ISSUES – STATE GUARANTEE FUNDS

Jack_crop 72dpiThis is mostly a reiteration of a piece that I posted on August 5, 2010.  It’s important, in my opinion, and it bears repeating.  Brokers and maritime employers should be aware of a potential gap in protection in their insured Longshore Act coverage.  (By the way, if you are an ALMA Member you don’t have to worry about the problem I’m about to describe).

I’ll start at the beginning.

The U.S. Department of Labor (DOL) administers the Longshore and Harbor Workers’ Compensation Act, and its extensions, the Defense Base Act, the Outer Continental Shelf Lands Act, and the Nonappropriated Fund Instrumentalities Act.

Section 935 of the Longshore Act provides that payment of benefits by an insurance carrier on behalf of an insured employer discharges that employer’s obligation to pay those benefits. But if the insurance carrier fails to pay then the employer must immediately assume its primary obligation to pay all benefits due and payable, subject to the penalty and interest provisions of the Act.

The DOL implemented a security requirement in 1990 applicable to authorized insurance carriers rated lower than “A” by the A.M. Best Company, in order to protect injured workers from the consequences of default in the payment of benefits due to insolvency, and to protect the Special Fund administered under section 944 of the Act.  This was in response to the carrier insolvencies during the 1980s and the subsequent failure by many state guarantee funds to protect Longshore employers and employees.

Due to the inability of Best ratings (or any other rating system) to predict insurance carriers’ financial viability for the long term of the typical workers’ compensation long tail obligation, and the continuing failure by many state guarantee funds to protect maritime employers, DOL published new regulations during 2005 aimed at requiring security from insurance carriers without regard to Best ratings, but rather aimed specifically at business written in those states where the state guarantee funds do not fully protect Longshore benefits.

State insurance laws creating and governing guarantee funds come with a wide variety of restrictions and conditions.  Some states’ funds simply do NOT pay federal Longshore benefits.  These states are:  Arizona, California, Iowa, Kentucky, Missouri, New Mexico, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, West Virginia, and Wyoming.  Longshore Act business written in these states must be fully secured with DOL.

In addition, provisions in many other states restrict Longshore protection.  A partial list of the restrictions on state payments includes time limits for filing, claims definitions that do not recognize occupational disease exposures, non-payment of deductible portions of an employer’s exposure, maximum limits on benefits, restrictions based on the financial size of the insured employer, restrictions based on financial viability of the insured employer, residency requirements, and payments that are limited to state rates that are lower than federal Longshore rates.

The following states have demonstrated that their guarantee funds do not provide full protection for Longshore benefits:  Alabama, Arkansas, Delaware, Illinois, Indiana, Louisiana, Maine, New Jersey, New York, Oregon, Pennsylvania, Utah, and Wisconsin.  Longshore business written in these states must be partially secured with DOL.

States’ 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.  Security with DOL is not required for Longshore business written in these states.

In those states where guarantee funds have paid full Longshore benefits in the past, it is not a sure thing for the future.  State laws and their interpretation have proven to be very changeable.  I note that the “State Guarantee Fund Longshore Security Factor Chart” on the DOL/OWCP/DLHWC website has not changed since I myself composed it back in 2005.  If your Longshore coverage is in an insured program, you would be well advised to check those states in which you have maritime operations to determine the current status of Longshore claims in the event of an insurance carrier default.  (As I said above, if you’re with ALMA, don’t worry about it.  You’re secure.)

The lesson:  If you are a maritime employer you cannot always rely on state guarantee funds to protect you if your insurance carrier fails to pay your claims.

ISSUE: The Nonappropriated Fund Instrumentalities Act

Jack_crop 72dpiWe’ve discussed the Defense Base Act on several occasions, as well as the Outer Continental Shelf Lands Act.  These are two well known extensions of the Longshore and Harbor Workers’ Compensation Act.  There’s another extension of the Longshore Act that doesn’t get as much general attention.  It’s the Nonappropriated Fund Instrumentalities Act (NFIA), 5 U.S.C. sections 8171 et seq. (1952).

The NFIA extends Longshore Act benefits to, “… civilian employees, compensated from nonappropriated funds, of the Army and Air Force Exchange Service, Army and Air Force Motion Picture Service, Navy Ship’s Stores Ashore, Navy exchanges, Marine Corps exchanges, Coast Guard exchanges, and other instrumentalities of the United States under the jurisdiction of the Armed Forces conducted for the comfort, pleasure, contentment, and mental and physical improvement of personnel of the Armed Forces ….” 

The employees covered by the NFIA work at base exchanges and other retail and recreational activities on U.S. military bases.  These activities are not funded by public appropriations but rather are operated from revenue generated by the activities themselves.

Coverage includes,

  1.  “those employees of such nonappropriated fund instrumentalities as are employed within the continental United States” (Alaska and Hawaii are considered to be part of the continental United States), and,
  2.  “those United States citizens or permanent residents of the United States or a Territory who are employees of such nonappropriated fund instrumentalities outside the continental limits of the United States.”

For employees working outside of the continental United States who are neither citizens nor permanent residents of the United States or a Territory, “compensation shall be provided in accordance with regulations prescribed by the Secretary of the military department concerned and approved by the Secretary of Defense or regulations prescribed by the Secretary of the Treasury ….”

The larger nonappropriated fund instrumentalities are individually self-insured for their NFIA exposure by virtue of their self-insurance authorization from the U.S. Department of Labor, which administers the NFIA.

There are some quirks to NFIA coverage. 

1)      The so-called “Zone of Special Danger” doctrine, which the courts apply in Defense Base Act cases (and in the old, now repealed District of Columbia Compensation Act extension of the Longshore Act), is not applicable to NFIA cases.

2)      There is an apparent coverage conflict with the Defense Base Act.  The Defense Base Act provides that it covers all employment on U.S. military bases overseas, and upon any lands occupied or used by the United States for military or naval purposes in any Territory or possession outside the continental United States.  There is no conflict, however, since for employees of the nonappropriated fund instrumentalities overseas, the NFIA pre-empts the DBA and applies as the nonappropriated fund instrumentalities employees’ exclusive remedy.

3)      Off duty military personnel working at a nonappropriated fund instrumentality, for example on a part time basis, are not covered by the NFIA.

4)      Nonappropriated fund instrumentalities’ employees “shall not be held and considered as employees of the United States for the purpose of any laws administered by the Civil Service Commission or the provisions of the Federal Employees’ Compensation Act ….”

5)      The United States is exempt from liability as a third party with respect to disability or death covered by the NFIA.

So that’s it.  There’s the Defense Base Act, the Outer Continental Shelf Lands Act, and the Nonappropriated Fund Instrumentalities Act.  We’re out of extensions to the Longshore Act.