Article cited to keep up with GM bankruptcy and its affect on workers compensation claims. JEFF SWANEY FREE CONSULTATION (314) 310-8373
(June 1, 2009 – Madison, WI) Self insurance directors had a jolting start to their work week as headlines of General Motors bankruptcy petition filled the news yesterday. The so called “first day motion” to the court included a petition to continue wages and benefits to GM’s workforce. As part of this motion, General Motors’ management took the position that payment for all workers’ compensation benefits, whether for future or past claims, was in the best interest of preserving the commitment of its labor force. Thus, the petition calls for the payment of all workers’ compensation benefits for any of its past or present employees, administrative expenses, and any workers compensation insurance premiums due, with exceptions for certain states, as noted below.
It is assumed that GM will continue premium payments, as most companies in bankruptcy place high priority in maintaining health and disability insurance. In fact, it is commonly assumed that a company’s assets can be best preserved by continuation of normal operations until the court deliberates on reorganization and releases the organization from bankruptcy as a viable entity.
The petition before the court includes workers’ compensation liabilities for active plants and operations, as well as incurred claims for ongoing workers’ compensation benefits in many jurisdictions where operations have ceased. According to the petition, the magnitude of past claims is enormous:
As of the Commencement Date approximately 12,500 workers’ compensation claims were pending against the Debtors. The Debtors estimate that the aggregate amount payable on account of incurred but not yet paid claims and IBNR claims arising prior to the Commencement Date is approximately $1.47 billion. Of course, not all of this amount is immediately due, but rather would be payable throughout the succeeding months and even years. The Debtors estimate that cash payments for the next 12 months related to prepetition workers’ compensation claims will be approximately $240 million.
The formal request to honor these past payments is stated as follows:
The Debtors intend to continue to review the proposed treatment of the Debtors’ obligations under Workers Compensation programs in the various states in which they operate or have in the past operated. Although this review is ongoing, the Debtors seek authority to pay all amounts related to workers’ compensation claims and IBNR claims that arose prior to the Commencement Date as they become due in the ordinary course of business (including reimbursements of administrators for claims paid by them), including all insurance premiums and administrative costs, and to continue their Workers’ Compensation Programs in the ordinary course, as deemed necessary to continue to operate and preserve value in the exercise of their business judgment in all states other than Alabama, Georgia, New Jersey and Oklahoma. In these four states, the Debtors do not currently intend to pay amounts related to workers’ compensation claims and IBNR claims that arose prior to the Commencement Date.
A GM official commented that Alabama, Georgia, New Jersey, and Oklahoma were omitted because they have no current GM operations. However, Greg Krohm, Executive Director of the IAIABC notes, “Even if collateral or surety coverage is sufficient to pay all future claims, there is likely going to be at least a few weeks delay in initiating payments in these four states. Moreover, the adequacy of security at ultimate payout is not guaranteed.”
How quickly the court will respond to the petition is unclear. If the Bankruptcy Court of the Southern District of New York rules that evidentiary filings and hearings are called for, turning claims over to sureties or third party administrators will inevitably result in some interruptions in benefit payments. The company rationale to the court for priority preference for these claims is:
If the Debtors are not authorized to pay their prepetition workers’ compensation obligations, the Debtors expect that the letters of credit, security deposits, and/or surety bonds will be drawn, resulting in millions of dollars of claims against the Debtors’ estates. Moreover, if they are not permitted to honor their workers’ compensation obligations, (a) alternative arrangements for workers’ compensation coverage likely would be more costly, (b) the failure to provide coverage may, in some states, subject the Debtors or their officers to significant penalties and possibly a shut down of operations, and (c) the Debtors may have their qualified self-insured employer status revoked in the respective states, resulting in substantially higher costs.
“If unopposed, this first day petition is likely to be granted. However, if creditors object the matter may be reopened,” according to Robert Aurbach, Principle, Uncommon Approach.