Here is the story of an organization selling what it calls “Workers’ Comp Benefits” not insurance to hundreds of California employers mostly in hazardous classes including staffing companies, farm labor contractors, and tough manufacturing risks. The organization, American Labor Alliance, meets none – none – of California’s statutory requirements to provide workers’ comp in California. It’s collecting fees as if it were a carrier despite having no relation with the entities whose fees it is collecting. And despite not one – but two cease and desist orders it continues to solicit business.
Equally as important, an ALA representative also stated under oath that states are not obligated to accept the coverage it has sold to California employers. “That’s a paradox contained within ERISA that is unresolved to this day,” ALA’s chief architect of the program told the administrative law judge hearing its appeal of the cease and desist orders. ALA admitted under oath that it is not providing statutorily required workers’ comp insurance, rather it says it provides “benefits.”
California employers – ALA’s clients – are required by California law to obtain workers’ comp coverage in one of three ways: From an admitted and approved workers’ comp insurance company which uses approved forms; or from a SIG – an approved Self-Insured Group; or an employer can be an individually self-insured which has been approved. A self-insured cannot provide coverage to other organizations. State officials say the statutes are clear: that there are no other ways for employers to meet this obligation.
The lengthy story unfolds in pieces. Here it is:
In fact, even after California Department of Insurance issued two cease and desist orders the organization, also known as CompOneUSA, is still selling its program and issuing certificates. A certificate issued as recently as February 13 implies that Travelers Casualty is the workers’ comp carrier. This same policy number with the same coverage period previously appeared on a certificate issued by ALA to another insured that was investigated by the state.
CDI confirmed with Travelers which said the policy was not a valid Travelers policy, according to evidence submitted in this case. The earlier check was conducted last October as part of CDI’s investigation. ALA said on the witness stand and in briefs submitted with the case that Travelers is the carrier that writes its ERISA bond, not the carrier offering workers’ comp coverage.
American Labor Alliance (ALA) officials spent two days on the witness stand before a California Department of Insurance ALJ attempting to explain their unapproved, and under California law, allegedly illegal ‘workers’ comp’ program.
No State Oversight Alleged
ALA officials testified that the company’s workers’ comp certificates have been rejected by various state agencies including the Contractors State License Board, Department of Industrial Relations and the Department of Motor Vehicles. The California Department of Insurance says the “policies” and the “coverage” are invalid because the organization is not licensed.
ALA contends the program is not subject to any State of California control, review, or oversight. Its clients, however, are required to have statutory coverage which, according to CDI, they do not.
American Labor Alliance continues to maintain that it is outside of state purview because it is providing benefits through the Employee Retirement Income Security Act (ERISA) under the federal Multiple Employer Welfare Arrangement as an “Entity Claiming Exception.” A key to qualifying as an ECE is to be the valid bargaining representative for the workers.
Executives testified that they have collected signed union cards from the covered workers. However, no representation elections have ever been held, and neither the National Labor Relations Board nor any state agency has ever been involved in certifying ALA as the workers’ representative.
Failing to prove its claim that it is an ECE makes ALA a multiple employer welfare arrangement or MEWA that is subject to state oversight. In other words, “illegal” as the California Department has said.
The Department also heard that at least one other state insurance department, as well as at least one federal agency, is now investigating ALA’s operations. Federal officials from the Department of Labor (DOL) were on hand to witness both days of testimony. DOL has been issuing subpoenas for information for the better part of a year. Additionally, it was revealed that ALA is now operating in two other states.
Assessments
Despite its insistence that it is not subject to California law, it is collecting fees required of admitted carriers. Now comes important questions: what, if anything, it is trying to imply to customers by collecting these fees, what is being done with the fees it collects? Has it even had any contact with CIGA or DIR?
Workers’ Comp Executive investigated ALA and CompOneUSA some months ago. In a telephone interview with Workers’ Comp Executive, Marcus Asay, its chairman admitted ALA is adding to and collecting the 2% California Insurance Guarantee Association (CIGA) surcharge and the surcharges Department of Industrial Relations charges and collects for the Uninsured Employers Fund and other fees. Asay told Workers’ Comp Executive it had been working with both organizations.
Wayne Wilson, president of CIGA, said not only is ALA not authorized to collect the fees there is no coverage provided by CIGA for problems it may encounter. Wilson said it would be statutorily impossible for CIGA to accept the fees or to provide coverage. Further, Wilson categorically stated CIGA had never been contacted by ALA or CompOneUSA.
Workers’ Comp Executive confirmed in a physical meeting with DIR lawyers that it has never received the policy surcharge fees from ALA or CompOneUSA and that the organization apparently has no basis in law to collect them.
When told both government organizations had been contacted and said ALA had no authority to collect these fees Asay said he was working with them to make it happen.
Asay also said he is working with the Workers’ Compensation Insurance Rating Bureau. When pressed he admitted that the Bureau would not accept coverage data from ALA. Employers in the program do not show up on the coverage locator.
And, importantly, Asay admitted to Workers’ Comp Executive, and on the witness stand that ALA isn’t remitting the funds it collects to either DIR or CIGA.
During the CDI hearing, Asay testified they are not required by law to collect these assessments but are doing so anyway to be “a good citizen.” He said that it is ALA’s belief that by law they do not have to turn over these assessments to the state agencies, but says they would do so if only DIR or CIGA would accept the payments.
