RULES AND REGULATIONS
Title 34—LABOR
AND INDUSTRY
DEPARTMENT OF LABOR AND INDUSTRY
[ 34 PA. CODE CH. 125 ]
Workers' Compensation; Individual Self-Insurance
[40 Pa.B. 5147]
[Saturday, September 11, 2010]The Department of Labor and Industry (Department), Bureau of Workers' Compensation (Bureau), amends Chapter 125, Subchapter A (relating to individual self-insurance) to read as set forth in Annex A. This final-form rulemaking updates and clarifies the standards and procedures which govern the processing of applications for and the administration of self-insurance for individual employers under the Workers' Compensation Act (act) (77 P. S. §§ 1—1041.4 and 2501—2506 and 2701—2708) and The Pennsylvania Occupational Disease Act (Occupational Disease Act) (77 P. S. §§ 1201—1603).
Statutory Authority
This final-form rulemaking is published under the authority in sections 305(a) and 435(a) of the act (77 P. S. §§ 501 and 991(a)) and section 2205 of The Administrative Code of 1929 (71 P. S. § 565).
Background
Under section 305(a) of the act and section 305 of the Occupational Disease Act (77 P. S. § 1405), an employer liable for the payment of benefits under those acts may be granted an exemption from the necessity of insuring the payment of its liability with an authorized insurer. The grant of an exemption, which is commonly referred to as self-insurance status, is based on the employer demonstrating to the Department that it has the financial ability to pay the compensation provided under the acts. Subchapter A addresses these technical issues as the application procedures for self-insurance by individual employers, the materials and information that must be provided with the application, minimum requirements to be considered for self-insurance, factors used in assessing the financial ability to self-insure, financial security and excess insurance requirements and requirements to service a self-insurer's claims.
Chapter 125 (relating to workers' compensation self-insurance) was adopted on October 13, 1995, and has seen only very limited regulatory amendments in the last 15 years. The most recent regulatory amendments followed the act of June 24, 1996 (P. L. 350, No. 57) which, among other things, amended section 305 of the act and 802 of the act (77 P. S. § 1036.2) and added section 819 of the act (77 P. S. § 1036.19) affecting matters regarding the requirements for self-insurance. The Department then amended, in pertinent part, § 125.2 (relating to definitions) and § 125.9 (relating to security requirements). See 28 Pa.B. 5459 (October 24, 1998).
On November 14, 2005, the Department held a stakeholder meeting to discuss possible changes to the regulations. A proposed rulemaking was published at 39 Pa.B. 2293 (May 2, 2009). As a result, the Department received written comments from the following: Jonathan H. Rudd, Esquire, on behalf of Kominklijke Ahold N.V. and Giant Food Stores, LLC (collectively referred to as Giant Foods); Cathy L. James on behalf of Porter & Curtis, LLC; Walter T. Hannigan on behalf of AVI Risk Services, LLC; Claudia Allen on behalf of the Port Authority of Allegheny County (Port Authority); Barry Scott on behalf of the City of Philadelphia; Yolanda Romero on behalf of the Southeastern Pennsylvania Transportation Authority (SEPTA); Jayne K. Lemon on behalf of Wells Fargo Disability Management (Wells Fargo); and, Richard A. Armbrust on behalf of United States Steel Corporation (US Steel). The Department also received written comments from the Independent Regulatory Review Commission (IRRC) dated July 1, 2009. In response to comments received, changes were made to the proposed rulemaking.
Purpose
The final-form rulemaking increases clarity and consistency through the introduction of new standard terms throughout the regulations, provides more objective standards for qualifying for and maintaining self-insurance status and improves and strengthens the Department's ability to efficiently and effectively monitor and regulate workers' compensation self-insurance in this Commonwealth.
Summary of Final-Form Rulemaking and Responses to Comments
The Department amends § 125.1 (relating to purpose) to clarify existing language.
The Department amends § 125.2 to clarify existing language, delete the existing definition of ''excess insurer'' and ''instrumentality of the Commonwealth'' and include definitions for the following terms: ''active self-insurer,'' ''adequate accident and illness prevention program,'' ''authorized retention amount,'' ''catastrophic loss estimation,'' ''dedicated asset account, '' ''excess indemnity insurance,'' ''excess insurance,'' ''financial ability to self-insure,'' ''guarantor,'' ''investment grade long-term credit or debit rating,'' ''liability limit,'' ''long-term credit or debit rating,'' ''maximum quick asset exposure amount,'' ''minimum funding amount,'' ''minimum security amount,'' ''NRSRO,'' ''self-insurance loss portfolio transfer policy,'' ''special retention amount,'' ''standard retention amount,'' ''workers' compensation excess insurance,'' ''workers' compensation excess insurance recoveries'' and ''workers' compensation insurer.''
IRRC and Porter & Curtis commented that the Department should explain the basis of the definition for ''catastrophic loss estimation.'' Porter & Curtis additionally asked whether it would affect the amount of security a self-insurer shall provide. The catastrophic loss estimation is a general assumption of an applicant's potential worst-case loss that is used to determine if the applicant would be able to self-insure without the usual protection provided by excess insurance. The definition first takes into account an applicant's concentration of risk by considering the number of employees working at the same time at its largest location. It then assumes that a catastrophic event causes injuries to all of the employees such that compensation equal to the Statewide average weekly wage for 500 weeks shall be paid on all employees. The use of the 500-week factor reflects the maximum 500-week period of partial disability allowable under the act. In and of itself, the catastrophic loss estimation will not affect the amount of security a self-insurer must provide. However, if the applicant's catastrophic loss estimation exceeds its quick asset exposure amount, the applicant must obtain excess insurance to self-insure.
IRRC also commented that the use of the word ''usually'' in the proposed definition of ''catastrophic loss estimation'' was vague and should be clarified. The Department agrees and revised the final-form rulemaking to replace ''usually'' with ''anticipated to work at one time during a work day.''
IRRC questioned the process for administering the proposed definition for ''default multiplier'' as well the lack of criteria for its use. IRRC also commented that the regulation did not indicate the time of publication in the Pennsylvania Bulletin. Upon further consideration, the Department deleted this term and its companion definition ''default multiplier-calculated security factor'' from the final-form rulemaking.
