DATE: March 18, 1999

TO: All Interested Parties

FROM: Christine Baker, Executive Officer

SUBJECT: Request for Legislative Recommendations on the Labor Code Section 5814 Issue

Last October, with a ‘call for information’, the Commission on Health and Safety and Workers’ Compensation requested input from the workers’ compensation community and the public for a CHSWC issue paper on the Labor Code Section 5814 penalty provisions. The community responded with great interest.

At its meeting in Los Angeles last month, the Commission decided to share its analytical work on this issue with the community and the public and offered to serve as a clearinghouse for recommendations regarding Labor Code Section 5814.

Enclosed is a packet containing information relating to the Labor Code 5814 issue. This includes a background paper by Tom McBirnie and a memo with Legislative recommendations by Larry Swezey along with a listing of the individuals and organizations that have submitted comments thus far.

You are cordially invited to submit your written comments and recommendations on Labor Code Section 5814 to the Commission by May 1, 1999.

The Commission will compile all suggestions for legislative changes as a resource to assist the community and the Legislature. Thank you.

cc: Commission members

Enclosure


MEMORANDUM

Date: February 2, 1999

To: Christine Baker, Executive Officer

From: C. L. Swezey, Consultant

Re: Proposed Study of Penalty Provisions of Labor Code 5814

Pursuant to your request for my recommendations with regard to the penalty provisions of Labor Code 5814, there follows my recommendation that CHSWC undertake a study of the various Labor Code penalty provisions.

INTRODUCTION

Information received by the Commission on Health and Safety and Workers' Compensation has identified the application of the "penalty" provisions of Labor Code 5814 as an issue in the workers' compensation community. On October 28, 1998, CHSWC requested suggestions from the public and the workers' compensation community whether and what changes should be made in the section. Responses were received from California Orthopedic Association, Liberty Mutual Group, American Insurance Association, Alliance of American Insurers, State Compensation Insurance Fund, injured workers Stephanie Moore and Paul D. Stutrud, attorneys David Bryan Leonard and Mark A. Yabrof, and Workers' Compensation Administrative Law Judge Pamela W. Foust. The recommendations ranged from amending the statute to conform to current case law to limiting the amount of increased benefits that can be assessed.

THE STATUTE

Labor Code 5814 provides:

When payment of compensation has been unreasonably delayed or refused, either prior to or subsequent to issuance of an award, the full amount of the order, decision or award shall be increased by 10 percent. The question of delay and the reasonableness of the cause thereof shall be determined by the appeals board in accordance with the facts. Such delay or refusal shall constitute good cause under Section 5803 to rescind, alter or amend the order, decision or award for the purpose of making the increase provided for herein.

[It should be observed that the section speaks of an increase in the award and nowhere refers to it as a penalty.]

HISTORY OF 5814 AND ITS INTERPRETATION

Labor Code 5814 was adopted in its present form in 1945. Except for a minor amendment in 1965 to conform to the statute transferring jurisdiction of the former Industrial Accident Commission to the Workers' Compensation Appeals Board, it has not been modified by the Legislature. As early as 1959, however, the appellate courts began a continuing series of decisions interpreting and reinterpreting the section. Some of the decisions created a potential for exorbitant increases in awards. Other decisions tried to alleviate this potential. Some of the results of judicial interpretation, such as limiting the increase in benefits to the species of benefit delayed and increasing previously voluntarily paid benefits as well as those awarded, can find no direct support in the language of the section.

Retired Deputy Commissioner Thomas J. McBirnie represented the WCAB before the Court of Appeal and the Supreme Court in many of these cases and is intimately familiar with their history. To have him trace this history and the difficulties with 5814 faced by the courts would be extremely valuable to the Commission's analysis of the subject.

PERCEIVED PROBLEMS WITH THE EXISTING LAW

The complete judicial history of 5814 will doubtless demonstrate that its application can have draconian effects which some courts have to some extent tried to ameliorate. This endeavor, however, has sometimes had the opposite effect when other factual situations were presented.

The problems created by 5814 in its present form have been discussed over the years but with no serious legislative efforts to resolve them. In 1981, the editor of the California Workers' Compensation Reporter commented at page 17 of volume 9 that there was even then an urgent need for legislative revision of 5814 as follows:

The punishment is not always suited to the crime, and courts rewrite the statute to avoid harsh and unreasonable results. The time is ripe for a statutory change to provide a sufficient deterrent against unreasonable delay or refusal to pay compensation, but one not so harsh that it is viewed as unfair and results in more judicial legislation.

More recently, Justice Baxter of the California Supreme Court echoed the same sentiment in a concurring opinion when he said:

I also write separately to suggest that the Legislature revisit the subject of penalties for delay in payment of workers' compensation benefits. .... [T]he 10 percent penalty for delay in paying [transportation] expenses may be grossly disproportionate to the employer's culpability. ....

The Legislature .... has the ability to preserve the penalty scheme by acting to ensure that penalties bear some rational relationship between the need to deter delay and the harm to the injured worker the delay in payment threatens. [Concurring opinion, Avalon Bay Foods v. WCAB (Moore)(1997) 18 C4th 1165, 26 CWCR 221, 63 CCC 902.]

