Chapter 18:

The In's and Out's of the Workers' Compensation Claims System


Updated as of June 2006

Overview of California's Workers' Compensation System

Under the California Constitution, the Legislature is authorized to create and enforce a system of workers' compensation for employees injured in the course and scope of their employment. Workers' Compensation in California is a no-fault system.   As long as an employee's injury arises out of and occurs in the course of his or her employment, benefits must be paid without regard to negligence or fault of any party. Under this system, employees generally cannot sue their employers for damages in civil court (exceptions to workers' compensation as an exclusive remedy for employee injuries can be found in the California Labor Code, Sections 3602, 3706 and 4558).   As a result of this system, injured workers are not required to prove fault in order to receive workers' compensation benefits. These benefits are regulated by the workers' compensation system with regard to specific types and set amounts of these benefits.   In this way, the workers' compensation system is seen as a trade-off between employers and employees, with each side giving some of their rights up in order to gain certain advantages. In theory, employers would pay for more injuries but would gain by eliminating the high costs of litigation and damages awarded in civil lawsuits.   The employees gave up their right to sue in civil court but no longer had to prove that the employer was at fault for their injury in order to receive workers' compensation benefits.

In some cases, disputes will arise over the proper provision of workers' compensation benefits. The Legislature is authorized by the California Constitution to grant power, authority and jurisdiction to the Workers' Compensation Appeals Board (WCAB) to resolve these disputes.   The WCAB is responsible for accomplishing substantial justice in all cases quickly and inexpensively.   However, Labor Code Section 3202, instructs the WCAB to liberally construe the laws in favor of the injured employee so that benefits maybe extended to them.   When SB 899 was signed into law on April 19, 2004 it amended Labor Code Section 3202.5 instructing the WCAB to consider all parties equal before the law and that all parties must meet the same burden of proof but did not eliminate Labor Code Section 3202.

A work related injury can result from a specific event (a slip and fall) or from a cumulative trauma (typing on a keyboard for an extended period of time) and can include a physical injury, a psychiatric injury and occupational diseases.   There are special rules that govern whether a psychiatric injury is considered work related or not. There are also special rules for injuries that are reported after an employee has been terminated from employment.    

Workers' Compensation Injury Defined

In order for an injury to be considered a work related injury it must meet the following criteria:

•  The employer and the employee must be subject to the laws in the Labor Code;

•  The injury must arise out of employment (AOE);

•  The employee must be acting within the course of their employment (COE); and

•  The employment must be the proximate cause of the injury. Proximate cause meaning that the employment caused all or some of the injury.

The Five Benefits

The purpose of workers' compensation benefits is to adequately relieve workers from the consequences of any injury, illness or death sustained in the course of their employment. The benefit types, rates of payment and rules governing how these benefits are paid are set forth by law and are subject to numerous exclusions and exceptions. The workers' compensation system does not attempt to cover every financial loss an injured employee may incur nor is it intended for an injured employee to profit from their work related injury.

Medical Care

All medical treatment reasonably required to cure or relieve from the effects of the injury is included in the medical care benefit.   Covered expenses include but are not limited to medical treatment, chiropractic treatment, acupuncture, hospital costs, medicines, lab tests, x-rays, mileage reimbursement, crutches and other medical services.   Medical care is provided at no cost to the injured worker and does not have a lifetime cap.

Effective January 1, 2004 physical therapy and chiropractic visits are limited to 24 each per industrial injury.   SB 899 added 24 occupational therapy visits during the lifetime of the claim.   SB 899 also added the provision that effective April 19, 2004, that within one working day of an employee filing a claim form and until the claim is accepted or rejected; employers must authorize all necessary treatment up to $10,000 in medical fees. The employers will still have 90 days to investigate and determine the compensability of the claim, however all medical treatment must be authorized and paid for during this investigation period up to the $10,000 cap. Disability payments do not have to be made during the time it takes to investigate a claim. If it is determined that after the investigation that the claim is not work related there is no provision to recoup the money from the employee that was spent under the $10,000 cap. Employers currently have the first 30 days of medical control once an employee is injured unless the employee has pre-designated a physician to manage his/her treatment prior to an injury.   For treatment on or after January 1, 2005, SB 899 allows employers and insurers to establish medical provider networks. By establishing a medical provider network, the employer could have unlimited medical control on a claim, unless the employee has pre-designated a physician to manage his/her treatment   prior to an injury.

