CSHB 116(FIN): "An Act relating to workers' compensation self-insurance."

00CS FOR HOUSE BILL NO. 116(FIN) 01 "An Act relating to workers' compensation self-insurance." 02 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA: 03 * Section 1. AS 21 is amended by adding a new chapter to read: 04 Chapter 47. Workers' Compensation Self-insurance Groups. 05  Sec. 21.47.010. Scope. The provisions of this chapter apply to workers' 06 compensation self-insurance groups. This chapter does not apply to public employees 07 or governmental entities. A workers' compensation self-insurance group that is issued 08 a certificate of approval by the director may not be considered to be an insurer or an 09 insurance company and is not subject to the provisions of the insurance laws of this 10 title except as otherwise provided in this chapter. 11  Sec. 21.47.020. Authority to act as a workers' compensation self-insurance 12 group. A person may not act as a workers' compensation self-insurance group unless 13 the person has been issued a certificate of approval by the director. 14  Sec. 21.47.030. Required qualifications. (a) A proposed workers'

01 compensation self-insurance group shall file with the director an application for a 02 certificate of approval accompanied by a nonrefundable filing fee established by the 03 director under AS 21.06.250. The application must include the group's name, location 04 of its principal office, date of organization, name and address of each member, and 05 other information that the director may reasonably require, together with the following: 06  (1) proof of compliance with the provisions of (b) of this section; 07  (2) a copy of the group's articles of association, if any; 08  (3) a copy of agreements with the administrator and with any service 09 company; 10  (4) a copy of the bylaws of the proposed group; 11  (5) a copy of the agreement between the group and each member 12 securing the payment of workers' compensation benefits; the agreement must include 13 a provision for payment of assessments as provided under AS 21.47.180; 14  (6) designation of the initial board of trustees and administrator; 15  (7) the address in this state where the books and records of the group 16 shall be maintained at all times; 17  (8) a pro forma financial statement on a form acceptable to the director 18 showing the financial ability of the group to pay the workers' compensation obligations 19 of its members; 20  (9) proof of the group's qualification under 26 U.S.C. 501(c)(6) and 21 exemption from taxation under 26 U.S.C. 501(a); and 22  (10) proof of payment to the group by each member of not less than 23 25 percent of that member's first year estimated annual net premium on a date 24 prescribed by the director; payment shall be considered to be part of the first year 25 premium payment of a member if the proposed group is granted a certificate of 26 approval. 27  (b) To obtain and to maintain its certificate of approval, a workers' 28 compensation self-insurance group shall meet the following requirements, as well as 29 other requirements established by law: 30  (1) a combined net worth of all members of the group of at least 31 $1,000,000;

01  (2) security in the amount of $450,000 that shall be provided by either 02 cash, a surety bond, security deposit, or financial security endorsement or any 03 combination of cash, bond, deposit, or endorsement; if a surety bond is used to meet 04 the security requirement, it shall be issued by a corporate surety company authorized 05 to transact business in this state; if a security deposit is used to meet the security 06 requirement, securities shall be limited to bonds or other evidences of indebtedness 07 issued, assumed, or guaranteed by the United States of America, or by an agency or 08 instrumentality of it; certificates of deposit in a federally insured bank; shares or 09 savings deposits in a federally insured savings and loan association or credit union; or 10 any bond or security issued by a state of the United States of America and backed by 11 the full faith and credit of the state; securities shall be deposited with the director and 12 assigned to and made negotiable by the commissioner of labor under a trust document 13 acceptable to the director; interest accruing on a negotiable security shall be collected 14 and transmitted to the depositor, provided the depositor is not in default; a financial 15 security endorsement, issued as part of an acceptable excess insurance contract, may 16 be used to meet all or part of the security requirement; the cash, bond, security deposit, 17 or financial security endorsement must be 18  (A) for the benefit of the state solely to pay workers' 19 compensation claims and associated expenses; and 20  (B) payable upon the failure of the group to pay workers' 21 compensation benefits that it is legally obligated to pay; 22  (3) specific and aggregate excess insurance in a form, in an amount, 23 and by an insurance company acceptable to the director; the director may establish 24 minimum requirements for the amount of specific and aggregate excess insurance 25 based on size differences among groups, types of employment, years in existence, and 26 other relevant factors, and may permit a group to meet this requirement by placing in 27 a designated depository securities of the type referred to in (2) of this subsection; 28  (4) an estimated annual standard premium of at least $500,000 during 29 a group's first year of operation; in subsequent years, the annual standard premium 30 must be at least $750,000; 31  (5) an indemnity agreement jointly and severally binding the group and

