The saga of the New York self insurance trusts continues. We reported in April that justice had been served by Judge Kimberly O’Connell, who ruled that requiring solvent trusts to pay for the sins of insolvent trusts was unconstitutional. Now, according to Work Comp Central (subscription required), O’Connell herself has been overruled by a four judge panel, which has reinstated the assessments on the solvent trusts. While the justices are undoubtedly correct in their literal interpretation of the law, the ruling comes under the heading of “let no good deed go unpunished.” It may be legal, but it is in no way just.
Here’s the (rotten) deal: 15 self-insurance trusts are shut down by the state. They ran out of money because they under-priced their premiums, under-reserved claims and sold insurance like a ponzi scheme. Oh, they also paid themselves handsomely for their fine work as administrators. These defunct trusts are in the hole to the tune of $500-$600 million. State oversight? There wasn’t any.
Who Pays?
The WCB decides to assess the remaining, solvent trusts to make up the deficit. In other words, the “joint and several liability” within a trust group now expands to include liability for all trust groups. To be sure, the enabling legislation allows the WCB to do this. After all, someone has to pay and this is New York, so deal with it. In this case, the trusts that operated by the rules, fairly pricing and fairly reserving claims, are penalized for the sins of the clowns who are no longer in business.
As we pointed out in yesterday’s post, a task force has recommended that New York get out of the self insured trust business. We concur. Any state that loads the dice of “joint and several liability” to this absurd point makes a mockery of the concept. Self-insurance is based upon the ability to limit risk and contain exposures. Given New York’s operating rules for self-insured trusts, conventional management tools are rendered useless. The liabilities of operating a group trust are uncontrollable and virtually infinite. Why would any company choose this path for managing risk?
Posts Tagged ‘joint and several liability’
New York: Joint and Infinite Liability
Friday, June 18th, 2010New York: In Trusts We Trust Not
Thursday, June 17th, 2010Two years ago, New York Governor Patterson convened a task force to examine the status of self-insured trusts for workers comp. He was forced to take action when a number of trusts failed, most notably those administered by Compensation Risk Managers (CRM). The insolvent trusts left behind a deficit of $500 million. (See our prior blogs here and here.) The task force recently presented its findings to the governor. In 189 pages of closely reasoned text, the commission recommends that New York abandon this particular model for insurance. The risks, in their view, outweigh the benefits and perhaps most important, the state lacks the resources to adequately monitor how these groups operate from day to day. You cannot trust the trusts.
The commission zeroed in on what it considers to be the (fatal) flaws in the group trust model:
: Joint and several liability, where prudent employers are held accountable for the actions of the weakest members
NOTE: it’s one thing to have “joint and several” liability; as the commission points out, it’s quite another to actually collect on these obligations: less than 15% of what is owed by participants in the failed trusts has been collected to date.
: potential conflicts of interest involving group administrators and TPAs, who seek to grow the business by keeping rates artificially low and by understating losses
: inability of trustees to understand what is really going on
: inability of the state to monitor and assess the true status of each operating trust
Death Spiral
Self insurance groups currently operate successfully in 18 states, but not in New York. As we pointed out in a prior blog, the NY comp board tried to assess all trust members – not just those in the insolvent trusts – to make up the $500 million deficit. The solvent trusts sued and for the moment, have prevailed. (The Held decision can be read in the appendix of the task force report).
There is a certain logic to assessing all members for the failings of a few, but this only works when you are dealing with very large numbers, so the individual assessments are relatively small. This was not the case back in 2008, when there were about 18,000 employers participating in NY trusts. After all hell broke lose, the number dwindled to 4,000.
The crippling assessments issued by the comp board to cover the trust deficit created a death spiral, with solvent trusts folding their tents and moving out of the state. Even though those assessments have been retracted by the courts, that action comes too late to save the viable trusts. New York probably has no choice but to abandon the group trust model.
