ERIC K VAUGHN, Applicant

KV CONSTRUCTION LLC, Employer

HARLEYSVILLE LAKE STATES INS CO, Insurer

KV Construction, L.L.C. (KVC) and the Wisconsin Uninsured Employer's Fund (UEF) each submitted a petition for commission review alleging error in the administrative law judge's Findings and Interlocutory Order issued in this matter on February 6, 2002. On August 29, 2002, the commission issued an order remanding the matter to the department for the taking of additional evidence; and on June 18, 2003, the additional evidence was received at a second hearing. The matter is currently back before the commission for decision, and the parties have submitted briefs. At issue are: (1) whether the applicant sustained a compensable low back injury on March 1, 1999; (2) whether Harleysville Lake States Insurance Company had a worker's compensation insurance policy covering KVC in force on March 1, 1999; and (3) what are the nature and extent of disability and liability for medical expense attributable to the alleged work injury of March 1, 1999.

The commission has carefully reviewed the entire record in this matter, and hereby affirms the administrative law judge's Interlocutory Order but substitutes the following findings for those made in her decision. The commission makes the following:

The applicant, whose birth date is March 6, 1960, was employed as a carpenter for KVC, a construction firm owned by his brother. He sustained a conceded back injury while working for the employer on December 9, 1998, and Lake States paid the temporary disability and medical expense attributable to that injury. The applicant returned to his regular work duties, and on March 1, 1999, he was picking up lumber when he heard a snap in his lower back. About 15 minutes later he began to experience sharp pain in his back, which still later traveled down his left leg. Shortly thereafter he stopped working, and he began receiving medical treatment the next day.

A MRI performed on March 8, 1999, revealed a broad base lateral bulge of the disc at L5-S1. On March 19, 1999, Dr. Mark Stevens diagnosed a left L5-S1 protruded disc with left sciatica. Dr. William Buchta also treated the applicant and noted on November 19, 1999, that the applicant had sustained a "major injury" to his low back on March 1, 1999. Dr. Stephen Weiss, who examined and evaluated the applicant at Lake States' request, also opined that the applicant sustained a new injury to his back on March 1, 1999, resulting in a disc herniation at L5-S1. Dr. Larry Lindesmith, who reviewed the applicant's medical records at KVC's request, opined that both the December 1998 and the March 1999 injuries contributed to the bulging disc at L5-S1. Dr. Lindesmith indicated that the March 1999 injury was the more significant of the two. Dr. Bruce Davey examined and evaluated the applicant at UEF's request. He opined that although the applicant had preexisting degenerative disc disease, the L5-S1 disc rupture was the result of the work incident of March 1, 1999.

Accordingly, all the credible medical evidence leads to the conclusion that the applicant sustained his L5-S1 disc injury in the work incident of March 1, 1999, and that his subsequent disability and medical treatment are attributable to the injury of that date.

COVERAGE

The coverage dispute centers around whether or not Lake States had a worker's compensation insurance policy in force with KVC when the applicant's injury occurred on March 1, 1999. The administrative law judge found that the factual and legal questions involving the issue of whether a policy was in force were beyond the jurisdiction of the department. Nevertheless, the administrative law judge additionally found that Lake States' worker's compensation policy covering KVC was no longer in force on March 1, 1999, because the Wisconsin Compensation Rating Bureau had previously notified KVC that the policy had been cancelled for nonpayment of premium. In a letter the department sent to the commission after the commission's remand order of August 29, 2002, the department asserted:

"Only the Office of the Commissioner of Insurance (OCI) has jurisdiction to consider improper premium billings and insurance cancellations. Chapter 102 does not provide the Department with any jurisdiction in these matters. We are uncertain of the Commission's jurisdiction over an issue that does not fall within Chapter 102." (Respondent Lake States exhibit 15).

