HOUSE BILL REPORT
EHB 1451
As Passed House:
March 15, 1995
Title: An act relating to expansion of employer workers' compensation group self‑insurance.
Brief Description: Expanding employer workers' compensation group self‑insurance.
Sponsors: By House Committee on Commerce & Labor (originally sponsored by Representatives Mielke, Lisk, McMorris, Sheldon, Mastin, Horn, Thompson, Hargrove, Sherstad and Basich).
Brief History:
Committee Activity:
Commerce & Labor: 2/2/95, 2/6/95, 2/9/95 [DPS].
Floor Activity:
Passed House: 3/15/95, 63-32.
HOUSE COMMITTEE ON COMMERCE & LABOR
Majority Report: The substitute bill be substituted therefor and the substitute bill do pass. Signed by 6 members: Representatives Lisk, Chairman; Hargrove, Vice Chairman; Thompson, Vice Chairman; Cairnes; Fuhrman and Goldsmith.
Minority Report: Do not pass. Signed by 4 members: Representatives Romero, Ranking Minority Member; Conway, Assistant Ranking Minority Member; Cody and Cole.
Staff: Chris Cordes (786-7117).
Background: Employers covered by the industrial insurance law must insure their responsibilities under the law by self-insuring or by purchasing insurance from the Department of Labor and Industries. Although a single employer with sufficient financial ability is permitted to self-insure, a group of employers is not permitted to self-insure as a group unless the employers are school districts and educational service districts, or hospitals. Hospital group self-insurance is limited to one group for public hospitals and one group for other hospitals.
Group self-insurers operate under rules adopted by the department that address requirements for formation of and membership in the group, responsibilities of the group's trust fund trustees, and the amount of reserves that must be maintained to assure financial solvency of the group.
The certification of a self-insurer is subject to withdrawal on a number of grounds,including that the self-insurer fails to meet the financial and other requirements of the law, intentionally or repeatedly induces employees to fail to report injuries or to report injuries as off-the-job injuries, persuades claimants to accept less than the benefits due, or unreasonably makes it necessary for claimants to resort to proceedings to obtain compensation.
Workers who are discriminated against for filing or communicating an intent to file an industrial insurance claim or otherwise exercising their rights with respect to industrial insurance may file a complaint with the department and may be entitled to appropriate relief including reinstatement and back pay.
Summary of Bill:
Certification of a self-insurance group
A nonprofit group of five or more employers who are engaged in the same or similar type of business may submit an application to the director of the Department of Labor and Industries for approval as a workers' compensation self-insurance group. Application may also be made by local government entities that exist as a jointly self-insured group under other statutes. A group approved by the director is obligated to pay all industrial insurance benefits for which its members become liable during the period of membership. The group is subject to all requirements for self-insurers, except those requirements governing approval and operation of the group, procedures on default, and participation in the insolvency trust fund.
Nonpublic hospitals may choose to group self-insure under these new provisions or under the existing group self-insurance authority.
To obtain and maintain a certificate of approval as a self-insurance group, the group must have:
!a combined net worth of at least $2 million.
!security in the amount prescribed by the director, including a surety bond, security deposit, letter of credit, or financial security endorsement.
!specific and aggregate excess insurance.
!an estimated annual standard premium of at least $1 million in the first year of operation, with a minimum annual premium of $500 per member thereafter.
!an indemnity agreement jointly and severally binding the group and each member to meet the industrial insurance obligations of each member.
!a fidelity bond for the administrator of the self-insurance group and for the group's service company.
The application must include a nonrefundable filing fee, information about the group and its organization, and a copy of the group's safety and occupational health plan. The director must act on a completed application within 60 days, or if the director is unable to act because of the number of applications, within an additional 60 days. A certificate of approval must be issued on finding that the self-insurance group has met all requirements or, if all requirements are not met, an order denying the certificate and listing the reasons for refusal must be issued. A certificate of approval remains in effect until terminated at the request of the group or revoked by the director. Termination may not be effective until each member employer has filed for industrial insurance coverage with the state fund, has become an approved self-insurer or member of another group, or has ceased being an employer.
