AN ACT Relating to employer workers' compensation group self-insurance; adding a new chapter to Title 51 RCW; and prescribing penalties.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION. Sec. 1. The provisions of this chapter shall apply to workers' compensation self-insurance groups. This chapter shall not apply to public employees or government entities. Groups that are issued a certificate of approval by the director shall not be deemed to be insurers or insurance companies and shall not be subject to the provisions of the insurance laws and rules except as otherwise provided in this chapter.

NEW SECTION. Sec. 2. Unless the context clearly requires otherwise, the definitions in this section apply throughout this chapter.

(1) "Administrator" means an individual, partnership, or corporation engaged by a workers' compensation self-insurance group's board of trustees to carry out the policies established by the group's board of trustees and to provide day-to-day management of the group.

(2) "Director" means the director of the department of labor and industries.

(3) "Insolvent" or "insolvency" means the inability of a workers' compensation self-insurance group to pay its outstanding lawful obligations as they mature in the regular course of business, as shown either by an excess of its required reserves and other liabilities over its assets or by it not having sufficient assets to reinsure all of its outstanding liabilities after paying all accrued claims owed by it.

(4) "Net premium" means premium derived from standard premium adjusted by any advance premium discounts.

(5) "Service company" means any person or entity that provides services not provided by the administrator, including but not limited to:

(a) Claims adjustment;

(b) Safety engineering;

(d) Preparation of other required self-insurance reports;

(e) Development of members' assessments and fees; and

(f) Administration of a claim fund.

(6) "Standard premium" means the premium derived from the manual rates adjusted by experience modification factors but before advance premium discounts.

(7) "Workers' compensation" when used as a modifier of "benefits," "liabilities," or "obligations" means both workers' compensation and employers' liability.

(8) "Workers' compensation self-insurance group" or "group" means a not-for-profit, unincorporated association consisting of fifteen or more employers who are engaged in the same or similar type of business, who are members of the same bona fide trade or professional association that has been in existence for not less than two years, and who enter into agreements to pool their liabilities for workers' compensation benefits and employers' liability in this state.

NEW SECTION. Sec. 3. No person, association, or other entity shall act as a workers' compensation self-insurance group unless it has been issued a certificate of approval by the director.

NEW SECTION. Sec. 4. (1) A proposed workers' compensation self-insurance group shall file with the director its application for a certificate of approval accompanied by a nonrefundable filing fee in an amount of one hundred fifty dollars or such larger sum as the director finds necessary for the administrative costs of evaluating the group's qualifications. The application shall include the group's name, location of its principal office, date of organization, name and address of each member, and such other information as the director may reasonably require together with the following information:

(a) Proof of compliance with the provisions of subsection (2) of this section;

(b) A copy of the articles of association, if any;

(d) A copy of the bylaws of the proposed group;

(e) A copy of the agreement between the group and each member securing the payment of workers' compensation benefits, which shall include provision for payment of assessments as provided for in section 17 of this act;

(f) Designation of the initial board of trustees and administrator;

(g) The address in this state where the books and records of the group will be maintained at all times;

(h) A pro forma financial statement on a form acceptable to the director showing the financial ability of the group to pay the workers' compensation obligations of its members; and

(i) Proof of payment to the group by each member of not less than twenty-five percent of that member's first year estimated annual net premium on a date prescribed by the director. Each payment shall be considered to be part of the first year premium payment of each member if the proposed group is granted a certificate of approval.

(2) To obtain and maintain its certificate of approval, a workers' compensation self-insurance group shall comply with the following requirements as well as any other requirements established by law or rule:

(a) A combined net worth of all members of the group of at least one million dollars;