Temporary Disability

Employees are entitled to receive compensation for lost wages know as temporary disability (TD) during the period of time that they are off of work as a result of their industrial injury.   No temporary disability shall be paid during the first three days after an employee leaves work as a result of an industrial injury unless temporary disability continues for more than fourteen days or the employee is hospitalized as an inpatient as a result of their injury, in either case temporary disability would be paid from the date of disability. Otherwise, the first day of temporary disability will include the date of injury unless the employee was paid his/her full wages on the date of injury. If this is the case, then the day after the injury starts the three-day waiting period. Injured employees are entitled to receive up to two-thirds of their average weekly wage subject to maximum caps set by law for each date of injury.   The maximum temporary disability rate for 2004 is $728.00 per week, for 2005 it is $840.00 per week, for 2006 and continuing it is $840.00 or the State Average Weekly Wage (the average wage that employers pay employees covered by unemployment insurance). As of 2003 the minimum temporary disability rate that an injured employee can be paid is $126.00 per week. Payment of temporary disability must be made within fourteen days from the date of first lost time as a result of the work related injury.   Injured employees are entitled to receive temporary disability benefits until they are released to return to full duties, are released to modified duty which their employer can accommodate, or they are declared permanent and stationary, meaning they have reached a plateau and aren't going to get any better or any worse.   Under SB 899 for injuries on or after April 19, 2004, temporary disability benefits are limited to 104 weeks within two years of the date of the first payment of temporary disability began except for specified injuries (burns, amputations, high velocity eye injuries, etc.) that would require an extended recuperation time. The temporary disability benefit for these types of injuries would be limited to 240 weeks within five years from the first temporary disability payment.

Permanent Disability

For all dates of injury prior to January 1, 2005 injured employees are entitled to receive permanent disability (PD) in order to compensate them for their inability to compete on the open labor market.   The amount of PD benefits is based on the injured employees' occupation, age, and part of body injured and severity of the injury at the time the injury took place.   This mathematical calculation is known as the PD rating, and it determines how much an employee will receive in PD benefits and for how long.   Permanent disability payments are paid for a period of time based on what the PD rating is, and only in the most severe cases is permanent disability a lifetime benefit.   SB 899 instructs the Administrative Director to adopt a new, objective, uniform PD Rating schedule by January 1, 2005.   PD determinations will be based on a formula that reflects the injured worker's future loss of earning capacity rather than his/her ability to compete on the open labor market. SB 899 mandated that as of April 19, 2004 permanent disability is based on causation and that all doctor's reports must consider what portion of the permanent disability is attributable to work.   This will limit the employer's responsibility to the percentage of PD directly caused by the work injury.   SB 899 also enacted that for all injuries on or after January 1, 2005, that permanent disability benefits will be increased by 15% if within 60 days of the permanent and stationary date, the employer fails to offer a regular, modified or alternative position lasting at least one year.   This provision does not apply to employers with fewer than 50 employees.   It also states that permanent disability will be decreased by 15% if within 60 days of the permanent and stationary date, the employer offers a suitable regular, modified or alternative work lasting at least one year, whether or not the employee accepts the offer. If an employee is terminated from employment while the permanent disability benefit is being paid out, the 15% reduction in permanent disability will be restored to the employee's benefits. This provision does not apply to employers with fewer than 50 employees.   If an employee voluntarily quits, the employee is not eligible for the 15% increase in PD benefits.   