[Note that Justice Baxter, as have the courts over the years, refers to the increase in compensation provided for in 5814 as a "penalty."]

The wide range of responses to the Commission's invitation for comment and recommendations add the following specific criticisms:

• The current penalty structure is insufficient to compel claims administrators to act promptly and efficiently.

• The 10 percent penalties for late payment of medical bills provided in 4603.2 and 4622 are insufficient to encourage prompt payment.

• Section 5814, as currently interpreted, does not provide adequate penalties for bad faith delays or refusals but unduly punishes inadvertent delays.

• The Labor Code now provides for audit penalties, self-imposed penalties for late payments of disability indemnity, penalties on late payment of medical bills, and penalties for unreasonable delay in reimbursing the Employment Development Department which have the potential of penalizing a claims administrator three times for the same offense.

• Current case law differs from the literal language of 5814.

• There is no statute of limitations on claims for penalties.

• There is no limit on the amount or the number of penalties that can be imposed in a single claim.

• Penalties can be imposed for delays about which the claims adjuster is unaware, e.g., file is lost or award is misdirected.

• Penalties can be imposed for delays over which the claims administrator has no control. A current example is that case law has established that a delay caused by violation of 4651 which requires that compensation be paid in cash or by an instrument that is "immediately negotiable and payable in cash, on demand, without discount at some established place of business in the state," is unreasonable. This provision, which was 9(b) of the original California act, was adopted to prevent eastern insurers from making payments with drafts drawn on their home offices in Boston or New York. This is not currently a concern, but most banks will now put a hold on large checks causing a delay for which claims administrators are frequently penalized.

• When claims administrators know that they have been guilty of unreasonable delay and will be penalized, they sometimes delay indefinitely knowing that the penalty will not be greater. There is no incentive to make prompt payment after an unreasonable delay.

• Use of the term penalty suggests criminal conduct and makes claims administrators reluctant to admit liability even where there is no valid excuse for the delay.

DISCUSSION

The responses to the CHSWC invitation quite clearly indicate a need for revision of 5814 to provide an adequate deterrent against unreasonable delay or refusal but at the same time provide penalties that bear some relationship to the claims administrator's culpability. It is also reasonable to consider some kind of coordination among the various Labor Code penalty provisions. It is premature, however, for the CHSWC staff to make concrete recommendations as to what the revisions should be. Based on the responses submitted so far, the recommendations are so divergent that no majority view, let alone a consensus, can be ascertained. The injured workers, doctors, and applicants' attorneys want more effective penalties. Claims administrators concede that it "takes too long to deliver too little to injured workers," but their specific recommendations include such things as limiting the penalty to the amount delayed. Workers' compensation judges would appreciate penalty provisions that can be fairly applied to "meet the crime." A roundtable or advisory committee could facilitate development of recommendations that are broadly acceptable.

RECOMMENDATION

It is recommended that an advisory committee representing all segments of the workers' compensation community be convened to develop proposed revisions of the Labor Code penalty provisions that provide an adequate deterrent against unreasonable delay but at the same time provide penalties that bear some relationship to the claims administrator's culpability, encourage sound claims practices, and discourage unjustified or vindictive withholding of benefits.


California Commission on

Health and Safety and Workers’ Compensation

 

wpe1.jpg (13698 bytes)

 

BACKGROUND PAPER ON LABOR CODE SECTION 5814

 

CHSWC Members

Kristen Schwenkmeyer, Chair

Jill A. Dulich

Leonard C. McLeod

Gerald O’Hara

Tom Rankin

Robert B. Steinberg

Darrel "Shorty" Thacker

John C. Wilson

Christine Baker

Executive Officer

 

Prepared by

Thomas J. McBirnie

February 26, 1999


BACKGROUND PAPER ON LABOR CODE SECTION 5814

Labor Code section 5814 has not undergone any substantive legislative change since its enactment in 1945. However, for the past thirty years it has been the subject of continued appellate court conflicts and controversies. In 1968, one appellate court stated that the section "is no model of legislative draftsmanship" and "many problems are buried in its language when the realities of workmen's compensation litigation are considered." In 1979, the Supreme Court, faced with the possibility of what it described as "harsh and unfair results," adopted "the more moderate construction of the statutory language" and limited the 10 percent penalty called for by the section to "the particular class of benefit delayed or withheld." This interpretation, in turn, has spawned additional litigation and criticism of the statute. In 1998, Supreme Court Justice Baxter stated that the Legislature would "do well to consider the constitutional implications of the present penalty scheme" and warned that if the Legislature did not act, "the court might have no alternative but to invalidate the penalty scheme in toto." It is comments such as these that have prompted calls for revision of the present penalty provisions.

The following is a summary of the history of section 5814 and the principles and issues that have shaped its current legal interpretation. It is based solely on "published" appellate court opinions and Workers' Compensation Appeals Board in bank decisions. It does not include unpublished appellate court opinions, which are not citable authority, or "writ denied" cases, which lack precedential value. For simplicity, only opinions of the California Supreme Court are referred to by name. All statutory references are to the Labor Code. The Workers’ Compensation Appeals Board is referred to as the "Board."