IRRC commented that the Department should explain when it would exercise the discretionary provision in calculating the ''special retention amount'' for current self-insurers. In response, the Department deleted the discretionary language to allow current self-insurers to use an amount equal to the retention amount of their excess insurance in effect on the effective date of this final-form rulemaking.
IRRC also commented about the use of the terms ''generally'' and ''commonly'' in the definition of ''standard retention amount'' as well as the lack of information on when the Department intended to publish updates of the amount in the Pennsylvania Bulletin. In response, the Department revised the definition in the final-form rulemaking to remove these terms and to allow this amount to be calculated based upon the Statewide average weekly wage without the need to publish annual updates.
AVI Risk Services requested clarification on whether the ''standard retention amount'' would be a single amount encompassing all industries or multiple amounts based on industry groupings, since the latter may have an impact on excess insurance. The standard retention amount is a single amount covering self-insurers in all industries. If the insurance market requires a self-insurer to seek authorization to retain excess insurance with a retention amount that exceeds the standard retention amount, it may do so through the application of the ''special retention amount,'' which is separately defined in this section.
The Department amends § 125.3 (relating to application) to better reflect the application requirements. The Department replaces the existing affidavit requirement with a verified statement. Under § 125.3(b), the Department allows renewal applicants to file their applications 3 months before the expiration of current permits, which is 1 month earlier than under the current language. Under § 125.3(c)(1), the Department specifies the application fees required for affiliates or subsidiaries who file a consolidated application under § 125.4 (relating to application for affiliates and subsidiaries). The Department amends § 125.3(c)(3)(i) to require that the text of financial statements must be in English. The Department amends § 125.3(c)(5) and (6) to require that loss information must be filed on each employer requesting self-insurance for an initial application and that a report on incurred loss must be filed on each self-insurer for a renewal application. Also, § 125.3(c)(6) allows applicants that have retained an actuary to submit that actuary's report with the application.
The Department adds requirements that applicants include evidence of long-term credit or debt ratings, if any, in § 125.3(c)(9), as well as a listing of workers' compensation claims previously incurred all Pennsylvania as a self-insurer and closed on or after January 1, 2005, in § 125.3(c)(8). This will replace existing language regarding the OSHA No. 200 report, which has not been utilized since the promulgation of Chapter 129 (relating to workers' compensation health and safety). The Department amends § 125.3(d) to require applicants to provide the data, information, explanations, corrections and missing items regarding an application within the time period prescribed in writing by the Bureau. Otherwise, the application will be deemed withdrawn and a renewal applicant will have to obtain insurance coverage by the expiration of the time period. The Department amends § 125.3(e) to clarify that the Bureau will not issue a decision on an application until the data, information, explanations, corrections and missing items have been submitted. The Department also clarifies existing language and references currently recognized auditing standards when applicable.
SEPTA and the City of Philadelphia commented that the deadline for filing a renewal application should remain as it is due to the volume of information that needs to be compiled for the application. IRRC also asked the Department to provide justification for changing the application deadline. In considering the effect of the amendment to subsection (b), the commentators apparently were left with the impression that the Department intended to reduce by 1 month the time an applicant would have to prepare and submit a renewal application. This is not the Department's intention. Rather, this amendment is intended to benefit self-insurers by providing an additional month between the filing of the application and the expiration of the present permit for the self-insurer to satisfy any revised conditions for renewal that are established by the Bureau. This amendment will improve the ability of self-insurers to satisfy renewal conditions and obtain Department approval of their application in a timely manner.
Giant Foods and IRRC questioned how foreign corporations that do not file Forms 10-K or 10-Q with the Securities and Exchange Commission (SEC) would be able to comply with the proposed documentary requirements in § 125.3(c)(2) and (3). Giant Foods suggested amending the two paragraphs to reference equivalent forms filed by foreign corporations with the SEC or with the governing body of other international security exchanges. In response, the Department substantially adopted the language suggested by Giant Foods for applications of affiliates and subsidiaries under § 125.4(e). For clarity in § 125.3(c)(3), the Department moved this language into new subparagraph (iii).
Porter & Curtis expressed concern that the proposed requirement in § 125.3(c)(3)(i) that a parent company applicant provide consolidated financial statements for its subsidiaries in support of its application would be unduly burdensome. In response, the Department deleted this specific language since, when necessary, these consolidated statements already must be provided to conform to generally accepted accounting principles requirements.
Giant Foods also commented that the proposed requirement in § 125.3(c)(3)(i) that the currency values referenced in the supporting financial statements must be in United States dollars would be problematic for foreign corporations. In response, the Department substantially adopted the suggestion set forth by Giant Foods to require an applicant to assist the Department in converting financial statements not in United States dollars to United States dollar amounts.
Giant Foods commented that the required standard for reviewing financial statements submitted under § 125.3(c)(4) should include standards established by the International Accounting Standards Board (IASB) to accommodate foreign corporations. IRRC also expressed concern about how foreign corporations using IASB standards could comply with this provision. The Department agrees and revised the final-form rulemaking to allow for the submission of financial statements prepared in conformance with the International Auditing and Assurance Standards Board, which is the international counterpart organization to the American Institute of Certified Public Accountants.
IRRC questioned why the three accounting organizations referenced in § 125.3(c)(3)(i) vary from the organizations referenced in § 125.3(c)(4), which concerns the standards for reviewed financial statements. This difference lies in the fact that the organizations involved in the setting of standards for audited financial statements are different from those involved in setting standards for reviewed financial statements.
SEPTA expressed concern over the requirement in § 125.3(c)(8) that applicants shall report data on closed claims. Giant Foods commented that the information on closed claims should be limited to those claims closed within the past 5 years, while IRRC suggested limiting the information to claims closed within a specific time period. In response to these comments, the Department revised § 125.3(c)(8) to limit this requirement to claims closed on or after the effective date of this final-form rulemaking. Similar changes were made to the reporting provisions in § 125.16(b) (relating to reporting by runoff self-insurer).
The City of Philadelphia and IRRC requested clarification on when to find the case reserve instructions referenced in § 125.3(c)(8)(iii) (now § 125.3(c)(8)(iv)). The Department added language specifying that the instructions can be found on the Bureau-prescribed forms currently provided to employers requesting self-insurance.