Rotten Apples
The New York narrative, as written by the governor’s commission, attributes the trust failures to fatal flaws in the business model. But where New York sees an insurance approach that cannot work, other states see vulnerabilities that can be addressed through prudent management. Self-insured groups still operate profitably and effectively in many states. What happened in New York was the result of rogue and perhaps felonious trust management combined with inadequate state oversight. The state failed to see the true status of the troubled trusts in a timely manner and then took exactly the wrong action to correct it. That’s not a problem with trusts themselves, but with the people entrusted to run them.
Joint and Several Bust
Monday, December 14th, 2009Back in June we blogged the failure of several self-insurance groups (SIGs) in New York, all run by Compensation Risk Managers (CRM). There was bad news all around: participants in CRM SIGs were suddenly without coverage; and participants in other (non-CRM) SIGs were hit with a huge surcharge to make up the deficits created by CRM’s deficient management. Now the proverbial “other shoe” (presumably a Gucci) has dropped, directly on the heads of CRM managers: the company has been indicted by Attorney General Andrew Cuomo for fraud and sued by the state comp board. CRM is having what appears to be a well deserved, terrible, horrible, no good, very bad week.
In their own defense, CRM asserts that problems are industry wide:
According to the WCB’s website, of the 65 self insurance workers compensation trusts authorized by the WCB and subject to its oversight and regulation, as of November 2009, 32 were either insolvent, being terminated or were underfunded, 13 had been voluntarily terminated and only 20 were operating with no fiscal issues and no regulatory restriction. Compensation Risk Managers managed 8 of these 65 trusts. The Company believes that an industry-wide problem exists and that the WCB has unfairly singled the Company out. The Company intends to defend the WCB litigation vigorously and prove that the WCB’s unsubstantiated allegations are utterly without merit.
In other words: don’t hold us accountable for something everyone is doing.
Well, maybe other SIGs are in bad shape, but CRM is under fire for operating the insurance equivalent of a Ponzi scheme: the indictment charges that they deliberately under-reserved claims, leading to under-stated losses. The resulting “healthy” loss ratios became the basis for under-pricing the rest of the market, which led to increased membership in their self-insurance groups. The new premiums helped CRM keep up with increasing payments. It all came crashing down when insufficient reserves ran out and payments exceeded available cash. Heck, the experts at Madoff Consulting guaranteed that it would work… right up until the moment it didn’t.
Joint and Several Liability
Most people buy insurance with stand-alone policies. Each company is the master of its own fate. If the company performs well, they benefit from lower premiums. If losses are high, the experience rating process leads to higher premiums. As long as the carrier remains solvent (not a given these days), there are no big problems.
Self-insurance groups are different. They involve a much higher level of trust (and risk): not only are you accountable for your own losses; you are on the hook for the losses of other group members. A SIG is only as strong as its weakest member. Indeed, SIG participants in New York discovered that they were on the hook for losses in other SIGs, through a painful surcharge imposed by the comp board.
This brings to mind the response of the immortal Groucho Marx to an invitation to join an exclusive club: “I don’t want to belong to any club that will accept me as a member.” That’s just the kind of thinking that might have helped the unfortunate companies who find themselves swinging in the wind at the end of CRM’s tattered rope.
News roundup: Health Wonk Review, WC recovery, fatalities, joint & several, AIG and web tools
Friday, August 21st, 2009Things are sure getting ugly out there in the national debate on health policy. Read what the health policy wonks in the blogosphere have to say about all this – a fresh Health Wonk Review is posted over at David Williams Health Business Blog.
The recovery and WC – Joe Paduda offers an excellent analysis of the likely impact of economic recovery on various segments of the workers comp industry in his post The recovery is coming – what does that mean for work comp? He offers a word of caution for employers: as hiring increases, so too will injuries. “The good folks at the NCCI have looked at the impact of economic recoveries on workers comp, finding “Job creation is related to an increase in the proportion of workers who are inexperienced in their current job and, hence, more likely to sustain a workplace injury.”
