SAN FRANCISCO—The reversal of a decision in a controversial workers compensation case has added to the legal uncertainty around permanent disability ratings in California.

California's 1st District Court of Appeal reversed a decision by the California Workers' Compensation Appeals Board in the case of Ogilvie vs. WCAB, sending the case back to the appeals board for further review of evidence.

The case of Wanda Ogilvie vs. City and County of San Francisco was combined with Mario Almaraz vs. Environmental Recovery Services and Joyce Guzman vs. Milpitas Unified School District in 2009, with the WCAB ruling that the rating of permanent disabilities can be rebutted with certain evidence, including data and medical determinations.

The Court of Appeal, however, found that the WCAB exceeded its authority in that finding.

“Because we cannot conclude on this record whether Ogilvie effectively rebutted application of the rating schedule, we reverse the decision of the Workers Compensation Board of Appeals, annul the award benefits to Ogilvie, and remand further proceedings consistent with our opinion,” Judge Peter J. Siggins wrote in the opinion.

Joseph C. Waxman, an independent attorney who represented Ms. Ogilvie, could not be reached for comment.

In overturning the WCAB opinion, the Court of Appeal rejected the WCAB formula for rebutting the diminished future earning capacity component of the permanent disability award, and it offered three ways in which an injured worker can challenge the rating. Under the appeal's court ruling, the employee must prove that:

• The earning capacity adjustment contained a factual error in the calculation or application of the formula;

• The employee is not amenable to rehabilitation due to the industrial injury; or

• The omission of medical complications aggravating the disability used to compute the diminished future earning capacity adjustment factor.

“The court found nothing in the statute that authorized an alternative method for determining an employee's diminished future earning capacity, so when the (WCAB) devised a formula to rebut the diminished future earning capacity factor, it acted in excess of its authority,” Michael Nolan, president of the Oakland-based California Workers' Compensation Institute, wrote in an email. “Every permanent disability case rated in accordance with the WCAB's "Ogilvie formula' is, therefore, invalid in our opinion.”

With the Court of Appeal opinion invalidating the WCAB's rebuttal formula, Mr. Nolan said the Court of Appeal could require that cases decided based on the “Ogilvie formula” be re-evaluated.

Fred O. Pachón, vp of risk management and insurance at Santa Barbara, Calif.-based Select Staffing Inc., said the court's opinion seems to bring California's workers comp system back to the days prior to reform in 2004, when S.B. 899 was signed.

The law was intended to provide better guidelines and incentives for determining permanent disability, lawmakers and workers comp industry professionals said, and allowed employers to create physician networks for the assessment and treatment of work-related injuries. However, based on the court's opinion, Mr. Pachón said it could spur longer litigation of these cases and creates a gray area of what individuals should be paid.

“Once again it will be up to the judges to review the evidence and decide if it meets the threshold of the (American Medical Assn.'s) guidelines of permanent disability,” he said. “It's like a big circle to where we were before with these cases being fought out in court.”

Risk managers can avoid getting tangled in a court fight by trying to address permanent disabilities as quickly as possible, Mr. Pachón said, which could help companies that experience high levels of permanent disability claims cut costs and mitigate the litigation process. He added that avoiding losses altogether is the ultimate goal.

“When you do have a claim, investigate the claims quickly and thoroughly and try to get them resolved as soon as possible,” he said, adding that the longer the claim's life, the higher costs of benefits and litigation will climb.

The WCAB's initial decision in Ogilvie caused unrest within California's workers comp system, with employers and insurers stating the decision would create significant cost increases—up to $800 million in additional costs by some estimates.

A spokesman for the Workers' Compensation Insurance Rating Bureau of California said the organization is in the process of evaluating the Court of Appeal opinion.