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DEPARTMENT OF LABOR AND ECONOMIC GROWTH WORKERS' COMPENSATION AGENCY
GENERAL RULES
Filed with the secretary of state on February 21, 2007
These rules become effective 7 days after filing with the secretary of state
(By authority conferred on the director of the workers' compensation agency by section 205 of 1969 PA 317, section 48 of 1969 PA 306, and Executive Reorganization Order Nos. 1996-2, 1999-3,
2002-1, and 2003-1, MCL 418.205, 24.248, 445.2001, 418.3, 445.2004, and 445.2011)
09/28/06
R 408.43a, R 408.43i, R 408.43k, R 408.43m and R 408.43q of the Michigan Administrative Code are amended as follows:
R 408.43a. Employer individual self-insurer; surety bond or letter of credit; consideration of employer in business less than 5 years; excess liability Insurance; required guaranties; claims service companies; self-administered claims.
Rule 13a. (1) A nonpublic self-insurer may be required to furnish a surety bond or letter of credit. The bureau will establish the amount of security at the time of initial application. The bureau shall review the adequacy of security periodically. The bureau shall prescribe the format and language of the bond or letter of credit. The bureau shall accept surety bonds only from a surety writer authorized to transact security bond business in Michigan. A surety bond shall provide for 60 days’ notice of cancellation to the bureau. Letters of credit are administered under R 408.43q.
(2) An employer that is in business less than 5 years shall not be considered for self-insured authority unless its workers’ disability compensation liability will be guarantied by a parent corporation or combinable affiliated entity that has been in business not less than 5 years and that would qualify for self-insured authority in Michigan.
(3) The bureau shall require specific excess liability insurance, with policy limit and retention acceptable to the bureau, for every self-insured employer, unless the bureau, at its discretion, waives the requirement. The bureau may require aggregate excess liability insurance as a condition of approval for a self-insured employer. Specific and aggregate excess liability insurance policies are accepted under R 408.43k.
(4) Parent corporations shall guaranty all liability incurred by their self- insured subsidiaries under the workers’ disability compensation act, unless the bureau, at its discretion, waives the requirement. The bureau shall prescribe the form and substance of the guaranties. The bureau may require employers, combinable under a single self-insured authority, to execute workers’ disability compensation payment
guaranties as a condition for approval of the self-insured authority. The bureau shall prescribe the form and substance of the guaranties.
(5) A self-insurer approved under section 418.611(1)(a) of the act shall contract with a claims service company approved by the bureau under R 408.43m.The bureau may approve a self-insurer to self- administer claims if the employer has all necessary systems, processes, and reporting capabilities and can demonstrate it has employed competent claims personnel with Michigan workers’ compensation adjusting experience.
R 408.43i. Group self-insurer's fund; board of trustees' power and duties; investment restrictions.
Rule 13i. To ensure the financial stability of each group self-insurers' fund, a board of trustees of each fund shall be responsible for all operations of the fund. A board of trustees shall be a group of members elected by the membership of the fund for stated terms of office. The majority of the trustees shall be owners or employees of members of the self-insurers' fund, but a trustee shall not be an owner, officer, or employee of a service company. The board of trustees of each fund shall take all necessary precautions to safeguard the assets of the fund, including all of the following:
(a) Designate a trustee as administrator or, in the alternative, hire an employee or designate an individual to act as the group fund administrator. The trustees may delegate to the administrator the duties they determine proper. The duties may include, but are not limited to, advising the board with regard to any of the following:
(i) Contracting with a service company.
(ii) Determining the premium charged.
(iii) Investing surplus monies, subject to the restrictions set forth in this rule.
(iv) Accepting applications for membership. However, the board of trustees remains the responsible party for the operation of the fund. The duties delegated to the administrator and all compensation to be paid to the administrator shall be reduced to writing, and a copy shall be provided to the bureau with each annual group renewal application. The group fund administrator shall not be an owner, officer, or employee of a service company. The trustees shall purchase a fidelity policy covering the fund trustees, administrator, employees of the fund, and the service company in an amount sufficient to protect the assets of the fund. A copy of the fidelity policy will be provided to the bureau with each annual renewal.
