Regulations Implementing the Longshore and Harbor Workers’
Compensation Act and Related Statutes
[07/26/2005]
Volume 70, Number 142, Page 43223-43239
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Part III
Department of Labor
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Employment Standards Administration
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20 CFR Parts 701 and 703
Regulations Implementing the Longshore and Harbor Workers' Compensation
Act and Related Statutes; Final Rule
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DEPARTMENT OF LABOR
Employment Standards Administration
20 CFR Parts 701 and 703
RIN 1215-AB38
Regulations Implementing the Longshore and Harbor Workers'
Compensation Act and Related Statutes
AGENCY: Employment Standards Administration, Labor.
ACTION: Final rule.
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SUMMARY: This final rule requires each insurance carrier authorized to
write insurance under the Longshore and Harbor Workers' Compensation
Act and its extensions (the Defense Base Act; the Outer Continental
Shelf Lands Act; the Nonappropriated Fund Instrumentalities Act; and
the District of Columbia Workmen's Compensation Act) to demonstrate to
the Office of Workers' Compensation Programs (OWCP) that its LHWCA
obligations are sufficiently secured and, if necessary, to deposit
security in an amount set by OWCP. This procedure will ensure the
prompt and continued payment of compensation and medical benefits to
injured workers and help protect the Longshore special fund's assets
from consequences flowing from insurance carrier insolvencies. In
addition, the rule conforms, where appropriate, the rules governing
OWCP's authorization of employers as self-insurers to the provisions
governing carrier security deposits.
DATES: This rule is effective August 25, 2005.
FOR FURTHER INFORMATION CONTACT: Michael Niss, Director, Division of
Longshore and Harbor Workers' Compensation, Office of Workers'
Compensation Programs, Employment Standards Administration, 202-693-
0038. TTY/TDD callers may dial toll free (877) 889-5627 for further
information.
SUPPLEMENTARY INFORMATION:
I. Background of This Rulemaking
On March 15, 2004, the Department issued a Notice of Proposed
Rulemaking (NPRM) under the Longshore and Harbor Workers' Compensation
Act, as amended (LHWCA), 33 U.S.C. 901 et seq., proposing rules
governing insurance carrier security deposits. 69 FR 12218-31 (March
15, 2004). As explained in the NPRM (69 FR 12218-19 (March 15, 2004)),
since 1990 the Department has required insurance carriers it has
authorized to write Longshore coverage to deposit security in an amount
sufficient to secure the payment of their LHWCA obligations in States
without guaranty or analogous funds and in States whose funds do not
fully secure such obligations. The Department waived the deposit
requirement for carriers with financial security ratings of ``A'' or
higher issued by the A.M. Best Company. Intervening changes in the
insurance industry and related insurance rating systems, however,
prompted the Department to re-examine and reformulate its security
deposit policy. The NPRM embodied the Department's proposal to revamp
this policy.
The NPRM proposed a process by which OWCP would determine: (1) The
extent of an insurance carrier's unsecured LHWCA obligations; (2) the
deposit amount necessary to secure those obligations in light of the
guaranty or analogous funds in the State or States in which the carrier
writes LHWCA insurance; (3) how such deposit will be held; and (4) when
OWCP may seize or otherwise use deposited funds. 69 FR 12219 (March 15,
2004). The proposed rules also eliminated the Department's prior waiver
policy so that all carriers, regardless of their financial strength,
would be subject to the deposit requirements. 69 FR 12219 (March 15,
2004).
The Department has received five written comments in response to
the NPRM: two from insurance carriers and one each from an insurance
carrier association, a Longshore employer association, and a state
insurance division. The Department has found these comments very
helpful and, in several important respects, has revised the final rule
in response.
II. Explanation of Changes
A. Statutory Authority
Congress granted the Department broad authority to ``administer the
provisions of [the LHWCA], and for such purpose the Secretary is
authorized (1) to make such rules and regulations * * * as may be
necessary in the administration of the Act.'' 33 U.S.C. 939(a). Three
commenters fully support the Department's efforts to ensure a
financially sound Longshore program through the proposed rules. Two
commenters, however, argue that the LHWCA does not grant the Department
authority to require carriers to post security deposits. They contend
that section 32 (33 U.S.C. 932, erroneously referenced by the
commenters as 33 U.S.C. 939) allows the Department to require employers
who seek to self-insure to deposit security but does not allow
imposition of a similar requirement on carriers. In these two
commenters' view, the Department must instead rely on the various State
regulators' supervision of carriers and those regulators' assessment of
a carrier's financial strength to ensure solvency and the carrier's
future ability to meet its obligations.
The Department disagrees with the commenters' construction of the
statute and believes it has acted well within its rulemaking authority.
Section 32 provides, in relevant part:
(a) Every employer shall secure the payment of compensation
under this Act--
(1) By insuring and keeping insured the payment of such
compensation with any stock company or mutual company or
association, or with any other person or fund, which such person or
fund is authorized (A) under the laws of the United States or of any
State, to insure workmen's compensation, and (B) by the Secretary,
to insure payment of compensation under this Act; or
(2) By furnishing satisfactory proof to the Secretary of his
financial ability to pay such compensation and receiving an
authorization from the Secretary to pay such compensation directly.
The Secretary may, as a condition to such authorization, require
such employer to deposit * * * either an indemnity bond or
securities * * * in an amount determined by the Secretary, based on
the employer's financial condition, the employer's previous record
of payments, and other relevant factors. * * *
(b) In granting authorization to any carrier to insure payment
of compensation under this Act the Secretary may take into
consideration the recommendation of any State authority having
supervision over carriers or over workmen's compensation. * * * The
Secretary may suspend or revoke any such authorization for good
cause shown. * * *
33 U.S.C. 932.
Section 32 ensures that there is money available to pay
compensation to an injured worker. United Marine Mutual Indemnity Assn.
v. Marshall, 510 F.Supp. 34, 36 (N.D. Cal. 1981), affm'd sub nom.,
United Marine Mutual Indemnity Assn. v. Donovan, 701 F.2d 791 (9th Cir.
1983). The Act seeks ``certain and absolute payment'' of compensation,
United Marine, 510 F.Supp. at 36, and the ``major guarantee of the
financial ability of the employer to compensate those injured or killed
in the scope of employment is found in section 32.'' Id. at 793. As one
court has noted, ``[i]t is obvious from the language chosen that
Congress wanted a central approval mechanism to support the fiscal
soundness of the LHWCA system.'' Id.
To accomplish these goals, section 32(a)(1)(B) gives the Secretary
discretion to authorize insurance carriers to write Longshore coverage.
Apart from
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requiring that the carrier be authorized by a State (or the United
States) to insure workers' compensation, 33 U.S.C. 932(a)(1)(A), and
permitting the Secretary to consider a State's recommendation as to the
insurer's status, 33 U.S.C. 932(b), section 32 grants the Secretary the
power to authorize carriers without any limitation, description,
standards, or guidance. The power to authorize necessarily includes the
power to refuse authorization as well; any other interpretation would
render meaningless section 32(a)(1)(B)'s grant of authority to the
Secretary to authorize carriers. Once granted, authorization may be
suspended or revoked for ``good cause.'' Id. By using broad, undefined
terms such as ``authorization'' and ``good cause,'' Congress afforded
the Secretary wide discretion in deciding which carriers should be
allowed to write Longshore insurance.
Requiring carriers to post security as a condition of authorization
to write Longshore insurance is a proper exercise of the Secretary's
authority under section 32. The deposits fulfill section 32's goal
because they will prevent interruption in compensation payments and
medical benefits to injured workers in the event the carrier defaults
or becomes insolvent. Moreover, the statute does not compel the
Secretary to authorize any carrier she believes may not be able to meet
its LHWCA obligations. No conceivable legislative purpose would be
served, however, by precluding authorization of a carrier who
demonstrates actual reliability by posting security. In fact,
permitting the Secretary to require insurance carriers whom she might
not otherwise authorize to post security enlarges, rather than
diminishes, the opportunities available to carriers.
One commenter points to section 32(b), 33 U.S.C. 932(b), and argues
that Congress intended the Secretary to rely exclusively on the various
States' supervision of carriers to assure a carrier's future ability to
meet its LHWCA obligations. The plain terms of the statute, however,
contradict this interpretation. First, Congress wrote section 32(b) in
permissive language: ``the Secretary may'' consider a State supervisory
authority's recommendation in making an authorization decision, but the
statute does not require her to do so. Second, although State licensure
is a condition to authorization, 33 U.S.C. 932(a)(1)(A), State approval
is not sufficient alone because the statute also requires authorization
by the Secretary to write Longshore insurance. 33 U.S.C. 932(a)(1)(B).
Indeed, the commenter's view reads Section 32(a)(1)(B) out of the
statute. The sweeping language of the statute and the sparseness of its
requisites, coupled with Congress' decision not to make State licensure
sufficient alone, all suggest congressional intent to permit the
Secretary to condition authorization on the terms the Secretary
considers most appropriate.
One comment states that because the statute expressly permits the
Secretary to impose a security deposit requirement on employers seeking
authorization to self-insure, 33 U.S.C. 932(a)(2), but does not include
the same provision for carriers, Congress intended to preclude the
Secretary from imposing this condition on carriers. The Department
disagrees. The statute's express security deposit provision for self-
insurers is logical because Longshore employers, unlike insurers, would
not have funds put aside to cover their liabilities under the statute.
Thus, security deposits the Department requires from self-insurers
under section 32(a)(2) may be the only source of payment available for
an employer's LHWCA obligations. Insurers, on the other hand, may have
additional sources for the payment of carrier obligations, such as
State guaranty funds. The statute therefore appropriately gives the
Secretary wide latitude to regulate within the carrier authorization
arena.
The Secretary could have determined that the steps States take to
ensure a carrier's fiscal soundness, including any coverage afforded by
State insurance guaranty funds, were sufficient to fulfill section 32's
goal of ensuring adequate funds to compensate injured workers. But
experience has proved that wrong. See generally 69 FR 12218-19 (March
15, 2004). In 2003 and 2004, 23 carriers authorized to write Longshore
insurance became insolvent. For one of these carriers, the Department
has already exhausted the company's $200,000 deposit (made under OWCP's
existing policy) and is now paying the carrier's remaining obligations
from the special fund. For two other carriers, whose security deposits
total approximately $11,000,000, the Department is currently meeting
the carriers' obligations by using the deposited security. The
Department anticipates that it will exhaust those funds and will have
to pay all remaining obligations from the special fund. Had the
security deposits not been available, the industry as a whole, through
annual special fund assessments, would have borne the full brunt of
these insurers' insolvency. See 33 U.S.C. 918(b), 944.
Moreover, the statute's structure does not reveal congressional
intent to limit the Secretary's regulatory options by negative
implication. As already noted, section 32 contains virtually no
limitations on the Secretary's right to authorize carriers to write
Longshore coverage. And the Secretary may exercise her right to revoke
authorization for ``good cause,'' a term of broad compass. Given the
broad general rulemaking authority conferred on the Secretary by
section 39(a), and the sweeping authority section 32 gives the
Secretary to grant or deny carrier authorization, it is
counterintuitive to draw from Congress' silence a flat prohibition on
the Secretary's ability to condition a carrier's authorization to write
Longshore insurance on a deposit of security.
One comment contends that the proposed rules improperly create an
``extra-statutory'' funding and payment structure because the Secretary
has no authority to put seized deposits into the special fund under the
funding mechanism set out in section 44 of the Act (33 U.S.C. 944), and
the statute gives the Secretary no obligation or authority to pay for
insolvent employers or insurers except from the special fund under
section 18(b) (33 U.S.C. 918(b)). In this same vein, the commenter also
argues that the Secretary cannot set up a separate guaranty fund for
Longshore benefits to protect employers from carrier insolvencies.
