Agents Advised to Know How Trusts Differ From Typical Insurance Companies
To start off, what exactly is a workers’ compensation group trust? Per the New York State Insurance Department Web site, it is:
[A] group of employers who perform related activities in an industry who agree to be jointly and severally liable for the payment of workers’ compensation benefits to the employees of the employer members by contributing to a trust, the assets of which may exceed the liabilities, out of which benefits are paid. The group deposits with the chair of the Workers’ Compensation Board a minimal deposit of securities or a surety bond in an amount set by the chair of Workers’ Compensation Board.
Workers’ compensation trusts have been in existence for many years and have been providing this coverage to businesses in many states. Although I do not have a count on the number of trusts in existence, it is fair to say that it is substantial.
Agents dealing with customers on their workers’ compensation coverage have the option of placing their coverage in a variety of ways, among them the traditional insurance company mechanism, another dealing with these trusts.
An administrator whose duties include, among other things, underwriting, loss control and claims typically manages these trusts. It is common for the administrator to handle multiple trusts and, essentially, the goal of the administrator is to manage these trusts like an insurance company. They collect the premiums, issue the policies and pay claims. They produce financial statements on an ongoing basis.
While they may look like an insurance company, there are many differences that are important to note and these differences can create certain pitfalls to placing workers’ compensation coverage with a trust. As hard as many insurance departments try, they oftentimes find themselves unable to truly evaluate the quality and financial well-being of these trusts. The financials of workers’ compensation trusts are somewhat different than those of a typical company financial. While carriers and trusts both carry a line item for surplus (essentially assets minus liabilities), with workers’ compensation trusts, it is not uncommon to find this line item at $0 or an actual deficit.
Are they paying today’s claims out of today’s premium? This is a very legitimate question. When workers’ compensation trusts encounter financial difficulty, they have the option of assessing each trust member an amount necessary to improve the bottom line. It is critical that if agents who have placed accounts with a trust truly understand that this potential exists.
It appears that at this period in the marketplace, there are many workers’ compensation trusts that are in significant financial difficulty. It is important to understand that like insurance companies, trusts have been declared insolvent from time to time. Another difference is that there is no state guaranty fund protection accounts placed in trusts, so if one is declared insolvent; there is no state mechanism to bail them out. The recourse is that the members of the trust are assessed.
The phrase “joint and several” is included in the definition of trusts. This is a legal obligation that the members assume where they may be liable for the payment of the total judgment (and costs) even if they are only partially responsible for losses inflicted. I am personally aware of a trust that has been declared insolvent in the amount of $36 million and the insured has received an interim assessment of $529,000. The possibility for future assessments still exists.
Most agents’ errors and missions policies exclude the insolvency of workers’ compensation trusts, so it is important to understand that this is a responsibility for which an agency could be assuming.
There are many well-run trusts. Taking the necessary steps to identify whether the trust that you are considering is among them is the key.
Trust in Trusts? Things To Consider
If you are the agent for a business that has or is considering placing an account with a workers’ compensation trust, here are a number of items to consider:
- How long has the trust been around?
- Does the administrator have a solid track record with managing these trusts?
- Has the trust ever assessed its members?
- What do the current financials look like? Just because the trust was solvent at one point does not mean that it is in solid financial condition today.
- What type of loss control is in place?
- Does the state insurance department have any knowledge of issues involving the trust?
- Does the insured truly understand what its responsibilities are by placing its workers’ compensation coverage in a trust? There is an agreement that the insured needs to sign — be certain the insured totally understands it.
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