Insolvency of Workers' Compensation Liability Insurance Carrier May Result in Employer’s Liability for Claims

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06.30.2008

Steven A. Rowe

Susanna Knutson Gibbons

In recent years, a number of workers’ compensation liability insurance carriers, which issued workers’ compensation liability insurance policies to North Carolina employers, have been declared insolvent. When an insurance company is declared insolvent, normally a deadline is set by the Court for the filing of claims and proof of claims against the estate of the company in liquidation.

The North Carolina Insurance Guaranty Association (“Guaranty Association”) is a non-profit, statutory association existing pursuant to the requirements of the North Carolina Insurance Guaranty Association Act (“Guaranty Act”). Pursuant to the Guaranty Act, the Guaranty Association only has to step into the obligations of the insolvent insurer on “covered claims.” The Guaranty Act sets forth the obligations of the Guaranty Association with respect to “covered claims,” and for purposes of this employer alert, states in relevant part as follows:

Notwithstanding any other provision of this Article, a covered claim shall not include any claim filed with the Association after the final date set by the Court for the filing of claims against the liquidator or receiver of an insolvent insurer.

The unfortunate scenario for an employer occurs when its workers’ compensation liability insurance carrier becomes insolvent, the employer is unaware of the claim until after the date for filing proof of claims against the estate of the insolvent insurance carrier has passed, and then the Guaranty Association takes the position that it has no responsibility for payment of the claim. The Deputy Commissioners with the North Carolina Industrial Commission, who have ruled on this issue, have upheld the Guaranty Association’s position that it does not have coverage for these claims. The Full Commission of the North Carolina Industrial Commission and the Appellate Courts in North Carolina have not issued opinions on this issue.

A second possible, unfortunate scenario, for employers with an insolvent workers’ compensation liability insurance carrier, is the potential right by the Guaranty Association to recover payments made for a “covered claim” from the employer. The Guaranty Act provides that if the employer had a net worth as of a certain date which exceeds $50,000,000 and the Guaranty Association had made payments on its behalf, then the Guaranty Association has a right to recover its payments from the employer.

If an employer is placed in the situation of having its workers’ compensation liability insurance carrier declared insolvent, it is important for it to determine if the time has passed for filing a proof of claim; does it meet the net worth criteria such that the Guaranty Association will seek reimbursement; does it have possible uninsured liability, etc. Steve Rowe has represented clients facing these issues

Physical Address: 301 Fayetteville Street, Suite 1900, Raleigh, NC 27601

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06.30.2008