Agency Sued After Group Self-Insurance Program Goes Bust
- October 29, 2018
Every insurance agent seeks to help his clients better manage their insurance costs. Sometimes that means investigating programs that are outside the traditional business insurance products. As a New York agency learned, nontraditional programs call for clear communications about the risks.
From the late 1990s until around 2010, New York State had a burgeoning group self-insured trust industry for providing Workers’ Compensation benefits. Under this system, groups of employers in a particular industry segment would band together to fund each other’s Workers’ Comp obligations. Rather than buy traditional insurance, the employers would each make contributions to the trust to cover administration and claims.
The trusts were promoted as a less expensive alternative to insurance, but they came with a risk. Each member of a trust was jointly and severally liable for the trust’s debts. This meant that a single employer could be legally responsible for all outstanding benefit obligations if the trust were unable to pay its bills.
By 2008, it became apparent that most of the trusts were significantly underfunded, and many became insolvent. Such was the case with the Elite Contractors Trust of New York.
One construction employer joined the trust when it was formed in 1999, “allegedly on the recommendation of ... its insurance broker and consultant.” The broker, an insurance agency local to the employer, was also a managing agent and marketing partner of the trust, though the employer did not know that.
The employer was a member of the trust until April 2008. Two years later, the New York State Workers’ Compensation Board ruled that the trust was insolvent and took over its administration. By the end of that year, the trust had a deficit of more than $82 million; it decreased to $58 million by 2013. The board sent notices in late 2010 to every employer that had ever been a member of the trust, assessing them proportionately for their shares of the deficit.
The court opinion does not state how much the employer was assessed. However, it was a member for nine years in a trust providing benefits for high-hazard occupations. The assessment was likely more than $100,000.
In March 2014, more than three years after the board assessed the trust members, the employer in this case sued its insurance agent for the agency’s "improper continuous placement and retention of its membership in the [t]rust, as well as for its role in facilitating the overall [t]rust deficit." The agent moved to have the case dismissed based on the state’s statute of limitations. The trial court ruled in the agency’s favor and dismissed all of the employer’s causes of action.
The employer appealed, arguing that the agent breached its contract with them continuously from the time they joined the trust until the day their membership ended. If so, then there was a 25-day period of contract breaches in 2008 that would have fallen within the six-year statute of limitations. The appellate court agreed, holding that the agent had failed to prove that all of the alleged breaches occurred before that period.
The court applied the same reasoning to the employer’s claims that the agent aided and abetted fraudulent conduct by the trust administrator and negligently misrepresented the risks of belonging to the trust. Since the agent’s conduct could have occurred during the 25-day period, the court ruled that these claims should not have been dismissed. It returned the case to the trial court.
The opinion does not say that the agent raised as a defense its communications with the employer. This implies that there were no written warnings to the employer of the risks. Coverage in a vehicle that has a significant downside should always be accompanied by a letter or email to the client advising them of the risks. Alternative risk financing arrangement that may incur sizeable out-of-pocket costs for the client call for a fully-informed client.
Insurance products constantly evolve, and there is certainly nothing wrong with an agent suggesting nontraditional insurance programs to clients. However, every agent proposing these arrangements must confirm in writing that the client is aware of the risks. When things go wrong as they did here, the client may forget that verbal warnings were given.