The commenter misapprehends the nature of carrier security
deposits. Security posted by a carrier under OWCP's current policy and
these final rules is neither allocable to, nor payable from, the
special fund established by section 44. Instead, the Department treats
carrier security deposits in the same manner as security deposits made
by authorized self-insurers, which are not placed in the special fund.
See 33 U.S.C. 932(a)(2) (as a condition to self-insurer authorization,
the Secretary may ``require such employer to deposit in a depository
designated by the Secretary either an indemnity bond or securities * *
*''). Accordingly, negotiable securities posted by carriers are
deposited in a Department of Labor Federal Reserve Bank account (now in
St. Louis, Missouri) and held under sub-accounts the Bank creates in
the name of each carrier and self-insurer. The Bank pays the carrier
interest on the deposited securities as it accrues. The Department has
no authority to disperse funds from these accounts. Letters of credit
and indemnity bonds posted by carriers are held by OWCP in its
Washington, DC office.
In the event the Department redeems the posted security, and the
security is in the form of a surety bond, the surety will pay claims
directly. If, however, the
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security is in the form of a letter of credit or negotiable securities,
OWCP deposits the proceeds of the security in an OWCP agency account,
established by the Treasury Department, so that OWCP may disperse the
funds when necessary. This agency account also contains, inter alia,
monies that constitute the section 44 special fund, proceeds of seized
self-insurer security deposits, and monies payable under the District
of Columbia Workmen's Compensation Act. The carriers' security proceeds
are neither part of the section 44 special fund nor pooled to form a
separate insurance carrier guaranty fund. Instead, like the Federal
Reserve Bank, OWCP creates sub-accounts for each carrier so that both
interest on, and payments from, the security deposit proceeds are
allocated to the individual carrier.
Security deposits simply provide some measure of assurance that a
carrier will meet its own payment obligations. These obligations are
separate from the increased assessment costs the carrier may also bear
for another carrier's or employer's insolvency when the special fund
makes payments under Section 18(b). Because OWCP uses a carrier's
security deposit solely to satisfy the carrier's own liabilities, OWCP
pays claims from the deposits in the same manner the carrier would.
Accordingly, OWCP does not require claimants to follow the procedure
set forth in section 18(b) for payments made from the special fund. If,
for example, the employer is bankrupt and the carrier was voluntarily
paying compensation to an injured worker prior to becoming insolvent,
OWCP will continue those payments on the carrier's behalf if that
carrier deposited security and continued payments are appropriate. Once
the security deposit is exhausted, however, the claimant must obtain a
compensation order before OWCP will make payments from the special fund
under section 18(b).
Thus, rather than imposing an independent obligation on the United
States or seeking to alter the role of the special fund, as the
commenter suggests, security deposits provide a separate mechanism
through which a carrier's liabilities may be satisfied. If the carrier
fully discharges its payment obligations, then OWCP never uses the
carrier's security deposit and returns it (or any unused portion) to
the carrier (or its successor in interest) when the carrier ceases
writing Longshore insurance or becomes insolvent. See Sec. Sec.
703.209(c) and 703.211(c). For instance, one of the 23 insolvent
carriers mentioned above had posted a $400,000 deposit in the form of
negotiable securities. Because the carrier had no remaining LHWCA
obligations, OWCP returned the deposited securities to the State office
handling the carrier's liquidation.
Finally, nothing in the proposed or final rules relieves an
employer from its payment obligations if its insurer is financially
incapable of meeting those obligations. See generally 33 U.S.C. 904(a);
B.S. Costello v. Meagher, 867 F.2d 722 (1st Cir. 1989). In these
circumstances, OWCP routinely seeks payment from the employer before
turning to any deposited security. Only if the employer is also unable
to pay due to insolvency does OWCP use the carrier's deposited
security. OWCP intends to continue this practice under these rules.
B. Changes Made Between Proposed and Final Rule To Allow Exemption From
the Deposit Requirements for Certain Carriers
The proposed rule eliminated OWCP's current practice of exempting
from the security deposit requirements those carriers who have an ``A''
or higher A.M. Best rating. See 69 FR 12218-19 (March 15, 2004).
Instead, the proposal required all carriers authorized to write
Longshore insurance, regardless of their financial strength, to deposit
security based on the amount of their outstanding Longshore obligations
not otherwise secured by State guaranty funds. Two comments generally
support this approach. Two other comments, however, object to
eliminating the exemption and propose alternatives.
Commenters lodging objections point out that eliminating the
exemption increases operating costs for the financially strongest
companies who are exempt under OWCP's current policy. These companies
pose the least risk to the special fund. The commenters also argue
against moving away from private insurance carrier rating systems to a
new system of OWCP's creation because the private rating systems
provide an objective, verifiable standard for determining whether a
particular company is financially fit. Thus, rather than eliminating
the exemption altogether, the commenters recommend that OWCP elevate
the standard for exempting companies, and they offer a variety of
suggestions for accomplishing this goal: Raise the required rating
above the current A.M. Best ``A'' rating; consider ratings from
multiple recognized carrier rating systems; factor in the carrier's
overall size, as well as the size of its Longshore exposure; and
consider the carrier's longevity in the workers' compensation insurance
market.
The Department agrees that the strongest carriers should be exempt
from the security deposit requirements. In implementing this decision,
the Department has adopted the commenters' suggestion to strengthen the
criteria for exemption. Under the final rule, carriers awarded the
highest rating by each of three private insurance carrier rating
services designated on OWCP's web site--currently, A.M. Best, Standard
& Poor's, and Weiss Research--for the current rating year and the
immediately preceding year will be exempt from the security deposit
requirements. This change is reflected in revisions the Department has
made to Sec. Sec. 703.203(a) and 703.204(c)(1). The Department
estimates that 10% of currently authorized carriers will meet the new
exemption requirements.
The Department's decision to exempt certain carriers remains
faithful to the measured approach the Department advocated in the NPRM.
69 FR 12219 (March 15, 2004). Although exempting even one carrier
necessarily entails some degree of additional risk for the special
fund, the Department believes that it has substantially reduced that
risk by adopting a more stringent financial test for exemption than
currently used so that only the strongest carriers--those least likely
to run into financial difficulties--are granted an exemption. Moreover,
by looking at ratings from three private systems and requiring
sustained superior financial ratings over a two-year period, the
Department believes it has minimized the impact of flaws inherent in
any one static rating scheme for predicting future financial
performance.
Granting an exemption to the strongest carriers has additional
benefits. First, very strong carriers will not be discouraged from
participating in the Longshore insurance market by the added costs the
security deposit requirement would impose. Second, OWCP's
administrative burden will be lessened because it will not have to
determine security deposit amounts for exempt carriers.
The Department has responded to the remaining comments in the
following section-by-section discussion.
C. Section-by-Section Explanation
The Department received two comments addressing specific sections
of the proposed rule. The following discussion responds to those
comments and explains any changes the Department has made in the final
rules. The Department received no comments concerning, and has made no
changes to, proposed rule sections not discussed
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here; these sections appear in the final rule as proposed.
20 CFR 701.301(a)(7)
(a) The Department proposed revising the definition of ``District
Director'' by adding a sentence stating that ``[a]ny action taken by a
person under the authority of a district director will be considered
the action of a deputy commissioner.'' 69 FR 12225 (March 15, 2004).
The Department added this sentence to clarify that substitution of the
title ``district director'' for ``deputy commissioner'' did not in any
way alter OWCP staff members'' authority to act.
(b) One comment states that this sentence should be removed in
order to avoid any implication that OWCP claims examiners have the same
scope of authority as district directors. The Department agrees with
this comment and has deleted the last sentence from the final rule. The
Department did not intend to change the scope of authority of either
district directors or claims examiners. Deleting the last sentence
removes any implication to the contrary.
20 CFR 703.201
(a) Section 703.201 provides a general overview of security
deposits and their purpose. As proposed, it states, in part: ``Security
deposits secure the payment of benefits when an insurance carrier
defaults on any of its obligations under the LHWCA, regardless of the
date such obligations arose.'' 69 FR 12226 (March 15, 2004).
(b) One comment states that the phrase ``obligations under the
LHWCA'' is unclear and should be revised. The Department agrees that
this phrase in the proposed rule could be misconstrued. Accordingly,
the Department has revised this section in the final rule by including
specific language clarifying that the phrase ``obligations under the
LHWCA'' means a carrier's liability for both compensation payments and
medical benefits, and that such meaning applies to the entire subpart.
(c) The same comment states that the word ``default'' is unclear
because it could include situations where a solvent insurer simply
disputes a claim. The comment suggests that default be expressly
limited to a carrier's failure ``to timely pay a final judgment against
the carrier for its obligation to pay benefits under the LHWCA and
against which there is a right of execution.''
In both legal and everyday parlance, the term ``default'' is
commonly understood to mean a failure to meet a legal or contractual
duty. See, e.g., Black's Law Dictionary (8th Ed. 2004); The New Shorter
Oxford English Dictionary (1993). Such duty does not arise simply
because an employer or insurance carrier contests a claim. Instead, it
arises when a valid compensation order is entered. Under the Longshore
Act's comprehensive adjudication scheme, claims are initially
considered by an OWCP district director. 33 U.S.C. 919(c); 20 CFR
702.311-.317. If the district director is unable to resolve all
disputed issues to the parties' satisfaction, an administrative law
judge holds a de novo hearing and issues a compensation order. 33
U.S.C. 919(d), (e); 20 CFR 702.301, 702.332. Once filed by the district
director, the administrative law judge's order becomes effective and
imposes a legal obligation on the employer or carrier to pay any
compensation awarded, notwithstanding any appeal from the order. 33
U.S.C. 919(e), 921(a), 921(b)(3); 20 CFR 702.350. Failure to comply
with this effective order within the statutory 10-day time period
constitutes a default. 33 U.S.C. 914(f); 20 CFR 702.350.
To the extent this comment implies that OWCP should be allowed to
use the posted security only when a carrier fails to satisfy a district
court order enforcing an underlying compensation order (or, as put by
the commenter, a ``final judgment * * * against which there is a right
of execution'') issued under section 18 of the statute, 33 U.S.C. 918,
the Department rejects the comment. Requiring claimants or the Director
to go to district court in every case in which a financially troubled
carrier defaults runs counter to the primary purpose of the security
deposit requirement: the uninterrupted and prompt payment of
compensation and medical benefits when a carrier is no longer capable
of paying. Accordingly, the Department has not changed this portion of
the rule.
(d) The Department has also revised the third sentence of this
regulation for stylistic and grammatical purposes. As proposed, this
sentence stated that security deposits ``also secure the payment of
compensation and medical benefits when a carrier with LHWCA obligations
becomes insolvent in States with no insurance guaranty funds, or with
guaranty funds that do not fully secure such obligations.'' The final
rule states more simply and clearly that security deposits ``secure the
payment of compensation and medical benefits when a carrier becomes
insolvent and such obligations are not otherwise fully secured by a
State guaranty fund.''
20 CFR 703.202
(a) Section 703.202 discusses how the Department will determine
gaps in State guaranty fund coverage and how it will convey those
determinations to the public. Specifically, the rule: (1) Outlines
factors OWCP will consider in determining each State's guaranty fund
coverage of Longshore obligations; (2) requires OWCP to post its
findings on the agency's web site, where they will be open for public
inspection and comment; (3) provides that OWCP will deem 33 % of a
carrier s Longshore obligations unsecured if the amount of State fund
coverage cannot be determined or is ambiguous; and (4) states that OWCP
will revise its findings in response to substantiated public comments
or for any other relevant reason. 69 FR 12226 (March 15, 2004).
(b) One comment suggests that OWCP should complete State fund
reviews and receive public comments before calculating and requiring
security deposits. The commenter states that this would give State
legislators and regulators an opportunity to remedy any State guaranty
fund coverage deficiencies OWCP identifies, thus implying that the need
for certain security deposits would be eliminated.
