HB 198: "An Act relating to workers' compensation self-insurance."

00HOUSE BILL NO. 198 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 23 is amended by adding a new chapter to read: 04 Chapter 32. Workers' Compensation Self-insurance Groups. 05  Sec. 23.32.010. Scope. (a) 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. 08  (b) A workers' compensation self-insurance group that is issued a certificate 09 of approval by the director may not be considered to be an insurer or an insurance 10 company and is not subject to AS 21 except as otherwise provided in this chapter. 11  Sec. 23.32.020. 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. 23.32.030. 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 department. The application must include the group's name, location of its principal 04 office, date of organization, name and address of each member, and other information 05 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 23.32.170; 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.; and 21  (10) proof of payment to the group by each member of not less than 22 25 percent of that member's first year estimated annual net premium on a date 23 prescribed by the director; payment may be considered to be part of the first year 24 premium payment of a member if the proposed group is granted a certificate of 25 approval. 26  (b) To obtain and to maintain its certificate of approval, a workers' 27 compensation self-insurance group shall meet the following requirements, as well as 28 other requirements established by law: 29  (1) a combined net worth of all members of the group of at least 30 $1,000,000, evidenced by financial statements that have been audited by an 31 independent certified public accountant;

01  (2) security in the amount of $450,000 that shall be provided by cash, 02 a surety bond, security deposit, or financial security endorsement or any combination 03 of cash, bond, deposit, or endorsement; if a surety bond is used to meet the security 04 requirement, the surety bond 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 the United States of America; certificates of deposit in a federally 09 insured bank; shares or savings deposits in a federally insured savings and loan 10 association or credit union; or any bond or security issued by a state of the United 11 States of America and backed by the full faith and credit of the state; securities shall 12 be deposited with the director and assigned to and made negotiable by the 13 commissioner of labor under a trust document acceptable to the director; interest 14 accruing on a negotiable security shall be collected and transmitted to the depositor, 15 provided the depositor is not in default; a financial security endorsement, issued as part 16 of an acceptable excess insurance contract, may be used to meet all or part of the 17 security requirement; the cash, bond, security deposit, or financial security endorsement 18 must be 19  (A) for the benefit of the state solely to pay workers' 20 compensation claims and associated expenses; and 21  (B) payable upon the insolvency of the group as described 22 under AS 23.32.170(d); 23  (3) evidence of the availability of specific and aggregate excess 24 insurance in a form, in an amount, and by an insurance company acceptable to the 25 director; the director may establish minimum requirements for the amount of specific 26 and aggregate excess insurance based on size differences among groups, types of 27 employment, years in existence, and other relevant factors, and may permit a group to 28 meet this requirement by placing in a designated depository securities of the type 29 referred to in (2) of this subsection; 30  (4) an annual standard premium of at least $1,000,000; 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) in a form and amount prescribed by the director, a fidelity bond and 07 an errors and omissions insurance policy for the administrator and a professional 08 liability insurance policy for the trustees; and 09  (7) in a form and amount prescribed by the director, a fidelity bond and 10 an errors and omissions insurance policy for the service company; the director may 11 also require the service company providing claim services to furnish a performance 12 bond in a form and amount prescribed by the director. 13  (c) A group shall notify the director of any material change in the information 14 required to be filed under (a) of this section or in the manner of its compliance with 15 (b) of this section not later than 30 days after the change. 16  (d) The director shall 17  (1) evaluate the information provided by the application required to be 18 filed under (a) of this section to assure that gaps in funding do not exist and that funds 19 necessary to pay workers' compensation benefits will be available on a timely basis; 20  (2) act upon a completed application for a certificate of approval within 21 60 days; if, because of the number of applications, the director is unable to act upon 22 an application within this period, the director may have an additional 60 days to act 23 on an application; 24  (3) issue to the group a certificate of approval upon finding that the 25 proposed group has met all requirements, or the director shall issue an order refusing 26 the certificate setting out reasons for refusal upon finding that the proposed group does 27 not meet all requirements of this chapter. 28  Sec. 23.32.035. Premium tax. A workers' compensation self-insurance group 29 is subject to the premium tax imposed on domestic insurers under AS 21.09.210(b)(1). 30  Sec. 23.32.040. Certificate of approval; termination. (a) A certificate of 31 approval issued by the director to a workers' compensation self-insurance group