History

As indicated, section 5814 was enacted in 1945. Prior to that time, section 5811 provided that the Industrial Accident Commission (predecessor of the Board) could, in its discretion, allow interest at a rate not to exceed 1-1/2 percent per month on unreasonably delayed payments of compensation during such period of delay. There was no provision for interest on an award when there was no unreasonable delay or refusal of payment. In 1945, section 5800 was added to provide that interest shall run on payment of all awards. At the same time, the interest provision in section 5811 was deleted and the ten percent penalty provision was added in section 5814.

Language of the statute

The first sentence of section 5814 states that "when payment of compensation has been unreasonably delayed or refused, either prior to or subsequent to the issuance of an award, the full amount of the order, decision or award shall be increased by 10 percent." Almost every phrase in this sentence has been the subject of considerable litigation. The remainder of the section provides that the question of delay and the reasonableness of the of the cause therefor shall be determined by the Board in accordance with the facts, and that such delay or refusal shall constitute good cause under section 5803 to rescind, alter or amend the order, decision or award for the purpose of making the increase provided for in section 5814. These latter provisions have not produced substantial litigation.

Nature and purpose

Nature of the statute

The power to make awards granted to the Board by the California Constitution and the enabling legislation is limited to compensating employees for injuries. The Board may not award punitive or exemplary damages that exceed the injured worker's actual loss. In spite of the Board's lack of authority to make punitive or exemplary awards, statutory provisions for increased compensation, such as section 5814, are commonly called "penalties," and have been referred to by the courts as "in the nature of a penalty." However, they are not true penalties, because they allow only for an additional amount to provide more nearly full compensation for the damages suffered by the injured worker and do not penalize the employer in the sense of punitive or exemplary damages that are in excess of actual damages.

Purpose of the statute

In SCIF (Stuart), a 1998 opinion, the Supreme Court stated that the purpose of the section 5814 penalty is twofold. First, the statute provides an incentive to employers and insurance carriers to pay benefits promptly by making delays costly. Second, an equally important purpose is to encourage timely payments of compensation to injured workers to promptly ameliorate economic hardship resulting from interruption of their employment and concomitant loss of income. In Avalon Bay, decided the same day, the Court added that the "Legislature intended the potentially severe penalty for unreasonable refusal or denial of benefits to have an in terrorem effect on employers and their insurance carriers." In this connection, the courts have indicated that it is not necessary for the injured worker to have suffered actual detriment before the employer or insurance carrier can be required to pay a section 5814 penalty.

Rules of construction

Liberal interpretation

In Kerley, a 1971 opinion, the Supreme Court stated that, "although denominated a 'penalty,' [section 5814] is to be interpreted liberally in accordance with the general purpose of the workmen's compensation laws." This rule, which is based on the mandate of section 3202, is contrary to the normal "narrow construction" of penalty provisions in other areas of the law. However, section 3202.5 states that nothing contained in section 3202 shall be construed as relieving a party from meeting the evidentiary burden of proof by a preponderance of the evidence.

Burden of proof

In Kerley, the Supreme Court also stated that, once delay or refusal is shown, "the burden is on the employer or carrier it establish the existence of a genuine doubt, from a medical or legal standpoint, as to its liability for the benefits to be advanced."

Mandatory enforcement

In Gallamore, a key 1979 opinion, the Supreme Court held that the Board could consider the size of the delinquency in determining whether the employer or carrier had acted unreasonably, but that, if it found unreasonable behavior, it could not refuse to impose the penalty on the ground that the amount of the delinquency was "de minimus." In that same opinion, the Court told the Board to "proceed with a view toward achieving a fair balance between the right of the employee to prompt payment of compensation benefits, and the avoidance of imposition upon the employer or carrier of harsh and unreasonable penalties." In practice, these directives have proven difficult for the Board to properly interpret and apply.

In Rhiner, a 1993 case, the employer relied on the above language in support of its contention that the Board had discretion in the imposition of penalties. However, the Supreme Court rejected this argument, stating that the Board "does not have discretion to ignore de minimus delinquencies." The mandatory nature of the section 5814 penalty also has been emphasized by the courts of appeal in other cases that did not involve the issue of "de minimus" amount.

Penalty goes to the worker

In a 1968 case involving an employer's unreasonable delay in paying the lien for attorney's fee on the injured worker's award, the Court of Appeal stated that if the penalty is appropriate, it applies to the compensation to which the injured worker is entitled and it is payable to him or her and not to the attorney (who suffered the delay). Since then, the Board and the appellate courts have followed this interpretation, although there have been occasional variances at the trial level. In 1990, the Legislature enacted section 4603.2, which provides for a 10 percent penalty, payable to the provider, for a 60-day delay in the payment of medical treatment bills. However, the section also states that this liability "shall not affect [an employer's] liability to an employee under Section 5814." On the other hand, section 4622, which contains a similar provision for 10 percent penalty payment to the provider for unreasonable delay in payment of the worker's medical-legal expenses, adds that the provisions of section 5814 "shall not apply to this section."

Justifiable grounds for delay or refusal

In general

In Kerley, the Supreme Court stated that "the only satisfactory excuse for delay in payment of disability benefits, whether prior to or subsequent to an award, is genuine doubt from a medical or legal standpoint as to liability for benefits." For many years, this statement dominated all discussion of what constituted a reasonable basis for delay or refusal of benefits. Unintentional mistakes or inadvertence by a claims adjuster did not constitute a defense to a penalty claim, at least where it caused unusual delay. However, in 1998, in SCIF (Stuart), the Supreme Court opened the door further to consideration of "business realities" in determining whether compensation has been unreasonably delayed. Each of these defenses will be discussed in the following paragraphs.