While the Department agrees that public comment on OWCP's State
guaranty fund evaluations will be helpful, it has not incorporated the
commenter's proposal in the final rule. The procedure Sec. 703.202
adopts is a dynamic one: OWCP will revisit its determinations regarding
State guaranty fund coverage when public comment or other relevant
information makes a re-determination useful. This can happen before,
during, or after calculating deposits for insurers on an individual
basis. At a minimum, though, OWCP will consider each insurer's comments
prior to setting the required security deposit amount for that company.
Section 703.203(b) explicitly gives each insurer who disagrees with
OWCP's assessment of State fund coverage the opportunity to submit
evidence and/or argument on the question with its security deposit
application. Thus, although OWCP might make a security deposit
determination before all public comments are received, it is unlikely
that general public comments will be more enlightening than information
offered by insurers with a direct financial stake in the determination.
Moreover, the regulation's dynamic process is designed to take into
account actions States may take in response to OWCP's evaluation of
their guaranty funds' coverage for Longshore claims. The legislative
process is often protracted, outcomes are uncertain, and OWCP has no
control over that process in any event. If and when a State alters its
guaranty fund coverage, that
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alteration will be considered in the security deposit calculation
process.
20 CFR 703.203
(a) Section 703.203 requires carriers to apply annually for a
security deposit determination and prescribes the information the
application must include. In addition to reporting its outstanding
Longshore Act liabilities, the subsection (a)(2) of the proposed rule
required each carrier to include a statement either ``[o]f the deposit
amount it believes will fully secure its obligations'' or ``[t]hat it
has sufficient assets or other means to fully secure its obligations.''
69 FR 12227 (March 15, 2004).
(b) One commenter states that the proposed rule does not clearly
explain: (1) How an insurance carrier ``fully secures'' its
obligations; (2) what factors a carrier should consider in suggesting a
security deposit amount that will fully secure its liability; and (3)
how a carrier determines whether it has sufficient assets to secure its
obligations. The Department has reconsidered proposed subsection (a)(2)
and determined that a carrier should not be required either to suggest
a security deposit amount or to state that it has sufficient assets to
fully secure its obligations. The statement the proposed rule describes
is superfluous and unnecessary to the security deposit determination
process set forth in the final rules. Accordingly, the Department has
deleted these requirements. This change will make the application
process simpler because the carrier need only supply very limited,
clearly defined information: (1) A statement of its outstanding
liabilities on a state-by-state basis; (2) other specific information
OWCP requests; and (3) if the carrier wishes, evidence and/or argument
regarding OWCP's evaluation of relevant State guaranty funds. Moreover,
given the changes the Department has made to Sec. 703.204 (see
discussion below), a carrier generally will not be asked to submit
voluminous financial information because it will no longer be
necessary.
(c) The final version of Sec. 703.203 adds a new subsection (a)(1)
to implement the Department's decision to exempt the financially
strongest carriers from the security deposit requirement. In order to
obtain this exemption, a carrier must submit, as part of its annual
application, documentation from three OWCP-designated private insurance
rating organizations demonstrating the rating each service awarded the
carrier for both the current year and the immediately preceding year.
The carrier must receive the highest rating each service awards for
both years in order to qualify for the exemption. OWCP will make an
exemption decision each year. Thus, an exempt carrier whose rating is
downgraded by any one of the rating services the following year will be
required to deposit security. The carrier may again qualify for an
exemption, but only after it has demonstrated sustained superior
financial performance by receiving the highest ratings from the three
designated rating organizations for two consecutive years.
Currently, OWCP has designated A.M. Best, Standard & Poor's, and
Weiss Research as the three private rating services it will use. The
rule does not name these rating services; instead, the rule requires
OWCP to publish the services it selects by posting their names on the
agency's web site. This procedure will give OWCP the option of
selecting different rating services from time to time without having to
engage in a new rulemaking. A variety of factors may lead OWCP to
change its selections. For instance, a selected service could change
its name or corporate form, or even go out of business. By the same
token, new rating services that prove to be reliable may enter the
market. The procedure the rule adopts allows OWCP the flexibility to
make changes as the agency deems necessary. Subsection (a)(2) of the
final rule also clarifies that a carrier seeking an exemption based on
its financial standing need not include a statement of its outstanding
LHWCA liabilities with its application unless OWCP denies its exemption
request.
20 CFR 703.204
(a) This section sets forth the process OWCP will follow in
determining the security deposit amount for each carrier.
(b) Proposed Sec. 703.204(b) lists a variety of factors, most
financial in nature, that OWCP could evaluate and consider in making
its determination. These factors include the carrier's: (1) Financial
strength; (2) insureds' strength; (3) reinsurance protection; (4)
surplus and recent settlements; (5) amount of business written through
the National Reinsurance Pool; (6) deductibles secured by letters of
credit; (7) reduced exposure; (8) increases in capitalization; (9)
State guaranty fund coverage for its LHWCA obligations; and (10)
expansion of business into States without guaranty fund coverage for
Longshore obligations. 69 FR 12227 (March 15, 2004).
One comment states that evaluation of these factors requires highly
technical expertise in both insurance company and general financial
analysis. The factors encompass voluminous information that is often
confidential and difficult, if not impossible, to present in a
meaningful way. The commenter contends that private insurance rating
organizations are in a better position to conduct this analysis. In
addition, the commenter notes that it is unclear whether OWCP intends
to consider these factors as they pertain only to the carrier's
Longshore business or its business as a whole.
The Department agrees with this comment. Accordingly, it has made
substantial revisions in the final rule. OWCP has insufficient
resources to conduct a financial evaluation of each carrier that
matches the breadth and depth of recognized private rating
organizations' evaluations. Moreover, a survey of private
organizations' rating methodology documents verifies that they consider
many of the same financial factors listed in the proposed rule.
Thus, the Department agrees that it should rely on insurance rating
organizations for a picture of each carrier's financial health and has
eliminated those factors already considered by the rating organizations
from the list in Sec. 703.204(b). There is one exception. The final
rule retains consideration of the strength of a carrier's insureds in
the Longshore industry. Because a carrier's insolvency does not absolve
an employer of its own liabilities under the LHWCA, the size and
financial strength of the employers a carrier insures is an important
consideration in determining the special fund's risk in the event the
carrier becomes insolvent. If the employer is financially capable of
meeting its LHWCA obligations, notwithstanding its carrier's
insolvency, the risk to the special fund is diminished. In some
instances, the strength of a carrier's insureds is also relevant to the
amount of coverage a State guaranty fund affords. For example, some
State guaranty funds will not pay any of an insolvent carrier's
obligations where the insured employer is insolvent as well; as a
result, the special fund's risk increases.
The final rule also adds a variety of Longshore-insurance-related
factors that fall within OWCP's particular expertise as administrator
of the program. The Department drew two of these factors--a carrier's
longevity in the Longshore insurance market and Longshore claim-payment
history--from the comments discussing criteria for exempting carriers
from the security deposit requirements. While a reliable payment
history of significant duration does not guarantee future performance,
this information is nevertheless a helpful indicator for OWCP in
setting the
[[Page 43229]]
security deposit amount for a particular carrier.
The Department has also deleted from Sec. 703.204(b) language
regarding the deposit amount suggested by the insurance carrier. See 69
FR 12227 (March 15, 2004). This language is no longer necessary in
light of the Department's revisions to proposed Sec. 703.203 explained
above.
(c) Proposed Sec. 703.204(c) provides that OWCP will require all
carriers that write LHWCA insurance in States without complete guaranty
fund coverage identified under Sec. 703.202(b) to deposit security for
their unsecured LHWCA obligations. For each carrier who writes more
than an insignificant or incidental amount of LHWCA insurance, OWCP
will fix a security deposit amount between 33\1/3\% and 100% of the
carrier's outstanding LHWCA obligations in each State. 69 FR 12227
(March 15, 2004).
One comment states that Sec. 703.204(c) is unclear. The commenter
suggests that the rule be revised to clarify that: (1) OWCP will
require a security deposit for only those obligations not covered by
State guaranty funds; (2) the 33\1/3\% minimum deposit applies only to
that portion of a carrier's Longshore obligations not covered by State
guaranty funds; and (3) OWCP will consider the factors set forth in
Sec. 703.204(b) in making its security deposit determination. The
commenter's first two points have merit. Accordingly, the Department
has revised the final rule by breaking Sec. 703.204(c) into three
subparts. Subpart (1) implements the Department's decision to exempt
from the security deposit requirements those carriers awarded the
highest financial ratings for both the current rating year and the
immediately preceding year from the three rating organizations selected
by OWCP. Subpart (2) clarifies that carriers whose LHWCA obligations
are fully secured by State guaranty funds will not be required to
deposit security. Subpart (3) contains language similar to proposed
Sec. 703.204(c), but specifically qualifies the phrase ``outstanding
LHWCA obligations'' by adding ``not secured by a State guaranty fund.''
The Department does not believe any change to the proposed rule is
necessary in response to the commenter's third point because Sec.
703.204(b) makes clear that OWCP may consider the factors listed in
that subsection in rendering a security deposit determination (i.e.,
``The Branch may consider a number of factors in setting the security
deposit amount, including. * * *'' Sec. 703.204(b).).
One comment asks whether a carrier must make a pledge or other
assurance that it will meet its payment obligations in addition to the
security deposit if that deposit is less than 100% of its outstanding
obligations. The Department does not believe an additional pledge or
other guaranty is necessary. The statute already requires each carrier
to meet its payment obligations, regardless of the amount of security a
carrier deposits.
20 CFR 703.205
(a) Section 703.205(a) requires each carrier to execute an
Agreement and Undertaking containing terms set forth in the regulation.
As proposed, these terms give OWCP authority to act upon any deposited
security when ``[t]he carrier fails to renew any deposited letter of
credit or substitute acceptable securities in their place'' or ``[t]he
carrier fails to renew any deposited negotiable securities at maturity
or substitute acceptable securities in their place.'' 69 FR 12227
(March 15, 2004) (proposed Sec. 703.205(a)(2)(ii), (iii)).
One comment suggests that proposed Sec. 703.205(a)(2)(ii) be
rewritten to clarify that a carrier may substitute a new letter of
credit or a bond, in addition to negotiable securities, in lieu of
renewing any deposited letter of credit. This comment has merit. As
proposed, Sec. 703.205(a)(2)(ii) could be read to foreclose a
carrier's ability to use a new letter of credit or an indemnity bond to
secure its obligations. Proposed Sec. 703.205(a)(2)(iii) similarly
could be read to preclude a carrier from substituting a letter of
credit or an indemnity bond for matured securities. The Department does
not wish to restrict a carrier's ability to shift among approved forms
of security as the carrier deems necessary. Accordingly, the Department
has revised both Sec. 703.205(a)(2)(ii) and (iii) to make clear that a
carrier may substitute approved forms of security for others that have
reached maturity or expired. As set forth below, the Department has
also revised several other regulations that contain the same language
as proposed Sec. Sec. 703.205(a)(2)(ii) and (iii).
(b) Proposed Sec. 703.205(a)(2)(iii) requires that the carrier
either renew matured negotiable securities or substitute acceptable
securities in their place. 69 FR 12227 (March 15, 2004). One commenter
contends this provision is unnecessary because the Treasury
Department's regulations, which govern the conduct of the custodian of
the deposited securities (e.g. the Federal Reserve Bank), prohibit
release of the principal to the carrier unless OWCP consents or the
carrier provides substitute securities. The commenter misconstrues this
provision's point. The rule requires that carriers authorize OWCP to
take possession of their security deposits under certain conditions.
Thus, unlike the Treasury Department's rule, which governs the
custodian's conduct, Sec. 703.205(a)(2)(iii) governs the carrier's
obligations and OWCP's rights with respect to the deposited security.
The regulation is therefore appropriate and necessary.
