The folks at Murray Bresky Consultants are just trying to scratch out a living by raising chickens – not just any chickens, but free range chickens that are “happy and healthy.” Their signature breed is “fed an all-natural and all-vegetable diet that, combined with plenty of exercise, makes our birds the leanest on the market. The leisurely lifestyle eliminates the need for antibiotics to prevent diseases commonly found in chickens as a result of stress and confined living conditions. Minimally processed, without the use of preservatives or other artificial ingredients, Murray’s Certified Humane Chicken is truly all chicken.”
Unfortunately for the company, they secured workers comp insurance through New York Compensation Managers (NYCM), the now defunct operator of a dozen self-insurance groups in New York. NYCM claimed to offer favorable rates, strict underwriting standards and exemplary claims services. They ended up with egg on their face with their inadequate rates, suspect underwriting and rampant under-reserving of claims. In retrospect, the operation ran around like a chicken with its head cut off. By the time the problems emerged (in 2006), it was too late to shake a feather and correct the problems.
Following the SIG’s failure, Murray Bresky Associates was hit with a $1.2 million assessment to make up their share of the SIG’s deficit. That ain’t chicken feed.
A Game of Chicken
Murray Bresky is not chickening out of a fight. Indeed, the chickens have come home to roost in the form of a lawsuit filed against NYCM and its board of trustees. The lawsuit seeks to recover the $1.2 million and then some, alleging breach of contract and breach of fiduciary duty. The case worked its way up to the NY Supreme Court, Appellate Division, where the motion by the defendents to dismiss the lawsuit was, for the most part, dismissed.
Now the defendents are walking on egg shells, facing the prospect of personal liability for the failures of the SIG. Where they once feathered their nests with the proceeds of the operation, their financial security has flown the coop. This is a legal mess perhaps best described by the late Lyndon Baines Johnson: “Boys, I may not know much, but I know chicken poop from chicken salad.”
Roles and Irresponsibilities
One of the former trustees of the SIG is squawking that he was not aware that he was, in fact, a trustee. He may have signed off on a few trustee documents, he may have performed some of the functions of a trustee, but he insists that he had no memory of being appointed. He insisted that he was not a bad egg and claimed that he had no place in the pecking order. The court, however, ruled otherwise.
As the saying goes, you have to break eggs to make an omelette. Quite a few more eggs will be broken before this particular concoction is served up. Hard-boiled attorneys will parse the details to figure out who, if anyone, owes Murray Bresky Consultants and exactly how much they owe.
Pecking Orders
The courts now rule the roost. They have upheld Murray Bresky’s right to sue, with the exception of some actions that are time-barred. There may well be a sunny side up in the chicken company’s quest for justice. We look forward to the final resolution of this stew, the chicken scratch of a judge’s signature that will put a final number on the liability of an insurance operation that flaps my wattles (ie., annoys me).
Here’s a little unsolicited advice to Murray Bresky Consultants: don’t count your chickens before they hatch. This one has a long way to go before the company can feather its nest with the proceeds of a complex litigation. In the meantime, their free range chickens have the run of the coop, enjoying their cage-free, stress-free lives right up to the very end. Bon appetite!
Posts Tagged ‘self insurance’
New York Self Insurance: Chicken Stew
Tuesday, May 28th, 2013New York: Busted Trusts and the Law of Small Numbers
Wednesday, April 18th, 2012We have been following the fate of self insurance groups (SIGs) in New York, where the innocent pay for the sins of the guilty and where what is legal is by no means fair. We read in WorkCompCentral (subscription required) that an appeal to over-rule the onerous assessments imposed on the trusts who played by the rules, to cover the liabilities of trusts who did not, has been rejected by the U.S. Supreme Court. [The Insider is quoted at length in the article.] Had employers known just how expansive the risks of SIG participation were, they would likely have chosen to purchase conventional insurance.
The appellate court wrote that “a fair reading of [comp law] within the context of the related provisions and the legislative history, leads to the conclusion that group self insurers were intended to be included among those to be assessed to provide the funds to cover the defaults of all private self-insurers, including groups.”
