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Wyoming's workers compensation law excludes benefits for mental injuries that are not the result of physical injuries, the state Supreme Court ruled.

Merta Frantz worked for Campbell County Memorial Hospital from April 1991 until June 1995. She filed a workers compensation report of injury in July 1995, alleging continuous, unrelenting fear of job security. She also claimed extreme and unbearable stress related to work environment, relationship to and treatment by senior management leading to emotional collapse. Her claim for benefits was denied. She filed a petition in the trial court for review. The trial court certified the case directly to the state Supreme Court for resolution.

On appeal, Ms. Frantz argued that denial of benefits violated her constitutional equal protection rights under the federal and state constitutions. According to her argument, when the Legislature defined "injury" to exclude mental injuries not caused by a physical injury while allowing recovery of benefits for physical injuries, it created two classes. This violated the equal protection clauses of the federal and state constitutions because the classifications did not serve a legitimate state interest, she maintained.

But the Wyoming Supreme Court disagreed, concluding that the Legislature's decision to exclude mental injuries unless accompanied by a physical injury was rationally related to legitimate governmental objectives of controlling costs and protecting viability of the workers compensation program. The denial of benefits was affirmed.

Frantz vs. Campbell County Memorial Hospital, Supreme Court of Wyoming, Feb. 21, 1997 (BI/01/N.-$10).

Plan covers scalp prosthesis

A group health insurance plan must provide benefits to a beneficiary for a scalp hair prosthesis that a physician had prescribed for a severe disease resulting in the loss of all body hair, according to the Court of Appeals of South Carolina.

Janet C. Hendley was covered under her husband's group state health plan. she suffers from a severe case of alopecia, which results in the loss of all scalp and body hair, including eyebrows and eyelashes. Her physician prescribed a scalp hair prosthesis for her condition. The prosthesis, costing $3,290, was custom-fitted. The Hendleys' claim for benefits under the group plan was denied because the reviewing physician stated the scalp hair prosthesis was a cosmetic device and that it did not replace lost function. The Division of Insurance Services for the state also denied benefits on the basis that the prosthesis was not medically necessary. A trial court master upheld the denial of benefits.

However, the appellate court concluded that the definition of "prosthetic appliance" in the state plan was broad enough to encompass a scalp hair prosthesis used to replace a part of the body that has been lost from disease. The appeals court said the scalp prosthesis is no different from breast prostheses, prosthetic eyes or artificial limbs. The court also said the prosthesis was a necessary medical expense because it was appropriate for Ms. Hendley's condition. The decision denying coverage was reversed.

Hendley vs. State Budget and Control Board, Court of Appeals of South Carolina, Dec. 23, 1996. Rehearing denied Feb. 21, 1997 (BI/02/N.-$10).

Fiduciary duties upheld

A contract exonerating a fiduciary of an Employee Retirement Income Security Act plan from fiduciary responsibilities is void as a matter of law, according to the 9th U.S. Circuit Court of Appeals.

IT Corp. hired General American Life Insurance Co. to administer IT Corp.'s ERISA plan. The insurer had IT sign an administrative agreement under which IT was to establish a bank account and keep enough money in it to cover checks. The insurer had check-writing authority, processed all claims and paid or denied them.

The agreement included a number of clauses designed to limit the insurer's liability in the event of error or misjudgment, except for gross negligence. A further clause provided that under no circumstances shall the insurer be considered the named fiduciary. In this suit, IT and a plan participant sued the insurer, alleging breach of fiduciary duty by paying more than $600,000 of the plan's money for medical expenses relating to an IT Corp. employee's dependent child who was ineligible for benefits. The trial court dismissed the suit, ruling in favor of the insurer.

The appellate court said that though the insurer did much to exonerate itself from responsibility by means of the contract it had IT sign, the contractual exoneration could not do it much good in this case.

According to the court, a contract exonerating an ERISA fiduciary from fiduciary responsibilities is void. Also, the court said a fiduciary's contract with an employer cannot get it off the hook with the employees who participate in the ERISA plan as they did not sign a contract exonerating the fiduciary. Furthermore, the court said a contract providing that a party is not a named fiduciary does not mean it is an unnamed fiduciary. The trial court decision was reversed, and the case was sent back for further proceedings.

IT Corp. vs. General American Life Insurance Co., 9th U.S. Circuit Court of Appeals, March 3, 1997 (BI/03/N.-$10).

Time-card losses not covered

An employee dishonesty insurance policy does not cover losses sustained when workers manipulate a time-card system to receive payment for hours they did not work, according to a Texas appellate court.

Dr. Efrain Dickson was covered under a special business owners' insurance policy issued by Dallas-based State Farm Lloyds. The policy covered losses resulting from dishonest acts committed by employees with the intent to obtain financial benefit for any employee. The policy excluded coverage for salaries, commissions, fees, bonuses, promotion awards, profit-sharing pensions or other employee benefits earned in the normal course of employment.