(c) The Department has also corrected a typographical error that
appeared in the proposed rule. As proposed, Sec. 703.205's
introductory paragraph cross-referenced Sec. 703.203 when referring to
OWCP's decision fixing a carrier's required security deposit amount. 69
FR 12227 (March 15, 2004). The regulation governing OWCP's decision,
however, is Sec. 703.204. Accordingly, the final rule contains the
correct cross-reference to Sec. 703.204.
20 CFR 703.207
(a) Proposed Sec. 703.207 cross-references the Treasury
Department's regulations to define the types of negotiable securities a
carrier may post. The rule states that if a carrier elects to use
negotiable securities, the carrier ``shall deposit any negotiable
securities acceptable as security for the deposit of public monies of
the United States under regulations issued by the Secretary of the
Treasury. (See 31 CFR part 225.)'' 69 FR 12228 (March 15, 2004).
(b) One comment objects to this provision on the ground that the
Treasury Department's regulations appear inapplicable. The commenter
states that those regulations define ``bond'' as a written instrument
that guarantees fulfillment of an obligation to the United States. From
this premise, the commenter contends that because the statute does not
place any financial obligations on the United States, the Treasury
Department's rules are not applicable. The Department disagrees. As the
statutorily designated administrator of the LHWCA invested with broad
rulemaking authority, 33 U.S.C. 939(a), 944(a), the Secretary (and,
thus, the United States) has a direct interest in ensuring that the
statute's primary goal is met. That goal is the prompt and certain
payment of compensation and medical benefits to injured workers and
their families. Taking steps to safeguard the Longshore program's
fiscal vitality by requiring insurers to deposit security furthers that
goal. The Treasury Department rule referred to by the commenter does
not lead to a different conclusion. That rule specifically pertains to
obligations to the United States--the sort of obligation these rules
impose on insurance
[[Page 43230]]
carriers--as opposed to obligations of the United States--those duties
the United States owes to other entities. Obligations to the United
States--the kind governed by this regulation--squarely fall within the
Treasury Department's rules. See 31 CFR 225.2 (``Bond means an executed
written instrument, which guarantees the fulfillment of an obligation
to the United States and sets forth the terms, conditions, and
stipulations of the obligation.'')
To the extent this comment relates to the Department's authority to
require carriers to post security deposits, the Department has
responded fully in the Statutory Authority discussion above.
Accordingly, the Department rejects this comment and has made no
changes in the final rule.
20 CFR 703.208
(a) This section provides that a carrier who chooses to secure its
Longshore obligations with negotiable securities must deposit the
securities with a Federal Reserve bank or the Treasurer of the United
States. As proposed, this rule also sets forth OWCP's discretionary
authority to authorize the securities' custodian to pay interest
accrued on the deposited securities to the carrier. 69 FR 12228 (March
15, 2004).
(b) One comment states that the rule should be revised to require
OWCP to direct interest payments to the carrier unless the carrier has
defaulted on its Longshore obligations. OWCP currently directs the
Federal Reserve bank to pay accrued interest on deposited negotiable
securities to the carrier absent other specific instructions. OWCP does
not plan to depart from its current practice under the new rules. The
Department has therefore revised Sec. 703.208 to reflect that interest
accruing on deposited negotiable securities will be paid to the carrier
unless any of the conditions set forth in Sec. 703.211(a) occur (i.e.
the conditions that allow OWCP to seize a carrier's security deposit
and/or use its proceeds).
20 CFR 703.209
(a) Proposed Sec. 703.209 proscribes substitution of ``an
indemnity bond, letters of credit or negotiable securities deposited by
an insurance carrier under the regulations in this part'' without OWCP
authorization. This regulation also explains how carriers may apply to
withdraw their security deposits when they have ceased writing
Longshore insurance. 69 FR 12228 (March 15, 2004).
(b) One comment suggests that for carriers who secure their
obligations with negotiable securities, the Department should include
in the rule a list of acceptable securities that a carrier could
substitute without OWCP's consent. The commenter notes that this would
reduce the administrative burden on OWCP and carriers alike.
The Department agrees in principal with this comment. Section
703.207 limits the types of negotiable securities a carrier may use to
those approved by the Treasury Department. Because the approved list of
securities and their valuations change over time, the Treasury
Department has eliminated from its regulations all mention of
acceptable classes of securities. It has opted instead to put this
information in other documents (e.g. Treasury Department circulars) and
to post it on the Treasury Department's Web site. Thus, it would not be
advisable for the Department to promulgate a rule containing a list of
acceptable substitute securities.
Nevertheless, the Treasury Department's regulations governing the
conduct of the custodian (e.g. a Federal Reserve Bank holding the
carrier's deposited securities) allow the custodian to release proceeds
from matured securities to the depositor without specific instructions
from the agency, but only if the depositor substitutes Treasury
Department-approved securities in their place. 31 CFR 225.7(c). Because
the custodian will allow substitution only with approved negotiable
securities, a carrier need not seek the Department's approval in those
circumstances. To implement this change in the final rule, the
Department has: (1) Limited Sec. 703.209(a) to requirements regarding
substitution of security; (2) added language to Sec. 703.209(a) to
allow different treatment for substitution of negotiable securities;
(3) moved language regarding withdrawal of security from proposed Sec.
703.209(a) to Sec. 703.209(b); and (4) renumbered proposed Sec.
703.209(b) as Sec. 703.209(c).
20 CFR 703.211
For the reasons set forth in paragraph (a) of the discussion of
comments received regarding Sec. 703.205(a)(2)(ii) and (iii), the
Department has revised Sec. Sec. 703.211(a)(2) and (3) in the same
manner.
20 CFR 703.301
(a) Section 703.301 discusses the Department's authority to
authorize employers to self-insure. As proposed, the rule allows the
Department to authorize any employer who furnishes ``satisfactory proof
of its ability to pay compensation directly, and who agrees to
immediately cancel any existing insurance policy when OWCP approves the
employer's application to be self-insured.''
(b) Although the Department received no comments on this section,
the Department realized in finalizing the rule that the phrase
``immediately cancel any existing insurance policy'' could be construed
more broadly than intended. For instance, the phrase could be read as
requiring an employer to cancel any excess or catastrophic insurance it
may have to cover its Longshore obligations, a reading that would be
contrary to other regulations authorizing the Department to require a
self-insurer to carry catastrophic coverage. See, e.g., Sec.
703.304(a)(6). To avoid confusion, the Department has added language to
Sec. 703.301 clarifying that an approved self-insurer must agree to
cancel existing insurance policies covering its Longshore obligations
but may continue to carry excess or catastrophic coverage it chooses
(or is required by the Department) to purchase.
20 CFR 703.304
For the reasons set forth in paragraph (a) of the discussion of
comments received regarding Sec. 703.205(a)(2)(ii) and (iii), the
Department has revised Sec. 703.304(a)(4)(ii) and (iii) in the same
manner. The Department has also added a comma after the phrase ``in a
form prescribed and provided by OWCP'' in Sec. 703.304(a) for
grammatical purposes.
20 CFR 703.307
For the reasons set forth in the discussion of comments received
regarding Sec. 703.208, the Department has revised Sec. 703.307 in
the same manner.
20 CFR 703.308
For the reasons set forth in the discussion of comments received
regarding Sec. 703.209, the Department has revised Sec. 703.308 in
the same manner.
20 CFR 703.310
For the reasons set forth in paragraph (a) of the discussion of
comments received regarding Sec. 703.205(a)(2)(ii) and (iii), the
Department has revised Sec. Sec. 703.310(a)(2) and (3) in the same
manner.
III. Executive Order 12866 (Regulatory Planning and Review)
The Office of Management and Budget (OMB) has determined that this
rule is a ``significant regulatory action'' under section 3(f)(4) of
Executive Order 12866. Under that section, a ``significant regulatory
action'' includes one that ``raise[s] novel legal or policy issues
arising out of legal mandates, the President's priorities, or the
principles
[[Page 43231]]
set forth in this Executive order.'' Accordingly, OMB has reviewed this
rule.
In adopting this final rule, the Department considered several
alternatives set forth in the NPRM. 69 FR 12219 (March 15, 2004). The
Department considered requiring all carriers to fully secure their
LHWCA obligations. This approach would place the risk of insolvency on
the failed insurer rather than the surviving, healthy members of the
insurance industry and self-insured employers through special fund
assessments. 33 U.S.C. 944(c)(2). The Department rejected this
approach, however, because it might lead some insurance carriers to
leave the market and would duplicate, at least to some extent, the
reserve requirements imposed by State insurance regulators.
Another alternative the Department considered but rejected was to
use the existing special fund as an overall guaranty fund for all LHWCA
claims. Although easy to administer, this approach would likely create
negative incentives for prudent fiscal responsibility in the insurance
industry.
Thus, the Department proposed a third approach in the NPRM. The
proposed rules required all authorized insurance carriers to post
security deposits, but only where there was no adequate State guaranty
fund and only in amounts that reflected the actual risk of loss to the
special fund. 69 FR 12226-12228 (March 15, 2004). As discussed in
detail above, the Department has adopted this approach in the final
rule, with the addition of an exemption from the security deposit
requirements for the financially strongest carriers.
The benefits of this rule are numerous. First, security deposits
will ensure that the Longshore Act's primary purpose--the prompt
payment of compensation and medical benefits to injured workers and
their survivors--is fulfilled, notwithstanding an insurance carrier's
insolvency.
Second, security deposits protect both healthy members of the
insurance industry and the special fund. The special fund's costs,
which are calculated and assessed against authorized Longshore
insurance carriers and self-insured employers each year, are primarily
incurred for compensation payments in two circumstances: (1) When a
carrier (and the employer it insured) or a self-insurer is insolvent;
and (2) when a carrier or employer is entitled to relief under 33
U.S.C. 908(f) (second-injury fund). Security deposits will avoid
draining the special fund's available resources in the event a carrier
becomes insolvent. Moreover, as many industry members recognized in
responding to the Department's request for information published in the
Federal Register on February 22, 2002 (67 FR 8450), requiring
authorized carriers to fully secure their LHWCA obligations obviates
the need to collect annual special fund assessments from healthy
carriers to pay for the insolvency of weaker carriers. See 69 FR 12219
(March 15, 2004). Because the requirement that liabilities be fully
secured should decrease the fund's costs for benefits paid on behalf of
insolvent carriers, the special fund assessments levied against
carriers and self-insured employers are expected to decrease
commensurately.
Third, security deposits protect the special fund from the
unpredictable future, including the inherent inability of any static
rating scheme to accurately predict the future financial stability of
an insurance carrier, and the potential for catastrophic losses beyond
the carrier's control (e.g. natural disasters, acts of terrorism) in
the shipping and shipbuilding industries. See 69 FR 12219 (March 15,
2004).
By providing three methods for meeting the security deposit
requirements, the final rules allow carriers to manage the direct costs
associated with posting security by choosing an appropriate financial
instrument. A carrier who deposits negotiable securities, for instance,
continues to own the negotiable securities (subject to OWCP's security
interest) and receive the income generated by them. See Sec. 703.208.
The majority of carriers have chosen this method for securing their
LHWCA obligations under OWCP's current policy. A carrier may also elect
to purchase an indemnity bond or letter of credit to meet its security
deposit obligation. As noted in the NPRM, the Department estimates a
$400,000 bond would require only a small initial cash outlay of
approximately $6,000-$8,000 at typical current rates. See 69 FR 12223
(March 15, 2004).
In sum, the final rule balances the interests of insurance
carriers, Longshore Act claimants, and the Department. The rule exempts
from the deposit requirements those insurance carriers with the highest
financial ratings who demonstrate solid financial strength, and limits
the number of remaining carriers who must post deposits to those
carriers operating in States with inadequate guaranty funds. At the
same time, the rule meets the Department's objectives of protecting the
special fund from insurance carrier insolvency and ensuring the prompt
and continued payment of compensation and medical benefits to injured
workers.