(b) Security in the form and amount prescribed by the director which shall be provided by a surety bond, security deposit, letter of credit, or financial security endorsement, or any combination thereof. If a surety bond is used to meet the security requirement, it shall be issued by a corporate surety company authorized to transact business in this state. If a security deposit is used to meet the security requirement, securities shall be limited to: Bonds or other evidences of indebtedness issued, assumed, or guaranteed by the United States, or by an agency or instrumentality thereof; certificates of deposit in a federally insured bank; shares or savings deposits in a federally insured savings and loan association or credit union; or any bond or security issued by a state of the United States and backed by the full faith and credit of the state. Any such securities shall be deposited in an escrow account in a depository designated by the director. Interest accruing on a negotiable security so deposited shall be collected and transmitted to the depositor provided the depositor is not in default. A financial security endorsement issued as part of an acceptable excess insurance contract may be used to meet all or part of the security requirement. The bond, security deposit, letter of credit, or financial security endorsement shall be for the benefit of the state solely to pay claims and associated expenses and payable on the failure of the group to pay workers' compensation benefits it is legally obligated to pay. The director may establish and adjust, from time to time, requirements for the amount of security based on differences among groups in their size, types of employment, years in existence, and other relevant factors;

(c) Specific and aggregate excess insurance in a form, in an amount, and by an insurance company authorized to transact insurance business in the state of Washington. The director may establish minimum requirements for the amount of specific and aggregate excess insurance based on differences among groups in their size, types of employment, years in existence, and other relevant factors, and may permit a group to meet this requirement by placing in a designated depository securities of the type referred to in (b) of this subsection;

(d) An estimated annual standard premium of at least one million dollars during a group's first year of operation. Thereafter, the annual standard premium shall be at least five hundred dollars;

(e) An indemnity agreement jointly and severally binding the group and each member thereof to meet the workers' compensation obligations of each member. The indemnity agreement shall be in a form prescribed by the director and shall include minimum uniform substantive provisions prescribed by the director. Subject to the director's approval, a group may add other provisions needed because of its particular circumstances;

(f) A fidelity bond for the administrator in a form and amount prescribed by the director; and

(g) A fidelity bond for the service company in a form and amount prescribed by the director. The director may also require the service company providing claim services to furnish a performance bond in a form and amount prescribed by the director.

(3) A group shall notify the director of any change in the information required to be filed under subsection (1) of this section or in the manner of its compliance with subsection (2) of this section no later than thirty days after the change.

(4) The director shall evaluate the information provided by the application required to be filed under subsection (1) of this section to assure that no gaps in funding exist and that funds necessary to pay workers' compensation benefits will be available on a timely basis.

(5) The director shall act on a completed application for a certificate of approval within sixty days. If, because of the number of applications, the director is unable to act on an application within this period, the director shall have an additional sixty days to so act.

(6) The director shall issue to the group a certificate of approval on finding that the proposed group has met all requirements, or the director shall issue an order refusing such certificate setting forth reasons for such refusal on finding that the proposed group does not meet all requirements.

(7) Each workers' compensation self-insurance group shall be deemed to have appointed the director as its attorney-in-fact to receive service of legal process issued against it in this state. The appointment shall be irrevocable, shall bind any successor in interest, and shall remain in effect as long as there is in this state any obligation or liability of the group for workers' compensation benefits.

NEW SECTION. Sec. 5. (1) A certificate of approval issued by the director to a workers' compensation self-insurance group authorizes the group to provide workers' compensation benefits. The certificate of approval remains in effect until terminated at the request of the group or revoked by the director pursuant to section 20 of this act.

(2) The director shall not grant the request of any group to terminate its certificate of approval unless the group has insured or reinsured all incurred workers' compensation obligations with an authorized insurer under an agreement filed with and approved in writing by the director. Such obligations shall include both known and unknown claims and expenses associated therewith and claims incurred but not reported and expenses associated therewith.

(3) Subject to the approval of the director, a group may merge with another group engaged in the same or similar type of business only if the resulting group assumes in full all obligations of the merging groups. The director may hold a hearing on the merger and shall do so if any party, including a member of either group, so requests.