AVI Risk Services and Porter & Curtis requested the Department to consider the potential compliance costs in developing the electronic formats for the required reserve and claims reporting. For the electronic reporting under § 125.3(c)(8), as well as the related reporting under § 125.16(b), the costs will be minimal. The Department intends to capture only a limited number of readily available data elements and will do so in a widely used format, such as an Excel spreadsheet.
IRRC commented that the time frame for an applicant to provide missing or incomplete application data in § 125.3(d) should both establish a reasonable minimum period and allow for extension due to unique conditions. The Department agrees and specified a 21-day period for the provision of the application data, which may be extended if requested by the applicant and approved by the Bureau.
SEPTA expressed concern that the requirement in § 125.3(e) that application materials must be provided before decision will delay the approval of renewal applications for reasons such as the self-insurer's excess insurance does not correspond to the renewal of its application. This is not the case. The Department will not delay the issuance of a permit under these circumstances as long as excess coverage is currently in place under § 125.6(c)(2)(ii) (relating to decision on application). Under existing regulations, a significant cause for the delay in issuing decisions involving a public employer such as SEPTA was the regulatory requirement that they provide audited financial statements covering the last complete fiscal year. To address this issue, the Department amended § 125.3(c)(3) to clarify that only private employers shall provide audited financial statements on the most recent fiscal year. This will eliminate the common cause of application delays for public employer applicants and will make public employers' compliance with § 125.10 (relating to funding by public employers) paramount in determining whether they have adequate financial health to self-insure.
The Department amends § 125.4 to allow for the submission of audit reports and financial information for applicants that are subsidiaries of a foreign parent company. The Department deletes the provision in subsection (a) requiring that a parent company of a consolidated program be incorporated under the laws of a state of the United States, because this incorporation requirement is extended to applicants in § 125.5 (relating to preliminary requirements). The Department also deletes the requirement that a Bureau form be used by an applicant to delete an affiliate or subsidiary from a consolidated permit, because a specific form for this purpose is unnecessary.
Giant Foods commented that the Department should include the terms ''direct or indirect subsidiary'' and ''direct or indirect parent company'' in § 125.4(a) and elsewhere throughout the regulations to recognize that an applicant's direct parent might be a holding company or other intermediary between the applicant and the ultimate holding company. IRRC also suggested clarifying the terminology regarding this subject. In response, the Department amended the definitions of ''subsidiary'' and ''parent company'' in § 125.2 to include reference to direct or indirect ownership and control.
IRRC commented that final-form § 125.4(d) should both establish a reasonable minimum period for the provision of a parent company's financial information and allow for extension by the Bureau due to unique conditions. The Department agrees and specified a 21-day period for the provision of the financial information, which may be extended if requested by the applicant and approved by the Bureau.
Giant Foods commented that § 125.4(d) should be excepted in the case of foreign corporations to whom § 125.4(e) applies. The Department agrees and revised § 125.4 (d) accordingly.
Giant Foods also commented that the term ''consolidated audit report'' be replaced with ''consolidated financial statements'' in § 125.4(e). The Department agrees and made this change to § 125.4(d) and (e). The Department also made a similar change in § 125.3(c)(3), (c)(3)(i) and (4) and § 125.6(h).
The Department amends § 125.5 to require, for enforcement purposes, that an applicant be incorporated or organized under the laws of a state of the United States and have an adequate accident and illness prevention program under Chapter 129. The Department deletes existing language in § 125.5(b)—(d) because this information is addressed in § 125.6.
IRRC commented that § 125.5(c) should be amended to specify what constitutes an ''adequate'' accident and illness prevention program. The term ''adequate accident and illness prevention program'' is defined in § 125.2, which references Chapter 129. The criteria for and determination of an adequate accident and illness prevention program are more properly governed by section 1001 of the act (77 P. S. § 1038.1) and Chapter 129. For consistency with those provisions, the Department replaced the ''applicant'' with ''self-insured employer'' in the definition of ''adequate accident and illness prevention program'' in § 125.2.
The Department amends § 125.6 to add paragraphs which set forth objective standards that an applicant shall satisfy to demonstrate its financial ability to self-insure, including that the applicant has adequate financial capacity and adequate financial health. The criteria for adequate financial health depend upon whether the applicant is a public or private employer. For a private employer, the Department requires an investment grade long-term credit or debt rating, or a long-term credit or debt rating that it is one grade below investment grade as issued by a rating organization or estimated by the Bureau. This will ensure that a private employer applicant which is approved to self-insure will have adequate, current financial health to meet its obligations, including its self-insurance liability, into the reasonably foreseeable future. The Department also adds language in § 125.6(a) to grandfather existing self-insurers who do not meet the rating requirements under certain conditions.
The Department amends § 125.6(a) to streamline the factors to be considered in assessing an application. The Department clarifies the information, standards and procedures pertaining to initial decisions, compliance with conditional approvals, issuance of permits, reconsideration requests and decisions, and appeals from reconsideration decisions to standardize and streamline the process and identify the necessary time frames involved. The Department also reduces the time period for compliance with conditional approvals in § 125.6 from 60 to 45 days. The Department modifies the hearing procedures following a reconsideration decision to replace the de novo hearing process with an appeal hearing process that will be conducted according to these regulations and 1 Pa. Code Part II (relating to General Rules of Administrative Practice and Procedure) to the extent not specifically superseded by these regulations.
Giant Foods commented that § 125.6(a)(2)(ii)(A) and (B) should contain a reference to the parent company's actual or estimated long-term credit or debt rating for determining the requisite financial health to self-insure. In response, the Department agrees and revised these sections accordingly for applicants under § 125.4(e).
IRRC commented that the Department should include the criteria to be used in the Bureau's rating estimation for applicants that do not have the referenced Nationally-recognized statistical rating organization (NRSRO) rating under § 125.6(a)(2)(ii)(A). An outline of the specific criteria for this determination is difficult to provide, as it requires a judgment based upon a review of the information provided under § 125.6(b)(1)(i)—(iii). The Department will be using generally available ''financial analysis comparison databases and evaluations models'' for this estimation however and added this language to § 125.6(b)(1)(iii).
