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.

ISSUE – What Happens When a U.S. Department of Labor Authorized Self-insured Employer Defaults Due to Insolvency?

INSOLVENCY – PART FOUR

Upon default on the payment of benefits (not the filing of a petition in Bankruptcy Court), the U.S. Department of Labor (DOL) will seize the self-insurer’s security deposit.  The security will be in one of three types:

  1. A bank issued Letter of Credit – upon default the DOL will send a sight draft to the bank for the entire proceeds of the Letter of Credit.  The money will be put into a sub-account of the Special Fund and DOL will take over administration and payment of open claims.
  2. Treasury securities in a Federal Reserve Bank – upon default the DOL will transfer the entire amount on deposit into a sub-account of the Special Fund and DOL will take over administration and payment of open claims.
  3. Surety bond – upon default DOL will advise the surety company of its obligation under all existing surety bonds and will transfer open claim files to the surety for administration and payment.

If the total security posted by the self-insured employer ultimately proves to be inadequate to pay all claims, then the injured workers have recourse to the Special Fund under the provisions of section 918(b) as discussed in previous postings.

The security requirement is designed so that total incurred obligations will be matched dollar for dollar by security, without regard to the typical indemnity style excess insurance coverage (with the possible exception for the instance where DOL is a named insured on the excess policy).

Of course, in my many years of administering the Special Fund for DOL I noticed that individual self-insurers seem to be poor at reserving workers’ compensation cases.  This may have been due to the inherent uncertainties of reserving, except that reserving “mistakes” ran 100% on the low side – improving the internal numbers for the self-insurer’s compensation program as well as offering low figures for the regular reports to DOL on which the company’s security deposit is based.  In other words, individual self-insureds seemed to uniformly be too optimistic in estimating their workers’ compensation unpaid incurred losses.

In the case of a large employer with primary exposure under the Longshore Act, I considered it to be almost impossible to set aside adequate collateral in the event of default.

Actually, there is a partial explanation for the individual self-insurers’ chronic low reserving.  The company’s reserves assume that the company will continue to be a viable concern, able to actively adjust and defend its claims.  Once the company has defaulted one of the consequences is likely to be deterioration in the development of claims, as well as an increase in the number of claims filed as future employment at the self-insured employer becomes threatened.

At any rate, the security requirement is imposed for the purpose of protecting the injured worker and the Special Fund in the event of the self-insured employer’s (or insurance carrier’s) default, and ultimately to protect the rest of the industry, which will pay higher assessments in the event there is insufficient security and cases go into the Special Fund under Section 18.

A final note:  the employer who decides to terminate its individual self-insurance program should not expect the immediate release of its security.  DOL will hold that security for as long as it is necessary to secure open claims.  And for anyone familiar with workers’ compensation claims, that could be a long time.

From the employer’s perspective, the collateral requirement is a serious impediment to individual self-insurance.  From the DOL’s perspective, you can never have enough security.

ISSUE: What Happens When An Uninsured Employer Goes Bankrupt?

INSOLVENCY – PART THREE

We’ve previously looked at what happens when an insurance carrier defaults on the payment of benefits due to insolvency (Part One) and what happens when both the insurance carrier and the insured employer default due to insolvency (Part Two).

Now it’s time to discuss uninsured employers.  What happens if the insolvent, defaulting employer has failed to meet the Longshore Act’s insurance requirement as spelled out in Sections 904(a) and 932 and thus is an uninsured employer?

A maritime employer without required Longshore Act insurance means problems for everyone.  (We are assuming that the uninsured employer has been making voluntary payments up until default and the issue of its insurance status has not come up earlier.)

The injured worker has a remedy under Section 918 of the Longshore Act, which we looked at in Part Two.  The injured worker will inevitably encounter delays while the investigation of the employer’s status is undertaken, until the case is in posture for the issuance of a Compensation Order, and finally, while the Default Order makes its way through the U.S. District Court.  Eventually, when all requirements are met, the Special Fund will pick up payments in the case under Section 918.

The annual Special Fund assessment process spreads these defaulted liabilities and payments to beneficiaries across the industry through the provisions of Section 944(c).  Each authorized insurance carrier and self-insured employer’s assessment will go up a bit to reflect the Fund’s payments to the worker under Section 918.

