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Legislation inked to ease group trust cash crunch/firm up regulation By Ellen D. Kiehl, Ph.D., CAE 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 recently 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 that the new law will institute aggressive collection efforts against employers who are responsible for the ongoing obligations of trusts they belonged to. The court's ruling appears to be the first clear statement of how the group self-insurance law has 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 has been swept away by the signature of A.11756. Reportedly, group trust managers are evaluating the new law and how it affects group members. Insurance producers with clients insured by the trusts may be hearing 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 this year 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.” An attorney for the trusts that brought the suit claimed victory because their petition to nullify the assessments was granted. However, the WCB also came out a winner on the core issue of whether, in fact, the WCB can tap healthy trusts in the event a closed trust becomes insolvent. “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 new legislation sets up additional ways of funding the obligations of defaulting groups. The legislation allows 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. 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 new law's mandatory billing for all outstanding liabilities, to go out 120 days after enactment; payment plans could be offered. Also, group trusts that currently are under-funded will be 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 new law include: a new, temporary “group self-insurer default fund” to offset assessments due from private self-insurers (including groups); borrowing from Uninsured Employer Fund (UEF) to create the default fund, help bridge cash-flow issues and ensure timely claims payments owed by defaulted groups; such borrowing is 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 Workers' Compensation Board; 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 Much of the bill would take effect immediately, with new rules governing the groups' finances taking effect in 120 days after enactment. Penalty provisions generally would take effect in 90 days and apply only to acts committed on or after their effective date. 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 to100 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 2nd 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 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 Workers' Compensation 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 day 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 Uninsured Employer Fund 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 workers' compensation 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 Uninsured Employer Fund Prior to April 1, 2009 Not to exceed $52,000,000 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 is effective immediately on 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 7/08

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