Giant Foods also commented that § 125.6(b)(1)(i) and (2) should include references to an applicant's parent company. The Department agrees with regard to § 125.6(b)(1) and (b)(1)(i) and the revised the subsection accordingly for applicants under § 125.4(e). The Department does not believe this change is proper for § 125.6(b)(2) because the quick asset amount measured for self-insurance should be only that of the applicant. However, the Department deleted the word ''audited'' and added a reference to § 125.4(e) in § 125.6(b)(2) to clarify that the financial statements reviewed under § 125.6(b)(2) may be the unaudited statements submitted under § 125.4(e).
The City of Philadelphia commented that the time frame for satisfying approval conditions under § 125.6(c)(1) should remain at 60 days and not be decreased to 45 days. IRRC requested that the Department explain the reason for the decreased time frame. The Department believes that the current 60-day compliance period is unnecessarily lengthy and causes delay in the timely processing of applications. A 45-day period is a reasonable time frame when there has been a conditional approval. Moreover, if an applicant requires additional time to meet conditions, it continues to have the ability to request a 30-day extension under § 125.6(c)(1)(ii).
The City of Philadelphia commented that an applicant should be given 90 days, rather than 30 days, to comply with the requirement to obtain workers' compensation insurance coverage in § 125.6(d) and (f)(2) as well as § 125.19(a)(3) and (b)(2) (relating to additional powers of Bureau and orders to show cause). The Department believes that the existing 30-day period is sufficient as it has not proven to be problematic. It is also more closely aligned with section 305(a)(3) of the act, which provides that coverage shall be obtained ''immediately.''
IRRC commented that the Department should provide time frames for the Bureau to take certain actions, including issuing decisions, assigning appeals to hearing officers and appealing to Commonwealth Court in § 125.6(c), (d), (f), (g) and (g)(5). The Department does not believe time frames for these actions are required or useful for several reasons. With the exception of § 125.6(g)(5), these actions have not been subject to time constraints in the past and this has never been problematic. Importantly, an applicant or current self-insurer's status is not affected by the time it takes for the Bureau to make its decision or assign an appeal. The Department has always acted within a reasonable time and will continue to do so. Finally, the time frame for appeal to Commonwealth Court under § 125.6(g)(5) is separately governed by Pennsylvania Rule of Appellate Procedure 1512 (relating to time for petitioning for review).
IRRC commented that final-form § 125.6(e)(1) should both establish a reasonable minimum period for the applicant to submit additional materials in support of its application and allow for extension by the Bureau due to unique conditions. The Department agrees and specified a 21-day period for the provision of the additional materials, which may be extended if requested by the applicant and approved by the Bureau.
The City of Philadelphia commented that the conditions under which a self-insurer continues to operate when its permit is extended under § 125.6(e)(2) and (g) were unclear. In response, the Department incorporated a reference to the conditions ''as set forth under subsection (c)(2)'' of that section for clarification.
IRRC commented that the Department should explain its rationale for placing the burden on the applicant to prove that the Bureau acted arbitrarily or abused its discretion in § 125.6(g)(4). The Department added this provision consistent with the current case law in City of Scranton v. Bureau of Workers' Compensation, 787 A.2d 1094 (Pa. Cmwlth. 2001), wherein the Court determined that this was the appropriate burden in the context of a self-insurance appeal. The Department retained this provision in the final-form rulemaking, but for clarity purposes deleted the unnecessary phrase ''under this subchapter.''
The Department amends § 125.7 (relating to permit) to clarify the nature and applicability of the automatic extension of an existing permit, providing safeguards for renewal applicants when the Bureau fails to issue an initial decision on a renewal application before the permit's expiration or when a renewal applicant is in the process of timely satisfying conditions in the Bureau's decision at the time an existing permit is set to expire.
IRRC commented on the lack of a timetable for an applicant to satisfy conditions in § 125.7(c). The Department revised this section in the final-form rulemaking to provide that the conditions must be satisfied within the applicable time periods for the initial or reconsideration decision set forth under § 125.6 (relating to decision on application).
The Department rescinds § 125.8 because it contained information that is duplicated in § 125.6.
The Department amends § 125.9 to clarify existing language and replace the use of the outdated security constant with the new term ''minimum security amount.'' The Department also amends the requirements regarding the forms of acceptable security, the procedures for posting and replacing security and the methods for calculating security amounts. The Department amends § 125.9(b)(3) to delete Alaska and Hawaii as states in which a bank's branch office may issue a securing letter of credit to the Bureau, because time zone differences hamper the Bureau's ability to promptly draw down a letter of credit with a bank located in these states. The Department amends the various methods for calculating the required amount of security for private employers under § 125.9(d) to set forth in detail the factors for calculating security depending upon the status and duration of the private employer's self-insurance program.
The Department also adds a specific security discount table in § 125.9(l) based on the self-insurer's investment grade long-term credit or debt rating, if any, under which security amounts calculated under subsection (d) may be discounted. The Department replaces the language in § 125.9(f) permitting present value discounting of liability projected in an actuary's report, which may result in an inadequate security amount, with language requiring the Bureau to use the overall experience of all self-insurers or of self-insurers in the self-insurer's industry in its selection of loss development factors under certain circumstances. The Department amends § 125.9(j) to allow for a phase-in of increased security requirements under subsection (d) over a period of up to 2 years. It also amends § 125.9(k) to specify the circumstances under which the Bureau may release a runoff self-insurer of the obligation to provide security.
Wells Fargo commented that the Department should clarify when the 45-day time period for providing replacement security under § 125.9(b)(1)(ii) begins to run. The Department agrees and revised the subparagraph to state that the bond must be replaced within 45 days ''of the self-insurer's receipt of written notification of the rating decline from the Bureau.''
IRRC commented that the Department should specify the type of evidence that would be acceptable for a standby claims service arrangement under the proposed § 125.9(b)(2)(iii) and (3)(iv). US Steel commented that the proposed standby claims service agreements would impose additional costs and an unnecessary administrative burden on self-insured employers, with limited benefit to the Department or injured workers, and therefore requested that the Department reconsider this requirement. The purpose of the standby claims service arrangements was to ensure the timely and efficient continuation of benefit payments to injured workers in the event of a default when deposits under trust or irrevocable letters of credit are used as security. Upon further consideration, the Department agrees with US Steel and deleted the proposed subparagraphs.
