N.Y. Worker’s Comp Reform Hits New Snafu Over Trust Fund

A state-run pool system to pay workers with permanent partial disabilities could erode the savings promised by New York’s landmark workers compensation reform, insurers warn, although some insiders say that those threats are exaggerated.

The brewing battle concerns payments insurers must make to the so-called Aggregate Trust Fund (ATF), a pool of cash set up in 1935 to pay death benefits to some workers’ families, and some total disability cases. It had been funded by carriers to ensure payments would be made if a carrier became insolvent but it has not been big enough to be much of a problem for insurers.

But now, as part of the workers compensation reform package passed last March, the fund is taking on added significance because carriersare being told they must also pay funds into the ATF to cover non-medical benefits for workers who have been classified as having a permanent partial disability (PPD).

Insurers say expanding the fund in this way and requiring them to pay into it for PPD indemnity claims could end up costing everyone more. They also worry the money might be raided for other purposes.

While the ATF population sounds like it would involve a large pool, proportionately it doesn’t, said Hampton Finer, chief economist for the New York Insurance Department. “We’re talking about 7,000 to 8,000 claims a year in a system that generates more than 150,000,” Finer said. “It’s less than five percent of claims in the system.”

Finer estimated the change in the fund could bump up insurers’ payments by several hundred million dollars. The ATF had roughly a $220 million surplus prior to the change.

Finer’s department has set a 5 percent post-tax discount rate on money paid by insurers into the fund, an amount he described as “reasonably high” given current returns on the market.

Still, Finer said, his agency is not thrilled with this piece of the reform package. “[T]he insurance department does not think for a moment this move is good for the carriers. We were not supportive of the provision, and we don’t think it has a strong purpose in the law,” he told Insurance Journal.

“We don’t like to see our carriers getting soaked,” he said. “It won’t have a huge effect if they settle claims prudently, but the question is whether they will have to increase their settlement offers to go way from their contribution.”

An (Un) Settling Situation

Although the law took effect in July, its impact on insurance companies may take years to materialize for several reasons.

The chief reason is timing. Most PPD claims take between two and four years to be classified as such, meaning that many of the claims pending may not be resolved — nor payments added to the fund — for several years.

Once that classification does occur, under the new statute, carriers have 84 days to make a settlement offer to an insured before the money must be paid into the fund. Companies anxious about having to pay into the ATF may opt to settle more often — settlements are typically 40 cents on the dollar — and avoid the larger, longer payments to ATF. If that spike in settlements occurs, it could drastically reduce the claims handled by the fund.

Another dynamic is the environment in which the reforms take shape. Under the new law, total amounts for PPD claims were raised, but the length of time they were to be paid was shortened. The average PPD claim lasted 17 years; under the new regime they should drop to about seven years, Finer said.

Adding to the problem: What will be done with deductibles? Michael Barrett, legislative representative for the Independent Insurance Agents and Brokers of New York (IIABNY), said the new ATF provision could cause problems for employers with large deductibles, since they would have to pay whole amount of the deductible into the ATF. “This hurts businesses,” he said.

The IOU Treatment

Industry insiders question the logic of the bill, and wonder whether the ATF provision could cause an overall price increase for workers compensation.

“It just seems like something devoid of its original purpose,” said Richard Creedon, executive vice president of Utica Mutual Insurance. “It’s this strange kind of financial mechanism. The original purpose was to secure a small class of benefits and ensure they were paid, but it’s completely morphed from that.”

Ellen Melchionni, incoming president of the New York Insurance Association, a trade group for insurers, said insurers worry the ATF payments will bump up premiums — the exact opposite goal of the reform legislation. “Our members are very concerned,” she said.

Another concern is that the state will raid the surplus of money inside the ATF, using it to pay for other items. “We don’t want to see the fund left with IOU for $220 million from the state of New York. What has happened historically is there’s ae big pot of money, and the state asks insurers to post money up front, takes it and leaves.”

“Half the guarantee funds in the state are broke — they haven’t paid any claims and there are injured parties. That wasn’t the intent behind any of these funds,” she said.

It’s also unclear what will happen to any money left unpaid, Melchionni said. Under the law, money set aside but not paid out for a particular claim is kept by the ATF, which is run by the New York State Insurance Fund. For instance, if an insurer put in $300,000 to pay a claim, but only $200,000 was ultimately paid out, the fund keeps $100,000. Insurers, however, will have to cover any claims that exceed what they paid in.

“There has been some discussion about whether doing that is even legal,” Melchionni said.

Or to put it another way, “it’s just not equitable,” said IIABNY’s Barrett

The requirement also irks many carriers because the NYSIF — which writes about 40 percent of the market for workers compensation in the state — does not have to pay that money. “That sets up unequal competition in the marketplace,” Barrett said.

Overturning the ATF provisions in the workers comp reform package is a major goal in the IIABNY’s legislative agenda.

Both Melchionni and Barrett claim the ATF provisions were added at the last minute at the behest of organized labor groups, which have a powerful presence in Albany. The AFL-CIO of New York was a major backer of the bill and the ATF provision. AFL-CIO President Denis Hughes lauded the bill as one that “begin(s) to take back a system that has long been dominated by the insurance industry.”

Topics Carriers New York Claims Workers' Compensation