Legislation inked to ease group trusts cash crunch; firm up regulation

On June 30, 2008, Gov. Paterson signed into law A.11756, a bill to provide a temporary cash solution to the anticipated defaults by group workers' compensation insurers which have closed. (Note, the sponsor's memo for identical companion bill S.8708 refers to a Section 7 that has since been deleted, so Section 8 in the sponsor's memo now corresponds to Section 7 in the bill text, etc.) The bill was signed even as Plan A for handling the need for cash was set to be quashed in court. A recent ruling nullified assessments that had been levied by the New York Workers' Compensation Board (WCB) for this purpose.

PIANY members who have clients in active trusts can expect to hear more about the new legislation, combined with the thrust of the court decision. Although setting aside the WCB's 2008 assessments, the judge's ruling basically affirmed the liability of healthy trusts for insolvencies of other trusts, provided the WCB has first exhausted the defunct trusts' assets.

Members with clients who participated in trusts that have closed should be aware this law instituted aggressive collection efforts against employers who are responsible for the ongoing obligations of trusts to which they belonged.

The court's ruling appeared to be the first clear statement of how the group self-insurance law had been structured, even though part of the WCB's 2007 assessments on active trusts reportedly went to pay obligations of closed trusts. Any lingering doubts or ambiguity on the trusts' liability were swept away by the signature of A.11756.

Reportedly, group trust managers evaluated the new law and how it affects group members. Insurance producers with clients insured by the trusts can expect to hear from the managers on this point.

Background. On June 20, 2008, PIANY provided members with a briefing on the dilemma posed by actual or anticipated defaults among the group trusts that have closed, and the need to ensure that workers' claims against insolvent groups continue to be paid.

Court rules on trusts' liability, WCB procedures. The WCB's original plan was to assess all group trusts to avoid disruption of claims payments. However, the assessments that the WCB billed to active groups early were challenged in court. Collection was stayed by the court while arguments were presented. In a ruling handed down on July 7, 2008, Acting Supreme Court Justice Kimberly A. O'Conner said the Workers' Compensation Board had erred in issuing the assessments without proving that the closed trusts were insolvent.

"Insolvency must be real and actual prior to imposing the assessment, not prospective or speculative," she wrote. The order also said the 2008 assessments to cover defaults are "annulled and vacated."

"I am pleased the board has prevailed on the law and that this decision will allow us to collect the money needed to pay the claims of injured workers," said WCB Chairman Zachary S. Weiss. "The bottom line is the board has the legal right to pay the claims of injured workers by assessing group self-insured trusts and will conform to the court's decision as we move ahead," Weiss added.

Legislation provides short-term funds. Without their 2008 assessments, the WCB faced a possible point in time where it could not pay claims owed by the closed trusts whose affairs the WCB is managing. The 2008 legislation sets up additional ways of funding the obligations of defaulting groups.

The legislation allowed assessments to be offset by funding from a new, temporary "group self-insurer default fund" that could tap funds from the state's Uninsured Employer Fund (UEF).

Expect stepped-up enforcement efforts against employers charged with failing to maintain workers' compensation insurance, since UEF coffers benefit from these penalties. Fines are being doubled for lapses in coverage, from $1,000 to $2,000 for each 10-day period without insurance.

Calls by the healthy trusts for aggressive collection efforts against members of defaulting trusts will be answered by the law's mandatory billing for all outstanding liabilities, which went out 120 days after enactment.

Also, group trusts that were under-funded were given a limited period of time to bring funding up, or be required to terminate.

Group trust administrators will be more stringently regulated and newly licensed by the WCB, with restrictions on their involvement in commercial workers' compensation carriers that solicit or write excess insurance for members of groups they administer.

Features of the 2008 law included:

• a temporary "group self-insurer default fund" to offset assessments due from private self-insurers (including groups);
• borrowing from UEF to create the default fund, help bridge cash-flow issues and ensure timely claims payments owed by defaulted groups;
• borrowing was authorized between Aug. 1, 2008, and April 1, 2009, up to a maximum of $52 million;
• payback to the UEF would come from an extra amount, up to $3 million, in the annual assessment on groups, beginning Jan. 1, 2010;
• higher financial penalties ($2,000 per 10-day period; currently $1,000) for employers charged with failing to have workers' compensation coverage (payable to UEF);
• much stronger regulation of the groups by the WCB;
• groups still under-funded as of 2015 will be terminated;
• clear, ongoing liability by members of self-insured groups, and individual self-insured employers, for defaults by other self-insurers or groups;
• much stronger regulation and licensing requirements for administrators of group trusts;
• group rates must be filed and are subject to disapproval by the WCB;
• new group self-insurance advisory committee, new task force to report; and
• new local occupational health clinic advisory committees.