(b) Limit disbursements to payment and expenses of handling claims and administrative expenses necessary for operating the fund. The board of trustees shall also establish necessary accounts and accounting procedures for control and accurate financial reporting. Established accounting procedures shall provide accurate financial information for each open year individually with respect to revenue and expense until the year is closed out. The board of trustees shall maintain, and be responsible for, all records and documents relating to the formation and ongoing operation of the group self-insurance fund. If the board of trustees does not maintain the records in a responsible manner and in accordance with these rules, then the self-insured approval of the fund may be terminated by the director.
(c) Audit the accounts and records of the fund annually or at any time required by the bureau. Audits shall be made by certified public accountants or by authorized representatives of the bureau. The bureau reserves the right to prescribe the type of audits to be made and the uniform accounting system to be used by the self-insurers' fund to enable the bureau to determine the solvency of the group self-insurers' fund. Copies of financial audits prepared by certified public accountants shall be filed with the bureau in Lansing within 180 days after the close of the fund year. Claim reserve audits used in support of surplus distribution requests shall be performed by auditors who meet the requirements of the bureau relating to independence, report content, and timing.
(d) Not extend credit to individual members for payment of premium.
(e) Apply a penalty rate in excess of the normal premium to any risk that has unfavorable loss experience, if the member and the bureau are notified in writing before the effective date of the change in rates.
(f) Not utilize any of the monies collected as premiums for any purpose unrelated to workers' compensation. Further, the board of trustees shall not borrow any monies from the fund or in the name of the fund without advising the bureau of the nature and purpose of the loan and obtaining bureau approval. The board of trustees may, at its discretion, invest any surplus monies not needed for immediate cash needs, but the investments shall be limited to United States government bonds, United States treasury notes, United States government agency issues, United States government-sponsored enterprises, investment share accounts in any savings and loan association and credit unions that have their deposits insured by a federal agency, and certificates of deposit issued by a duly chartered commercial bank. Deposits in savings and loan associations, credit unions, and commercial banks shall be limited to institutions in this state and shall not exceed the federally insured amount in any 1 account, except that the federally insured amount in any 1 account in a commercial bank may be exceeded if the account amount involved does not exceed either of the following factors:
(i) Five percent of the combination of surplus and undivided profits and reserves as currently reported for each bank in the state in the banking division annual report of the financial institutions bureau of the department of consumer and industry service.
(ii) Five hundred thousand dollars per institution. A group self-insurance fund shall not invest in mutual funds, except that investments in money market mutual funds of short-term duration which invest only in government agency issues, government-sponsored enterprises, and government bills, bonds, and notes will be allowed for short-term cash investment needs. As used in this paragraph, "short-term duration" means 180 days or less.
(g) The board of trustees of a group self-insurance fund, subject to the limitations set forth in subdivisions (h), (i), and (j) of this subrule, may, in its discretion, and upon contracting with a bank trust department or with a professional investment advisor registered with the securities and exchange commission under the investment advisors act of 1940, 15 U.S.C. '80B-3, invest monies not needed for immediate cash needs in corporate bonds and municipal bonds and common and preferred stock.
(h) Limit the combined holdings of corporate and municipal bonds to not more than 45% of the market value of the available investment portfolio. Corporate and municipal bonds must be (A) rated or better by at least two nationally recognized rating services. Not more than 5% of the corporate and municipal bond portfolio may be invested in any 1 corporation or municipality.
(i) Of the 45% of the market value of the investment portfolio available for investment in municipal or corporate bonds, 25% may be invested in common or preferred stocks. Common or preferred stocks shall be limited to publicly owned companies that trade on a United States regulated exchange. Mutual funds or bank pooled funds that invest in common or preferred stocks are permitted and shall be calculated as part of the percentage of market value available for investment in common and preferred stocks.
(j) Ensure that the professional investment advisor completes a compliance review of the investment portfolio on a quarterly basis. A copy of the investment review shall be provided to the fund and the bureau within 30 days of the close of each quarter. The annual financial statements shall be audited by a certified public accountant and shall include a certification as to whether the fund has been in compliance with the requirements for investments. Failure to report on investments as required by this rule may result in withdrawal of the authority to invest in corporate and municipal bonds and/or common and preferred stocks.