Genuine legal doubt

There are certain threshold legal matters that an injured worker must establish before he or she is entitled to receive workers’ compensation benefits. The most common disputed threshold issues are Board jurisdiction, employment, industrial injury and statute of limitations. Generally, a genuine legal doubt regarding liability for benefits based on one of these threshold issues, even if ultimately incorrect, is a valid defense to a claim for penalty. Thus, in Reynolds Electric (Buckner), a 1966 opinion, the Supreme Court ruled that imposition of a section 5814 penalty was unjustified where the employer had genuine legal doubt regarding California jurisdiction over an industrial injury suffered in Nevada. However, in upholding a Board imposition of a ten percent penalty, one Court of Appeal noted that the "doubt as to its liability for an industrial injury must be ‘reasonable’ as well as ‘genuine’ in order for the employer to prevail under Labor Code section 5814."

In cases where all threshold requirements have been met, employers and carriers may still have genuine legal doubts as to the extent of liability. In some cases, this can be sufficient to avoid a section 5814 penalty. However, defendants act at their peril in such cases, and the appellate courts have upheld penalties where employers and carriers acted in disregard of other statutory provisions or well-established case law. On the other hand, one Court of Appeal overturned the Board’s imposition of a penalty where it determined that employer’s reasonable interpretation of unsettled law was a valid excuse.

One contentious area of the law is where an employer or carrier unilaterally stops paying benefits because of a claimed "credit" either for overpayment of compensation or for the injured worker’s recovery from a third party of civil damages for the same injury. In one case, where the carrier stopped paying benefits because of a claimed overpayment, the Court of Appeal held that the carrier had acted unreasonably in not seeking immediate hearing on the issue. The Board in bank announced a similar rule in a case where the employer had unilaterally taken credit for overpayment of vocational rehabilitation temporary disability without seeking relief through the Division of Workers’ Compensa-tion Rehabilitation Unit. On the other hand, in a case where the carrier had discontinued payment of benefits in anticipation of receiving credit for an injured worker’s third party recovery (which it later received), the Court of Appeal held that the carrier had not acted unreasonably and that for it "to have continued payment … would have been financially foolhardy."

Another problematic area is where the employer or carrier delays payment of an award pending its possible petition to the appellate courts. In one instance, the Court of Appeal found no unreasonable delay where the carrier had filed an unsuccessful petition for writ of review without seeking a stay of the Board’s award. In another case, however, where the Court of Appeal found no reasonable basis for the employer’s petition for writ, it directed the Board to "award a [section 5814] penalty for unreasonable delay in paying permanent disability benefits." And, in a third case, where the employer had considered, but did not file, a petition for writ, the Court of Appeal directed imposition of a penalty, stating that the employer "merely waited ostensibly to consider the legal alternatives" and "failed to meet its burden of demonstrating a ‘genuine doubt’ as to liability."

Genuine medical doubt

The most common defense to a claim for ten percent penalty is that the employer or carrier had genuine medical doubt regarding its liability for claimed benefits. In most instances, the opinion of a single physician is sufficient to avoid a penalty, even if the doctor’s opinion is not accepted. In one atypical case, the Court of Appeal rejected this defense, stating that it found the carrier’s medical evidence "to be in its totality self serving, internally inconsistent, and unreliable." The court said that such evidence "in no way approximates the kind of ‘genuine doubt’ envisioned by section 5814." Likewise, in a situation where the medical opinions relied on by the carrier had been superseded by the reports of agreed medical examiners, the same court ruled that the earlier defense reports were "no longer germane."

Another exception is when the medical opinion relied on conflicts with governing law. In one case, where the employer denied benefits to a police officer with heart trouble based on a medical opinion that the condition was congenital, the Court of Appeal directed imposition of a ten percent penalty because, in the cases of police officers with heart trouble, section 3212.5 prohibits attribution to pre-existing conditions that develop or manifest during their employment. The court stated that "in a case where the section 3212.5 presumption is known to be operative, and where the medical evidence relied upon to rebut it is plainly rendered ineffectual by the terms of that statute, the employer’s doubt is not a reasonable or genuine doubt." Further, in an in bank decision, the Board upheld imposition of a section 5814 penalty on an employer who had some medical basis for delaying payment of permanent disability benefits, but who had failed to obtain the doctor’s report in accordance with statutory procedural requirements.

Excusable inadvertence

Based on the previously quoted language in Kerley, the Board and the appellate courts generally refused to excuse unintentional delays in the delivery of compensation benefits due to claims adjuster mistakes, inadvertence or office administrative practices. Such delays were not based on medical or legal doubt. However, there were exceptions. In 1978, one Court of Appeal refused to direct a section 5814 penalty where the employer had accidentally mailed the widow’s settlement check to the wrong address. The court stated that this did not per se require a penalty and that a delay of 26 days did not per se make the delay unreasonable. In 1986, another Court of Appeal held that a 22-day delay in the payment of an award was justified because of the carrier’s administrative problems.

