Residents of the Capitol District are all too familiar with the January routine. The post-holiday depression gives way to the beginning of the State legislative session. First up was the annual State of the State message from the Governor in which he painted a rather bleak picture of New York’s fiscal future. About two weeks after the State of the State message came the submission of the Governor’s budget. Last week, Governor Paterson announced the submission of a budget designed to make “significant” spending reductions in order to close a $7.4 Billion deficit. More specifically, the proposal contains $5.5 Billion in recurring spending reductions, $1 Billion in new taxes and fees, $430 million in taxes and fees that do not represent an increase and $565 million in “non-recurring” actions, better known as “one-shots”.

INSURANCE DEPARTMENT BUDGET

The proposal includes another very large insurance department budget which will be raised through an Insurance Law Section 332 assessment on the insurance industry. Although, supporting documents indicate that the Department budget is decreasing from last year by some $32 million, the proposal also shows that the Insurance Department budget will again top a half-billion dollars! Of this amount, a whopping $450 million is proposed to be raised through the Sec. 332 assessment on domestic insurance companies. The $32 million decrease from last year is not the result of any cost savings but is instead due to a decrease in general fund support for health insurer expenses incurred from the mandates of Timothy’s Law. The amount of funding needed to operate the Department is about $115 million, with the additional input of $50 million in (albeit) reduced funding for Timothy’s Law expenses. The balance of the monies to be assessed to the domestic insurance industry will fund “sub-allocations to other agencies. Thus, only 25 cents of each dollar of the 332 assessment, paid by New York’s insurers will actually go to pay for the operation of the insurance department. Of course, the sub-allocations will be used to pay for “insurance-related operations” in those other agencies, as described as in the Agency Publications booklet, submitted along with the budget bills. Some of these “sub-allocations” are, $15 million to the Health Department to run the “center for community health program”; $2 million to the division of criminal justice services to operate the “traffic and criminal software” project; $11 million to Health to operate the enhanced newborn screening program; and $3.7 million to Health for aid to localities to run the lead poisoning prevention program.

HEALTH INSURANCE PRIOR APPROVAL

The complicated budget legislation also provides that the Superintendent of Insurance would have to approve any request for a rate change for health insurers before that change could go into effect. In the proposal, the Superintendent would be empowered to “modify or disapprove” the filing if he finds that the premium requested is “unreasonable, excessive, inadequate, or unfairly discriminatory”. In an unusual twist for rate approval legislation, the Superintendent is authorized to consider “the financial condition of the insurer when approving, modifying or disapproving any premium adjustment.” I assume that means that the Superintendent may deny a rate increase request if a company is financially healthy, even despite the fact that the underlying actuarial and financial data supports such an increase. The proposal also increases the expected minimum loss ratio from 75% to 85%. Any requested increase in excess of 10% requires the Superintendent to hold a public hearing at the insurer’s expense. Further, the alternate “file and use” procedure contained in Insurance Law Sec. 3231(e)(2)(A) shall not be used after October 1, 2010.

WORKER’S COMPENSATION INSURERS MUST GIVE BACK FUNDS

Worker’s Compensation carriers will also be under the gun in the proposed budget as they would be required to remit to the Worker’s Compensation Board (WCB) any New York State Assessment Surcharge funds collected from policyholders which are in excess of amounts billed to those carriers by the WCB during State FY 2008-09. According to budget support documents, a “disconnect” in the Worker’s Compensation Law which required the insurers to apply the surcharge to its policyholders based on standard premium whereas the bills sent out by the WCB were based upon written premium. As a result, according to the budget documents, insurers have collected over $100 million from their policyholders in excess of what the WCB has billed them. The proposed budget requires the excess be remitted to the WCB for the assessment billed by WCB for the time period attributable to State FY 2008-09, which is estimated to be $23.6 million, which will be transferred by WCB to the State general fund. The “disconnect” was eliminated through Chapter 56 of the laws of 2009 which required that the surcharge and the amount billed be based upon standard premium, beginning with the FY starting January 1, 2010.

