N.Y. Workers’ Comp Safety Fund Facing Serious Financial Shortfall

How to rescue the state’s workers’ compensation safety fund became the topic of debate in Albany as officials reported that without government intervention, the fund would not be able to pay injured workers their benefits for very long after the end of March.

The New York State Workers Compensation Security Fund, which officials in January predicted would run out of money by the end of last month, could go on paying claims until the end of March, thanks to early access to funds from an out-of-state liquidation and monies from the second injury fund. The fund received an unexpected early distribution of $6.8 million from the liquidators in New Hampshire of The Home Insurance Co. and an additional $2.3 million from the state’s second injury fund.

While the fund may now survive for a few more weeks, regulatory officials warned that quick legislative action would still be needed to keep it paying claims of injured workers after that.

News of the brief reprieve for the troubled insolvency fund came out of a legislative hearing into its financial problems and short and long term remedies.

Lawmakers were told that even the March prediction is iffy. “Like the estimates provided in January, though, this projection of course assumes that the fund’s distribution patterns remain consistent. Should the fund’s payouts increase over the next month, the fund may become insolvent sooner,” Peter Molinaro, senior deputy superintendent of insurance, who oversees the fund, told the legislative committees.

Based on the current 1 percent assessment rate (which by statute the fund must stop levying when it has $74 million), the fund collects about $20 million a year. Payouts from the fund totaled $46.6 million in 2002, $59.6 million in 2003, and $82.9 million in 2004. According to the latest projections, $88.2 million will be paid out in 2005.

The assessments are supplemented by recoveries from the estates of insurers including those from other states that have been placed in liquidation. Those funds from liquidated estates amounted to $46 million in 2004. Even with the estate funds, however, the New York pool is facing monthly payouts that far exceed its assessments and recoveries.

The fund is responsible for paying claims to about 7,500 claimants, mostly injured workers in need of medical treatment or permanently disabled and dependent on their checks from the fund to support themselves day-to-day.

Assemblyman Pete Grannis, chair of the insurance committee, and Assemblywoman Susan John, chair of the labor committee, who called the hearing, asked Molinaro why the legislature was not notified sooner about the financial crunch than late January of this year.

“This did not fall out of the sky,” Molinaro commented, suggesting that signs of trouble came as far back as 2001.

Molinaro outlined a history of warnings and proposals dating back to at least 2001, when Reliance Insurance Co. was declared insolvent. “There is no question that the insolvency of Reliance in 2001 served as the first warning that the current assessment rate was insufficient to meet the fund’s current and projected liabilities,” Molinaro stated.

Also, the potential shortfall was discussed with legislative staffers last April and possible fixes were included in stalled legislative proposals in 2003 and 2004, according to Molinaro.

The effect of the Reliance failure has been significant. In 2002, some $31 million, or more than two-thirds of the fund’s disbursements, were to Reliance policyholders. By 2004, $38 million or 71 percent went to cover Reliance claims.

However in 2001, the fund carried a note from the state for $67 million that the state has been gradually repaying. The fund has been required to carry this note as an asset against the mandated $74 million threshold, which has prevented it from restarting insurer assessments.

The insolvency of Legion Insurance Co. in 2003 also had a major impact. In 2003, the fund paid some $8.7 million in Legion claims and in 2004, $20.1 million.

The state’s repayment of the $67 million allowed the fund to meet its obligations but those payments ended in 2004. Since 2001, when assessments were resumed, the fund has been operating below its $74 million threshold.

Molinaro devoted much of his testimony to explaining the imprecise nature of predicting when insolvency claims will become due from liquidations of companies. He noted that the department is currently monitoring two insurers, one in the state and the other from outside the state, and must be prepared for the possibility that additional liquidations are ahead.

The Pataki Administration has proposed letting the workers’ compensation fund receive funds from another security fund. It has asked that $50 million be taken from the property casualty security pool. It is also recommending that the current 1 percent of written premium assessment on workers’ comp carriers be raised to 2 percent.

The Property Casualty Insurers Association of America (PCI) spoke out against transferring $50 million from the property casualty fund. “It can result in policyholders of one type of insurance subsidizing the insolvency of a company that writes an entirely different type of policy,” said Kristina Baldwin, regional manager and counsel for PCI. “That is simply not fair.”

Baldwin had another idea. The workers’ comp fund could obtain a loan from liquidation estates, where according to the National Conference of Insurance Guaranty Funds, there are significant assets.

Baldwin said that bonding might be another alternative to borrowing between funds. California recently did this to keep its workers’ comp fund afloat, she said. “This proposal is noteworthy because it’s another way to ensure the payment of workers’ compensation claims without raising premiums on unrelated lines of insurance,” Baldwin said.

Molinaro said all options should be vetted but questioned the loan proposal offered by insurers because under it some worthy creditors might be denied distribution from those liquidated estates if the fund were to be given access.

Despite their differences, Molinaro and Baldwin agreed that both short and long term remedies are needed and time is short.