01 each member of the group to meet the workers' compensation obligations of each 02 member; the indemnity agreement must be in a form prescribed by the director and 03 must include minimum uniform substantive provisions prescribed by the director; 04 subject to the director's approval, a group may add other provisions needed because 05 of its particular circumstances; 06  (6) a fidelity bond and an errors and omissions insurance policy for the 07 administrator in a form and amount prescribed by the director; and 08  (7) a fidelity bond and an errors and omissions insurance policy for the 09 service company in a form and amount prescribed by the director; the director may 10 also require the service company providing claim services to furnish a performance 11 bond in a form and amount prescribed by the director. 12  (c) A group shall notify the director of any change in the information required 13 to be filed under (a) of this section or in the manner of its compliance with (b) of this 14 section not later than 30 days after the change. 15  (d) The director shall 16  (1) evaluate the information provided by the application required to be 17 filed under (a) of this section to assure that gaps in funding do not exist and that funds 18 necessary to pay workers' compensation benefits will be available on a timely basis; 19  (2) act upon a completed application for a certificate of approval within 20 60 days; if, because of the number of applications, the director is unable to act upon 21 an application within this period, the director may have an additional 60 days to act 22 on an application; 23  (3) issue to the group a certificate of approval upon finding that the 24 proposed group has met all requirements, or the director shall issue an order refusing 25 the certificate setting out reasons for refusal upon finding that the proposed group does 26 not meet all requirements of this chapter. 27  (e) A workers' compensation self-insurance group shall be considered to have 28 appointed the director as its attorney to receive service of legal process issued against 29 it in this state. The appointment is irrevocable, binds any successor in interest, and 30 remains in effect as long as there is in this state an obligation or liability of the group 31 for workers' compensation benefits.

01  Sec. 21.47.035. Premium tax. A group is subject to the premium tax imposed 02 on domestic insurers under AS 21.09.210(b)(1). 03  Sec. 21.47.040. Certificate of approval; termination. (a) A certificate of 04 approval issued by the director to a workers' compensation self-insurance group 05 authorizes the group to provide workers' compensation benefits as required under 06 AS 23.30. The certificate of approval remains in effect until terminated at the request 07 of the group or revoked by the director under AS 21.47.200. 08  (b) The director may not grant the request of a group to terminate its 09 certificate of approval unless the group has insured or reinsured all incurred workers' 10 compensation obligations with an authorized insurer under an agreement filed with and 11 approved in writing by the director. Workers' compensation obligations must include 12 both known claims and associated expenses and claims incurred but not reported and 13 associated expenses. Subject to the approval of the director, a group may merge with 14 another group engaged in the same or similar type of business only if the resulting 15 group assumes in full all obligations of the merging groups. The director may hold 16 a hearing on the merger and shall hold a hearing if any party, including a member of 17 either group, requests a hearing. 18  Sec. 21.47.050. Examinations. The director may examine the affairs, 19 transactions, accounts, records, and assets and liabilities of a group as often as the 20 director requires. The expense of an examination shall be assessed against the group 21 in the same manner that an insurer is assessed for an examination. 22  Sec. 21.47.060. Board of trustees: membership, powers, duties, and 23 prohibitions; accounts. (a) A group shall be operated by a board of trustees of not 24 less than five persons whom the members of a group elect for stated terms of office. 25 At least two-thirds of the trustees shall be employees, officers, or directors of members 26 of the group. The group's administrator, service company, or an owner, officer, 27 employee of, or another person affiliated with the administrator or service company 28 may not serve on the board of trustees of the group. A trustee shall be a resident of 29 this state or an officer of a corporation authorized to do business in this state. The 30 board of trustees of a group shall ensure that all claims are paid promptly and take all 31 necessary precautions to safeguard the assets of the group. A trustee shall observe the

