WCB-35-08-00020-P Insolvency of Group Self-insured Trusts

8/27/08 N.Y. St. Reg. WCB-35-08-00020-P

NEW YORK STATE REGISTER

VOLUME XXX, ISSUE 35

August 27, 2008

RULE MAKING ACTIVITIES

WORKERS' COMPENSATION BOARD

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. WCB-35-08-00020-P

Insolvency of Group Self-insured Trusts

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Proposed Action:

Amendment of section 317.20 of Title 12 NYCRR.

Statutory authority:

Workers' Compensation Law, sections 50 and 117

Subject:

Insolvency of group self-insured trusts.

Purpose:

Provide definition of insolvent for group self-insured trust and when the Chair will levy an assessment to pay claims.

Text of proposed rule:

Section 317.20 of Part 317 of Title 12 NYCRR is amended to designate the current section as subdivision (c) and add new subdivisions (a) and (b) to read as follows:

Section 317.20 [T]Insolvent; assessments; termination and dissolution of the group.

(a) Definition. "Insolvent", in the context of a determination by the Chair, or his or her designee, to levy an assessment pursuant to the provisions of Workers' Compensation Law section 50(5)(g), shall mean the inability of a private group self-insurer, to pay its outstanding lawful obligations under the Workers' Compensation Law as they mature in the regular course of business, as may be shown by: i) the self-insurer being underfunded as defined in Workers' Compensation Law section 50 (3-a); and ii) the sum of the self-insurer's assets, as defined by section 317.2(n) of this Part, plus the available security deposit held by the Chair pursuant to Workers' Compensation Law section 50(3-a) and section 317.5 of this Part, being less than the total cost of all of the self-insurers anticipated workers' compensation liabilities, as defined by section 317.2(o) of this Part, that will accrue within the succeeding six months.

(b) The Chair shall levy an assessment against all private group self-insurers, pursuant to Workers' Compensation Law section 50(5)(g), whenever he or she, or his or her designee, determines that workers' compensation benefits may be unpaid by reason of the default of an insolvent private group self-insurer as defined in subdivision (a).

(c) Termination and dissolution of the group. The group shall continue for such time as may be necessary to accomplish the purpose for which it was created, and so long as all requirements to maintain authorization as set forth in this Part continue to be met. Upon termination of the group's status as a group self-insurer, the group will continue to administer the workers' compensation liabilities incurred by the group. Upon failure on the part of the group to properly administer such liabilities, the [c]Chair shall assume the administration and final distribution of the group's assets and liabilities.

Text of proposed rule and any required statements and analyses may be obtained from:

Cheryl M Wood, Special Counsel to the Chair, NYS Workers' Compensation Board, 20 Park Street, Room 400, Albany, New York 12207, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

45 days after publication of this notice.

Regulatory Impact Statement

1. Statutory Authority: Workers' Compensation Law (WCL) § 117 authorizes the Chair of the Workers' Compensation Board (Board) to adopt reasonable rules consistent with the provisions of the WCL. Section 50(3-a) (6) further directs the Chair to adopt reasonable rules relating to group self insurance. Chapter 139 of the Laws of 2008, effective June 30, 2008, amended the WCL with respect to private individual and group self-insureds. Section 3 of Chapter 139 amended the second paragraph designated as (f) of subdivision (5) of WCL § 50 to renumber it as paragraph (g). Newly renumbered WCL § 50(5)(g) requires the Chair to assess and collect from all private self-insureds, including private group self insurers, necessary funds to assure the prompt payment of workers' compensation benefits when they may be unpaid by reason of the default of an insolvent private self-insured employer.

2. Legislative Objectives: Employers in New York must provide workers' compensation coverage for their employees by either purchasing a policy from the State Insurance Fund or a private carrier, or by being authorized by the Chair to be individually self-insured, or by being a member of a group self-insured trust authorized by the Chair to provide coverage. Members of a group self-insured trust are jointly and severally liable for the claims and related costs incurred by the group self-insured trust. As additional security, former WCL § 50(5)(f) now WCL § 50(5)(g) provides that if a private self-insurer is insolvent and may default on the payment of benefits, the Chair may assess all private self-insurers for the funds to pay the claims. This is to ensure that claimants always receive their benefits. The proposed regulation defines insolvent to govern how the Chair determines that a private group self-insurer is insolvent and explains when the Chair shall levy an assessment to pay the claims of the insolvent private self-insurers.

