When Is Self-Insurance "Insurance?"
Over the past ten years, an emerging body of law has emerged concerning the efforts of State Guaranty Funds to avoid paying insolvent claims on the bais that self-insured programs are "insurance" within the statutory exception to their obligations.
Thus, the Iowa Supreme Court ruled in Iowa Contractors Worker’s Compensation Group v. Iowa Insurance Guaranty Association, 437 N.W.2d 909 (Iowa 1989) that a pooled self-insured worker’s compensation program was not “insurance” In a dispute with the Iowa Insurance Guaranty Association. On the other hand, a group self-insurance fund was found to constitute “insurance” in Maryland Motor Truck Assoc. Worker’s Compensation Self-Ins. Group v. Property & Cas. Ins. Guaranty Corp., 871 A.2d 590 (Md. 2005) and South Carolina Property & Cas. Ins. Guaranty Assn. v. Carolina’s Roofing & Sheet Metal Contractors Self-Ins. Fund, 446 S.E.2d 422 (S.C. 1994).
Now the Sixth Circuit has added a new wrinkle to the debate, holding that although an individual self-insured plan is not "insurance" because there is no transfer of risk to third parties, the same is not true of a group plan.
In Associated Industries of Kentucky, Inc. v. U.S. Liability Ins. Group, No. 07-5662 (6th Cir. June 27, 2008), the courtr held that a liability exclusion for lawsuits arising out of the insured’s operation of any “insurance plan or program” precluded coverage for claims arising out of a self-insurance fund that a trade association sponsored so as to allow local manufacturers to pool their worker’s compensation liabilities. While agreeing that individual self-insurance is not “insurance” as that term is defined under Ky. Rev. Stat. § 304.1-030 since the self-insured entity bears all of its own risks, the court held that in the case of group self-insurance, the participants shifted their risks to another, the group self-insurance fund.
