The Office of General Counsel issued the following opinion on March 18, 2005, representing the position of the New York State Insurance Department.

Re: Assumption of Workers’ Compensation Risk From Employer By Insurer

Question Presented:

1. When an employer terminates its status as a workers' compensation self-insurer and purchases an insurance policy covering the employer’s workers’ compensation obligations for employees' injuries that occurred during such status, pursuant to N.Y. Work. Comp. § 50(3) (McKinney Supp. 2004), would such a policy be considered to be workers’ compensation insurance or reinsurance under the Insurance Law?

2. When a group of employers terminates its status as a workers' compensation "group self-insurer" and purchases an insurance policy covering the group's workers' compensation obligations for employees' injuries that occurred during such status, pursuant to N.Y. Work. Comp. § 50(3-a) (McKinney Supp. 2004), would such a policy be considered to be workers' compensation insurance or reinsurance under the Insurance Law?

Conclusion:

1 & 2. Under both circumstances, such policies would be considered to be workers' compensation insurance and would not be considered to be reinsurance.

Facts:

No specific facts were specified. The inquiry was a general question from the Workers' Compensation Board ("the Board") regarding the termination of an employer’s status as a self-insurer under the Workers' Compensation Law and the classification of the insurance policy that would be issued upon such termination. In a follow-up phone conversation, the inquirer also wished a response where a group of employers terminated the group’s status as a "group self-insurer."

In a letter dated May 11, 2004, the inquirer wrote:

As you are aware, the Board authorizes various employers to act as self-insurers for workers’ compensation purposes. In so doing, the Board requires a security vehicle to insure the payment of claims in the eventuality that the proposed self-insurer is unwilling or unable to meets [sic] its claim liabilities. In the eventuality that the self-insurer does default, the Board is required to make the claims payments on behalf of the defaulting employer using the security on deposit.

Workers' Compensation Law § 50(3) requires the Chair of the Board to retain on deposit for at least twenty six (26) months after the status of an employer as a self-insured is terminated. Upon the expiration of the twenty six months the Chair is authorized by this subdivision to accept in lieu of the security deposit, to secure the liability of the incurred employer while self-insured, a policy of insurance from the employer. Such policy must be in a form approved by the Superintendent of Insurance and issued for a single complete premium paid in advance by the employer. The Chair must determine the amount of the policy and it cannot be cancelled for any cause.

Simply put, the arrangement would be a loss transfer agreement wherein a private carrier would agree to assume full liability for all remaining claims of a terminated self-insured employer in exchange for a single premium.

Workers' Compensation Law § 50(3-a) contains similar provisions for a "group self-insurer." The inquirer notes that the Board is amenable to such agreements but is concerned about how the Insurance Department would classify them. Specifically, the Board is concerned whether such an arrangement would be classified as a worker’s compensation policy, and thus would be covered by the Workers' Compensation Security Fund in the eventuality of the insolvency of the insurer or if the agreement would be viewed as reinsurance, which would not be covered by the Fund. If the latter, the inquirer notes that the Board would likely not employ such a vehicle out of concern for injured claimants.

Discussion:

1. Individual Employer Terminating Self-Insurer Status

N.Y. Work. Comp. § 50(3) (McKinney Supp. 2004) provides, in pertinent part:

An employer shall secure compensation to his employees in one or more of the following ways:

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3. By furnishing satisfactory proof to the chairman of his financial ability to pay such compensation for himself, in which case the chairman shall require the deposit with the chairman of such securities as the chairman may deem necessary of the kind prescribed in subdivisions one, two, three, four and five, and paragraph a of subdivision seven of section two hundred thirty-five of the banking law, or the deposit of cash, or the filing of irrevocable letters of credit issued by a qualified banking institution as defined by rules promulgated by the chairman or the filing of a bond of a surety company authorized to transact business in this state, in an amount to be determined by the chairman, or the posting and filing as aforesaid of a combination of such securities, cash, irrevocable letters of credit and surety bond in an amount to be determined by the chairman, to secure his liability to pay the compensation provided in this chapter… If for any reason the status of an employer under this subdivision is terminated, the securities or the surety bond, or the securities, cash, or irrevocable letters of credit and surety bond, on deposit referred to herein shall remain in the custody of the chairman for a period of at least twenty-six months. At the expiration of such time or such further time period as the chairman may deem proper and warranted under the circumstances, and so designates, the chairman may accept in lieu thereof, and for the additional purpose of securing such further and future contingent liability as may arise from prior injuries to workers and be incurred by reason of any change in condition of such workers warranting the board making subsequent awards for payment of additional compensation, a policy of insurance furnished by the employer, his heirs or assigns or others carrying on or liquidating such business. Such policy shall be in a form approved by the superintendent of insurance and issued by the state fund or any insurance company licensed to issue this class of insurance in this state. It shall only be issued for a single complete premium payment in advance by the employer. It shall be given in an amount to be determined by the chairman and when issued shall be non-cancellable for any cause during the continuance of the liability secured and so covered.

In the case of the assumption of liability by an insurer of an individual employer’s self-insurance arrangement, the policy to be issued would not be reinsurance. Reinsurance is a contractual arrangement under which a "ceding" insurer buys insurance from an "assuming" insurer to cover losses incurred by the ceding insurer under insurance contracts that the ceding insurer issued to its insureds. N.Y. Ins. Law § 1101(a)(1) (McKinney Supp. 2004) defines an insurance contract to mean:

any agreement or other transaction whereby one party, the "insurer", is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.