Vocational Rehabilitation

Injured workers qualify for vocational rehabilitation (VR) benefits if they are both medically eligible and vocationally feasible.   In order to meet both of these requirements, an injured employee must be deemed a qualified injured worker. A Qualified Injured Worker (QIW) is someone whose injury precludes them from returning to their usual and customary occupation (medically eligible) and who can be expected to return to suitable gainful employment through the provisions of vocational rehabilitation services (vocational feasibility).   For dates of injury on or before December 31, 2003, the VR benefit is capped at $16,000.00 which includes weekly vocational rehabilitation maintenance allowance (VRMA) up to a maximum of $246.00 per week but can be supplemented by permanent disability benefits up to the TD rate, vocational evaluation and counseling, job training and placement services.   The law also stated that an injured employee were unable to settle out their vocational rehabilitation benefits. The passage of AB 749 changed this law and now allows for represented injured employees to settle out their vocational rehabilitation benefits with a one-time payment of up to $10,000.00.   With the passage of SB 899, a sunset clause has been put in place that this benefit will repealed as of January 1, 2009 and cease to exist, unless modified by the Legislature.  

For injuries on or after January 1, 2004 , the above vocational rehabilitation benefits were repealed and replaced with a non-transferable supplemental job displacement benefit (SJDB).   The notice of this right must be sent to the employee within 10 days from the last TD payment. The employers return to work offer is due within 30 days from the date of the last TD payment. The SJDB provides a retraining or skills enhancement voucher to injured workers who have permanent disability and whose employers do not offer them an appropriate modified job or alternative work.   The maximum value of the voucher depends on the injured worker's level of permanent disability: up to $4,000 for workers with PD ratings of 1% to 14%, $6,000 for workers with PD ratings of 15% to 25%, $8,000 for workers with PD ratings of 26% to 49% and $10,000 for workers with PD ratings of 50% to 99%. The injured employee must use PD benefits to support him or herself during a training program.  

If the employer were to provide a permanent modified/alternate (accommodates the work restrictions, is paid at least 85% of their prior wages, is a reasonable commute and lasts for at least one year) work position then the injured employee would not be entitled to the above VR benefits or the supplemental job displacement benefits regardless of whether or not the injured employee took the permanent modified/alternate position.  

Death Benefits

If an employee dies as a result of an industrial injury, death benefits are to be paid. There are two types of death benefits: burial benefits and dependency benefits.   The burial benefit provides for reimbursement of burial expenses up to $5,000.   Dependency benefits provide for wage replacement benefits to qualified survivors/dependents who were dependent upon the deceased employee's earnings for their own financial support.     There is no credit of indemnity (TD & PD) benefits against death benefits.   There are several types of dependents: 1) total dependents - have one source of support: the deceased employee's earnings, 2) partial dependents - rely in part on the deceased employee's earnings but have at least one other source of income, 3) dependency presumed: child - a child must meet one of the following criteria: a) a child is a minor AND living with the employee. The child must be under 18 and their residence must be the same as the deceased employee's, b) the child is over the age of 18 AND is physically or mentally unable to earn a living or c) the deceased employee-parent was legally liable for the child's maintenance AND there is no surviving totally dependent parent, 4) dependency presumed: spouse - a spouse to who the deceased employee is married to at the time of death shall be presumed a total dependent if the spouse's earnings were $30,000 or less in the 1 year period immediately preceding the employee's death.   The spouse is not required to prove that they live with the deceased employee, only that they were legally married.   Some relatives of the deceased employee are considered a dependent, while others are not. The following relatives would be eligible to receive workers' compensation benefits according to their relationship to the deceased employee as follows: a) husband or wife, b) child, adopted child, stepchild, grandchild and posthumous child (born after the employee's death), c) mother, mother-in-law, grandmother, father, father-in-law, and grandfather, d) brother, brother-in-law, sister, sister-in-law and e) uncle, nephew, aunt and niece. Also, any good faith member of the deceased employee's family or household can qualify as a dependent, even if the relative is not listed above. Death benefits for dates of injury on or before December 31, 2005 range from $125,000 to $160,000 depending on the number and types of dependents.   Death benefits for dates of injury on or after January 1, 2006 range from $250,000 to $320,000 depending on the number and types of dependents. The burial benefit of $5,000 is in addition to the dependency benefits. The maximum cap for dependency benefits may be increased depending on the number of minor children under the age of 18 at the time of the employee's death. If there are minor children under the age of 18 who meet the dependency requirements, dependency benefits are paid until the youngest child turns 18 regardless of what the maximum dependency benefit cap is.  