In 1998, in SCIF (Stuart), the Supreme Court addressed the question in a case in which a clerical mistake in entering a change of address led to a one-week delay in the injured worker’s temporary disability check. In refusing to direct imposition of a penalty, the court agreed that the mistake was careless, but noted that in any endeavor in which humans are involved, mistakes are made. It said: "A reasonably short delay attributable to human error cannot, standing alone, be considered unreasonable. In requiring a finding of unreasonableness as the trigger for a section 5814 penalty, our Legislature intended something beyond the mere existence of any delay in the payment of benefits."

However, the court still had to discuss its prior language in Kerley. After quoting that language, the court stated: "[O]ur opinion in Kerley was not intended to address the universe of potential factual circumstances that could give rise to delay in payment. Instead, we addressed in that case the discrete situation of an employer intentionally refusing to pay, not as here, a situation where the delay was inadvertent. Kerley is thus distinguishable on this ground, for there is no factual finding in this case that the delay in payment was intentional."

Although the court in SCIF (Stuart) expressed its willingness to accept some inadvertent delays "occasioned by the realities of the business of processing claims for benefits," it added an important qualification: "Were there substantial evidence in the record showing that SCIF had a history of improperly processing benefits payments, or that SCIF failed to provide a sufficient number of adjusters to handle the caseload or otherwise configured its office or business practices in such a way that errors were likely or probable, we would have a different case. Here, however, all the record demonstrates is a solitary instance of human error, which was quickly corrected upon discovery."

As a consequence of the SCIF (Stuart) opinion, current litigation on section 5814 penalties is in flux. On one hand, employers and carriers have the additional defense of inadvertent delay occasioned by the realities of the business of processing claims. But, on the other hand, attorneys for injured workers are now seeking discovery of previously undisclosed records regarding whether the employer or carrier has a history of improperly processing benefit payments, or has failed to provide a sufficient number of adjusters to handle the caseload, or, because of inadequate training or other reasons, has configured its business practices in such a way that errors are likely or probable. Such novel issues may well lead to a substantial increase in litigation before the Board and appellate courts.

Common grounds for penalty

The following are some of the common grounds on which the appellate courts and the Board have upheld or directed imposition of a 10 percent penalty pursuant to section 5814. The list is not intended to be exhaustive.

Failure to commence or continue temporary disability benefits where it is medically supported. Normally, contrary medical opinion is sufficient to avoid penalty.

Failure to pay disability benefits at the proper rate, due either to lack of sufficient investigation or to disregard of relevant statutes and case law.

Failure to advance permanent disability benefits pending determination of the proper percentage of disability.

Failure to pay disability benefits with an instrument that is "immediately negotiable and payable in cash, on demand, without discount at some established place of business in the state," as required by section 4651. This has been a common problem for employers and carriers who handle claims nationwide and seek to make benefit payments through out-of-state banks, resulting in "holds" being put on checks to injured workers.

Failure to pay disability benefits within the time limits required by section 4650. This probably is the most frequently invoked ground for penalty claims and the one most likely affected by the Supreme Court’s opinion in SCIF (Stuart).

Failure to provide or reimburse for medical treatment reasonably required to cure or relieve from the effects of the industrial injury. Once again, contrary medical opinion normally is sufficient to avoid penalty.

Failure to pay a Board ordered award in timely fashion. There is no specific statutory time limit for payment of Board ordered awards. As a matter of general practice, awards paid within 25 days are considered timely and awards paid after 30 days are considered untimely. Awards paid within 26-30 days probably will be subject to litigation, with varying results. However, these time parameters are not absolute and may be subject to change in light of recent Supreme Court opinions.

Failure to pay interest on a Board ordered award, as required by section 5800. For many years, employers and carriers often disregarded this provision, which led to much of the litigation regarding delays in payment of "de minimus" amounts. Today, most Compromise and Release [settlement] agreements include a specific provision that the amount paid in settlement includes interest if paid within 25 days of Board approval.

Failure to timely pay incidental expenses, such as transportation costs, medical examination charges and bills for vocational rehabilitation tools. In many cases, the amounts involved are not significant, but the delays in payment cause considerable annoyance to injured workers who have paid the charges as out-of-pocket expenses.

Scope and amount of the penalty

Pre-Gallamore cases

Initially, the Board and the appellate courts applied the language of section 5814 fairly literally. The section required that in cases of unreasonable delay or refusal, either prior to or subsequent to the issuance of an award, the "full amount of the order, decision or award" must be increased by 10 percent. Thus, if one class of benefits in an award was improperly delayed, the penalty was applied to all benefits included in that entire award. On the other hand, if the benefits delayed were part of one award, but were not part of a prior or subsequent award, the penalty was limited to the entirety of the one award that was unreasonably delayed. One difficulty was that many workers’ compensation judges had a practice of including in awards classes of benefits that had been timely paid in full prior to the award, less credit to the employer or carrier for the sums paid. Upon review, the appellate courts concluded that those classes of benefits should not be included in the penalty computation, despite their inclusion in the award that was unreasonably delayed.