Work fatalities down, suicides up – The good news: “A total of 5,071 fatal work injuries were recorded in the U.S. in 2008, down about 10 percent from a total of 5,657 fatal work injuries reported for 2007, according to preliminary government figures.” However, some of the drop is attributed to the economy and a decline in the number of hours worked. Researchers also think that numbers may be lagging since budget constraints at reporting agencies may have delayed classifying cases. One of the most troubling parts of the report is that workplace suicides were up 28 percent to a series high of 251 cases in 2008 – “…the highest number ever reported by the fatality census. Suicides among protective service occupations rose from 14 in 2007 to 25 in 2008.” Read more about the report in Insurance Journal’s story, Fatal Work Injuries Dropped 10% in 2008; Down 20% in Construction.
Joint and Several Liability in action – Roberto Ceniceros blogs about the hefty bills that some New York employers are facing after the demise of self-insured trusts (aka SIGs) in his post Self insuring comp claims has its risks. About 1,789 will be footing about $133 million in unfunded workers comp claims – an average of about $74,000 per employer.
AIG wins one – An NCCI suit alleging that AIG has been shortchanging state workers comp pools for 35 years was dismissed by a federal judge yesterday, but the suit was dismissed on a legal technicality, with no ruling on the actual charges.
Web tools – here are a few good web tools we’ve come across in our travels:
Choose the Best Search for Your Information Need – a guide to some specialty search engines
Wordnik – An ongoing project devoted to discovering all the words and everything about them. We’re liking this, and also recommend our long-term favorite word tool, OneLook.
Meeting ticker – log the number of attendees, enter the average hourly rate, and start your engines. You’ll be surprised to learn how much meetings cost!
ParkWhiz – find and reserve parking before you get there. Enter a date, time & address and get nearby parking garages, rate comparisons, and distance from your destination.
Down for everyone of just me? – enter the address of a website to see if the site is having a widespread problem or if the problem with the page is on your end. It’s surprisingly useful!
Health Wonk Review, medical costs, price hikes, joint & several liability, and more
Thursday, December 11th, 2008Health Wonk Review — The “Just the Facts, Ma’am” Edition – hosted by Vince Kuraitis at e-CareManagement – Dragnet fans take note!
NCCI report on medical benefits – The medical share of total losses has grown dramatically — from just over 40% in the early 1980s to almost 60% today. NCCI takes a closer look: Analyzing the Shift in the Medical Share of Total Benefits (PDF)
Price hikes forecasted – economists at Swiss Re are predicting a deep recession and price hardening across all lines of insurance through 2010, insurance and reinsurance inclusive.
Walmart death – This topic has been making waves in the law blogs. Troy Rosasco talks about the likelihood that exclusive remedy will preempt any lawsuits in the case of the trampling death of a Walmart employee in a post-Thanksgiving sale stampede, and talks about how the retailer could face criminal investigations. Of course, that doesn’t mean that lawsuits haven’t been filed – Eric Turkewitz updates us on the family bringing suit; Walter Olson offers his perspective on “5 minute after” suits. My colleague Jon had blogged about this last week: Walmart’s Killer Bargains.
Can you say Joint & Several liability? – a recent study profiled in Risk and Insurance shows that small business owners are not fully aware of the financial risks involved in obtaining workers’ compensation insurance through self-insured groups. Despite several high-profile failures, “…85 percent of respondents indicated that they had not seen, read or heard about the closure of several self-insured groups over the past year. More than one-half (58 percent) of respondents reported that they were unaware that companies belonging to self-insured groups remain financially responsible — often for years — for the claims of all companies in their group, not just their own businesses.” See: joint & several liability.
Fumes and confined space – We noted a sad story last month about two amateur winemakers in France who died after being overcome by fumes while trampling grapes. While this might sound like unusual circumstances, the issue of confined space and the danger of fumes is a significant agricultural risk. Hydrogen dioxide-related deaths (PDF) also occur in manure pits – there have been several instances when rescuers enter the pit only to succumb to the fumes as well.