(k) Any group fund found to have investments in vehicles other than as provided by this rule shall be given 30 days or a time period approved by the director to divest themselves of the investments. Failure to meet the divestiture requirement may subject the fund to further sanction by the director.
R 408.43k Aggregate excess liability insurance; specific excess liability insurance; individual self- insurer; group self-insurer.
Rule 13k. The bureau shall not recognize a policy of aggregate or specific excess liability insurance in considering the ability of a self-insurer to fulfill its financial obligations under the act, unless the policy is issued by a casualty insurance company authorized, as defined in section 108 of PA 218, MCL 500. to transact such business in this state. The policy shall comply with all of the following provisions unless specifically waived by the bureau. Policies issued that do not comply with all provisions of this rule may be considered grounds for termination of the employer’s self-insured authority.
(a) The policy shall not be cancelable or nonrenewable unless written notice, sent by courier, registered mail or certified mail, is given to the other party to the policy and to the bureau not less than 60 days before termination by the party desiring to cancel or not renew the policy.
(b) The policy shall contain no endorsements, provisions, or terms that increase the named insurer or insurers retentions or increase the amount that must be paid by the named insurer or insurers beyond the retentions reported on the declarations page of the policy and the Michigan certificate of specific/aggregate excess liability insurance. This provision does not apply to customary policy language that may call for increased payments by the insurer or insurers for failure to act or abide by a policy provision.
(c) A policy that has any type of commutation clause shall provide that any commutation effected under the policy shall not relieve the casualty insurance company of further liability with respect to claims and expenses unknown at the time of the commutation or in regard to any claim apparently closed at the time of initial commutation that is subsequently reopened by or through a competent authority. If the casualty insurance company proposes to settle its liability for future payments payable as compensation for accidents occurring during the term of the policy by the payment of a lump sum to the employer, to be fixed as provided in the commutation clause of the policy, then the casualty insurance company or the company’s agent shall give the bureau not less then 30 days’ prior notice of the commutation. Notice shall be by courier, registered mail or certified mail. If any commutation is affected, then the bureau has the right to direct that the sum be placed in trust for the benefit of the injured employee or employees entitled to future payments of compensation.
(d) The policy shall state that if a private self-insured employer becomes insolvent and is unable to make compensation payments and the self-insurers’ security fund may have responsibility for making payment under section 537 of the act, then the excess insurance carrier shall make, directly to the claimants or their authorized representatives, payments as would have been made by the excess insurance carrier to the employer after it has been determined that the retention level has been reached on the excess liability insurance policy.
(e) The policy shall state that 100% of the following payments shall be applied toward reaching the retention level in the specific and aggregate excess liability policy:
(i) Benefit payments made by the employer as required in the act.
(ii) Benefit payments, as required in the act that are due and owing to claimants of the employer.
(iii) Benefit payments made on behalf of the employer, as required in the act, by a surety under a bond or through the use of other security required by the director.
(iv) Payments made by the self-insurers’ security fund.
(v) Usual and customary claims allocated loss adjustment expenses.
(vi) Payments made, as specified in paragraphs (i), (iii), (iv) and (v) of this subdivision, that are reimbursable by the specific excess liability policy shall not be considered in reaching the aggregate excess liability retention.
(f) The policy shall provide for 100% reimbursement of the following payments that exceed the retention levels as defined in the specific or aggregate excess liability policy:
(i) Benefit payments made by the employer as required in the act.
(ii) Benefit payments made on behalf of the employer as required in the act by a surety under a bond or through the use of other security required by the bureau.
(iii) Payments made by the self-insurers’ security fund.
(iv) Usual and customary claims allocated loss adjustment expenses.
(g) Reimbursement shall be pro rata if multiple excess insurers insure the same self-insured for the same period. A request to waive a provision of this rule shall be in writing and approved by the bureau before a policy is issued. The carrier shall confirm issuance of an aggregate or specific excess liability policy on a form prescribed by the bureau.