Notwithstanding these limitations, 10 percent penalties frequently were sought in the late 1960s and early 1970s because a single delay in payment of a relatively small amount could result in a significant penalty when all classes of benefits in the award were considered. In 1972, in Garcia, the Supreme Court did indicate a further limitation on the amount of the section 5814 penalty. In dicta that was to be cited frequently in later years, the court stated: "Had respondent employer made voluntary payments of temporary disability benefits before an application for compensation was filed or an award issued, the penalty imposed for delay in providing temporary disability benefits could not have been applied to such voluntary payments. … [Also,] in view of the fact that the penalty is not applicable to payments voluntarily made prior to issuance of an award, admittedly the costs of such medical treatment as was voluntarily paid by respondent employer on petitioner’s behalf prior to issuance of an award, is not subject to the penalty."

In Adams, a 1976 opinion, the Supreme Court made what was thought at the time to be a significant expansion of the scope of the 10 percent penalty. In 1959, in the first appellate court opinion on section 5814, the Court of Appeal had held the penalty applied not only to indemnity payments, but also to medical treatment and "every benefit or payment conferred upon an injured worker by division IV of the Labor Code." However, the Court of Appeal declined to apply the penalty to medical-legal expenses, stating that "this award is not in the nature of compensation but is in the nature of costs." That holding was followed by later courts of appeal. In Adams, however, the Supreme Court disapproved of those cases and ruled that "section 5814 should be applied to medical-legal costs as well." Since there often were administrative delays in reimbursement of medical-legal expenses, Adams raised the possibility of both more frequent penalties and penalties that were disproportionate to the amounts delayed.

The Gallamore case

With the Gallamore opinion, much of the accepted law changed. In that case, the injured worker sought three separate section 5814 penalties because the carrier had (1) taken unauthorized credit for overpayment of temporary disability benefits, (2) failed to advance permanent disability benefits, and (3) unreasonably delayed reimbursement of travel expenses in connection with two medical-legal examinations. In its opinion, the Supreme Court held that multiple penalties must be assessed for successive delays, so long as separate and distinct acts of misconduct are involved. However, this conclusion presented the potential for penalties in a large combined amount if applied to the entire Board award. The court chose to mitigate the severity of the penalties, stating that "if, as in the usual case, an award is readily severable into the different classes or categories of compensation …, then the penalty is to be assessed against only the amount awarded for the particular benefit of the kind delayed or refused." The court said that any alternative construction of section 5814 would lead to "harsh and unfair" results, and that "it is more fair and reasonable to assess penalties only upon the type of benefits, the payment of any part of which has been delayed." In this regard, however, the court also emphasized that "if any part of a specific benefit has been delayed or withheld, the penalty is imposed against the entirety of that benefit."

The primary effects of the Gallamore opinion on section 5814 interpretation have been threefold. First, it confirmed that multiple penalties must be imposed for separate delays, raising the question of what constitutes a separate delay. Second, it limited the scope of the penalty to the particular class of benefit delayed or withheld, raising the question of what are the separate classes of workers’ compensation benefits. Third, it indicated that the penalty was applicable to the entirety of the particular class of benefits, raising the question of the continuing validity of the Garcia dicta that the penalty is not applicable to payments voluntarily made prior to issuance of an award. Each of these three questions has prompted years of additional litigation and differing appellate court interpretations, culminating in each instance in the need for still another Supreme Court opinion. It is these three questions that will be addressed next.

Classes of benefits

In light of Gallamore, the Board and the appellate courts have spent the past two decades attempting to identify and define the particular classes or "species" of workers’ compensation benefits. In general, injured workers have argued for only a few classes of benefits with greater amounts subject to the penalty, while employers and carriers have argued for a large number of classes with smaller amounts then subject to the penalty. Influenced perhaps by the relative size of potential penalties, the Board and the appellate courts have followed a ragged and conceptually confusing course in defining the various classes of benefits. In many instances, the scope of the class is still uncertain today. The following are some of the classes generally discussed.

Temporary disability benefits. Although this usually is thought of as one class, it appears from cases that medical temporary disability benefits are a separate class of benefits from vocational rehabilitation temporary disability benefits.

Permanent disability benefits. Although case law has established that this class includes both normal permanent disability indemnity and life pension benefits, it appears that the permanent disability benefits paid by the Subsequent Injuries Fund may be a separate class of benefits.

Medical treatment expenses. Although it is broadly accepted that medical treatment is a single, unitary class of benefits, and that self-procured treatment is not a class of benefits different from future medical treatment, there is one post-Gallamore appellate court opinion in which the penalty was applied only to self-procured treatment expenses. One issue of long dispute has been whether transportation expense for medical treatment is a separate class of benefits. Finally, in 1998, in Avalon Bay, the Supreme Court resolved the conflict in Board and appellate court opinions and determined that "a penalty for unreasonable refusal or delay of such expenses should be computed on the basis of the total amount of medical treatment expenses."

Vocational rehabilitation benefits. Although it appears that vocational rehabilitation temporary disability indemnity and vocational rehabilitation maintenance allowance are a single class of benefits, the Board has indicated that such indemnity is separate from vocational rehabilitation services and costs (which may be another class of benefits for penalty purposes).

Death benefits for dependents. The scope of the 10 percent penalty for unreasonable refusal or delay in payment of death benefits remains unclear, particularly in light of the fact that separate payments may be made to different dependents, including "special" augmented death benefits payable to dependent minor children.