Wis. Stat. § 102.16(1) provides that "Any controversy concerning compensation" shall be submitted to the department. Wis. Stat. § 102.18(3) provides that any party may petition the commission for review of a department decision awarding or denying compensation. The court stated in Maryland Casualty Co., v. Industrial Comm., 198 Wis. 202, 221 N.W. 747 (1929):

"Therefore, when an insurance company undertakes to write workmen's compensation insurance it assumes the employer's obligation to pay compensation. The measure of its liability under its policy and the statute is the employer's liability to the injured employee. It is permitted to make no defense which will impair the employee's right to payment of compensation. Its liability is in effect primary. It is not a mere indemnity. It is therefore considered that a controversy relating to compensation insurance is, within the meaning of the provisions quoted in the original opinion, a dispute or controversy concerning compensation . . .

here it appears that the plaintiff company had been engaged in the business of writing workmen's compensation insurance. It is not disputed that it had written a policy upon this identical risk. It had therefore submitted itself to the law and to the jurisdiction of the Industrial Commission with respect to all matters relating to compensation under the act, including the question of whether or not it had in this instance in fact renewed its policy . . ." Id. at 211. 
(emphasis added).

This holding in Maryland Casualty has not been overruled or changed. (1)    Under Wis. Stat. §§ 102.16(1) and 102.18(3), the department and the commission have the statutory responsibility to determine whether compensation is payable to an individual for an alleged work injury, and also to determine who is liable to pay that compensation. Currently, once it has been established that a worker's compensation insurance policy has been properly issued to cover a particular employer's risk, there is normally only one practical inquiry for the department or the commission to make to decide whether the coverage was terminated or cancelled. That inquiry is whether the policy was terminated or cancelled pursuant to the procedures outlined in Wis. Stat. § 102.31(2)(a) and Wis. Admin. Code § DWD 80.65. Those procedures were not part of the statutory scheme when Maryland Casualty was decided, so in most cases, the task of the department/commission in deciding whether a policy has been cancelled or terminated has been made much simpler than it was in 1929.

Nevertheless, the department/commission must determine whether the statutory cancellation or nonrenewal procedures were followed. Coverage questions may also arise in a particular case with respect to whether or not in the first instance, a worker's compensation insurance policy was legally contracted between an employer and an insurance company. Finally, issues may arise concerning the validity of specific provisions of a worker's compensation insurance contract (Wis. Stat.§ 102.31(1)(a)), or whether department consent has been given for divided or partial insurance coverage (Wis. Stat. § 102.31(1)(b)). In short, the department and the commission do retain jurisdiction over worker's compensation insurance coverage issues that arise as part of a worker's compensation claim, including whether a policy was ever legally contracted, and whether it was ever legally terminated or cancelled. The statutory procedures for termination or cancellation of a policy normally make resolution of that issue straightforward. However, in all coverage controversies arising as part of a worker's compensation claim, the department and the commission must still make the appropriate findings necessary to determine whether coverage existed.

It was primarily concern over whether and when actual notice of cancellation had been given and received under Wis. Stat. § 102.31(2), that prompted the commission to order the taking of additional evidence in its order of August 29, 2002. However, additional questions were asked in order for the commission to understand exactly what had occurred between Lake States and KVC, and between the independent insurance agent and the parties. The evidence submitted at the hearing held on September 4, 2001, was not sufficient for the commission to understand many significant facts surrounding the issuance and cancellation of the Lake States policy, including whether or not there had been more than one policy issued. However, the facts were clarified after submission of the evidence at the remand hearing held on June 18, 2003. Most significantly, it is clear that on January 15, 1999, Lake States sent out a notice of cancellation to both KVC and to the WCRB, indicating KVC's policy would terminate effective February 16, 1999, unless the outstanding premium was paid. On January 15, 1999, premiums were still outstanding for the August-through-October policy quarter, as well as for the November-through-January policy quarter. The notice only asked for the balance due on the earlier quarter in order to avoid cancellation. The WCRB received its copy of the cancellation notice on January 22, 1999, thereby making the effective date for the policy cancellation February 21, 1999 (Wis. Stat. § 102.31(2)).