Claims Reserves

Workers' compensation claims reserves represent the most probable cost of bringing an open claim to resolution and closure.   The total reserve figure (total incurred costs) on a claim is made up of separate dollar values for temporary disability benefits, permanent disability benefits, vocational rehabilitation benefits/supplemental job displacement benefits, medical treatment and expenses.   The reserve includes monies that have already been paid out on a claim, as well as monies that the insurance carrier anticipates on having to pay on the claim in the future.   The reserve estimates are formulated based on information about the claim at the time the reserves are established. The claims adjuster periodically reviews the reserves throughout the life of the claim to ensure that the appropriate amount of money to cover the claim is in place as the facts of the claim change.   Each insurance company has its own set of rules and guidelines when setting the reserves on the claim, however the accuracy in setting reserves varies from adjuster to adjuster depending on the experience of the adjuster and the facts of the claim.   Remember: Reserve setting is an art, not a science!

Penalties Not Covered By Workers' Compensation Insurance

An employer's liabilities for the penalties described below are not insurable. However, the defenses of these penalty actions are insurable.   So, the insurance carrier might pay for the costs of defending the penalty action for the employer, but may not provide insurance coverage for the actual penalties themselves.

Labor Code Section 132(a) - Wrongful Termination or Discrimination

It is unlawful for any employer who discharges, or threatens to discharge, or in any manner discriminates against any employee because he or she has filed or made known his or her intention to file a claim for Workers' compensation with his or her employer or filed an application for adjudication, or an employee who has testified on behalf of another employee before the WCAB, or because the injured employee has received a rating, award, or settlement. A violation of this labor code section is   a misdemeanor. The employee's compensation, as a result of such violation, shall be increased by 50%, but in no event shall it be more than $10,000 together with costs and expenses in excess of $250.   Any such employee who prevails on this type of lawsuit shall also be entitled to reinstatement and reimbursement for lost wages and work benefits caused by the acts of the employer.

Labor Code Section 4553 - Serious and Willful Misconduct  

Serious and Willful misconduct on the part of the employer has been interpreted as any action(s) displaying a reckless disregard for an employee's safety.   Where the employee is injured by reason of the serious and willful misconduct of any of the following: a) employer or his managing representative, b) if the employer is a partnership, on the part of one of the partners or a managing representative or general superintendent and c) if the employer is a corporation, on the part of an executive, managing officer, or general superintendent the penalty for this misconduct is the amount of the employee's compensation shall be increased by 50%, together with costs not to exceed $250.  

Notification Requirements -What Employers Need To Know

•  Time of Hire: State law requires employers to notify every new employee either at the time of hire or by the end of the first pay period written notice of their right to receive workers' compensation benefits and provide a form that the employee may use to notify the employee of his or her choice to pre-designate a personal physician or chiropractor in the event that he/she sustains a work related injury.   This form must be easily understandable and in both English and Spanish.    This applies to all employees hired as of January 1, 2004. For all employees hired prior to January 1, 2004, the employer is required to have a form readily available to give to an employee who requests to pre-designate a physician in the event that they have a work related injury. The pre-designation of a physician must be done prior to an employee sustaining a work related injury.  

•  Posting Requirements: State law requires that employers post information regarding work related injuries in a conspicuous place and must include the following information:

•  The name of the current workers' compensation insurance carrier or claims administrator

•  Who at the place of employment should be contacted in the event of a work related injury

•  A description of potential rights and benefits if a work related injury occurs

•  The location and telephone number of the nearest Information and Assistance Officer.

