The highly controversial New York State Budget for FY09-10 has been completed. Among the hardest hit businesses in the new budget is the insurance industry. While many aspects of the Governor’s original proposal which were very costly to the insurance industry did not make their way into the final enactment, the new budget still stings the insurance industry. Probably to single most controversial impact on the insurance industry will take the form of massively increased Section 332 assessments for the operation of the insurance department. The insurance department budget for the upcoming year was set at the eye-popping level of five hundred and fifty-five million, five hundred and ninety-six thousand dollars!
($555,596,000) A last minute change converted the planned appropriation for Timothy’s Law of about one hundred million dollars ($100,000,000) from the assessable portion of the Department’s budget to an appropriation to come from the State General Fund. Thus, the Section 332 assessable portion of the Insurance Department budget amounts to four hundred and fifty-five million, three hundred and eighty-five thousand dollars. ($455,385,000) Of course, as I have discussed in an earlier column, the predominant share of the Department’s budget will be “transferred” or “suballocated” to other agencies to run their programs. What are those “other” agencies and their programs? There is nearly $10 million to the Health Department for administration of various lead poisoning prevention programs, $7.5 million to the Health Department to administer the immunization program, $161 million to Health to finance the Healthy NY program. The monies for the Healthy NY program had previously come from the HCRA fund.
The large increase in the Section 332 assessment will force significant cost increases on all insurance carriers in New York, no matter which line of insurance they may write. A Governor’s proposal to extend the Section 332 assessment to foreign insurers doing business in New York was left out of the final budget due to serious retaliatory tax concerns raised by the domestic industry. Health insurers were also hit very hard since they bear well over half the increased Section 332 assessment but also must deal with a $240 million increase in the Covered Lives Assessment. Also, the new budget calls for an increase of $126 million in the HCRA hospital patient services assessment, which is essentially a sales tax on health care services performed in hospitals. HMO’s were hit with an extension of the premium tax on commercial insurers to them in the amount of $107 million.
Finally, the auto insurance surcharge for the motor vehicle security fund run by the Department of Motor Vehicles was raised from $5 to $10. From my conversations with several industry representatives the message they sent to their insurance company clients was “It could have been a lot worse!” I know it is hard to look for the positive aspect of a budget hit that is this bad but there was indeed a silver lining on this dark cloud. Gone was the initial proposal to raise the premium tax on life insurers. Also rejected was language in the Governor’s initial Deficit Reduction Plan which would have permanently changed the language in Section 332 which would expressly justify the sub-allocation process from the department to other agencies and their programs which are unrelated to the operation and maintenance of the Insurance Department. This preserves, at least in principle, the industry position that the Section 332 assessment may only be used for expenses necessary to operate the Department.
The proposal to increase fines and penalties for violation of the Insurance Law was also defeated. This defeat included proposals to raise the basic penalty for willful violation of the Insurance Law from $500 to $2500, an increase of the fine for acting without a license from $500 to$10,000 and several other fine and penalty increases that would have placed a prohibitive burden on industry players committing inadvertent or minor violations of the Insurance Law.
The further bad taste left in everyone’s mouth was the fact that the budget was developed under the highest level of secrecy ever. That is really saying a lot, since there has always been a great deal of secrecy surrounding the Albany budget process.

New York weighs rule putting D&O buyers in charge of defense
Superintendent Eric Dinallo recently announced that the New York Insurance Department is developing a rule that likely would legalize directors and officers liability policies that allow the policyholder to manage its legal defense during litigation.
Speaking at the Professional Liability Underwriting Society’ D&O Symposium in New York City, Dinallo explained that an October, 2008 opinion of the Department’s General Counsel which held that those types of policies are illegal under the regulations, which caused a great uproar among D&O insurers and buyers because many such policies are currently in force, was meant to “help” and “clarify”. He further stated that “we were surprised as an agency (by) the amount of distress that this caused.” Some policyholders want the right to select their own counsel, said John McCarrick, a partner at Edwards, Angell Palmer & Dodge, LLP, “if you’re taking that right away and saying ‘no, the insurer has to do it’, then that’s problematic.”
The Department has asked for the industry’s help in crafting a new regulation by the end of April clarifying the legality of such policies.
The October 2008 General Counsel’s opinion dropped something of a bombshell on the D&O industry, who asserted that the Department had previously approved several policy forms which transferred the duty to defend to policyholders. There is a question as to whether the Opinion applies only to the policy which was the subject of the inquiry or whether its prohibition could apply to all of the policies in the marketplace. Over time, the D&O industry came to the conclusion that something needed to be done to prevent such an occurrence, “By the end of November, everyone knew about this and thought, ‘This is a disaster, we’ve got to do something on this,’” said Gary Henning, assistant VP of the Northeast region for the American Insurance Association. The industry began discussions with the Department. The AIA has sought feedback from its members after circulating a revised draft for comment.
Brokers are creating their own draft and the two groups will meet to reconcile any differences before approaching the Department with a proposal. The self-defense D&O policies can be very popular with large corporations with their own legal departments and are able to manage their own defense. Sometimes the insurance company desire to settle quickly to avoid large legal bills is contrary to the insured’s desire to fully litigate a matter to avoid damage to its reputation. All sides appear confident that an amicable regulatory solution will be worked out.

