ISSUE – What Happens When a U.S. Department of Labor Authorized Self-insured Employer Defaults Due to Insolvency?

INSOLVENCY – PART FOUR

Upon default on the payment of benefits (not the filing of a petition in Bankruptcy Court), the U.S. Department of Labor (DOL) will seize the self-insurer’s security deposit.  The security will be in one of three types:

1. A bank issued Letter of Credit – upon default the DOL will send a sight draft to the bank for the entire proceeds of the Letter of Credit.  The money will be put into a sub-account of the Special Fund and DOL will take over administration and payment of open claims.
2. Treasury securities in a Federal Reserve Bank – upon default the DOL will transfer the entire amount on deposit into a sub-account of the Special Fund and DOL will take over administration and payment of open claims.
3. Surety bond – upon default DOL will advise the surety company of its obligation under all existing surety bonds and will transfer open claim files to the surety for administration and payment.

If the total security posted by the self-insured employer ultimately proves to be inadequate to pay all claims, then the injured workers have recourse to the Special Fund under the provisions of section 918(b) as discussed in previous postings.

The security requirement is designed so that total incurred obligations will be matched dollar for dollar by security, without regard to the typical indemnity style excess insurance coverage (with the possible exception for the instance where DOL is a named insured on the excess policy).

Of course, in my many years of administering the Special Fund for DOL I noticed that individual self-insurers seem to be poor at reserving workers’ compensation cases.  This may have been due to the inherent uncertainties of reserving, except that reserving “mistakes” ran 100% on the low side – improving the internal numbers for the self-insurer’s compensation program as well as offering low figures for the regular reports to DOL on which the company’s security deposit is based.  In other words, individual self-insureds seemed to uniformly be too optimistic in estimating their workers’ compensation unpaid incurred losses.

In the case of a large employer with primary exposure under the Longshore Act, I considered it to be almost impossible to set aside adequate collateral in the event of default.

Actually, there is a partial explanation for the individual self-insurers’ chronic low reserving.  The company’s reserves assume that the company will continue to be a viable concern, able to actively adjust and defend its claims.  Once the company has defaulted one of the consequences is likely to be deterioration in the development of claims, as well as an increase in the number of claims filed as future employment at the self-insured employer becomes threatened.

At any rate, the security requirement is imposed for the purpose of protecting the injured worker and the Special Fund in the event of the self-insured employer’s (or insurance carrier’s) default, and ultimately to protect the rest of the industry, which will pay higher assessments in the event there is insufficient security and cases go into the Special Fund under Section 18.

A final note:  the employer who decides to terminate its individual self-insurance program should not expect the immediate release of its security.  DOL will hold that security for as long as it is necessary to secure open claims.  And for anyone familiar with workers’ compensation claims, that could be a long time.

From the employer’s perspective, the collateral requirement is a serious impediment to individual self-insurance.  From the DOL’s perspective, you can never have enough security.

ISSUE: What Happens When An Uninsured Employer Goes Bankrupt?

INSOLVENCY – PART THREE

We’ve previously looked at what happens when an insurance carrier defaults on the payment of benefits due to insolvency (Part One) and what happens when both the insurance carrier and the insured employer default due to insolvency (Part Two).

Now it’s time to discuss uninsured employers.  What happens if the insolvent, defaulting employer has failed to meet the Longshore Act’s insurance requirement as spelled out in Sections 904(a) and 932 and thus is an uninsured employer?

A maritime employer without required Longshore Act insurance means problems for everyone.  (We are assuming that the uninsured employer has been making voluntary payments up until default and the issue of its insurance status has not come up earlier.)

The injured worker has a remedy under Section 918 of the Longshore Act, which we looked at in Part Two.  The injured worker will inevitably encounter delays while the investigation of the employer’s status is undertaken, until the case is in posture for the issuance of a Compensation Order, and finally, while the Default Order makes its way through the U.S. District Court.  Eventually, when all requirements are met, the Special Fund will pick up payments in the case under Section 918.

The annual Special Fund assessment process spreads these defaulted liabilities and payments to beneficiaries across the industry through the provisions of Section 944(c).  Each authorized insurance carrier and self-insured employer’s assessment will go up a bit to reflect the Fund’s payments to the worker under Section 918.