NEW SECTION. Sec. 6. Each group shall be operated by a board of trustees which shall consist of not less than five persons elected by the members of a group for stated terms of office. At least two-thirds of the trustees shall be employees, officers, or directors of members of the group. The group's administrator, service company, or any owner, officer, or employee of, or any other person affiliated with such administrator or service company shall not serve on the board of trustees of the group. All trustees shall be residents of this state or officers of corporations authorized to do business in this state. The board of trustees of each group shall ensure that all claims are paid promptly and shall take all necessary precautions to safeguard the assets of the group, including all of the following:

(1) The board of trustees shall:

(a) Maintain responsibility for all moneys collected or disbursed from the group and segregate all moneys into a claims fund account and an administrative fund account. At least seventy percent of the net premium shall be placed into a designated depository for the sole purpose of paying claims, allocated claims expenses, reinsurance or excess insurance, and special fund contributions, including second injury and other loss-related funds. This shall be called the claims fund account. The remaining net premium shall be placed into a designated depository for the payment of taxes, general regulatory fees and assessments, and administrative costs. This shall be called the administrative fund account. The director may approve an administrative fund account of more than thirty percent and a claims fund account of less than seventy percent only if the group shows to the director's satisfaction that more than thirty percent is needed for an effective safety and loss control program or the group's aggregate excess insurance attaches at less than seventy percent;

(b) Maintain minutes of its meetings and make such minutes available to the director;

(c) Designate an administrator to carry out the policies established by the board of trustees and to provide day-to-day management of the group, and delineate in the written minutes of its meetings the areas of authority it delegates to the administrator; and

(d) Retain an independent certified public accountant to prepare the statement of financial condition required by section 10(1) of this act.

(2) The board of trustees shall not:

(a) Extend credit to individual members for payment of a premium, except pursuant to payment plans approved by the director; or

(b) Borrow any moneys from the group or in the name of the group except in the ordinary course of business without first advising the director of the nature and purpose of the loan and obtaining prior approval from the director.

NEW SECTION. Sec. 7. (1) An employer joining a workers' compensation self-insurance group after the group has been issued a certificate of approval shall submit an application for membership to the board of trustees or its administrator, and enter into the indemnity agreement required by section 4(2)(e) of this act. Membership takes effect no earlier than each member's date of approval. The application for membership and its approval shall be maintained as permanent records of the board of trustees.

(2) Individual members of a group shall be subject to cancellation by the group pursuant to the bylaws of the group. In addition, individual members may elect to terminate their participation in the group. The group shall notify the director of the termination or cancellation of a member within ten days and shall maintain coverage of each canceled or terminated member for thirty days after such notice, at the terminating member's expense, unless the group is notified sooner by the department of labor and industries that the canceled or terminated member has procured workers' compensation insurance, has become an approved self-insurer, or has become a member of another group.

(3) The group shall pay all workers' compensation benefits for which each member incurs liability during its period of membership. A member who elects to terminate its membership or is canceled by a group remains jointly and severally liable for workers' compensation obligations of the group and its members that were incurred during the canceled or terminated member's period of membership.

(4) A group member is not relieved of its workers' compensation liabilities incurred during its period of membership except through payment by the group or the member of required workers' compensation benefits.

(5) The insolvency or bankruptcy of a member does not relieve the group or any other member of liability for the payment of any workers' compensation benefits incurred during the insolvent or bankrupt member's period of membership.

NEW SECTION. Sec. 8. (1) No service company or its employees, officers, or directors may be an employee, officer, or director of or have either a direct or indirect financial interest in an administrator. No administrator or its employees, officers, or directors may be an employee, officer, or director of or have either a direct or indirect financial interest in a service company.

(2) The service contract shall state that unless the director permits otherwise the service company shall handle, to their conclusion, all claims and other obligations incurred during the contract period.

NEW SECTION. Sec. 9. Except for a salaried employee of a group, its administrator, or its service company, any person soliciting membership in a workers' compensation self-insurance group must be licensed as provided in chapter 48.06 RCW.

