The recent failure of an Atlanta-based workers’ compensation insurer left a number of employers — and ultimately 88 workers — with no coverage for job-related injuries.
And it raised questions about whether it can happen again.
Twelve other firms that operated under rules that exempted the failed company’s clients from drawing from an insolvency pool still do business in the state. And while they all now pay into that pool, 10 have claims predating the 2008 change in the law that required them to do so.
If any fail, workers with active pre-2008 claims could find themselves in a similar bind. State insurance regulators say they don’t know how many people ultimately could fall in that category. But they say they don’t think any of the 12 companies is in danger of failing.
“We are taking a closer look at the 12 remaining (companies), but at this point, they meet our solvency requirements based on our analysis of the most recently available financial statements,” said Donald F. Roof, insurance regulatory services director at the Georgia Department of Insurance.
Southeastern U.S. Insurance Inc., the company that failed, was specifically excluded from the state’s $136.9 million insurance insolvency pool, which serves as a safety net for consumers and businesses in case their insurers become insolvent.
SEUS was excluded because it was a so-called “captive insurer,” so named because it covered employees of one company or members of an association. The reasoning behind allowing captive insurers was that they could better manage risk since the covered members all faced similar liability exposures.
But if a captive failed, employers were on the hook for workers’ claims; the insolvency pool funded by mainstream insurers wouldn’t cover injured employees.
“As for any potential future captive insolvencies, unless the law is changed, to the extent that they occur, we will be faced with the same situation as SEUS for claims that were incurred prior to Jan. 1, 2008,” Roof said.
SEUS initially wrote workers comp policies for an association serving the temp worker and employee leasing industries. It later expanded to small businesses, school boards and municipal governments across Georgia. After complaints that its expansion violated the law, John W. Oxendine, the state’s insurance commissioner, pressured the company to convert into a traditional insurer.
SEUS’ founder, M. Clark Fein III, converted the company to a traditional insurer in June 2006. But when SEUS failed, the employers of 88 workers whose claims predated the conversion were responsible for their bills. Eight of those workers have catastrophic injuries and will need lifetime care. One has medical needs exceeding $45,000 a month.
Some of those workers’ employers say paying those medical bills will bankrupt them. They want the state legislature to change the law to retroactively include workers not initially covered by the insolvency fund. Such a change, they say, could help Georgia avoid problems if any of the other 12 workers comp captives get into trouble.
“It cost me $150,000 to $200,000 a year for workers’ comp,” said John Hulsey, president of Hulsey Environmental Services, a Gainesville-based, family-owned plumbing company that was an SEUS client. Two of his employees were injured — one lost a leg in a car crash and the other injured his back — and are not covered by the pool. Hulsey, who has been to the Capitol two to three times a week to meet with legislators, says he’ll have to shut down without their help.
He argues the pool, which had $136.9 million at the end of the 2008 when the most recent audit was completed, should be expanded to include workers who weren’t covered before since all captives are paying into it now anyway. About $77 million of the amount in the pool is earmarked for workers’ comp-related insurance failures.
Expanding the coverage to include everyone won’t cost taxpayers any money since the pool is funded by insurers, he said.
“If I go out of business, it doesn’t help these two guys or the 70 people who would lose their jobs,” Hulsey said. “I have over 500 people through my employees’ spouses, children and others who are dependent on us for their living.”
State insurance regulators say they are working behind the scenes with a few legislators who’ve expressed interest in changing the law, said Glenn Allen, a spokesman at the Georgia Department of Insurance. But so far, no legislation has been introduced.
One concern is that such a retroactive law would not hold up to legal challenge. But that concern is misplaced, said Joel G. Pieper, an attorney with Womble, Carlyle, Sandridge & Rice in Atlanta who focuses on the impact of retroactive legislation.
“As a practical matter, I don’t see any legal impediment to the legislature passing a law designed to provide rights to them so long as they’re not depriving anyone else of their rights,” Pieper said.
SEUS’ failure points out key differences in how Georgia, prior to 2008, regulated captive insurers versus other states. Many states patterned their laws after Vermont, which, with 560 captive insurers, has the most of any state.
But Vermont doesn’t allow captives to write workers comp policies directly. They can only reinsure the workers comp policies of a primary insurer, said David Provost, deputy commissioner of the captive insurance division of Vermont’s Department of Banking, Insurance, Securities & Health Care Administration. Other safeguards assure that injured workers are covered by the insolvency pool.
“Workers’ comp is not something where you want to leave the workers exposed,” Provost said.
In Georgia, before the 2008 change that included them in the insolvency fund, captives were required to make it clear to potential customers that if they failed there was no safety net.
SEUS met minimum financial requirements, regulators say. The company also had a reinsurance policy but later cashed it in.
Captive firms aren’t a bad idea, but they’re better suited to large corporations with ample financial resources, said Bob Klein, director of the Center for Risk Management & Insurance Research at Georgia State University. Smaller firms, he said, typically face greater risk if the captive fails.
“Going forward, it seems to me that there needs to be much better standards and enforcement in how firms handle their workers’ compensation obligations,” Klein said.
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