Other states' coverage in WC residual market policies Resource kit 31034

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1 Other states' coverage Other states' coverage in WC residual market policies Resource kit By Dan Corbin, CPCU, CIC, LUTC The idea of a uniform solution to other states coverage in the workers' compensation residual market seems like it is going about as far as our nation's political talk of eliminating the federal budget deficit. It is one of those topics that struggles to get out of the realm of fantasy. The National Council on Compensation Insurance (NCCI) has made significant progress in giving employers access to some of this elusive coverage. Its newly introduced Residual Market Limited Other States Insurance Endorsement (discussed later in this resource kit) may solve a significant part of the problem for many NCCI states (not New York) that have approved the endorsement. Nevertheless, without harmony and uniformity of workers' compensation laws and licensing laws throughout the states, a complete solution to this problem will remain out of reach. Before discussing the specifics of other states coverage in the residual market, allow me to refresh your memory about what it is, and what it is not. Extraterritorial application Employees frequently are called upon to travel outside the state of their employment and residency. Some of the reasons involve attendance at seminars, visitation with clients, sales activities, delivery and/or installation of products, maintenance contracts, temporary operations and field management functions. Most states apply the protection afforded employees under state workers' compensation laws in an extraterritorial manner, either by statutory provision or judicial interpretation (some may set time limitations on coverage out of state). New York Workers' Compensation Law Section 2(4) defines an employee as a person "... who is in the service of an employer whose principal business is that of carrying on or conducting a hazardous employment upon the premises or at the plant, or in the course of his employment away from the plant of his employer... [emphasis added]." This means that New York employees can expect New York workers' compensation benefits for injuries while working in another state, another country or in transit (case law under a variety of circumstances supports this interpretation). The extraterritorial coverage provided under the workers' compensation laws of the state of hire must not be confused with other states coverage found in Part Three of the Workers' Compensation And Employers Liability Insurance Policy (WC A). Other states coverage is not necessary to provide a New York employee with New York benefits while working in another state or country, as long as the claim is filed in New York. In other words, to obtain this protection, only the state of New York needs to be listed in item 3.A of

2 the Information Page. It is, therefore, unnecessary to list a state under item 3.C in order to trigger New York coverage in that state. Sovereign domain Although New York workers' compensation coverage will respond to an out-of-state injury, each of the other states has its own sovereign criteria for eligibility under the domain of its workers' compensation laws. Specific employments within each state are subject to statutes which hold the employer liable for various benefits made available to injured employees. Generally, payment of these benefits is required to be funded by an insurance policy. What seems to a New York employer like temporary and incidental work in another state may actually be sufficient to hold that employer liable to the workers' compensation laws of the other state. If the benefits of the other state are more liberal than New York's, the employee may want to file his claim in that other state. The employer, then, could end up compensating the employee for benefits available in the other state; or more likely, the difference between benefits paid by New York and the other state. Further, the employer could be subject to penalties for violating the other state's mandatory insurance requirements. For instance, the maximum civil penalty for failing to insure employees in Connecticut is now $50,000, although it is not likely to be imposed on an employer of nonresident employees. (1993 reform legislation significantly restricted application of the Connecticut Workers' Compensation Law to nonresident employees discussed later in this resource kit.) Other states coverage It is the other states provision of the policy that is intended to be a bridge to obtaining coverage under the workers' compensation laws of another state. All states, where current operations exist and coverage is relied upon from the policy, will necessarily be listed in item 3.A of the Information Page. If the potential exists to begin or temporarily extend operations in a state not listed in item 3.A, then such state should be listed in item 3.C of the Information Page. In doing so, coverage will apply automatically in that state whenever the employer conducts operations there. There is no premium charge for merely listing a state under item 3.C. However, any payroll associated with work done in that state will be assigned to that state's premium basis in the course of normal audit procedures. Notice required Other states coverage must be viewed as emergency coverage for temporary out-of-state employee assignments or for filling the void between the time work begins in another state and the time that the insurer is notified according to policy provisions. The policy notice provision found in Part Three, provision B, obligates the employer to notify the insurer when work begins. The notice reads: "Tell us at once if you begin work in any state listed in item 3.C of the Information Page." When notified, the insurer has the discretion to place that state under item 3.A for permanent coverage or direct the employer to obtain coverage elsewhere. An April 1992 revision of the workers' compensation policy makes it especially important to notify the insurer when work commences in an item 3.C state. Provision A.4 of Part Three was added to strengthen the notification requirement. As a result, no coverage is granted in a state, despite being listed under item 3.C, when the employer has work in progress in that state on the effective date of the policy; unless the state is listed in item 3.A, or notice is given to the insurer within 30 days of the effective date of the policy. Further limitations Insurers may withhold some states from item 3.C coverage, such as the monopolistic fund states, states where