With the elimination of the proposed standby claims service provisions, the Department also deleted § 125.9(b)(3)(iii), which required the maintenance of a separate trust agreement to accommodate the proceeds from a letter of credit which is drawn on by the Bureau. The deletion of this requirement will alternatively accomplish the goal of a smooth transition in payment after a default when there is a letter of credit as security, without placing additional cost on the self-insured employer. In light of the rescission of § 125.9(b)(3)(iii), which included a requirement that the trust company obtain a nonprocurement registration number, the Department deleted the proposed definition of ''nonprocurement registration number'' in § 125.2, since it is no longer necessary.
AVI Risk Services commented that few self-insurers have a long-term credit or debt rating issued by an NRSRO and that the security discounts in § 125.9(d), as well as the similar funding discounts in § 125.10(b), (c) and (d) should be extended to a self-insurer who receives a Bureau-estimated financial health rating equivalent to an investment-grade long-term credit or debt rating issued by an NRSRO. In response, the Department notes that 54% of current self-insurers are rated by one or more NRSRO. Further, since ratings provided by an NRSRO are more complete and accurate than those estimated by the Bureau, the Department believes that it is appropriate to allow the security and funding discounts to be based only upon the actual investment-grade long-term credit or debt ratings issued by an NRSRO.
Giant Foods commented that the security discounts in § 125.9(d)(1)(ii) and (4)(ii) should be expanded to apply to an appropriate long-term credit or debt rating from an NRSRO on the applicant's parent company. The Department disagrees and did not made this change. The Department believes that the privilege of the security discount should directly correspond to the financial rating of the applicant alone, which will be either the actual self-insurer or the guarantor of the self-insurer.
Giant Foods similarly commented that the security discounts in § 125.9(d)(5)(ii) and (6)(ii) should be expanded to apply to the calculation of a runoff self-insurer's security when a runoff self-insurer's guarantor possesses an appropriate long-term credit or debt rating by an NRSRO. The Department agrees that the discount should apply in this instance and made this change to this subsection. This change was also made to § 125.9(d)(5)(iii). For clarity in this regard, the Department also added a definition for the term ''guarantor'' in § 125.2.
Giant Foods commented that the Department's use of ''runoff'' and ''runoff self-insurer'' was not consistent in §§ 125.9(d)(5) and (6) and 125.16(b). The Department agrees and revised these sections to consistently use the term ''runoff self-insurer.''
IRRC commented that the provisions regarding submission and consideration of a self-insurer's actuarial report in § 125.9(e) do not establish a binding norm and should be deleted or rewritten to establish criteria the Department will apply to accept or use this report. In response, the Department deleted the proposed amendments.
IRRC commented that § 125.9(f), which addresses the Department's selection of loss development factors to project a self-insurer's outstanding liability, did not provide enough certainty to the regulated community. IRRC also commented that § 125.9(g), which addresses the Department's ability to adjust loss development procedures, also did not provide enough certainty to the regulated community. By its very nature, a projection of liability based on loss development techniques contains many adjustments, selections and considerations based on the experience and judgment of the actuary performing the projection. To provide additional certainty regarding this necessary projection in § 125.9(f) however, the Department amended this section to require that it will incorporate the overall Pennsylvania workers' compensation experience factors in its selection of loss development factors when the self-insurer's volume or experience is not sufficient based upon generally accepted actuarial procedures. Further, the Department revised § 125.9(g) to require that it will make adjustments to the loss development procedures under the circumstances in that subsection. The Department deleted proposed amendments that would have provided discretion to use methods other than loss development to make this projection. The Department also deleted proposed § 125.9(g)(1) and (2), consistent with its deletion of the proposed definitions of ''default multiplier'' and ''default multiplier-calculated security factor'' in § 125.2, by which the Department would have had additional discretion to substitute the loss development liability amount for a default-multiplier security factor.
Wells Fargo commented that self-insurers should be provided an opportunity to furnish additional information and participate in discussions prior to the Department utilizing the default multiplier-calculated security factor in § 125.9(g)(1). As previously noted, the Department deleted this provision from the final-form rulemaking.
Wells Fargo commented that the maximum security phase-in period in § 125.9(j) should remain at 3 years and not be reduced to a 2-year period. IRRC commented that the Department should provide justification for the change or maintain the current arrangement. The Department believes that a 2-year phase-in period for current self-insurers who are already posting security based upon the terms of the regulations is reasonable, based upon its past experience with this section and the fact that it is unlikely there will be significant increases in the amount of security under these amendments.
Wells Fargo and IRRC questioned whether the Department intended to discontinue the practice of reducing a runoff self-insurer's amount of security due to the deletion of language on the subject under § 125.9(k). The Department will continue to authorize security reductions for runoff self-insurers. The provisions for calculating the required amount of security for this category of self-insurer are now in § 125.9(d)(5) and (6).
IRRC commented that the Department should specify the type of evidence that would be acceptable under § 125.9(k)(2) for a runoff self-insurer to establish that its closed claims are unlikely to be reopened. In response, the Department deleted that requirement from the subsection.
Giant Foods commented that the Department should amend § 125.9(l) to clarify whether the security discount is based upon the current long-term credit or debt rating or a past rating. The Department revised the final-form rulemaking to clarify that the security discount is based on the ''current'' long-term credit or debt ratings of the self-insurer or its guarantor.
IRRC commented that § 125.9(m) would give the Department the authority to amend the security discount table under subsection (l) while bypassing the normal rulemaking process. The Department's sole intention in this subsection is to provide a method for the Department to set forth the discounts resulting from financial ratings issued by a new organization that receives a designation as an NRSRO after the effective date of the final-form rulemaking. Therefore, the Department revised this subsection accordingly.