01 standards in dealing with the assets of the group that would be observed by a prudent 02 person dealing with the property of another, and, if the trustee has special skills or is 03 named trustee on the basis of representations of special skills or expertise, the trustee 04 is under a duty to use those skills. 05  (b) The board of trustees shall 06  (1) be responsible for all money collected or disbursed from the group 07 and segregate all money into a claims fund account and an administrative fund 08 account; at least 70 percent of the net premium shall be placed into a designated 09 depository for the sole purpose of paying claims, allocated claims expenses, 10 reinsurance or excess insurance, and special fund contributions, including second injury 11 and other loss related funds; this shall be called the "claims fund account"; the 12 remaining net premium shall be placed into a designated depository for the payment 13 of taxes, general regulatory fees and assessments, and administrative costs; this shall 14 be called the "administrative fund account"; the director may approve an administrative 15 fund account of more than 30 percent and a claims fund account of less than 70 16 percent only if the group shows to the director's satisfaction that 17  (A) more than 30 percent is needed for an effective safety and 18 loss control program; or 19  (B) the group's aggregate excess insurance attaches at less than 20 70 percent; 21  (2) maintain minutes of its meetings and make the minutes available 22 to the director; 23  (3) designate an administrator to carry out the policies established by 24 the board of trustees and delineate in the written minutes of its meetings the areas of 25 authority the board of trustees delegates to the administrator; 26  (4) retain an independent certified public accountant to prepare the 27 statement of financial condition required under AS 21.47.100. 28  (c) The board of trustees may not 29  (1) extend credit to individual members for payment of a premium 30 except under a payment plan approved by the director; or 31  (2) borrow money from the group or in the name of the group, except

01 in the ordinary course of business, without first advising the director of the nature and 02 purpose of the loan and obtaining prior approval from the director. 03  Sec. 21.47.070. Group membership; termination; liability. (a) An 04 employer joining a workers' compensation self-insurance group after the group has 05 been issued a certificate of approval shall (1) submit an application for membership 06 to the board of trustees or its administrator; and (2) enter into the indemnity agreement 07 required under AS 21.47.030(b)(5); membership may not take effect earlier than each 08 member's date of approval. An application for membership and approval of the 09 application shall be maintained as a permanent record by the board of trustees. 10  (b) Individual membership in a group is subject to cancellation by the group 11 under the bylaws of the group. In addition, individual members may elect to terminate 12 their participation in the group. The group shall notify the director and the division 13 of workers' compensation regarding the termination or cancellation of a membership. 14 Notice shall be given within 10 days after the termination or cancellation. 15  (c) The group shall pay all workers' compensation benefits for which a 16 member incurs liability during its period of membership. A member who elects to 17 terminate its membership or is cancelled by a group remains liable for any workers' 18 compensation obligations of the group and its members that were incurred during the 19 cancelled or terminated member's period of membership. 20  (d) A group member is not relieved of its workers' compensation liabilities 21 incurred during its period of membership except through payment by the group or the 22 member of workers' compensation benefits required under AS 23.30. 23  (e) The insolvency or bankruptcy of a member does not relieve the group or 24 another member of liability for the payment of any workers' compensation benefits 25 incurred during the insolvent or bankrupt member's period of membership. 26  Sec. 21.47.080. Service companies. (a) A service company or its employees, 27 officers, or directors may not be an employee, officer, or director of, or have either a 28 direct or indirect financial interest in, an administrator. An administrator or its 29 employees, officers, or directors may not be an employee, officer, or director of, or 30 have either a direct or indirect financial interest in, a service company. 31  (b) A service contract must state that unless the director permits otherwise, the

01 service company shall handle, to conclusion, all workers' compensation claims and 02 other obligations incurred during the contract period. 03  Sec. 21.47.090. Licensing of agent. Except for a salaried employee of a 04 group, its administrator, or its service company, a person soliciting membership for a 05 workers' compensation self-insurance group must be licensed as provided under 06 AS 21.27. 07  Sec. 21.47.100. Financial statements and other reports. (a) A group shall 08 submit to the director a statement of the financial condition of the group that is 09 annually audited by an independent certified public accountant on or before the last 10 day of the sixth month following the end of the group's fiscal year. Upon request, the 11 director shall allow a 60 day extension of the deadline described in this subsection. 12 The financial statement must be on a form prescribed by the director and must include 13 actuarially appropriate reserves, known as liabilities, for 14  (1) known claims and associated expenses; 15  (2) claims incurred but not reported and associated expenses; 16  (3) unearned premiums; and 17  (4) bad debts. 18  (b) The actuarial opinion required under (a) of this section shall be given by 19 a member of the American Academy of Actuaries or other qualified loss reserve 20 specialist as defined in the annual statement adopted by the National Association of 21 Insurance Commissioners. 22  (c) A person may not make an untrue statement of a material fact, or omit to 23 state a material fact necessary in order to make the statement made, in light of the 24 circumstances under which it is made, not misleading, in connection with the 25 solicitation of membership in a group. 26  (d) The director may prescribe the format and frequency of other required 27 reports including payroll audit reports, summary loss reports, and quarterly financial 28 statements. 29  Sec. 21.47.110. Required second injury contribution. A group is subject to 30 the required contribution provisions of the second injury fund under AS 23.30.040. 31 If an employee of a member of a group suffers a compensable injury, the member

