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GROUP SELF-INSURANCE? THE DOWNSIDE OF GROUP SELF-INSURANCE IN WORKERS’COMPENSATION UNDERSTANDING JOINT & SEVERAL LIABILITY BY: KATHLEEN M. CARROLL, ESQ., MANAGING DIRECTOR, GUY CARPENTER & COMPANY AN EMPLOYER’S obligation to provide workers’ compensation insurance can be satisfied in one of two ways: • by purchasing an insurance policy from a licensed insurance company • by self-insuring, either individually or in a group As you know, when a policy is purchased, the employer transfers its risk for employment-related losses to the insurer and incurs no further liability. Should the insurer become insolvent, claims are paid by a guaranty association. In contrast, if an employer elects to self-insure, liability stays with the employer or group of employers. It is not transferred. While group self-insurance may seem like an attractive option, one feature of this coverage may give rise to concern for employers and for their employees—joint and several liability. Generally speaking, joint and several liability means two or more persons are fully responsible equally for the liability. When companies participate in a Self-Insurance Group (SIG), they need to keep in mind that assets are limited to those in the SIG pool and the degree of fault doesn’t matter in some jurisdictions. It’s possible those assets will be insufficient to pay a judgment. Further, if the pool itself becomes insolvent, there is no guaranty fund backstop to pay all or part of an award. Because a SIG continues to be liable for workers’ compensation benefits, the law imposes stringent financial requirements in all states that permit self- insurance. For example, all members of a SIG must provide annual audited financial statements, a balance sheet, and a statement of operations for the preceding year for evaluation by the commissioner of insurance. Each SIG must also provide a form of payment guaranty. The amount is equal to the group’s self-insured retention or is determined by the commissioner in the form of a surety bond, securities, or cash. Self- insurers must purchase excess insurance above their retention. A group must also enter into an indemnification agreement providing for joint and several liability. A team is only as strong as its weakest member. If one member of the group experiences a financial distress or bankruptcy, it may be unable to pay its share of the SIG retention. If the amount of collateral provided by way of the guaranty is insufficient, joint and several liability is then triggered. That results in an assessment levied on all remaining group members. And that assessment could well exceed the premium the participants would have paid for insurance coverage, not to mention the costs of establishing the SIG, complying with all regulatory requirements, and the fees associated with obtaining the bond or other security. On the surface, self-insurance may look enticing. But the unforeseen liability that could arise as a result of joint and several liability should give employers pause. KATHLEEN M. CARROLL is a Managing Director of Guy Carpenter & Company. Katie advises brokers and clients with respect to reinsurance contracts and program design, insurance regulatory issues, reinsurance collections and coverage matters. Previously, she was Senior Vice President and General Counsel at Chartwell Re Corporation, an insurance holding company. Katie began her legal career at the Hartford Group and served in positions of increasing responsibility at the American Insurance Association, Swiss Reinsurance Group and NAC Re Corporation. She is a graduate of Providence College and served as an officer in the U.S. Army before attending Loyola University School of Law. Katie is a frequent speaker at industry seminars and was the recipient of both the 2006 Lifetime Achievement Award for excellence in insurance education jointly conferred by the Insurance Education Institute and the Reinsurance Association of America (RAA) and the 2010 Educator of the Year conferred by the RAA. She has over 35 years’ experience in the insurance/ reinsurance industry. Statements or analysis concerning or incorporating tax, accounting, regulatory or legal matters should be understood to be general observations or applications based solely on our experience as reinsurance brokers and risk consultants and may not be relied upon as tax, accounting, regulatory or legal advice, which we are not authorized to provide. All such matters should be reviewed with the client’s own qualified advisors in these areas. Views expressed herein are the author’s own and do not represent the views of Guy Carpenter 3