The Department amends § 125.10 to focus on a public employer's short-term solvency rather than its long-term reserves. Therefore, the amendments require public employers to maintain sufficient dedicated cash reserves to meet payments over the next year for benefits and expenses to self-insure. The Department amends § 125.10(a) to provide that a public employer shall maintain a dedicated asset account, which no longer needs to be a trust fund. This requirement now includes the Commonwealth, but not certain runoff self-insurer public employers who do not meet the threshold for average annual payout of benefits on self-insurance claims. The Department deletes existing language in § 125.10(b) and (c) regarding long-term reserves and adds subsections (b)—(e) which set forth in detail the various methods and factors for calculating the required asset level of a public employer's dedicated asset account depending upon the status and duration of the public employer's self-insurance program.
IRRC and the City of Philadelphia commented that the Department should include a definition for ''dedicated asset account'' for this section. The Department agrees and added a definition of the term in § 125.2.
The Port Authority commented that by replacing the existing ''trust'' concept with the dedicated asset account for public employers in § 125.10, the regulations will create a financial burden on public employers and their taxpayers without increasing the security of benefit payments to injured workers. The Port Authority suggested that the Department either eliminate the requirement or establish an exemption for public employers with a history of financial responsibility in the payment of benefits. IRRC requested an explanation of the financial impact of this change on public employers. IRRC also commented that the Department should explain what constitutes ''good cause'' for purposes of the proposed retroactive phase-in requirement under § 125.10(d)(3).
The Department believes that the replacement of trusts with dedicated asset accounts will not increase costs. To the contrary, this change will likely decrease costs for most public employers since they will no longer be required to maintain a formal trust arrangement. While the amount of assets set aside in a dedicated asset account may increase for some public employers, overall this system will reduce the amount of funding required to be set aside under the existing trust concept. The Department recognizes the importance of allowing a public employer to use as much of its available financial resources as possible to provide its mandated public services. The Department believes that the dedicated asset account concept is carefully tailored to balance this recognition with the need to ensure that an employer who is granted the privilege to self-insure clearly has the financial resources to liquidate its workers' compensation liability. As set forth in more detail in the Fiscal Impact section of this preamble, the Department projects that 37 of the 57 current self-insured public employers actually will be able to reduce their reserve funding for workers' compensation by an average of 49% under this final-form rulemaking. While the remaining 20 public employers may be required to increase their funding, this increase will be based upon the increases in their annual payments of benefits.
To avoid a possible undue burden on the few public employers that also may have been subject to the proposed retroactive funding phase-in requirement in § 125.10(d)(3), the Department deleted that requirement. The Department instead included a grandfathering provision which establishes the initial dedicated asset account level for those public employers at their existing funding level as of the effective date of the final-form rulemaking. Future funding increases for those employers would be based only on the same minimum funding calculations in § 125.10(d)(1) and (2) applicable to all public employers that fall under § 125.10(d).
Further, to limit the impact on a public employer's provision of services while ensuring that they maintain asset reserves within a reasonable margin of safety, the Department amended the definition of ''minimum funding amount'' in § 125.2 to reduce in half the formula's consideration of the Statewide average weekly wage. Additionally, the Department eliminated the separate definition for an ''instrumentality of the Commonwealth'' in § 125.2 and included this type of public employer under the existing definition of ''Commonwealth;'' this will avoid the need for those employers to post unnecessary security under the separate requirements for private employers under § 125.9(a). These employers are now treated as all other public employers under the final-form rulemaking.
IRRC commented that the Department should include additional details regarding the process of determining ''a later date agreed to by the Bureau'' for a public employer to meet its funding requirement under § 125.10(d)(4). The Department revised the language to provide that this period may be extended if requested by the applicant and approved by the Bureau. Similar proposed language in § 125.10(c)(3) has also been revised accordingly. Additionally, for clarity, the Department revised § 125.10 (a), (c)(1)(i) and (d)(1)(i) to clarify that the required asset level is calculated based on a public employer's ''fiscal'' year payout of benefits.
The City of Philadelphia commented that adjustments the Department would make to a public employer's annual payment of benefits under § 125.10(d)(5) for the purpose of calculating the required asset level should only occur following a hearing on the matter. The Department does not believe that a hearing prior to the adjustments is necessary or practical. However, it is important to note that these adjustments are made in the context of the Bureau's initial or reconsideration decision under § 125.6. When the self-insurer disputes the adjustment or funding amount regarding their permit approval, the self-insurer may avail itself of the reconsideration and appeal proceedings consistent with § 125.6(c)(2)(i) and (e)—(g). For clarity, this subsection has been revised to include specific reference to § 125.6. A similar change also has been made to § 125.10(c)(4) for this reason.
The Department amends § 125.11 (relating to excess insurance) to replace the current requirements and limits of excess insurance with new language addressing excess insurance in terms of adequate financial capacity and the coverage of a possible catastrophic loss. Under § 125.11(a), the Department adds the requirement that, when excess insurance is required to demonstrate adequate financial capacity, the applicant's retention amount must at least equal its authorized retention amount, and the applicant's liability limit of its insurance must be in an amount acceptable to the Bureau to cover adequately a catastrophic loss. The Department deletes existing requirements for aggregate excess insurance in § 125.11(b), as these requirements are no longer necessary. The Department also clarifies and organizes the contract requirements for excess insurance in § 125.11(c) (now § 125.11(b)).
IRRC and the Port Authority commented that the language in § 125.11(a) requiring that the liability limit of an excess insurance policy be ''acceptable to the Bureau'' was unclear and lacked detail. The language reflects the current practice of the Department, whereby the Bureau reviews the liability limit suggested by the self-insurer to ensure that it provides adequate protection for a catastrophic loss. For clarity, the Department specified that the Bureau's determination will be based upon consideration of the financial capacity of the applicant consistent with § 125.6(a) and the amount of the catastrophic loss estimation consistent with § 125.2 involving the applicant and its self-insured affiliates.
The Port Authority also commented that the regulations on excess insurance retention amounts should take into consideration the existence of cash flow protection coverage the self-insurer may have obtained. The Department notes that since ''cash flow protection amount'' is a defined term in § 125.2 and included under the definition of ''retention amount,'' the regulations do take this into consideration.
