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You are here: Home . rules . 2004 . 0315-059
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Subchapter G. Workers' Compensation Insurance

Division 2. Group Self-Insurance Coverage

28 TAC §§5.6401 - 5.6411

The Texas Department of Insurance proposes new Division 2, §§5.6401 - 5.6411, concerning the provision of workers' compensation insurance through a self-insurance group. These new sections are necessary to implement HB 2095, 78th Legislature, which added Chapter 407A to the Labor Code. The new chapter allows employers in the same or similar type of business who are members of a trade association in Texas to join together and, with the approval of the commissioner of insurance, self-insure as a group for workers' compensation. The legislation is based on the National Association of Insurance Commissioners model act titled "Private Employer Workers' Compensation Group Self-Insurance Model Act." Many employers in Texas report that they cannot afford to provide workers' compensation coverage offered by insurance companies nor can they qualify as certified self-insurers. Because employers are more familiar with their industry, group self-insurance provides a more targeted approach to loss prevention, rehabilitation, and other preventive and corrective measures to reduce injuries covered by workers' compensation and related costs. Group self-insurance is intended to provide an affordable option for small and mid-size employers to make the benefits of workers' compensation coverage available to their employees. Employees enjoy the same protection as they would with workers' compensation provided through an insurance company or certified self-insurer since all provisions of the Texas workers' compensation law will apply to a self-insurance group approved by the commissioner under Labor Code Chapter 407A.

The proposed sections clarify or execute some provisions of the legislation. They are not intended to impose additional burdens beyond the legislation. Proposed §5.6401 describes the purpose of Labor Code Chapter 407A and the qualifications of a group. Proposed §5.6402 incorporates the definitions in Labor Code Chapter 407A and defines three additional terms. Proposed §5.6403 incorporates the provisions of Labor Code Chapter 407A as the requirements for obtaining a certificate of approval for a group; clarifies the information required to demonstrate the members of the group are in a similar type of business, belong to the trade or professional association that meets the requirements of the statute and satisfy the financial requirements of the statute, and requires each trustee of the group to provide a biographical affidavit and a set of fingerprints. Proposed §5.6404 clarifies the giving of the notice required by Labor Code §407A.051(d). Proposed §5.6405 clarifies the requirements for excess insurance under Labor Code §407A.054. Proposed §5.6406 prescribes provisions to be included in a group's indemnity agreement in accordance with Labor Code §407A.056(b). Proposed §5.6407 prescribes the form of an acknowledgement of the provisions of the indemnity agreement required by Labor Code §407A.056. Proposed §5.6408 prescribes the form of the performance bonds required by Labor Code Chapter 407A in accordance with §407A.051(c)(12) and (13). Proposed §5.6409 clarifies the limits on the location of the books and records. Proposed §5.6410 authorizes a group to invest its funds in the same manner as an insurer operating under Texas Insurance Code Chapter 2 for minimum capital and surplus and reserves. Proposed §5.6411 describes the requirement for contracts with a group.

Betty Patterson, Senior Associate Commissioner, Financial Program, has determined that for each year of the first five years the proposed sections will be in effect, there will be no fiscal impact to state and local governments as a result of the enforcement or administration of the rule. There will be no measurable effect on local employment or the local economy as a result of the proposal.

Ms. Patterson has determined that for each year of the first five years the sections are in effect, the public benefits anticipated as a result of the proposed sections will be the ability of small and mid-size employers to self-insure as large employers when they obtain certification to self-insure from the Texas Workers' Compensation Commission. By providing this option, more Texas employers should be able to participate in the workers' compensation system. Any cost to persons required to comply with this division for each of the first five years the proposed division will be in effect is the result of the enactment of HB 2095 and not the result of the adoption, enforcement, or administration of the division. Texas does not require employers to provide workers' compensation coverage to employees; therefore, only small and micro-businesses that chose to join a self-insurance group must comply with the proposed division. The cost of compliance with the proposed division for small and micro-businesses, if any, results entirely from the legislative enactment of HB 2095 and not as a result of the administration or enforcement of the proposed division. The proposed new division may not be waived for members of groups or groups that qualify as small or micro-businesses under Government Code §2006.001 because the requirements of the division only execute or clarify the statute, and the statute does not provide an exemption.