01 shall contribute to the second injury fund as required under AS 23.30.040. 02  Sec. 21.47.120. Misrepresentation prohibited. A person may not make a 03 material misrepresentation or omission of a material fact in connection with the 04 solicitation of membership of a group. 05  Sec. 21.47.130. Investments. Funds not needed by a group for current 06 obligations may be invested by the board of trustees as provided under AS 21.21. 07  Sec. 21.47.140. Rates and reporting of rates. (a) A workers' compensation 08 self-insurance group shall adhere to the uniform classification system, uniform 09 experience rating plan, and manual rules designated by the director. 10  (b) Premium contributions to the group shall be determined by applying the 11 manual rates and rules to the appropriate classification of a member. Premium 12 contributions shall be adjusted by a member's experience credit or debit. Subject to 13 approval by the director, the premium contributions may also be reduced by an 14 advance premium discount reflecting the group's expense levels and loss experience. 15  (c) Notwithstanding (b) of this section, a group may apply to the director for 16 permission to make its own rates. Rates established under this subsection shall be 17 based on at least five years of the group's experience. 18  (d) A group shall use the premium rates designated by the director plus an 19 additional amount representing the member's portion of estimated expenses. A group 20 may contract with an advisory organization approved by the director for assistance in 21 developing appropriate rates. 22  (e) A group shall be audited at least annually by an auditor acceptable to the 23 director to verify proper classifications, experience rating, payroll, and rates. A report 24 of the audit shall be filed with the director in a form acceptable to the director. A 25 group or a member of a group may request a hearing on objections to the 26 classifications. If the director determines that as a result of an improper classification 27 a member's premium contribution is insufficient, the director shall order the group to 28 assess that member an amount equal to the deficiency. If the director determines that 29 as a result of an improper classification a member's premium is excessive, the director 30 shall order the group to refund to the member the excess premium collected. The 31 audit required under this subsection shall be at the expense of the group.

01  Sec. 21.47.150. Refunds. (a) If approved by the director, money for a fiscal 02 year in excess of the amount necessary to fund all obligations for that fiscal year may 03 be declared to be refundable by the board of trustees not less than 12 months after the 04 end of the fiscal year. 05  (b) A member shall be given a written description of the refund plan at the 06 time of application for membership. A refund for any fiscal year shall be paid only 07 to those employers who remain participants in the group for the entire fiscal year. 08  Sec. 21.47.160. Premium payment; reserves. (a) A group shall establish to 09 the satisfaction of the director a premium payment plan; the plan must include payment 10 of the balance of each member's annual premium in monthly or quarterly installments. 11  (b) A group shall establish and maintain actuarially appropriate loss reserves 12 that must include reserves 13  (1) for known claims and associated expenses; 14  (2) for claims incurred but not reported and associated expenses; and 15  (3) consisting of a deposit by each member of at least 25 percent of 16 that member's estimated annual premium before the start of the group's fiscal year; 17 a deposit made under this paragraph is in addition to the payment required under 18 AS 21.47.030(a)(10) and shall be refunded to a member who leaves the group if the 19 group does not have a deficiency and is not insolvent. 20  (c) A group shall establish and maintain bad debt reserves based on the 21 historical experience of the group or other groups. 22  Sec. 21.47.170. Workers' compensation self-insurance guaranty fund. A 23 group shall establish a workers' compensation self-insurance guaranty fund. The 24 purpose of the fund is to prevent insolvency and to allow a group to discharge its legal 25 liabilities and other obligations. In addition to any other deposit requirement under 26 this chapter, each member of the group shall make a one time only deposit of five 27 percent of that member's estimated annual premium before the start of the member's 28 first fiscal year with the group. A deposit made under this section shall be refunded 29 to a member who leaves the group if the group does not have a deficiency and is not 30 insolvent. 31  Sec. 21.47.180. Deficits and insolvencies. (a) If the assets of a group are at

