Giant Self-Insurance Fiasco in New York

ALBANY, N.Y. (CN) - Members of an insolvent self-insurance trust seek treble damages under RICO and New York general business law for actions by insurance brokers and agencies that they claim cost them millions of dollars.

The alleged racketeering and deceptive business practices left the Healthcare Industry Trust of New York underfunded by $176.5 million - a shortfall they're on the hook for, the trust's employer-members claim in Albany County Supreme Court.

The nearly three dozen plaintiffs operate nursing homes and rehabilitation centers across the state. Through the trust, established in 1999, they bought workers' compensation coverage for employees.

The trust failed and was taken over in 2008 by New York's Workers' Compensation Board, which assessed pro rata shares of the deficit to the plaintiffs and bound them to repayment plans.

The trust's administrator, Compensation Risk Managers of Poughkeepsie, surrendered its license to the state in 2008 as deficits piled up at the eight self-insurance trusts it oversaw in New York. Other trusts existed for manufacturers, truckers, commercial builders and even cemeteries.

The plaintiffs contend the insurance brokers and agencies knew the trust administrator "lacked the expertise and knowledge" to do its job, but turned a blind eye because they were earning outsized commissions from the trust.

"The brokers acted in concert with CRM [Compensation Risk Managers] to increase the membership of the trust despite a mounting deficit by aggressively marketing trust membership as a relatively safe and conservative alternative to regulated insurance products, while negotiating, pursuing and accepting excessive and hidden commissions that were dramatically higher than those customary in the industry," the complaint states.

Eleven insurance agencies are named as defendants, along with John Does representing unknown brokers and brokerage firms.

New York law allows employers in similar industries to form self-funded insurance trusts to meet their obligation to provide workers' compensation coverage. Members are assessed payments to keep the trusts fully funded so current and anticipated claims can be paid.

The trusts became popular in New York in the 1990s, as workers' compensation premiums were rising. By joining forces in a trust, similar businesses could monitor each other's safety practices to reduce injuries and compensation claims and keep insurance rates low.

After the Healthcare Industry Trust of New York was created, Compensation Risk Managers was hired to serve as group administrator and claims processor. The defendant insurance agencies and brokers worked on behalf of the plaintiff employers and placed them into the trust.

But the duty of care the defendants owed their clients was "undermined and compromised by the hidden compensation arrangements with the trust and CRM," according to the complaint.

As a result, the defendants overlooked the administrator's shortcomings and "breached their professional and/or contractual duty to plaintiffs," according to the complaint. That included not investigating the financial viability of the trust, placing employers in the trust when they knew it was underfunded, and not disclosing the risk of joint and several liability inherent in self-insurance trusts, the employers claim.

The plaintiffs also allege conversion, unjust enrichment, negligent misrepresentation and fraud in the inducement by the agencies and brokers.

They seek disgorgement and restitution of any commissions paid from their assets, and damages that include their pro rata share of the bill from the Workers' Compensation Board to cover the trust's deficit.

They also seek treble damages for deceptive business practices under New York general business law and for "a pattern of racketeering activity" under RICO, that was intended to defraud them.

The RICO claim alleges the defendants "committed multiple related acts of mail fraud" to send "misleading materials to plaintiffs and to other employers in New York."

They are represented by Joseph Murphy of Hiscock & Barclay in Albany.

The 11 named defendants are Cool Insuring Agency, Hickey-Finn & Co., Hirsch Wolf & Co., Marshall & Sterling, Oxford Coverage, The Rampart Group, The Reis Group, Shel-Bern Associates, Spain Agency, The Treiber Group and Vanner Insurance Agency.

Representatives of Cool Insuring in suburban Albany and Marshall & Sterling in Poughkeepsie could not be reached for comment via email.

Here are the plaintiffs: Belair Care Center Inc.; Bellhaven Center for Geriatric & Rehabilitation Center; Berkshire Nursing and Rehabilitation Center; Crest Hall Corp. dba Crest Hall Care Center; Crown Nursing Home Associates Inc.; DMN Management Services LLC dba Capital Living & Rehabilitation; Heritage Ministries Management Co. Inc., successor in interest to Gerry Homes Management Co. Inc.; Heritage Village Rehab & Skilled Nursing Inc., successor in interest to Gerry Nursing Home Co. Inc.; Hillside Manor Rehabilitation and Extended Care Center LLC; Hudson Valley Care Partners LLC dba Hudson Valley Rehabilitation and Extended Care; Hudson Valley Hospital Center; Jackson Heights Care Center LLC dba Regal Heights Rehabilitation & Health Care Center; Morgan Estates ACF LP; Nassau Extended Care Center Corp; Nesconset Nursing Center LLC; New Sans Souci Nursing Home LLC; New Vanderbilt Rehabilitation & Care Center Inc.; NYMED Inc. dba Ten Broeck Commons; NYMED Putnam Inc. dba Putnam Ridge Nursing Home; Oak Hollow NC Corp.; PALJR LLC dba East Neck Nursing and Rehabilitation; Park Avenue Extended Care Center Corp.; Pontiac Nursing Home Inc.; Rensselaer Planning LLC dba Evergreen Commons; River Manor Corp. dba River Manor Health Related Facility; Ross Health Care Center Inc.; RWB Corp. dba Port Chester Nursing and Rehabilitation Center; Sea Crest Health Care Center LLC; Sephardic Home for the Aged Inc. dba Sephardic Skilled Nursing & Rehabilitation Center; Shore View Nursing Home LP; The Gerry Homes; Throgs Neck Care Corp., c/o Benjamin Development; UPR Care Corp. dba Cold Spring Hills Center for Nursing & Rehabilitation; Wen Extended Care Facility Management Corp.

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