To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on April 26, 2004 to Gene C. Jarmon, General Counsel and Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P. O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comment must be simultaneously submitted to Betty Patterson, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104. A request for a public hearing should be submitted separately to the Office of the Chief Clerk.

The new sections are proposed under the Labor Code §407A.008 and Insurance Code §36.001. Labor Code §407A.008 provides the commissioner may adopt rules as necessary to implement Labor Code Chapter 407A, Group Self-Insurance Coverage. Insurance Code §36.001 provides that the commissioner of insurance may adopt any rules necessary and appropriate to implement the powers and duties of the Texas Department of Insurance under the Insurance Code and other laws of this state.

Labor Code Chapter 407A is affected by this proposal.

§5.6401. Purpose and Scope. Labor Code Chapter 407A and §§5.6401-5.6411 of this title (relating to Group Self-insurance Coverage) permit employers in the same or similar type of business who belong to a trade association in Texas to join together as a Group to self-insure for workers' compensation coverage. Employers may join together in any manner they choose, such as a partnership, trust, or a corporate form, however, regardless of the form of association, each employer is contractually liable for the workers' compensation obligations of the other employers in the Group if any of them default in the payment of those obligations. Groups which are issued a certificate of approval by the commissioner shall not be deemed to be insurers or insurance companies and shall not be subject to the provisions of the insurance laws or regulations except as provided by statute and this division; however, after a certificate of approval is issued, a Group shall comply with all the provisions of the workers' compensation law, Labor Code Chapter 407A and these sections. Only employers based in Texas are eligible to be members of a Group.

§5.6402 Definitions.

(a) The definitions in Labor Code Chapter 407A are incorporated into this division.

(b) The following words and terms, when used in this division shall have the following meanings, unless the context clearly indicates otherwise.

(1) Certified Public Accountant - An accountant or firm in good standing with the American Institute of Certified Public Accountants and the Texas State Board of Public Accountancy and who conforms to the Code of Professional Ethics of the American Institute of Certified Public Accountants.

(2) Actuary - A member in good standing of the Casualty Actuarial Society, or a member in good standing of the American Academy of Actuaries who has been approved as qualified for signing casualty loss reserves opinions by the Casualty Practice Council of the American Academy of Actuaries.

(3) Qualified claims servicing contractor - A person who provides claims service for a certified self-insurer, who is a separate business entity from the affected certified self-insurer, and who is:

(A) an insurance company authorized by the Texas Department of Insurance to write workers' compensation insurance;

(B) a subsidiary of an insurance company that provides claims service under contract; or

(C) a third-party administrator that has on its staff an individual licensed under Texas Insurance Code Article 21.07-4.

§5.6403. Application for Initial Certificate of Approval.

(a) An association of employers that proposes to organize as a workers' compensation self-insurance Group shall file with the department an application for a certificate of approval.

(b) Contents of the application must include the information required by Labor Code §407A.051.

(c) In addition to the information required under subsection (b) of this section, an applicant must provide the following:

(1) A statement that demonstrates that the members of the Group are in the same or similar type of business as required by Labor Code §407A.002(a)(1).

(A) The statement should demonstrate that the members of the Group have the same governing classification.

(B) If the members of the proposed Group have different governing classifications, the statement should demonstrate how the business pursuits of the members of the Group are similar enough in operation in the commissioner's discretion to be grouped together.

(2) To aid the department in making the determination that the trade or professional association meets the requirements of Labor Code §407A.002(a)(2) that the trade or professional association has been in existence in this state for purposes other than insurance for five years before the establishment of the Group, provide copies of all documents relating to the organization, governance and operation of the association and a narrative describing the activities of the association. Annual reports, conventions, seminars, dues requirements, newsletters and other evidence acceptable to the commissioner may be submitted to aid the department in making its determination.

(3) In addition to the copy of the bylaws of the Group required by Labor Code §407A.051(c)(6), submit copies of all documents relating to the organization, governance and operation of the Group.

