While we have covered this issue before on our blog, a topic that is important enough to bear repeating is that of state guarantee funds. Brokers and maritime employers should be aware of a potential gap in protection by their insured Longshore Act coverage.
The U.S. Department of Labor (DOL) administers the Longshore and Harbor Workers’ Compensation Act and its extensions, the Defense Base Act, the Outer Continental Shelf Lands Act, and the Nonappropriated Fund Instrumentalities Act.
Section 935 of the Longshore Act provides that payment of benefits by an insurance carrier on behalf of an insured employer discharges that employer’s obligation to pay those benefits. But if the insurance carrier fails to pay, then the employer must immediately assume its primary obligation to pay all benefits due and payable, subject to the penalty and interest provisions of the Act.
The DOL implemented a security requirement in 1990 applicable to authorized insurance carriers rated lower than “A” by the A.M. Best Company. This was to protect injured workers from the consequences of default in the payment of benefits due to insolvency, and to protect the Special Fund administered under section 944 of the Act. This requirement was in response to the carrier insolvencies during the 1980s and the subsequent failure by many state guarantee funds to protect Longshore employers and employees.
Due to the inability of A.M. Best ratings (or any other rating system) to predict insurance carriers’ financial viability for the full term of the typical workers’ compensation long tail obligation, and the continuing failure by many state guarantee funds to protect maritime employers, the DOL published new regulations during 2005 aimed at requiring security from insurance carriers without regard to A.M. Best ratings, but rather aimed specifically at business written in those states where the state guarantee funds do not fully protect Longshore benefits.
Which State Guarantee Funds Pay… and Which Don’t?
State insurance laws creating and governing guarantee funds come with a wide variety of restrictions and conditions. Some states’ guarantee funds simply do NOT pay federal Longshore benefits. These states are: Arizona, California, Iowa, Kentucky, Missouri, New Mexico, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, West Virginia, and Wyoming. Longshore Act business written in these states must be fully secured with DOL.
In addition, provisions in many other states restrict Longshore protection. A partial list of the restrictions on state payments includes time limits for filing, claims definitions that do not recognize occupational disease exposures, non-payment of deductible portions of an employer’s exposure, maximum limits on benefits, restrictions based on the financial size of the insured employer, restrictions based on financial viability of the insured employer, residency requirements, and payments that are limited to state rates that are lower than federal Longshore rates.
The following states have demonstrated that their guarantee funds do not provide full protection for Longshore benefits: Alabama, Arkansas, Delaware, Illinois, Indiana, Louisiana, Maine, New Jersey, New York, Oregon, Pennsylvania, Utah, and Wisconsin. Longshore business written in these states must be partially secured with DOL.
State funds that have paid or are likely to pay Longshore benefits in full include: Alaska, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, North Carolina, Rhode Island, South Carolina, Texas, Vermont, Virginia, and Washington. Security with DOL is not required for Longshore business written in these states.
The “State Guarantee Fund Longshore Security Factor Chart” on the DOL’s website has not changed since I composed it myself in 2005, but just because a state’s guarantee fund has paid full Longshore benefits in the past, it is not a sure thing for the future. State laws and their interpretation have proven to be changeable, so if you have Longshore coverage in an insured program, it may be worthwhile to check those states in which you have maritime operations to determine the current status of Longshore claims in the event of an insurance carrier default.
The lesson: If you are an employer in the maritime industry, you cannot always rely on state guarantee funds to protect you if your insurance carrier fails to pay your claims.
The above lists of states are based on research conducted when I was at the Department of Labor, roughly 13 years ago. I do not believe the DOL has updated it or verified that it’s still 100% accurate. If you are about to enter into an insured program for your USL&H exposure, it would be a good idea to verify the applicability of the state guarantee fund in the state(s) where your USL&H exposure will be located.
ABOUT THE AUTHOR
John A. (Jack) Martone served for 27 years in the U.S. Department of Labor, Office of Workers’ Compensation Programs, as the Chief, Branch of Insurance, Financial Management, and Assessments and Acting Director, Division of Longshore and Harbor Workers’ Compensation. Jack joined The American Equity Underwriters, Inc. (AEU) in 2006, where he serves as Senior Vice President, AEU Advisory Services and is the moderator of AEU's Longshore Insider.