California employers who self-insure their workers’ compensation risk now stand to lose millions of dollars if they purchased “specific excess workers’ compensation” coverage from an insurance company that goes out of business. 

Contrary to its consistent practice for the last 20 years of paying claims against bankrupt carriers under specific excess policies, the California Insurance Guarantee Association (“CIGA”) recently announced that it will no longer provide self-insured employers with that protection.  CIGA’s decision will force self-insured employers with specific excess coverage to pay all of their employees’ workers’ compensation claims in the event their carriers become insolvent.  With the insolvency of Reliance Insurance Company and the expected failure of Kemper Insurance Companies, self-insured employers are sure to face this problem with increasing frequency in the very near future. 

Self-insured employers, their excess insurance companies, and CIGA have operated for years under the assumption that self-insured employers are entitled to CIGA protection if their excess carriers become insolvent.  CIGA even imposed surcharges on excess workers’ compensation insurance carriers to raise revenue, and most insurance companies passed those surcharges on to the employers as a component of their premiums.  CIGA then used that money to pay claims under specific excess workers’ compensation policies issued by insolvent insurance companies. 

After initially paying some claims under specific excess policies in the Reliance insolvency, CIGA has now announced that it will no longer provide self-insured employers with that safety net.  In fact, CIGA has filed a lawsuit against a Reliance insured on this very issue, asking the court to rule that CIGA is not required to pay that self-insured employer’s claims under its specific excess policies.  This recent development potentially leaves self-insured employers without the excess insurance coverage they paid for and are counting on in the event their excess carriers become insolvent.    

CIGA’s decision to refuse payment under specific excess workers’ compensation insurance policies has far-reaching implications for all self-insured employers with specific excess insurance coverage, regardless of whether the excess carrier is already insolvent.  It not only will remove CIGA protection for self-insured employers should their specific excess workers’ compensation carriers become insolvent in the future, but it might also cause the Office of Self-Insured Plans to increase the amount of the deposit self-insured employers are required to post.  If CIGA succeeds in avoiding payment of claims under specific excess policies, insurance carriers are likely to increase the premiums they charge for workers’ compensation coverage.

In light of these developments, we encourage all self-insured employers to review their workers’ compensation insurance programs to determine whether they have specific excess coverage and which insurance company issued the policies.