The attorney for the petitioners in Held, et. al. v. Workers' Compensation Board, et.al. (Albany County Supreme Court, Index No.2957–08) submitted a comment letter objecting to the proposed regulation. This proceeding is discussed in the Regulatory Impact Statement filed with the Notice of Proposed Rule Making. These were the only comments received.
In his comment letter, the attorney makes three arguments to support the objection:
With respect to the first argument, the attorney claims that the proposed definition of insolvent "rejects all definitions previously adopted by New York State's Legislature" and that the proposed definition does not "comply with GAAP". In crafting the proposed definition, the chair reviewed the definitions of insolvency or insolvent according to GAAP, Department of Taxation and Finance regulations and Debtor and Creditor Law §271(1). Pursuant to these sources insolvency is when an entity's liabilities exceed its assets. Because a large majority of GSITs would be insolvent under these definitions, the chair determined they were overbroad.
While the Workers' Compensation Law (WCL) does not define insolvent, section 106 defines an "insolvent carrier" as a carrier which is under an order of rehabilitation or liquidation of the Superintendent of Insurance. The definition of insolvency in Insurance Law §1309 requires the superintendent to deem an insurer insolvent when it is "unable to pay its outstanding lawful obligations as they mature in the regular course of business, as shown by an excess of required reserves and other liabilities over admitted assets, or by its not having sufficient assets to reinsure all outstanding risks with other solvent authorized assuming insurers after paying all accrued claims owed, …"
Case law regarding this section holds that a "company is insolvent in the sense that it is wholly unable to meet the demands which may be made on it in the ordinary and regular course of business". In re New York Title & Mortg. Co., 156 Misc. 186, 281 NYS 715 (S.Ct. 1935). This court found that that the company in question "concededly found itself 'unable to meet the present and early future demands upon it for fulfillment of its obligations' …". Id. Thus, courts have viewed the phrase "in the regular course of business" in Insurance Law §1309 as including both present obligations and those that will come due in the immediate future. Case law further holds that the mere inability to pay one's debts is to be distinguished from insolvency. Accordingly, any definition of insolvency that includes an inability to meet current or near future obligations must also include a second component that demonstrates "serious financial instability," such as the standard of assets less than liabilities.
Treatises on insurance and insolvency generally opine that an insurer does not have to be insolvent before state regulators may act. Rather, they may step in whenever an insurer is in a "hazardous financial condition." This occurs when an insurer continuing its business operations presents risk of loss to its policy holders. 26 Appleman on Insurance §159.4. This concept mirrors the provisions in Insurance Law §7402(e) which allow the superintendent to conduct liquidation and or rehabilitation proceedings against an insurer whenever it is "in such condition that its further transaction of business will be hazardous to its policyholders, creditors, or the public." Ins. Law §7402(e) & §7404.
The board also reviewed definitions of insolvency used by other states with GSIT programs. In Massachusetts insolvent is defined in Part 211 of the Code of Massachusetts Regulations §67.00 as "the inability of a workers' compensation self–insurance group to pay its outstanding lawful obligations as they mature in the regular course of business, as may be shown either by an excess of its required reserves and other liabilities over its assets or by its not having sufficient assets to reinsure all of its outstanding liabilities after paying all accrued claims owed by it."
The definition of insolvent in the proposed regulation is based upon this extensive research. It is a two prong definition using the language contained in Insurance Law §1309 with modifications to the qualifier, "as they mature in the regular course of business", to capture both the serious financial instability concept espoused in GAAP (the GSITs assets being less than liabilities) and the inability to meet early future demands from the Insurance Law, case law and treatise (the GSITs assets coupled with available security deposit being insufficient to meet all anticipated workers' compensation obligations that will accrue within the succeeding six months). Thus, the definition of insolvent is fully consistent with the various definitions of insolvent/insolvency in the law.
With respect to the second argument, the attorney claims that the proposed definition of insolvent fails to take into account "substantial asset classes of" GSITs. Specifically, he cites three types of assets:
He argues that not including these assets will render the majority of GSITs insolvent, exposing the employer–members of such GSITs to "penalties, fines, assessments and other liabilities" and transfers the costs from insolvent GSITs to healthy ones.
These claims are inaccurate. First, several of the definitions of insolvency proposed as alternatives by the attorney, were not accepted because they would artificially render a majority of GSITs insolvent. Moreover, the chair's adoption of the proposed definition on an emergency basis has decreased, not increased, the number of previously declared insolvent GSITs, from nine to seven. Second, the attorney fails to explain how the proposed definition will subject GSITs to "penalties, fines … and other liabilities." Third, with regard to the proposed definition subjecting GSITs to assessments, any definition of insolvent would expose GSITs to potential assessments because WCL §50(5)(g) requires assessments on all private self–insured employers, including GSITs, as a temporary cash flow mechanism to allow the chair/board to ensure that the workers' compensation benefits of injured workers are not interrupted due to the insolvency of a self–insurer.
