Friday, March 28, 2014

Trite Financial Cliches Still True

I write sometimes about what would happen if there were no workers' compensation.

Of course I postulate in facetiousness - obviously such an occurrence would certainly teach employers who doubt the value of workers' compensation programs and insurance that it's better than the exposure to tort liability.

But then again, sometimes I'm not so facetious. Sometimes I think that employers do need a lesson every once in a while.

Some New York employers are getting some lessons.

There was a self insurance trust group called the Healthcare Industry Trust of New York. That trust shut down in 2008. That trust was marketed and managed by Compensation Risk Managers which had seven other trusts - all eight have now shut down.

CRM also had a part in five California trusts which have also shut down. WorkCompCentral covered the stories extensively.

Employers who join self-insurance trusts pay premiums, which are pooled, to cover the costs of claims against them. They receive dividends if claims remain under control, but if the group's liabilities exceed its assets, the members have to make up the difference, paying proportional assessments based on their initial premiums. All the members of a group are jointly and severally liable for the group's liabilities.

The Healthcare Industry Trust left its members with a $176.5 million shortfall.

Members are now trying to recoup that expense by suing the brokers that pitched the trust to its members, alleging that the brokers knew that the trusts were in trouble when they marketed it to the employers but that they sold the memberships anyhow.

According to the complaint filed last Monday, the defendants committed multiple related acts of mail fraud by using the U.S. Postal Service to transmit fraudulent and misleading materials to the plaintiffs and other New York employers. These alleged actions serve as the basis for plaintiff's Racketeer Influenced and Corrupt Organizations Act claim.

The trust plaintiffs assert that their brokers knew CRM "lacked the expertise and knowledge" to properly administer the Healthcare Industry Trust, but said nothing because of the generous commissions they earned.

According to the complaint, the brokers "acted in concert with CRM to increase the membership of the trust despite a mounting deficit by aggressively marketing trust membership as a relatively safe and conservative alternative to regulated insurance products, while negotiating, pursuing and accepting excessive and hidden commissions that were dramatically higher than those customary in the industry."

Defendants named are the Cool Insuring Agency, Hickey-Finn & Co., Hirsch Wolf & Co., Marshall & Sterling, Oxford Coverage, The Rampart Group, The Reis Group, Shel-Bern Associates, The Spain Agency, The Treiber Group and The Vanner Insurance Agency.

Self-insurance trusts were all the rage in New York during the mid-1990s after rule changes to make the state's workers' compensation market more competitive.

In September 2005, though, the New York State Workers' Compensation Board declared nearly half of the 62 self-insurance groups then in operation as "underfunded on a regulatory basis."

Seven trusts went dissolved between 2006 and 2007, and another 10 failed in the following year. New security requirements imposed in January 2012 took care of most of the rest.

Only three remain in operation today.

Consequently about 10,000 employers were left holding the bag for nearly $1 billion in claims.

The board reported the outstanding liability for the defaulted trusts had been reduced to $346,076,000 as of the end of 2013 by its settlements with employers and its bond program.

The bond program raised $370 million and the proceeds of the bond sales went to the board to arrange a loss-portfolio transfer that assumed the risks of the defaulted trusts.

The board sued CRM for $450 million in December 2009 but settled for $41 million in 2010 because of CRM's tenuous financial position.

The board currently has 11 pending lawsuits against various administrators, accountants and actuaries for mishandling trust assets as well. CRM is named as a defendant in two of them, although Majestic Capital, CRM's parent company, declared insolvency in April 2011.

A suit similar to the current New York broker complaint was dismissed in California.

The 3rd District Court of Appeal upheld summary judgment, explaining that the only obligation a broker owes a client is to procure legitimate coverage. Brokers have no independent duty to inquire into the financial health of the provider from which it secures coverage for a client, the court said.

But the lawyer for the California plaintiffs told WorkCompCentral that his investigation didn't discover a document that laid out the marketing agreement between CRM and the defendant brokers in his case until after discovery had closed. He thinks this document is material to the New York case.

But regardless the ultimate responsibility falls on the employers to make sure their workers are protected, and relying on another's expertise or knowledge does not delegate that responsibility.

The lesson - you can't get something for nothing. Or probably more accurately, you can pay now, or you an pay later, but eventually you will have to pay. Or, perhaps even more acute, penny-wise, pound foolish.

In other words, all of those trite cliches you learned as a child about proper financial management still apply.


  1. Excellent cautionary tale David, and not at all trite, for in a similar vein, those dismissive of Chicken Little’s “the sky is falling” alarm may too find cause for introspection one not-so-distant day. In some states pressures are mounting against perceived ‘excess’ reform, certainly not in states like Illinois, my defense friends there assure me, but it is a ball in play here in Florida. In such states, given attempt after attempt being reported anecdotally, I can foresee a combination of “bad cases make bad law” latched onto by a liberal bench as means to threaten the viability of an act as a whole, in consequence of one or more of its weakest links which should perhaps have been attended-to beforehand like the virus they may serve ultimately to be. Should that occur, there will be a large-scale abject lesson in “what would happen if there were no workers’ compensation!” Calmer heads will probably prevail in time, but not without consi and derable tumult and anxiety.

  2. hgk, H.George Kagan, MKRS Law, W. Palm Beach, Florida