R 408.43m Servicing self-insured employers or groups; application; requirements; noncompliance. Rule 13m. (1) An individual, partnership, limited liability company, or corporation that desires to engage in the business of providing 1 or more services for an individual self-insurer or a self-insurers’ group shall apply to the bureau before entering into a contract with the individual or group self-insurer and shall satisfy the bureau that it has adequate facilities and competent staff with Michigan workers’
compensation adjusting experience within the state to service a self-insured program in a manner that fulfills the employers’ obligations under the act and the rules of the bureau. Workers’ compensation claims of Michigan individual or group self-insured employers shall be handled within the state of Michigan by its staff, except that the director, at his or her discretion, may permit an approved service company to handle the claims of a Michigan individual self-insurer outside of this state upon specific written request by the individual self-insurer and the service company. The request for permission shall set forth documentation sufficient to the agency that claims will be handled pursuant to Michigan law, administrative rules, and agency policy. The director will respond to the request in writing, giving the reasons for denial, or if approved, the conditions of approval. The approval may be withdrawn by the director at any time based upon the failure of the service company and/or employer to comply with the conditions of the approval. Service may include claims adjusting, loss control services, underwriting, and the capacity to provide required reporting. Any individual, partnership, limited liability company, or corporation that provides claims adjusting or loss control services to an approved self-insured employer, where the self-insured employer has designated within its own organization an individual to be responsible to the bureau for its claims program or loss control services, or both, shall not be considered a service company for purposes of this rule.
(2) An applicant shall apply to the bureau for approval to act as a servicing company for self-insured employers or group funds on a form prescribed by the bureau. The application shall contain answers to all questions. An applicant shall give the answers under oath. The bureau shall approve the application prior to the service company entering into a contract with an approved self- insurer. Approval to act as a service company for self-insurers is granted for a period of 1 year and is subject to renewal annually.
(3) If a service company seeks approval to service claims for self-insurers, then it shall submit proof that it has, within its organization at least 1 person who has the knowledge and Michigan workers’ compensation adjusting experience necessary to handle claims involving the act. The service company shall attach a resume covering the principal person’s background to the application of the service company. The principal individuals adjusting workers’ compensation claims shall hold a current workers’ disability compensation adjuster’s license under chapter 12 of 1956 PA 218, MCL §500.1201.
(4) If a service company seeks approval to provide underwriting service to self-insurers, then it shall submit proof that it has, within its organization or under contract on a full-time basis, at least 1 person who has the knowledge and experience necessary to provide underwriting services for workers’ compensation excess liability insurance coverage. The service company shall attach a resume detailing the principal person’s background to the application of the service company.
(5) If a service company seeks approval to furnish loss control services to self-insurers, then it shall submit proof that it has, within its organization or under contract on a full-time basis, at least 1 person who has the knowledge and background necessary to adequately provide loss control and health services.
(6) A service company shall maintain adequate staff in the state. The service company shall authorize staff to act for the service company on all matters covered by the act and the rules of the bureau.
(7) A service company shall attach to the application a copy of its standard service agreement that it will enter into with self-insured employers or group funds. The service company shall certify, in writing, that the service agreement is in compliance with the act and these rules. The service company shall certify, and include a provision in its standard service contract which states, that the contract provides for the handling of all claims with dates of injury or disease within the contract until conclusion of the claims, unless the service company is relieved by the bureau, in writing, of the responsibility for handling claims. If the service contract calls for additional fees for any reason, then the service company shall clearly define the additional fees in the contract. For a service company to be relieved of the responsibility of handling claims to conclusion, the client, the previous service company, and the new service company shall sign a claims transfer agreement. The claims transfer agreement shall be completed on a form prescribed by the bureau and shall include a written request made by the previous service company to be relieved of its claims handling responsibilities to the bureau. A requesting company is relieved of its claims handling responsibility only after receiving a written response from the bureau approving a request. The service company shall certify that it will report to the specific excess insurance carrier or aggregate excess insurance carrier, or both, and put the specific excess insurance carrier or aggregate excess insurance carrier, or both, on notice of all claims as required by the self- insurers’ or group self-insurers’ insurance policies. The standard service contract filed with the bureau for approval and renewal of the service company authority shall include language specifically stating that the service company is responsible for reporting to the excess insurance carrier. The bureau may waive the reporting requirement upon written request to the bureau. Any dispute involving late reporting of excess liability insurance claims and potential penalties shall be reported to the bureau immediately.
