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How to Commute the Attorney Fee
on a Life Pension: Uniform Increasing Reduction and Uniform Reduction Distinguished


By Warren Schneider, Esq.

Med-Legal co-founder Warren Schneider, Esq. is an expert on rating permanent disability and the architect of the AIR rating program and Med-Legal’s online rating calculators. Here he discusses how to commute the attorney fee when the rating is 70% or higher.

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Uniform Increasing Reduction (UIR)

When there is an award in a workers’ compensation case and the rating is 70% or more, including 100%, one of the additional benefits is a disability payment for the rest of the individual's life. Whether the rating is 70-99% or 100% the payment for life will be referred to as a life pension.

The rate of the payment is specified as a weekly rate, although the payment is actually made every two weeks.

For a rating of 70-99% the base weekly payment rate for the life pension is determined by using a formula that is based on the value of the rating and the date of the injury. For a rating of 100%, i.e., totally disabled, the base weekly payment rate is the same as the temporary total disability indemnity in effect at the date of injury.

The payment gets increased each year to account for the increase in the cost of living (COLA). The yearly cost-of-living increase is based on the increase in the average wage in the state (SAWW). This yearly increase is effective on January 1 of each year.

The amount of each of these yearly increases is unknown at the time of the award so the exact rates for payments in the future are unknown. The increase is based on the percentage increase of the state average wage as reported in the previous year, so this cannot be predicted.

An attorney's fee is awarded on the pension benefit as a percentage -- usually 15% but can be lower such as 9%. In this article 15% will be used. So from every payment to the injured worker a percentage is deducted and paid to the attorney. The injured worker receives a check less the attorney fee and the attorney receives a check. The insurance company writes two checks every pay period - the pay period being two weeks.

The injured worker’s check is:

IW Check = (weekly rate in current year x 2) – 15% of payment

As the pension payment increases for cost-of-living increases so does the amount deducted for attorney fee. This is a uniform increasing reduction. The reduction is uniform because it is always a fixed percentage (15%) of the payment. The deduction increases when the payment increases.

That’s the way it’s supposed to work.

 

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The check for the attorney is usually a small amount. The insurance company would rather pay off the attorney with one check for a lump sum rather than incur the administrative costs of issuing a check to the attorney each pay period. The attorney would also like to receive a lump sum rather than many small checks over a period of many years.

Both sides benefit if the attorney is paid off with one check for a lump sum. The injured worker’s benefits are unaffected.

The process of calculating the amount of the lump sum is a commutation. What is being commuted is the attorney fee. The injured worker's benefit is not being commuted.

Not being discussed here is a commutation of the injured worker’s payments. The injured worker's entire benefit can be commuted or a specific sum can be commuted and paid in a lump sum to the injured worker. This results in a reduction of the injured worker’s payments. It does not affect the payment to the attorney where the attorney fee has not been commuted.

The commutation of all or a portion of an injured worker's benefit requires a petition for commutation with review and approval by an administrative workers’ compensation judge. But this article is not dealing with a commutation of any part of the injured worker’s benefits. It is only dealing with a commutation of the attorney fee on the life pension.

Eliminating the periodic payment check to the attorney does not affect the payments to the injured worker. The amount of the injured worker’s check is the same using the same formula above. Only after the commutation of attorney fee the insurance company then issues one periodic payment check. That check is to the injured worker.

The question then becomes what is the lump-sum amount to pay the attorney?
 
Both sides benefit if the attorney is paid off with one check for a lump sum

 

The amount of the lump sum for commutation of attorney fee depends on the present value of the total attorney fee payments. Determining the present value of the attorney fee payments is complicated.

Fortunately the attorney and the judge do not have to do the calculations. The calculations are done by an expert using a computer program.

The lump sum for the commutation of the attorney fee is calculated by computing the present value of the entire life pension and then taking 15% of that:

Lump Sum = present value of the life pension x 15%

Although the present value of the entire life pension is calculated the value is only used to calculate the attorney fee portion. The periodic check to the injured worker remains the same:

IW Check = (weekly rate in current year x 2) – 15% of payment

Nothing is changed for the injured worker after the commutation, only the insurance company issues one check. That is the check to the injured worker. The attorney already has the entire fee. No check is issued to the attorney.

This is the uniform increasing reduction (UIR) method.


Example of Uniform Increasing Reduction


Method Suppose the date of injury is 1/1/2006 and the injured worker is a high wage earner with a disability rating of 100%. The award is issued on 1/1/2007.

Year
Percentage
State Wage
Increase
Pension
Payment
Injured
Worker
Payment
Attorney
at 15%
Payment
2007
4.95933
881.66
749.41
132.25
2008
3.93182
916.33
778.88
137.45
2009
4.54844
958.01
814.31
143.70
2010
2.99414
986.69
838.69
148.00
2011
0
986.69
838.69
148.00
After
2011
Unknown
Unknown
Unknown
Unknown

If the attorney fee was commuted in the award then the last column is eliminated.

If in the example above the rating was 75% as opposed to 100% then the life pension would not start until the year 2017. For partial disability the life pension does not start until the total of the permanent disability weeks have elapsed. The permanent disability weeks for a 75% rating are 513.25 weeks.

