[opinions/oagheade.htm]

OAG 93-18

February 23, 1993

Judge Armand Angelucci

Chairman of the Workers' Compensation Board

Perimeter Park West, Building C

1270 Louisville Road

Frankfort, Kentucky 40601

Dear Judge Angelucci:

You have asked whether the Uninsured Employers Fund may be considered liable for any workers compensation claims against South East Coal Company for the period July 6, 1986, to January 15, 1993. We conclude that liability may be asserted against the fund.

The Facts

Our understanding of the factual background for this question is based on documents that you supplied with your request. Those documents give a rather detailed history of South East Coal Company's relationship with the Workers' Compensation Board. The essential facts relevant to this question follow.

A Kentucky employer must maintain workers' compensation coverage in one of three ways: as a policyholder, as an individual self-insured, or as a self-insured group. KRS 342.340. Self-insurance, either as an individual or as a group, requires approval in the form of a certification from the Board. KRS 342.345. South East Coal Company was certified as an individual self-insured from February 1, 1976, to July 31, 1985. From August 1, 1985, until July 6, 1986, the company was a member of a certified self-insured group, the Miners' Self Insurance Fund.

Although Miners' Self Insurance Fund renewed its application for certification following the expiration of its certificate in 1986, the Board took no action on the application for several years. During this time South East Coal Company remained in business, employing approximately 1200 workers. The Board could not renew certification because of the company's precarious financial position, caused primarily by the possibility of an enormous judgment against South East in litigation with Kentucky Utilities. The Board was reluctant to deny certification, for that action could prompt the company to shut down and idle its workforce. South East was able to satisfy workers' claims as they arose during this period, so the Board continued to delay taking any action on the application, officially placing the company in “application pending” status.

Any prospect of South East's financial status improving so that it could receive certification vanished on August 25, 1992, when the Kentucky Supreme Court ruled against South East in the Kentucky Utilities suit. The company filed bankruptcy and its assets have been sold to DLX Corporation, which has obtained coverage through an assigned risk pool. The question that now arises is whether the Uninsured Employers' Fund may have any liability for worker claims from the period following South East's last day as a member of a certified self-insured group until the approval of coverage for South East's successor.

Analysis

The Uninsured Employers' Fund is a trust fund that exists “for the payment of compensation when there has been default in the payment of compensation due to the failure of an employer to secure payment of compensation as provided by this chapter.” KRS 342.760(4). That statute and the overall purpose of the UEF were discussed in Whitehead v. Davis, Ky., 692 S.W.2d 801 (1985). Because Whitehead v. Davis provides an analysis directly applicable to the situation that you have presented, we rely on it exclusively in forming our opinion.

The issue in Whitehead was whether the UEF was liable when a certified self-insurer became financially unable to pay claims. The court held unequivocally that the UEF may not be used “to guarantee payment of worker compensation benefits from defaulting employers, insolvent insurance companies, and underinsured employers. KRS 342.760 does not apply when an employer has satisfied KRS 342.340 by providing a workers' compensation insurance policy or by being certified by the board as a qualified, self-insured employer.” Id. at 803.

After describing how the UEF should not be used, the court described the circumstances in which the UEF is available to pay worker claims:

Of additional persuasion is the wording of KRS 342.770, which statute relates to the filing of a lien in favor of the Fund against the noncomplying employer, and the wording of KRS 342.790, relating to the amount of the award. KRS 342.770, in applicable part, reads:

(1) Upon the filing of a claim the director shall ascertain whether the employer. . . . has secured [meaning insured] payment of compensation by either securing [meaning obtaining] insurance coverage or qualifying as a self-insurer pursuant to KRS 342.340. Upon determination that any employer has failed to comply with the provisions of KRS 342.340, the director shall. . . . . .

Thus it is obvious that the liability of the Uninsured Employers' Fund arises from failure of the employer to comply, not from the failure to pay. . . .

Id. (Brackets in original.) Thus, liability of the fund is invoked when an employer “has failed to comply with KRS 342.340.”

There is no question that during the period in question South East Coal Company failed to comply with KRS 342.340: it did not obtain coverage through insurance, it was not a certified self-insurer, and it was not a member of a certified self-insured group. It was an uninsured employer. Under the terms of the Whitehead case, and the plain language of KRS 342.760, the Uninsured Employers' Fund may be available to pay claims against the uninsured employer South East Coal Company.

Conclusion

We conclude that South East Coal Company failed to comply with KRS 342.340 from July 6, 1986, to January 15, 1993, and consequently claims made against it for that period may be payable through the Uninsured Employers' Fund.

Sincerely,

Chris Gorman

Attorney General

Ross T. Carter

Assistant Attorney General