Special Issue: Staffing, Work Comp & Bankruptcy

Special Issue:  Staffing, Work Comp and Bankruptcy...

What happens to a staffing firm when their insurance carrier, PEO or franchisor files for Chapter 11 Bankruptcy or other financial restructuring?

When an insurance company fails, most states operate guarantee funds to make sure the claims are paid.  Carriers are monitored and are usually seized before they have a chance to fail unnoticed.  Your premiums are not guaranteed, but the payment of claims are.  Even if a carrier is seized, the policies do not cancel immediately and a business could have up to 364 days to replace coverage.

PEOs are monitored and regulated 50 different ways.  Some states require licensing and some don't.  In general, if a PEO fails, there is no notice given to the clients.  If their insurance is non-renewed, they usually don't share that with their clients 90-days in advance.  Consumer protections are much stronger for insurance companies than for PEO relationships.

What happens if your work comp is provided by your franchisor?  This can be tricky.  In these cases the franchisor is rarely self-insured, they are usually on high-deductible plans with admitted carriers.  These plans require very large collateral requirements, usually in the millions if not tens of millions of dollars.  As these dollars are held by the insurance company to pay future claims that may not have even occurred, courts have forced insurance companies to surrender these assets of bankrupt businesses to pay creditors.  Insurance companies are in the business of assuming pure risk, but they despise credit risk.  If they see that an insured has a $500,000 deductible and is unable to pay claims, the policy will cancel.

If your insurance company, PEO or franchisor is experiencing financial challenges or even filed for bankruptcy protection, do not wait until the last minute.  Be proactive and immediately seek contingency plans to cover your work comp exposure so you can avoid joining them in line at the bankruptcy court.

If you would like to discuss these or any other issues, please feel free to contact me below.  We can help.

michael.hrovat@huninternational.com