Failed insurer can’t use special deposit funds for administrative costs

The Illinois Appellate Court ruled a defunct insurer that provided workers compensation insurance in California cannot use emergency funds set aside for claims to cover unpaid administrative costs such as rent, utilities and other bills, the California Department of Insurance announced Tuesday.

The court issued its decision in In re Liquidation of Lumbermens Mutual Casualty Co. in support of California Insurance Commissioner Dave Jones and the California Insurance Guarantee Association’s position requiring that Lumbermens Mutual Insurance Co. workers compensation deposits in California may not be used to reimburse overhead and administrative expenses incurred in connection with the company’s liquidation, the insurance department said in a statement.

Lake Zurich, Illinois-based Lumbermens, which could not immediately be reached for comment, began liquidating its company in 2013, according to its website.

The department argued that the “California Insurance Code states special deposit proceeds must be used solely for the payment of compensable workers compensation claims,” according to the statement.

The department contended that general administrative expenses are not related to the payment of a specific workers compensation claims, so it is improper for Lumbermens to require CIGA to pay general administrative expenses such as rent, postage, telephone, lighting, cleaning, heating and electricity with funds held in a special deposit, according to the statement.

The Illinois court agreed and determined the special California workers compensation deposit is security for the payment of workers compensation claims in California and must be used exclusively to protect policyholders from insolvent insurers by providing an asset from which to pay compensable workers compensation claims, according to the statement.

Mr. Jones applauded the ruling in the press statement

“The court’s ruling upholds my position that Lumbermens Mutual Casualty Company must use funds reserved for workers compensation claims on actual claims-and not other expenses,” he said in the statement.

This article was first published by Business Insurance.

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