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April 21, 2011

Solvent Group Self Insured Trusts Subject to Workers' Compensation Board Authority to Assess Expenses to Cover Insolvent Trusts

In Held v. State of New York Workers' Compensation Board the Appellate Division upheld the authority of the Workers' Compensation Board to assess the solvent group self insured trusts to cover the liabilities of insolvent trusts. In 2008 a major amendment to the Workers' Compensation Law was enacted to deal with the crisis of insolvent group self insured trusts in workers' compensation in New York State. It was enacted to clarify the rights and power of the Workers' Compensation Board to regulate the self insured industry in workers' compensation in New York State. This was in addition to the major amendments enacted in 2007 that cut off the benefits that injured workers could receive if they were found to have a permanent partial disability. That amendment clarified a situation that affects all types of self-insured employers in New York State. The clarification was that members of a group self insured trust could be mandated to pay assessments to cover shortfalls in other trusts.

Members of the group self insured trusts knew that when they became a member of the a trust that they could be held liable if other members of the trust they were in failed to pay their appropriate share of the funds needed to make sure that the trust was able to meet all of its obligations.

Although the Workers' Compensation Law allowed for the creation of group self insured trusts since 1966 they were not a very large segment of the self-insured employers in New York State. Most self-insured employers were large companies such as utilities. However, during the 1990s group self insured trusts became a much more common occurrence across New York State. A group of small employers in an industry would band together to form a group self insured trust under the assumption that being self insured would cheaper than purchasing workers' compensation insurance from a private workers' compensation carrier or the State Insurance Fund.

Many of the trusts were well run and properly financed. However, a segment of the trusts was poorly run and grossly underfunded. The most notorious of the poorly run trusts were those managed by Compensation Risk Managers. When the Spitzer administration came to power they saw the severity of the shortfalls involving the underfunded trusts and began to clamp down on bad actors in the area of group self insured trusts.

In order to make sure that all of the trusts would be able to have their obligations to injured workers met the Workers' Compensation Board began to impose assessments against all individual self-insured employers as well as members of all of the group self insured trusts. The assessments were made against the members of a health group self insured trust to cover the liabilities of the insolvents trusts.

When this occurred the members of the healthy trusts were upset because they believed their only liability was for shortages from members of their trust and not for other trusts. When these assessments were made the members of the properly funded trusts sued the Workers' Compensation Board to prevent it from imposing the assessments. This resulted in law suits being filed against the Workers' Compensation Board to prevent these assessments. In response to the lawsuits the legislature amended §50 of the Workers' Compensation Law to specifically confirm that the Workers' Compensation Board had the authority impose and collect the assessments. Laws of 2008 Chapter 139.

Since 1976 all self-insured employers have been required to allow the Workers' Compensation Board to pay assessments to cover unfunded liabilities of insolvent self-insured employers. This provision was enacted prior to the creation of any of the trusts involved in the lawsuit against the Workers' Compensation Board in this litigation. The court went on to say that the 2008 amendments to parts of §50 of the Workers' Compensation Law was to clarify that there is no difference between a single entity self-insured employer and a group self insurance trust and that the Workers' Compensation Board could have always imposed these assessments against the group self insured trusts.

The court also rejected a claim that requiring the members of a trust to pay for the Workers' Compensation Board's administrative expenses violates their contractual liability to only each other. Each trust has an obligation to pay their share of the Workers' Compensation Board operating expenses and therefore within each trust each member is liable for their pro rata share of the expenses.

The amendments to §50 of the Workers' Compensation Law led the plaintiffs to amend their complaint to allege violations of the taking clauses of the New York State and United States Constitutions. The New York State challenge was dismissed in a footnote based upon the state's "broad and unencumbered" authority to enact workers' compensation legislation. To find a taking under the Fifth and Fourteenth Amendments of the United States Constitution a plaintiff must show that the regulation is 'so onerous that it is tantamount to a direct appropriation or ouster.'"

The court concedes that level of the assessments may not have been anticipated the trust members, but that the impact of the level of the assessments is not so severe as to amount to an unconstitutional taking. Because the actions taken by the Workers' Compensation Board were clearly authorized by the Workers' Compensation Law the employers who joined the trusts knew or should have known of their potential liability for any self insured employers or trusts that became insolvent. The court also found that legislation like workers' compensation, which is "to promote the common good" is not the type of legislation that can rise to the level of a taking.

A violation of the Contract Clause of the United States Constitution (Article I §10) was also alleged. This challenge was dismissed because the authority to impose these assessments was created in 1976 prior to the creation of the trusts involved in the litigation. Since the law predated the creation of the trusts, the existing legislation could not impair the contractual rights of the parties.

A due process violation was also alleged because the trusts alleged that the law was unconstitutionally vague. However, based on the court's interpretation of §50 of the Workers' Compensation Law of a sufficiently clear meaning the trust members did not have to guess at what it meant and therefore the statute was not unconstitutionally vague.

The trusts were also assessed other expenses of the Workers' Compensation Board under §15(8)(h)(4) and §151(2)(b) of the Workers' Compensation Law. The assessments were also challenged by the trusts. Changes were made in 2007 and 2008 as to how these assessments were to be calculated. The changes in these calculations also failed to violate any provisions of the United States Constitutions.

All of the challenges raised by the trusts were denied by the Appellate Division which reversed the decision of the Supreme Court Justice in Albany that had granted some of the relief requested by the trusts was reversed and summary judgment dismissing all of the claims against the Workers' Compensation Board was granted.

As a result of this decision all self-insured employers and group self insured trusts must share the cost of insolvent entities within the New York State self insurance system for workers' compensation. Each trust will be given an assessment that will be passed on to its members on a pro rata basis. Within each trust if there are shortfalls, the shortfalls will be spread around the members as they have agreed to be jointly and severely liable for the expenses of their trust.

The silver lining for the group self insured trusts and regular self-insured employers is contained in the 2008 amendment to the Workers' Compensation Law as well as an amendment that became effective on March 31, 2011. Laws of 2011 Chapter 57. If a self insured is inactive for a year they will completely avoid any additional liability for these expenses. The 2011 amendment specifically defines the term self insurer as to include a group that has been inactive for over one year.

What the long term effect of this case for self insurance in workers' compensation in New York State is unknown. However, it is likely that leave a motion for leave to appeal to the Court of Appeals will be filed. Even though the decision of the Appellate Division was unanimous the fact that Court of Appeals granted a motion for leave to appeal in the Aggregate Trust Fund cases, it would seem likely that they would grant such a motion in this case as well. IF the motion is granted a final determination on the authority of the Workers' Compensation Board to impose these assessments will not come until sometime in 2012 or 2013.

Regardless of whether or not an appeal is taken, it may not be fiscally possible for some of the members of the group self insured trusts to pay their share of the assessments, which will continue to grow over time. It may very well lead the trusts to dissolve themselves and avoid future liability by becoming inactive an "unself" insured. Since the liability for the insolvent trusts also applies to the individual self-insured employers there may be a drop in the number of self-insured employers in New York State as well. This is a trend that will bear watching over the next few years.

About April 2011

This page contains all entries posted to Torts, Insurance and Compensation Law Weblog in April 2011. They are listed from oldest to newest.

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