The Potential Liability of Becoming a Member of a Worker's Compensation Group Self Insurance Fund

Overview

Numerous Worker's Compensation Group Self Insurance Funds ("Group Funds") have been established since Louisiana authorized their formation in 1980s. Many employers have been drawn to Group Funds that promote themselves to a specific industry and purport to provide convenience and save money.  However, recently, the fine details of the Group Funds have shown that they can also carry devastating hidden liabilities for employers if not operated properly.  This article addresses the unanticipated liabilities that employers who are members of a Group Fund can face when the Group Fund or its excess insurer encounters financial difficulties.

Group Fund Establishment

Louisiana law provides three methods of obtaining workers' compensation insurance: (1) purchase a traditional workers' compensation insurance policy through a traditional insurance company, (2) become a self-insured employer, or (3) become a member of an approved Group Fund.

Louisiana law provides for the establishment of "Group Self Insurance Funds for Workers' Compensation."  La. R.S. 23:1191 et seq.  Any five or more Louisiana employers who are not public entities, each of whom has a positive net worth, is financially solvent, and is capable of assuming the obligations set forth under this Chapter, and who are all members of the same bona fide trade or professional association may agree to pool their liabilities to their employees on account of personal injury and occupational disease arising out of or incurred during the course and scope of the employment relationship.  La. R.S. 23:1195(A)(1).  This arrangement shall not be an insurer, shall not be deemed to be insurance and shall not be subject to the Louisiana Insurance Code.  Id.  The member employers of the arrangement likewise shall not be insurers or be subject to the Louisiana Insurance Code.  Id.

The Group Fund is required to keep books and records and show that two or more members of the arrangement shall maintain a minimum combined net worth of one million dollars and a ratio of current assets to current liabilities of at least one-to-one.  La. R.S. 23:1195(A)(5) and (A)(6).  Even though the Group Fund is not an insurer, the Group Fund must submit an application to the Department of Insurance for authority to act with specific supporting information pertaining to the financial solvency of the Group Fund and its members.  La. R.S. 23:1195(C).  The Group Fund must maintain records so that its financial statements filed with the commissioner of insurance can be readily verified and its compliance with the law determined.  La. R.S. 23:1195(A)(5)(a).  In addition to other minimum financial requirements, the Group Fund is required to maintain at all times, on a fund-year basis, a contract or contracts of specific excess insurance or reinsurance of not less than two million dollars per occurrence and aggregate excess insurance or reinsurance of not less than two million dollars.  La. R.S. 23:1196(A(5).

As of July 10, 2009, the Louisiana Workforce Commission listed twenty approved Group Funds for the State of Louisiana.[1]

Member Liability Exposure

La. R.S. 23:1196(F) provides that "[A] fund member shall be liable in solido for liabilities of the fund incurred by the fund after the inception of the fund year in which the employer becomes a member of the fund."  La. R.S. 23:1195(A)(2) similarly provides that "[A]n agreement to pool liabilities under this Chapter shall be set forth in an indemnity agreement signed by the employer and fund representative acknowledging and agreeing to the assumption of the liabilities as set forth in this Subpart."

A typical indemnity agreement may, for example, provide that the member:

will remain jointly and in solido liable for obligations of the group and each and every member of the group which were incurred under the provisions of the Louisiana Worker's Compensation Act during the terminated employer's period of membership in the self-insurance group.

An employer that joins a Group Fund should note that by entering into a Group Fund the employer is liable for workers' compensation benefits owed to employees of all members of the Group Fund.  Liability is not limited to solely the claims asserted by the employer's employees; the employer's exposure is to all employees of all employers in the Group Fund for the years that the employer is a member of the Group Fund.  Considering that employees who become permanently disabled are entitled to weekly benefits and medical benefits for life, the exposure is significant.

We are aware of three instances where Group Funds filed for bankruptcy protection.[2]  The financial consequences to the remaining employers in the Group Funds were shocking.

Conclusion

An employer who desires to join a Group Fund for the convenience and potential savings must realize that the employer may be faced with significant exposure should the Group Fund or its excess insurer face financial difficulties.

               Author: Connell L. Archey                Practice Area: Insurance Law                Date: December 21, 2015

[1] LAAC Self-insured Fund; Louisiana Association of Clerks of Court; Louisiana Automobile Dealers Association; Louisiana Commerce & Trade Association Self Insured Fund; Louisiana Construction & Industry – Self-Insured Fund; Louisiana Health Care Self-Insurance Fund; Louisiana Home Builders Association Self Insured Fund; Louisiana Hospital Association Workers' Comp Group Self-Insured Fund; Louisiana Housing Council Group Self-Insured Fund; Louisiana Loggers Self-Insurance Fund; Louisiana Municipal Risk Management Agency Group Self-Insurance Fund; Louisiana Oilfield Contractors Association Insurance Fund; Louisiana Public Schools Risk Management Agency; Louisiana Restaurant Association Self-Insurers Fund; Louisiana Rural Parish Insurance Cooperative (Self-Insured Fund); Louisiana Safety Association of Timbermen; Louisiana Schools Self-Insured Group; Police Jury Association of Louisiana; Casualty Alliance of Louisiana; Sugar Cane Safety Group Self-Insurance Fund.

[2] The three bankruptcies are: (1) Employers Self Insurance Fund filed for bankruptcy protection, Case No. 12-11512, United States Bankruptcy Court, Middle District of Louisiana; (2) Louisiana Oilfield Contractors Association Insurance Fund filed for bankruptcy protection, Case No. 14-51518, United States Bankruptcy Court, Western District of Louisiana; and (3) the Louisiana Safety Association of Timberman, Case No. 15-81004, United States Bankruptcy Court, Western District of Louisiana.


Disclaimer: The information provided herein (1) is for general information only; (2) does not create an attorney-client relationship between the author or the author’s firm and the reader; (3) does not constitute the provision of legal advice, tax advice, or professional consulting of any kind; and (4) does not substitute for consultation with professional legal, tax or other competent advisors.  Before making any decision or taking any action in connection with the matters discussed herein, you should consult with a professional legal, tax and/or other advisor who should be provided with all pertinent facts relevant to your particular situation. The information provided herein is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information.

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