HOUSE BILL ANALYSIS

                     HB 1258

Brief Description:  Expanding employer workers= compensation group self-insurance.

Sponsors:  Representatives McMorris, Honeyford, Dyer, Boldt, Sheldon, Clements and Thompson.

                  Hearing:  January 30, 1997

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 ensure 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.

SUMMARY OF BILL:

The industrial insurance laws are amended to create additional authority for certain groups of employers to self-insure their industrial insurance obligations.

Who may be certified as a self-insurance group

In addition to the self-insurance groups permitted for school districts and hospitals, a workers' compensation self-insurance group may be certified that consists of five or more employers engaged in the same or similar type of business.  Local government entities that exist as a jointly self-insured group under other statutes may also apply to become a workers' compensation self-insurance group. 

Nonpublic hospitals may choose to group self-insure under these new provisions or under the existing group self-insurance authority.

A workers' compensation self-insurance group approved by the director of the Department of Labor and Industries 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 existing requirements for self-insurers, except those requirements governing approval and operation of the group, procedures on default, and participation in the insolvency trust fund.

To obtain and maintain a certificate of approval as a self-insurance group, the group must have the following:

!a combined net worth of at least $2 million

!security in the amount prescribed by the director, in the form of a surety bond, security deposit, letter of credit, or financial security endorsement

!specific and aggregate excess insurance in an approved form and amount

!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 group's administrator or service company may not serve on the board of trustees.

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 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, and a claims fund account.  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 submit an application to and 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 or the employer's representative takes an action that is grounds for decertification of the group.

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 or is excessive, the director must order the group to make an assessment equal to the deficiency or to refund the excess premium. 

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 deemed 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 employer who is self-insured under existing law.

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 new 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.

Group self-insurance certificates may be revoked under the existing decertification procedures applying to all self-insurers and may also be revoked for insolvency, failure to pay assessments, failure to comply with the self-insurance group provisions or rules or with an order of the director, upon finding that the certificate was issued through fraud or because of material misrepresentation, or if the group or administrator has converted or refused to pay money entrusted to the group.

If the director finds grounds under the decertification procedures for revoking a self-insurance group certificate because of actions of the group or the group's representative, then the group's certificate must be withdrawn.  If the grounds are based on actions of an employer member of the group or the employer's representative, then the employer's membership in the group must be canceled.

Actions of the director may be appealed as in other industrial insurance cases.

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.

Rules adoption

The director is authorized to adopt rules to implement the workers' compensation self-insurance group provisions, including rules implementing administrative assessments.

FISCAL NOTE:  Requested on January 24, 1997.

EFFECTIVE DATE:  Ninety days after adjournment of session in which bill is passed.