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The Importance of Understanding and Assisting our Clients in the Art of Reserving

By Michael McDonald, Esq.

In this series, Michael G. McDonald, Esq. of the McDonald Law Corporation offers practical advice to WC lawyers and adjustors.
> History of WC, Part 1
> Getting Back to Work
> Art of Reserving
> Structures Still Relevant
> War Story: Favorite Case
> War Story: Greenhorn
Ah, reserving: A basic foundation for insuring against claims; a potential time-consuming activity required from our clients; a dam preventing settlement.

Reserves are the lifeline for costs and operations of an insurance carrier or self-insured client. They affect operating margins, tail coverage and retrospective rates. Loss experience is a fundamental factor in determining workers’ compensation premiums.

My mentors taught me over twenty years ago that a good file is a closed file. In order to close a file, the adjuster needed to provide me with sufficient authority for settlement. That settlement authority was primarily based upon reserving, as well as several other factors. In this article, we will discuss the factors of reserving in order to provide our clients with sufficient information upon which their reserves may be based.

This article is not intended to usurp the adjuster’s or carrier’s rules concerning reserving. In many instances, the carrier does not want their attorney to be directly involved in the reserving process. This article is intended to provide a better understanding of reserves in order to enhance the attorney’s customer service for the client. By doing so, we may have a better opportunity to obtain proper settlement authority without significant delays, delays which could negatively impact settlement negotiations.

Is Reserving an Art or a Science?

Reserves require analyzing indemnity, medical and other allocated and unallocated expense factors. The analysis is based upon the adjuster’s experience, carrier’s reserve guidelines, and legal requirements. Reserves take money out of operations and profits. So, it is important that proper reserves are set.

Most carriers require some form of Reserve Factor Worksheet. The client will consider indemnity, age of the injured worker, work injury history, prior lost time, return to work status, type of injury, and the employer’s/employee’s willingness to return to work and the treating physician’s willingness to order a return to work.

Obviously, some of the factors are “hard”, number-based, and easily identified. Others, such as “willingness” factors and type of injury, require a high degree of experience and subjectiveness on the part of the examiner.

Indemnity Benefits

The list for indemnity benefits includes temporary partial disability (TPD), temporary total disability (TTD), permanent partial disability (PPD), permanent total disability (PTD), supplemental job displacement benefits, death benefits, dependent’s benefits.

When analyzing a file, the attorney should always consider the actual and potential value of each of the indemnity factors and advise the client of their opinion. By doing so, the adjuster should have notice of the benefit amounts and will not claim any surprise when you seek settlement authority.

Medical Factors

On a regular basis, the defense attorney should receive an updated accounting of benefits. This accounting, when properly analyzed with the medical information, will provide the attorney with an opportunity to advise the client of the expected future medical expenses.

Allocated medical factors include physicians, hospitals, diagnostic testing, specialist costs, medications, transportation expenses, attendant care.

Unallocated costs/expenses are typically medical-legal reports, expert testimony, peer review, bill review, attorneys, and investigators.

Depending upon the client, MSA costs may be partially divided between the allocated and unallocated expenses.

Best Practices for Adjusters

For adjusters, the reserves should be based upon the review of current medical reports. What is the nature and extent of the injury? What is the probable ultimate value of the claim? When MMI is achieved, are changes in the indemnity and future medical analysis required?

The attorney should analyze the costs and report his/her opinion concerning the injured worker’s return to work status, medical treatment requirements (probable vs. possible), PD rating, Almaraz/Guzman/Ogilvie issues, MSA necessity.

The attorney should keep in mind that accuracy and flexibility are required in order to obtain the proper settlement analysis. The attorney must be able to explain the reasoning behind the expressed opinion. By continuing to analyze all factors and reporting on them to the adjuster, the attorney should be able to obtain proper settlement authority without the need for delay in obtaining the necessary settlement authority.

Self-Insured Plans [SIP]

Labor Code sections 3702 et seq. and 8 CCR 15300, 8 CCR 15400.2 provide SIP reserving requirements. They require a realistic estimate of future liability listed on the annual SIP report. The reserves must represent the probable total future cost of estimated future medical liabilities. The reserves must include estimates for 132a, LC 4553 and/or LC 5814 liability.

Section 15300 requires the use of a higher PD rating unless sufficient evidence exists to support a lower estimate. If the injured worker is not MMI, the reserves must be based upon projected costs for the total anticipated period of treatment throughout the life of the claim. Once MMI is achieved, the estimated reserves should be calculated on the average annual cost of the past three years after MMI status, or a lesser period (if less than three years). Those costs are to be projected over the life expectancy of the injured worker and must include additional reasonable medical procedures expected over the life of the claim.

These factors may be utilized by an attorney to assist in evaluating the cost of the claim. By reviewing the accounting of benefits, subtracting the one time medical expenses and obtaining an average of cost over a period of time, the attorney is in a good position to advise the client of the future costs.

The law does not allow the future medical reserves to be reduced on undocumented anticipated reductions in frequency of treatment or lower cost of treatment. PD estimates require documentation to support apportionment. U.S. life expectancy tables are to be used to determine the worker’s life expectancy.


Proper reserving is the life line of any insurance operation. Reserves affect past, present and future costs, including tail coverage, operating margins and profits. With an understanding of reserving, a defense attorney’s analysis will provide better customer service for the client. The client should not be surprised with unexpected costs. By continually providing cost analysis, the defense attorney should be able to obtain proper settlement authority without undue delay.

A good file is a closed file. Period.



About the Author:
Michael G. McDonald is the founder of McDonald Law Corporation in Concord, California and a Certified Specialist in Workers' Compensation Law, State Bar of California. He is a Director for the California Workers’ Compensation Defense Attorneys Association.

Michael G. McDonald, Esq.
McDonald Law Corporation
1800 Sutter Street, Suite 430
Concord, CA 94520-2563
Voice: (925) 363-4380
Fax: (925) 363-4352

Other locations: Sacramento, San Jose and Fresno www.mcdonaldlawcorp.com

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