2004 Annual Report

Dear Member Self-Insurer:

During 2004 the Association addressed new bankruptcy filings by member self-insurers Dan River, a textile manufacturer, and Interstate Bakeries, the maker of Hostess snack foods. As of this writing, both Dan River and Interstate continue to pay their workers’ compensation claims. [Three additional individual member self-insurers have filed for bankruptcy protection in 2005: Shelby Williams Industries, Dixie Stores, Inc. (operating as “Winn Dixie”), and Collins & Aikman. The North Carolina Department of Insurance (“NCDOI”) has recently liquidated former group self-insurance fund American Yarn Spinners and transferred its remaining claims to the Association as a result of insufficient assets.]

Since 1986, the Association has addressed and investigated 47 member insolvencies: 43 individual self-insurers and four (4) group self-insurance funds. A complete, updated listing of all member insolvencies is detailed on the Association website at www.ncsiga.org.

During 2004 the Association continued to expend significant resources defending against the assertion that the Association is liable for claims arising out of the liquidation of insurance companies that had assumed workers’ compensation liabilities from former self-insurance funds. These claims could pose substantial liability for the Association.

Reliance Insurance Company, et al. was liquidated in 2001 after having assumed claims from three North Carolina self-insurance funds: North Carolina Selective Fund (“Selective”), Professional Business Owners of America group (“PBOA”), and Burger King Franchisees Self-Insurance Fund (“Burger King”). Each fund ceased operations after transferring its respective liabilities and assets to Reliance in a loss portfolio transfer assumption reinsurance agreement (“LPT”). The Bowles case is the test case for the former Selective claims and should have some precedent value on the PBOA and Burger King insolvencies as well. The issues in Bowles are essentially whether the Association is liable for unpaid claims originally covered by a former group self-insurance fund (because the group was once a member of the Association) or whether the North Carolina Insurance Guaranty Association (“NCIGA”) is liable because a now insolvent commercial insurer assumed the claims. The Association has prevailed at every stage of this litigation. Arguments were presented in the Court of Appeals on May 9, 2005 and a decision is anticipated in 2005, although an appeal to the North Carolina Supreme Court is likely.

 

A substantially similar LPT transaction from the former SunHealth Group Self-Insurance Association (“SunHealth”) to Reciprocal of America has also resulted in litigation with numerous parties. However, in the SunHealth litigation, the NCIGA has questioned whether the LPT satisfied statutory requirements for a novation of the insurance obligations. Nevertheless, an appellate decision in the Bowles claim should provide persuasive authority for the central issue in the SunHealth case. The Association has prevailed on the SunHealth claim at the Deputy Commissioner level and the NCIGA appeal to the Full Commission has been delayed by a request for sanctions by some claimants against the employer-defendants.

Other litigation in the appellate courts involves the attempted transfer of workers’ compensation claims arising during the period that P.H. Glatfelter Company (“Glatfelter”) was licensed to individually self-insure its workers’ compensation liability. Glatfelter attempted to transfer its workers’ compensation liability to RFS Ecusta, Inc. (“Ecusta”), which was never a licensed North Carolina self-insurer, in connection with the sale of its Transylvania County paper plant. The Department of Insurance allowed Ecusta to post a $1.6 million certificate of deposit to secure the Glatfelter liabilities and released the Glatfelter surety bond. Ecusta subsequently defaulted on the Glatfelter workers’ compensation claims, closed the paper plant, and filed a bankruptcy petition.

The Association has prevailed at both levels of the Industrial Commission, asserting that the Glatfelter transfer to Ecusta was invalid and that Glatfelter remains solvent and liable for the claims. The Association has argued that Glatfelter must post a new statutory deposit adequate to secure its workers’ compensation liabilities. Oral arguments have been conducted in the Court of Appeals and a decision is anticipated soon, although an appeal to the Supreme Court is likely.

The Association anticipates this litigation will continue throughout 2005 and into 2006. Should the NCIGA or Glatfelter prevail, the potential liability for the Association is significant. Unlike most of the member insolvencies processed by the Association, there would be no statutory deposit available to defray the costs of Selective, PBOA, Burger King, or SunHealth claims because the statutory deposit held by the NCDOI was used to pay Reliance and Reciprocal of America to assume the claims. The ownership of the certificate of deposit securing the Glatfelter claims is in dispute and subject to litigation in the Western District of North Carolina in connection with the Ecusta bankruptcy petition.

The Association continues to litigate a significant charge against Pillowtex. The $500,000.00 statutory deposit has been exhausted and, despite efforts to maximize third party recoveries, the Pillowtex projected claims liability exceeds anticipated recoveries. New claims continue to be filed against this insolvent former self-insurer on a regular basis.

In 2004, the continued inadequacy of security deposits to pay claims against insolvent member self-insurers and the costs of defending the Association in the LPT Litigation and the Glatfelter litigation caused the Guaranty Fund balance to fall below the $5 million statutory minimum as of December 31, 2004. As a result, the Association authorized an annual assessment of 0.19% of each member’s 2004 gross premium or premium equivalent.

 

In order to lessen the likelihood of future assessments, the Association devoted substantial time and resources during 2004 to the study of a proposed Collateral Replacement Program for individual self-insurers. After more than two years of study, the Association, with the cooperation of the North Carolina Self-Insurers Association, sponsored Senate Bill 319, introduced in the General Assembly in February 2005. The Collateral Replacement Program enacted by Senate Bill 319 would replace the current system of individual self-insurers posting deposits with the NCDOI in the form of cash, surety bonds or letters of credit, with a system of aggregate security purchased by the Association using premiums collected from the individual self-insurers. The new Collateral Replacement Program would not affect group self-insurers. As of this writing, Senate Bill 319 has passed the Senate and is pending in the House. The full text of Senate Bill 319, in the form passed by the Senate, can be found on the Association’s website at www.ncsisa.org.

Please review the following summary of the Association’s audited financial statements for the years 1999-2004. This information is also posted on the Association website. A complete set of the Association audited financial statements for the period ending December 31, 2004 by sending a written request to the Association at P.O. Box 12442, Raleigh, NC 276052442.

The Board of Directors has very specific goals for the Association. The Association has a mandate to pay “covered claims” against insolvent member self-insurers in a fair and timely manner. The Association has sought to perform its duties during its 19-year history and to avoid the likelihood of member assessments. Inadequate security deposits have imposed significant contingent liability on the Association over the last three years. Moreover, the Association has been drawn into significant and unanticipated legal disputes seeking to impose additional liability on the Association.

In recent years, the Board of Directors has focused on studying and suggesting improvements to the NCDOI system of establishing the security deposit posted by member self-insurers because so often the reserves and numbers reflected in the actual reports have not been sufficient after member insolvencies. Inadequate security has been the predominant cause of assessments. The Board of Directors anticipates that the Collateral Replacement Program authorized by the passage of Senate Bill 319 would eventually eliminate member assessments resulting from inadequate security deposits and would eventually eliminate the need for Association assessments in any form.

Sincerely,

NORTH CAROLINA SELF-INSURANCE GUARANTY ASSOCIATION Stephen P. Gennett
Chairman,
Board of Directors