Mark Teich, who runs a plumbing company near Union Square in New York that his father started 65 years ago, wanted to save money on the workers’ compensation insurance he is required to carry should any of his 25 employees get injured on the job. His broker mentioned Poughkeepsie-based Compensation Risk Managers, which administered insurance trusts catering to New York small businesses. CRM offered cheap premiums.
“We joined it because my insurance broker at the time said it would be a lot more economical for us,” says Teich, president of M&T Plumbing & Heating Co. “Had I known then what I know now, I never would have gotten involved.”
Over nearly three years, beginning in 2002, Teich paid more than $147,000 in premiums to CRM. But he was dissatisfied with the value he was getting: He had only one injured worker and one claim, for $2,136. He canceled his insurance with CRM and didn’t give the company another thought until last year, when he learned that the state was accusing its executives of fraud.
In a lawsuit, the state alleged that CRM executives enticed new business to maximize their management fees even at the expense of the trusts they were hired to safeguard, and maintained shadowy corporate structures that went unnoticed by the state workers’ compensation board charged with regulating a booming industry.
By the time the board caught on, it was too late. CRM’s eight trusts were insolvent.
Though this was not the first time a trust had gone bankrupt—seven run by other companies went belly-up in 2006 and 2007—the size of the CRM insolvency dwarfed anything that came before it.
Today, the state faces a crisis in its group self-insured workers’ compensation trusts, which have a shortfall of at least $800 million. Most of that deficit is attributable to CRM, whose sudden collapse left business owners feeling duped.
“I think it’s reasonable to expect our government—in exchange for considerable taxes—to protect us from scams and fraud such as that perpetrated by CRM,” says another affected business owner, Jerry Hahn, president of computer furniture maker TBC Consoles Inc. in Edgewood, New York.
Far from protecting the 4,500 New York-based small businesses in the CRM trusts—some 900 of which are located in New York City—the state is holding them responsible.
Teich thought he had washed his hands of CRM. But last year, he got a notice from the state saying he owed $87,000 to cover his share of the liabilities. Hahn’s bill came to $350,000. Business owners were told that if they failed to pay, they would face a 22 percent penalty and a lawsuit filed by the state attorney general’s office seeking to bar them from doing business in the state of New York.
The battle lines were drawn. Threats of countersuits quickly followed. A resolution in the near future is unlikely unless Gov. Andrew Cuomo steps in.
Audits and court filings reviewed by Workforce Management sister publication Crain’s New York Business tell the story of a good idea gone bad, one that led to the boom and bust of an industry and cast a pall over thousands of small businesses whose owners believe they’ve been victimized not once, but twice.
Promise gone sour
When CRM entered the workers’ compensation business in 1999, a total of 6,614 employers participated in group self-insured trusts statewide. The trusts, which have been around for decades, are not insurance in the classic sense. Employers do not pay an insurance company a premium to shoulder risk.
Instead, businesses within similar industries—such as transportation, health care, manufacturing, government, retail and even cemeteries—formed insurance funds out of which they would pay workers’ claims. Outside administrators, such as CRM, are responsible for making sure the companies they let into the trusts have similar workplace safety records. They are also responsible for setting premiums high enough to cover claims.
The trusts held the promise that if businesses could work together to improve safety conditions, they could lower their workers’ compensation costs. The danger, of course, was that the opposite could occur. If injuries increased, their costs would go up. Either way, the firms would all be responsible—a concept known as “joint and several liability,” which would come back to haunt every business that signed on with CRM.
Ripe for conflict
The men who launched CRM were themselves small businessmen enjoying comfortable suburban lives.
President Daniel Hickey Jr. previously worked at Hickey-Finn & Co., his father’s insurance agency in Poughkeepsie, New York. Chief executive Martin Rakoff was already in the insurance trust business. He had launched Consolidated Risk Services in 1996, and Hickey helped supply him with members, in exchange for a commission. In 1999, they teamed up to form CRM.
Like successful companies in any industry, CRM won business by underpricing competitors’ premiums.
For example, Frank Budwey, who owns two supermarkets in the Buffalo area, saved $40,000 in premiums over five years when he joined a CRM-managed trust. CRM earned management fees based on the number of employees in the trusts and the value of premiums. In an unusual twist, however, CRM’s fees were linked not to the premiums that employers paid, but to an industry benchmark. This meant that CRM could offer discounts to companies with poor safety records and heavy claims without affecting its revenue.
Says Christopher Rosetti, an accountant at BST Valuation, Forensic and Litigation Services, which would eventually review CRM’s operations, this practice put the trusts at risk.
“There’s no incentive to make sure worthy candidates join the trust,” Rosetti says.
CRM saw spectacular growth. From 2001 to 2007, the company collected at least $70 million in fees, according to the state’s lawsuit. The company completed an initial public offering on the Nasdaq in December 2005 that valued CRM at $175 million. But its lax membership requirements and the steep discounts it offered eventually meant that as workers got injured on the job, the fund did not have enough money to pay the claims that were projected to mount up.