The court went on to say that the liability of individual employers “is proportional to their role as self-insurers within the workers’ compensation system.”
The New York appellate court has expanded the concept of joint and several liability way beyond the members of a given trust, including not only all those who participate in self insurance groups, but virtually every self insurer in the state. There is no way a company can reasonably assess the scope of this risk. Why would anyone put their trust in trusts?
The Law of Small Numbers
The problem for the dwindling number of employers who participate in New York SIGs is the inverse of the law of large numbers: because their numbers are relatively small (compared to the total number of employers and comp premium in the state), they own a disproportionately large share of the open-ended liabilities generated by the failed trusts. Given the now-established legality of the assessments, and given the impossibility of verifying the viability of every self-insured risk, New York has basically eliminated self insurance as an option. That’s too bad, especially in the context of the state’s relatively high costs for comp.
Perhaps the state’s 800,000 employers could push for fundamental changes in the way workers compensation is managed: they could argue that the system is too complex and too costly for employers, even as the benefits for injured workers are way too low. As a group, they would have the law of large numbers in their favor, which is certainly more than can be said for the hapless remnants of the state’s self insurance groups.
NOTE: For access to the Insider’s numerous blogs in this issue, enter “New York trusts” in the search box.
Risk roundup, virtual WC event, presumption, self insurance, haboob video & more
Thursday, July 14th, 2011Risk roundup – This week’s edition of Cavalcade of Risk – edition #135 – is being hosted by The Notwithstanding Blog. In that several countries celebrate their independence in the month of July, our host has a suitably related theme that may test the breadth of your geographic trivia. Oh, and there are some good posts this week, too!
Mark September 22 on your calendar now – Better yet, head on over to Business Insurance and register for Virtual Advantage 2011 – Workers Comp Trends & Cost Control Strategies. We’re very pleased that our own Tom Lynch will be participating on a blogger panel with three other blog luminaries: Roberto Ceniceros, Joe Paduda, and Mark Walls. There will also be a keynote by NCCI’s Harry Shuford, an expert panel on pharmaceutical cost controls for worker’s comp – and more. It’s a one-day virtual conference – and best of all – there is no charge to attend.
Presumption – And speaking of Mark Walls, congrats to him on his first column in Risk & Insurance. If you don’t know Mark by name, suffice it to say he is the powerhouse behind LinkedIn’s popular Work Comp Analysis Group. In Not all claims are created equal he talks about the thorny issue of presumption and how presumption laws fiddle with a basic tenet of the workers compensation pact: that the burden to prove an injury or illness “arose out of employment” falls to the employee.
Self Insurance – If the workers comp market continues to harden, as many are predicting, many employers might be looking to alternatives to the traditional insurance options. In Risk Management Magazine, Richard C. Frese, a consulting actuary from Milliman, tackles the topic in his article Does Your Self-Insured Program Need a Tune-Up?. It’s a good overview of what you need to know if you are considering the move.
Employment law – Attorney Phillip Miles posts a handy SCOTUS Employment Law Year in Review 2011 – a summary of cases with links for more information.
New blog discovery – check out Texas Mutual’s Blog. We particularly liked the recent post on The ABCs of new employee safety. This is an important issue – in their own claim analysis, they found that roughly 27% of job-related fatalities involve employees who have been on a new job for less than 90 days. They also cite the OSHA stat that 40% of all injured employees have been on the job for less than a year. They also note that “new employee” may not just be a new hire: “New employees include people who transfer to a new position, return to work after an extended absence, operate a new piece of equipment or implement a new procedure.” Check out the post for tips on this topic.
Wow of the week – a little off topic, but check out this amazing video of the massive haboob (dust storm) that hit Phoenix on July 5.
Briefs
* Opioids, deaths, and workers comp
* LAPD prescription drug abuse tied to disabilities
* Consumer Reports: Can you read this drug label?
