Bermuda-based CRM Holdings has been targeted in a lawsuit by New York state as Governor David Paterson signalled his intent to tighten up control of the use of self-insured trusts in the Empire State.

A report by Insurance Journal dated June 30, 2010 revealed that a task force formed in 2008 during the wake of several high-profile trust insolvencies and collapses, as well as the failure of a major third party administrator, over the past few years, has recommended lawmakers shut down any private self-insured trust unable to post security for its liabilities.

Self-insured trusts are used by groups of similar employers who pool their resources to self-insure for workers' compensation insurance. The trusts, which share liabilities for payments to injured workers, have been a big concern for years as insolvencies of more than a dozen trusts have caused problems for state regulators and led to a major lawsuit by solvent trusts over assessments they were forced to pay. The task force report detailed 15 insolvent trusts in New York with an estimated combined deficit of $498 million. Approximately $379 million of that deficit has been attributed to self-insured trusts administered by CRM Holdings, the third party administrator that in 2008 voluntarily surrendered its trust license to operate in the state, according to Insurance Journal.

Insurance Journal reported in December 2009 that CRM was being sued for $405 million by the New York State Workers' Compensation Board (WCB) and faced a separate $150 million lawsuit by the state Attorney General Andrew Cuomo over its alleged fraud in the management of its workers' compensation business in the state.

The WCB and the state's Attorney General maintain that the company intentionally undervalued the liabilities and underpriced the premiums for employers to win their workers' compensation business.

Both added that CRM failed to adequately manage certain trusts that have had to be closed down because they lacked sufficient reserves to cover claim. They allege that CRM acted fraudulently and left thousands of employees of businesses that used these trusts for their insurance without coverage, according to Insurance Journal.

But CRM denied WCB's allegations and said that Compensation Risk Managers LLC complied with its contractual obligations to the trusts it managed and in line with the law and rules and regulations of the WCB.

"The company believes that an industry-wide problem exists and that the WCB has unfairly singled the company out," CRM said in a statement released in December 2009.

"The company intends to defend the WCB litigation vigorously and prove that the WCB's unsubstantiated allegations are utterly without merit." In the company's report to the SEC on Form 10-K, CRM said that on or about January 9, 2009 the underwriting department of Majestic, CRM's primary insurance subsidiary, received a subpoena from the New York state WCB Office of the Fraud Inspector General requesting various documents related to the issuance of excess workers' compensation and general liability policies by Majestic to the Elite Contractors Trust of New York.

On May 8, 2009, CRM Holdings and its subsidiary Twin Bridges received a subpoena from the Office of Fraud Inspector General requesting documents related to quota share agreements and a novation agreement among Twin Bridges, NY Marine and General and Majestic.

CRM's filing said that, to the company's knowledge, the Inspector General had not commenced any action against CRM or any of its affiliates and it could not predict when the Office of Fraud Inspector General would conclude its review and what, if any, action would be taken.

The task force report concluded that the "inherent risks of group self-insurance, combined with the financial risks posed by insolvent groups" outweighed the potential benefits and recommended that efforts should be made to find "acceptable alternatives to help the employers who are members of (trusts) obtain alternative coverage", with appropriate arrangements for orderly transition and provisions for all appropriate benefits for claimants and uninterrupted coverage for employers.

It recommended that the group self-insurance trust programme be eliminated in New York effective from December 31.

Gov. Paterson has introduced legislation that would institute the recommendations of the task force, including limitations on assessments imposed on group self-insurers and the creation of new rules for trusts, such as an administrator's requirements and a means to secure the liability for the group's members.

The bill, according to the Governor's office, "would stem a significant and growing cycle of financial loss, allow closed (trusts) to wind down there affairs in an orderly manner, and eliminate a workers' compensation option that subjects employers to excessive risk".