New York Officials Sue Workers’ Compensation Trust Manager CRM

December 11, 2009

Insurance administrator CRM Holdings is being sued for $405 million by New York’s workers compensation board and faces a separate $150 million lawsuit by the state attorney general over its alleged fraud in the management of its workers’ compensation business in the state.

The New York State Workers’ Compensation Board and Attorney General Andrew Cuomo maintain that the company intentionally undervalued the liabilities and underpriced the premiums for employers to win their workers compensation business.

The Bermuda-based company, which manages self-insurance trusts for employers, has denied any wrongdoing and said its management of its trust has been in line with all laws and regulations. The firm operates a subsidiary Compensation Risk Management in Poughkeepsie.

A spokesman for CRM responded to the WCB lawsuit and Cuomo’s notice of intent to sue in a statement: “The most important thing for us is we deny these claims. We want to try to get on with our corporate life here. We are a well-run, prudent, well-respected workers’ comp insurer.”

The WCB and Cuomo maintain that CRM has failed to adequately manage certain trusts that have had to be closed down because they lacked sufficient reserves to cover claims. They allege that CRM acted fraudulently and left thousands of employees of businesses that used these trusts for their insurance without coverage.

In June 2008, the WCB reported that several self-insured trusts in the state had unpaid liabilities of more than $360 million and that CRM was the designated administrator for a number of them. The WCB then moved to pull CRM’s license, accusing it of repeatedly failing to pay injured workers in a timely fashion, giving the board false information and routinely under-reserving for claims.

CRM at that time agreed to surrender its license to represent self-insured employers in New York as of September.

Self-insured trusts have been a concern for years and the CRM-run trusts were not alone in running into financial difficulty. By November of last year, officials reported that nearly half of the state’s 65 self-insured workers compensation trusts were underfunded and another 13 had been voluntarily closed.

Self-insurance trusts differ from traditional insurers in several ways, including that their insureds do not have the protection of the state guaranty fund should the trust go bankrupt. Instead, member employers of the trust can be assessed for shortfalls, sometimes millions of dollars, as happened in New York in 2008.

After 19 months of investigation, Cuomo informed CRM this week in a letter – a notice of imminent enforcement action– that his agency would be filing suit seeking $150 million to cover damages and unfunded liabilities of the trusts it believes CRM had mismanaged.

The WCB lawsuit accuses CRM of fraud, breaches of fiduciary duty, deceptive acts and mismanagement.

The WCB and Cuomo charge the company undervalued the exposures in its self-insured trusts so that it could charge lower premiums than it should have and that this action was a deliberate part of its marketing plan.

Cuomo also said he would be charging CRM with securities fraud, claiming the firm did not accurately disclose the financial condition of the trusts it managed when prior to its public offering in 2005.

The attorney general’s notice indicated that it remains open to resolving the investigation without litigation and it gave the company and its directors and officers five days to present offers of settlement.

In its statement, CRM said was disappointed that Cuomo disclosed the letter before the five-day window for settlement had expired.

“The company denies the attorney general’s allegations and believes that its business and management practices in connection with the New York trusts were proper and that all material information was disclosed during its initial public offering. The company believes that the attorney general’s allegations are without merit, but is committed to resolving the company’s legal issues in the best interests of its shareholders, employees, clients and other stakeholders,” the company said.

In addition to managing self-insurance trusts, CRM Holdings underwrites primary, reinsurance and excess workers’ compensation insurance policies. Among the states it operates in are California, Arizona, Florida, Nevada and New Jersey

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