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A REPORT ON WORKERS’ COMPENSATION INSURANCE POLICIES WITH LARGE DEDUCTIBLES:

  1. Introduction:

The Office of Monitoring, Auditing and Enforcement Division of the Maine Workers’ Compensation Board (MWCB) has noticed a recent shift in the insurance market regarding workers’ compensation policies. More employers that previously were self-insured have now opted out of self-insurance for more conventional polices. These are usually policies with large deductibles. This paper will address some of the reasons for this shift and the impact on the State of Maine regulatory agencies.

  1. Financial incentives:

In discussions with insurance company underwriters and with employers (see reference #1), several financial reasons were cited as to why this shift is occurring.

While on the surface, this appears to be a positive shift, there have been several problems that have arisen as a result of this shift. Some of the aspects of this shift in workers’ compensation coverage will be explained in Section 4, impact on the MWCB.

  1. Existing Legislation and Regulation:

The Bureau of Insurance is responsible for administering and overseeing rules regarding workers’ compensation policies with large deductibles. The pertinent statutory language is as follows:

Title 24-A: MAINE INSURANCE CODE

Chapter 25: RATES AND RATING ORGANIZATIONS

§ 2385. Optional deductibles:

  1. Optional deductible: Each insurer transacting or offering to transact workers’ compensation insurance in the State shall offer optional deductibles to employers that may be used upon election by the insured.
  2. Indemnity: Deductibles must be available for indemnity benefits in amounts of $1,000 and $5,000 per claim and in other reasonable amounts as may be approved by the superintendent.
  3. Reimbursement: The deductible form must provide that the claim must be paid by the applicable insurer, which must then be reimbursed by the employer for any deductible amounts paid by the carrier. The employer is liable for reimbursement up to the limit of the deductible.
  4. Deductible not required: An insurer is not required to offer a deductible to an employer if, as a result of credit investigation, the insurer determines that the employer is not sufficiently stable to be responsible for the payment of deductible amounts.

Currently the statutory language is enforced in the following manner.

The Bureau of Insurance (BOI) does not identify policy specific information. Currently neither the Bureau of Insurance nor the Workers’ Compensation Board actively collects the actual workers’ compensation policy information that is written for the employer. The Bureau of Insurance ensures that the carrier is active and has sufficient reserves to operate in the State of Maine, but collects no policy specific information.

Discussions with the staff and the legal division at the Bureau of Insurance (see reference #2) did not reveal much additional information. They have indicated that if the Board is having difficulties in determining which policies have large deductibles, it would be up to the Board to request any information from either the employer or carrier. Again it was reiterated that there is no procedure for the Bureau to identify these policies.The BOI staff felt that perhaps the Boards’ assessment formula would be a resource to identify policy specific information. Discussions with representatives of the MWCB (see reference #3) indicated that the assessment formula does not deal with policy specific information and would not be a tool to identify those policies with large deductibles, or any other policy specific information.

The Board requires that most employers be covered by a workers compensation policy. There is no Board requirement to address premium levels or deductibles. The Board’s form for showing proof of coverage (form WCB 1-A) gives only cursory policy information. This form indicates that a carrier provides the coverage for a specified period of time. A carrier name and policy number are also included, as well as the locations that are covered by the policy.

There is also no process for the Board to be notified when a Third Party Administrator (TPA) is administering claims. TPAs can be working for the employer directly in these situations where a policy with a high deductible is present. Sometimes they may be working for another carrier that actually holds the policy. Whether or not a high deductible exists is currently unknown as the Board does not collect this information. Whether or not the TPA is administering these claims only within the deductible range, or some other relationship exists is still unclear. This poses some issues as will be discussed further in Section 4.

  1. Impact on the WCB:

Many formerly self-insured employers are transitioning to conventional workers’ compensation policies with large deductibles. This transition has happened with Great Northern Paper, MBNA, and Home Depot to name but a few larger employers in the State of Maine. There is a process in place for the MWCB to be notified when these changes in insurance status occur, but frequently there are breakdowns in the notification process.

Representatives of the Bureau of Insurance notify the Board when an employer either becomes self-insured or opts out of self-insured status, or is added or dropped from a self-insured group. Some of the self-insured groups include the Maine Oil Dealers, Construction Service Group, Maine Forest Products Group etc. The database is updated when the MWCB is notified of the change. When an employer is no longer self-insured or group self-insured, the assumption is that a workers’ compensation policy will be put in place. Unfortunately, this is not always the case. There are circumstances where employers drop their self-insured or group coverage status altogether and do not obtain a workers’ compensation policy. As this is a manual notification process, sometimes the notices are not sent, or are sent to the wrong person.

There is an administrative hearings process in place at the MWCB to ensure that employers remain compliant with the Statute. The Abuse Investigation Unit of the MWCB identifies employers that do not have active workers’ compensation coverage. Currently there is a back log of several months worth of cases to be heard. As more and more employers are non-compliant, this process will take even longer to identify problems and address the issues.

  1. Case Studies:

Recently, the Board was made aware of a change in the coverage status for Great Northern Paper, a subsidiary of Bowater. This is a large employer with many different holdings under different names. Great Northern Paper gave up their self-insured status in 1999 and obtained a conventional workers’ compensation policy with a large deductible. During their self-insured phase, Sedgwick Claims Management (a TPA) was the claims administrator. When the new policy was in place, Sedgwick Claims Management (TPA) was again hired as the claims administrator even though they were not the carrier of record on the policy. It was later shown that Sedgwick Claims Management was administering all claims activity on behalf of both the employer and the carrier of record.