* The 10 worst states for P&C insurers
* Safety tip sheet: Livestock handling
* Safety on the loading dock
CRM: Wreaking Bi-Coastal Havoc in Self Insurance
Monday, December 6th, 2010You may recall the New York saga of Compensation Risk Managers (CRM), who single-handedly brought down the entire workers comp self-insurance group (SIG) industry in the empire state. Well, CRM is back in the news, this time in California, where their dubious business practices have collapsed a self-insurance group for the construction industry. The name of the failed SIG is “Contractors Access Program – get it? “CAP.” As in, “your exposure is capped; you have nothing to worry about.” To paraphrase a legendary President, “we have nothing to fear except fear itself” – to which we must add, unfortunately, the legitimate fear of predatory insurance administrators.
New York regulators took a very hard line in their response to the insolvency of a dozen SIGs operated by CRM. Someone had to make up the deficit created by CRM’s mismanagement, so they decided to penalize all the SIGs operating by the rules. This harsh and rather expansive definition of “joint and several liability” led the well-managed SIGs to abandon the state.
At this point, it’s not clear how California is going to pursue the $38 million shortfall. They will probably go after the actual participants in CAP, but it’s highly unlikely they will find anywhere near the cash to cover the insurance deficit. Meanwhile, eleven of the SIG members are suing CRM, the agent who sold the product and the SIG’s board of directors (some of whom are SIG members). If you total up the premiums paid by those filing the lawsuit, you only come up with $5.2 million. So the scale of the losses – $38 million – appears large enough to put every one of the SIG members out of business.
Promises, Promises
One of the interesting aspects of the lawsuit is the way the plaintiffs have quoted the marketing spiel right back at the defendents. They were promised “superior underwriting, claims oversight, loss control and administration.” The “rigorous underwriting” would provide savings “while preserving the integrity of the program.” Potential clients were assured that their exposure was limited to the premiums paid (a complete misrepresentation of the nature of SIGs) and that reinsurance kicked in on any claim above $500,000. (In reality, there was no reinsurance.) The agent who sold this dubious product promised to function as “much more than a broker.” They brought “particular expertise” to the program and would serve as the clients’s “partners in risk management functions.” Some partner!
What apparently was not disclosed to members and prospects was the fact that the SIG was losing money almost from the very beginning. CRM had a fall out with the original broker, which resulted in $6 million of SIG funds being used to pay him off.
The CRM website is still up, where you can read about “the CRM advantage.” They have an advantage, all right: they take advantage of naive and trusting companies seeking a little edge in the competitive comp market. It’s a killer edge, to be sure.
Thanks to Work Comp Central (subscription required) for the heads up on this case.
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.
Maryland officials monitoring GM solvency related to workers compensation
Monday, December 8th, 2008With the Big 3 automakers discussing potential fallout if the federal government doesn’t come through with a bailout package, there is one aspect of the fallout that would likely be a mere footnote in the wake of such a massive failure, but that would be of interest to thousands of workers: the issue of what happens to workers compensation claims.
Maryland officials are considering and planning for such a scenario now in the case of GM. The state’s Workers’ Compensation Commission (WCC) is closely monitoring GM and other distressed, self-insured firms with operations in Maryland. Officials note that GM has 200 employees statewide that are covered for workers compensation under the company’s self-insured plan. They note that even in the case of a bankruptcy (which GM states it is not considering), the funding for claims would not automatically be wiped out. R. Karl Aumann, chairman of WCC, said it’s rare for a company to default on its workers’ compensation program. The last time this happened, he said, was with Bethlehem Steel Corp., which declared bankruptcy in October 2001.
In the case of property and casualty insurer insolvencies, every state has a safety net for policyholders, usually in the form of a Guaranty Fund. However, these funds do not necessarily cover self-insured employers, according to an overview of the insolvency process and guaranty fund laws by the The National Conference of Insurance Guaranty Funds:
Q: Am I covered by a state property and casualty guaranty association if I purchased my policy from an unlicensed carrier or a managed care plan?
A: No. Guaranty associations cover only licensed insurers. Companies not licensed in the state, surplus lines carriers, managed care plans, preferred provider organizations (PPOs), Health Maintenance Organizations (HMOs) and self insured plans are not covered under the property and casualty guaranty association statutes. If you purchased coverage from one of these entities, and the company is now insolvent, you may file a claim with the Liquidator. There may also be other guaranty associations that may provide coverage for policies issued by these types of organizations. Your state Department of Insurance can provide you additional information.