3 the insurer is not licensed or states where the insurer chooses not to write coverage. (NCCI, as well as other insurance practitioners, believe that other states coverage provided an employer in a state where the insurer is unlicensed is not a hindrance to providing benefits because of the indemnity provision found in provision A.3 of Part Three. Nevertheless, insurers have been subject to penalty by state regulators for being unlicensed under such circumstances.) Thus, no automatic coverage will apply for states not listed. Also, there is no provision for automatic coverage under federal compensation laws (e.g., Longshore and Harbor Workers' Compensation Act, Jones Act, etc.). Coverage for obligations under these laws must be obtained by endorsement to the policy. Residual market Having established the purpose and use of item 3.A and item 3.C in the provision of other states coverage, we can now place this discussion in the context of the residual market. The residual workers' compensation mechanism in New York is the State Insurance Fund (SIF). This self-funded state agency is charged with the obligation to insure any employer seeking coverage required by the New York workers' compensation laws. Since the SIF is permitted to compete with private insurers, it is not necessarily the "market of last resort." The dilemma The availability of other states coverage in the SIF is impacted by the fact that it is not a licensed insurer in other states. Providing insurance in New York is its only mandate; it cannot provide coverage to meet the workers' compensation laws of another state. Thus, the employer and producer have a dilemma where to obtain other states coverage. State by state When an employer has ongoing operations in another state, it is easy to recognize the need for coverage under that state's laws. The employer usually does not protest when directed to purchase additional coverage under these circumstances. It is when employment is temporary or incidental that resistance occurs. The producer is then put in a position of counseling the employer on the ramifications of being without other states coverage. This may necessitate that the producer do a little research on the laws of other states. At present, the only alternative is to apply on an "if any" payroll basis to the residual market facility in the state where protection is desired; assuming, of course, that coverage is not available to the employer in the voluntary market. This is awkward for both the employer and the producer. NCCI limited other states' coverage Many NCCI jurisdictions have approved Item Filing RM-W-8018 Residual Market Limited Other States Insurance and Item P-35 (Amended) Residual Market Limited Other States Insurance Endorsement. Consequently, assigned insurers in these states are required to provide limited other states' coverage for policyholders. The endorsement's coverage is limited because it only covers incidental exposures in other states, not newly begun operations. An incidental exposure is one in which an employee temporarily enters another state in the course of employment. "Temporarily" is not defined in the endorsement, so some interpretive problems may surface on the question of how long is temporary? On the other hand, this limited coverage is very broad in the sense that coverage extends to all states, including the monopolistic fund states of North Dakota, Ohio, Washington, West Virginia and Wyoming. While NCCI makes it clear in the endorsement that payments made under other states coverage are permitted to be in the form of indemnification, thereby circumventing the licensing problem (hopefully), the employer may yet be accountable to the state for not complying with mandatory insurance requirements.

4 CT nonresidents Connecticut recently removed some employees from coverage under its Workers' Compensation Law. The 1993 Connecticut Workers' Compensation Reform Act [Public Act ] adds certain nonresident employees to the state's list of exempt employments. If the employer has no place of business in Connecticut, then a nonresident employee is not required to be covered, unless his services are primarily conducted in the state. And if the employer does maintain an office in Connecticut, coverage for the nonresident employee is still not required, unless at least 50 percent of his employment time is spent in the state. Wishful thinking A truly satisfactory solution cannot be achieved without some consistency in workers' compensation and licensing laws among the states. One unlikely solution would be for each state to provide its injured employees with benefits identical to all other states. Then there would be less reason for an employee to file a claim in a state other than the state of hire. Another solution, more conceivable, is for all states to adopt a model law which excludes most nonresident employees from coverage under their own workers' compensation laws (as Connecticut did). This would release an employer from dual liability when employment in other states is temporary or incidental. Licensing problems can be overcome with changes to existing licensing laws. Insurers that are obligated to insure temporary or incidental exposures in a given state can be exempted from that state's licensing requirements. The Alliance of American Insurers has pressed the National Association of Insurance Commissioners (NAIC) for action on this very issue.6/01 PIA your best source of information

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