The Board was not aware of these relationships and who ultimately was responsible for claims administration, until a problem with payments of compensation benefits to injured employees was brought to the Board’s attention. The employer had gone bankrupt sometime in 2002 and was no longer financially able to support it’s obligations to pay under the high deductible policy payment rules. Several employees’ weekly indemnity benefits checks were refused by local banks due to insufficient funds in the accounts that they were drawn upon. This in turn led to several phone calls to and from representatives of the Board to try and determine what, if any, workers’ compensation policy was in effect and the party responsible for claims payments. It was determined that Great Northern Paper was indeed no longer self-insured and had a policy with a large deductible in place and that there was a third party claims administrator for claims.

This situation has been addressed and the carrier of record is now paying for claims activity. Given that the policy can be canceled for non-reimbursement of deductible amounts to the carrier, the policy can be canceled at any time and the coverage problem may continue.

Both of these employers are related, but were set up to operate independently. They had either given up or lost their self-insured status and opted for a conventional policy with a large deductible. The Board was notified in a timely manner and the database updated accordingly.

Currently, both of these employers are now bankrupt but still open and operating. The carrier of record has been paying for any claims to date. Failure to reimburse the carrier constitutes a non-payment of the premium and the policy is then canceled.  This has happened with these two employers. MEMIC holds the policy, but it has been canceled effective March 23rd, 2003. Whether this is for non-payment of premiums or failure to reimburse the deductible amount is not clear. The end result is the same, there is no policy in place to protect the injured workers.

Because the employer is in bankruptcy proceedings, the injured employees would be added to the list of outstanding creditors and it is unclear what priority they would have in this process.

  1. Summary:

There appears to be a nationwide trend for employers to opt out of self-insured programs and move to workers’ compensation policies with large deductibles. In Maine, several employers who developed problems with this type of coverage have been brought to the attention of the Board, but others have not. These employers previously were self-insured, but are no longer. Given that there is no process to track policy specific information, the Board does not know just how many employers are opting for polices with large deductibles. Although the problems that the Board has discovered are disturbing, the potential that more undiscovered problems await is of an even greater concern.

Research of other states workers’ compensation statutes and discussions with the Bureau of Insurance and Maine Workers’ Compensation Board representatives (see reference #4) has shown that other states such as California, Montana, Kansas, Connecticut, and New Jersey have statutes similar to that of the Maine Bureau of Insurance. Unlike Maine, these states require that the insurance carrier identify those situations where a workers’ compensation policy with a large deductible is being written and that this information be reported to the Bureau of Insurance or the similar regulator in each state. The research indicates that most states have much stricter reporting requirements than does the State of Maine.

The MWCB Annual Compliance report for 2002 has not yet been published, but preliminary data indicates a significant increase in the number of Third Party Administrators adjusting claims in the State of Maine. As more and more employers and even other insurance carriers use TPA’s to administer their claims, the confusion continues to grow regarding exactly who is administering the claims processing of workers compensation policies. The Office of Monitoring, Audit and Enforcement has noted an increase in the number of TPA’s that are administering claims for other entities. The motives behind this shift in claims administration are unclear. There is no current process that requires the TPA to notify the Board that they are the claims administrator for a given employer, carrier or policy. To better track this trend, reporting requirements would have to be modified to account for this industrial shift. This would better allow the Board to track changes to workers’ compensation policies and follow the claims activity, rather than trying to decipher the problem after the fact.

There are probably many employers that utilize policies with large deductibles, but as the Board is not aware of these situations until after the fact and a problem of non-payment or no coverage has occurred. Some employers that were previously self-insured but utilizing a TPA for claims administration, continue to hire the TPA for claims once the conventional policy is in place. This causes confusion in determining who the responsible party is as the claims administration can change hands repeatedly.

The only recourse for injured employees that is in place is to “fast track” the employer to the Abuse Investigation Unit for a no coverage hearing. Given the lack of resources and the back log in the Abuse Unit, this is not practicable.

The Maine Workers’ Compensation Act exists to ensure that employees are protected should an occupational injury or disease occur. If there is no workers’ compensation policy in effect, the employees would have no recourse other than to petition the Board or sue the employer directly. As employers change how they do business, the Workers’ Compensation Board along with the Bureau of Insurance needs to adapt to these changes as well. Both agencies need to monitor employers and the insurance industry to ensure that they are compliant with the provisions of the Act and ultimately to see that employees are protected.

References:

#1 Royal and Sunalliance Insurance Company
8300 Arrowpoint Boulevard
Charolotte, North Charolina 27283
  Sedgwick Claims Management Services
PO Box 417
Freeport, Maine 04032
  MBNA Marketing Systems Inc.
1 Hatley Road
Belfast, Maine 04915
#2 Brad Brown
Senior Insurance Rate Analyst
Bureau of Insurance
34 State House Station
Gardiner, Maine 04345
  Bob Wake
Staff Attorney
Bureau of Insurance
34 State House Station
Gardiner, Maine 04345
  Stuart Turney
Insurance Examiner in Charge
Bureau of Insurance
34 State House Station
Gardiner, Maine 04345
#3 Terrie McLaughlin
Administrative Assistant
Workers' Compensation Board
27 State House Station
Augusta, Maine 04333
  Frank Richards
Assistant to the Executive Director
Workers' Compensation Board
27 State House Station
Augusta, Maine 04333
#4

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