The office of General Counsel issued the following informal opinion on April 19, 2000, representing the position of the New York State Insurance Department.
RE: Workers Compensation Coverage, Definition of Reinsurance/Insurer.
Would it be permissible for an authorized workers compensation insurer to reinsure the risks assumed by certain fire districts as participants in a group self-insurance pool?
The above arrangement would be permissible under the New York Insurance Law. The Pool, as the "ceding insurer", may purchase reinsurance from "The Company" (fictitious name), as the "assuming" insurer, to cover losses paid by the Pool to employees of individual fire districts that are members of the Pool.
Certain fire districts in New York are included in county-wide group self insurance workers compensation pools (the "Pools") as permitted by the Volunteer Firefighters Benefit Law (the "VFBL") and the New York Workers Compensation Law (the "WCL"). "The Company" which was originally formed by the fire districts to write workers compensation insurance under the VFBL on a cost-effective basis, desires to reinsure the risks assumed by certain of the Pools. "The Company" believes that by structuring reinsurance programs for the Pools it will be better able to carry out its goal of improving service and reducing cost to its membership."
"The Company" is licensed as a mutual property and casualty insurer, with authority to write workers compensation insurance pursuant to N.Y. Ins. Law §1113(a)(15) (McKinney 1999). Pursuant to N.Y. Ins. Law §1114(a) (McKinney 1985), a mutual insurance corporation may reinsure "the kinds of insurance business which it is licensed to do in this state". Thus, "The Company" is authorized to reinsure workers compensation insurance risks.
In 1999, the above proposal was presented by "The Company" to this Departments Property Insurance Bureau. The bureau raised a concern that it might not be permissible based upon the opinion expressed in Department Circular Letter 1994-13.
Circular Letter 1994-13 concerned policies issued by authorized workers compensation insurers to individual employers who were acting as self-insurers in providing workers compensation benefits to their employees. Pursuant to the regulations of the Workers Compensation Board, as a qualifying condition for approval to act as a self-insurer, the employers were required to provide security against catastrophic loss arising out of one accident. 12 N.Y. Comp. Codes R. & Regs. §316.2 (1989). The regulation requires self-insured employers to file with the chair of the Workers Compensation Board a "certification of an excess, reinsurance policy " issued by an authorized workers compensation insurer. 12 N.Y. Comp. Codes R. & Regs. §316.6 (1989) states that the above requirement shall " be equally applicable in all respects to group self-insurers ."
The Circular Letter determined that, notwithstanding the language of the regulation, the policy was not reinsurance as defined by the Insurance Law. It states as follows:
"Although the Regulation refers to such insurance policy as an "excess reinsurance policy" the policy is not reinsurance in the true sense of the term. Reinsurance is a contractual arrangement under which a "ceding" insurer buys insurance from an "assuming" insurer to cover losses incurred by the ceding insurer under insurance contracts the ceding insurer issued to its insureds. Since a reinsurance contract is a contract between two insurers, and an employer which is self-insured is not an insurer as defined in the New York Insurance Law, the employer cannot enter into a reinsurance contract."
Based upon the above, the Property Insurance Bureau questioned whether "The Company" could write the coverage as reinsurance. The crucial issue was whether the Pool was an insurer under the Insurance Law, whereas an individual self-insured employer had been determined not to be.
Chapters 895 and 896 of the Laws of 1966 amended the Workers Compensation Law to authorize employers with related activities in a given industry to cover their liability under the Workers Compensation Law by forming a "self-insurance" plan. Prior to enactment of the legislation, no such authority existed, although individual employers could self-insure their own statutory liability under the Workers Compensation Law.
The Departments Memorandum to the Governor on the two bills (which was never actually transmitted because the Governor signed the legislation into law before the memorandum could be sent) specifically raised the issue that the group self-insurers would be operating in a way analogous to a reciprocal insurer. The memorandum went on to express concern that many safeguards which would be applicable to the operation of a reciprocal insurer, the most significant being the requirement for a periodic financial examination by the Insurance Department, were missing from the legislation. The memorandum suggests that the Superintendent might perform financial examinations of the Pools pursuant to a "request" from the chair of the Workers Compensation Board to "insure the financial ability of such groups to pay compensation...". N.Y Workers Compensation Law §50(5)(d) (McKinney 1994).
In addition, "The Company" proposes practical reasons why the Pool should be treated differently than an individual self-insured employer. Its letter states as follows:
"Under a group self-insurance plan, the Pool assumes liability of all the employers that participate in the Pool, and the Pool pays all compensation for which the members are liable under the law. As a result, each individual employer/member shifts its risk to the Pool, and the Pool spreads the risks of each member over all of the members of the Pool. In this regard, the contractual relationship between the Pool and its members exhibits the fundamental characteristics of "insurance."
Individual employers that self-insure their Workers Compensation risk are regulated pursuant to the Workers Compensation Law and Regulations. 12 N.Y. Comp. Codes R. & Regs. §315 (1989) establishes financial and reporting requirements for individual self-insured employers. The Regulation states that those requirements are "equally applicable in all respects to group self-insurers". In the case of an individual self-insured employer, the employer is retaining the risk of compensable injuries to its employees for which it is responsible under the law. N.Y. Workers Compensation Law §50 (McKinney 1994). By contrast, the members of the Pool are engaged in loss spreading, with each member accepting responsibility for the losses which may be payable by the other employer members.
The Regulation goes on to impose additional requirements on group self-insurers which are not applicable to individual self-insured employers. Among those additional requirements are that the group submit the following to the chair of the Workers Compensation Board:
A certified, independently audited financial statement of the groups assets and liabilities; satisfactory proof of financial ability to pay compensation for the employers participating in the group plan; the groups reserves, its source and assurance of continuance.
Any and all agreements contracts and other pertinent documents relating to the organization of the employers in the group.
A consolidated version of the reports which each employer would otherwise have been obligated to file individually pursuant to the Regulation.
Notification, within 10 days time, on a prescribed form, of any new employer joining the group.
12 N.Y. Comp. Codes R. & Regs. §315.6 (1989).
All of the preceding are indicative of the fact that the Pool is treated much in the manner that a reciprocal would be treated under the Insurance Law, albeit pursuant to the Workers Compensation Law, whereas individual self-insured employers are not treated in the same manner. As "The Companys" letter goes on to state:
"Thus, the Pools function much as if they are insurers as a matter of substance, and are subject to regulation by the State with respect to their operations. When a Pool turns to an insurance company to procure insurance protection for the risks it has assumed from its members, it is not procuring "direct" insurance for each employer; it is ceding the pooled risks it has accepted from its member-insureds to a reinsurer, in a transaction that is properly characterized as reinsurance."
Based upon the law and the facts presented in the letter and the additional authorities discussed herein, "The Company" may issue the coverage to the Pool as a reinsurance policy. The distinction between a pool of self-insured employers and a single self-insured employer is a valid one, and is supported by the history of the enabling legislation. Insurance Department Circular Letter 1994-13 is not contrary to the opinion expressed herein.
One should be aware that the Workers Compensation Board currently has a proposal pending to amend the regulations applicable to group self insurers, which could impact upon the proposed transaction by "The Company".
For further information you may contact Associate Attorney Samuel Wachtel at the New York City Office.