01 authorizes the group to provide workers' compensation benefits as required under 02 AS 23.30. The certificate of approval remains in effect until terminated at the request 03 of the group or revoked by the director under AS 23.32.190. 04  (b) The director may not grant the request of a group to terminate its 05 certificate of approval unless the group has insured or reinsured all incurred workers' 06 compensation obligations with an authorized insurer under an agreement filed with and 07 approved in writing by the director. Workers' compensation obligations must include 08 both known claims and associated expenses and claims incurred but not reported and 09 associated expenses. Subject to the approval of the director, a group may merge with 10 another group engaged in the same or similar type of business only if the resulting 11 group assumes in full all obligations of the merging groups. The director may hold 12 a hearing on the merger and shall hold a hearing if any party, including a member of 13 either group, requests a hearing. 14  Sec. 23.32.050. Examinations. The director may examine the affairs, 15 transactions, accounts, records, and assets and liabilities of a group as often as the 16 director requires. The expense of an examination shall be assessed against the group 17 in the same manner that an insurer is assessed for an examination under AS 21.06.160. 18  Sec. 23.32.060. Board of trustees: membership, powers, duties, and 19 prohibitions; accounts. (a) A group shall be operated by a board of trustees of not 20 less than five persons whom the members of a group elect for stated terms of office. 21 At least two-thirds of the trustees must be employees, officers, or directors of members 22 of the group. The group's administrator, service company, or an owner, officer, 23 employee of, or another person affiliated with the administrator or service company 24 may not serve on the board of trustees of the group. A trustee shall be a resident of 25 this state or an officer of a corporation authorized to do business in this state. The 26 board of trustees of a group shall ensure that all claims are paid promptly and take all 27 necessary precautions to safeguard the assets of the group. A trustee shall observe the 28 standards in dealing with the assets of the group that would be observed by a prudent 29 person dealing with the property of another, and, if the trustee has special skills or is 30 named trustee on the basis of representations of special skills or expertise, the trustee 31 is under a duty to use those skills.

01  (b) The board of trustees shall 02  (1) be responsible for all money collected or disbursed from the group 03 and segregate all money into a claims fund account and an administrative fund 04 account, as follows: 05  (A) at least 70 percent of the net premium shall be placed into 06 a designated depository for the sole purpose of paying claims, allocated claims 07 expenses, reinsurance or excess insurance, income taxes, and special fund 08 contributions, including second injury and other loss related funds; this shall 09 be called the "claims fund account"; 10  (B) the remaining net premium shall be placed into a designated 11 depository for the payment of taxes, general regulatory fees and assessments, 12 and administrative costs; this shall be called the "administrative fund account"; 13  (C) the director may approve an administrative fund account of 14 more than 30 percent and a claims fund account of less than 70 percent only 15 if the group shows to the director's satisfaction that 16  (i) more than 30 percent is needed for an effective safety 17 and loss control program; or 18  (ii) the group's aggregate excess insurance attaches at 19 less than 70 percent; 20  (2) maintain minutes of its meetings and make the minutes available 21 to the director; 22  (3) designate an administrator to carry out the policies established by 23 the board of trustees and delineate in the written minutes of its meetings the areas of 24 authority the board of trustees delegates to the administrator; 25  (4) retain an independent certified public accountant to prepare the 26 statement of financial condition required under AS 23.32.100. 27  (c) The board of trustees may not 28  (1) extend credit to individual members for payment of a premium 29 except under a payment plan approved by the director; or 30  (2) borrow money from the group or in the name of the group, except 31 in the ordinary course of business, without first advising the director of the nature and

