Insolvency: Part II

Insolvency: Part II
Back on August 31, 2011, in Insolvency – Part One, we considered the circumstances where the insurance carrier was insolvent but the insured employer was solvent, and we concluded that if the insurance company doesn’t pay then the employer must pay.

We said at that time that we would discuss various other insolvency scenarios in future postings.

So, now we will look at what happens when there is a default because the insurance carrier is insolvent and the insured employer is bankrupt.

If both the insurance carrier and the insured employer have defaulted on the payment of benefits then the injured worker may seek to proceed under Section 918 (33 U.S.C. 918) and obtain payment from the Special Fund administered by the U.S. Department of Labor.

Section 918(a) provides that in the case of default by the employer in the payment of compensation due under any Award for a period of thirty days after the compensation is due and payable, the injured worker may seek the issuance of a Supplemental Order Declaring Amount of Default.  This “Default Order” may be issued by the Department of Labor’s District Director after the appropriate investigation.  The injured worker may then file a copy of this “Default Order” with the clerk of the Federal district court for the judicial district in which the employer has his principal place of business or maintains an office, or for the judicial district where the injury occurred.  If the “Default Order” is in accordance with law, the district court will issue a judgment in favor of the injured worker.  The injured worker can then proceed to attempt to execute the judgment.

Section 918(b) provides that in cases where the judgment cannot be satisfied by reason of the employer’s insolvency or other circumstances precluding payment, the Secretary of Labor may, in his discretion and to the extent he shall determine advisable after consideration of current commitments payable from the Special Fund, make payment from the Fund.

The basic requirements for relief under section 918(b) are:

1)      There must be an existing final Compensation Order,

2)      The employer must be in default,

3)      Thirty days must elapse without payment,

4)      The injured worker must obtain a “Default Order”,

5)      The injured worker must obtain a judgment from federal district court based on the default order,

6)      The injured worker must seek to execute the district court’s judgment. 

If there is no existing Compensation Order, then the injured worker should have the case immediately referred to the Office of Administrative Law Judges for a formal hearing, since the District Director does not have the authority to issue a Compensation Order unless there is the express agreement of all parties.

Expedited Payment

Under certain circumstances, the injured worker may seek expedited payment from the Special Fund under Section 918(b).  In the event that both the insurance carrier and the employer are defunct and this can be clearly documented, the injured worker may seek expedited payment from the Director, Division of Longshore and Harbor Workers’ Compensation. Where the investigation by the District Director reveals that the responsible employer and insurance carrier are both defunct and that it would be futile to require the injured worker to obtain and attempt to execute a judgment from the federal district court, and there is no other possible source of payment, then the Director may make payment from the Special Fund without requiring the injured worker to follow futile procedures.   

Note:  payment under section 918(b) will only be made after all other sources of payment have been eliminated, including state insurance administrators, state guarantee funds, collateral deposits, and corporate officers (in the case where the employer was uninsured).

Section 918(b) is funded by means of the annual Special Fund assessment of all authorized insurance carriers and authorized self-insured employers.  It currently accounts for between 3 and 4 per cent of annual Special Fund expenditures.

Next:  What happens when an uninsured employer goes bankrupt?


John A. (Jack) Martone served for 27 years in the U.S. Department of Labor, Office of Workers’ Compensation Programs, as the Chief, Branch of Insurance, Financial Management, and Assessments and Acting Director, Division of Longshore and Harbor Workers’ Compensation. Jack joined The American Equity Underwriters, Inc. (AEU) in 2006, where he serves as Senior Vice President, AEU Advisory Services and is the moderator of AEU's Longshore Insider.
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