NEW SECTION. Sec. 10. (1) Each group shall submit to the director a statement of financial condition audited by an independent certified public accountant on or before the last day of the sixth month following the end of the group's fiscal year. The financial statement shall be on a form prescribed by the director and shall include, but not be limited to, actuarially appropriate reserves for known claims and expenses associated therewith, claims incurred but not reported and expenses associated therewith, unearned premiums, and bad debts, which reserves shall be shown as liabilities. An actuarial opinion regarding reserves for known claims and expenses associated therewith and claims incurred but not reported and expenses associated therewith shall be included in the audited financial statement. The actuarial opinion shall be given by a member of the American academy of actuaries or other qualified loss reserve specialist as defined in the annual statement adopted by the national association of insurance commissioners.

(2) No person may make an untrue statement of a material fact, or omit a material fact necessary to make the statement made, in light of the circumstances under which it is made, not misleading, in connection with the solicitation of membership of a group.

(3) The director may prescribe the format and frequency of other reports which may include, but shall not be limited to, payroll audit reports, summary loss reports, and quarterly financial statements.

NEW SECTION. Sec. 11. No person may make a material misrepresentation or omission of a material fact in connection with the solicitation of membership of a group.

NEW SECTION. Sec. 12. Funds not needed for current obligations may be invested by the board of trustees in accordance with chapter 48.13 RCW.

NEW SECTION. Sec. 13. (1) Every workers' compensation self-insurance group shall adhere to the uniform classification system, uniform experience rating plan, and manual rules filed with the director by an advisory organization designated by the director.

(2) Premium contributions to the group shall be determined by applying the manual rates and rules to the appropriate classification of each member which shall be adjusted by each member's experience credit or debit. Subject to approval by the director, premium contributions may also be reduced by an advance premium discount reflecting the group's expense levels and loss experience. A group may apply to the director for permission to make its own rates. Such rates shall be based on at least five years of the group's experience.

(3) Each group shall be audited at least annually by an auditor acceptable to the director to verify proper classifications, experience rating, payroll, and rates. A report of the audit shall be filed with the director in a form acceptable to the director. A group or any member thereof may request a hearing on any objection to the classification. If the director determines that as a result of an improper classification a member's premium contribution is insufficient, the director shall order the group to assess that member an amount equal to the deficiency. If the director determines that as a result of an improper classification a member's premium is excessive, the director shall order the group to refund to the member the excess collected. The audit shall be at the expense of the group.

NEW SECTION. Sec. 14. (1) Any moneys for a fund year in excess of the amount necessary to fund all obligations for that fund year may be declared to be refundable by the board of trustees not less than twelve months after the end of the fund year.

(2) Each member shall be given a written description of the refund plan at the time of application for membership. A refund for any fund year shall be paid only to those employers who remain participants in the group for the entire fund year. Payment of a refund based on a previous fund year shall not be contingent on continued membership in the group after that fund year.

NEW SECTION. Sec. 15. (1) Each group shall establish to the satisfaction of the director a premium payment plan which shall include an initial payment by each member of at least twenty-five percent of that member's annual premium before the start of the group's fund year and payment of the balance of each member's annual premium in monthly or quarterly installments.

(2) Each group shall establish and maintain actuarially appropriate loss reserves which shall include reserves for known claims and expenses associated therewith and claims incurred but not reported and expenses associated therewith.

(3) Each group shall establish and maintain bad debt reserves based on the historical experience of the group or other groups.

NEW SECTION. Sec. 16. (1) If the assets of a group are at any time insufficient to enable the group to discharge its legal liabilities and other obligations and to maintain the reserves required of it under this chapter, it shall forthwith make up the deficiency or levy an assessment on its members for the amount needed to make up the deficiency.

(2) In the event of a deficiency in any fund year, the deficiency shall be made up immediately from surplus from a fund year other than the current fund year, administrative funds, assessment of the membership if ordered by the group, or such alternative method as the director approves or directs. The director shall be notified prior to any transfer of surplus funds from one fund year to another.

(3) If the group fails to assess its members or to otherwise make up such deficit within thirty days, the director shall order it to do so.

(4) If the group fails to make the required assessment of its members within thirty days after the director orders it to do so, or if the deficiency is not fully made up within sixty days after the date on which such assessment is made, or within such longer period of time as specified by the director, the group shall be deemed to be insolvent.