Here is a more detailed summary of A.11756:

A moratorium on forming new groups until April 1, 2009.

New standards for groups, to be spelled out by regulation:

Groups required to file annual reports including

Audited financial statements

Actuarial opinion

Payroll information

Proof of being fully funded

"Fully funded" means:

Cash/investments must equal 100 percent of group's total liabilities

Groups failing to show they are fully funded are deemed under-funded

Under-funded groups

Must develop a plan to achieve full funding

Can include deficit assessments on members

WCB can impose limits on new members

WCB can limit discounts

Under-funded groups that fail to achieve fully funded status

WCB can appoint monitor

Outside limit is 2015; then will be terminated

Groups must be evaluated at least every three years by the WCB

WCB can request reports at any time of group or group member

20-day notice before new group member joins

WCB will provide explanation of joint/several liability

New member must sign understanding of joint/several liability

Employer cannot join another group for three years if:

Was member of defaulting group; or

Left a group after less than four years

Every member is jointly and severally responsible

For all liabilities of group incurred during its membership

Liability extends to recipients of assets fraudulently conveyed

Group administrators

Every group must have a group self-insurance administrator

Duties of administrator:

Compliance

Coordination of services

Claims processing

Loss control

Legal and accounting

Actuarial

Must be licensed as group self-insurance administrator by WCB

$5,000 annual license fee
Regulations governing conduct and compensation

$500,000 bond for each group administered

WCB can recoup penalties from bond

Trustees of group still retain fiduciary duty

Penalties on group self-insurance administrators

Misrepresentation in soliciting members

Class E felony
Fine up to $10,000

Misrepresent group financials (includes actuaries, accountants)

Class E felony

Fine up to $20,000
Second offense—Class D felony

WCB can recover in civil action damages from misrepresentation

Includes assessments against other self-insureds

Annual written reports by group administrators

To all group members and WCB

Contents

Members of group

Group self-insurance administrator and trustees

Results of most recent audit

Percent of liabilities held in cash/investments

Number and amount of rate deviations in prior year

Whether recipient of rate deviation is group trustee

Additional disclosures

Annual audited financials

Provide to any group member upon request

WCB shall make public

All group self-insurers operating in last three years

Group self-insured administrator of each group

Financial condition of all groups

Other information if not confidential/proprietary

To claimants—whether employer is a member

Group self-insurance administrators' compensation

WCB can condition license on providing information:

Financial statement of administrator including

Compensation, how calculated

Ownership in affiliates receiving compensation

WCB can issue regulations governing compensation

WCB can revoke license, fine for violation of compensation rules

Restricted activities—officers/directors of administrators

Cannot serve with workers' compensation (WC) carrier that solicits group members

Cannot serve with carrier providing excess WC to group members

Civil penalty up to $10,000 per violation

Agreements with self-insured administrators

Group must submit contract to WCB 30 days prior to effective date

WCB shall object to contract if contract:

Violates regulations

Contains no reasonable cancellation/renewal terms

Cannot provide for automatic renewal

Must allow cancellation for cause

Group self-insurers' rating plans

Group must file plan with WCB 60 days prior to start of fiscal year

Plan must

Be supported by actuarial rate study

Clearly identify indicated-rate assumptions

Group must apply rating plan consistently to all members

Members must have common renewal date

Rates may be adjusted by individual experience mod for each member

Must conform with WCB's experience-rating plan

Must apply identically to all members

Other deviations may be used if approved by WCB

If WCB believes group's contributions (rates/mods) violate WC law

May require data from prior year and projections

If WCB deems group's contribution rates detrimental to solvency

May mandate modification of rates

Penalty up to $5,000 per violation

Is cause for terminating group

Assessments—members of defaulted trusts

WCB shall levy assessments

On members of defaulting groups

Within 120 days of act's effective date; or

Within 120 days after default, if later

On members of any other terminated group self-insurer

When necessary

In amount necessary to discharge all liabilities of defaulted group

WCB may adjust collections, including

Imposing subsequent deficit assessments; or

Returning funds to members

Purpose of such adjustments is to reflect

Members' time in group
Members' percent of liabilities for such time

Each member remains jointly and severally liable for

All outstanding liabilities of group

Estimated future liabilities and assessments

WCB may, as necessary to facilitate collection

Offer payment plans

Settle claims on behalf of group

Additional provisions

Rules and regulations need not be adopted for law to be in effect

Civil penalties of up to $10,000 against self-insured groups

In addition to any other penalty under WC law
For violation of any applicable law or regulation

Group cannot add members resulting in more than 500 members

Exceptions must be approved by WCB
Existing groups over 500 not required to cut members

