Bankruptcy of Workers’ Compensation Insurer in Pennsylvania Does Not Preclude Claim

A common fear with an injured worker is the impact of his or her employer, or the workers’ compensation insurance carrier, filing for bankruptcy. In Pennsylvania, an injured worker need not be concerned with such a development. Whether it is the bankruptcy of the employer, or the workers’ compensation insurance carrier, in PA, workers’ compensation benefits should not be disturbed.

When a party files for bankruptcy, which is governed by Federal law, the main purpose (or at least the immediate purpose) is the protection of the “automatic stay,” provided by Section 362(a)(1) of the Federal Bankruptcy Code, 11 U.S.C. §362(a)(1). The “automatic stay” causes any collections efforts (including any litigation) to be stopped. A creditor usually must apply for permission with the bankruptcy court, in order to have the stay lifted. Only if the request is granted, and the stay is lifted, can the creditor take any action on the debt (including litigation). The automatic stay allows payments from the bankrupt party to stop. This would, of course, be catastrophic for an injured worker who relies on Pennsylvania workers’ comp benefits.

Workers’ compensation laws are State laws, as opposed to Federal law, such as bankruptcy. One of the exceptions to the “automatic stay” is an exercise of a State’s “police powers,” under 11 U.S.C. §362(b)(4). The Commonwealth Court of Pennsylvania has recently confirmed that “the administration of worker’s compensation claims by the State … is a valid exercise of a governmental unit’s regulatory power, and is exempt from the automatic stay.” Pope & Talbot v. W.C.A.B. (Pawlowski), decided on May 21, 2008. Therefore, workers’ compensation benefits in PA are usually to be paid regardless of the filing of bankruptcy. Similarly, litigation in workers’ compensation cases in Pennsylvania may continue, despite the bankruptcy filing.

In years past, if an employer in PA failed to carry Pennsylvania workers’ compensation insurance (which is a crime in Pennsylvania), and that employer filed for bankruptcy, the injured worker may have been left out in the cold. Fortunately, as part of Act 147, passed by the Pennsylvania Legislature in 2006, the Uninsured Employers’ Guaranty Fund (UEGF) was created. The UEGF, funded by payments from all workers’ comp insurance companies in PA, steps in when there is a claim against an uninsured employer (regardless of whether that employer is bankrupt). This fund provides a measure of security for the injured worker who, unknown to the worker, is employed by a company who fails to carry the required workers’ comp insurance.