Attorneys’ fees. Despite the fact that attorney’s fees frequently are a lien on other classes of benefits, one Court of Appeal has held that for the purpose of applying section 5814, "attorneys’ fees are a separate ‘class of benefit.’" The court stated that "any other conclusion would result in excessive penalties." However, in addition to traditional attorneys’ fees, there now are several special categories of attorneys’ fees for vocational rehabilitation, depositions and certain statutory penalties. To date, the Board has declined to include all categories of attorneys’ fees in the 10 percent penalty calculation.

Interest on awards. Despite the fact that interest is payable in addition to the various categories of benefits in an award, one Court of Appeal held that computation of a penalty based on a finding of unreasonable delay in the payment of interest "is to be made on the basis of the underlying benefit to which the interest applies increased by the amount of the delinquent interest." The court said that "to limit the penalty to the interest accrual alone as a special class of benefit would … tend to discourage or defeat timely payment."

Compromise payments. It is generally accepted that if the parties reach a Compromise and Release in overall settlement of an injured worker’s disputed claims and the employer or carrier unreasonably delays payment of that settlement, the penalty is 10 percent of the settlement amount, not 10 percent of the underlying classes of benefits that were involved in the settlement. Also, in a situation where each defendant was ordered to pay a separate amount as part of a joint settlement, and one carrier unreasonably delayed payment of its portion of the settlement, the Court of Appeal held that the penalty was 10 percent of that carrier’s portion of the overall settlement. On the other hand, in a situation where there was a prior award of permanent disability benefits and, thereafter, the carrier stipulated to payment of a lump sum in compromise of several disputed issues, including permanent disability, the section 5814 penalty for unreasonable delay in payment of the lump sum was held to reach back to the prior award.

Statutory penalties. Section 132a provides for a 50 percent increase in the injured worker’s compensation if the employer or carrier discriminates against him or her because of an industrial injury. In a case where the employer had unreasonably delayed payment of a portion of the injured worker’s 50 percent increase, one Court of Appeal held that "the 50 percent increase in benefits under section 132a is itself a separate ‘class of benefits.’" On the other hand, in a case where the carrier unreasonably delayed payment of a 10 percent penalty for a prior unreasonable delay, the Court of Appeal held that "a section 5814 penalty is properly characterized as part and parcel of the original compensation awarded. It is an increase in compensation awarded, rather than a separate type of benefit."

Status of timely pre-award payments

As previously noted, in 1972, the Supreme Court stated in a footnote in Garcia that "the [section 5814] penalty is not applicable to payments voluntarily made prior to issuance of an award." However, in 1979, the Supreme Court in Gallamore stated that "if any part of a specific benefit has been delayed or withheld, the penalty is imposed on the entirety of that benefit."

Following Gallamore, the courts of appeal initially continued to exclude from the penalty computation those benefits that had been timely and "voluntarily" paid prior to any award. In doing so, the courts relied in large part on cases that were decided prior to Gallamore and had not been disapproved. With time, however, the analysis changed and the courts of appeal began focusing on the language and holdings in Gallamore. In 1991, one of the courts reviewed the prior cases and concluded that employers and carriers "are liable to their insured employees for 10 percent of the aggregate award of a class of workers’ compensation benefits ultimately paid, including those benefits of the class voluntarily and timely paid prior to and in anticipation of an award, for unreasonable delay in payment or refusal to pay any portion of that class of benefit."

In 1993, the conflict finally was resolved in Rhiner. After reviewing the language of section 5814, the holding in Gallamore and the conflicting court of appeal opinions, the Supreme Court stated: "We affirm our holding in Gallamore … that the penalty required by section 5814 … must be assessed against the entire amount ultimately awarded to the employee for the class of compensation in which the payment was unreasonably delayed or refused by the employer, without deduction of payments made by the employer before the formal award. Any unfairness that the employer perceives in the statutorily mandated penalty assessment should be addressed to the Legislature." At the end of its opinion, the court disapproved its own language in Garcia and that in eight other appellate court opinions.

Multiple and successive penalties

Multiple penalties

Where there are separate and distinct acts of unreasonable delay in payment or nonpayment of one class of benefits, and the injured worker gives the employer or carrier notice of the worker’s intention to seek separate penalties for each act, then a separate 10 percent penalty may be imposed for each delay, and these separate penalties may be awarded in single proceeding.

Likewise, when an employer or carrier unreasonably delays payment of several types of benefits, the Board must impose a separate 10 percent penalty against each class of benefits delayed. Such multiple penalties may be awarded in a single proceeding.

Both of these principles were applied in a 1983 case in which the Court of Appeal said: "[W]e conclude that petitioner should have been awarded two 10 percent penalties upon the total amount of temporary disability based upon delinquencies both prior to and subsequent to the court stipulations because those delinquencies represent ‘separate and distinct acts of misconduct.’ … Further, two penalties should have been assessed against the cost of petitioner’s medical treatment. Fremont’s failure to promptly and fully reimburse petitioner for (1) hospitalization costs prior to the date of the stipulation and (2) physical therapy expenses before and after the date of the stipulation also constitute separate and distinct acts of misconduct. Significantly, the record clearly establishes that ample notice was given of petitioner’s intention to seek penalties based upon the afore-mentioned delinquencies."

