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Its complexity beckons the insider. And its flaws reveal a troubling problem that extends to other aspects of relations between insurers and their insureds.

At its worst, a second injury fund (SIF) is a legal racket paid for by employers and taxpayers that benefits insurers.

Their idealized version persists today among unschooled state legislatures and labor unions. Ideally, the funds are meant to work as follows. An employer, at the verge of hiring a worker who had sustained an injury in a prior job, is told of a fund that will reimburse him for any new, related injury. When such an injury occurs, the insurer then petitions the state's SIF for reimbursement on behalf of that claim. The SIF honors the request and the insurer then credits the insured.

Assuming a guaranteed plan is in place with little or no deductible, this credit to the insured takes the form of resetting downward that claim's cost in the experience modification calculation. This causes the mod rate to be adjusted downward.

The SIF, according to this idealized version, assesses the entire insured population proportional to their insurance premiums.

About everything that can subvert this ideal has occurred, at least in Massachusetts and New York. Other states have closed their SIF's down.

Each state with an SIF defines prior job, or even prior condition, differently. To know the scope in detail requires experience. Then there are complicated filing rules. Only a relative handful of people master these intricacies. And the insured may not get the benefit of an award which the insurer has obtained.

First, many SIF awards are for a portion of claim costs and are too small to prompt a rate recalculation.

Second, a typically lengthy petition and award cycle may delay the award for years. This is a fatal problem in Massachusetts. A recent study of 200 SIF awards in that state revealed that credits to insureds were made for only nine of them. Bear in mind that the insureds are paying 100 percent of the costs of the SIF.

And now for the most aggravating and far reaching of the problems: the insurer may not get around to crediting their insureds due to accounting deficiencies.

Bonnie Brook, president of the consulting firm of Stephenson and Brook, said that in Massachusetts and New York insurers vary in how compliant they are in crediting their insureds for SIF awards and other recoveries, such as subrogation awards.

She said AIM Mutual in Massachusetts and Chartis, Liberty Mutual, and Travelers in both states are very responsive. Many other insurers, she said, may need to be prodded.

New York's massive SIF faces an additional problem. Its assessments were so low, and awards so high, that it has accumulated an $18 billion actuarial deficit. Who's going to pay for this? Taxpayers and employers, through bond issuances and higher premiums. It's time to do the right thing and shut these funds down.

PETER ROUSMANIERE is an expert on the workers' compensation industry.

September 1, 2010

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