(4) Projected financial statements for the 24 month period from the Group's start of operations using quarterly balance sheet projections based on the Group's fiscal year, quarterly cash flow schedules reflecting expenditures by category, quarterly revenue and expense projections and an actuarial projection of the Group's total projected incurred liabilities for workers' compensation which demonstrate compliance with Labor Code §407A.051(c)(10) which requires the Group to show its financial ability to pay the workers' compensation obligations of the employers who are members of the Group and Labor Code §407A.053(c) which requires the Group to post security equal to the greater of $300,000 or 25% of the Group's total incurred liabilities for workers' compensation. The projections shall include an estimate of the employees to be covered on which the projections and actuarial assumptions are based. The projections must reflect the identity, qualifications and credentials of the persons making the projections.

(5) A policy or contract of excess insurance that meets the requirements of §5.6405 of this title (relating to Excess Insurance).

(6) A performance bond for the administrator. The bond shall be in the form prescribed in §5.6408 of this title (relating to Performance Bonds).

(7) A performance bond for the service company, if there is one. The bond shall be in the form prescribed in §5.6408 of this title.

(8) An indemnity agreement executed by the members of the Group indemnifying the members, jointly and severally, for the obligations of the Group. At a minimum, the agreement shall include the provisions described in §5.6406 of this title (relating to Indemnity Agreement).

(9) An acknowledgement, in the form prescribed in §5.6407 of this title (relating to Acknowledgement), executed by each member of the Group that it is aware that it can be called upon to pay the workers' compensation claims of another member as a result of executing the indemnity agreement in §5.6406 of this title.

(10) The statement required by §5.6404 of this title (relating to Notification to the Department).

(11) A business plan or plan of operation that describes the general business activities, safety program and organization. The plan must include the identity of the administrator, service companies, qualified claims servicing contractor, risk manager, accountant and actuary.

(d) The Group must also submit the following:

(1) proof that it has received payment from each member of 25% of its first year estimated modified schedule rating premium. If the Group approves a member's submission of a promise to pay the premium, the employer must submit payment in full of the promise to pay within 10 days of the date the Group is approved by the department, or

(2) a certification by a certified public accountant and an actuary that assets and reserves of the trust satisfy the requirement of the Labor Code §407A.053.

(e) Each member of the initial board of trustees, subsequent members of the board, and senior management officials of the administrator and any service company shall provide the department a completed biographical affidavit adopted by reference under §7.507(b) of this title (relating to Forms Incorporated by Reference).

(f) Each member of the initial board of trustees, subsequent members of the board, and senior management officials of the administrator and any service company shall provide the department a complete set of fingerprints in a manner acceptable to the department.

§5.6404. Notification to the Department.

(a) A Group shall notify the department if any information filed under Labor Code §407A.051(c) has changed, the Group's manner of compliance with Labor Code §407A.051(c) or any regulations adopted thereunder has changed no later than 30 days after the effective date of the change.

(b) The Group shall acknowledge its responsibility by executing a statement that it will notify the department of any change in the information filed under Labor Code §407A.051(c) or the Group's manner of compliance with Labor Code §407A.051(c).

(c) A Group shall notify the department within 10 days whenever the books and records of the company indicate any of the conditions in Labor Code §407A.355(a) - (c) exist or in the opinion of the administrator are likely to occur.

§5.6405. Excess Insurance.

(a) The Group shall obtain excess insurance in an amount acceptable to the commissioner but in no event shall the excess insurance coverage be less than $5 million per occurrence.

(b) The Group shall obtain excess insurance coverage from an insurer that has a certificate of authority from the Texas Department of Insurance.

(c) In determining the Group's excess insurance, the commissioner shall consider a Group's size, types of employment, years in existence and other relevant factors.

(d) To assist the commissioner in making the determination under subsection (c) of this section, the Group shall submit an analysis prepared by an actuary of the appropriate level of specific excess insurance for the Group.

