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Insuracne Companies Sue in Federal Court to Undercut the 2007 New York Workers Compensation Reforms

A major trade-off in the 2007 Workers Compensation Reform Legislation was for injured workers to accept caps on permanent injury benefits but requiring Insurance companies to put away possible future payments into a special fund (Aggregate Trust Fund). The Insurance Carriers are now suing in Federal Court in an attempt to rid New York of this provision, while not changing anything else! So if the lawsuit succeeds, the Insurance industry gets all the benefits of capping payments to severely injured workers, while not having to secure any future resposibility. Insurance companies and self-insureds go broke all the time (see CRM), so why give up this benefit? The following article which appeared on www.workcompcentral.com provides some very interesting insight.

New York — Liberty Mutual Sues over N.Y. Settlement Deposits: Top [08/18/08]

Liberty Mutual Insurance Co. and 13 sister insurers filed a federal lawsuit seeking to repeal a section of former New York Gov. Eliot Spitzer's reforms requiring carriers to make deposits to the state Aggregate Trust Fund (ATF) to cover awards in most permanent partial disability cases.

The insurer said in an action filed in the U.S. Southern District of New York in Manhattan last week that the ATF provisions of A 6163 – the reform bill Spitzer signed into law on March 13, 2007 – put private carriers at a major disadvantage because the fund is controlled by the New York State Insurance Fund (NYSIF), New York's state-run carrier.

The suit names both the governing board of NYSIF, which includes Labor Commissioner Patricia Smith and AFL-CIO New York President Denis M. Hughes, and the members of the New York State Workers' Compensation Board (SWCB).

It cites violations of four separate sections of the U.S. Constitution and alleges that changes to the Depression-era law governing the ATF serve only to shift the competitive advantage in New York's workers' compensation market to NYSIF and the state's self-insured employers.

Neither NYSIF nor the state's self-insureds are required to make deposits into the fund. The level of lump-sum settlements for workers who won their claims disputes are decided by the state insurance fund as administrator of the ATF and approved by the state board, under the new law.

Insurers are banned from negotiations of those settlements and cannot appeal decisions by the board.

Spokesmen for both the State Workers' Compensation Board and NYSIF declined comment Friday because the lawsuit is pending. Richard Angevine, a spokesman for Liberty Mutual, also declined comment for the same reason.

Art Wilcox, who oversees workers' compensation matters for the AFL-CIO, said the union is planning to seek amicus curiae status in the case on behalf of the state entities.

"Our grounds are simple," he said. "These are cases in which the workers have won their case. This legislation has been in place since the 1930s. Back in the '30s, there were a number of carriers that had financial problems.

"Economically, the times haven't been as bad since the Depression as they are today," Wilcox said. "You're going back to the laws used in the Depression times to ensure that workers with permanent disability claims will be able to collect their benefits."

Liberty Mutual says in the 23-page complaint that the Spitzer reforms "radically altered the regime" in terms of the ATF.

The carrier said the ATF dates back to the creation of the workers' compensation system in 1914. ATF funding requirements were amended in the 1930s to expand deposits for benefits covering death and permanent total disability claims – but only for permanent partial disability (PPD) awards covering the loss of limbs or eyes.

Liberty Mutual said the changes were meant to protect workers at time when there was a substantial risk of insolvency among stock and mutual insurance carriers.

The requirement for lump-sum deposits was expanded in the 2007 reforms to include deposits for all non-scheduled or "classified" PPD claims. Liberty Mutual calls the expansions "significant."

Prior to the 2007 changes, the ATF and its administrator, the state insurance fund, had no role in determining lump-sum settlements, which insurers argued before the SWCB.

But Liberty Mutual said in the lawsuit:

  • The new law gives carriers no voice in the settlements, which are handled between workers and the ATF. If the carriers' deposit is less than the amount agreed to in a lump-sum settlement, carriers must pay the difference. But if the settlement is less than the deposit, the carrier doesn't get a refund.
  • The new law requires the deposits from only stock or mutual carriers. Both the NYSIF and self-insureds are exempt. New York State Insurance Department records put NYSIF's market share at 41%, based on 2006 figures.
  • The new requirements apply retroactively to claims arising under workers' compensation policies issued prior to July 1, 2007, the effective date of that portion of the reforms. Liberty Mutual said that exposes it to losses that weren't anticipated in the older policy contracts.
  • Carriers no longer have any role in lump-sum settlements and have no right to appeal SWCB approval of settlements made by the ATF.
  • During the Depression, New York lawmakers also created a backstop in the form of the Stock Workers' Compensation Security Fund and the Mutual Workers' Compensation Security Fund. The funds were combined in 1990 and are supported by premium-based assessments on carriers to pay claims for failed carriers.

"The principal effect of the (ATF) amendments is to confer a significant cost advantage on the NYSIF, the state-owned insurer that is the largest in the state and the principal competitor of plaintiffs and other carriers," the Boston-based carrier argued in the complaint.

Liberty Mutual alleged the ATF changes violate the contract clause, the equal protection clause, the due-process clause and the government "takings" clause of the U.S. Constitution.

The carrier said lawmakers filed legislation on June 24 to rewrite that section of the Spitzer reforms as Senate Bill 8718 with the backing of Gov. David Paterson. The bill died without action.

Efforts by the American Insurance Association (AIA) and the Independent Insurance Agents and Brokers of New York (IIABNY) to remove the provision date back to July 2007. While actions to change the law were pending, Liberty Mutual said, SWCB refrained from deciding appeals by insurers on classified PPD claims. So the carriers have not yet paid any deposits to the ATF based on the new law.

Wilcox said Liberty Mutual took part in the work of the task forces created by the Spitzer reforms, and the carrier played a key role in crafting medical treatment guides and other parts of the reforms.

"We're disappointed," Wilcox said of the lawsuit. "Liberty Mutual has been willing to work these things out in the past."

Richard Flaherty, president and CEO of First Cardinal, the state's largest administrator of group self-insured trusts, said First Cardinal never favored the new ATF requirements even though self-insureds are exempt.

"It makes no sense," he said. "There is a guaranty fund to ensure that injured workers are going to have their claims paid."

All of the plaintiffs are subsidiaries of Liberty Mutual Holding Co. and include Liberty Mutual Insurance Co., Liberty Mutual Fire Insurance Co., Liberty Insurance Corp., LM Insurance Co., Employers Insurance Co. of Wausau, Wausau Business Insurance Co., Wausau General insurance Co., Wausau Underwriters Insurance Co., Peerless Insurance Co., Peerless Indemnity Insurance Co., The Netherlands Insurance Co., Excelsior Insurance Co., The American Fire and Casualty Co., and The Ohio Casualty Insurance Co.

A copy of the complaint is at http://www.workcompcentral.com/pdf/2008/misc/LibertyMutual081508.pdf.
By Michael Whiteley, Eastern Bureau Chief
mike@workcompcentral.com

 

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