CIGA and Specific Excess Policies

Saturday, February 11, 2006 | 0

By Daniel R. Sovocool

The following information is of interest to self-insured employers who need guidance regarding a new law that redefines the responsibilities of the California Insurance Guarantee Association ("CIGA") under specific excess workers compensation policies issued by insurers that are now insolvent. The new law took effect January 1, 2006.

Background

Many self-insured employers have purchased specific excess workers' compensation policies, intended to provide a layer of protection above a self-insured retention ("SIR") level, typically ranging from $250,000 to $500,000. In many cases, these policies were issued by Reliance(or its subsidiary Planet Insurance Company),Home Insurance Company and Mission Insurance Company, all of which are now insolvent. Similar policies were also issued by financially troubled Kemper Insurance Companies (or subsidiaries Lumbermen's Mutual Casualty Company or American Motorists Ins. Co.)

The California Insurance Guarantee Association (CIGA) is California's guarantee fund for insurance carriers. CIGA generally provides coverage under policies issued by insolvent insurance companies, including specific excess workers' compensation polices. As with many insurance guaranty funds, CIGA's responsibilities are statutory and exclude responsibility where "other insurance" is available, such as in the case of a cumulative trauma spanning two policy periods, with a solvent carrier "jointly and severally" liable for the loss.

The Problem

In May 2004, CIGA declared that it would no longer provide coverage to qualified self-insured employers with specific excess workers' compensation policies. Relying primarily on various statutory exclusions and its interpretation of the opinion of the California Court of Appeal in Denny's, Inc. v. Workers' Compensation Appeals Board (2003) 104 Cal.App.4th 1433, CIGA asserted that claims made under these excess policies are not "covered claims" because, among other things, there is "other insurance" available; namely, the self-insurance of the insured. The California Self-Insurers' Security Fund, and many self-insured employers, vigorously disagreed with this position. We believe that many CSIA members and their third party administrators received Notice of Rejection letters from CIGA after this change in position, and remain still unpaid.

Legislative Response

Addressing this problem, the California Legislature amended the Guarantee Act (which described CIGA's responsibilities) to provide that these claims were covered, up to $500,000 over the SIR. Amounts over the $500,000 over SIR will be the responsibility of the employer. In enacting this legislation, the Legislature provided a layer of protection for self-insured employers, and for the California Self-Insurers' Security Fund. The new legislation, which took effect January 1, 2006, sets forth detailed rules regarding payment and adjustment responsibilities for these claims.

To What Claims Does This Apply?

We believe CIGA will assert that the amendment will not apply to claims that have received final awards prior to January 1, 2006. (Whether those claims will, or will not be paid by CIGA, may depend on the nature of the claims, and insureds and third party administrators are urged to contact the undersigned for further information.) Claims that do not have final awards entered by January 1, 2006 will likely be treated by CIGA as subject to the new statute, meaning that they will be paid subject to the $500,000 over SIR limit.

How It Works

Under the new statute, the employer adjusts and pays the claims within the first layer (up to the SIR.) When the payments go over the SIR, the employer has no responsibility to make payments and CIGA does, provided that the claims are otherwise "covered claims" under the Guarantee Act. CIGA has the right to intervene in these cases as well, and self-insured employers may want to join CIGA in cases where it appears that benefit payments may exceed the SIR. While benefit payments are within the CIGA layer, CIGA has a right to adjust the claims if the underlying policies require the excess carrier to adjust the claims; many do not, and self-insured employers are advised to check their policies to make sure. In the event that benefits exceed the CIGA layer, the payment responsibilities shift back to the employer. This is just a general description of the new law; readers are advised to review it carefully.

We anticipate that there will be many questions from the self-insured community and third-party administrators about how the new law operates, and its impact on reserving, claims handling and financial statements, among other things. We urge them to contact us at Thelen Reid & Priest LLP should they need copies of the statute or other guidance and direction.

Daniel R. Sovocool is a partner in the San Francisco office of Thelen Reid & Priest, LLP. He can be reached by e-mail at dsovocool@thelenreid.com or by phone at 415.369.7340.

Mr. Sovocool thanks Theresa Muir of Southern California Edison, Jill Dulich of Marriott International, William Zachry of Safeway, Inc., Tamara Watt of Value Story, Inc. and Susan M. Wright of Susan M. Wright and Associates for their invaluable guidance regarding MPNs. Mr. Sovocool also thanks Thelen Reid associate Lorinda Harris for her assistance in preparing this article.

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