If the uninsured employer was a subcontractor then the general contractor will end up with the claim under the Section 905(a) statutory employer provision.

Probably the worst news is for the corporate officers of the uninsured employer.  Section 938(a) makes the president, treasurer, and secretary severally liable along with the corporation for criminal misdemeanor charges.  And even worse, it makes those officers personally jointly and severally liable, along with the corporation, to the injured worker.  (We discussed the meaning of “joint and several liability” under the Longshore Act in Question #8 – 11/12/09).

I can tell you from personal experience that before accepting a case for payment under Section 918, the Special Fund will require the injured worker to add the corporate officers of an uninsured employer as parties to his claim. 

If you are the president, secretary, or treasurer of an uninsured employer under the Longshore Act you will be held personally responsible in the event that one of your employees is injured on the job and the company defaults on the payment of benefits. 

Next will be Part Four – Bankruptcy of an authorized self-insured employer.

INSOLVENCY – PART TWO

Back on August 31, 2011, in Insolvency – Part One, we considered the circumstances where the insurance carrier was insolvent but the insured employer was solvent, and we concluded that if the insurance company doesn’t pay then the employer must pay.

We said at that time that we would discuss various other insolvency scenarios in future postings.

So, now we will look at what happens when there is a default because the insurance carrier is insolvent and the insured employer is bankrupt.

If both the insurance carrier and the insured employer have defaulted on the payment of benefits then the injured worker may seek to proceed under Section 918 (33 U.S.C. 918) and obtain payment from the Special Fund administered by the U.S. Department of Labor.

Section 918(a) provides that in the case of default by the employer in the payment of compensation due under any Award for a period of thirty days after the compensation is due and payable, the injured worker may seek the issuance of a Supplemental Order Declaring Amount of Default.  This “Default Order” may be issued by the Department of Labor’s District Director after the appropriate investigation.  The injured worker may then file a copy of this “Default Order” with the clerk of the Federal district court for the judicial district in which the employer has his principal place of business or maintains an office, or for the judicial district where the injury occurred.  If the “Default Order” is in accordance with law, the district court will issue a judgment in favor of the injured worker.  The injured worker can then proceed to attempt to execute the judgment.

Section 918(b) provides that in cases where the judgment cannot be satisfied by reason of the employer’s insolvency or other circumstances precluding payment, the Secretary of Labor may, in his discretion and to the extent he shall determine advisable after consideration of current commitments payable from the Special Fund, make payment from the Fund.

The basic requirements for relief under section 918(b) are:

1)      There must be an existing final Compensation Order,

2)      The employer must be in default,

3)      Thirty days must elapse without payment,

4)      The injured worker must obtain a “Default Order”,

5)      The injured worker must obtain a judgment from federal district court based on the default order,

6)      The injured worker must seek to execute the district court’s judgment. 

If there is no existing Compensation Order, then the injured worker should have the case immediately referred to the Office of Administrative Law Judges for a formal hearing, since the District Director does not have the authority to issue a Compensation Order unless there is the express agreement of all parties.

Expedited Payment

Under certain circumstances, the injured worker may seek expedited payment from the Special Fund under Section 918(b).  In the event that both the insurance carrier and the employer are defunct and this can be clearly documented, the injured worker may seek expedited payment from the Director, Division of Longshore and Harbor Workers’ Compensation. Where the investigation by the District Director reveals that the responsible employer and insurance carrier are both defunct and that it would be futile to require the injured worker to obtain and attempt to execute a judgment from the federal district court, and there is no other possible source of payment, then the Director may make payment from the Special Fund without requiring the injured worker to follow futile procedures.   

Note:  payment under section 918(b) will only be made after all other sources of payment have been eliminated, including state insurance administrators, state guarantee funds, collateral deposits, and corporate officers (in the case where the employer was uninsured).

Section 918(b) is funded by means of the annual Special Fund assessment of all authorized insurance carriers and authorized self-insured employers.  It currently accounts for between 3 and 4 per cent of annual Special Fund expenditures.

Next:  What happens when an uninsured employer goes bankrupt?

ISSUE – INSURANCE CARRIER INSOLVENCY

What happens when an insurance carrier defaults on its obligations under the Longshore and Harbor Workers’ Compensation Act due to insolvency?