IV. Information Collection Requirements (Subject to the Paperwork
Reduction Act)
As explained in the NPRM, the Department submitted several new
collections of information contained in the proposed rules to the
Office of Management and Budget (OMB) for review in accordance with the
Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et seq., and its
implementing regulations at 5 CFR part 1320. 69 FR 12221-22 (March 15,
2004). The new information collection requirements are found in
Sec. Sec. 703.2, 703.203, 703.204, 703.205, 703.209, 703.210, 703.212,
703.303 and 703.304.
With the exception of Sec. Sec. 703.303 and 703.304, these
collections relate to information insurance carriers are required to
submit as part of the authorization process for writing LHWCA
insurance, and as part of the process by which OWCP decides both the
extent of an authorized insurance carrier's unsecured LHWCA obligations
and the amount of the required security deposit. To implement these new
collections, the Department proposed creating two new forms for
insurance carriers (LS-276 and LS-275 IC). 69 FR 12221 (March 15,
2004). The information collections established in Sec. Sec. 703.303
and 703.304 relate to the security a self-insured employer deposits to
secure its payment of compensation under the LHWCA and its extensions.
To implement these collections, the Department proposed one new form
for self-insurers (Form LS-275 SI). 69 FR 12221 (March 15, 2004).
Burden estimates. (1) Form LS-276, Application for Security Deposit
Determination. As fully explained in the NPRM, approximately 385
insurance carriers annually will file Form LS-276. The Department
estimates that on average, it will take a carrier one hour to collect
the information, complete Form LS-276 and mail it. Thus, the total
annual hour burden is estimated to be 385 hours. The Department also
estimates respondents' total annual operating and maintenance (printing
and mailing) costs to be $163.80. 69 FR 12221 (March 15, 2004).
(2) LS-275 IC, Agreement and Undertaking (Insurance Carrier); LS-
276 SI, Agreement and Undertaking (Self-Insured Employer). As fully
explained in the NPRM, the Department estimates that approximately 343
(or 50%) of all authorized insurance carriers and self-insurers
annually will complete and file Form LS-275 IC or LS-275 SI. The
[[Page 43232]]
Department estimates that on average, it will take a respondent 15
minutes to locate the information, complete form LS-275 IC or LS-275 SI
and mail it. Thus, the total annual hour burden is estimated to be
85.75 hours. The Department also estimates respondents' total annual
operating and maintenance (printing and mailing) costs to be $145.60.
69 FR 12222 (March 15, 2004).
The Department invited public comment on the new information
collection requirements. 69 FR 12218, 12221 (March 15, 2004). No
comments were received. OMB subsequently approved the use of the three
new forms under OMB No. 1215-0204 until June 30, 2007, provided that
the Department reports on the viability of developing criteria to
exempt financially secure carriers from making a security deposit when
it renews these collections of information in 2007.
Changes made between the proposed and final rules in response to
public comment require a minor revision to Form LS-276, Application for
Security Deposit Determination. Under the final rules, any carrier
seeking an exemption from the security deposit requirements must submit
documentation establishing its current rating and its rating for the
immediately preceding year from each of three private insurance rating
services designated by the Department. The Department intends to revise
Form LS-276 to: (1) Allow a carrier to indicate that it is seeking an
exemption; and (2) notify the carrier that it must submit the required
ratings from private insurance rating services with its application.
The Department believes this new reporting requirement will result in
only de minimus increases in the cost and time burdens estimated for
completing Form LS-276 that the Department set forth in the NPRM's
preamble. 69 FR 12221 (March 15, 2004).
V. Regulatory Flexibility Act and Executive Order 13272 (Proper
Consideration of Small Entities in Agency Rulemaking)
The Regulatory Flexibility Act of 1980, as amended (5 U.S.C. 601 et
seq.), requires an agency to prepare regulatory flexibility analyses
when it proposes regulations that will have ``a significant economic
impact on a substantial number of small entities,'' or to certify that
the proposed regulations will have no such impact, and to make the
analyses or certification available for public comment. For the reasons
set forth in the NPRM, the Department determined that a complete
regulatory flexibility analysis was not necessary, and certified that
the proposed rules would not have a significant economic impact on a
substantial number of small entities. 69 FR 12222-23. The Department
invited public comment on the certification and delivered a copy of the
NPRM to the Chief Counsel for Advocacy of the Small Business
Administration.
The Department has received no comments responding to the
certification or its underlying factual basis. Accordingly, for the
reasons stated in the NPRM, the Assistant Secretary of Labor for
Employment Standards again certifies that this rule will not have a
significant economic impact on a substantial number of small entities.
As a result, no regulatory impact analysis is required.
List of Subjects
20 CFR Part 701
Longshore and harbor workers, Organization and functions
(government agencies), Workers' compensation.
20 CFR Part 703
Bonds, Insurance companies, Longshore and harbor workers, Reporting
and recordkeeping requirements, Securities, Workers' compensation.
0
For the reasons set forth in the preamble, title 20, Chapter VI,
Subchapter A of the Code of Federal Regulations is amended to read as
follows:
PART 701--GENERAL PROVISIONS, DEFINITIONS AND USE OF TERMS
0
1. The authority citation for Part 701 is revised to read as follows:
Authority: 5 U.S.C. 301 and 8171 et seq.; 33 U.S.C. 939; 36 D.C. Code
501 et seq.; 42 U.S.C. 1651 et seq.; 43 U.S.C. 1331; Reorganization
Plan No. 6 of 1950, 15 FR 3174, 3 CFR, 1949-1953 Comp., p. 1004, 64
Stat. 1263.
0
2. Revise Sec. 701.101 to read as follows:
Sec. 701.101 Scope of this subchapter and subchapter B.
(a) This subchapter contains the regulations governing the
administration of the Longshore and Harbor Workers' Compensation Act,
as amended (LHWCA), 33 U.S.C. 901 et seq., except activities, pursuant
to 33 U.S.C. 941, assigned to the Assistant Secretary of Labor for
Occupational Safety and Health. It also contains the regulations
governing the administration of the direct extensions of the LHWCA: the
Defense Base Act (DBA), 42 U.S.C. 1651 et seq.; the Outer Continental
Shelf Lands Act (OCSLA), 43 U.S.C. 1331; and the Nonappropriated Fund
Instrumentalities Act (NFIA), 5 U.S.C. 8171 et seq.
(b) The regulations in this subchapter also apply to claims filed
under the District of Columbia Workmen's Compensation Act (DCCA), 36
D.C. Code 501 et seq. That law applies to all claims for injuries or
deaths based on employment events that occurred prior to July 26, 1982,
the effective date of the District of Columbia Workers' Compensation
Act, as amended (D.C. Code 32-1501 et seq.).
(c) The regulations governing the administration of the Black Lung
Benefits Program are in subchapter B of this chapter.
0
3. Revise Sec. 701.102 to read as follows:
Sec. 701.102 Organization of this subchapter.
Part 701 provides a general description of the regulations in this
subchapter; sets forth information regarding the persons and agencies
within the Department of Labor authorized by the Secretary of Labor to
administer the Longshore and Harbor Workers' Compensation Act, its
extensions and the regulations in this subchapter; and defines and
clarifies use of specific terms in the several parts of this
subchapter. Part 702 of this subchapter contains the general
administrative regulations governing claims filed under the LHWCA. Part
703 of this subchapter contains the regulations governing insurance
carrier authorizations, insurance carrier security deposits, self-
insurer authorizations, and certificates of compliance with the
insurance regulations, as required by sections 32 and 37 of the LHWCA
(33 U.S.C. 932, 937). Because the extensions of the LHWCA (see Sec.
701.101) incorporate by reference nearly all the provisions of the
LHWCA, the regulations in parts 701, 702 and 703 also apply to the
administration of the extensions (DBA, DCCA, OCSLA, and NFIA), unless
otherwise noted. Part 704 of this subchapter contains the exceptions to
the general applicability of parts 702 and 703 for the DBA, the DCCA,
the OCSLA, and the NFIA.
0
4. Revise Sec. 701.201 to read as follows:
Sec. 701.201 Office of Workers' Compensation Programs.
The Office of Workers' Compensation Programs (OWCP) is responsible
for administering the LHWCA and its extensions (see 20 CFR 1.2(e)). The
regulations in subchapter A of chapter I of this title (20 CFR part 1)
describe OWCP's establishment within the Employment Standards
Administration, the functions assigned to it by the Assistant Secretary
of Labor for
[[Page 43233]]
Employment Standards, and how those functions were performed before
OWCP's establishment.
Sec. 701.202 [Reserved]
Sec. 701.203 [Reserved]
0
5. Remove and reserve Sec. Sec. 701.202 and 701.203.
0
6. Amend Sec. 701.301 by revising paragraphs (a)(1), (a)(5), (a)(6),
(a)(7), (a)(8), (a)(9), (a)(10), (a)(12)(i)(B), (a)(12)(ii)(A) and
(a)(12)(iii)(E) to read as follows:
Sec. 701.301 Definitions and use of terms.
(a) * * *
(1) Act or LHWCA means the Longshore and Harbor Workers'
Compensation Act, as amended (33 U.S.C. 901 et seq.), and includes the
provisions of any statutory extension of such Act (see Sec. 701.101(a)
and (b)) pursuant to which compensation on account of an injury is
sought.
* * * * *
(5) Office of Workers' Compensation Programs or OWCP or the Office
means the Office of Workers' Compensation Programs within the
Employment Standards Administration, referred to in Sec. 701.201 and
described more fully in part 1 of this title. The term Office of
Workmen's Compensation Programs shall have the same meaning as Office
of Workers' Compensation Programs (see 20 CFR 1.6(b)).
(6) Director means the Director of OWCP, or his or her authorized
representative.
(7) District Director means a person appointed as provided in
sections 39 and 40 of the LHWCA or his or her designee, authorized to
perform functions with respect to the processing and determination of
claims for compensation under the LHWCA and its extensions as provided
therein and under this subchapter. The term District Director is
substituted for the term Deputy Commissioner used in the statute. This
substitution is for administrative purposes only and in no way affects
the power or authority of the position as established in the statute.
(8) Administrative Law Judge means a person appointed as provided
in 5 U.S.C. 3105 and subpart B of 5 CFR part 930, who is qualified to
preside at hearings under 5 U.S.C. 557 and is empowered by the
Secretary to conduct formal hearings whenever necessary in respect of
any claim for compensation arising under the LHWCA and its extensions.
(9) Chief Administrative Law Judge means the Chief Judge of the
Office of Administrative Law Judges, United States Department of Labor,
whose office is at the location set forth in 29 CFR 18.3(a).
(10) Board or Benefits Review Board means the Benefits Review Board
established by section 21 of the LHWCA (33 U.S.C. 921) as amended and
constituted and functioning pursuant to the provisions of chapter VII
of this title and Secretary of Labor's Order No. 38-72 (38 FR 90),
whose office is at the location set forth in 20 CFR 802.204.
* * * * *
(12) * * *
(i) * * *
(B) Any harbor worker, including a ship repairer, shipbuilder and
shipbreaker; and
* * * * *
(ii) * * *
(A) A master or member of a crew of any vessel; or
* * * * *
(iii) * * *
(E) Aquaculture workers, meaning those employed by commercial
enterprises involved in the controlled cultivation and harvest of
aquatic plants and animals, including the cleaning, processing or
canning of fish and fish products, the cultivation and harvesting of
shellfish, and the controlled growing and harvesting of other aquatic
species; or
* * * * *
PART 703--INSURANCE REGULATIONS
0
7. The authority citation for Part 703 is revised to read as follows:
Authority: 5 U.S.C. 301 and 8171 et seq.; 31 U.S.C. 9701; 33
U.S.C. 932 and 939; 36 D.C. Code 501 et seq.; 42 U.S.C. 1651 et
seq.; 43 U.S.C. 1331; Reorganization Plan No. 6 of 1950, 15 FR 3174,
3 CFR, 1949-1953 Comp., p. 1004, 64 Stat. 1263; Secretary's Order 4-
2001, 66 FR 29656.