01 any time insufficient to enable the group to discharge its legal liabilities and other 02 obligations and to maintain the reserves required of it under this chapter, it shall 03 immediately make up the deficiency or levy an assessment upon the group members 04 for the amount needed to make up the deficiency. 05  (b) In the event of a deficiency in any fiscal year, the deficiency shall be made 06 up immediately, either from 07  (1) surplus from a fiscal year other than the current fiscal year; 08  (2) administrative funds; 09  (3) funds collected under AS 21.47.160(b)(3); 10  (4) funds collected under AS 21.47.170; 11  (5) assessment of the membership, if ordered by the group and funds 12 described under (3) and (4) of this subsection are exhausted; or 13  (6) an alternate method that the director may approve or direct. 14  (c) The director shall be notified before a transfer of surplus funds from one 15 fiscal year to another. If a group fails to assess its members or to otherwise make up 16 a deficit within 30 days, the director shall order the group to make up the deficit. 17  (d) If a group fails to make the required assessment of its members within 30 18 days after the director orders it to do so, or if the deficiency is not fully made up 19 within 60 days after the date on which the assessment is made, or within a longer 20 period of time that is specified by the director, the group shall be considered to be 21 insolvent. 22  (e) The director shall proceed against an insolvent group in the same manner 23 as the director would proceed against an insolvent domestic insurer in this state as 24 provided under AS 21.78. 25  (f) In the event of the liquidation of a group, the director shall levy an 26 assessment upon its members in an amount the director determines to be necessary to 27 discharge all liabilities of the group, including the reasonable cost of liquidation. 28  Sec. 21.47.190. Penalties. (a) After notice and opportunity for a hearing, the 29 director may impose a civil penalty on a person or group found to be in violation of 30 any provision of this chapter. The civil penalty may not exceed $500 for each act or 31 violation and may not exceed $5,000 in the aggregate.

01  (b) After notice and opportunity for a hearing, the director may issue an order 02 requiring a person or group to cease and desist from engaging in an act or practice 03 found to be in violation of any provision of this chapter. 04  (c) Upon a finding, after notice and opportunity for a hearing, that a person 05 or group has knowingly violated a cease and desist order, the director may 06  (1) impose a civil penalty of not more than $5,000 for each act or 07 violation of the order not to exceed an aggregate amount of $25,000; or 08  (2) revoke the group's certificate of approval or any insurance license 09 held by the person. 10  (d) In this section, "knowingly" has the meaning given in AS 11.81.900. 11  Sec. 21.47.200. Revocation of certificate of approval. (a) After notice and 12 opportunity for a hearing, the director may revoke a group's certificate of approval if 13 the group 14  (1) is found to be insolvent; 15  (2) fails to pay any premium tax, regulatory fee or assessment, or 16 special fund contribution imposed upon the group; or 17  (3) fails to comply with any of the provisions of this chapter or with 18 any lawful order of the director within the time prescribed. 19  (b) In addition to (a) of this section, the director may revoke a group's 20 certificate of approval if, after notice and opportunity for hearing, the director finds 21 that 22  (1) a certificate of approval that was issued to the group was obtained 23 by fraud; 24  (2) there was a material misrepresentation in the application for the 25 certificate of approval; or 26  (3) the group or its administrator has misappropriated, converted, 27 illegally withheld, or refused to pay over upon proper demand any money that belongs 28 to a member, an employee of a member, or a person otherwise entitled to it, and that 29 has been entrusted to the group or its administrator in its fiduciary capacities. 30  Sec. 21.47.500. Definitions. In this chapter, 31  (1) "administrator" means an individual, partnership, or corporation

01 engaged by a workers' compensation self-insurance group's board of trustees to carry 02 out the policies established by the group's board of trustees and to provide day-to-day 03 management of the group; 04  (2) "insolvent" or "insolvency" means the inability of a workers' 05 compensation self-insurance group to pay its outstanding lawful obligations as the 06 obligations mature in the regular course of business, as may be shown either by an 07 excess of its required reserves and other liabilities over its assets or by its not having 08 sufficient assets to reinsure all of its outstanding liabilities after paying all accrued 09 claims owed by the group; 10  (3) "net premium" means premium derived from standard premium 11 adjusted by an advance premium discount; 12  (4) "service company" means a person that provides services not 13 provided by the administrator, including 14  (A) claims adjustment; 15  (B) safety engineering; 16  (C) compilation of statistics and the preparation of premium, 17 loss, and tax reports; 18  (D) preparation of required self-insurance reports; 19  (E) development of members' assessments and fees; and 20  (F) administration of a claim fund; 21  (5) "standard premium" means the premium derived from the manual 22 rates adjusted by experience modification factors but before advance premium 23 discounts; 24  (6) "workers' compensation self-insurance group" or "group" means a 25 not-for-profit association that has qualified as a trade organization under 26 U.S.C. 26 501(c)(6) (Internal Revenue Code) and is exempt from taxation under 26 U.S.C. 501(a) 27 (Internal Revenue Code), and consists of 10 or more employers who are engaged in 28 the same or similar type of business, who are members of the same bona fide trade or 29 professional association that has been in existence for not less than five years, and who 30 enter into agreements to pool their liabilities for workers' compensation benefits in this 31 state.