There are three issues involving the California Insurance Guarantee Fund that should come up in the next legislative session. First, making sure that employers reimburse CIGA not a defunct carriers' estate under large deductible policies. Second and third are about whether the premium tax and CIGA surcharges should continue to be waived for the large deductible portion of workers' comp policies. The Executive says Yes to the first and No to the second and third.

Not that long ago, former Insurance Commissioner Harry Low stunned the business and insurance communities by suggesting that payments made under a workers' compensation deductible should be subject to the gross premium tax. He also wanted to collect those taxes retroactively.

That was during Commissioner John Garamendi's most recent campaign. We don't say last because it seems he never stops, but we digress and Garamendi will be the subject of another article. In fairness to Commissioner Garamendi we must add that after the election Garamendi wisely agreed that the tax, if and when imposed, should not be retroactive.

The issue was taken to the Board of Equalization by business and insurance interests which agreed that absent legislation, the loss reimbursements are not subject to premium tax. That settled that. Or did it?

Our position that large deductibles should indeed pay the premium tax and in addition should pay the CIGA surcharge is based upon simple fairness. While the Executive's editorial position loathes taxation, this tax is a matter of fairness between large and small business.

By not paying the premium tax and CIGA surcharges, the level playing field has become a bumpy road in which small businesses are paying taxes for burdens that large businesses have simply been excused from. The result is that large business would pay about $20,000 in taxes and surcharges on a $500,000 deductible.

That's the taxes, how about the reimbursements?

Nationwide, deductible policies are coming under fire, largely because of the fallout over recent insurance insolvencies and the confusion that followed. The Pennsylvania regulator attempted to keep the deductible reimbursements for the estate of the failed Legion and Reliance Insurance Companies and a court fight ensued in which the Guarentee Funds mostly prevailed.

Currently, California loss reimbursements are not subject to Guarantee Fund assessments. The payments made by employers under deductible policies are applied to claims under the "other insurance" provisions of the Insurance Code that courts interpret expansively in cases arising from cumulative injuries and general/special employment situations, much to the chagrin of many insurers.

Use of that theory in the context of deductibles, which the courts are likely to uphold, is not without its complexities. CIGA is responsible for paying claims, so it is at best a bit awkward to have a mechanism where the insured employer is responsible for the deductible portion (other insurance) but the insolvent insurer was responsible for first dollar payment to the injured worker and CIGA would arguably be responsible for payments where the payments exceed the deductible amount.

The solution to this dilemma is to do what many states are doing - require the employer to reimburse the Guarantee Fund rather than pay the injured worker directly. This solution, adopted in an increasing number of states, resolves a number of issues regarding claims administration, data reporting, and benefit delivery. Clarifying the roll of deductibles in the administration of insolvencies, however, is only part of a bigger issue. In California the payments are transferred by the CLO to CIGA at this time but the transfer is not codified.

There is another side of this issue. That is the issue of whether employers who use large deductibles are paying their fair share as it relates to Guarantee fund assessments. As the Board of Equalization stated, deductible amounts are not premium. But are they?

While we think this means that guaranteed cost and retrospectively rated policyholders are subsidizing large deductible policyholders, others say that is not exactly the case. The issue is not one of subsidization, it is one of equity. The resolution of this issue is apparent, they say, when one considers the underlying rationale behind Guarantee funds.

CIGA is a mechanism designed to discharge employers' obligations to pay workers' compensation benefits when an insurer is insolvent. That means that all employers share in the cost of all insolvencies. In other words, an employer covered by State Fund or any other carrier pays two percent of premium to discharge the obligations of Fremont or Reliance.

In the case of a deductible, while the loss reimbursements reduce CIGA's exposure, they do not change the fundamental cost sharing obligation of all insured employers to cover the payment of benefits to injured workers whose employers were insured by insolvent employers. In this regard, the loss reimbursement serves much the same purpose as the special statutory deposit - it reduces the amount of payments that need to be made by CIGA.

But this argument is hollow. The employers covered under large deductibles do not pay either the premium tax or the 2% CIGA surcharge while small employers do pay.

Requiring large deductible policyholders to contribute more equitably to CIGA is also not the precursor to taxing these amounts. There is no will on the part of anyone to raise that issue.

If, however, premiums drop in line with expectations, both premium tax revenues and CIGA collectibles will also drop. The general fund implications are not going to be considered, but the CIGA ones should be. It would be far preferable to deal with this equitably rather than irresponsibly. Whether Sacramento can make that distinction, however, is anyone's guess.