Store operator Budwey realized that the savings he’d achieved were illusory when he got a letter from CRM in 2007 saying that he owed $17,000 to cover his share of the trust’s costs. The next year, CRM said he needed to pay $80,000.
“That’s when I was made aware that a lot of things didn’t make sense,” Budwey says.
As several independent reviews of CRM’s operations later showed, the company was fraught with conflicts and mismanagement that led to—and obscured—the insolvency of its trusts.
CRM engaged in practices that looked like those of a Ponzi scheme, according to accountants’ reviews. The company took cash paid by employers one year to cover deficits from the previous year. CRM avoided scrutiny by rarely—if ever—holding general membership meetings for trusts, though it was required to by law, and by controlling the trustees charged with overseeing management.
A review conducted in May 2010 by accounting firm Lumsden & McCormick showed that the trustees of the manufacturing industry trust, appointed to act as independent monitors, were handpicked by the very CRM managers they were supposed to oversee.
One of the trustees was Mark Bottini, an owner of CRM. Additionally, some individuals were named as trustees but were never told that they had been appointed.
The state’s lawsuit—in which the word “fraudulent” appears a dozen times—alleges that CRM used another firm owned by Rakoff and Hickey to provide claims management, independent medical evaluation and medical billing services to the trusts. The executives employed yet another company they owned to provide reinsurance to the trusts at above-market rates. CRM also used a brokerage company owned by one of its founders, Daniel Hickey Sr.
The state made annual reviews of whether each trust was adequately funded. But it did so based on the audited financial statements provided by CRM—statements that were based on “questionable data” that CRM gave its actuaries and accountants, a state report on the trusts says. It wasn’t until the workers’ compensation board conducted its own audits that it discovered that the CRM trusts were insolvent.
In 2006, seven years after CRM first showed up on the New York scene, state regulators took over the trusts and began shutting them down. Rakoff left the firm in December of that year, but not before collecting a $3.3 million severance package.
None of CRM’s current or former executives would comment for this story. Nor would representatives from the state’s attorney general’s office or the workers’ compensation board.
State comes calling
Soon after the state took over, it sent letters to members saying that because of joint and several liability, they—not the state—were responsible for making the trusts whole. Hahn’s share came to $40,000; Budwey’s was $88,000.
After the state asked independent auditors to review the bankrupt trusts, however, they concluded that the deficits were much larger than originally thought. What was initially suspected to be a $178 million deficit is now projected at $800 million—as a result of forensic audits conducted on both CRM and non-CRM trusts.
The figure represents the amount that the state will have to come up with to pay the medical claims and lost wages for workers injured on the job between 1999 and 2007, according to actuaries’ estimates. Meanwhile, Hahn’s and Budwey’s debts keep growing; Budwey is now expected to pay close to $400,000.
“We’re struggling with the recession and trying to keep things going, and then to get hit with a $350,000 bill?” Hahn says. “It’s devastating.”
Hahn sent the state $10,000 as a “good faith gesture.” Then he hired a lawyer. He has no plans to pay a penny more.
Meanwhile, the state is using its authority to collect money from solvent trusts. Scores of organizations have responded by shutting down their trusts and suing the state to make sure the trusts’ money is used to pay the claims of their workers.
The crisis has decimated the group-self-insured trusts industry. Today, only about 4,000 employers participate. And while there’s currently enough money to pay workers’ claims, as of last summer, only $33.8 million of the estimated shortfall had been collected.
New York’s missteps
John Giardino, a lawyer for 400 of the small businesses in the CRM trusts, says his clients shouldn’t be targeted by the state because of its inability to oversee an industry that nearly tripled in size in the eight years CRM operated.
“These programs were approved by the state, monitored by the state; the state published reports every year about the adequacy of funding for the trusts,” says Giardino, who is special counsel, Buffalo, at the law firm Phillips Lytle. “They were the regulators. And they failed.”
Giardino says the state made a number of bad decisions after it discovered the insolvencies. The first was revoking CRM’s state insurance license, rather than instituting better management controls. That would have allowed the funds needed for claims payments to keep flowing into the trusts, he notes.
Also, the state waited a year before suing CRM, losing valuable time to recoup money. New York sued for $405 million. But a proposed settlement announced last fall would yield just $41 million, of which only $11 million would be in cash. The company has changed its name to Majestic Insurance, but two men named in the state’s lawsuit remain with the firm.
So far, none of the executives at CRM has been charged with a crime. Hickey Jr. left the company in March 2009 with a severance deal worth $3.3 million, while business owners such as Hahn have been left holding the bill.
They had been told by the state that it will sue them and assess further penalties if they do not agree to pay 50 percdent of their assessments. Legislation proposed by Cuomo would hit the businesses with stop-work orders if they don't pay. But the state has not yet put a cap on the size of the companies' liabilities.
“Workers’ comp insurance is mandated and overseen by the state to protect workers and their companies against catastrophic loss,” Hahn says, “not create it.”
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