Q: How can find out if my company was licensed in my state?
A: Check with your state Department of Insurance. They should have a listing of all admitted companies.
However, many states have some type of guaranty mechanism established that covers self-insured entities. Here are some resources to learn more about the protections that your state affords:
State Insurance Departments
Self-Insurance Guaranty Funds of America
State Guaranty Fund websites
State Guaranty Fund Directory (PDF)
In the case of bankruptcies, workers comp claims payments are often considered a priority – see this discussion of a recent court ruling in Pennsylvania. However, insurers may be out of luck when it comes to payment for workers comp premium in the case of bankruptcy. In the 2006 case of Delivery Service, Inc., et al v. Zurich American Insurance Co., The U.S. Supreme Court ruled that a workers compensation insurer does not have a priority claim against a bankrupt business for unpaid premiums under bankruptcy law.
For more information on State Guaranty Funds and insurer insolvencies, see the Bob Hartwig’s excellent overview for the Insurance Information Institute, which includes a chart about the top 10 largest insurer insolvencies:
Year / Insolvent company / Payments / Recoveries / Net cost
– 2001 Reliance Insurance Co / $2,265,845,612 / $1,415,385,230 / $850,460,383
– 2002 Legion Insurance Co / 1,272,694,066 / 227,503,349 / 1,045,190,717
– 2000 California Compensation Insurance Co / 1,049,745,420 / 327,756,089 / 721,989,331
– 2000 Fremont Indemnity Insurance Co / 843,405,746 / 643,377,434 / 200,028,312
– 2001 PHICO Insurance Co / 699,420,144 / 205,770,569 / 493,649,574
– 1985 Transit Casualty Insurance Co / 566,549,902 / 379,499,906 / 187,049,996
– 2000 Superior National Insurance Co / 555,797,035 / 174,168,193 / 381,628,842
– 1988 American Mutual Liability Insurance Co / 543,085,140 / 238,199,539 / 304,885,602
– 1986 Midland Insurance Co / 531,641,477 / 50,648,348 / 480,993,129
– 2006 Southern Family Insurance Co / 516,844,804 / 246,101,399 / 270,743,405
KY SIG members owe $51 million
Tuesday, December 14th, 2004Members of a self-insurance group (SIG) in Kentucky are learning a harsh lesson in joint and several liability. More than 4,000 employers who are or were members of AIK Comp, a plan promoted by Associated Industries of Kentucky, face some $51 million in unfunded claims. Apparently, AIK reserves were insufficient to cover claims, and now all current members — and even some former members — are liable for the shortfall.
In workers comp, insurers often refer to the long tail. Essentially, this means that the costs of the claim extend well beyond the actual event or occurrence that the insurance covers. With most types of insurance, if a claim occurs, the payment is made within a short amount of time. With workers comp, payments cover medical costs and wage replacement (also called indemnity payments) over the life of the claim. Insurers estimate the ultimate cost of the claim and set aside reserves, the amount estimated as necessary to pay claims. In recent years, underreserving has been a factor in the demise of some very prominent insurers.
It’s too bad to see such a mismanaged pool because well-run SIGs can be viable and beneficial alternatives for small to mid-size employers that would not qualify for stand-alone self insurance. Recently, an A.M. Best report demonstrated that SIGs and captives often outperform traditional insurance programs:
“The combination of at-risk member capital, as well as joint and several liability, is a strong incentive to control losses, minimize frictional expenses, and detect and control fraud, according to the report. These factors benefit the results, with the five-year average loss and loss-adjustment-expense ratio for rated self-insurance pools at 60.6, vs. 89.3 for captives and 80.8 for A.M. Best’s commercial casualty insurance industry composite.”
Employers need to conduct rigorous due diligence before joining a SIG. As with any self-insurance program, they need to ensure their own house is in order and their loss experience is good – there are no shortcuts for good loss control; employers also need to ensure that the prospective SIG is very cautious in selecting its members, both in terms of member financial solvency and in terms of risk management and loss control requirements. If the entry threshold is low, that should be a serious sign for caution.
