Some employers in Colorado and New York are learning that the so-called long tail of workers comp has more than one meaning. In the wake of a multitude of insurer insolvencies in recent years, many state guaranty funds are buckling under the burden, and turning to employers to help pick up the pieces.
Like many other states, Colorado has been suffering the ill effects of insurer insolvencies. In recent years, at least 14 insurers have gone out of business. The 1971 demise of Reliance is the most prominent and most notorious example. The Colorado Insurance Guaranty Association has been paying claims for injured workers of the insolvent insurers, but the Association now faces more than $40 million in unfunded liabilities. To shore up the troubled fund and continue paying claimants, the Association has taken to a new tactic: billing 26 of Colorado’s larger employers more than $2 million.
… recently, employers have been surprised by letters announcing, in some cases, that they owe the association hundreds of thousands of dollars for claims that were paid. The association has had the power to recover money from large employers for more than 10 years, experts say, but few policyholders knew about it.
It has only been recently — within the last 18 months — the association has sought payment.
This comes as an unwelcome surprise to the employers who are being assessed. Employers are already contributing to the guaranty fund by way of a 2% surcharge on their premium.
This is a scenario that may soon be playing out in New York as well in the form of increased employer assessments. We recently posted an item about the dire straights of the Workers’ Compensation Security Fund. The Fund was scheduled for complete exhaustion as of the end of February leaving 7.500 injured workers in the lurch, but a deus ex machina in the form of an unexpected sum of cash from another state fund and from the liquidators of Home Insurance Co. bought a few weeks.
Among the proposals to shore up the Fund:
A doubling of assessments on some employers is part of the Pataki administration’s recommended solution to the impending bankruptcy of the Workers’ Compensation Security Fund, along with borrowing $50 million from another state insurance fund. Both are subject to approval by the state Legislature.
Colorado and New York aren’t alone, simply the two states that are in the headlines this week. Obviously these short-term fixes are band-aids at best, and injured workers and employers alike deserve more security and more protection from our industry.
For those of you interested in a more in-depth treatment of the issue of insurer insolvencies, here are two policy-orientated papers of note:
Managing the Cost of Property-Casualty Insurer Insolvencies in the U.S. (PDF) from the Center for Risk Management and Insurance Research, Georgia State University, December 2002. Note that one of the authors of this report is a fellow blogger, Martin Grace of RiskProf.
Managing Insurer Insolvency 2003 (PDF) prepared for the Foundation for Agency Management Excellence by Stewart Economics, Inc., September 2003.
Posts Tagged ‘state guaranty funds’
The long tail of insolvencies: Colorado, New York employers face potential assessments
Tuesday, March 8th, 2005West Virginia is cracking down on deadbeat employers
Wednesday, October 27th, 2004West Virginia has a message for employers that have defaulted on workers comp obligations in one company, and moved on to another: You can run, but you can’t hide. The state has an aggressive plan to collect from deadbeat employers who owe the state millions of dollars in unpaid workers compensation claims. We found this story interesting after just having discussed the implications of insolvencies on state guaranty funds a few days ago. It is just such a scenario prompting West Virginia’s crackdown.
“The fund currently has $3.3 billion in unfunded liability because it needs about $4.2 billion invested to cover the projected costs of the claims it will pay out over the next 40 years but only has about $900,000 invested.”
The state has identified deadbeats through a new state Employer Violator System that crosschecks data from the Tax and Revenue Department database to identify ties between active companies and defunct companies, looking for shared officers, owners, and principals. They have identified nearly 400 companies that owe the fund more than $124 million in unpaid debts, and they plan to track them down and take aggressive actions:
“The system was developed to comply with a 2003 legislative mandate that state agencies revoke contracts, yank licenses and permits and otherwise block companies and individuals from doing business in the state if they default on their workers’ comp obligations.”
We’ve certainly heard of many state efforts to crack down on employer fraud – it seems as though this issue is particularly prominent right now. There is no doubt some relation between a tough economy when employers are squeezed and a spike in firms that fail to insure their employees. Add to that, the numbers of companies that fail in a bad economy, defaulting on obligations. By tracking senior managers from one business venture to another to collect debt, West Virginia’s initiative raises the stakes for noncompliant employers, althought there will still be issues to sort out.
“…the agency is still debating is how close the association must be between a defaulted company and other companies before those other companies also end up being barred from doing business in the state.”
This bears watching – some issues will no doubt play out in the courts. It may be good news for injured employees and taxpayers who have been stuck with bills. Compliant employers and insurers who bear a cost burden for the sins of the few should also applaud aggressive efforts to crack down on fraud wherever it occurs.
