What happens when a U.S. Department of Labor Authorized Self-insured Employer Defaults Due to Insolvency

What happens when a U.S. Department of Labor Authorized Self-insured Employer Defaults Due to Insolvency


Upon default on the payment of benefits (not the filing of a petition in Bankruptcy Court), the U.S. Department of Labor (DOL) will seize the self-insurer’s security deposit.  The security will be in one of three types:

  1. A bank issued Letter of Credit – upon default the DOL will send a sight draft to the bank for the entire proceeds of the Letter of Credit.  The money will be put into a sub-account of the Special Fund and DOL will take over administration and payment of open claims.
  2. Treasury securities in a Federal Reserve Bank – upon default the DOL will transfer the entire amount on deposit into a sub-account of the Special Fund and DOL will take over administration and payment of open claims.
  3. Surety bond – upon default DOL will advise the surety company of its obligation under all existing surety bonds and will transfer open claim files to the surety for administration and payment.

If the total security posted by the self-insured employer ultimately proves to be inadequate to pay all claims, then the injured workers have recourse to the Special Fund under the provisions of section 918(b) as discussed in previous postings.

The security requirement is designed so that total incurred obligations will be matched dollar for dollar by security, without regard to the typical indemnity style excess insurance coverage (with the possible exception for the instance where DOL is a named insured on the excess policy).

Of course, in my many years of administering the Special Fund for DOL I noticed that individual self-insurers seem to be poor at reserving workers’ compensation cases.  This may have been due to the inherent uncertainties of reserving, except that reserving “mistakes” ran 100% on the low side – improving the internal numbers for the self-insurer’s compensation program as well as offering low figures for the regular reports to DOL on which the company’s security deposit is based.  In other words, individual self-insureds seemed to uniformly be too optimistic in estimating their workers’ compensation unpaid incurred losses.

In the case of a large employer with primary exposure under the Longshore Act, I considered it to be almost impossible to set aside adequate collateral in the event of default.

Actually, there is a partial explanation for the individual self-insurers’ chronic low reserving.  The company’s reserves assume that the company will continue to be a viable concern, able to actively adjust and defend its claims.  Once the company has defaulted one of the consequences is likely to be deterioration in the development of claims, as well as an increase in the number of claims filed as future employment at the self-insured employer becomes threatened.

At any rate, the security requirement is imposed for the purpose of protecting the injured worker and the Special Fund in the event of the self-insured employer’s (or insurance carrier’s) default, and ultimately to protect the rest of the industry, which will pay higher assessments in the event there is insufficient security and cases go into the Special Fund under Section 18.

A final note:  the employer who decides to terminate its individual self-insurance program should not expect the immediate release of its security.  DOL will hold that security for as long as it is necessary to secure open claims.  And for anyone familiar with workers’ compensation claims, that could be a long time.

From the employer’s perspective, the collateral requirement is a serious impediment to individual self-insurance.  From the DOL’s perspective, you can never have enough security.


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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