0
8. Amend Part 703 by redesignating Sec. Sec. 703.001 through 703.003
as Sec. Sec. 703.1 through 703.3 and designating them as new ``Subpart
A--General,'' by designating center heading ``Authorization of
Insurance Carriers'' as ``Subpart B--Authorization of Insurance
Carriers,'' and revising newly designated subpart A to read as follows:
Subpart A--General
Sec.
703.1 Scope of part.
703.2 Forms.
703.3 Failure to secure coverage; penalties.
Subpart B--Authorization of Insurance Carriers
* * * * *
Subpart A--General
Sec. 703.1 Scope of part.
Part 703 governs insurance carrier authorizations, insurance
carrier security deposits, self-insurer authorizations, and
certificates of compliance with the insurance regulations. These
provisions are required by the LHWCA and apply to the extensions of the
LHWCA except as otherwise provided in part 704 of this subchapter.
Sec. 703.2 Forms.
(a) Any information required by the regulations in this part to be
submitted to OWCP must be submitted on forms the Director authorizes
from time to time for such purpose. Persons submitting forms may not
modify the forms or use substitute forms without OWCP's approval.
------------------------------------------------------------------------
Form No. Title
------------------------------------------------------------------------
(1) LS-271.......................... Application for Self-Insurance.
(2) LS-274.......................... Report of Injury Experience.
(3) LS-275 SI....................... Self-Insurer's Agreement and
Undertaking.
(4) LS-275 IC....................... Insurance Carrier's Agreement and
Undertaking.
(5) LS-276.......................... Application for Security Deposit
Determination.
(6) LS-405.......................... Indemnity Bond.
(7) LS-570.......................... Card Report of Insurance.
------------------------------------------------------------------------
(b) Copies of the forms listed in this section are available for
public inspection at the Office of Workers' Compensation Programs,
Employment Standards Administration, U.S. Department of Labor,
Washington, D.C. 20210. They may also be obtained from OWCP district
offices and on the Internet at http://www.dol.gov/esa/owcp/dlhwc/lsforms.htm
.
Sec. 703.3 Failure to secure coverage; penalties.
(a) Each employer must secure the payment of compensation under the
Act either through an authorized insurance carrier or by becoming an
authorized self-insurer under section 32(a)(1) or (2) of the Act (33
U.S.C. 932(a)(1) or (2)). An employer who fails to comply with these
provisions is subject, upon conviction, to a fine of not more than
$10,000, or by imprisonment for not more than one year, or both. Where
the employer is a corporation, the president, secretary and treasurer
each will also be subject to this fine and/or imprisonment, in addition
to the fine against the corporation, and each is severally personally
liable, jointly with the corporation, for all compensation or other
benefits payable under the Act while the corporation fails to secure
the payment of compensation.
[[Page 43234]]
(b) Any employer who willingly and knowingly transfers, sells,
encumbers, assigns or in any manner disposes of, conceals, secretes, or
destroys any property belonging to the employer after an employee
sustains an injury covered by the Act, with the intent to avoid payment
of compensation under the Act to that employee or his/her dependents,
shall be guilty of a misdemeanor and punished, upon conviction, by a
fine of not more than $10,000 and/or imprisonment for one year. Where
the employer is a corporation, the president, secretary and treasurer
are also severally liable to imprisonment and, along with the
corporation, jointly liable for the fine.
0
9. Amend Part 703 by adding new ``Subpart C--Insurance Carrier Security
Deposit Requirements'' (consisting of Sec. Sec. 703.201 through
703.213), designating the center heading ``Authorization of Self-
Insurers'' as ``Subpart D--Authorization of Self-Insurers,''
designating center heading ``Issuance of Certificates of Compliance,''
as ``Subpart E--Issuance of Certificates of Compliance,'' and revising
new Subpart D.
The addition and revision read as follows:
Subpart C--Insurance Carrier Security Deposit Requirements
Sec.
703.201 Deposits of security by insurance carriers.
703.202 Identification of significant gaps in State guaranty fund
coverage for LHWCA obligations.
703.203 Application for security deposit determination; information
to be submitted; other requirements.
703.204 Decision on insurance carrier's application; minimum amount
of deposit.
703.205 Filing of Agreement and Undertaking; deposit of security.
703.206 [Reserved]
703.207 Kinds of negotiable securities that may be deposited;
conditions of deposit; acceptance of deposits.
703.208 Deposits of negotiable securities with Federal Reserve banks
or the Treasurer of the United States; interest thereon.
703.209 Substitution and withdrawal of indemnity bond, letters of
credit or negotiable securities.
703.210 Increase or reduction in security deposit amount.
703.211 Authority to seize security deposit; use and/or return of
proceeds.
703.212 Required reports; examination of insurance carrier accounts.
703.213 Failure to comply.
Subpart D--Authorization of Self-Insurers
703.301 Employers who may be authorized as self-insurers.
703.302 Application for authority to become a self-insurer; how
filed; information to be submitted; other requirements.
703.303 Decision on employer's application.
703.304 Filing of Agreement and Undertaking; deposit of security.
703.305 [Reserved]
703.306 Kinds of negotiable securities that may be deposited;
conditions of deposit; acceptance of deposits.
703.307 Deposits of negotiable securities with Federal Reserve banks
or the Treasurer of the United States; interest thereon.
703.308 Substitution and withdrawal of indemnity bond, letters of
credit or negotiable securities.
703.309 Increase or reduction in the amount of indemnity bond,
letters of credit or negotiable securities.
703.310 Authority to seize security deposit; use and/or return of
proceeds.
703.311 Required reports; examination of self-insurer accounts.
703.312 Period of authorization as self-insurer.
703.313 Revocation of authorization to self-insure.
Subpart E--Issuance of Certificates of Compliance
* * * * *
Subpart C--Insurance Carrier Security Deposit Requirements
Sec. 703.201 Deposits of security by insurance carriers.
The regulations in this subpart require certain insurance carriers
to deposit security in the form of indemnity bonds, letters of credit
or negotiable securities (chosen at the option of the carrier) of a
kind and in an amount determined by the Office, and prescribe the
conditions under which deposits must be made. Security deposits secure
the payment of compensation and medical benefits when an insurance
carrier defaults on any of its obligations under the LHWCA, regardless
of the date such obligations arose. They also secure the payment of
compensation and medical benefits when a carrier becomes insolvent and
such obligations are not otherwise fully secured by a State guaranty
fund. Any gap in State guaranty fund coverage will have a direct effect
on the amount of security the Office will require a carrier to post. As
used in this subpart, the terms ``obligations under the Act'' and
``LHWCA obligations'' mean a carrier's liability for compensation
payments and medical benefits arising under the Longshore and Harbor
Workers' Compensation Act and any of its extensions.
Sec. 703.202 Identification of significant gaps in State guaranty
fund coverage for LHWCA obligations.
(a) In determining the amount of a carrier's required security
deposit, the Office will consider the extent to which a State guaranty
fund secures the insurance carrier's LHWCA obligations in that State.
When evaluating State guaranty funds, the Office may consider a number
of factors including, but not limited to--
(1) Limits on weekly benefit amounts;
(2) Limits on aggregate maximum benefit amounts;
(3) Time limits on coverage;
(4) Ocean marine exclusions;
(5) Employer size and viability provisions; and
(6) Financial strength of the State guaranty fund itself.
(b) OWCP will identify States without guaranty funds and States
with guaranty funds that do not fully and immediately secure LHWCA
obligations and will post its findings on the Internet at http://www.dol.gov/esa/owcp/dlhwc/lstable.htm.
These findings will indicate
the extent of any partial or total gap in coverage provided by a State
guaranty fund, and they will be open for inspection and comment by all
interested parties. If the extent of coverage a particular State
guaranty fund provides either cannot be determined or is ambiguous,
OWCP will deem one third (33\1/3\ percent) of a carrier's LHWCA
obligations in that State to be unsecured. OWCP will revise its
findings from time to time, in response to substantiated public
comments it receives or for any other reasons it considers relevant.
Sec. 703.203 Application for security deposit determination;
information to be submitted; other requirements.
(a) Each insurance carrier authorized by OWCP to write insurance
under the LHWCA or any of its extensions, and each insurance carrier
seeking initial authorization to write such insurance, must apply
annually, on a schedule set by OWCP, for a determination of the extent
of its unsecured obligations and the security deposit required. The
application must be addressed to the Branch of Financial Management and
Insurance (Branch) within OWCP's Division of Longshore and Harbor
Workers' Compensation, and be made on a form provided by OWCP. The
application must contain the following:
(1) Any carrier seeking an exemption from the security deposit
requirements based on its financial standing (see Sec. 703.204(c)(1))
must submit documentation establishing the carrier's current rating and
its rating for the
[[Page 43235]]
immediately preceding year from each insurance rating service
designated by the Branch and posted on the Internet at http://www.dol.gov/esa/owcp/dlhwc/lstable.htm
.
(2) All other carriers, and any carrier whose exemption request
under paragraph (a)(1) of this section has been denied, must provide--
(i) A statement of the carrier's outstanding liabilities under the
LHWCA or any of its extensions for its LHWCA obligations for each State
in which the obligations arise; and
(ii) Any other information the Branch requests to enable it to give
the application adequate consideration including, but not limited to,
the reports set forth at Sec. 703.212.
(b) If the carrier disagrees with any of OWCP's findings regarding
State guaranty funds made under Sec. 703.202(b) as they exist when it
submits its application, the carrier may submit a statement of its
unsecured obligations based on a different conclusion regarding the
extent of coverage afforded by one or more State guaranty funds. The
carrier must submit evidence and/or argument with its application
sufficient to establish that such conclusion is correct.
(c) The carrier must sign and swear to the application. If the
carrier is not an individual, the carrier's duly authorized officer
must sign and swear to the application and list his or her official
designation. If the carrier is a corporation, the officer must also
affix the corporate seal.
(d) At any time after filing an application, the carrier must
inform the Branch immediately of any material changes that may have
rendered its application incomplete, inaccurate or misleading.
(e) By filing an application, the carrier consents to be bound by
and to comply with the regulations and requirements in this part.
Sec. 703.204 Decision on insurance carrier's application; minimum
amount of deposit.
(a) The Branch will issue a decision on the application determining
the extent of an insurance carrier's unsecured LHWCA obligations and
fixing the amount of security the carrier must deposit to fully secure
payment of its unsecured obligations. The Branch will transmit its
decision to the applicant in a way it considers appropriate.
(b) The Branch may consider a number of factors in setting the
security deposit amount including, but not limited to, the--
(1) Financial strength of the carrier as determined by private
insurance rating organizations;
(2) Financial strength of the carrier's insureds in the Longshore
industry;
(3) Extent to which State guaranty funds secure the carrier's LHWCA
obligations in the event the carrier defaults on its obligations or
becomes insolvent;
(4) Carrier's longevity in writing LHWCA or other workers'
compensation coverage;
(5) Extent of carrier's exposure for LHWCA coverage; and
(6) Carrier's payment history in satisfying its LHWCA obligations.
(c) In setting the security deposit amount, the Branch will follow
these criteria:
(1) Carriers who hold the highest rating awarded by each of the
three insurance rating services designated by the Branch and posted on
the Internet at http://www.dol.gov/esa/owcp/dlhwc/lstable.htm for both
the current rating year and the immediately preceding year will not be
required to deposit security.
(2) Carriers whose LHWCA obligations are fully secured by one or
more State guaranty funds, as evaluated by OWCP under Sec. 703.202 of
this subpart, will not be required to deposit security.