•  Upon Knowledge of Injury:

A. The employer must notify the employee of their potential right to workers' compensation benefits within 24 hours of the employer's knowledge that a work related injury has taken place.   This information must be given to the employee's dependents in the event of a work related death and must include the following information:

•  Notice of the right to medical treatment

•  Instructions on how to contact the Workers' Compensation Appeals Board

•  Instructions on how to contact the Information and Assistance Officer

B. The employer must a file an Employer's Report of Occupational Injury or Illness within five days of knowledge of the claim. It is best if an employer can report a new claim within 24 hours of their knowledge of a claim.

C. The employer must provide the employee with an Employee Claim Form (DWC-1) within one working day of knowledge of a work related injury. This time frame is not waived if the employee has not returned back to work.

D. The employer must notify the nearest district office of the Division of Occupational Safety and Health (DOSH) of any serious injury or illness, or death, of an employee occurring in a place of employment or in connection with any employment.   Immediately means as soon as practically possible but no longer than 8 hours after the employer knows or with diligent inquiry would have known of the death or serious injury or illness. If extenuating circumstances can be shown then the timeframe is to be no longer than 24 hours after the incident.   Serious injury or illness is defined as whenever a state, county or local fire or police agency is called to an accident involving an employee. A list of DOSH district office can be found at

Six Strategies for Successful Claims Management

•  Report Claims Promptly

Report claims as soon as possible. The sooner claims are reported, the sooner the claims can start to be managed. This will insure that benefits are paid promptly and correctly, penalties can be avoided, questionable claims can be investigated in a timely manner and all of the parties can start to work immediately on returning the employee back to work.

•  Investigate and Respond

Once a claim has been reported a through investigation of the accident should take place immediately. Witness statements and pictures of the accident site should be taken as soon as possible to ensure that everyone has a clear picture as to how the accident happened and the insurance carrier or claims administrator can be notified of any issues that come up during the investigation. Safety hazards should be corrected as soon as possible to avoid additional injuries. Get the injured employee medical treatment as soon as possible. Work with your insurance carrier and broker to designate an occupational health clinic where your employees will receive quality care from physician's who are familiar with workers' compensation requirements and your facility.

•  First Aid

First aid means any one-time treatment, and any follow up visit for the purpose of observation of minor scratches, cuts, burns, splinters, or other minor industrial injury, which do not ordinarily require medical care.   This one time treatment and follow up visit for the purpose of observation is considered first aid even though a physician or registered personnel provided it.   While all claims must be reported to the insurance carrier, employers can still pay for first aid claims themselves. By employers paying for first aid claims, they lower the losses against their workers' compensation policy, which could translate into savings on their premiums.   First Aid claims should be investigated as thoroughly as any other work related claim.

•  Use Medical Case Management

If possible choose an insurance carrier or claims administrator whose   registered nurses work with claims adjusters in the claims management process. Medical case managers can help make sure that employees get to the right doctors, receive the right treatment and know what to expect in the process. This will translate into a happier employee and claims that cost less.  

•  Communication is Key

Communication is essential to successful claims management. Talk to your employees about safety issues before an accident happens. Prevention is the best way to manage a workers' compensation claim.   Stay in contact with your employees once they are injured. Let them know that the company cares about their health and that they are wanted back at work as soon as possible. Develop a relationship with your claims administrator and work closely with them in order to get the employees back to work and the claims resolved as soon as possible.

•  Establish A Return-To-Work Culture

Let your employees know that you will bring them back to work even if they have work restrictions. This lets them know that they are valued members of the company. Develop transitional and modified duty programs that injured employees can go into while they are healing from their injuries. Send a copy of job description of the job that the employee was hurt on with them to the medical clinic and have the physician address what the employee can and cannot do in that job. Then match those work restrictions against the transitional or modified duty program that has been put in place. Doing this will decrease lost productivity and claims costs.