The rates of payment of the life pension and attorney fee deduction are unknown at the time of the award. The exact amount of the life pension weekly rate is not unknown until January 1 of the year that the payments start.

If an applicant or a judge were to ask what the life pension payment will be the answer is that it is unknown at this time. An estimate can be made but the award should not specify an exact amount.

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Determining the present value of the attorney fee payments is complicated. The calculations are done by an expert using a computer program.
   
 
How to Determine the Attorney Fee on a Life Pension

In the UIR method how the payment to the injured worker was calculated was discussed in the first part of this article. Each payment to the injured worker is reduced by 15%.

But how much should the lump sum be that is paid to the attorney? The lump sum is the present value of all the payment deductions. This is determined by multiplying the percentage attorney fee by the present value of the life pension without deductions.

The present value of the life pension depends on how long the injured worker will live. That is unknown at the time of the award. So, the attorney fee must be based on an estimate.

An estimate of how much an injured worker will collect in a lifetime of payments is made with the use of life tables. Life tables are based on actual statistics of the percentage of people that die by a certain age.

The math to find out how much an injured worker will receive in a lifetime can be complicated. Suffice it to say, it is not the life expectancy multiplied by the payment. This is where a computer program comes in. The expert using a program will give the present value of the total of all the payments the injured worker is expected to receive in his or her lifetime.

To make the calculation of the present value even more complicated the payment does not remain the same. The payment gets increased every year by an amount that is unknown at the time of the award and is unknown from year to year, i.e. the payment varies every year by an unknown amount. This variance in payment depends on the state average wage.

Because the exact amount of each pay is unknown at the time of the award the award should not specify the exact amount of the future payment.

Because the amount that the payment gets increased every year, the increase must to be estimated for the calculations. The increase in payment depends on the state average weekly wage. It has been estimated that past increases have been 4.6 or 4.7% per year. So, that number is used to estimate future increases in the calculations.

Now the expert using a computer program can calculate the present value of the life pension.

Note that the amount deducted from the injured workers payment is not increased by 4.6% each year. That figure is only used to estimate the present value of the attorney fee. The increase in the injured worker’s payment is dependent on the actual percentage increase in the reported state average wage.
 

   
 
Uniform Reduction (UR)

If the injured worker needs money and a petition for commutation is approved by a judge, then a portion of the injured worker’s benefit can be commuted. The amount deducted from each payment is not based on a percentage. It is based on a specific amount. This is more like borrowing from an annuity. The amount deducted from each payment is the same. It is uniform. It does not increase. This is the uniform reduction method. The reduction does not change depending on the cost of living.

The constant deduction can be calculated using the tables in the back of Workers’ Compensation Laws of California by LexisNexis.

But again that is not the situation for determining the lump sum attorney fee. The tables in the back of book cannot be used to determine the present value of the attorney fee because they do not take into account payment increases based on the state average weekly wage.

The UR method results in a constant deduction, i.e., the deduction is the same amount throughout but the starting deduction is higher. The UIR method results in an increasing deduction because it is based on a percentage.
 
The UR method results in a constant deduction, i.e., the deduction is the same amount throughout but the starting deduction is higher. The UIR method results in an increasing deduction because it is based on a percentage.
 
The UR method is used by the DEU when computing the deduction for attorney fees as well as when commuting an amount for the injured worker. The UR method should not be used for attorney fee without carefully explaining to the injured worker the consequences. This requires presenting the injured worker with numbers.

For example a woman would begin receiving a life pension in 2017. The starting deduction using the UIR method is estimated at $23.16 and for the UR method is $45.17. In 2005 she was 54 years old. Until age 81 her payment using the UIR method would be higher, i.e., the deduction is less. At age 81 the payment using the UR method would become higher. The cross-over point is 28 years. At that point she would have received $10,000 more using the UIR method.

Until age 93 the total of the accumulated payments under the UIR would be higher. After age 93 she would have been paid more money under the UR method than under the UIR method.
 
The UR method is used by the DEU when computing the deduction for attorney fees as well as when commuting an amount for the injured worker, but it should not be used for attorney fee without carefully explaining to the injured worker the consequences.
   
 
Conclusion

The Uniform Increasing Reduction (UIR) is used when the attorney fee is commuted and the Uniform Reduction (UR) method is used when the injured worker’s benefit is commuted.

 
The Uniform Increasing Reduction (UIR) is used when the attorney fee is commuted and the Uniform Reduction (UR) method is used when the injured worker’s benefit is commuted.
 
 
Warren Schneider, Attorney on Staff

After graduating from Loyola Law School in 1970, Warren worked for a year and a half for the public defender's office in Los Angeles. He then joined the partnership of Kessler, Schneider, Downen and Fagen, where he practiced criminal, civil, family and workers’ compensation law. In 1978 Warren formed the Law Offices of Warren Schneider and became a State Bar Certified Workers’ Compensation Specialist. In 1986 Warren and his son Stephen formed the partnership of Med-Legal Photocopy Service (the precursor to Med-Legal, Inc.).

Reach Warren at 626-653-5169, extension 104 or
contact him via email.

 

Warren Schneider, Esq.

Warren is an expert on WC ratings and architect of Med-Legal's ratings programs.