01 purpose of the loan and obtaining prior approval from the director. 02  Sec. 23.32.070. Group membership; termination; liability. (a) An 03 employer joining a workers' compensation self-insurance group after the group has 04 been issued a certificate of approval shall (1) submit an application for membership 05 to the board of trustees or its administrator; and (2) enter into the indemnity agreement 06 required under AS 23.32.030(b)(5); membership may not take effect earlier than each 07 member's date of approval. An application for membership and approval of the 08 application shall be maintained as a permanent record by the board of trustees. 09  (b) Individual membership in a group is subject to cancellation by the group 10 under the bylaws of the group. In addition, an individual member may elect to 11 terminate participation in the group. The group shall notify the director regarding the 12 termination or cancellation of a membership. Notice shall be given within 10 days after 13 the termination or cancellation. 14  (c) The group shall pay all workers' compensation benefits for which a 15 member incurs liability during its period of membership. A member who elects to 16 terminate its membership or whose membership is cancelled by a group remains liable 17 for any workers' compensation obligations of the group and its members that were 18 incurred during the cancelled or terminated member's period of membership. 19  (d) A group member is not relieved of its workers' compensation liabilities 20 incurred during its period of membership except through payment by the group or the 21 member of workers' compensation benefits required under AS 23.30. 22  (e) The insolvency or bankruptcy of a member does not relieve the group or 23 another member of liability for the payment of any workers' compensation benefits 24 incurred during the insolvent or bankrupt member's period of membership. 25  Sec. 23.32.080. Service companies. (a) A service company or its employees, 26 officers, or directors may not be an employee, officer, or director of, or have either a 27 direct or indirect financial interest in, an administrator. An administrator or its 28 employees, officers, or directors may not be an employee, officer, or director of, or 29 have either a direct or indirect financial interest in, a service company. 30  (b) A service contract must state that unless the director permits otherwise, the 31 service company shall handle, to conclusion, all workers' compensation claims and

01 other obligations incurred during the contract period. 02  Sec. 23.32.090. Licensing of agent. Except for a salaried employee of a 03 group, its administrator, or its service company, a person soliciting membership for a 04 workers' compensation self-insurance group must be licensed as provided under 05 AS 21.27. 06  Sec. 23.32.100. Financial statements and other reports. (a) A group shall 07 submit to the director a statement of the financial condition of the group on or before 08 the last day of the sixth month following the end of the group's fiscal year. The 09 statement of financial condition must be annually audited by an independent certified 10 public accountant. Upon request, the director shall allow a 60 day extension of the 11 deadline described in this subsection. The financial statement must be on a form 12 prescribed by the director and must include actuarially appropriate reserves, known as 13 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) The director may prescribe the format and frequency of other required 23 reports including payroll audit reports, summary loss reports, and quarterly financial 24 statements. 25  Sec. 23.32.110. Required second injury contribution. A group is subject to 26 the required contribution provisions of the second injury fund under AS 23.30.040. 27 If an employee of a member of a group suffers a compensable injury, the group shall 28 contribute to the second injury fund as required under AS 23.30.040. 29  Sec. 23.32.120. Misrepresentation prohibited. (a) A person may not make 30 a material misrepresentation or omission of a material fact in connection with the 31 solicitation of membership of a group.

01  (b) A person may not make an untrue statement of a material fact, or omit to 02 state a material fact necessary in order to make the statement made, in light of the 03 circumstances under which it is made, not misleading, in connection with the 04 solicitation of membership in a group. 05  Sec. 23.32.130. Rates and reporting of rates. (a) A workers' compensation 06 self-insurance group shall adhere to the uniform classification system, uniform 07 experience rating plan, and manual rules designated by the director. 08  (b) Premium contributions to the group shall be determined by applying the 09 manual rates and rules to the appropriate classification of a member. Premium 10 contributions shall be adjusted by a member's experience credit or debit. Subject to 11 approval by the director, the premium contributions may also be reduced by an 12 advance premium discount reflecting the group's expense levels and loss experience. 13  (c) Notwithstanding (b) of this section, a group may apply to the director for 14 permission to make its own rates. Rates established under this subsection shall be 15 based on at least five years of the group's experience. A group may contract with an 16 advisory organization approved by the director for assistance in developing appropriate 17 rates. 18  (d) Unless a group receives permission from the director to make its own rates, 19 a group shall use the premium rates designated by the director. 20  (e) A group shall be audited at least annually by an auditor acceptable to the 21 director to verify proper classifications, experience rating, payroll, and rates. A report 22 of the audit shall be filed with the director in a form acceptable to the director. A 23 group or a member of a group may request a hearing on objections to the 24 classifications. If the director determines that as a result of an improper classification 25 a member's premium contribution is insufficient, the director shall order the group to 26 assess that member an amount equal to the deficiency. If the director determines that 27 as a result of an improper classification a member's premium is excessive, the director 28 shall order the group to refund to the member the excess premium collected. The 29 audit required under this subsection shall be at the expense of the group. 30  Sec. 23.32.140. Refunds. (a) If approved by the director, money for a fiscal 31 year in excess of the amount necessary to fund all obligations for that fiscal year may

