporation seem to provide that the Division, either on its own or in concert with findings and determinations made by Guaranty Corporation's board of directors, may declare a member insolvent. one statutory provision states that Guaranty Corporation's board of directors may make a "determination ... that the member employer has fully expended all surety bonds, insurance or reinsurance, and all other available assets and is not able to pay compensation benefits." (25) If the board determines by a majority vote that a "member employer may be insolvent or in a financial condition hazardous to the employees thereof or to the public," the board has a duty to so inform the Division. (26) Alternatively, the board can "request that the [D]ivision determine the condition of any member employer which the board in good faith believes may no longer be qualified to be a member." (27) The Division then must make the determination and respond to the board within thirty days. (28) Finally, the Division has a duty to notify the board when it independently determines that "reasonable cause" exists that a member employer is no longer financially able to self-insure. (29)

         The administrative procedures for terminating self-insurance privileges reflect similar foundations for a determination of insolvency while also suggesting additional foundations. (30) For example, regulations provide that the Division may "terminate the self insurance privilege if the employer is unable to demonstrate [an ability] to meet all obligations under [T]he Workers' Compensation Act." (31) Also, failure to keep the required levels of security and "insolvency ... constitute[s] cause for revocation." (32)

         Once a decision to terminate a member employer's self-insurance privilege is made, procedural due process considerations require that the employer receive reasonable notice. (33) A state regulation requires that notice of the Division's revocation of an employer's authority to self-insure be mailed to the employer. (34) When insolvency is either the ground or a ground for revocation, the revocation notice seems to be an adequate vehicle for communicating the determination of insolvency. (35) In addition to the regulatory notice requirement, a statute allows the Division to pass the responsibility of giving adequate notice to Guaranty Corporation. (36)

      2. Overall Workers' Compensation Claims Process

         Notice plays a pivotal role in the overall workers' compensation claims process. The essential foundation of a claim for compensation is the existence of some cognizable harm "arising out of and in the course of the employee's employment." (37) Once there has been an injurious event, generally the employer must receive notice of...