(8) A service company shall certify, and provide for in all service contracts, that all documents generated or prepared by the service company for the group or the individual self-insurer or any materials relating to an individual or group self-insurer held by a service company are the property of the individual or group self-insurer and shall be surrendered to the individual or group self-insurer within 10 days of termination of the service contract, subject to written request by the individual or group self-insurer.
(9) Failure to comply with the provisions of the act constitutes good cause for withdrawal of the approval to act as a service company for self-insurers. The bureau shall give 30 days’ notice of withdrawal. The bureau shall give the notice by certified or registered mail, upon all interested parties.
R 408.43q Irrevocable letter of credit; acceptance; requirements; payment of surety bond or letter of credit.
Rule 13q. (1) An irrevocable letter of credit may be accepted by the bureau as other security for a self- insured program as provided by section 611(1)(a) of the act. The bureau will retain discretion in each particular case to determine if the letter of credit is acceptable and if its language and format are satisfactory.
(2) Irrevocable letters of credit shall be issued by a state-chartered bank, a federally chartered bank or foreign bank. Funds shall be immediately payable on demand. The director may require confirmation of acceptable letters of credit from any state, federally or foreign chartered bank without state operations or branch services within this state. If a confirmation is required, it shall be by a State of Michigan
chartered bank or federally chartered bank with Michigan branch operations and state that the confirming bank is primarily obligated on the letter of credit.
(3) An employer who elects an irrevocable letter of credit as other security for a self-insured program shall furnish a memorandum of understanding with the letter of credit, on a form provided by the bureau, which affirms the employer’s acceptance of all of the following requirements:
(a) A letter of credit is furnished to the bureau instead of a surety bond as one of the requirements for approval of a self-insured program.
(b) The employer understands that the letter of credit shall be deemed automatically extended without amendment for 1 year from the expiry date or any future expiry date unless, 60 days before any expiry date, the bureau is notified, by courier, certified or registered mail, that the letter of credit shall not be renewed for any additional period.
(c) A policy of insurance or a surety bond of equal amount may be furnished at a later date as a substitute for the letter of credit if the policy of insurance or surety bond covers all claims that would have been covered by the letter of credit. All policies of insurance and surety bonds furnished as substitutes for letters of credit are subject to prior bureau approval.
(d) The employer shall affirm that the irrevocable letter of credit in the amount requested by the bureau is being offered with the understanding that if the bureau receives notice that the letter of credit will not be renewed, then the bureau, in its discretion, may, after 30 days from the date of receipt of the notice, call the proceeds of the letter of credit and deposit the proceeds in the state treasury. And further, if, in the judgment of the bureau, the letter of credit is needed to cover any worker’s disability compensation claims, then the proceeds of the letter of credit shall be called immediately and deposited in the state treasury for such purpose.
(e) If legal proceedings are initiated by any party with respect to payment of any letter of credit, then the proceedings shall be subject to Michigan courts and law.
(4) The bureau shall not grant an effective date for a self-insured program until a completed letter of credit and the memorandum of understanding have been reviewed and accepted by the bureau.
(5) If it is necessary for the director, under statute and bureau rules, to call the bond or other security, then a trust shall be established with the funds, unless the provider of the bond or other security elects to handle the claims directly and the bureau approves. If a trust is established, the funds shall be deposited in the state treasury and the state treasurer, as provided by section 551(7) of the act, shall be the custodian of the trust. The trustees of the trust shall be the trustees of the funds denominated in chapter 5 of the act and also those who are appointed as trustees under section 511 of the act. The service company of the self-insured employer, if any, shall continue to perform in accordance with the terms of the employer’s contract with the service company.