Insurer insolvencies, guaranty funds, and joint and several liabilities between temp staffing agencies & contracting employers
Monday, October 25th, 2004Roberto Ceniceros of Businss Insurance points to a recent interesting decision by California’s 2nd District Court of Appeals in Los Angeles dealing with general and special employers. The case involved a claim by an employee of RemedyTemp, a temporary staffing firm, considered the general employer; the employee was injured while on assignment at Jacuzzi Inc, the contracting or special employer. Normally, Remedy Temp’s insurer would be responsible for the claim, but in this case, the insurer – Reliance – was in liquidation. The court found that Jacuzzi – not the California Insurance Guarantee Association (CIGA) – was responsible for the claim.
There are several interesting issues involved in this case, perhaps more than can be easily addressed in one post, but we’ll give it a try. The whole issue of “general” vs. “special” employers is one facet worth discussing. But by way of laying groundwork, let’s first look at the issue of employee protection when an insurer goes belly up. Sadly, this is not an uncommon scenario in recent times. In the first quarter of 2004, NAIC recorded 20 property casualty insurer insolvencies.
In this case, the original insurer, Reliance National, went into liquidation. While remedies vary state to state, most jurisdictions have an established state guaranty fund as an insurer of last resort to ensure outstanding workers comp claims are paid. A guaranty fund is usually funded through assessments of a state’s licensed insurers. If an insurer fails and a claim is pending, the guaranty fund generally pays the claim and seeks recovery through litigation. Generally, guaranty funds leave no stone unturned in an effort to exhaust any other available insurance .
This is a simplistic summary of a much more complex issue. The Insurance Information Institute (III) has an excellent overview on the issue of insurer insolvencies and state guaranty funds that is well worth a read. Just look at how the Reliance insolvency affected Pennsylvania and the tsunami effect it had on other states:
The Pennsylvania Insurance Department is seeking to recover hundreds of millions of dollars from former executives of the bankrupt Reliance Global Holdings and its insolvent subsidiary Reliance Insurance Company and also from companies that the department says owe the company money. Reliance has only about $5.9 billion in assets, which are being disbursed rapidly because the company has to pay claims as well as the salaries of administrative staff and law firms that keep the firm running until the liquidation process is complete. The company has 144,000 claims amounting to $8.7 billion, almost twice as many claims as expected. Every state has been affected by the insolvency, but those most severely impacted are California, New York and Texas. At the time Reliance was declared insolvent it had 187,000 unsettled claims. In a lawsuit filed in June 2002 in Philadelphia, the insurance commissioner blamed the company’s executives for the failure, charging them with draining cash from the company to support their “lavish lifestyle.” Reliance Insurance Company, established in 1817, is the largest insurance company to be liquidated in U.S. history.
Guaranty funds have been severely challenged by the flood of insolvencies in recent years. For example, III says that in California, where may insolvencies have occurred, the Guaranty Fund faced a more than $750 million shortfall, no small part of the recent crisis.
In the case at hand, Mark Micelli v. Jacuzzi, Inc., Remedy Temp, Inc., American Home Insurance Co., Reliance National Indemnity Co., and California Insurance Guaranty Association (PDF), the court reaffirmed the idea of CIGA as an “insurer of last resort,” and found that joint and several liability existed between Remedy Temp and Jacuzzi, and that Jacuzzi’s workers comp insurer, American Home Assurance, qualifies as “other available insurance.”
The implication for temp staffing agencies remains to be seen. According to Ceniceros’ report:
The appeals court ruling could cause customer dissatisfaction for RemedyTemp and “could affect thousands of companies that, in part, rely on temporary staffing to avoid the costly overhead associated with carrying additional workers compensation insurance,” RemedyTemp said in a statement.