(3) The Branch will require all carriers not meeting the
requirements of paragraphs (c)(1) or (2) of this section to deposit
security for their LHWCA obligations not secured by a State guaranty
fund, as evaluated by OWCP under Sec. 703.202 of this subpart. For
carriers that write only an insignificant or incidental amount of LHWCA
insurance, the Branch will require a deposit in an amount determined by
the Branch from time to time. For all other carriers, the Branch will
require a minimum deposit of one third (33\1/3\ percent) of a carrier s
outstanding LHWCA obligations not secured by a State guaranty fund, but
may require a deposit up to an amount equal to the carrier's total
outstanding LHWCA obligations (100 percent) not secured by a State
guaranty fund.
(d) If a carrier believes that a lesser deposit would fully secure
its LHWCA obligations, the carrier may request a hearing before the
Director of the Division of Longshore and Harbor Workers' Compensation
(Longshore Director) or the Longshore Director's representative.
Requests for hearing must be in writing and sent to the Branch within
10 days of the date of the Branch's decision. The carrier may submit
new evidence and/or argument in support of its challenge to the
Branch's decision and must provide any additional documentation OWCP
requests. The Longshore Director or his representative will notify the
carrier of the hearing date within 10 days of receiving the request.
The Longshore Director or his representative will issue the final
agency decision on the application within 60 days of the hearing date,
or, where evidence is submitted after the hearing, within 60 days of
the receipt of such evidence, but no later than 180 days after
receiving the carrier's request for a hearing.
Sec. 703.205 Filing of Agreement and Undertaking; deposit of
security.
Within 45 days of the date on which the insurance carrier receives
the Branch's decision (or, if the carrier requests a hearing, a period
set by the Longshore Director or the Longshore Director's
representative) determining the extent of its unsecured LHWCA
obligations and fixing the required security deposit amount (see Sec.
703.204), the carrier must:
(a) Execute and file with the Branch an Agreement and Undertaking,
in a form prescribed and provided by OWCP, in which the carrier shall
agree to--
(1) Deposit with the Branch indemnity bonds or letters of credit in
the amount fixed by the Office, or deposit negotiable securities under
Sec. Sec. 703.207 and 703.208 in that amount;
(2) Authorize the Branch, at its discretion, to bring suit under
any deposited indemnity bond or to draw upon any deposited letters of
credit, as appropriate under the terms of the security instrument, or
to collect the interest and principal as they become due on any
deposited negotiable securities and to sell or otherwise liquidate such
negotiable securities or any part thereof when--
(i) The carrier defaults on any of its LHWCA obligations;
(ii) The carrier fails to renew any deposited letter of credit or
substitute a new letter of credit, indemnity bond or acceptable
negotiable securities in its place;
(iii) The carrier fails to renew any deposited negotiable
securities at maturity or substitute a letter of credit, indemnity bond
or acceptable negotiable securities in their place;
(iv) State insolvency proceedings are initiated against the
carrier; or
(v) The carrier fails to comply with any of the terms of the
Agreement and Undertaking; and
(3) Authorize the Branch, at its discretion, to pay such ongoing
claims of the carrier as it may find to be due
[[Page 43236]]
and payable from the proceeds of the deposited security;
(b) Give security in the amount fixed in the Office's decision:
(1) In the form of an indemnity bond with sureties satisfactory to
the Branch and in such form, and containing such provisions, as the
Branch may prescribe: Provided, That only surety companies approved by
the United States Treasury Department under the laws of the United
States and the rules and regulations governing bonding companies may
act as sureties on such indemnity bonds (see Department of Treasury's
Circular-570), and that a surety company that is a corporate subsidiary
of an insurance carrier may not act as surety on such carrier's
indemnity bond;
(2) In the form of letters of credit issued by a financial
institution satisfactory to the Branch and upon which the Branch may
draw; or
(3) By a deposit of negotiable securities with a Federal Reserve
Bank or the Treasurer of the United States in compliance with
Sec. Sec. 703.207 and 703.208.
Sec. 703.206 [Reserved]
Sec. 703.207 Kinds of negotiable securities that may be deposited;
conditions of deposit; acceptance of deposits.
An insurance carrier electing to deposit negotiable securities to
secure its obligations under the Act in the amount fixed by the Office
under the regulations in this part shall deposit any negotiable
securities acceptable as security for the deposit of public monies of
the United States under regulations issued by the Secretary of the
Treasury. (See 31 CFR part 225.) The approval, valuation, acceptance,
and custody of such securities is hereby committed to the several
Federal Reserve Banks and the Treasurer of the United States.
Sec. 703.208 Deposits of negotiable securities with Federal Reserve
banks or the Treasurer of the United States; interest thereon.
Deposits of negotiable securities provided for by the regulations
in this part must be made with any Federal Reserve bank or any branch
of a Federal Reserve bank designated by the Branch, or the Treasurer of
the United States, and must be held subject to the order of the Branch.
The Branch will authorize the insurance carrier to collect interest on
the securities it deposits unless any of the conditions set forth at
Sec. 703.211(a) occur.
Sec. 703.209 Substitution and withdrawal of indemnity bond, letters
of credit or negotiable securities.
(a) A carrier may not substitute other security for any indemnity
bond or letters of credit deposited under the regulations in this part
except when authorized by the Branch. A carrier may, however,
substitute negotiable securities acceptable under the regulations in
this part for previously-deposited negotiable securities without the
Branch's prior approval.
(b) A carrier that has ceased to write insurance under the Act may
apply to the Branch for withdrawal of its security deposit. The carrier
must file with its application a sworn statement setting forth--
(1) A list of all cases in each State in which the carrier is
paying compensation, together with the names of the employees and other
beneficiaries, a description of causes of injury or death, and a
statement of the amount of compensation paid;
(2) A similar list of all pending cases in which the carrier has
not yet paid compensation; and
(3) A similar list of all cases in which injury or death has
occurred within one year before such application or in which the last
payment of compensation was made within one year before such
application.
(c) The Branch may authorize withdrawal of previously-deposited
indemnity bonds, letters of credit and negotiable securities that, in
the opinion of the Branch, are not necessary to provide adequate
security for the payment of the carrier's outstanding and potential
LHWCA liabilities. No withdrawals will be authorized unless there has
been no claim activity involving the carrier for a minimum of five
years, and the Branch is reasonably certain that no further claims will
arise.
Sec. 703.210 Increase or reduction in security deposit amount.
(a) Whenever the Office considers the security deposited by an
insurance carrier insufficient to fully secure the carrier's LHWCA
obligations, the carrier must, upon demand by the Branch, deposit
additional security in accordance with the regulations in this part in
an amount fixed by the Branch. The Branch will issue its decision
requiring additional security in accordance with Sec. 703.204, and the
procedures set forth at Sec. Sec. 703.204(d) and 703.205 for
requesting a hearing and complying with the Office's decision will
apply as appropriate.
(b) The Branch may reduce the required security at any time on its
own initiative, or upon application of a carrier, when in the Branch's
opinion the facts warrant a reduction. A carrier seeking a reduction
must furnish any information the Office requests regarding its
outstanding LHWCA obligations for any State in which it does business,
its obligations not secured by a State guaranty fund in each of these
States, and any other evidence as the Branch considers necessary.
Sec. 703.211 Authority to seize security deposit; use and/or return
of proceeds.
(a) The Office may take any of the actions set forth in paragraph
(b) of this section when an insurance carrier--
(1) Defaults on any of its LHWCA obligations;
(2) Fails to renew any deposited letter of credit or substitute a
new letter of credit, indemnity bond or acceptable negotiable
securities in its place;
(3) Fails to renew any deposited negotiable securities at maturity
or substitute a letter of credit, indemnity bond or acceptable
negotiable securities in their place;
(4) Has State insolvency proceedings initiated against it; or
(5) Fails to comply with any of the terms of the Agreement and
Undertaking.
(b) When any of the conditions set forth in paragraph (a) of this
section occur, the Office may, within its discretion and as appropriate
to the security instrument--
(1) Bring suit under any indemnity bond;
(2) Draw upon any letters of credit;
(3) Seize any negotiable securities, collect the interest and
principal as they may become due, and sell or otherwise liquidate the
negotiable securities or any part thereof.
(c) When the Office, within its discretion, determines that it no
longer needs to collect the interest and principal of any negotiable
securities seized pursuant to paragraphs (a) and (b) of this section,
or to retain the proceeds of their sale, it must return any of the
carrier's negotiable securities still in its possession and any
remaining proceeds of their sale.
Sec. 703.212 Required reports; examination of insurance carrier
accounts.
(a) Upon the Office's request, each insurance carrier must submit
the following reports:
(1) A certified financial statement of the carrier's assets and
liabilities, or a balance sheet.
(2) A sworn statement showing the extent of the carrier's unsecured
LHWCA obligations for each State in which it is authorized to write
insurance under the LHWCA or any of its extensions.
[[Page 43237]]
(3) A sworn statement reporting the carrier's open cases as of the
date of such report, listing by State all death and injury cases,
together with a report of the status of all outstanding claims.
(b) Whenever it considers necessary, the Office may inspect or
examine a carrier's books of account, records, and other papers to
verify any financial statement or other information the carrier
furnished to the Office in any statement or report required by this
section, or any other section of the regulations in this part. The
carrier must permit the Office or its duly authorized representative to
make the inspection or examination. Alternatively, the Office may
accept an adequate independent audit by a certified public accountant.
Sec. 703.213 Failure to comply.
The Office may suspend or revoke a carrier's certificate of
authority to write LHWCA insurance under Sec. 703.106 when the carrier
fails to comply with any of the requirements of this part.
Subpart D--Authorization of Self-Insurers
Sec. 703.301 Employers who may be authorized as self-insurers.
The regulations in this subpart set forth procedures for
authorizing employers to self-insure the payment of compensation under
the Longshore and Harbor Workers' Compensation Act, or its extensions.
The Office may authorize any employer to self-insure who, pursuant to
the regulations in this part, furnishes to the Office satisfactory
proof of its ability to pay compensation directly, and who agrees to
immediately cancel any existing insurance policy covering its Longshore
obligations (except for excess or catastrophic workers' compensation
insurance, see Sec. Sec. 703.302(a)(6), 703.304(a)(6)) when OWCP
approves the employer's application to be self-insured. The regulations
require self-insurers to deposit security in the form of an indemnity
bond, letters of credit or negotiable securities (at the option of the
employer) of a kind and in an amount determined by the Office, and
prescribe the conditions under which such deposits shall be made. The
term ``self-insurer'' as used in these regulations means any employer
securing the payment of compensation under the LHWCA or its extensions
in accordance with the provisions of 33 U.S.C. 932(a)(2) and these
regulations.
Sec. 703.302 Application for authority to become a self-insurer; how
filed; information to be submitted; other requirements.
(a) Any employer may apply to become an authorized self-insurer.
The application must be addressed to the Branch of Financial Management
and Insurance (Branch) within OWCP's Division of Longshore and Harbor
Workers' Compensation, and be made on a form provided by OWCP. The
application must contain--
(1) A statement of the employer's total payroll for the 12 months
before the application date;
(2) A statement of the average number of employees engaged in
employment within the purview of the LHWCA or any of its extensions for
the 12 months before the application date;
(3) A statement of the number of injuries to such employees
resulting in disability of more than 7 days' duration, or in death,
during each of the 5 years before the application date;
(4) A certified financial report for each of the three years before
the application date;
(5) A description of the facilities maintained or the arrangements
made for the medical and hospital care of injured employees;
(6) A statement describing the provisions and maximum amount of any
excess or catastrophic insurance; and
(7) Any other information the Branch requests to enable it to give
the application adequate consideration including, but not limited to,
the reports set forth at Sec. 703.310.
(b) The employer must sign and swear to the application. If the
employer is not an individual, the employer's duly authorized officer
must sign and swear to the application and list his or her official
designation. If the employer is a corporation, the officer must also
affix the corporate seal.
