Workers Compensation Group Trusts—E&O Friend or Foe?

by Curtis M. Pearsall, CPCU, CPIA
Special Consultant to the Utica National E&O Program

To start off, what exactly is a WC Group Trust? Per the NY State Ins Department web site, a Group Trust is “a group of employers who perform related activities in an industry who agree to be jointly and severally liable for the payment of workers’ compensation benefits to the employees of the employer members by contributing to a trust, the assets of which may exceed the liabilities, out of which benefits are paid. The group deposits with the Chair of the WC Board a minimal deposit of securities or a surety bond in an amount set by the Chair of WC Board”. For many years, workers compensation trusts have been in existence and have been providing this coverage to businesses in many states. Although I do not have a count on the number of trusts in existence, it is fair to say that it is substantial.

As an agent when dealing with your customers on their WC coverage, you have the option of placing their coverage in a variety of ways, among them the traditional insurance company mechanism, another dealing with these WC trusts.

These trusts are typically managed by an administrator whose duties include, among other things, underwriting, loss control and claims. It is common for the administrator to handle multiple trusts and essentially, the goal of the administrator is to manage these trusts like an insurance company. They collect the premiums, issue the policies and pay claims. They produce financial statements on an ongoing basis.

While they may look like an insurance company, there are many differences that are important to note and these differences can create certain pitfalls to placing coverage with a WC trust. As hard as many insurance departments try, they oftentimes find themselves unable to truly evaluate the quality and financial well being of these trusts. Actually in reviewing the financials of WC Trusts, they are somewhat different than your typical company financial. While carriers and trusts both carry a line item for Surplus (essentially assets minus liabilities), with WC trusts, it is not uncommon to find this line item at $0 or an actual deficit. Are they paying today’s claims out of today’s premium? A very legitimate question.  When WC trusts encounter financial difficulty, they have the option of assessing each of their members an amount necessary to improve their bottom line. It is critical that if you have placed any of your accounts with a trust, that they truly understand that this potential exists. 
 
It appears that at this period in the marketplace, there are many WC trusts that are in significant financial difficulty. It is important to understand that like Insurance Companies, WC trusts have been declared insolvent from time to time. Another difference is that there is no State Guaranty Fund protection for Trusts so if one is declared insolvent; there is no state mechanism to bail them out. The recourse is that the members of the trust are assessed. In the definition of WC Trusts, the phrase “joint and several” was included. This is a legal obligation that the members assume where they may be liable for the payment of the total judgment (and costs) even if that party is only partially responsible for losses inflicted. I am personally aware of a trust that has been declared insolvent in the amount of $36 million and the insured has received an interim assessment of $529,000! The possibility for future assessments still exists.

If you are the agent for a business that has or is considering placing your account with a trust, here are a number of items that you should consider:

1. How long has the trust been around?
2. Does the administrator have a solid track record with managing these trusts?
3. Has the trust ever assessed their members?
4. What do the current financials look like…just because the trust was solvent at one point, it does not mean that they are in solid financial condition today
5. What type of loss control is in place?
6. Does the Ins Dept have any knowledge of issues involving the trust
7. Does the insured truly understand what their responsibilities are by placing their WC coverage in a trust? There is an agreement that the insured needs to sign – be certain they totally understand it.

Most E&O policies exclude the insolvency of WC Trusts so it is important to understand that this is a responsibility that you could be personally assuming.

There are many well run trusts. Taking the necessary steps to identify whether the trust that you are considering is among them is the key.