I’ll discuss several insolvency scenarios in four separate entries.  Part One will cover default by an insurance carrier, Part Two will cover defaults by both the insolvent insurance carrier and by the insured employer due to bankruptcy, Part Three will cover uninsured employer bankruptcy, and Part Four will cover the bankruptcy of an authorized self-insured employer.  Here is Part One.  The other Parts will appear intermittently in the future.

PART ONE – INSURANCE CARRIER INSOLVENCY

First, what are the consequences to the insured employer if its insurance carrier becomes insolvent?

Section 935 of the Longshore Act (33 U.S.C. 935) provides that discharge of an obligation by an insurance carrier discharges the employer’s liability.  If the insurance carrier defaults, thus failing to discharge this obligation, then the primary obligation remains with/returns to the insured employer.

PARENTHETICAL NOTE:  In the reverse situation, that is, the insured employer becomes bankrupt, section 936(a) provides that, “Every policy or contract of insurance issued under authority of this Act shall contain…(2) a provision that insolvency or bankruptcy of the employer and/or discharge therein shall not relieve the carrier from payment of compensation for disability or death sustained by an employee during the life of such policy or contract.”  This provision refers to first dollar insurance policies issued by insurance carriers authorized by the U.S. Department of Labor to write coverage under the Longshore Act as required by section 932.  It does not apply to reinsurance or excess insurance contracts.

So, Mr. Employer, if your insurance carrier becomes insolvent and defaults then you must immediately assume responsibility for all benefits due and payable (and all interest and penalty provisions of the Act apply).

Here is a generic sequence of events when an insurance carrier becomes insolvent:

1. The State insurance regulator in the state of domicile goes to state court to have the carrier declared insolvent;
2. The State insurance department assumes administration of the carrier;
3. All new and renewal business is suspended and existing policies are cancelled;
4. The State insurance regulator examines the carrier’s finances to determine if it can be rehabilitated or must be placed in liquidation, while open claims go into runoff;
5. Each employer insured with the insolvent carrier receives a letter from the U.S. Department of Labor (DOL) advising that the employer must immediately obtain coverage to secure its obligations under the Act, and that if the carrier stops paying benefits then the employer must immediately assume responsibility for its claims;
6. The DOL will determine whether it is holding any collateral from the insolvent carrier, and in which states the insolvent carrier wrote Longshore business, and what the position of each state’s guarantee fund is likely to be.

Here is what the insured employer must do if its insurance carrier becomes insolvent:

1. get new insurance coverage immediately,
2. find out what protection is available from the guarantee fund in each state where the employer has operations (this can be problematic for Longshore cases, and was the subject of a previous blog posting on August 5, 2010),
3. obtain claim files from the carrier or its TPA, or from the DOL’s District Office,
4. Prepare to pay all open cases in the event that the state places the carrier into liquidation, at which time payments by the state will cease.  There will be a delay while the state administrator ships files to state guarantee funds for possible payment.  In the meantime, penalties and interest will accrue on late payments.

Note that the Special Fund administered by DOL is not yet involved.  The Special Fund under section 918(b) provides the injured employee with a possible source of payments if there is a default by an employer, not a default by an insurance carrier.

And especially Note that in the event of an insurance carrier insolvency and default it is likely that the DOL will take the position that any collateral it holds will be reserved for those cases that cannot be paid because both the carrier and the insured employer are insolvent.  In other words, solvent insured employers will be required to pay their own cases.  In states like California and West Virginia, where the state guarantee funds do not pay benefits in Longshore cases, and in states like Louisiana and New Jersey, whose guarantee funds pay only under restricted conditions, the insured employers are exposed to possible significant liability for their Longshore Act obligations.  For a more complete discussion of the various states please refer back to the August 5, 2010 discussion.

Main Point Number One: Under the Longshore Act, when an insurance carrier becomes insolvent and defaults, the insured employer must immediately meet its primary obligation to assume responsibility for and to pay its own claims.

Main Point Number Two:  In many states maritime employers cannot rely on protection from state guarantee funds.  As noted, this blog’s August 5, 2010 entry contained detailed information with regard to the expected responses of each state guarantee fund in the event of an insurance carrier’s default in Longshore cases.

Next:  What if both the insurance carrier is insolvent and the insured employer is bankrupt?