(5) The director shall proceed against an insolvent group in the same manner as the director would proceed against an insolvent workers' compensation self-insurer as prescribed in chapter 51.14 RCW.

(6) In the event of the liquidation of the group, the director shall levy an assessment on its members for an amount determined by the director to be necessary to discharge all liabilities of the group, including the reasonable costs of liquidation.

NEW SECTION. Sec. 17. In the event of a liquidation pursuant to section 16 of this act, after exhausting the security required under section 4(2)(b) of this act, the director shall levy an assessment against all groups to assure prompt payment of such benefits. The assessment on each group shall be based on the proportion that the premium of each group bears to the total premium of all groups. The director may exempt a group from assessment on finding that the payment of the assessment would render the group insolvent. Such assessment shall not relieve any member of an insolvent group of its joint and several liability. After any such assessment is made, the director shall take action to enforce the joint and several liability provisions of the insolvent group's indemnity agreement, and shall recoup all costs incurred by the director in enforcing such joint and several liability provisions, amounts that the director assessed any other groups pursuant to this section, and any obligations included within section 16(6) of this act.

NEW SECTION. Sec. 18. After notice and opportunity for a hearing, the director may impose a monetary penalty on any person or group found to be in violation of any provision of this chapter or of any rules promulgated under this chapter. Such monetary penalty shall not exceed one thousand dollars for each act or violation and shall not exceed ten thousand dollars in the aggregate. The amount of any monetary penalty shall be paid to the director for the use of the state.

NEW SECTION. Sec. 19. (1) After notice and opportunity for a hearing, the director may issue an order requiring a person or group to cease and desist from engaging in an act or practice found to be in violation of any provision of this chapter or of any rules promulgated under this chapter.

(2) On a finding, after notice and opportunity for a hearing, that any person or group has violated a cease and desist order, the director may do either or both of the following:

(a) Impose a monetary penalty of not more than ten thousand dollars for each act or violation of such order not to exceed an aggregate monetary penalty of one hundred thousand dollars; or

(b) Revoke the group's certificate of approval.

NEW SECTION. Sec. 20. After notice and opportunity for a hearing, the director may revoke a group's certificate of approval if it is found to be insolvent, fails to pay a regulatory fee, assessment, or special fund contribution imposed on it, or fails to comply with any of the provisions of this chapter, with any rules promulgated under this chapter, or with any lawful order of the director, within the time prescribed. In addition, the director may revoke a group's certificate of approval if, after notice and opportunity for hearing, the director finds that the certificate of approval that was issued to the group was obtained by fraud, that there was a material misrepresentation in the application for the certificate of approval, or that the group or its administrator has misappropriated, converted, illegally withheld, or refused to pay over on proper demand any moneys that belong to a member, an employee of a member, or a person otherwise entitled thereto and that have been entrusted to the group or its administrator in its fiduciary capacities.

NEW SECTION. Sec. 21. (1) The director shall serve on the group, personally or by certified mail, a notice of intention to revoke the group's certificate of approval, which notice shall describe the nature and location of the plants or operations involved and the specific nature of the reasons for the decision.

(2) The notice shall include: The period of time within which the grounds for revocation existed or arose; a directive to the group specifying the manner in which the grounds may be eliminated; and the date, not less than thirty days after the self-insurer's receipt of the notice, when the certificate of approval will be withdrawn in the absence of a satisfactory elimination of the grounds for withdrawal of the certificate.

(3) An appeal of any action by the director under this section may be taken by the group. Proceedings on the appeal shall be as prescribed in this title. Appeal by a group of notice of intention to withdraw a certificate of approval or to take corrective action shall not act as a stay of the withdrawal or corrective action unless the board or court, for good cause shown, orders otherwise.

NEW SECTION. Sec. 22. The director may adopt rules to implement this chapter.

NEW SECTION. Sec. 23. If any provision of this act or its application to any person or circumstance is held invalid, the remainder of the act or the application of the provision to other persons or circumstances is not affected.

NEW SECTION. Sec. 24. Sections 1 through 23 of this act shall constitute a new chapter in Title 51 RCW.