If the uninsured employer was a subcontractor then the general contractor will end up with the claim under the Section 905(a) statutory employer provision.

Probably the worst news is for the corporate officers of the uninsured employer.  Section 938(a) makes the president, treasurer, and secretary severally liable along with the corporation for criminal misdemeanor charges.  And even worse, it makes those officers personally jointly and severally liable, along with the corporation, to the injured worker.  (We discussed the meaning of “joint and several liability” under the Longshore Act in Question #8 – 11/12/09).

I can tell you from personal experience that before accepting a case for payment under Section 918, the Special Fund will require the injured worker to add the corporate officers of an uninsured employer as parties to his claim. 

If you are the president, secretary, or treasurer of an uninsured employer under the Longshore Act you will be held personally responsible in the event that one of your employees is injured on the job and the company defaults on the payment of benefits. 

Next will be Part Four – Bankruptcy of an authorized self-insured employer.

INSOLVENCY – PART TWO

Back on August 31, 2011, in Insolvency – Part One, we considered the circumstances where the insurance carrier was insolvent but the insured employer was solvent, and we concluded that if the insurance company doesn’t pay then the employer must pay.

We said at that time that we would discuss various other insolvency scenarios in future postings.

So, now we will look at what happens when there is a default because the insurance carrier is insolvent and the insured employer is bankrupt.

If both the insurance carrier and the insured employer have defaulted on the payment of benefits then the injured worker may seek to proceed under Section 918 (33 U.S.C. 918) and obtain payment from the Special Fund administered by the U.S. Department of Labor.

Section 918(a) provides that in the case of default by the employer in the payment of compensation due under any Award for a period of thirty days after the compensation is due and payable, the injured worker may seek the issuance of a Supplemental Order Declaring Amount of Default.  This “Default Order” may be issued by the Department of Labor’s District Director after the appropriate investigation.  The injured worker may then file a copy of this “Default Order” with the clerk of the Federal district court for the judicial district in which the employer has his principal place of business or maintains an office, or for the judicial district where the injury occurred.  If the “Default Order” is in accordance with law, the district court will issue a judgment in favor of the injured worker.  The injured worker can then proceed to attempt to execute the judgment.

Section 918(b) provides that in cases where the judgment cannot be satisfied by reason of the employer’s insolvency or other circumstances precluding payment, the Secretary of Labor may, in his discretion and to the extent he shall determine advisable after consideration of current commitments payable from the Special Fund, make payment from the Fund.

The basic requirements for relief under section 918(b) are:

1)      There must be an existing final Compensation Order,

2)      The employer must be in default,

3)      Thirty days must elapse without payment,

4)      The injured worker must obtain a “Default Order”,

5)      The injured worker must obtain a judgment from federal district court based on the default order,

6)      The injured worker must seek to execute the district court’s judgment. 

If there is no existing Compensation Order, then the injured worker should have the case immediately referred to the Office of Administrative Law Judges for a formal hearing, since the District Director does not have the authority to issue a Compensation Order unless there is the express agreement of all parties.

Expedited Payment

Under certain circumstances, the injured worker may seek expedited payment from the Special Fund under Section 918(b).  In the event that both the insurance carrier and the employer are defunct and this can be clearly documented, the injured worker may seek expedited payment from the Director, Division of Longshore and Harbor Workers’ Compensation. Where the investigation by the District Director reveals that the responsible employer and insurance carrier are both defunct and that it would be futile to require the injured worker to obtain and attempt to execute a judgment from the federal district court, and there is no other possible source of payment, then the Director may make payment from the Special Fund without requiring the injured worker to follow futile procedures.   

Note:  payment under section 918(b) will only be made after all other sources of payment have been eliminated, including state insurance administrators, state guarantee funds, collateral deposits, and corporate officers (in the case where the employer was uninsured).

Section 918(b) is funded by means of the annual Special Fund assessment of all authorized insurance carriers and authorized self-insured employers.  It currently accounts for between 3 and 4 per cent of annual Special Fund expenditures.

Next:  What happens when an uninsured employer goes bankrupt?