ISSUE: Risky Business

Jack_crop 72dpiThe U.S. Department of Labor (DOL) is the agency that authorizes insurance carriers to write coverage under the Longshore Act and extensions, the Defense Base Act, the Outer Continental Shelf Lands Act, and the Nonappropriated Fund Instrumentalities Act.

When an event occurs that has even remotely negative implications for an insurance carrier that writes business under the Longshore Act, alarm bells go off at the DOL. And with good reason. DOL has seen instances over the years where Longshore licensed insurance carriers with A.M. Best ratings of A or higher are virtually here today, gone tomorrow.

Guiding Principle: Based on experience, DOL always assumes the worst case outcome in any developing scenario.

When an event occurs, such as when a carrier announces that it will voluntarily stop writing new and renewal business and go into runoff, the initial thought is, what if this is the first step in the financial impairment of the carrier, leading eventually to state supervision, and ultimately to liquidation. What if the carrier’s case reserves are inadequate to cover its claims? What if the carrier defaults on its obligations under the Longshore Act? What if it has been writing Longshore business in states where there is no, or only partial, state guarantee fund protection for Longshore claims? How much collateral does the DOL have? How vulnerable is the Special Fund?

There’s a lot that can go wrong for the insured maritime employer when a Longshore carrier fails.

First, the question is whether the carrier is adequately reserved – is there enough to pay all claim obligations? Section 35 of the Longshore Act (33 U.S.C. 935) provides that discharge of an obligation by an insurance carrier discharges the employer’s liability. If the insurance carrier fails to pay, thus failing to discharge this obligation, then the primary obligation remains with/returns to the insured employer. If the insurance carrier defaults then the employer must immediately assume responsibility for all benefits due and payable, and all interest and penalty provisions of the Act apply.

Next, does the DOL hold enough collateral for Longshore obligations in the event that the carrier’s reserves prove to be inadequate? Back in 2005, the DOL published regulations requiring security from insurance carriers specifically for Longshore business written in those states where the state guarantee funds did not fully protect Longshore benefits. It is likely that DOL will take the position that any collateral it holds will be used only for those cases where payment cannot be made because both the carrier and the insured employer are insolvent. In other words, solvent employers will be required to pay their own cases. So, there is probably no help for the maritime employer here.

So, the carrier may default either because its reserves are inadequate or because the state of domicile decides to place the carrier in liquidation. DOL collateral will likely only go to pay those cases where both the carrier and the employer have defaulted due to insolvency. This in turn implicates state guarantee funds. The question is, in which states did the carrier write Longshore business, and what is the coverage of the guarantee funds in those states for Longshore claims.

State insurance laws creating and governing guarantee funds come with a wide variety of restrictions and conditions.

Some states simply do not pay federal Longshore benefits. These states are: Arizona, California, Illinois, Iowa, Kentucky, Missouri, New Mexico, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, West Virginia, and Wyoming.

The following states have demonstrated that their guarantee funds do not provide full protection for Longshore benefits: Alabama, Arkansas, Delaware, Indiana, Louisiana, Maine, New Jersey, New York, Oregon, Pennsylvania, Utah, and Wisconsin.

States’ guarantee funds that have paid or are likely to pay Longshore benefits in full include: Alaska, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, North Carolina, Rhode Island, South Carolina, Texas, Vermont, Virginia, and Washington.

Warning: If you are a maritime employer you cannot rely on state guarantee funds to protect you if your insurance carrier defaults on its obligations.

The DOL always assumes the worst because the Special Fund is vulnerable whenever a Longshore writer and the insured employer default. Under Section 18 claimants can seek payment from the Fund in cases of insolvency. The cost of these cases is spread through the rest of the industry by means of the Special Fund assessment.

The Special Fund is also in jeopardy since the defaulting carrier will stop paying its assessment, and the Fund’s claim for unpaid assessments will most likely not have a preference in a state’s liquidation proceedings. The defaulting carrier’s unpaid assessments will also have to be spread around the rest of the industry. The higher the number of cases that the defaulting carrier has placed into the Special Fund under Section 8(f) (second injury) then the higher will be the burden of its unpaid assessments on the rest of the payers.

So here are the main points that an insured maritime employer should remember:

1. If the insurance carrier defaults then each insured employer must immediately assume responsibility for all benefits due and payable in its cases;
2. In many states maritime employers cannot rely on protection from state guarantee funds to cover Longshore claims;
3. If The American Equity Underwriters, Inc. (AEU) places your Longshore coverage in the American Longshore Mutual Association Ltd. (ALMA), you don’t have to be concerned with Best ratings, the default of a carrier, or the unpredictable response of state guarantee funds. Your claim obligations are fully secured in a dedicated trust fund regulated by the U.S. Department of Labor and invested only in U.S. Treasury securities.

Maritime employers have to be careful when it comes to insuring their Longshore Act exposure. It can be a risky business.

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