No Standard Coverages
When asked about the provision that workers’ comp coverage contain employer’s liability coverage, Asay said there was none of that, that “we don’t offer that.” He said he was unaware of the statutory protections of sole and exclusive remedy, and agreed that it is likely not available to employers in his program.
At that point, he threatened our reporter and warned: “do not interfere with my organizing or you’ll be sorry.”
The “Financials:” No Capitalization and No Reserving
Testimony delivered under oath revealed the shaky financial start of ALA’s CompOneUSA workers’ comp benefit program. Additionally, Administrative Law Judge Kristin Rosi heard that ALA’s claims reserving practices are so far outside of industry norms as to be heretofore unheard of for any legally operating entity.
In addition to Asay, the chief architect of CompOneUSA’s compliance program Antonio Gastelum testified before the Department’s ALJ. Both disclosed important details about the alliance’s finances and operations.
“There was no initial capitalization of the benefits program. They did have contingency plans, but they didn’t capitalize the benefits program,” ALA’s Gastelum testified under oath. The consultant appeared to disagree with this approach telling the ALJ that “I don’t want to offer a value judgment on the business decision by management, but that is how it was done.”
ALA was started with only the initial deposits and “pledges” of the member employers. It said typical deposits for these tough classes amount to 5% to 10% of covered payroll. To bolster its claims that it is not selling insurance, the officials maintained that they collect “pledges” from the member employers rather than “premiums” for the workers’ comp coverage they provide.
ALA was asked how was the association prepared to handle a catastrophic claim during the start-up phase? “The contingency plan was to secure borrowed funds, if necessary, and to pursue reinsurance to protect the organization from a catastrophic claim,” Gastelum testified.
No reinsurance was purchased in advance. However, obtaining reinsurance is unlikely based upon the organizations reserving – make that non-reserving practices: It has no reserves. Claims are paid out of current cash flow.
Gastelum later testified that ALA is still seeking reinsurance or stop loss coverage but to this day is still on the hook for the full cost of any and all claims incurred. Remember, there is no backstop or CIGA coverage in the event of its failure.
Through the end of 2016, ALA says it has paid roughly $350,000 in workers’ comp claims, including a medical bill from one provider, it says, of $80,000 to $100,000. It only began offering the workers’ comp program in early 2016.
Gastelum did not give an accounting of how many claims have been incurred and how many are still open. Testimony presented during the hearing indicated that ALA’s exposure included nearly 30,000 workers since it began offering workers’ comp benefits. It says the bulk are employees of farm labor contractors. Other covered industries include high-risk classifications such as trucking and construction, as well as small manufacturing, restaurants, retail operations and call centers.
It has at least one large staffing company on its books, BarronHR.
Pay Claims As They Go
The state asked Gastelum about reserves and whether ALA sets aside reserves for the expected benefits that will be paid out over the life of the claim. His answers were, by any normative insurance measure, laughable, unsophisticated, or just plain ignorant.
He testified that the program does not maintain separate reserves for the workers’ comp claims it incurs. He also admitted ALA has no reinsurance or stop loss coverage although it is seeking reinsurance or stop loss coverage. It has not obtained any as of this point in time. The connection between claims reserving and reinsurance apparently escaped him.
“We retain all the risk in the program. None of the risk is outsourced,” he says. “The cash reserve for the benefits program is the residual balance of the trust fund,” he maintained. “There’s no separate reserve for each beneficiary.”
The consultant was also asked about ALA’s loss ratio.
After a long pause, during which the ALJ questioned if he was doing the math in his head, Gastelum responded that ALA was running a loss ratio of roughly 10% as of December. Since the beginning of the year, however, the loss ratio has climbed. “As of right now, I think it is much closer to 15%, and that’s because the volume of contributions has gone down significantly because of the disruption of this process on the program and also the claims trail,” he noted.
Lost Accounts
ALA executives testified during the hearing that 10 to 15 accounts have dropped out of the program since the original cease and desist order came out last fall.
ALA reportedly covers some 400 employers in California. In some cases, ALA says, former employer members were given back everything they had paid into the program – even for the time they had coverage under the program. Gastelum says these employers were also refunded the CIGA and DIR assessments they had paid while in the program.
He says that everyone who requested a complete refund got back all monies they paid into the program with the only subtraction being what was already paid on a claim.
Post-Hearing
CDI’s Rosi will be ordering ALA to submit additional information into the record, including actual signed copies of the collective bargaining agreements its holds. Copies submitted as evidence were not signed, she noted during the hearing.
Additionally, Rosi is allowing each party to submit a post-hearing brief to bolster its arguments. These are not due until late March, after which she will take the case under submission and render a decision – in other words, this is not likely to be resolved for weeks if not months.
In the meantime, it appears that ALA will continue to conduct business as usual as it has been doing since CDI issued the cease and desist order months ago. CDI’s first order came out in October and then an amended order in December. ALA faces a $5,000 penalty for every day it violates the order.
ALA chairman Asay reasserted during testimony that the alliance is an entity claiming exception or ECE and as such is outside the purview of the Department. “We are working within what we believe are the confines of correct law,” he testified. “The state of California Department of Insurance does not oversee ECEs.”
Until then, whether or not ALA can be regulated or shut down, employers it provides “benefits” to do not have the required statutory insurance coverage, may not have the protection of California’s sole and exclusive remedy laws, and appear to be out of compliance with California law which requires they have insurance.