State insurance commissioners recently testified before a subcommittee of the House Banking Committee concerning state regulation of the insurance industry.
The position of these commissioners, as indicated by the testimony of James P. Corcoran, superintendent of insurance of the state of New York, is that state regulation of insurance companies is functioning effectively and fairly for consumers of insurance and insurance companies.As a consumer of insurance in the state of New York, Universal Maritime Service Corp., a New York corporation, begs to differ. Consumers of insurance like Universal are severely exposed to financial ruin because of:
Incomplete regulation of the insurance industry due to gaps in coverage in the laws of the states and the federal government.
Spurious determinations by officials of state insolvency funds that coverage be denied to an insured.
The following description of Universal's experience to date with the insolvency funds of the state of New York demonstrates the compelling need for federal regulation of the insurance industry and the need to establish a single federal insolvency fund, similar to the Federal Deposit Insurance Corp.
Universal is a stevedoring and marine terminal operator in the port of New York, performing services in the city of New York and Port Newark, N.J. As an employer of longshoremen operating in an ofttimes hazardous occupation, Universal is subject to claims for workers compensation.
Longshore employees are covered by two compensation schemes - state workers compensation laws and the Federal Longshore Harbor Workers Compensation Act. In almost all circumstances, however, an injured employee will select benefits under the LHWCA because of the higher payments offered.
In the 1960s and 1970s, Universal purchased workers compensation insurance coverage from Midland Insurance Co., a New York-domiciled and -licensed stock insurance carrier. The insurance covered losses arising under the New York workers compensation law and/or the LHWCA. On April 3, by order of the New York State Supreme Court, Midland was placed in liquidation under the direction of the New York State Insurance Department, Liquidation Bureau.
At the time Midland was placed into liquidation, many of Universal's former employees (or their dependents) were receiving benefits under the LHWCA. Shortly after the date of the liquidation order, the U.S. Department of Labor informed Universal that it was liable to the employees under the LHWCA for payments that Midland ceased to make.
The New York law has a stock workers compensation security fund, for claimants entitled under New York law to receive workers compensation payments, in the event that a stock worker's compensation insurer, such as Midland, becomes insolvent. The New York superintendent of insurance administers the Workers Compensation Security Fund.
On or about May 5, the New York Liquidation Bureau, having assumed the superintendent's statutory duties as liquidator of Midland, informed Universal by letter that no payments on any LHWCA claims would be made from the Workers Compensation Security Fund. The letter, written on Midland stationery, failed to give any reason for this position, other than to refer to the Department of Labor's communication to the employees.
Stock workers compensation insurers, like Midland, contribute to the Workers Compensation Security Fund 1 percent of the net of premiums that they write on workers compensation, including LHWCA coverage. The premiums that Universal paid to Midland contributed directly to the Workers Compensation Security Fund. Universal paid premiums under a Plan D retrospectively rate policy, which included the full value of the compensation that Midland was obligated to pay the claimants. Universal is now being required to pay the losses again in spite of the fact that contributions were paid to the Workers Compensation Security Fund during the period that Universal was insured by Midland.
Despite the fact that Universal indirectly paid assessments to the Workers Compensation Security Fund, New York officials have refused to indemnify Universal for the indemnity payments Universal has assumed from Midland. They assert that the special fund created pursuant to the LHWCA and supervised by the Department of Labor is the appropriate insolvency fund to cover Universal in the absence of Midland.
The Department of Labor refutes that assertion and has stated that the special fund covers longshoremen only in the event of an employer's insolvency. Meanwhile, Universal has paid $119,000 in indemnity payments since the date of the liquidation order, to employees covered by policies of insurance issued by Midland.
It is interesting to note that in 1985 the state of New York withdrew $67 million from the Workers Compensation Security Fund for use in the state's General Fund. In American Insurance Association vs. Chu, 487 N.Y.S. 2d 311 (Court of Appeals 1985), the New York Court of Appeals reviewed a declaratory judgment action brought by trade associations of insurance companies, certain property and casualty policyholders and others challenging the constitutionality of the state statute authorizing the transfer.
The state prevailed in the action, arguing, in part, that the Workers Compensation Security Fund had a balance of $78 million before the transfer and in the 50 years of the Workers Compensation Security Fund's existence, the Workers Compensation Security Fund had only been required to pay claims totaling $2 million.
Universal believes that New York officials are reluctant to acknowledge the requests for indemnification from the W/C Security Fund by Universal and others similarly situated, in light of certain arguments presented by the state in support of the transfer. But Universal, a large employer in a troubled industry, must now assume additional indemnity expenses in excess of $20,000 a month with no termination date for such expense. The ultimate cost for these indemnity payments will likely exceed $5 million.
Universal is one company among many in the maritime industry similarly affected by the Midland insolvency. A financial blow of this magnitude certainly will have detrimental consequences for this already beleaguered industry.
A federal insolvency fund could eliminate the legal maze in which Universal finds itself and relieve insureds of legal expenses and contingent liabilities they should not be expected to bear in the event of the insolvency of their insurance company.