3. Needs and Benefits. The Board is funded by assessments paid by the employers of New York. The assessment process requires the Chair to assess and collect the Board's administrative and special fund costs from the State Insurance Fund, private insurance carriers, and self-insurers (both individual and groups) including self-insured political subdivisions. In addition to the administrative and special fund assessments paid by all employers, public and private self-insurers, both individuals and groups, pay an assessment to cover the administrative costs of running the self-insurance program. Finally, private individual and group self-insurers pay another assessment to cover any unmet obligations of any insolvent group or individual private self-insurer that defaults on its payments.

In 2006 the first private group self-insurer became insolvent and defaulted. Since then another eight private group self-insurers have been deemed insolvent and defaulted. When a private self-insurer is insolvent and defaults on the payment of its obligations, the Chair is responsible for ensuring the claims continue to be paid. The Chair obtains the necessary funds to pay claims, pending any collection of funds from group members, by issuing assessments pursuant to WCL § 50(5) (g) [until June 20, 2008, WCL§ 50(5)(f)] against all private individual and group self-insurers. Due to the number of insolvencies and defaults the Chair determined that approximately $66 million was needed to pay claims in 2008, an amount many times greater than that needed in the past.

The Chair levies the assessments required by WCL § 50(5) (g) in accordance with WCL § 50(5) (e), and partial payments of the assessment are made on March 10th, June 10th, September 10th and December 10th of each year. In other words billing is made quarterly. In order for payments to be made on such dates and to provide private self-insureds with thirty days in which to make the payment, the Chair sends the invoices or bills for the quarterly assessments on or about February 10th, May 10th, August 10th and November 10th. Before each quarterly bill is sent, the amount needed is redetermined and then apportioned among the private self-insureds.

In response to the bills for the first quarter assessments 13 of the 58 group self-insurers refused to pay and commenced an Article 78 action seeking to annul the Chair's imposition of the assessments on them as invalid based upon a number of theories, chief amongst them was that the term "private self-insured employer" did not encompass a group self-insurer. (See, Held, et. al. v. Workers' Compensation Board, et.al., Albany County Supreme Court, Index No.2957-08, July 7, 2008) While the petitioners did pay the portion of the assessment related to the administrative cost of the self-insurance office, they also refused to pay the portion of the second quarter assessment to cover the obligations of the insolvent and defaulted groups.

By decision issued May 2, 2008, the court granted the petitioners' request in Held, et. al. for a stay of the enforcement of the 2008 assessments. Three trusts were allowed to intervene in the action but they did not obtain the relief of the stay. Instead, like many other private group self-insurers, the intervening groups paid their assessments "under protest." In a Decision/Order/Judgment dated July 7, 2008, Judge O'Connor determined that the Chair's application of the provisions of WCL § 50(5)(f) [now renumbered as WCL § 50(5)(g) and amended] on all private group self-insurers was appropriate and proper, but annulled the assessments because the Chair did not meet the conditions precedent to levying the assessments. The court held that the Chair failed to establish that any of the private group self-insurers were actually insolvent as required by WCL § 50(5)(g) before issuing the assessments. Specifically, Judge O'Connor held that the statements of the Board's Director of Licensing were insufficient to establish the insolvency of the private group self-insurers. The Director of Licensing stated in her affidavit that the Board was currently funding the compensation benefit payments of six of the nine private group self insurers that had defaulted, that assessments had been levied to fund the payments for all nine defaulted private group self-insurers, and based upon the cash flow statements of the other three private group self-insurers, the Board would begin funding their compensation benefit payments before the end of the fiscal year. Held, et. al. at p.18.

This rule sets forth the definition of insolvent for purposes of meeting the condition precedent to issue assessments pursuant to WCL § 50(5)(g). The definition of insolvent in the rule makes clear the information the Chair must have and how he must make the determination that a private group self-insurer is insolvent. Such specificity requires a reasoned decision based upon the facts that a private group self-insurer is insolvent. Without this definition, any determination of insolvency by the Chair will not meet the standards required by statute as set forth in the July 7, 2008, Held et.al. decision. The rule also addresses the court's finding that insolvency must not be prospective or speculative but real and actual before imposing the assessment. In accordance with this finding the definition of insolvent provides that assets plus the security deposit must be less than the total of the private self-insurer's workers' compensation liabilities that will accrue within the next six months. Further, when stating when the Chair will levy an assessment, the rule requires the security deposit to be less than the total cost of the next six months of liabilities. It is not feasible to use a shorter period as the assessments are made on a quarterly basis, which must include time to perform the calculations and to collect the payments.

