Workers’ Compensation Carrier Required to Pay Seed Money of an Annuitized MSA Despite Claimant’s Death

An MSA is intended to pay for future medical items which would otherwise be covered by Medicare. The intent behind establishing an MSA is to prevent the cost shifting of these future items to Medicare. It therefore logically follows that if a claimant passes away prior to disbursement of the MSA and/or finalization of the settlement agreement, that an MSA is no longer required to be paid due to the fact that there will be no future medical expenses incurred. The claimant has passed away and therefore there will be no shifting of the burden for future care to Medicare. A deceased person cannot incur medical expenses into the future.

In a recent case out of North Carolina, Holmes v. Solon Automated Services, 2013 N.C. App LEXIS 1238 (December 3, 2013), the North Carolina Industrial Commission agreed with this notion completely and found that the defendants did not have to pay for any portion of the MSA due to the fact that the claimant passed away prior to full finalization of the settlement. However, when the case was appealed to the Court of Appeals of North Carolina, the appellate court took a different direction from this logic when analyzing the parties mediated settlement agreement. The appellate court found that the defendant insurance carrier was still required to pay the seed money of the annuitized MSA, but was not required to pay for the annual payments of the MSA. Let’s take a deeper dive into the case to understand why.

As a background of the case, Mr. Holmes was an employee of defendant Solon Automated Services. Mr. Holmes sustained a compensable injury on May 16, 1990 for which he received workers’ compensation benefits. On August 26, 2010, Mr. Holmes and defendants (Solon Automated Services, employer and Specialty Risk Services, carrier) engaged in a voluntary mediation, and they “entered into an agreement to settle” Mr. Holmes’ claim. This “agreement was memorialized in an Industrial Commission Form MSC8 Mediated Settlement Agreement (“Agreement”) which was signed by all parties.”

In the Agreement, in consideration of the payments to be made by defendants, Mr. Holmes “waived the right to any further benefits under the Act” arising from his May 16, 1990 injury. Defendants agreed to pay the following: a. $250,000.00; b. Mediator’s fees; c. All authorized medical expenses to the date of the mediation; d. Funding of an MSA in the amount of $186,032.51, with ‘$19,582.37 seed money for the Medicare Set Aside for the benefit of Washington Holmes’ and payments of ‘9,247.23 annually beginning on September 15, 2011, payable 18 years only if Washington Holmes is living.'”

The defendants were to purchase an annuity to make the annual payments. The Agreement provided that “[t]he Employee understands and agrees that the monies in the Medicare Set-Aside Account will be used for the sole purpose of paying future medical expenses related to his injury which would otherwise be paid for by Medicare.'”

After the mediation, counsel for the parties began drafting a settlement agreement, but Mr. Holmes died unexpectedly of pneumonia on October 24, 2010, before the settlement agreement was completed.  Plaintiff, Mr. Holmes’ widow, was substituted as plaintiff in the action. When the defendants refused to fund any portion of the MSA, the Plaintiff requested that the Commission enforce the provisions of the Mediated Settlement Agreement which would require the defendants to fund the MSA account into Mr. Holmes’ estate. The Commission ruled in favor of the defendants, finding that an implied condition of the mediated settlement agreement was that Mr. Holmes be alive for the defendants to be required to fund the MSA. The Plaintiff appealed the Commission’s decision to the North Carolina Court of Appeals. The appellate court took a different method of analysis to determine the outcome of the case than the Commission did. Whereas the Commission looked to the intent behind of the MSA and found that the purpose was “frustrated” since the claimant had passed away, the appellate court looked more to the strict contractual language of the mediated settlement agreement rather than the intent behind the MSA.

The mediated settlement agreement stated, “$9,247.23 annually beginning on September 15, 2011, payable 18 years only if Washington Holmes is living[.]” As Mr. Holmes did not survive a single year, the appellate court concluded that Mr. Holmes had failed to meet an explicit condition precedent in the contract, survival.

However, as for the seed money, the mediated settlement agreement did provide for a guaranteed benefit in a specific sum, $19,582.37. Additionally, it did not have any specific language requiring Mr. Holmes to survive. The appellate court noted that this may have simply been “inartful wording of the Agreement,” but the parties agreed that the seed money would be for Mr. Holmes’ benefit, and that a benefit to Mr. Holmes’ estate is still a benefit to him. As a result, the appellate court required the defendants to pay the seed money of the MSA but not the annual payments portion of the annuitized MSA.

While the Commission’s logic that the purpose behind establishing the MSA had now been defeated due to Mr. Holmes’death was a correct analysis, the appellate court’s logic in taking strict construction of the settlement agreement is justified from a purely legal perspective. Unfortunately at times, analysis of the strict construction of a contract defeats logic.

The industry should be sure to take note of this case and take adequate precautions when drafting settlement agreements to ensure that the parties’ intent is clear. Payers would be wise to ensure that a condition precedent to paying any portion of the MSA would be the claimant’s survival prior to the payer having to pay for the MSA, and that would include both the seed money and annual payments if the MSA is annuitized.

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