Companies Ignored N.Y. Brokers’ Group Self-Insurance Trusts Risk Warnings

Two Westchester insurance brokers said they warned clients that group self-insurance trusts handling workers' compensation claims were too risky as the trusts surged into the state insurance market more than a decade ago. Many companies did not heed the warnings.

Companies that joined several group trusts that have financially failed since 2008 face demands for payment from the state to make up an approximately $810-million deficit in funding for injury claims by workers employed by members of the closed trusts. Since a state appeals court ruled last year that individual companies were liable for the trust deficits, the state Workers' Compensation Board has stepped up collection efforts against businesses that "have lawyered up" to fight the state's deficit collections, said a spokesman at the Albany agency.

Approximately 7,000 employers in New York are members of inactive group trusts for workers' compensation insurance, according to the state board. About 1,200 companies, or 17 percent of the failed trusts' membership, have signed final or preliminary payment agreements with the state.

The state has obtained 74 judgments against companies. The judgments total $3.9 million, less than one-half of 1 percent of the state's most recent calculation of the total liability incurred by insolvent trusts.

"What we're doing with these judgments is going after the people who actually owe the money" for injury claims against their companies, said Workers' Compensation Board spokesman Brian Keegan. If the deficit is not covered by those companies, the state board will move to collect the balance from other trust members who agreed to joint and several liability for claims against the trusts when they joined the self-insurance pools.

"There's going to be pain," Keegan said.

At Precision Carpentry of Westchester in Hawthorne, owner Louis Sulla is pained by the state board's claim that his company is liable for a $336,000 share of the group trust deficit. He called the state's assessment figure "a gross overstatement."

Precision Carpentry, a former subcontractor on Valhalla developer Louis Cappelli's mixed-use projects in White Plains and New Rochelle, paid into the 2,676-member Elite Contractors Trust. The -state board last month reported the building construction-industry trust has an approximately $76.6-million liability.

Sulla's company has joined some 250 New York companies in a lawsuit challenging the state board's deficit assessments and the legality of a provision of New York workers' compensation law adopted in 2011 that authorizes the court judgments pursued by the state. "We are working with a group of attorneys for a negotiated settlement," Sulla said.

"People are frustrated and scared," he said. "We're fighting a giant."

"They brought it upon themselves," said Ken Fuirst, co-president of Levitt-Fuirst Associates Ltd., a Yonkers firm that has provided group workers' compensation coverage to industries through the State Insurance Fund since 1951. His company lost clients to self-insured trusts that later failed, leaving clients responsible for the deficits. "Companies took the cheapest insurance out there and they now are paying the price for it," he said.

Fuirst said the "joint and several liability" provision in the group trust contracts had insurance agents warning clients: "Go in there with your eyes wide open. There's a huge risk with this."

The trusts "were very aggressive in their assumptions of how little they were going to pay" over the years for injury claims, Fuirst said. Unlike insurance companies, they failed to reserve adequate funds for claims.

Adam Friedlander, president of Friedlander Group Inc. in Purchase and the author of "How to Save Big on Workers' Compensation," said self-insured trusts for workers' compensation are available in many states. "Virtually every state they've been in, they've failed," he said.

Friedlander said the trusts grew popular in New York -where relatively low-cost coverage already was available through State Insurance Fund safety groups -in the mid-1990s as Gov. George Pataki tried to promote more competition to bring down workers' compensation costs. "They captured a good percentage of the marketplace. We were losing clients to them because they were cheaper up front," offering rates 5 percent to 10 percent lower than safety-group coverage.

Many businesses "didn't understand what joint or several liability meant or they didn't care because they were saving money up front,;" said Friedlander. "A lot of business owners and a lot of brokers didn't fully understand the risks."

"When you sign joint and several liability, you're betting every single dollar of your company's worth. They bet their whole farms on paying claims for their competitors" in the industry trusts.

Friedlander said audit reports from the Workers' Compensation Board regularly showed that several group trusts were not fully funded for injury claims. "The state did say they were underfunded -and no one cared," he said.

Friedlander met recently with 35 McDonald's franchise owners whose group self-insurance trust joined the insolvent ranks in 2011 with an estimated liability of $3.24 million. The fast-food operators and health care companies the industry with the largest liabilities among the failed group trusts -are joining fully insured safety groups, he said.