With the Big 3 automakers discussing potential fallout if the federal government doesn't come through with a bailout package, there is one aspect of the fallout that would likely be a mere footnote in the wake of such a massive failure, but that would be of interest to thousands of workers: the issue of what happens to workers compensation claims.
Maryland officials are considering and planning for such a scenario now in the case of GM. The state's Workers' Compensation Commission (WCC) is closely monitoring GM and other distressed, self-insured firms with operations in Maryland. Officials note that GM has 200 employees statewide that are covered for workers compensation under the company's self-insured plan. They note that even in the case of a bankruptcy (which GM states it is not considering), the funding for claims would not automatically be wiped out. R. Karl Aumann, chairman of WCC, said it's rare for a company to default on its workers' compensation program. The last time this happened, he said, was with Bethlehem Steel Corp., which declared bankruptcy in October 2001.
In the case of property and casualty insurer insolvencies, every state has a safety net for policyholders, usually in the form of a Guaranty Fund. However, these funds do not necessarily cover self-insured employers, according to an overview of the insolvency process and guaranty fund laws by the The National Conference of Insurance Guaranty Funds:
Q: Am I covered by a state property and casualty guaranty association if I purchased my policy from an unlicensed carrier or a managed care plan?
A: No. Guaranty associations cover only licensed insurers. Companies not licensed in the state, surplus lines carriers, managed care plans, preferred provider organizations (PPOs), Health Maintenance Organizations (HMOs) and self insured plans are not covered under the property and casualty guaranty association statutes. If you purchased coverage from one of these entities, and the company is now insolvent, you may file a claim with the Liquidator. There may also be other guaranty associations that may provide coverage for policies issued by these types of organizations. Your state Department of Insurance can provide you additional information.
Q: How can find out if my company was licensed in my state?
A: Check with your state Department of Insurance. They should have a listing of all admitted companies.
However, many states have some type of guaranty mechanism established that covers self-insured entities. Here are some resources to learn more about the protections that your state affords:
State Insurance Departments
Self-Insurance Guaranty Funds of America
State Guaranty Fund websites
State Guaranty Fund Directory (PDF)
In the case of bankruptcies, workers comp claims payments are often considered a priority - see this discussion of a recent court ruling in Pennsylvania. However, insurers may be out of luck when it comes to payment for workers comp premium in the case of bankruptcy. In the 2006 case of Delivery Service, Inc., et al v. Zurich American Insurance Co., The U.S. Supreme Court ruled that a workers compensation insurer does not have a priority claim against a bankrupt business for unpaid premiums under bankruptcy law.
For more information on State Guaranty Funds and insurer insolvencies, see the Bob Hartwig's excellent overview for the Insurance Information Institute, which includes a chart about the top 10 largest insurer insolvencies:
Year / Insolvent company / Payments / Recoveries / Net cost
- 2001 Reliance Insurance Co / $2,265,845,612 / $1,415,385,230 / $850,460,383
- 2002 Legion Insurance Co / 1,272,694,066 / 227,503,349 / 1,045,190,717
- 2000 California Compensation Insurance Co / 1,049,745,420 / 327,756,089 / 721,989,331
- 2000 Fremont Indemnity Insurance Co / 843,405,746 / 643,377,434 / 200,028,312
- 2001 PHICO Insurance Co / 699,420,144 / 205,770,569 / 493,649,574
- 1985 Transit Casualty Insurance Co / 566,549,902 / 379,499,906 / 187,049,996
- 2000 Superior National Insurance Co / 555,797,035 / 174,168,193 / 381,628,842
- 1988 American Mutual Liability Insurance Co / 543,085,140 / 238,199,539 / 304,885,602
- 1986 Midland Insurance Co / 531,641,477 / 50,648,348 / 480,993,129
- 2006 Southern Family Insurance Co / 516,844,804 / 246,101,399 / 270,743,405