Operation of a self-insurance group
Each self-insurance group must be operated by a board of trustees consisting of at least five persons. At least two-thirds of the trustees must be employees, officers, or directors of members of the group. The board of trustees is responsible for ensuring that all claims are paid promptly and for taking precautions to safeguard the group's assets. The board must maintain a claims fund account and an administrative fund account, which may not consist of more than 30 percent of the net premiums of the group unless approved by the director. The board may not extend credit to individual members or borrow money from the group or in the name of the group except in the ordinary course of business, unless permitted by the director.
The board must designate an administrator to carry out the board's policies. A service company may be used for services not provided by the administrator, including claims adjustment, safety engineering, preparation of reports and statistics, and administration of a claims fund.
Self-insurance groups are required to submit an annual statement of financial condition, including actuarially appropriate reserves for known claims and expenses, claims incurred but not reported, unearned premiums, and bad debts. An actuarial opinion is required for reserves for known claims and claims incurred but not reported.
Membership in a self-insurance group
To join a group, employers must be approved by the board of trustees. Individual members of the group are subject to cancellation according to the group's bylaws or may voluntarily terminate membership. In either case, coverage must be maintained for 30 days after notice to the director unless the director notifies the group that the employer has filed with the state fund for coverage, has become an approved self-insurer or the member of another group, or has ceased being an employer.
The director may also cancel an employer's membership in the group if the employer unreasonably attempts to influence an employee's attending physician regarding releasing the worker for return to work, requires workers to submit to an unreasonable number of medical examinations as a condition of receiving benefits, or unreasonably interferes with workers' choice of health services providers.
If approved by the director, a group may merge with another group engaged in the same or similar type of business.
Rating a self-insurance group's premiums
The director must designate an advisory organization that will file a uniform classification system, a uniform experience rating plan, and manual rates to which the self-insurance groups must adhere. Premium contributions to the group are determined under the manual rates in appropriate classifications, as adjusted by each member's experience credit or debit. Other adjustments may be made on approval by the director and a group may be permitted to makes its own rates, based on at least five years experience. If an audit determines that a premium contribution is insufficient based on an improper classification, the director must order the group to make an assessment equal to the deficiency.
Premium refunds may be declared if money for a fund year exceeds the amount necessary to fund all obligations for that year.
Each group must have a premium payment plan which includes an initial payment of at least 25 percent of each member's annual premium before the beginning of the fund year and payment of the balance in monthly or quarterly installments.
Each group must maintain actuarially appropriate loss reserves.
Requirements for deficiencies
If a self-insurance group's assets are insufficient to discharge the group's obligations and maintain required reserves, it must make up the deficiency or levy an assessment on its members. The group may be declared insolvent if the deficiency is not corrected as required. The director must proceed against an insolvent self-insurance group in the same manner as he or she would proceed against an insolvent single employer who is self-insured.
The director may levy an assessment against all groups to assure prompt payment of benefits after exhausting the security of a self-insurance group that has been liquidated.
A group self-insurance insolvency trust fund must be established using rules developed for the existing single employer self-insurance insolvency trust fund.
Penalties for violations
After notice and hearing, the director may impose monetary penalties for violations of the self-insurance group provisions, up to $1,000 for each violation with a maximum aggregate penalty of $10,000. Penalties are paid to the director for deposit in the state general fund.
The director may also issue cease and desist orders to persons or groups engaging in practices found to be in violation of the self-insurance group provisions. Violation of a cease and desist order may be subject to either or both of the following: a monetary penalty of up to $10,000 for each violation with a maximum aggregate penalty of $100,000, and revocation of the group's certificate of approval.
