The Office of General Counsel issued the following opinion August 4, 2010, representing the position of the New York State Insurance Department.

Re: Excess Insurance for Workers’ Compensation Self-Insurance Plans

Questions Presented:

1. May the the State Insurance Fund (the “Fund”) offer excess insurance to self-insured employers to cover catastrophic losses under a single accident?

2. Would the employer’s release from liability provided for by Workers’ Compensation Law § 53 (McKinney 2006) apply to excess insurance written by the Fund?

Conclusions:

1. Yes. The Fund may offer excess insurance to self-insured employers to cover catastrophic losses under a single accident.

2. No. The employer’s release from liability provided for by Workers’ Compensation Law § 53 (McKinney 2006) would not apply to excess insurance written by the Fund.

Facts:

Inquirer asserts that the ability to offer excess insurance ¹ could benefit self-insured employers in New York, and that this would be consistent with the overall purpose of the Fund, which is to provide direct insurance for workers’ compensation and employers’ liability in order to allow employers in New York State to secure the payment of compensation to injured employees as is required by the Workers’ Compensation Law. Inquirer asks whether it may properly offer such insurance, specifically in light of the Department’s Circular Letter No. 13 (1994). It also asks whether or not the release from liability set forth in Workers’ Compensation Law § 53 would apply with respect to excess coverage.

Analysis:

The offering of excess insurance by the Fund.

Employers in this state are required to arrange for coverage for workers’ compensation risks. Workers’ Compensation Law § 50 provides, in pertinent part, that the employer can satisfy this requirement in any of three methods:

An employer shall secure compensation to his employees in one or more of the following ways:

1. By insuring and keeping insured the payment of such compensation in the state fund.

2. By insuring and keeping insured the payment of such compensation with any stock corporation, mutual corporation or reciprocal insurer authorized to transact the business of workers’ compensation insurance in this state through a policy issued under the law of this state.

3. By furnishing satisfactory proof to the chair of his financial ability to pay such compensation for himself, in which case the chair shall require the deposit with the chair of such securities as the chair may deem necessary … , or the deposit of cash, or the filing of irrevocable letters of credit issued by a qualified banking institution … in an amount to be determined by the chair, or the posting and filing as aforesaid of a combination of such securities, cash, irrevocable letters of credit and surety bonds in an amount to be determined by the chair, to secure his liability to pay the compensation provided in this chapter.

Some employers elect, for a variety of reasons, to self-insure their workers’ compensation risk as permitted under Workers’ Compensation Law § 50(3). The workers’ compensation regulations allow employers to do so provided that certain conditions are met. Among these is a requirement that the employer provide security for catastrophic loss arising from a single incident. Specifically, N.Y. Comp. Codes R. & Regs. tit. 12, § 316.2(a) provides as follows:

(a) In addition to the deposit of securities and/or cash and/or the filing of a surety bond and/or irrevocable letters of credit required by the chair, the applicant shall provide security against catastrophic loss arising out of one accident, by filing with the chair the carrier’s certification of an excess, reinsurance contract issued to the self-insurer in form, content and amounts acceptable to the chair; such contract must be issued by an insurance carrier authorized by the Superintendent of Insurance to write said excess contract in New York State, and must contain specific coverage for workers’ compensation.

Self-insured employers are thus required to secure excess coverage, and you ask whether the Fund may provide it. Key to ascertaining whether or not a given kind of coverage can be written by the Fund is an examination of the Fund’s purpose, as set forth in Workers’ Compensation Law § 76, which provides, in relevant part, as follows:

1. There is hereby continued in the department of labor a fund known as “the state insurance fund”, for the purpose of insuring employers against liability for personal injuries or death sustained by their employees, including liability other than liability assumed by contract imposed upon employers by reason of a suit or claim brought against the employer by another to recover the amount of damages obtained from such other by an employee of the employer for injuries or in case of death by his dependents for death sustained by such employee arising out of and in the course of his employment and to pay such damages, and of assuring to the persons entitled thereto the compensation and benefits provided by this chapter or by any act providing for compensation now or hereafter enacted by the congress of the United States of America if such liability is incident to an employment carried on in this state… . (Emphasis added.)

It is noted that the Department’s Circular Letter No. 13 (1994) concluded that excess insurance is substantially similar to personal injury liability insurance, which Insurance Law § 1113(a)(13) essentially defines as insurance against legal liability loss, damage or expense incident to a claim of liability arising out of death or injury of any person, apart from workers’ compensation insurance.

Circular Letter No. 13 addressed authorized insurers licensed pursuant to Insurance Law § 1102 and did not address the Fund. Thus, it does not govern the question of whether the Fund may properly write excess insurance. Rather, in view of the Fund’s broad statutory mandate to insure employers’ liability for injured employees under Workers’ Compensation Law § 76, it is the Department’s view that the Insurance Law does not prohibit the Fund from writing excess insurance. The coverage that the Fund proposes to write falls squarely within Workers’ Compensation Law § 76.

Applicability of the employer’s release from liability to excess insurance.

Workers’ Compensation Law § 53 provides that an employer that secures workers’ compensation for an injured employee by virtue of its payment of premiums to the Fund is released of any further liability to that employee. The statute provides, in relevant part, as follows:

§ 53. Release from liability. An employer securing the payment of compensation by contributing premiums to the state fund shall thereby become relieved from all liability for personal injuries or death sustained by his employees, and the persons entitled to compensation under this chapter shall have recourse therefor only to the state fund and not to the employer. An employer shall not otherwise be relieved from the liability for compensation prescribed by this chapter except by the payment thereof by himself or his insurance carrier.

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Inquirer requested the Department’s opinion that excess insurance obtained by a self-insured employer would not be subject to the release from liability provided for pursuant to Workers’ Compensation Law § 53.

The statutory release from liability should apply only in the case of employers that meet their statutory mandate to provide workers’ compensation coverage through the payment of premiums to the Fund pursuant to Workers’ Compensation Law § 50(1). A self-insured employer does not do so; rather, it meets the statutory objective pursuant to Workers Compensation Law § 50(3) by assuming the burden to make compensation payments (and demonstrating to the workers’ compensation board its ability to pay). The purchase of excess insurance from the Fund by a self-insured employer is not the same as the purchase of workers’ compensation insurance – as noted above, the excess insurance is not an alternate or additional source of workers’ compensation benefits that are payable in the ordinary course. Instead, it only provides coverage for amounts in excess of a given threshold. In addition, allowing a release from liability in the case of a self-insured employer is completely inconsistent with the concept of self-insurance. It could be potentially harmful to injured employees if their employer could escape liability merely by paying premiums for an excess layer of coverage. Accordingly, the release from liability set forth in Workers Compensation Law § 53 should not apply.

For further information you may contact Michael Campanelli at the New York City Office.

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¹ In this context, “excess insurance” refers to coverage that indemnifies a self-insured employer for the payment of workers’ compensation benefits to an employee in excess of a specified amount. The coverage thus constitutes an excess layer; it is not an additional source of primary coverage from which an injured employee can seek payment in the event that the self-insured employer fails to pay benefits.