01 be declared to be refundable by the board of trustees not less than 12 months after the 02 end of the fiscal year. 03  (b) The group shall give a prospective member a written description of the 04 refund plan at the time of application for membership. A refund for any fiscal year 05 shall be paid only to those employers who remain participants in the group for the 06 entire fiscal year. 07  Sec. 23.32.150. Premium payment; reserves. (a) A group shall establish to 08 the satisfaction of the director a premium payment plan. The plan must include 09 payment of the balance of each member's annual premium in monthly installments. 10  (b) A group shall establish and maintain actuarially appropriate loss reserves 11 that must include reserves for 12  (1) known claims and associated expenses; and 13  (2) claims incurred but not reported and associated expenses. 14  (c) A group shall establish and maintain bad debt reserves based on the 15 historical experience of the group or other groups. 16  Sec. 23.32.160. Workers' compensation self-insurance guaranty fund. A 17 group shall establish a workers' compensation self-insurance guaranty fund. The 18 purpose of the fund is to prevent insolvency and to allow a group to discharge its legal 19 liabilities and other obligations. In addition to any other deposit requirement under 20 this chapter, the group shall make a one time only deposit to the guaranty fund of five 21 percent of the group's estimated annual premium before the start of the group's first 22 fiscal year. A group shall obtain reinsurance for the fund described in this section in 23 a form and amount approved by the director. 24  Sec. 23.32.170. Deficits and insolvencies. (a) If the assets of a group are at 25 any time insufficient to enable the group to discharge its legal liabilities and other 26 obligations and to maintain the reserves required of the group under this chapter, the 27 group shall immediately make up the deficiency or levy an assessment upon the group 28 members for the amount needed to make up the deficiency. 29  (b) In the event of a deficiency in any fiscal year, the deficiency shall be made 30 up immediately from 31  (1) surplus from a fiscal year other than the current fiscal year;

01  (2) administrative funds; 02  (3) funds collected under AS 23.32.160; 03  (4) assessment of the membership, if ordered by the group and funds 04 described under (3) of this subsection are exhausted; or 05  (5) an alternate method that the director may approve or direct. 06  (c) The director shall be notified before a transfer of surplus funds from one 07 fiscal year to another. If a group fails to assess its members or to otherwise make up 08 a deficit within 60 days, the director shall order the group to make up the deficit. 09  (d) If a group fails to make the required assessment of its members within 30 10 days after the director orders it to do so, or if the deficiency is not fully made up 11 within 120 days after the date on which the assessment is made, or within a longer 12 period of time that is specified by the director, the group shall be considered to be 13 insolvent. 14  (e) In the event of the liquidation of a group, the director shall levy an 15 assessment upon its members in an amount the director determines to be necessary to 16 discharge all liabilities of the group, including the reasonable cost of liquidation. 17  Sec. 23.32.180. Penalties. (a) After notice and opportunity for a hearing, the 18 director may impose a civil penalty on a person or group found to be in violation of 19 any provision of this chapter. The civil penalty may not exceed $500 for each act or 20 violation and may not exceed $5,000 in the aggregate. 21  (b) After notice and opportunity for a hearing, the director may issue an order 22 requiring a person or group to cease and desist from engaging in an act or practice 23 found to be in violation of any provision of this chapter. 24  (c) Upon a finding, after notice and opportunity for a hearing, that a person 25 or group has knowingly violated a cease and desist order, the director may 26  (1) impose a civil penalty of not more than $5,000 for each act or 27 violation of the order not to exceed an aggregate amount of $25,000; or 28  (2) revoke the group's certificate of approval or any insurance license 29 held by the person. 30  (d) In this section, "knowingly" has the meaning given in AS 11.81.900. 31  Sec. 23.32.190. Revocation of certificate of approval. (a) After notice and