To further improve the clarity of the excess insurance provisions in this section, the Department made minor editorial changes in the final-form rulemaking to § 125.11(b) and the related definitions in § 125.2 for the terms ''aggregate excess insurance,'' ''cash flow protection amount,'' ''excess indemnity insurance,'' ''liability limit,'' ''retention amount,'' ''specific excess insurance'' and ''workers' compensation excess insurance.'' These changes do not affect the substance of the provisions or definitions, but simply constitute a reorganization of the existing information to make the excess insurance requirements easier to locate and understand within the regulations. Additionally, in light of these changes, the Department deleted the proposed term ''nonworkers' compensation insurer'' and its related references in the definitions in § 125.2, as it is no longer necessary or useful.
The Department amends § 125.12 (relating to payment, handling and adjusting of claims) to require self-insurers to notify the Bureau when they change claims handling or adjusting arrangements, whether self-administered or administered by a registered claims service company. A self-insurer will also have to provide a summary of its claims data to the Bureau, upon request, to explain discrepancies or problems that may arise due to the change in claims handling responsibilities.
IRRC recommended that § 125.12(c) include the time frame for a self-insurer to report a change in claims handling arrangements and an explanation of how the Bureau will notify the self-insurer of its deadline for filing the data outlined in the subsection. The Department clarified that self-insurers shall ''immediately'' report changes and provide the summary claims data in a format both prescribed and provided by the Bureau within 21 days of its receipt of notification that the data is required.
The Department amends § 125.13 (relating to special funds assessments) to include the Uninsured Employers Guaranty Fund (UEGF) as one of the listed special funds for which a self-insurer is liable to pay assessments. The UEGF was newly established in sections 1601—1608 of the act (77 P. S. §§ 2701—2708) by the act of November 9, 2006 (P. L. 1362, No. 147). The amendments also allow the Bureau to require a self-insurer to retain the services of its certified public accountant to resolve questions about the accuracy of annual compensation payments reported by the self-insurer.
IRRC and Wells Fargo commented on the rationale for including assessments against self-insurers for the maintenance of the UEGF in § 125.13(a). The Department included this provision consistent with section 1607 of the act, which specifically provides that the Department will assess both insurers and self-insurers for the maintenance of the UEGF.
The Department amends § 125.15 (relating to workers' compensation liability) to clarify existing language, including specific reference to self-insurance loss portfolio transfer policies.
The Department amends § 125.16 to clarify existing language regarding the timing, format and contents of the runoff report and to specify the procedure for a runoff self-insurer to request adjustment of its security amount.
The Department amends § 125.17 (relating to claims service companies) to set forth the continuing obligation of claims service companies to assist the self-insurer and the Bureau in providing data and information on the self-insurer's claims serviced by that company.
IRRC, the City of Philadelphia and Wells Fargo each commented that the Department should provide an enforcement provision for claims service companies who do not comply with § 125.17(d). Section 441(c) of the act (77 P. S. § 997(c)) requires that registered claims service companies ''shall furnish such reports of its activities as may be required by rules and regulations of the department.'' This section of the act further provides an enforcement mechanism by which the company's privilege of conducting business may be suspended or revoked when the company's failure to assist or provide necessary information or reports affects the prompt payment of compensation. This provision does not appear to provide authority for the Department to impose other penalties for noncompliance. However, self-insurers themselves do not appear to be prohibited from seeking the claims service company's cooperation, or pursuing other recourse, if any, under their prior or expiring contract with that company.
The Department amends § 125.19 (relating to additional powers of Bureau and orders to show cause) to explain the procedures by which the Bureau may address changes in the financial condition of active self-insurers and violations of the act and this subchapter. The Department adds subsection (a) to set forth procedures whereby the Bureau may review the qualifications for self-insurance, and revoke an existing permit, when necessary, for active self-insurers whose financial condition declines before the expiration of an existing permit. Under paragraph (1), the Bureau will issue a letter to the self-insurer outlining its concerns. The Department further adds specific language pertaining to the Bureau's ability to suspend or revoke a permit following the issuance of an order to show cause. This will proceed in the manner in the order to show cause provisions in Chapter 121 (relating to general provisions) when a self-insurer unreasonably fails to pay compensation for which it is liable or fails to submit any report or pay any assessment made under the act.
The City of Philadelphia commented that the Department should provide a standard in § 125.19(a) for when the Bureau may question whether an applicant continues to maintain the financial ability to self-insure. This section implements section 305(a)(3) of the act and section 305 of the Occupational Disease Act, which allow the Department to request further statements of financial ability and revoke a self-insurer's permit during the permit period. The Department does not believe an additional standard is required insofar as § 125.19(a) is based upon the self-insurer's financial ability to self-insure, the requirements of which are clearly in §§ 125.2 and 125.6(a). Additionally, § 125.19(a)(2) provides a self-insurer with the ability to dispute a decision under the procedures in § 125.6(e)—(g).
The City of Philadelphia further suggested that the Department replace ''may'' with ''shall'' in § 125.19(a) regarding the Bureau's issuance of a letter when it has reason to question the financial ability of a self-insurer. The Department substantially agrees and modified the language to reflect that the Bureau will issue the letter.
IRRC and the City of Philadelphia commented that the Department should include specific language in the order to show cause provisions in § 125.19(b) to explain how a self-insurer acts unreasonably in failing to pay compensation. Since this issue involves a fact-specific, common sense inquiry, a more specific definition limited to self-insurers under Chapter 125 does not appear necessary or prudent at this time. In this regard, section 441(b) of the act, on which this provision is based, states that the secretary ''shall not [revoke or suspend self-insurance status] until the employer has been notified in writing of the charges made against it and has been given an opportunity to be heard before the secretary in answer to the charges.'' The issue of whether a self-insurer's failure to pay was ''unreasonable'' under the circumstances would be addressed by the self-insurer and the Bureau before a presiding officer at the show cause proceeding. Section 441(a) of the act contains identical language regarding the repeated or unreasonable failure to pay compensation by licensed insurers, which are not governed by Chapter 125. Moreover, reference to ''unreasonable'' delays in payment is also in section 435(d)(i) of the act and the courts have addressed the fact-specific issue of what constitutes ''unreasonable'' delay under that section on a case-by-case basis.
The Department amends § 125.20 (relating to computation of time) to adjust the manner in which a period of time will be computed under this chapter to be consistent with the time computation provisions in Chapter 121.