Exhibit 18 is a document submitted on remand from the Worker's Compensation Division Bureau of Insurance Programs indicating that the department sent "cancellation alerts" to KVC on January 26, 1999 and February 14, 1999. KVC's owner testified that he did not know whether he received a copy of the cancellation notice sent on January 15, 1999, and at the hearings he was not asked about the department's cancellation alerts. After the January 1999 notice of cancellation was sent, KVC's owner did not send any money or contact Lake States until the applicant was injured on March 1, 1999. The owner asserts that it was not until that date that he learned coverage had lapsed.

It is not credible that KVC failed to receive the notice of cancellation sent on January 15, 1999. Nor is it likely that KVC failed to receive the two cancellation alerts sent to that business by the department on January 26 and February 14, 1999. KVC had been able to get by in the first and second quarters of the insurance contract by making late premium payments, one of which was made with an insufficient funds check, and then benefiting from discretionary reinstatement by Lake States. KVC was given further leeway in January of 1999, when the insurance agent, Strangstalien, told KVC's owner that Lake States would resubmit his insufficient funds check if he paid the $25.00 "NSF" fee. It is inferred from the evidence that the owner decided that he could ignore the cancellation notice and the department alerts based on the prior history of discretionary reinstatements.

UEF argues that Lake States should be held liable because that company failed to resubmit the $3,525.00 check to the bank as Strangstalien had indicated Lake States would do (this argument is apparently made under an agency theory, although UEF's argument does not specify any legal theory). UEF asserts that KVC's owner gave credible testimony that there were sufficient funds in KVC's bank account to cover the $3,525.00 check, had Lake States resubmitted it. Of course, had Lake States resubmitted the check and had it cleared the bank, that payment would only have covered the premium through October 31, 1998. An additional premium payment had been due on November 1, 1998.

While Lake States' business procedures were inconsistent, and from a layman's perspective Lake States was anything but blameless in this matter, there can be no disputing the legal effect of the notice of cancellation sent out on January 15, 1999, pursuant to Wis. Stat. § 102.31(2)(a). The statute defines when cancellation is effective, and the statutory notice was given to effect cancellation on February 21, 1999. KVC did not submit payment as required by the notice, and as a result, the policy was legally cancelled pursuant to the statute. The notice of cancellation was received after Strangstalien's representation concerning resubmission of the check, and that notice gave an unambiguous date for policy cancellation, consistent with Wis. Stat. 102.31(2)(a). At a minimum, KVC should have responded to that notice by immediately contacting Strangstalien or Lake States to determine the status of the policy.

Pursuant to Wis. Stat. § 102.81, UEF is liable for the applicant's compensation attributable to the work injury of March 1, 1999, with rights for recovery against KVC and its officers and directors as provided in Wis. Stat. § § 102.82 and 102.83.

EXTENT OF LOSS OF EARNING CAPACITY

Dr. Buchta assessed ten percent permanent partial disability on November 19, 1999. On July 7, 2000, he gave restrictions of no lifting or carrying over 40 pounds once daily, 25 pounds occasionally, 20 pounds frequently, and 15 pounds constantly, with no frequent pulling or bending at the waist. He further indicated that there should be no sitting for more than 60 minutes, no jumping, and no lifting of more than 25 pounds from below the knee level.

Dr. Weiss examined the applicant on March 23, 2001. He assessed three percent permanent partial disability and gave restrictions of no lifting of more than 40 pounds on a frequent basis, and no more than 55 pounds occasionally. He also recommended that there be no frequent, prolonged, or deep bending or twisting.

In a WC-16-B signed on November 11, 2001, Dr. Lindesmith assessed seven percent permanent partial disability and gave lifting restrictions in the "light-medium" category. He also indicated the applicant should avoid frequent or prolonged bending or twisting at the waist, and avoid prolonged sitting.

The applicant's vocational expert, Armstrong, assessed loss of earning capacity at approaching 45 percent. The uninsured employer's vocational expert, Steinback, assessed it at between 31 and 34 percent. Lake States' vocational expert, Moglowsky, assessed it at five percent. The administrative law judge assessed the loss at 40 percent, based primarily on a comparison of preinjury earnings ($27,000.00) with post-injury earnings ($18,000.00), but also based on reduced access to higher-paying construction work.