01 opportunity for a hearing, the director may revoke a group's certificate of approval if 02 the group 03  (1) is found to be insolvent; 04  (2) fails to pay any premium tax, regulatory fee or assessment, or 05 special fund contribution imposed upon the group; or 06  (3) fails to comply with any of the provisions of this chapter or with 07 any lawful order of the director within the time prescribed. 08  (b) In addition to (a) of this section, the director may revoke a group's 09 certificate of approval if, after notice and opportunity for hearing, the director finds 10 that 11  (1) a certificate of approval that was issued to the group was obtained 12 by fraud; 13  (2) there was a material misrepresentation in the application for the 14 certificate of approval; or 15  (3) the group or its administrator has misappropriated, converted, 16 illegally withheld, or refused to pay over upon proper demand any money that belongs 17 to a member, an employee of a member, or a person otherwise entitled to it, and that 18 has been entrusted to the group or its administrator in its fiduciary capacities. 19  Sec. 23.32.200. Other provisions applicable. The following provisions of law 20 are applicable to a workers' compensation self-insurance group as if the group were 21 an insurer: 22  (1) authority granted to the director of the division of insurance under 23 AS 21.06.120, 21.06.140 - 21.06.160, and 21.06.180 - 21.06.230; 24  (2) service of process provisions under AS 21.09.180 and 21.09.190; 25  (3) requirements imposed under AS 21.12.010 - 21.12.090; 26  (4) investment practices required under AS 21.21; 27  (5) administration of deposit requirements under AS 21.24; 28  (6) provisions applicable to producers, agents, administrators, brokers, 29 adjusters, and managers under AS 21.27.405, 21.27.410, 21.27.420, 21.27.440, and 30 21.27.460; 31  (7) unfair trade practice provisions under AS 21.36;

01  (8) provisions applicable to reciprocal and cooperative insurers under 02 AS 21.75.130, 21.75.135, and 21.75.270; 03  (9) provisions applicable to rehabilitation and liquidation under 04 AS 21.78. 05  Sec. 23.32.499. Definitions. In this chapter, 06  (1) "administrator" means an individual, partnership, or corporation 07 engaged by a workers' compensation self-insurance group's board of trustees to carry 08 out the policies established by the group's board of trustees and to provide day-to-day 09 management of the group; 10  (2) "director" means the director of the subunit of the Department of 11 Labor responsible for the administration of AS 23.30; 12  (3) "insolvent" or "insolvency" means the inability of a workers' 13 compensation self-insurance group to pay its outstanding lawful obligations as the 14 obligations mature in the regular course of business, as may be shown either by an 15 excess of its required reserves and other liabilities over its assets or by its not having 16 sufficient assets to reinsure all of its outstanding liabilities after paying all accrued 17 claims owed by the group; 18  (4) "net premium" means premium derived from standard premium 19 adjusted by an advance premium discount; 20  (5) "service company" means a person that provides services not 21 provided by the administrator, including 22  (A) claims adjustment; 23  (B) safety engineering; 24  (C) compilation of statistics and the preparation of premium, 25 loss, and tax reports; 26  (D) preparation of required self-insurance reports; 27  (E) development of members' assessments and fees; and 28  (F) administration of a claim fund; 29  (6) "standard premium" means the premium derived from the manual 30 rates adjusted by experience modification factors but before advance premium 31 discounts;

01  (7) "workers' compensation self-insurance group" or "group" means 10 02 or more employers who are engaged in the same or similar type of business, who are 03 members of the same bona fide trade or professional association that has been in 04 existence for not less than five years, and who enter into agreements to pool their 05 liabilities for workers' compensation benefits in this state.