Joint & Several Liability Haunts Self-Insureds

In at least one situation good loss control measures are not only recommended but required: understanding the financial rating of the chosen carrier and, alternatively, the possible downsides of various alternative risk financing arrangements.

Sound loss control also means that participants in self-insurance and risk retention groups take steps to understand that most such programs are not regulated as typical insurance carriers are. Continued review of the group's financial footing is a must.

These are perhaps the most critical of loss control activities activities that don't require any capital expenditures but do require a look down the road, past the immediate premium being charged.

Unfortunately, even the most astute of risk professionals can be blind-sided by seemingly sudden turns in the financial stability of the transfer mechanism chosen.

One such instance recently occurred in the state of Kentucky, where a remedial plan has been filed to address a "very substantial deficit" in the 2003 year-end financial net worth of AIK Comp, a Kentucky group self-insurance fund for workers' compensation.

Though I can't say how many members of the AIK fund actually were caught off-guard, if my previous experience is at all indicative of the situation, Im fairly certain that many are not just surprised, but actually shocked, at what this deficit will mean to them individually.

Even the fund's sponsoring organization Associated Industries of Kentucky has expressed surprise over the "unexpected development" of a substantial deficit.

The remedial plan and its first supplement proposed that current and past members be assessed for the financial shortfalls caused by net underwriting losses. Some of the shortfall will be recovered through subrogation and from excess insurers, but the bulk of the burden will fall upon the membership.

The AIK program is typical of self-insurance and risk retention groups in being predicated upon the theory of joint and several liability meaning that the members are liable individually and jointly for the workers' comp liabilities of each other.

In other words, a company with a great safety record and few claims may end up shouldering part of the burden of a company with bad loss experience.

Group programs I have worked with in the past whether liability risk retention groups or group workers' comp programs all included provisions for joint and several liability. It's part of the essence of the group.

Even though the burden that joint and several liability can pose may seem like a remote possibility when entering the program, it's a land mine inherent in such group risk sharing. In fact, some companies may refuse to participate in these programs solely because of the joint and several liability issue.

Most group programs counter this by offering and, in many cases, requiring that participants meet stringent safety requirements and buy into the groups loss control programs. The fact remains, however, that one company can never totally control the activities of its fellow group members.

This appears to have been the case with AIK Comp, which currently provides group self-insurance coverage to more than 2,500 member companies. That's a lot of pain for a lot of companies.

What caused the deterioration? According to the original remedial plan, the current problems were caused by changes in Kentucky legal standards for workers' comp awards; medical cost increases that were higher than anticipated; poor economic conditions across the country, Kentucky in particular; and the so-called jobless recovery.

This confluence of factors is in no way peculiar to the state of Kentucky and emphasizes the overwhelming need to carefully scrutinize any group arrangement.

AIK Comp's supplemental remedial plan estimates a $39.37 million deficit as of Dec. 31, 2003, and proposes assessing members during policy years 1998-2002 for $49 million. At least $49 million is needed to eliminate the deficit, provide for adequate financial reserves and provide appropriate financial strength for the program.

At least a part of the assessments will be weighted, with members having poorer loss experience assessed the most for individual policy years of 1998-2001. After the weighted assessments are made, however, the fund proposes raising further cash from former and existing policyholders on a pro rata basis.

Weighting a portion of the assessments is an effort to charge the companies with the worst losses with a greater portion of the assessments. But all companies that participated in the program during the last six years will end up paying thousands of dollars, with additional assessments possible if the initial plan fails to recapture solid financial footing.

Does the situation mean that companies should universally shy away from group insurance programs? Not by a long shot.

But companies must be aware of the joint and several liability provisions of these programs and take appropriate loss control steps before and during membership to guard against such unwelcome surprises.

Diana Reitz is editor of the National Underwriter Company publication "The Tools & Techniques of Risk Management & Insurance" as well as the "Risk Funding" and "Self-Insurance" Bulletins, both. available at www.nationalunderwriter.com/nucatalog

Reproduced from National Underwriter Edition, July 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.