This rule provides a framework for making a determination of insolvency in light of the Court's decision in Held et.al., so that the Chair may determine the appropriate assessments in light of that decision.

4. Costs: The imposition of the assessments to cover the claims of the insolvent and defaulted private group self-insurers is required by statute. See, Held et.al. at p.18. This rule codifies when a group trust is insolvent, the condition precedent in WCL § 50(5)(g) before the Chair is authorized levy an assessment. The amendments to § 317.20 codify the definition used since 2006 of the term "insolvent" for the purposes of issuing assessments on private self-insurers. The information that would be requested by the Chair to determine if a group is insolvent is either already required to be maintained by the private group self-insurer, or would be maintained in the ordinary course of business, so the only cost to the private self-insurer is the cost of furnishing the information to the Chair. Therefore, any costs would be minimal.

The third quarter assessment bills will be sent on or about August 10, 2008. The amount billed is based on the quarterly determination of what is needed for the rest of the year and will be less than the estimated need reflected in the first two quarterly bills. The reduced assessment is due in part to ensuring the insolvency is real and not speculative. The Chair will apportion what is needed among the private self-insureds and bill over the remaining two quarters, crediting the private self-insureds for payments made in the first and second quarters. As private self-insureds, private group self-insured trusts will receive a third quarter bill for an assessment to cover the claims of defaulted groups. Upon receiving the bill the private group self-insureds will determine how to pay the assessment and if it needs to be immediately apportioned among the member employers. Some of the members of the group self-insured trusts are small businesses, who may incur this cost. The exact cost to members is unknown and will vary by group self-insured trust, as some groups will receive very small bills. The Board needs the funds from this assessment to pay the claims of the defaulted groups.

There is no cost to the Board in implementing this rule as it already engages in these activities.

5. Local Government Mandates: There are no local government mandates in this rule as it only applies to private self-insurers.

6. Paperwork: The Board's procedures for making the determinations involve the examination of financial information that private group self-insurers are already required to submit under existing regulations. There are no new paperwork requirements. The information requested by the Chair is either already required to be maintained by the private group self-insurer, or would be maintained in the ordinary course of business.

7. Duplication: This rule does not duplicate any other New York State or Federal rule.

8. Alternatives: One alternative would be to take no action. However, in light of the need to clarify the Chair's determination of insolvency, so as to allow him to levy an assessment to ensure the payment of claims covered by the defaulted insolvent private group self-insurers, this was not a viable option. To determine the definition of insolvent to adopt by regulation, the Board reviewed the existing policy for making such determinations, the definition of insolvency used by Certified Public Accountants, the New York State Department of Taxation and Finance, Debtor Creditor Law and Insurance Law. Except for the definition in Insurance Law § 1309(a) and the Board's existing policy, the definitions were too imprecise and speculative in light of the decision in Held et. al. Therefore, the decision was made to use the Board's policy and modify it to account for six months of liabilities instead of twelve months of liabilities.

9. Federal Standards: There are no federal standards that apply to these assessments.

10. Compliance Schedule: Private group self-insurers will be able to comply immediately.

Regulatory Flexibility Analysis

1. Effect of rule: This rule codifies in regulation the definition of insolvent and policy regarding determining an assessment is necessary to pay claims covered by private group self-insured trusts. This rule only affects private self-insurers, both individual and group and does not affect insurance carriers, the State Insurance Fund or self-insured local governments. Private individual self-insurers are not small businesses because in order to be authorized to individually self-insure, an employer must have the financial ability to pay all claims and deposit with the Chair security worth 100% of its claims. Private group self-insurers contain small employers. There are approximately 58 trusts with a total of approximately 20000 active and inactive members.

2. Compliance requirements: These paragraphs do not impose any new reporting, recordkeeping or other affirmative act upon any private self-insurer. Workers' Compensation Law § 50(5)(g) sets forth a temporary funding mechanism for payment of the claims and their related expenses of insolvent defaulted private self-insurers, by way of an assessment on all private self-insurers. The recent court decision in Held, et. al. v. Workers' Compensation Board, et.al., Albany County Supreme Court, Index No.2957-08, July 7, 2008, has questioned the Chair's determination of when a private group self-insured employer was insolvent and an assessment necessary. The Chair's procedures for making the determination involve the examination of financial information that group self-insurers are already required to submit pursuant to Part 317 of Title 12.