§5.6406. Indemnity Agreement. The indemnity agreement required by Labor Code §407A.051(c)(14) and §407A.056 must be executed by all employers in the Group and shall contain the following provisions:

(1) THIS IS A LEGAL DOCUMENT THAT BINDS THE SIGNATORIES TO SPECIFIC DUTIES AND RESPONSIBILITIES REGARDING GROUP FINANCIAL ARRANGEMENTS FOR COVERING WORKERS' COMPENSATION INJURIES AND OCCUPATIONAL DISEASE AND EMPLOYERS LIABILITY IN THE STATE OF TEXAS.

(2) JOINT AND SEVERAL LIABILITY: This paragraph requires the Employer to join in paying workers' compensation losses of the Group in the event the Group's assets are not sufficient to cover the liabilities. The Employer will be jointly and severally obligated with each other member of the Group to meet the workers' compensation and employer's liability obligations of the Group and to make any and all payments to the Group, which may be necessary to meet the Group's obligations under applicable Texas law and regulations and also in accordance with the Group's Bylaws; including agreeing that if the assets of the Group are at any time insufficient to enable the Group to discharge the Group's legal liabilities and other obligations and maintain the reserves required of it under applicable Texas statutes and regulations, and the Group is unable to otherwise make up the deficiency in accordance with Texas laws, regulations, and the Group's Bylaws, then the Employer will be jointly and severally liable to pay an assessment by the Group in an amount necessary to make up the deficiency.

(3) The Employer remains jointly and severally liable even if the Employer is cancelled by the Group or elects to terminate membership in the Group. The Employer will remain jointly and severally liable for the workers' compensation and employer's liability obligations for the Group and its members that were incurred during the Employer's period of membership.

(4) The insolvency or bankruptcy of the Employer will not relieve the Group, the Employer, or any member from liability for the payment of any benefits incurred during the insolvency or bankrupt member's period of membership.

(5) The Employer is not buying a policy of insurance.

(6) Because the sums required to fulfill workers' compensation and employer's liability obligation of the Group cannot be known precisely in advance, the premium and other assessments, reserve requirements, and other financial requirements for the Group's operation will initially be established by estimates.

§5.6407. Acknowledgement of Indemnity Agreement.

(a) Each member shall execute the acknowledgement set forth in subsection (b) of this section. The acknowledgement shall be printed in black ink on an 8 1/2 inch by 11 inch sheet of white paper in at least 12 point type.

(b) The acknowledgement form is as follows:

(Name of Group)

CAREFULLY READ and INITIAL SEPARATELY below that you fully understand the Employer's joint and several liability.

THE JOINT AND SEVERAL LIABILITY AGREEMENT FOR A WORKERS' COMPENSATION SELF-INSURANCE GROUP IS A LEGAL DOCUMENT THAT BINDS THE SIGNATORIES TO SPECIFIC DUTIES AND RESPONSIBILITIES REGARDING GROUP FINANCIAL ARRANGEMENTS FOR COVERING WORKERS' COMPENSATION INJURIES AND OCCUPATIONAL DISEASE AND EMPLOYERS LIABILITY IN THE STATE OF TEXAS.

In consideration of being made a member of the Group and sharing in the benefits of the Group's workers' compensation and employer's liability Group self-insurance, the Employer and the Group have executed an agreement. The agreement provides for JOINT AND SEVERAL LIABILITY: This agreement requires the Employer (you) to join in paying workers' compensation losses of the Group in the event the Group's assets are not sufficient to cover the liabilities.

The Employer (you) will be jointly and severally obligated with each other member of the Group to meet the workers' compensation and employer's liability obligations of the Group and to make any and all payments to the Group, which may be necessary to meet the Group's obligations under applicable Texas law and regulations and also in accordance with the Group's Bylaws; including agreeing that if the assets of the Group are at any time insufficient to enable the Group to discharge the Group's legal liabilities and other obligations and maintain the reserves required of it under applicable Texas statutes and regulations, and the Group is unable to otherwise make up the deficiency in accordance with Texas laws, regulations, and the Group's Bylaws, then the Employer (you) will be jointly and severally liable to pay an assessment by the Group in an amount necessary to make up the deficiency.

The Employer (you) remains jointly and severally liable even if the Employer is cancelled by the Group or elects to terminate membership in the Group. The Employer will remain jointly and severally liable for the workers' compensation and employer's liability obligations for the Group and its members that were incurred during the Employer's period of membership.