The Department adds § 125.21 (relating to self-insurance loss portfolio transfer policy) to establish procedures and guidelines for the transfer of a self-insurer's workers' compensation liability to an insurance carrier through the use of a self-insurance loss portfolio transfer policy.
IRRC generally commented that the Department should provide direction in the final-form rulemaking on how an applicant can access the various Bureau-prescribed forms outlined in the regulations. As a result, §§ 125.3(a), 125.4(a) and 125.9(b)(1) and (2) have been revised to state that the various forms described in those sections are available upon request from the Bureau. Additionally, § 125.3(c)(6), (7) and (8), 125.12(c) and 125.16(a) have been revised to state that the various forms and formats mentioned in those provisions will be provided to the applicant by the Bureau.
IRRC also commented that the Department should specify the type of evidence that would be acceptable when the regulations require self-insurers to provide evidence of workers' compensation insurance coverage, such as §§ 125.3(d), 125.6(c)(1)(iv), (d), (f)(1)(ii) and (2), 125.9(b)(1)(iii) and 125.19(a)(3). In response, the Department added ''such as a certificate of insurance'' to provide clarification. This change has also been made to § 125.19(b)(2).
Porter & Curtis commented that it would like an estimate of the one-time additional costs associated with the Bureau's implementation of the regulations and how those costs would be applied to self-insurers. The Department is not able to accurately project these costs. However, they will be minimal and will be paid through the Workmen's Compensation Administration Fund. Work in the reprogramming of the self-insurance system will be done internally by the Department's Office of Information Services.
Affected Persons
Active self-insurers, runoff self-insurers and employers applying for self-insurance in the future will be affected by the final-form rulemaking in various degrees. The final-form rulemaking will affect self-insurers and applicants for self-insurance. A number of the substantive amendments, including those regarding loss development calculations and security discounts, will affect existing private sector self-insurers. New and existing public sector self-insurers also will be affected by the funding requirements in the final-form rulemaking. Self-insurance claims service companies, sureties and trustees will also be impacted by the final-form rulemaking.
Fiscal Impact
Private employer applicants with a strong financial rating will likely see no significant, direct impact to their overall costs from the final-form rulemaking. These applicants may experience reduced costs due to the greater security discounts for employers having strong financial ratings. Private employer applicants with lesser financial ratings, however, may experience some increase in costs as a result of the changes to security and excess insurance requirements.
The vast majority of public sector applicants will realize substantially reduced funding requirements under the final-form rulemaking. The Bureau estimates that required funding amounts would decline by an average of 49% for 37 of the 57 public self-insurers. The remaining 20 public employers are subject to a grandfather waiver provision which requires increases to their amount of funding for workers' compensation based on increases in annual compensation payments. Four of the public employers from this group also will realize cost savings as the result of the elimination of security requirements on them.
Some one-time additional costs associated with the implementation of the final-form rulemaking are likely for the Bureau. These costs, which will not be substantial, will mostly result from the reprogramming of the computer system used to monitor self-insurers and to decide applications.
Reporting, Recordkeeping and Paperwork Requirements
The major reporting, recordkeeping and paperwork requirements resulting from the final-form regulation are as follows:
An active or runoff self-insurer is required to annually file, in electronic format prescribed by the Bureau, a listing of its open and closed claims incurred after the effective date of this final-form rulemaking.
An active or runoff self-insurer may be required to file with the Bureau summary data on its claims when it changes claims handling arrangements.
Effective Date
This final-form rulemaking is immediately effective upon publication in the Pennsylvania Bulletin.
Sunset Date
A sunset date is not necessary for these regulations. The regulations are continuously monitored by the Workers' Compensation Advisory Council and by the Bureau in the day-to-day handling and processing of individual self-insurance applications. If needed, corrections can be initiated based on information obtained by these operations.
Contact Person
Persons who require additional information about this final-form rulemaking may submit inquiries to George Knehr, Chief, Self-Insurance Division, Bureau of Workers' Compensation, Department of Labor and Industry, 1171 South Cameron Street, Room 324, Harrisburg, PA 17104-2501, gknehr@state.pa.us.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on April 20, 2009, the Department submitted a copy of the notice of proposed rulemaking, published at 39 Pa.B. 2293, to IRRC and to the Senate Committee on Labor and Industry and the House Labor Relations Committee (Committees) for review and comment.
Under section 5(c) of the Regulatory Review Act, IRRC and the Committees were provided with copies of the comments received during the public comment period, as well as other documents when requested. In preparing the final-form rulemaking, the Department has considered all comments from IRRC, the Committees and the public.
Under section 5.1(j.1)—(j.3) of the Regulatory Review Act (71 P. S. § 745.5a(j.1)—(j.3)), on August 4, 2010, the final-form rulemaking was deemed approved by the Committees. Under section 5.1(e) of the Regulatory Review Act, IRRC met on August 5, 2010, and approved the final-form rulemaking.
Findings
The Department finds that:
(1) Public notice of proposed rulemaking was given under sections 201 and 202 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. §§ 1201 and 1202) and the regulations thereunder, 1 Pa. Code §§ 7.1 and 7.2.
(2) A public comment period was provided as required by law and all comments were considered.
(3) The final-form rulemaking is necessary and appropriate for the administration and enforcement of the authorizing statute.
Order
The Department, acting under the authorizing statute, orders that:
(a) The regulations of the Department, 34 Pa. Code Chapter 125, are amended by adding § 125.21; by amending §§ 125.1—125.7, 125.9—125.13, 125.15—125.17, 125.19 and 125.20; and by deleting § 125.8 to read as set forth in Annex A.
(b) The Secretary of the Department shall submit this order and Annex A to the Office of General Counsel and the Office of Attorney General for approval as to legality and form as required by law.
(c) The Secretary of the Department shall submit this order and Annex A to IRRC and the Committees as required by law.
(d) The Secretary of the Department shall certify this order and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(e) This order shall take effective immediately upon publication in the Pennsylvania Bulletin.
SANDI VITO,
Secretary(Editor's Note: For the text of the order of the Independent Regulatory Review Commission relating to this document, see 40 Pa.B. 4814 (August 21, 2010).)
Fiscal Note: Fiscal Note 12-85 remains valid for the final adoption of the subject regulations.
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