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SAN FRANCISCO—California's Supreme Court has handed employers and insurers a victory in a case that has received nationwide attention for its potential impact on claims management practices and expenses.
In its Dec. 2011 ruling in Frances Harris et al. vs. The Superior Court of Los Angeles County, the state high court struck down a 2007 California appellate court finding that claims adjusters are not exempt from laws requiring employers to pay overtime wages.
The case stemmed from class action lawsuits filed by adjusters working for Liberty Mutual Insurance Co. and Liberty Mutual Group's San Diego, Calif.-based unit, Golden Eagle Insurance Corp. Liberty's claims handlers alleged the insurers erroneously classified them as exempt “administrative” employees and sought damages for unpaid overtime.
The ongoing legal debate over whether laws require paying adjusters overtime has significant ramifications for employers and insurers, said James Bacon, a managing principal at Integro Insurance Brokers Ltd. in San Francisco.
Insurers and third-party administrators operate on thin margins. If required to pay overtime, they could either pass the additional costs on to employers or become more cost-conscious, causing claims adjusters to spend even less time on each case file, Mr. Bacon said.
Time spent on workers compensation claims files already is minimal, particularly in California's complex claims adjusting environment, he said.
Having to pay overtime also could slow claims closures should insurers opt to hold down costs rather than pay overtime, added Mark Sektnan, president of the Sacramento, Calif.-based Assn. of California Insurance Cos.
The association views last week's ruling—which has particular significance for high-volume claims lines, such as workers comp and auto liability—as “a very favorable opinion for the (insurance) industry because they overturned the appellate court decision that said these employees were not exempt,” Mr. Sektnan said.
In a statement, Boston-based Liberty Mutual said it is pleased the court gave the case “thoughtful consideration.”
Under the state Supreme Court ruling, insurers may not have to pay adjusters overtime depending on the claims managers' level of decision-making, said Paul E.B. Glad, a partner and head of the appellate practice in the San Francisco office of SNR Denton.
California's Supreme Court focused narrowly on whether adjusters' work is administrative, and thus exempt from state and federal laws and rules requiring that they be paid overtime. It provided a four-part test to determine whether insurance adjusters are administrative employees.
To qualify as administrative employees, workers must be paid at a certain level, their work must be administrative, their primary duties must involve that administrative work, and they must regularly exercise independent judgment and discretion, the court said. The California court also looked to a 2007 federal court ruling that found insurance examiners typically engage in work that makes them exempt employees, sources said.
“What this should do is give insurance companies a safe harbor for designing the role of their claims adjusters to assure they are exempt from overtime rules,” said Mr. Glad, who filed an amicus brief in the case on behalf of several insurance associations.
Organizations that filed amicus briefs supporting Liberty Mutual included the U.S. Department of Labor, the U.S. Chamber of Commerce's National Chamber Litigation Center Inc. and the California Employment Law Council. Some argued that California's wage law should be consistent with federal regulations, but the 2007 decision by California's 2nd District Court of Appeal failed to do that.
The appellate court reviewed several issues in its decision, including a trial court's denial of summary judgment sought by the adjusters, who were seeking to eliminate insurers' defense that the adjusters were exempt from the overtime compensation requirements.
A divided appellate court ruled that “the undisputed facts show that plaintiffs are primarily engaged in work that falls on the production side of the dichotomy” between administrative and production work.
“None of that work is carried on at the level of management policy or general operations,” the appellate court ruled.
But in the unanimous ruling, the California Supreme Court said the appellate court improperly evaluated the situation.
“The majority...provided its own gloss to the administrative/production worker dichotomy and used it, rather than applying the language of the relevant wage order and regulations,” the Supreme Court said in remanding the case with directions for the lower courts to apply the legal standards it laid out.
However, the state high court also said it was not expressing an opinion on the strength of the parties' relative positions. “We merely hold that the Court of Appeal majority erred in its analysis,” the Supreme Court said.
That means the issue remains unsettled.
Still, the state Supreme Court provided lower courts with “dramatic guidance” to resolve key issues in the case by applying its four-part test, Mr. Glad said.