The insolvency or bankruptcy of the an employer will not relieve the Group, the Employer, or any member from liability for the payment of any benefits incurred during the insolvency or bankrupt member's period of membership.

________ By initialing to the left, I certify that I have carefully read the foregoing and understand that I may be responsible for paying the liabilities of other Group members if the Group's assets are not sufficient to cover its liabilities, regardless of the claims of the Employer.

________ By initialing to the left, I certify that I have carefully read the foregoing and understand that I may be responsible for paying an assessment by the Commissioner of Insurance as a result of the insolvency of another Group.

Employer: Name____________________________________

Address___________________________________

______________________________________

__________________________________________________________

(Printed name and title of officer/owner authorized to sign)

___________________________________________________________

(Signature of officer/owner authorized to sign)

§5.6408. Performance Bonds.

(a) Performance Bonds required of the administrator under Labor Code §407A.051(c)(12) and the service company under Labor Code §407A.051(c)(13) shall be in substantially the form set forth in subsection (b) of this section.

(b) The performance bond is as follows:

BOND OF ADMINISTRATOR OR SERVICE COMPANY FOR A WORKERS' COMPENSATION SELF-INSURED GROUP

Know all persons by these presents, that (name of administrator or service company) , as principal, and (name of surety) , as surety, being a surety company duly authorized to do business in the State of Texas, are held and firmly bound unto the Texas Department of Insurance for the obligations and liabilities of the principal, in the sum of $____________________, lawful money of the United States, for the payment of which sum we bind ourselves, our successors and assigns, jointly and severally.

The conditions of the above obligations are:

Whereas, the above named principal has entered into an agreement dated _____________ with (name of self-insurance Group) to perform duties and services for the Group.

Now, Therefore, if the principal shall perform his/her duties and obligations under the agreement dated ___________________, then this obligation shall be void; otherwise, this obligation will remain in full force and effect.

PROVIDED, this bond may be canceled as a future liability by the surety upon sixty days written notice to the principal and the Commissioner of the Texas Department of Insurance; however, such cancellation shall not discharge the surety's liability accrued during the term of this bond or which shall accrue in said sixty day period.

In witness whereof said principal and surety have executed this bond the _____ day of ___________, 20__, to be effective the ___day of ___________, 20__.

__________________________________

Principal

__________________________________

Surety

§5.6409. Books and Records. All books and records of a Group, held by the Group, its administrator or its service company, shall be located at all times in the State of Texas at the address stated in the application.

§5.6410. Investments.

(a) The board of trustees shall maintain responsibility for all money collected or disbursed from the Group.

(b) The board shall annually adopt a written investment plan consistent with the requirements for the investments authorized under Insurance Code Article 2.10 and §822.204 for minimum capital and surplus and reserves. The investment plan shall meet the requirements of Insurance Code Article 2.10(a). (c) With the prior written approval of the commissioner, a Group may invest up to 5% of its assets in a manner other than that authorized under this section.

(d) The Group shall hold all investments in accordance with Texas Insurance Code Article 21.39B.

§5.6411. Contract Provisions.

(a) A Group that engages any person to perform any function regulated under the Texas Insurance Code or Labor Code shall execute a contract with that person.

(b) A Group retains ultimate accountability and responsibility for compliance with all statutory and regulatory requirements and no contract, including a contract with the administrator or a service company, may be construed to limit in any way, the Group's ultimate accountability and responsibility.

(c) Any contract entered into between a Group and an administrator or a service company or any other person to perform functions regulated by the department must contain:

(1) a provision that the contract may not be construed to limit in any way the Group's responsibility, including financial responsibility, to comply with all statutory and regulatory requirements;

(2) a provision that requires subcontractors to comply with the applicable requirements of the Texas Insurance Code and rules adopted thereunder;

(3) a provision that requires the subcontractor to be appropriately licensed to perform any function required by the Texas Insurance Code to be licensed; and

(4) a provision that permits the commissioner to examine at any time:

(A) the financial solvency of the person, and

(B) the ability of the person to perform its responsibilities under the contract.



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