The applicant's physical restrictions do result in substantially reduced access to construction work. Based on his age, his high school education, and his previous work experience, construction work was most probably the highest-paying career the applicant had before him prior to his March 1999 work injury. The applicant has been able to start his own siding application and remodeling business with a friend, but this does not provide a full 40 hours of employment per week, particularly given the applicant's ability to tolerate the physical requirements of such work. Considering all the relevant factors, the commission agreed with the administrative law judge that the applicant sustained a 40 percent loss of earning capacity attributable to the work injury of March 1, 1999. This amounts to 400 weeks of compensation at the applicable rate of $184.00 per week, which begin accruing on September 6, 1999.

UEF previously paid $7,960.55 to the applicant for temporary disability, and no additional claim for temporary disability has been made. Also as a result of the work injury of March 1, 1999, the applicant incurred the following reasonably required medical expenses: to EMPI, Inc., $685.00; to Franciscan Skemp Clinic the sum of $4,424.00; and to the applicant as reimbursement for medical mileage expense the sum of $473.55.

The applicant's attorney is entitled to a 20 percent fee against the award for permanent partial disability, which after subtraction of an interest credit in the amount of $776.99, amounts to a present value fee of $13,943.01. Applicant's attorney is also entitled to costs in the amount of $937.74.

The credible medical evidence indicates that the applicant may require additional medical treatment and/or sustain additional disability attributable to the work injury of March 1, 1999. Accordingly, this order will be left interlocutory.

NOW, therefore, this

In addition, beginning on November 27, 2003, the Uninsured Employer's Fund shall make monthly payments to the applicant in the amount of seven hundred ninety-seven dollars and thirty-three cents ($797.33) until the currently-unaccrued compensation is paid in the total amount of twenty-seven thousand eighty-four dollars and eighty cents ($27,084.80).

All claims arising out of the work injury of December 9, 1998, have been paid, and the application against Harleysville Lake States Insurance Company is dismissed.

Jurisdiction is reserved for such further findings and orders as may be warranted.

Dated and mailed October 27, 2003
vaugher2 . wpr : 185 : 8 ND § 2.4

/s/ David B. Falstad, Chairman

/s/ James T. Flynn, Commissioner

/s/ Robert Glaser, Commissioner

cc: 
Attorney Dennis H. Wicht
Attorney Lee J. Fehr
Attorney Matthew C. Siderits
Attorney Jeffrey J. Strande

Appealed to Circuit Court.  Affirmed June 24, 2004.  Appealed to the Court of Appeals. Affirmed, unpublished opinion, December 8, 2005.

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(1)( Back ) In City of Manitowoc v. Iowa National Mutual Insurance Co., 68 Wis. 2d 722, 229 N.W.2d 577 (1975), the court accepted jurisdiction over the issue of whether an insurance policy issued by Iowa National Insurance and covering all risks arising under Wisconsin's worker's compensation law, which by the policy's terms included "any occupational disease law" of Wisconsin, covered the death benefit payable to a deceased Manitowoc fireman's widow pursuant to sec. 66.191, Stats. (1971). That statute provided a special death benefit to the "widows" of certain public employees considered to be working in hazardous public employment (the current version of this death benefit is found in the provisions of Wis. Stat. §§ 40.02(48) and 40.65(7)). Pursuant to the terms of sec. 66.191(4), the department of industry, labor & human relations was directed to hold hearings and resolve disputes under sec. 66.191, utilizing the procedures set forth in Chapter 102. 

In City of Manitowoc, the department held a hearing and issued an order finding that the City was liable to the fireman's widow for the sec. 66.191 benefit, without Iowa National Insurance having been made a party to the administrative proceeding. The City initiated a circuit court action requesting a declaratory judgment to compel Iowa National to reimburse it for all payments due to the widow. The Supreme Court affirmed the circuit court's granting of the declaratory judgment on the basis that sec. 66.191 was an "occupational disease law" of the state of Wisconsin. Thus, the case resolved a coverage issue arising under sec. 66.191, which was outside the parameters of Chapter 102. 

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