Workers’ Compensation Group Trusts: E&O Friend or Foe?

To start off, what exactly is a workers’ compensation group trust? Per the New York State Insurance Department Web site, it is:

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 when 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 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.

A former independent agent, Pearsall is vice president with Utica National Insurance Group, where he is Director of Special Programs and Director of the Utica Errors & Omissions operation. This is reprinted with permission from Utica’s E&O Communiqué.