All penalties involving self-insurance go to the UEF

Parties representing insurers before the WCB

Authorization fee becomes annual and is increased from $100 to $500

Advisory committee for individual self-insurance (existing)

Add three members
Additional duties

Advise WCB regarding

Qualifications to self-insure
Security payments

Written minutes must be provided to governor and Legislature

Advisory committee for group self-insurance (new)

WCB chair and 10 members appointed by chair

Members must be trustees or administrators of groups
Similar authorities, duties as existing individual advisory committee

Written minutes must be provided to governor and Legislature

Assessments—all self-insurers

Administrative assessments

WCB shall adjust amount quarterly
WCB shall assess all private self-insured employers, including

Active group self-insurers
Terminated group self-insurers
Active individual self-insurers
Employers who have ceased to self-insure

Basis for calculation each self-insurer's assessment

Applies to both individual and group self-insurers
Is proportion that each self-insurer bears to all self-insurers

Basis for calculation

Remains "pure premium" during 2008

Returns to "indemnity payments" on Jan. 1, 2009

Assessments made prior to Jan. 1, 2009, based on pure premium

If individual or group has ceased to self-insure

Base calculation on payroll when ceased

Reduce by factor reflecting reduced liabilities

Liability for paying liabilities on behalf of insolvent private self-insurers; assessments

Includes insolvent private group self-insurers
(Public entities exempted, as formerly)
WCB shall pay liabilities out of administration expenses
Payments shall be considered administration expenses of the WCB

WCB shall be reimbursed by

Security posted by self-insurer
If insufficient, by employer(s)

WCB shall assess all private self-insurers for administration expenses

Includes private group self-insurers
Assessment shall ensure prompt payment of liabilities

Nothing precludes recovery of payments from

Defaulting individual self-insurers
Members of a defaulting group self-insurer

Self-insurers (includes groups) are deemed to have failed to obtain WC coverage

If they fail to file or maintain security deposits
If they commit rate fraud

Group self-insurance default fund (new)

Money in the default fund

Held in sole custody of WCB chair
May be transferred to WCB administration account as necessary
Shall be used by WCB

To pay claims for defaulting groups if sufficient funds

Have not been collected from members
Are not anticipated to be collected from members

To offset assessments that otherwise would be made against

Private individual self-insurers
Private group self-insurers

WCB may borrow from UEF

Prior to April 1, 2009
Not to exceed $52 million
In amount to cover anticipated expenses
Money borrowed goes into default fund

Beginning Jan. 1, 2010

WCB shall add up to $3 million to private self-insureds' assessments
WCB shall assess more to ensure adequate UEF levels
Additional amounts go to UEF until all borrowings repaid
Interest shall be paid to UEF on borrowings

When WCB no longer paying claims for defaulting groups

Group self-insured default fund shall be closed

Task Force on Group Self-insurance (new)

A new Task Force on Group Self-insurance is formed

Two each: nominees by Senate Majority Leader, Assembly Speaker
WCB Chairman
Superintendent of Insurance
Commissioner of Labor
AFL-CIO
Business Council
Individual self-insurer
Group trustee or administrator
Claimants' representative
Three others without limitations

Task force report due Feb. 1, 2009

Preventing further defaults
Regulation of groups
Paying claims of defaulting groups
Long-term viability of group self-insurance

Uninsured employers

Penalty increased from $1,000 to $2,000 per 10-day period
Still not to exceed two times the cost of premium for uninsured period

Occupational Health Clinics Oversight Committee (existing)

Expanded to include AFL-CIO and Business Council
Report required by Sept. 30, 2009

Occupational Health Clinic Advisory Committees (new)

Membership in local committees

CEOs of every clinic
Two local representatives each

Labor
Business
Public health officials
Community groups

Tasks

Develop outreach plan
Assess clinic's funding needs and sources
Provide overall guidance for clinics

Funding of additional $4 million to be included in 2009-10 budget to support occupational health clinics network, to be considered part of administration expense of WCB.

Effective dates
The bill was effective immediately upon signature (June 30, 2008), except:

120 days after signature—

Group self-insurers' annual reports
Fully-funded requirements
Regulations implementing these two provisions
Notification/sign-off on joint and several (new members)
Most group administrators provisions
Required assessment—members of defaulting trusts

90 days after signature, apply to acts on and after effective date

Misrepresentations by group administrators—felony
Revocation of group administrators' license for violations
Penalties for administrators' role in

WC carrier that solicits group members
Excess WC carrier

WCB authority to modify group's rates/penalties

Additional $10,000 penalty for group self-insurer violations
Additional $1,000 per violation—if licensed to appear before WCB
Failure to maintain WC coverage

Self-insurers failing to post, maintain security
Group self-insurers committing rate fraud

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