(c) At any time after filing an application, the employer must
inform the Branch immediately of any material changes that may have
rendered its application incomplete, inaccurate or misleading.
(d) By filing an application, the employer consents to be bound by
and to comply with the regulations and requirements in this part.
Sec. 703.303 Decision on employer's application.
(a) The Branch will issue a decision granting or denying the
employer's application to be an authorized self-insurer. If the Branch
grants the application, the decision will fix the amount of security
the employer must deposit. The Branch will transmit its decision to the
employer in a way it considers appropriate.
(b) The employer is authorized to self-insure beginning with the
date of the Branch's decision. Each grant of authority to self-insure
is conditioned, however, upon the employer's execution and filing of an
Agreement and Undertaking and deposit of the security fixed in the
decision in the form and within the time limits required by Sec.
703.304. In the event the employer fails to comply with the
requirements set forth in Sec. 703.304, its authorization to self-
insure will be considered never to have been effective, and the
employer will be subject to appropriate penalties for failure to secure
its LHWCA obligations.
(c) The Branch will require security in the amount it considers
necessary to fully secure the employer's LHWCA obligations. When fixing
the amount of security, the Branch may consider a number of factors
including, but not limited to, the--
(1) Employer's overall financial standing;
(2) Nature of the employer's work;
(3) Hazard of the work in which the employees are employed;
(4) Employer's payroll amount for employees engaged in employment
within the purview of the Act; and
(5) Employer's accident record as shown in the application and the
Office's records.
(d) If an employer believes that the Branch incorrectly denied its
application to self-insure, or that a lesser security deposit would
fully secure its LHWCA obligations, the employer may request a hearing
before the Director of the Division of Longshore and Harbor Workers'
Compensation (Longshore Director) or the Longshore Director's
representative. Requests for hearing must be in writing and sent to the
Branch within ten days of the date of the Branch's decision. The
employer may submit new evidence and/or argument in support of its
challenge to the Branch's decision and must provide any additional
documentation OWCP requests. The Longshore Director or his
representative will notify the employer of the hearing date within 10
days of receiving the request. The Longshore Director or his
representative will issue the final agency decision on the application
within 60 days of the hearing date, or, where evidence is submitted
after the hearing, within 60 days of the receipt of such evidence, but
no later than 180 days after receiving the employer's request for a
hearing.
[[Page 43238]]
Sec. 703.304 Filing of Agreement and Undertaking; deposit of
security.
Within 45 days of the date on which the employer receives the
Branch's decision (or, if the employer requests a hearing, a period set
by the Longshore Director or the Longshore Director's representative)
granting its application to self-insure and fixing the required
security deposit amount (see Sec. 703.303), the employer must:
(a) Execute and file with the Branch an Agreement and Undertaking,
in a form prescribed and provided by OWCP, in which the employer shall
agree to:
(1) Pay when due, as required by the provisions of the Act, all
compensation payable on account of injury or death of any of its
employees injured within the purview of the Act;
(2) Furnish medical, surgical, hospital, and other attendance,
treatment and care as required by the Act;
(3) Deposit with the Branch indemnity bonds or letters of credit in
the amount fixed by the Office, or deposit negotiable securities under
Sec. Sec. 703.306 and 703.307 in that amount;
(4) Authorize the Branch, at its discretion, to bring suit under
any deposited indemnity bond or to draw upon any deposited letters of
credit, as appropriate under the terms of the security instrument, or
to collect the interest and principal as they become due on any
deposited negotiable securities and to seize and sell or otherwise
liquidate such negotiable securities or any part thereof when the
employer:
(i) Defaults on any of its LHWCA obligations;
(ii) Fails to renew any deposited letter of credit or substitute a
new letter of credit, indemnity bond or acceptable negotiable
securities in its place;
(iii) Fails to renew any deposited negotiable securities at
maturity or substitute a letter of credit, indemnity bond or acceptable
negotiable securities in their place; or
(iv) Fails to comply with any of the terms of the Agreement and
Undertaking;
(5) Authorize the Branch, at its discretion, to pay such
compensation, medical, and other expenses and any accrued penalties
imposed by law as it may find to be due and payable from the proceeds
of the deposited security; and
(6) Obtain and maintain, if required by the Office, excess or
catastrophic insurance in amounts to be determined by the Office.
(b) Give security in the amount fixed in the Office's decision:
(1) In the form of an indemnity bond with sureties satisfactory to
the Office, and in such form and containing such provisions as the
Office may prescribe: Provided, That only surety companies approved by
the United States Treasury Department under the laws of the United
States and the rules and regulations governing bonding companies may
act as sureties on such indemnity bonds (see Department of Treasury's
Circular-570);
(2) In the form of letters of credit issued by a financial
institution satisfactory to the Branch and upon which the Branch may
draw; or,
(3) By a deposit of negotiable securities with a Federal Reserve
Bank or the Treasurer of the United States in compliance with
Sec. Sec. 703.306 and 703.307.
Sec. 703.305 [Reserved]
Sec. 703.306 Kinds of negotiable securities that may be deposited;
conditions of deposit; acceptance of deposits.
A self-insurer or a self-insurer applicant electing to deposit
negotiable securities to secure its obligations under the Act in the
amount fixed by the Office under the regulations in this part shall
deposit any negotiable securities acceptable as security for the
deposit of public monies of the United States under regulations issued
by the Secretary of the Treasury. (See 31 CFR part 225.) The approval,
valuation, acceptance, and custody of such securities is hereby
committed to the several Federal Reserve Banks and the Treasurer of the
United States.
Sec. 703.307 Deposits of negotiable securities with Federal Reserve
banks or the Treasurer of the United States; interest thereon.
Deposits of negotiable securities provided for by the regulations
in this part shall be made with any Federal Reserve bank or any branch
of a Federal Reserve bank designated by the Office, or the Treasurer of
the United States, and shall be held subject to the order of the
Office. The Office will authorize the self-insurer to collect interest
on the securities deposited by it unless any of the conditions set
forth at Sec. 703.304(a)(4) occur.
Sec. 703.308 Substitution and withdrawal of indemnity bond, letters
of credit or negotiable securities.
(a) A self-insurer may not substitute other security for any
indemnity bond or letters of credit deposited under the regulations in
this part except when authorized by the Office. A self-insurer may,
however, substitute negotiable securities acceptable under the
regulations in this part for previously-deposited negotiable securities
without the Office's prior approval.
(b) A self-insurer discontinuing business, discontinuing operations
within the purview of the Act, or securing the payment of compensation
by commercial insurance under the provisions of the Act may apply to
the Office for the withdrawal of the security it provided under the
regulations in this part. The self-insurer must file with its
application a sworn statement setting forth--
(1) A list of all cases in each compensation district in which the
self-insurer is paying compensation, together with the names of the
employees and other beneficiaries, a description of causes of injury or
death, and a statement of the amount of compensation paid;
(2) A similar list of all pending cases in which the self-insurer
has not yet paid compensation; and
(3) A similar list of all cases in which injury or death has
occurred within one year before such application or in which the last
payment of compensation was made within one year before such
application.
(c) The Office may authorize withdrawal of previously-deposited
indemnity bonds, letters of credit and negotiable securities that, in
the opinion of the Office, are not necessary to provide adequate
security for the payment of the self-insurer's outstanding and
potential LHWCA obligations. No withdrawals will be authorized unless
there has been no claim activity involving the self-insurer for a
minimum of five years, and the Office is reasonably certain no further
claims will arise.
Sec. 703.309 Increase or reduction in the amount of indemnity bond,
letters of credit or negotiable securities.
(a) Whenever the Office considers the principal sum of the
indemnity bond or letters of credit filed or the amount of the
negotiable securities deposited by a self-insurer insufficient to fully
secure the self-insurer's LHWCA obligations, the self-insurer must,
upon demand by the Office, deposit additional security in accordance
with the regulations in this part in an amount fixed by the Branch. The
Branch will issue its decision requiring additional security in
accordance with Sec. 703.303, and the procedures set forth at
Sec. Sec. 703.303(d) and 703.304 for requesting a hearing and
complying with the Office's decision will apply as appropriate.
(b) The Office may reduce the required security at any time on its
own initiative, or upon application of a self-
[[Page 43239]]
insurer, when in the Office's opinion the facts warrant a reduction. A
self-insurer seeking a reduction must furnish any information the
Office requests regarding its current affairs, the nature and hazard of
the work of its employees, the amount of its payroll for employees
engaged in maritime employment within the purview of the Act, its
financial condition, its accident experience, a record of compensation
payments it has made, and any other evidence the Branch considers
necessary.
Sec. 703.310 Authority to seize security deposit; use and/or return
of proceeds.
(a) The Office may take any of the actions set forth in paragraph
(b) of this section when a self-insurer--
(1) Defaults on any of its LHWCA obligations;
(2) Fails to renew any deposited letter of credit or substitute a
new letter of credit, indemnity bond or acceptable negotiable
securities in its place;
(3) Fails to renew any deposited negotiable securities at maturity
or substitute a letter of credit, indemnity bond or acceptable
negotiable securities in their place; or
(4) Fails to comply with any of the terms of the Agreement and
Undertaking.
(b) When any of the conditions set forth in paragraph (a) of this
section occur, the Office may, within its discretion and as appropriate
to the security instrument--
(1) Bring suit under any indemnity bond;
(2) Draw upon any letters of credit;
(3) Seize any negotiable securities, collect the interest and
principal as they may become due, and sell or otherwise liquidate the
negotiable securities or any part thereof.
(c) When the Office, within its discretion, determines that it no
longer needs to collect the interest and principal of any negotiable
securities seized pursuant to paragraphs (a) and (b) of this section,
or to retain the proceeds of their sale, it must return any of the
employer's negotiable securities still in its possession and any
remaining proceeds of their sale.
Sec. 703.311 Required reports; examination of self-insurer accounts.
(a) Upon the Office's request, each self-insurer must submit the
following reports:
(1) A certified financial statement of the self-insurer's assets
and liabilities, or a balance sheet.
(2) A sworn statement showing by classifications the payroll of
employees of the self-insurer who are engaged in employment within the
purview of the LHWCA or any of its extensions.
(3) A sworn statement covering the six-month period preceding the
date of such report, listing by compensation districts all death and
injury cases which have occurred during such period, together with a
report of the status of all outstanding claims showing the particulars
of each case.
(b) Whenever it considers necessary, the Office may inspect or
examine a self-insurer's books of account, records, and other papers to
verify any financial statement or other information the self-insurer
furnished to the Office in any report required by this section, or any
other section of the regulations in this part. The self-insurer must
permit the Office or its duly authorized representative to make the
inspection or examination. Alternatively, the Office may accept an
adequate report of a certified public accountant.
Sec. 703.312 Period of authorization as self-insurer.
(a) Self-insurance authorizations will remain in effect for so long
as the self-insurer complies with the requirements of the Act, the
regulations in this part, and OWCP.
(b) A self-insurer who has secured its liability by depositing an
indemnity bond with the Office will, on or about May 10 of each year,
receive from the Office a form for executing a bond that will continue
its self-insurance authorization. The submission of such bond, duly
executed in the amount indicated by the Office, will be deemed a
condition of the continuing authorization.
Sec. 703.313 Revocation of authorization to self-insure.
The Office may for good cause shown suspend or revoke the
authorization of any self-insurer. Failure by a self-insurer to comply
with any provision or requirement of law or of the regulations in this
part, or with any lawful order or communication of the Office, or the
failure or insolvency of the surety on its indemnity bond, or
impairment of financial responsibility of such self-insurer, shall be
deemed good cause for suspension or revocation.
Signed at Washington, DC, this 18th day of July, 2005.
Victoria A. Lipnic,
Assistant Secretary for Employment Standards.
[FR Doc. 05-14530 Filed 7-25-05; 8:45 am]
BILLING CODE 4510-CF-P
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