3. Professional services: Private self-insurers do not need any professional services in order to comply with the proposed regulation. The paragraphs merely set forth the Chair's procedures for making determinations of insolvency. Only the Chair needs to actually make the calculations. The amendments do not require the private self-insurers to submit any additional information they are not otherwise already required to submit.

4. Compliance costs: This rule imposes only minimal costs on private self-insurers. The amendments to § 317.20 define the term "insolvent" which is used in Workers' Compensation Law § 50(5) (g) for the purposes of issuing assessments on private self-insurers. This definition is not new but rather is a codification of existing policy modified to consider only the next six months of liabilities rather than the next twelve months. This rule only affects private self-insurers, both individual and group and has no affect on insurance carriers, the State Insurance Fund or self-insured local governments. The information that would be requested by the Chair is either already required to be maintained by the private group self-insurer, or would be maintained in the ordinary course of business, so all that would be required is transmitting the information to the Chair. Any cost for such compliance would be minimal.

The third quarter assessment bills will be sent on or about August 10, 2008. The amount billed is based on the quarterly determination of what is needed for the rest of the year and will be less than the estimated need reflected in the first two quarterly bills. The reduced assessment is due in part to ensuring the insolvency is real and not speculative. The Chair will apportion what is needed among the private self-insureds and bill over the remaining two quarters, crediting the private self-insureds for payments made in the first and second quarters. As private self-insureds, private group self-insured trusts will receive a third quarter bill for an assessment to cover the claims of defaulted groups. Upon receiving the bill the private group self-insureds will determine how to pay the assessment and if it needs to be immediately apportioned among the member employers. Some of the members of the group self-insured trusts are small businesses, who may incur this cost. The exact cost to members is unknown and will vary by group self-insured trust, as some groups will receive very small bills. The Board needs the funds from this assessment to pay the claims of the defaulted groups.

5. Economic and technological feasibility: Private group self-insurers can easily comply with this rule. As stated above, the rule merely sets forth the Chair's procedures for determining of insolvency. Only the Chair needs to actually make the calculations. The rule does not require the private self-insurers to submit any additional information they are not otherwise already required to submit.

6. Minimizing adverse impact: As stated above, this rule only affects private self-insurers. It does not impact insurance carriers or SIF, so small businesses and local governments insured by them are not affected. It also does not affect any self-insured local government as they are largely exempted from the provisions of Part 317 and are not subject to the WCL § 50(5)(g) assessments. The proposed rule does not require any action on the part of private self-insurers. It merely defines the term "insolvent" as that term is used in Workers' Compensation Law § 50(5)(g) for the purposes of issuing assessments on private self-insurers. This definition is not new but rather is a codification of existing Board policy. This rule is intended to clarify this term in light of a recent court decision.

7. Small business and local government participation: The rule only affects private self-insurers, both individual and groups. Private individual self-insureds are not small businesses or local governments so their participation is irrelevant. Local governments who are self-insured as municipalities are not subject to assessments pursuant to WCL § 50(5) (g), therefore their participation is not relevant. The only small businesses affected by this rule are those who are members of private group self-insured trusts or administer private group self-insured trusts. The rule codifies the existing policy regarding the definition of "insolvent" with a modification to limit consideration to six months of liabilities rather than twelve months. This policy has been used since the first private group self-insured trust was determined to be insolvent in 1996. Until recently, the Chair's definition of insolvent has not been challenged. While some of the group self-insurers and some of their members have recently challenged the Board's definition of insolvency, these challenges were made in the context of the Chair's authority to levy assessments in general and such authority has been specifically upheld by the court.

Rural Area Flexibility Analysis

1. Types and estimated numbers of rural areas: This rule define the term "insolvent" as that term is used in Workers' Compensation Law § 50(5)(g) for the purposes of issuing assessments on private self-insurers. This definition is not new but rather codifies existing policy. This rule only affects private self-insurers, both individual and group. It has no affect on insurance carriers, the State Insurance Fund or self-insured local governments. Private individual self-insurers and members of private group self-insurers are located in all areas of the State, including all rural areas. There are approximately 150 private individual self-insured employers and 58 private group self-insured trusts with approximately twenty thousand active and inactive members.

