Report on Self Insurance Groups
Industrial Relations (DIR) in the amount of at least 135% of estimated future liabilities. (Labor Code Section 3701.) If a SIG defaults on payment of compensation liabilities, the Director may turn the deposit over to the Self Insurers’ Security Fund (SISF) and require SISF to pay the compensation benefits. (Labor Code Section 3701.3.) SISF would be obligated to make all payments of compensation even if the deposit is exhausted. The ultimate recourse is still against the members of the SIG, but SISF may have to pay benefits on behalf of a failed SIG and pursue collections actions against the members.
As noted, the members agree to joint and several liability. (Rules 15479, 15483.) This means that if some members fail to pay their assessments, the remaining members have to cover the shortfall, a scenario sometimes called ―last man standing.‖ Under the usual interpretation of joint and several liability, a creditor such as the Director or SISF may pursue any jointly and severally liable party for the full amount of the obligation.
The ability of the members to respond in damages could be problematic for SISF because regulations do not require any minimum financial capacity for an employer to become a SIG member. A SIG is only required to file independent certified financial statements for enough of its members to demonstrate at least five million dollars in net worth and at least one-half million dollars in net income, or an alternative combination of net worth and net income, as prescribed by Rule 15472. For members other than the core members, financial statements need not be filed. (Rule 15482.1.)
The assets of the SIG will include reinsurance. Every SIG is required to obtain specific excess reinsurance with an attachment point no higher than $500,000 per occurrence. This is taken into account when calculating the estimated future liabilities. There is no connection between the amount of permissible retained risk and the capacity of the SIG. A SIG may also purchase aggregate excess reinsurance. The original regulations did not prevent one SIG administrator from using its affiliated agency as the broker to place a group’s reinsurance with an affiliated captive reinsurance company, all owned by the same holding company. These conflicts of interest are prohibited by the new regulations, although it is not clear how aggressively the prohibitions will be enforced.
In summary, the priority of security for payment of workers’ compensation is the assets of the
SIG, assessments of the members, the security deposit, and SISF.
Depending on the
practicalities of collection from members, it may be necessary to draw on the deposit and SISF while collection actions against the members and former members are prosecuted.
Enforcement is based on reviews of documents which SIGs are required to file. Original Rule 15481 adopted in 1994 required an actuarial analysis every two years, and Original Rule 15475
of the every
financial accounts of the group by an independent certified public