New York Times skewers the New York Worker’s Compensation System
Calling the New York Worker’s Compensation system “a costly legal swamp”, N.R. Kleinfield and Steven Greenhouse of the New York Times released a lengthy tome on that administrative adjudicatory system, that pieced together anecdotal accounts from various participants in the system which, taken as a whole, amounts to an extremely unflattering image of a system in need of major reform. The compensation system is described as “a subbasement of the legal world, a $5.5 billion-a-year state-run bureaucracy that…struggles to treat workers with due speed, protect employers from fraud or mute tensions in the workplace.” According to the Times reporters, who claim to have spent 18 months attending hearings, reviewing cases and interviewing participants, “all that is flawed with the system can be witnessed daily inside the stubby building at 168- 46 91st Avenue in Jamaica (the Queens district office), one of three dozen redoubts statewide where cases get heard. It doesn’t take long there to grasp how proceedings have devolved into something out of Kafka, who was himself once a compensation claims examiner. At some hearings, as judges looked on, lawyers chatted on cell phones, cracked bawdy jokes or read newspapers during testimony. Expert witnesses seemed biased to the point of caricature. Claims dragged on, but hearings seldom exceeded a few blurred minutes, rarely proved conclusive and were conducted in baffling shorthand.”
Kafka? Bawdy jokes? As flawed as the compensation system may be, it is absurd and overly dramatic to compare it to a Kafka novel.
The dark and hopeless compensation world as created by the words of Kleinfield/Greenhouse bears little resemblance to the Compensation world I remember during my time as the General Counsel from 1999-2002. The system is bureaucratic, yes. It can be confusing to people who do not understand the compensation law or legal procedure. With 140,000 new claimants coming into the system each year and over a million active cases, it is a busy system. The Worker’s Compensation Board is the second largest administrative adjudicatory system in the United States. Each day thousands of cases are heard and complex determinations must be made about who is entitled to benefits, who may be lying, who is wrong and who is right; taking place within a system where both employees and employers are entitled to the full due process of law. While the article correctly points out some of the limitations and systemic problems, it unfairly paints a picture of a system out of control staffed by people who don’t care.
Put simply, the New York State Worker’s Compensation System did not deserve the carefully crafted “hatchet job” that it received in the pages of the New York Times.
The Times reporters wrote the description of the cases of about 15 claimants, quoted a handful of attorneys who practice compensation law, and several other “sources” and “critics” of the system who may or may not have had a personal ax to grind. Further, the Times seemed fixated on describing the political connections of persons appointed as Board Commissioners. The Commissioners that I worked with, many of whom are still on the Board, were all highly knowledgeable in the relevant law and worked very hard at their jobs. Further, their appeals decisions were researched and drafted by attorney “clerks” who are experts in the Worker’s Compensation law. The institution of attorney/clerks to assist the Commissioners was a reform instituted by the Pataki administration in an effort to improve the quality and consistency of appeals decisions. No mention of this appears in the article.
Also not appearing in the article was the fact that Governor Pataki and the state legislature appropriated nearly $40 million in the late 1990’s to convert the Board from a paper intensive system to a highly automated paperless one. Over 4 million files were scanned into an award-winning program called the “Electronic Case Folder” or ECF. The ECF modernized many Board processes and allowed faster and more efficient adjudication of claims. I used to sit at my desktop computer in Albany and monitor, in real time, hearing dispositions in every corner of the state. This was an oversight tool that was only a dream before the ECF came into existence. The ECF also allowed the Board to track the speed and quality of case adjudication which provided empirical evidence to support further reforms.
The article also unfairly disparages the Board’s claims examiners, who have been tasked to develop administrative decisions on cases in order to better serve claimants. The Times states these decisions often contain errors because examiners are not required to have legal or medical training “or even a high school diploma.” The Board examiners are rigorously trained and continually monitored to make sure that they possess the legal and medical knowledge they need to do their jobs. As an added safeguard, their decisions must be approved by a judge who is an attorney. Further, it has always been my understanding that to qualify to take the civil service test to be an examiner one must possess a high school diploma. To suggest that somehow examiners have no training or education is grossly unfair to those employees who handle tens of thousands of cases a year which result in an award of benefits to injured workers.
The article contains sharp criticism of the doctors who provide testimony on behalf of employers who are hired by insurers. These doctors are certified by the Board and essentially misnamed as “Independent Medical Examiners” (IME). The Times accuses such doctors of purposely understating a worker’s ailments “to win business from the insurers who pay them.” However, no mention is made of claimants’ treating physicians who overstate injuries. The article creates the impression that to remedy this problem of medical bias, the Board should return to its old policy of having doctors on staff to issue “independent” medical opinions. This policy was changed over 10 years ago because the quality of physician that the Board could attract at state wages was low, and the Board could not staff all of the medical specialties that were necessary. The real answer to this problem is to enact objective medical guidelines that would create consistent and objective standard to determine the nature and extent of any disability. The 2007 reform bill authorized such guidelines and the Board informs me that they are diligently developing them. Curiously, the article does not mention this important fact.
With respect to the speed that cases are heard, the Times does little to explore the fault of attorneys who practice before the Board. While the article does criticize attorneys for sometimes handling so many cases that they know little about each file, the Times stops short of a real examination of how attorneys, on both sides, draw and stretch out the litigation before the Board to enhance their compensation. Despite ignoring this critical area of potential improvement, the reporters generously quote attorneys about the state of the system without noting that they may have a particular ax to grind. The article is devoid of any meaningful empirical evidence about the actual claims experience before the Board. The Board is in possession of detailed data about adjudication times and results. This data can be compared with similar data going back many years. This data will show that the time that a case takes to be resolved today is only a fraction of the time that such a case took ten years ago. The data is public information yet no such data was included in the Times article. In short, we have a right to expect a better and more thorough job from the Times, especially after 18 months of work.