New York: Joint and Infinite Liability

Friday, June 25, 2010 | 0

By Jon Coppelman

The saga of the New York self insurance trusts continues. We reported in April that justice had been served by Judge Kimberly O'Connell, who ruled that requiring solvent trusts to pay for the sins of insolvent trusts was unconstitutional.

Now, according to Work Comp Central (subscription required), O'Connell herself has been overruled by a four-judge panel, which has reinstated the assessments on the solvent trusts. While the justices are undoubtedly correct in their literal interpretation of the law, the ruling comes under the heading of "let no good deed go unpunished." It may be legal, but it is in no way just.

Here's the (rotten) deal: 15 self-insurance trusts are shut down by the state. They ran out of money because they under-priced their premiums, under-reserved claims and sold insurance like a Ponzi scheme. Oh, they also paid themselves handsomely for their fine work as administrators. These defunct trusts are in the hole to the tune of $500-$600 million. State oversight? There wasn't any.

Who Pays?

The State Workers' Compensation Board decides to assess the remaining, solvent trusts to make up the deficit. In other words, the "joint and several liability" within a trust group now expands to include liability for all trust groups. To be sure, the enabling legislation allows the SWCB to do this. After all, someone has to pay and this is New York, so deal with it. In this case, the trusts that operated by the rules, fairly pricing and fairly reserving claims, are penalized for the sins of the clowns who are no longer in business.

As we pointed out in an June 17 post, a task force has recommended that New York get out of the self-insured trust business. We concur. Any state that loads the dice of "joint and several liability" to this absurd point makes a mockery of the concept. Self-insurance is based upon the ability to limit risk and contain exposures. Given New York's operating rules for self-insured trusts, conventional management tools are rendered useless. The liabilities of operating a group trust are uncontrollable and virtually infinite. Why would any company choose this path for managing risk?

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