The employer's obligations to its employees are a legal liability imposed pursuant to the Workers' Compensation Law and regulations thereunder. Hence, a Workers' Compensation self-insured employer is not an "insurer" as defined in the New York Insurance Law. Since, by definition, a reinsurance agreement is a contract between two insurers, the proposed policy of insurance would not be reinsurance but direct insurance.

N.Y. Ins. Law § 1113(15)(a) (McKinney 2001 & Supp. 2004) defines "workers" compensation and employers" liability insurance" to mean:

'insurance against the legal liability, under common law or statute or assumed by contract, of any employer for the death or disablement of, or injury to, his employee, including volunteer firefighters" benefit insurance provided pursuant to the volunteer firefighters" benefit law and including volunteer ambulance workers" benefit insurance provided pursuant to the volunteer ambulance workers" benefit law.

The proposed policy would come within the above definition and therefore constitutes workers’ compensation and employers" liability insurance.

2. Group of Employers Terminating Group Self-Insurer Status

N.Y. Work. Comp. § 50(3-a) (McKinney Supp 2004) provides, in pertinent part:

3-a. Group self-insurance.

(1) Definitions. As used in this chapter the term "employers" shall include: (a) employers with related activity in a given industry which shall include municipal corporations as that term is defined in sections two and six-n of the general municipal law, employing persons who perform work in connection with the given industry, (b) an incorporated or unincorporated association or associations consisting exclusively of such employers provided they employ persons who perform such related work in the given industry, and (c) a combination of employers as described in subparagraph (a) hereof and an association or associations of employers as described in subparagraph (b) hereof.

(2) Any group consisting exclusively of such employers may adopt a plan for self-insurance, as a group, for the payment of compensation under this chapter to their employees. Under such plan the group shall assume the liability of all the employers within the group and pay all compensation for which the said employers are liable under this chapter, except that in the case of municipal corporations as herein defined no proof of financial ability or deposit of securities or cash need be made in compliance with this subdivision. Where such plan is adopted the group shall furnish satisfactory proof to the chairman of its financial ability to pay such compensation for the employers in the industry covered by it, its revenues, their source and assurance of continuance. The chairman shall require the deposit with the chairman of such securities as may be deemed necessary of the kind prescribed in subdivisions one, two, three, four and five, and paragraph a of subdivision seven of section two hundred thirty-five of the banking law or the deposit of cash or the filing of irrevocable letters of credit issued by a qualified banking institution as defined by rules promulgated by the chairman or the filing of a bond of a surety company authorized to transact business in this state, in an amount to be determined to secure its liability to pay the compensation of each employer as above provided in accordance with the provisions of paragraph d of subdivision five of this section… The group qualifying under this subdivision shall be known as a self-insurer.

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(5) If for any reason, the status of a group self-insurer under this subdivision is terminated, the securities or cash or the surety bond on deposit referred to herein shall remain in the custody of the chairman for a period of at least twenty-six months. At the expiration of such time or such further period as the chairman may deem proper and warranted, he may accept in lieu thereof, and for the additional purpose of securing such further and future contingent liability as may arise from prior injuries to workers and be incurred by reason of any change in the condition of such workers warranting the board making subsequent awards for payment of additional compensation, a policy of insurance furnished by the group self-insurer, its successor or assigns or others carrying on or liquidating such self-insurance group. Such policy shall be in a form approved by the superintendent of insurance and issued by the state fund or any insurance company licensed to issue this class of insurance in this state. It shall only be issued for a single complete premium payment in advance by the group self-insurer. It shall be given in an amount to be determined by the chairman and when issued shall be noncancellable for any cause during the continuance of the liability secured and so covered.

(6) All the provisions of this chapter relating to self-insurance and the rules and regulations promulgated thereunder shall be deemed applicable to group self-insurance. The chairman shall implement the provisions of this subdivision by promulgating reasonable rules and regulations.

A group of employers that have joined together as a "group self-insurer" is not in fact a self-insurer. Rather, since the employers have jointly assumed the liability of each of the employers, the group acts an insurer, in a manner similar to a reciprocal insurer. However, since the Workers’ Compensation Law expressly recognizes such arrangements, we have previously concluded that such a "group self-insurer" is exempt from licensing and other regulation under the Insurance Law.

Although analytically the "group self-insurer" is an insurer, and hence the proposed agreement could be construed as reinsurance, the Department has generally not treated insurance of exempt insurers as reinsurance, but rather as direct insurance. See, for example our October 24, 2001 letter to the Board, in which we discussed this specific kind of insurance transaction with respect to "group self-insurers."1

Accordingly, it is our opinion that a policy issued to a "group self-insurer" terminating its status as such would be considered to be a direct policy of workers’ compensation and employer liability insurance and not reinsurance.

For further information please contact Principal Attorney Paul A. Zuckerman at the New York City Office.

1  The Department did, however, in an April 19, 2000 letter consider an excess insurance policy issued to a 'group self-insurer' to be reinsurance.  That opinion is distinguishable based upon the facts.