Labor Code section 3701.9, was added in 2012 as part of SB 863. This provision prohibits temporary services employers (TSE’s) and leasing employers (LE’s) from self-insuring their workers’ compensation liability. These entities that were self-insured in 2012 when SB 863 was passed had to become insured by January 1, 2015. The concern addressed by section 3701.9 is that a self-insured staffing company may grow rapidly during a calendar year without a concomitant increase in its workers’ compensation self-insurance deposit. Self-insured employers do not pay insurance premiums; instead, they post a security deposit each year. A self-insured employer would not have to increase the security deposit for its increased payroll until the following year, unlike a typical employer with workers’ compensation insurance, which is required to pay an increased premium on newly hired employees as soon as they are hired. When a self-insured employer’s security deposit is insufficient, the obligation for the loss falls on the Self-Insurers’ Security Fund (Fund) (§§ 3742, 3743) and other self-insured employers may be charged a pro rata share of the funding necessary to meet the obligations of an insolvent self-insurer.
Section 3701.9 was challenged on constitutional grounds by Kimco Staffing Services soon after the law was passed. But this month the Court of Appeal found the law to comply with constitutional standards in the published case of Kimco Staffing Services v State of California Many staffing companies have met the new requirements by purchasing workers compensation insurance with a large deductible.
But now, Lumbermen’s Underwriting Alliance, which issued large deductible workers’ compensation plans for professional employer organizations among other insurance lines, has been put into rehabilitation according to a Missouri Department of Insurance announcement.
LUA specializes in providing property and casualty insurance to the forest products industry, generally consisting of lumber and sawmill operations. Over time, LUA expanded its offerings, and therefore its membership, to a broader range of industries and insurance coverage’s. By 2014, LUA was providing property allied lines, inland marine, earthquake, and workers’ compensation coverage to assisted living facilities and the food processing industry, as well as the forest products industry. LUA also issued large deductible workers’ compensation plans for professional employer organizations (“PEOs”).
Lumbermen’s faced financial difficulty when one of its largest PEO insureds, TS Employment, failed to fully fund collateral obligations and filed Chapter 11 bankruptcy. The Chapter 11 bankruptcy filing for New York-based TS Employment listed the IRS as a creditor with $95.2 million in taxes owed, according to court records. Corporate Resource Services is TS Employment’s only client. New York-based Corporate Resource Service ranks as the 22nd-largest US staffing firm based on 2013 revenue. TS has up to 30,000 employees for which it processes payroll, according to court filings.
“Throughout LU A’s more than 110-year history, we have worked hard to build a reputation of integrity, trust and reliability, ” stated Jan Carlsson, President and Chief Executive Officer. “I want to assure the market that we are committed to remaining accessible and responsive to our policyholders during this voluntary supervision period and beyond.” LUA has taken the necessary step of entering into a voluntary supervision period due to a sudden and unanticipated Chapter 11 Bankruptcy filing by T.S. Employment Services, Inc., a Tri-State affiliated company with whom LUA has had a customer relationship for more than eight years. LUA provided workers compensation coverage for Tri-State, which offers payroll processing and revenue billing services as a Professional Employer Organization (PEO). T.S. Employment Services was forced into bankruptcy when it was unveiled that the company had “material., unpaid federal payroll tax liability.” Mr. Carlsson noted that as a result of T.S. Employment’s filing, “Tri-State’s ability to continue to meet its financial obligations to LUA has been placed in question .”
Rehabilitation is a legal step taken by the court to protect policyholders by preserving the company’s assets. John Huff, director of the Missouri Department of Insurance, was named receiver by the court. The move allows him to take over operations of the company. Huff will now attempt to correct existing problems, continue operations of Lumberman’s, maintain policyholder accounting and develop a plan of rehabilitation or petition the court for liquidation, according to the department. Policies will continue pursuant to their terms and conditions, and policyholders must continue making premium payments to keep insurance coverage intact, according to the department.. “Putting Lumbermen’s into rehabilitation allows us to ensure the company’s assets are handled properly so that claims are paid as fully as possible,” Huff said.
Lumbermen’s, based in Florida, had approximately 3,000 policyholders and 6,080 open workers’ compensation claims with the largest number of claims in California.