Dr. Dickson filed a claim against his insurer based on two employees who were manipulating the time-card system to obtain extra salary. The insurer denied his claim. Dr. Dickson sued but lost in the trial court.

The appellate court said an insurance policy or fidelity bond of this type protects the employer against such dishonest actions of his employees as embezzling the employer's funds or selling the employer's property for personal gain. The court said Dr. Dickson's claim was based on employee dishonesty aimed only at obtaining additional wages by lying about the amount of time they had worked. "This loss was clearly outside the coverage of the present policy," the court said. The trial court decision was affirmed.

Dickson vs. State Farm Lloyds, Court of Appeals of Texas, Feb. 27, 1997 (BI/04/N.-$10).

Worker photosensitivity

An employee's sensitivity to light is a non-compensable, gradually incurring injury and not an industrial "disease" within the meaning of the Workers' Compensation Act, according to the Court of Appeals of Virginia.

Helme Walter worked as a reservation agent for United Airlines for about six years. In 1995, Ms. Walter moved to a new workstation equipped with bright fluorescent lighting. At that time, her eyes began to burn. Within a week, she noticed darkening of a mole on her arm, developed speckles and coloration on her arms and experienced joint pains and visual difficulty. She was diagnosed as suffering from photosensitivity, defined as an "abnormal reactivity of the skin to sunlight." Ms. Walter applied for workers compensation medical benefits. The compensation commission awarded her benefits, and the employer appealed.

The appellate court said that, in Virginia, cumulative trauma conditions resulting from exposure to radiation by fluorescent lights is a gradually incurred injury and not an industrial disease. Thus, the court said Ms. Walter's photosensitivity was not compensable. The award of benefits was reversed.

United Airlines Inc. vs. Walter, Court of Appeals of Virginia, March 18, 1997 (BI/05/N.-$10).

No benefits for injury after union meeting

Is an employee who during an unpaid lunch break sustained an injury while walking to work from a union meeting entitled to workers compensation benefits? The Supreme Court of Connecticut decided benefits were not appropriate.

Rosemarie Spatafore, a clerical employee of Yale University, was a union representative for Local 34 of a university employees' union. In 1992, Ms. Spatafore was returning to work after having attended a weekly union meeting, during her unpaid lunch break, when she fell on a sidewalk owned by Yale-New Haven Hospital Inc. and injured her arm. The employer was not permitted to attend the meeting, and Ms. Spatafore's attendance was voluntary. She submitted a claim for workers comp benefits. The commissioner granted benefits; however, the compensation board reversed, denying her benefits.

The appellate court concluded that attendance at a union meeting was not mutual benefit to an employer and employee so as to bring Ms. Spatafore's injury within the compensation act. "The general desire to increase productivity and enhance employer-employee relations does not create a mutual benefit at every union meeting whenever and wherever held. . . ." the court said. The decision of the board was affirmed.

Spatafore vs. Yale University, Supreme Court of Connecticut, Dec. 3, 1996 (BI/01/Ju.-$10).

Court says fiduciaries did not fulfill duties

The 9th U.S. Circuit Court of Appeals held that fiduciaries of an Employee Retirement Income Security Act plan failed to carry their burden of proving that they fulfilled their duties of care and loyalty to participants.

The plaintiffs here are participants in an employee stock ownership plan that was created for the benefit of employees of Pacific Architects & Engineers Inc. In 1974, the plan purchased about 40% of Pacific's stock from Edward Shay for $4.2 million, or $10.67 per share. Mr. Shay was president and chairman of Pacific and one of the plan's fiduciaries. Prior to the sale, Mr. Shay owned 100% of Pacific's stock. In 1988, Mr. Shay's co-fiduciaries, both of whom worked for Mr. Shay, caused the plan to sell its Pacific stock back to Mr. Shay for $14.40 per share, a price determined by Arthur Young Inc., the plan's evaluator. The plan participants sued Mr. Shay and the co-fiduciaries under ERISA for breach of their fiduciary duties. The trial court ruled against the participants.

The appellate court concluded that the fiduciaries had not fulfilled their duties of care and loyalty to the participants. The court noted that the fiduciaries completed the transaction without negotiation, relying on the Arthur Young valuation without questioning it or retaining a second firm to review it. The court emphasized that an independent appraisal is not a "magic wand that fiduciaries may simply wave over a transaction to ensure that their responsibilities are fulfilled." Adopting a rule that an independent appraisal is a complete defense to a charge of imprudence would be foolish, the court said, especially in cases in which there is a strong possibility in self-dealing. The trial court decision was reversed.

Howard vs. Shay, 9th U.S. Circuit Court of Appeals, Nov. 23, 1996 (BI/02/Ju.-$10).

These abstracts were prepared by Mayo H. Stiegler. Copies of these decisions are available by sending a $10 check payable to Mayo H. Stiegler, to Business Insurance, 740 N. Rush St., Chicago, Ill. 60611-2590. List the number for each opinion.