AIG in financial crisis, will this effect my Workers’ Compensation benefits under the Defense Base Act? – Part 2 September 17, 2008Posted by Herb Chestnut in Uncategorized.
Tags: AIG, workers comp benefits
We have been receiving numerous emails in response to our previous posting on the AIG crisis and its effect on Defense Base Act claims. While it appears that a potential government bailout will keep AIG’s daily operations and claims management moving normally, we have been asked a lot of “What ifs?”
What if AIG Worldsource, the DBA insurance arm of AIG, declared bankruptcy? Who would pay for claimant’s medical care? Who would pay their weekly benefits?
Under the Defense Base Act extension to the Longshore and Harbor Workers’ Compensation Act (LHWCA), if the insurer is insolvent, the employer would then be responsible for paying these claims. Obviously, that would be a huge and otherwise unexpected financial responsibility for the employer. A small contractor, with many claims against could be pushed into financial ruin.
A larger, more sophisticated, company like Kellog, Root & Brown (KBR) who was either devious enough or clever enough to employ its personnel in Iraq and Afghanistan through a Caymon Islands corporation (Service Employers International) might opt to bankrupt that corporation and protect KBR from claims directly against that parent company. There is no telling if that would work, but in the worst case scenario of a complete meltdown by AIG, the rats will certainly look for every way to flee from the sinking ship.
Lets assume for a moment that both the insurer and the employer end up insolvent or bankrupt. Who then will pay these claims? The answer is the “Special Fund,” established by 33 U.S.C. section 944 of the LHWCA. Every DBA insurer is required to pay an amount into the fund each year based on a formula. The problem with the special fund is that it has nowhere near the resources to pay the hundreds or thousands of DBA claims that AIG insures. The 2008 audit of the Special Fund by the Office of Inspector General reveals that in 2006 and 2007 the fund paid out only $1.4 and 1.7 million in compensation for bankrupt self-insured employers. In a few years AIG has paid out over $70 million in benefits to its DBA claimants and has plently of pending claims. It is hard to see how the fund could absorb those claims without intervention.
In conclusion, since AIG Worldsource is a relatively small piece of the entire AIG company (and a profitable one at that), we would anticipate that it would be “business as usual” for DBA claimants, especially after the bail out. However, after the horror stories we have heard from some of our readers, I am sure some of you are expecting the worst. To many people, “Murphy’s Law” has applied to each and every step of their experience with KBR and/or SEI. This is just one more thing that has gone wrong, simply because it could.