In addition to the reasons for revoking a certificate under the existing law applying to all self-insurers, a self-insurance group certificate of approval may be revoked for insolvency, failure to pay assessments, failure to comply with the self-insurance group provisions or rules adopted under the provisions, or an order of the director, upon finding that the certificate was issued through fraud or because of material misrepresentation, if the group or administrator has converted or refused to pay money entrusted to the group or because the group or an employer member of the group unreasonably attempts to influence an employee's attending physician regarding releasing the worker for return to work, requires workers to submit to an unreasonable number of medical examinations as a condition of receiving benefits, or unreasonably interferes with workers' choice of health services providers.
Actions of the director may be appealed as in other industrial insurance cases.
The prevailing party in an action against a self-insurance group or employer member of the group alleging discrimination because an employee has exercised rights under the industrial insurance law is entitled to recover reasonable attorneys' fees.
Other provisions
Service companies and their employees may not have a financial interest in an administrator. An administrator or its employees may not have a financial interest in a service company.
A person soliciting membership in a self-insurance group must have an insurance solicitor permit unless the person is an employee of a self-insurance group, its administrator, or its service company. No person may make a material misrepresentation or omission of a material fact in connection with the solicitation of membership in a self-insurance group.
The director is authorized to adopt rules to implement the self-insurance group provisions, including rules implementing administrative assessments.
Appropriation: None.
Fiscal Note: Requested on January 24, 1995.
Effective Date of Bill: Ninety days after adjournment of session in which bill is passed.
Testimony For: This bill is needed to address a serious issue of competition among businesses. Small employers have difficulty competing with large self-insured businesses because of the industrial insurance cost. Allowing employers in similar businesses to pool their financial resources will increase competitiveness and permit sharing of safety resources as well. The bill sets high standards for solvency of the group. The bill will also benefit workers by improving safety, opportunities for return-to-work, and timely payment of benefits. Injured workers receive more attention when the employer believes he or she has a stake in the outcome. A self-insurance group can assist employers to understand the importance of safety and assist them in managing claims more efficiently. A majority of states recognize these benefits and permit group self-insurance. The state fund is not managed well and employers should be allowed other options.
Testimony Against: Because only the employers with the best risks will leave the state fund to join a group, the employers left in the state fund will be the worst risks. This will result in an increased premium for those employers who remain in the state fund and will threaten a very financially healthy state fund. The result in several states is a crisis for the state fund, with arguments about who should subsidize the fund. Group self-insurance is very risky because a group is like a small mutual fund. It will be costly because the group must provide actuarial solvency for the long-term and a surplus for bad years of experience. Self-insurance groups of small employers do not have the job openings to reach return-to-work levels of the very large self-insured companies. If workers had positive experiences with current self-insurers, the workers would be supporting expansion of self-insurance authority. If a group becomes insolvent, the workers will suffer. Workers have less of a stakeholder relationship in the self-insurance system. Third party administrators put another layer between the employer and the worker. Employers who are concerned about high rates could reduce rates now by making safety a priority. Any problems with the state fund are not going to be corrected by letting the best employers leave the fund. Many workers complain of problems with their self-insured employers.
Testified: (In favor) Representative Todd Mielke, prime sponsor; Ken Gipson, Association of Washington Business and Washington Self-Insurers Association; Jerry Johnston and Beverly Simmons, Washington Self-Insurers Association; Gerald Olson, Educational Service District 113; Diane Michalek, Aviation West Corporation; Tom Gilmer, Roofing Contractors Association and Independent Business Association; Ted Hartshorn, Wilcox Farms; and Bill Pickell, Contract Loggers Association. (Opposed) Robby Stern and Jeff Johnson, Washington State Labor Council; Robert Dilger, Washington Building and Construction Trades Council; Dick King, International Brotherhood of Electrical Workers; Tom Kwieciak, Building Industry Association of Washington; Pat LePlay, Washington State Trial Lawyers Association; and Theresa Whitmarsh and Bill White, Department of Labor and Industries.