New York: A Matter of Trust(s)

Friday, May 13, 2011 | 0

By Jon Coppelman
Lynch Ryan & Associates

New York continues to deal with the failure of the self-insurance groups (SIGs) managed by CRM. As is so often the case, the question is who pays? Who assumes the debts incurred by the failed management company? When a conventional insurance company fails, the state usually covers the benefits for the injured workers and then passes some of the costs on to insurance companies and their clients, in the form of assessments. Given the large number of insurers and their clients, these assessments are relatively small for any individual company. In the CRM failure, unfortunately, the financial implications for all SIG participants are enormous.

The New York approach to SIG failures has been to expand the concept of "joint and several liability" to include not just the companies in a given (failed) SIG, but any and all companies who participate in SIGs. In other words, when NY companies join a SIG, they are responsible for their own losses, the losses of other companies in their group, and the losses of all companies involved in SIGs. Such open-ended parameters for exposure should raise red flags for any risk manager thinking about joining an Empire State SIG.

In April 2010, Justice Kimberly O'Connor ruled that the assessments on healthy SIGs were unconstitutional. She appeared to strike a blow for fairness. Alas, she has been over-ruled by the state supreme court, which has determined that the comp statute allows the state to seek reimbursement from all SIGs. The sins of the few are to be borne by those who played by the rules.

Misplaced Trust

CRM, which has filed for bankruptcy, apparently managed SIGs like a Ponzi scheme: they under-priced the insurance to attract new customers; they under-reserved claims to give the appearance of profitability; and they charged exorbitant management fees every step of the way. Like all Ponzi schemes, tt worked beautifully until it collapsed. By the time the state uncovered the problem (therein lies a tale), CRM was on the ropes. The state settled CRM's liabilities for about 10 cents on the dollar. Where does the rest of the money come from? The state is reaching into the pockets of all SIG participants, those who participated in CRM SIGs and everyone else, thus including companies that paid fair rates for insurance, focused on managing their losses and, in general, played by the rules.

Well, as they say, let no good deed go unpunished. The comp statute protects the interests of the state. The law is quite clear. Members of the solvent SIGs share the liabilities incurred by SIGs that failed to live up to their responsibilities. Is it legal? Apparently, yes. Is it fair? Well, no.

The state legislature is tinkering with the assessment plan, trying to come up with ways to ease the pain of the current assessments and insure the solvency of SIGs going forward. Don't hold your breath.

The Nature of Trust

Trust is defined as having belief or confidence in the honesty, goodness, skill or safety of a person, organization or thing. The saga of CRM has shown that trust can be misplaced, and that when it comes to participating in SIGs in NY, any and all trust is misplaced.

My advice to NY companies is simple: forget about SIGs. Find yourself a nice, guaranteed cost plan from a conventional insurance carrier, then go to sleep knowing that your premiums will reflect two things, one good, one bad: the good? The premium you pay will be based upon your own losses; you are not responsible for anyone else. The bad? You operate in a state where, despite inadequate benefits paid to injured workers, the cost of comp insurance is way too high. But that's a tale for another day.

Jon Coppelman is a principal with Lynch Ryan & Associates, a Massachusetts-based employer consulting firm. This column was reprinted with his permission from the firm's blog, http://www.workerscompinsider.com