CONTINUED HIGHER ASSESSMENTS FOR SELF INSURANCE INSOLVENCIES

The proposed budget also contains new provisions to help the WCB better manage the financial impact of the extensive insolvencies which have occurred in the group self-insurance trust (GSIT) market on the remaining trusts. The authority of the WCB to borrow money from the Uninsured Employers Fund (UEF) to make payments on behalf of insolvent trusts would be extended and new, more enhanced authority to collect judgments against former members of insolvent GSIT’s are also included. Also, the authority of the WCB to assess the self-insurance industry to repay the UEF is continued for another two years. Further, the bill contains an amendment to the Insurance Law to facilitate the development and purchase of an “assumption of workers’ compensation liability insurance policy” by the GSIT or employer/former member of the GSIT. The new policy would be a single-premium, non-cancellable policy, covered by the workers’ compensation security fund. The purpose of the policy would be to provide some closure to the employer/member of a defunct GSIT, who may currently face many years or even decades of liabilities as a result of membership in the trust. The policy will contain a surcharge to satisfy all assessment liability due or to become due to the WCB. Thus, we have another difficult budget year before us and yet another budget seems to single out the insurance industry to help close a deficit gap. With other members of the financial services industry still recovering from the recent collapse one has to wonder how long the State can continue to come to the insurance industry to provide the cash to keep the government operating?

NEW YORK INSURANCE ASSOCIATION SUES THE STATE OVER SECTION 332 ASSESSMENTS

With a press release entitled “NYIA sues state for hijacking funds”, the New York Insurance Association fired the first shot in a battle that has been a long time in coming. New York’s insurers have long grumbled and complained under their collective breaths about the budget process whereby the Insurance Department sub-allocates monies raised through the assessment made pursuant to Insurance Law Sec. 332 to other agencies to operate programs in those agencies which are ostensibly “insurancerelated”. The practice has gone on for many years, but has shifted into “hyper-drive” during the last two budget cycles as the Insurance Department budget ballooned to over a half-billion dollars.

In unusually strong language, NYIA states that the source of their dispute with the State government is that “[t]his assessment on insurers is called a 332 assessment and by law is strictly for the expenses of the New York State Insurance Department (NYSID). The state has been deviating from this law for nearly a decade and engaging in the deceitful practice of using the assessment money to fund other state agency programs.” (emphasis added) NYIA president, Ellen Melchionni stated “[t]he assessment increase is a financial hardship to New York domestic insurers, but what is especially galling is that he increase is being used in ways that are blatantly contrary to what the law stipulates.” She added, “NYIA filed this lawsuit because the state is treating the 332 assessment as a bottomless ATM for programs that may be worthy but cannot legally be funded by this assessment. Ultimately consumers pay the price, and the state is brazenly ignoring their interests.”

A review of the NYIA complaint reveals further harsh language as it describes the actions of defendants, Governor Paterson, Superintendent Wrynn and Budget Director Robert Megna, as “systematic and intentional abuse of Insurance Law Sec. 332, to create a slush fund through which expenses of other state agencies and general state expenditures are funneled so that they are passed on to Plaintiff NYIA’s members and other insurance companies, rather than being obligations of the State’s General Fund, or other funding sources, where they properly belong.”

The complaint argues that the express purpose of Section 332 is to raise money to support the operations of the Insurance Department as indicated by the very title of the statute, Assessments to defray operating expenses of the department. Further, the complaint outlines the history of the section and argues that originally, the under earlier version of the statute, the assessment was authorized to cover the operating costs of the Insurance Department, “only to the extent costs were not met by other fees and refunds collected under other provisions of the Insurance Law.” However, in 1989 those fees and refunds, which were supposed to be used to operate the department, were confiscated, by statute, and transferred to the state general fund. In addition, the complaint highlights that section 332 also requires the department to refund any overpayment to insurers or, at their option, to be used as a credit against the next year’s assessment. However, in 2009 a $4.5 million overpayment was sent to the general fund.

The NYIA lawsuit charges that the defendant officials have exceeded the authority to assess the domestic insurance industry for expenses of the department as contained in Sec. 332, and have essentially circumvented the taxing authority vested in the legislature to “tax” those same insurers along with several other statutory and constitutional arguments. The “buzz” around Albany is that the suit most likely will not succeed but was brought to make a point that “enough is enough” for the seemingly endless increases in these sub-allocations. If the purpose of the suit was to indeed make a point, the potential risk and downside of making such a public point to the NYIA and its membership, is awfully high. Lawsuits by insurers and/or their trade associations against the Governor and the Insurance Department are rare, and are usually brought when the issue is a “make or break” issue and when all other avenues of “peaceful” resolution have been exhausted.

Interestingly, none of the other trade associations or other lines of insurance have joined in the litigation, despite the fact that health and life insurers pay the greatest share of the assessment. It could be that they give little chance of success for the suit, or they are unwilling to risk ill feelings from the department or the Governor’s office.

I cannot imagine that this action would be taken without some reasonable prediction of legal success. At the very least, the suit may indeed by a public sign of frustration from an industry that has been quite put upon in the recent past. Whether or not other associations or insurers decided to take this public action, I would imagine that they are privately applauding the move.

As of the writing of this article, I am not aware of any response from the Governor or the Insurance Department.