The vast majority of the attorney's arguments are premised on the claim that the failure of the proposed definition to include the assets of GSIT members in determining insolvencies is "unfair and contrary to applicable law." He suggests that the definition include a requirement that the joint and several obligations of the insolvent GSIT members be exhausted or that the board first attempt to access the assets of the employer–members before assessing the other GSITs. This suggestion suffers from several flaws. First, if the assets of all employer–members of a GSIT had to be exhausted before a declaration of insolvency/insolvent, there would be a gap when there would be no funds to pay the claims of the injured workers of the members of the GSIT. Second, "assets" as defined in the Board's regulations do not include the assets of the individual members. Third, if assets of the employer–members were to be included as assets of the GSIT then so too must their liabilities, as assets do not exist in a vacuum, which could cause more GSITs to be considered insolvent. Accordingly, the recommendation that the board consider assets (and only the assets) of the employer members of the GSITs in making an insolvency determination is not adopted.
The argument that the proposed definition of insolvency does not take into account the "substantial assets" of reinsurance recoverables and reimbursements issued pursuant to WCL §15(8) and §25–a is incorrect. Specifically, the proposed definition of insolvent requires the liabilities of the GSIT be in excess of the GSITs assets in order for a group to be deemed insolvent. These recoverables are reflected either as a receivable or a contra–liability on GSITs financial statements. Regardless of the presentation, the board has recognized and will continue to recognize the recoverable or amounts expected from excess insurance and other sources by netting the liabilities when determining funding status. For reinsurance, once a particular claim, or in the case of aggregate reinsurance a particular year of claims, meets the statutory threshold, the liabilities above that threshold are reflected as gross liabilities with offsetting recoverables on the GSIT's financial statement. Likewise, with respect to reimbursements from WCL §§15(8) and 25–a, once a particular claim has been accepted as the liability of the respective Special Fund, the liabilities for those claims are either drastically reduced or eliminated altogether as liabilities of the GSIT. Accordingly, the proposed definition already considers these when determining liabilities of GSITs, so to consider them again would be inappropriate.
With respect to the third argument, the attorney argues that the chair overstepped his powers and disregarded the Legislature's actions. The chair did not overstep his power as WCL §117 authorizes him to adopt reasonable rules consistent with the provisions of the WCL, and WCL §50(3–a) (6) directs him to adopt reasonable rules relating to group self insurance. The chair's amendment of his regulations to define insolvent in a GSIT context is within his powers. The claim that the chair "disregards the Legislature's actions" by amending his regulations is premised upon the recent amendments to the WCL not including a definition of insolvent. It is difficult to understand how the chair's clarification of his procedures, pursuant to the decision in Held, amounts to a disregard of legislative intent when the Legislature was silent on the issue. The chair/board disagree with the position that legislative silence on a particular issue means a legislative intent that no action be taken.
The attorney argues that the proposed definition lacks a statutory basis and is contrary to the WCL because it transfers burdens of insolvent GSITs to healthy ones. In fact, the proposed definition is part of the overall framework of the WCL, which provides for an uninterrupted flow of benefits to injured workers when a self insurer is insolvent, through temporary and transient assessments on solvent self insurers. When the board collects funds from the employer–members of an insolvent GSIT to cover the liabilities of the GSIT, the solvent self insurers receive a refund or a credit against future assessments. The characterization of this process as "joint and several liability among employer members of all trusts" and that "group–to–group liability was never contemplated or authorized by the Legislature" is incorrect.
The attorney argues that the process is "contrary to applicable law" despite his knowledge to the contrary. WCL 50(5)(f) [now renumbered as WCL §50(5)(g) and amended by Chapter 139 of the Laws of 2008] specifically provides that when an insolvent private self–insured employer defaults on the payment of claims, the chair shall levy an assessment on all private self–insured employers. The court in Held found that the Legislature intended the term "private self–insured employer" in WCL §50(5)(f) to apply to all non–public self–insurers, including GSITs. Thus, the courts have found that this statutory assessment process contemplates insolvencies. Second, Chapter 139 of the Laws of 2008, effective June 30, 2008, amended the WCL to clarify WCL §50(5)(g) [formerly 50(5)(f)] to add "including a private group self–insurer." Third, the Governor's memorandum in support of Chapter 139 stated that language was added "to renumbered WCL §50(5)(g) to confirm that the provisions of both paragraph (f)'s (before renumbering) of the Workers' Compensation Law §50(5) apply to both individual and group self–insurers and operate to allow assessment for the payment of expenses arising out of the default of both individual self–insured employers and group self–insurers, including expenses required to make payments to injured workers." The statutory framework of WCL §50(5)(f) contemplates the issuance of assessments on healthy GSITs as a temporary cash flow mechanism while the chair/board collects the liability of the insolvent GSIT from its members.
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