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: 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 – INSURANCE CARRIER INSOLVENCY

What happens when an insurance carrier defaults on its obligations under the Longshore and Harbor Workers’ Compensation Act due to insolvency?

I’ll discuss several insolvency scenarios in four separate entries.  Part One will cover default by an insurance carrier, Part Two will cover defaults by both the insolvent insurance carrier and by the insured employer due to bankruptcy, Part Three will cover uninsured employer bankruptcy, and Part Four will cover the bankruptcy of an authorized self-insured employer.  Here is Part One.  The other Parts will appear intermittently in the future.

PART ONE – INSURANCE CARRIER INSOLVENCY

First, what are the consequences to the insured employer if its insurance carrier becomes insolvent?

Section 935 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 defaults, thus failing to discharge this obligation, then the primary obligation remains with/returns to the insured employer.

PARENTHETICAL NOTE:  In the reverse situation, that is, the insured employer becomes bankrupt, section 936(a) provides that, “Every policy or contract of insurance issued under authority of this Act shall contain…(2) a provision that insolvency or bankruptcy of the employer and/or discharge therein shall not relieve the carrier from payment of compensation for disability or death sustained by an employee during the life of such policy or contract.”  This provision refers to first dollar insurance policies issued by insurance carriers authorized by the U.S. Department of Labor to write coverage under the Longshore Act as required by section 932.  It does not apply to reinsurance or excess insurance contracts.

So, Mr. Employer, if your insurance carrier becomes insolvent and defaults then you must immediately assume responsibility for all benefits due and payable (and all interest and penalty provisions of the Act apply).

Here is a generic sequence of events when an insurance carrier becomes insolvent:

  1. The State insurance regulator in the state of domicile goes to state court to have the carrier declared insolvent;
  2. The State insurance department assumes administration of the carrier;
  3. All new and renewal business is suspended and existing policies are cancelled;
  4. The State insurance regulator examines the carrier’s finances to determine if it can be rehabilitated or must be placed in liquidation, while open claims go into runoff;
  5. Each employer insured with the insolvent carrier receives a letter from the U.S. Department of Labor (DOL) advising that the employer must immediately obtain coverage to secure its obligations under the Act, and that if the carrier stops paying benefits then the employer must immediately assume responsibility for its claims;
  6. The DOL will determine whether it is holding any collateral from the insolvent carrier, and in which states the insolvent carrier wrote Longshore business, and what the position of each state’s guarantee fund is likely to be.

Here is what the insured employer must do if its insurance carrier becomes insolvent:

  1. get new insurance coverage immediately,
  2. find out what protection is available from the guarantee fund in each state where the employer has operations (this can be problematic for Longshore cases, and was the subject of a previous blog posting on August 5, 2010),
  3. obtain claim files from the carrier or its TPA, or from the DOL’s District Office,
  4. Prepare to pay all open cases in the event that the state places the carrier into liquidation, at which time payments by the state will cease.  There will be a delay while the state administrator ships files to state guarantee funds for possible payment.  In the meantime, penalties and interest will accrue on late payments.

Note that the Special Fund administered by DOL is not yet involved.  The Special Fund under section 918(b) provides the injured employee with a possible source of payments if there is a default by an employer, not a default by an insurance carrier.

And especially Note that in the event of an insurance carrier insolvency and default it is likely that the DOL will take the position that any collateral it holds will be reserved for those cases that cannot be paid because both the carrier and the insured employer are insolvent.  In other words, solvent insured employers will be required to pay their own cases.  In states like California and West Virginia, where the state guarantee funds do not pay benefits in Longshore cases, and in states like Louisiana and New Jersey, whose guarantee funds pay only under restricted conditions, the insured employers are exposed to possible significant liability for their Longshore Act obligations.  For a more complete discussion of the various states please refer back to the August 5, 2010 discussion.

Main Point Number One: Under the Longshore Act, when an insurance carrier becomes insolvent and defaults, the insured employer must immediately meet its primary obligation to assume responsibility for and to pay its own claims.

Main Point Number Two:  In many states maritime employers cannot rely on protection from state guarantee funds.  As noted, this blog’s August 5, 2010 entry contained detailed information with regard to the expected responses of each state guarantee fund in the event of an insurance carrier’s default in Longshore cases.

Next:  What if both the insurance carrier is insolvent and the insured employer is bankrupt?

Issues – State Guarantee Funds

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.  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, Illinois, 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 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, 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 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.

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

Note:  If AEU places your longshore coverage you don’t have to be concerned with 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.