On the other hand, in a 1984 case, another Court of Appeal refused to impose multiple penalties where the carrier had refused to respond to each of nine requests for payment. The court said: "[W]e are unable to conclude that Fremont’s ongoing reliance on the 1981 medical reports and its consequent repeated refusals to pay full benefits represent ‘separate and distinct acts of delay or nonpayment.’ … No new facts developed subsequent to the receipt of Dr. Murphey’s report which rendered the behavior of the defendants any more unreasonable than it had been when they initially declined or failed to make advances following the receipt of that report. Certainly the duration of the delay is not an appropriate ground for assessing multiple penalties."

In Christian, a 1997 case, the Supreme Court was confronted with a conflicting Court of Appeal opinion that had directed imposition of multiple penalties in a situation where the carrier had unreasonably refused to resume temporary disability benefits after repeated demands by the injured worker. In reversing the lower court, the Supreme Court stated: "Notice to the employer or carrier from the worker of intent to seek penalties and the employer’s or insurance carrier’s opportunity to reconsider its decision does not create a separate and distinct act for which imposition of penalties is authorized by section 5814 simply because the employer or carrier does not resume benefit payments on receipt of such notice." The court ruled that, inasmuch as the termination of temporary disability payments "resulted from a single unreasonable act by the insurance carrier before an award had been made, and no legally significant event establishing the employer’s or insurance carrier’s liability followed that act, section 5814 authorizes only one penalty."

Successive penalties

A separate situation occurs when an employer or carrier unreasonably refuses or delays benefits, the Board imposes a single 10 percent penalty, and then there is a further unreasonable refusal or delay involving the same class of benefits. In 1966, one Court of Appeal with those circumstances held that a second 10 percent penalty was permissible. However, the court added that: "Nevertheless, the language of the statute does not permit a penalty on a penalty. Under the statute each unreasonable delay calls for a flat 10 percent increase on the full amount of the original compensation. … The amount of any given penalty remains limited to 10 percent of the original award."

In a 1977 in bank decision, the Board relied on the holding in Adams in stating: "[T]he rationale of Davison is no longer applicable. Since medical-legal costs are subject to penalty and the ten percent penalty is akin to an award of costs, it follows that all benefits awarded under Division 4 are subject to the ten percent penalty, including an award of penalty."

In 1981, another Court of Appeal gave support to both positions. It stated that: "[A] section 5814 penalty is properly characterized as part and parcel of the original compensation award. It is an increase in compensation awarded, rather than a separate type of benefit. Accordingly, any subsequent penalties should be assessed against the principal amount of the original award as increased by any prior penalty assessments." However, the court added: "[I]t is important to note the difference between penalties for delayed payment of a prior penalty and successive delays in paying the basic benefit. In the latter case, each penalty is computed as 10 percent of the underlying benefit, rather than 10 percent of the increased sum. … Since the petition here involves the former situation, there is no impropriety in adding any prior penalties to the original benefit award for purposes of determining the base for any subsequent penalty assessments."

Suffice to say that computing the amount of compensation payable in successive penalty situations is never easy or well accepted.

Other statutory remedies

Section 4650 specifies the time limits for payments of temporary and permanent disability benefits. Subdivision (d) of the section states that "if any indemnity payment is not made timely as required by this section, the amount of the late payment shall be increased by 10 percent and shall be paid, without application, to the employee." The notable features of this section are (1) it is limited to disability indemnity payments, (2) there is no requirement that the delay be unreasonable, (3) the penalty is limited to the payment that was delayed, and (4) the penalty is self-executed by the employer or carrier. Case law has established that this penalty is in addition to any section 5814 penalty, and failure to timely pay this "automatic" penalty may itself give rise to a section 5814 claim.

Section 5813, enacted in 1993, states that a workers’ compensation judge or the Board "may order a party, the party’s attorney, or both, to pay any reasonable expenses, including attorney’s fees and costs, incurred by another party as a result of bad-faith actions or tactics that are frivolous or solely intended to cause unnecessary delay." In addition, they may order additional sanctions, not to exceed $2,500 to be transmitted to the General Fund. To date, this section has not been frequently utilized. However, that may change with changes in the composition of the Board. Part of the significance of this section is that injured workers for many years have sought the right to sue employers and carriers in civil court for bad faith in the handling of workers’ compensation claims. This is a right employers have against their insurance carriers. However, the courts have ruled that employees do not have the same right because, by law, their "exclusive remedy" is to seek a 10 percent penalty before the Board (and now section 5813 sanctions). It should be anticipated that in return for limitations on the section 5814 penalty, representatives of injured workers might seek some right for workers to sue their carriers and self-insured employers in civil courts for bad faith handling of claims.

Section 5814.5 provides that when a section 5814 penalty is obtained against most public employers (excluding state agencies), the Board also must award reasonable attorneys’ fees incurred in enforcing the payment of compensation awarded. This past year, a bill passed both houses of the Legislature expanding this provision to include all employers (I believe). However, the bill thereafter was vetoed by Governor Wilson. This issue may arise again in connection with proposed changes to section 5814.

It is hoped that this background paper provides some assistance to the members in understanding section 5814 and the numerous legal issues that it has produced.