Fighting Fraud

Insurance carriers/claims administrators are required by law to maintain a staff to investigate possible fraudulent activities. The activities of a Special Investigation Unit (SIU) may be limited or broad in scope depending on the size of the claims administrator and its commitment to fighting fraud.   The legal definition of fraud is: intentional pervasion of the truth or false representation designed to deceive for the purpose of inducing another to part with something valuable or to surrender a legal right. An injured employee, an employer, lawyer, hearing representative, cappers, doctors, medical groups, and medical and legal referral services can commit fraud.   In the criminal prosecution process, the following key elements define fraud: 1) a false representation ("the lie"); 2) the false representation (lie) must be intentional or knowingly made; 3) the false representation (lie) must be made for the purpose of obtaining a benefit to which the person is not entitled OR to deny a benefit that is due; AND 4) the false representation (lie) must be material; i.e., it must make a difference. The test question is: "If the truth had been told, would you have done anything differently?" ALL of these elements must be present, beyond a reasonable doubt, in a case for criminal fraud.   The following are a few indicators/red flags to potential workers' compensation fraud:

•  Accident is not witnessed

•  Injury occurs shortly after employee reports to work on Monday morning or late on a Friday afternoon

•  Information received that injured employee is working somewhere else

•  Worker is unhappy and facing a disciplinary action, layoff or firing

•  Injured worker is involved in seasonal work that is about to end

•  Injured worker is new on the job

•  Injury takes place at an odd time, i.e., at lunch or break

•  Fellow workers hear rumors that accident was not legitimate

•  Accident is not promptly reported by employee to supervisor

•  Details of accident are vague or different from those initially reported

•  Injured worker abandons job, then files the claim

•  Injuries are all subjective in nature, i.e. pain, headaches, nausea, inability to sleep

•  Injured worker cancels or fails to keep appointments

•  Injured worker is given light duty but claims incapable of doing light duty tasks

•  The social security number provided does not belong to the injured employee

If any of these indicators are present in a workers' compensation claim, a through investigation is warranted.

Employer Bill of Rights

In 1993, the Legislature passed a law underscoring the right of employers to access information, which impacts their workers' compensation insurance premium. The intent of the law was to improve communication between employers and their claims administrators and to involve employers in the issues affecting their premiums.  

The provisions of this law are outlined in Labor Code Section 3761 and 3762 and apply to claims filed for dates of injury on or after January 1, 1994 and include the following:

•  Notification of A Claim: An insurer shall notify the employer within 15 days of each claim for disability benefits filed against the employer directly with the insurer if the employer has not timely provided to the insurer an Employer's First Report of Occupational Injury or Illness.

•  Disputed Claims: An employer shall promptly notify its insurer in writing at any time during the claim when the employer has actual knowledge of any facts, which would tend to disprove any aspect of the employee's claim.   After an employer notifies its insurer in writing that in their opinion, no compensation is payable to an employee, the WCAB may still approve a compromise and release agreement, or stipulation, but only when there is proof that the employer was notified of the pending action. This notice must be sent to the employer's last known address no less than 15 days prior to the WCAB's action.

•  Reserves: In establishing a claim's reserve that affects premiums against an employer, an insurer shall provide the employer, upon request, a written report of the reserve amount established.

•  Legal Action: When the employer promptly notifies the insurer in writing of its knowledge of information that would disprove a claim and the WCAB thereafter determines that no compensation is payable, the insurer shall reimburse the employer any premium paid solely due to the inclusion of the successful challenged payments in the calculation of the employer's experience modification.

•  Claims Files/Information: The insurer shall discuss all elements of the claim that affect the employer's premium with the employer and shall supply copies of the documents that affect the premium at the employer's reasonable expense during reasonable business hours.   This right shall not apply to attorney-client privilege information or documents and any medical information that isn't with regard to the employee's diagnosis, treatment or work restrictions in order to modify the employee's duties.   





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