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: Individual Self-Insurance

Section 904(a) states, “Every employer shall be liable for and shall secure the payment to his employees of the compensation payable ….”

Section 932(a) states, “Every employer shall secure the payment of compensation under this Act –

(1)   By insuring and keeping insured the payment of such compensation with any stock company or mutual company or association, or with any other person or fund, while such person or fund is authorized (A) under the laws of the United States or of any State, to insure workmen’s compensation, and (B) by the Secretary, to insure payment of compensation under this Act; or

(2)   By furnishing satisfactory proof to the Secretary of his financial ability to pay such compensation and receiving an authorization from the Secretary to pay such compensation directly….  Any employer securing compensation in accordance with the provisions of this paragraph shall be known as a self-insurer.

You have two choices.  Buy insurance from an insurance carrier authorized by the Secretary of Labor to write Longshore Act coverage.  Or obtain authorization from the Secretary of Labor as a self-insurer.

How do you become self-insured?  You complete Form LS-271, Application for Self-Insurance, which, along with the supporting documentation, goes to the Division of Longshore and Harbor Workers’ Compensation’s National Office at the U.S. Department of Labor, 200 Constitution Ave., NW, Room C-4315, Washington, DC  20210.

What is the supporting documentation?

  1. Audited financial statements for the most recent three years.  They must be audited, certified by a public accounting firm.  No exceptions.  If you don’t have audited financial statements, save yourself the trouble.  The financial statements will be evaluated using standard liquidity, profitability, and debt ratios.
  2. Loss information for the most recent five years, showing paid and total incurred losses under the Longshore Act.
  3. The identity of the carrier and the limits of your proposed excess insurance coverage, and a sample of the policy form if requested.
  4. Statement of proposed claims administration.  If claims will be self administered, submit resumes of your claims people.  If you will use a third party administrator, submit sufficient information to demonstrate the organization’s experience with the Longshore Act.
  5. Statement of annual Longshore Act payroll by classification code.
  6. A corporate officer certification on a Longshore Division form committing the company to voluntary compliance with all statutory and regulatory requirements, and good faith participation in dispute resolution and self-policing.

That’s it.  There’s no filing or other fee associated with the application process.  You will have a decision in 30 – 60 days.

There are a number of other considerations, however, of which you should be aware.

Every self-insured employer must meet a security requirement.  The minimum security required is $400,000 for incidental Longshore exposure.  Otherwise, for a ballpark estimate take the last five years total incurred losses, increase the most recent two years by 35%, and obtain the five year average.  This will be your approximate starting point for the required collateral.

You have three ways to meet the security requirement:  1) deposit cash in a Federal Reserve Bank account in the name of the Office of Workers’ Compensation Programs, 2) obtain a letter of credit from an approved bank on the form supplied by the Longshore Division, or 3) obtain a surety bond on a form supplied by the Longshore Division issued by a surety company approved by the U.S. Treasury.

If a parent company and one or more separately incorporated subsidiaries are applying for self-insurance, a separate application will be required for each company.  A parent company guarantee will be required in the format provided by the Longshore Division.

The self-insurance authorization is non-transferable, so if ownership of the company changes, a new application will be required.  There is no expiration date or renewal date.  The authorization will continue until revoked by the Longshore Division for good cause.

There are annual reporting requirements.  Form LS-513, Report of Payments, will provide the basis of the self-insurer’s annual Special Fund Assessment.  Form LS-274, Report of Outstanding Liabilities, will measure the ongoing security requirement.  The self-insurer is also required to file an annual statement of its excess insurance coverage, and, if requested, an annual audited financial statement.  Also, any corporate name changes, significant changes in exposure, and new operations in previously unlisted locations should also be immediately reported.

Note:  There are currently about 209 authorized individual Longshore Act self-insurers.  If you go back about 25 five years, there were twice that many.

If you have any questions regarding Longshore Act self-insurance you can contact me at jack.martone@amequity.com.

Pop Quiz

If you are self-insured for your state workers’ compensation exposure and your excess insurance policy is endorsed for coverage under the Longshore and Harbor Workers’ Compensation Act, have you satisfied the statutory insurance requirement for Longshore coverage?

The answer is “No”, and if you answered “Yes”, then you should call your insurance broker and your attorney in that order to correct a potentially very costly mistake.

Under the above scenario you are an uninsured employer under the Longshore Act. Uninsured employers are subject to criminal penalties and an election of remedies for injured workers, including suits in tort, with corporate officers having personal liability jointly and severally with the company. This could turn even a relatively minor injury into a legal quagmire.

Section 932 of the Longshore Act (33 U.S.C. 932) provides that a maritime employer has only two ways to satisfy the insurance requirement: 1) purchase first dollar insurance coverage from an insurance carrier authorized by the U.S. Department of Labor, or 2) become authorized by the U.S. Department of Labor as a self-insured employer (this includes membership in a DOL authorized group self-insured trust such as the American Longshore Mutual Association (ALMA)).

Don’t take any chances. If you think that you might have any federal Longshore Act exposure, or if you have any questions about the coverage you now have, talk to an expert and make sure that you are properly covered.