2. Reporting, recordkeeping and other compliance requirements; and professional services: This rule does not impose any new reporting, recordkeeping or other affirmative act upon any private self-insurer in rural areas. Workers' Compensation Law § 50(50(g) sets forth a temporary funding mechanism for payment of the claims and their related expenses of insolvent defaulted private self-insurers, by way of assessments on all private self-insurers. A recent court decision in Held et. al. v. Workers' Compensation Board, et. al., Albany County Supreme Court, Index No. 2957-08, July 7, 2008, has questioned the Chair's determination of when a private group self-insured employer was insolvent and an assessment necessary. The Chair's procedures for making the determination involve the examination of financial information that group self-insurers are already required to submit pursuant to Part 317 of Title 12.

Private individual self-insurers in rural areas or members of private group self-insured trusts who are located in rural areas do not need any professional services in order to comply with the proposed regulation. The rule merely sets forth the Chair's procedures for making determinations of insolvency. Only the Chair needs to actually make the calculations. The rule does not require the private self-insurers to submit any additional information beyond what they currently are required to submit.

3. Costs: This rule imposes only minimal new costs on private self-insurers. The amendments to § 317.20 define the term "insolvent" which is used in Workers' Compensation Law § 50(5) (g) for the purposes of issuing assessments on private self-insurers. This rule only affects private self-insurers, both individual and group and does not affect on insurance carriers, the State Insurance Fund or self-insured local governments. The information that would be requested by the Chair is either already required to be maintained by the private group self-insurer, or would be maintained in the ordinary course of business, and all that would be required of the private self-insurer would be to furnish the information to the Chair. Any cost for such compliance by entities in rural areas would be minimal.

The third quarter assessment bills will be sent on or about August 10, 2008. The amount billed is based on the quarterly determination of what is needed for the rest of the year and will be less than the estimated need reflected in the first two quarterly bills. The reduced assessment is due in part to ensuring the insolvency is real and not speculative. The Chair will apportion what is needed among the private self-insureds and bill over the remaining two quarters, crediting the private self-insureds for payments made in the first and second quarters. As private self-insureds, private group self-insured trusts will receive a third quarter bill for an assessment to cover the claims of defaulted groups. Upon receiving the bill the private group self-insureds will determine how to pay the assessment and if it needs to be immediately apportioned among the member employers. Some of the members of the group self-insured trusts are small businesses, who may incur this cost. The exact cost to members is unknown and will vary by group self-insured trust, as some groups will receive very small bills. The Board needs the funds from this assessment to pay the claims of the defaulted groups.

4. Minimizing adverse impact: As stated above, this rule only affects private self-insurers. It does not impact insurance carriers or SIF, so businesses in rural areas insured by them are not affected. It also does not affect any self-insured local government as they are largely exempted from the provisions of this Part and are not subject to the WCL § 50(5)(g) assessments. The proposed rule does not require any action on the part of rurally located private self-insurers. It merely defines the term "insolvent" as that term is used in Workers' Compensation Law § 50(5)(g) for the purposes of issuing assessments on private self-insurers. This definition is not new but rather is a codification of existing policy modified to consider only the next six months of liabilities rather than the next twelve months. This rule is intended to clarify this term in light of the recent decision in Held et. al.

5. Rural area participation: This rule affects all private self-insurers, both individuals and groups, who are located all across New York, including rural areas. It codifies the existing policy regarding the definition of "insolvent" with a modification to limit consideration to six months of liabilities rather than twelve months. This policy has been used since the first private group self-insured trust was determined to be insolvent in 1996. Until recently, the Chair's definition of insolvent has not been challenged. While some of the group self-insurers and some of their members have recently challenged the Board's definition of insolvency, these challenges were made in the context of the Chair's authority to levy assessments in general and such authority has been specifically upheld by the court. The individual self-insurers, including those located in rural areas, have not and do not challenge how the Chair has made these determinations.

Job Impact Statement

The proposed amendment will not have an adverse impact on jobs. This amendment defines the term “insolvent” as that term is used in Workers’ Compensation Law § 50(5)(g) for the purposes of issuing assessments on private self-insurers. Further this rule merely codifies existing policy and definition into regulation.