Board of Industrial Insurance Appeals

State of Washington

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Significant Decisions

See SELF-INSURANCE Insolvency of self-insured employer

If the terms of a bond require that the penal sum of the bond be forfeited to the Department when the self-insured employer becomes insolvent, the Department can require the entire bond be forfeited, notwithstanding the fact that there were no unpaid claims.  ….Great American Insurance Company, 09 22005 (2011)

[Editor's Note: The Board's decision was appealed to superior court under Thurston County Cause No. 11-2-00612-1.]

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IN RE: GREAT AMERICAN INSURANCE COMPANY	)	DOCKET NO . 09 22005
	)
FIRM NO. 706,182-00	)	DECISION AND ORDER
	)

APPEARANCES:

The firm, Great American Insurance Company, filed an appeal with the Board of Industrial Insurance Appeals on November 23, 2009, from an order of the Department of Labor and Industries dated July 29, 2009. In this order, the Department reaffirmed their formal demand made on July 9, 2009, that the penal sum of the bond, $250,000, be paid to the Department no later than August 21, 2009. The Department order is AFFIRMED.

DECISION

As provided by RCW 51.52.104 and RCW 51.52.106, this matter is before the Board for review and decision. The employer filed a timely Petition for Review of a Proposed Decision and Order issued on September 30, 2010, in which the industrial appeals judge affirmed the Department order dated July 29, 2009.

The Board has reviewed the evidentiary rulings in the record of proceedings and finds that no prejudicial error was committed. The rulings are affirmed. The question in this appeal is whether Great American Insurance Company is liable to the Department for the penal sum of $250,000. We agree with the decision reached by our industrial appeals judge in holding that GAIC is liable for the penal sum and we remand to the Department for action consistent with our opinion. We have granted review to explain more fully our reasoning.

There is no dispute regarding the facts material to a judgment in this case, which was appropriately decided on the motion for summary judgment filed by each party. [2]

The following documents were called to the attention of the Board before the motion for summary judgment was granted:

• Self-Insurer's Bond;

• Notice of Cancellation or Nonrenewal Great American Insurance Company;

• Letter dated July 9, 2009, from Larry Wilkinson to Great American Insurance Company;

• Letter dated July 16, 2009, from Larry Wilkinson to Jan D. Sokel;

• Letter dated July 13, 2009, from Jan D. Sokel to Larry Wilkinson;

• Letter dated July 22, 2009, from Jan D. Sokel to Larry Wilkinson;

• Notice of Bankruptcy Case Filling, United States Bankruptcy Court, District of Delaware;

• Order Converting Cases from Chapter 11 to Chapter 7 of the Bankruptcy Code;

• House Bill Report for HB 3061;

• Senate Bill Report for HB 3061; and

• Individual State Agency Fiscal Note for HB 3061.

Avado Brands as principal and Great American Insurance Company as surety, posted Self Insurer's Bond No. FS 133 97 14 in the penal sum of $250,000, effective March 7, 2005. The bond set out contractual obligations assumed by the principal and by the surety.

In early 2008, Avado Brands, Inc. (hereinafter Avado), filed for Chapter 11 bankruptcy. Shortly thereafter, on March 10, 2008, Great American Insurance Company, (hereinafter GAIC), notified the Department that the bond would terminate 30 days after the Department received the notice of termination. The action taken by the surety in terminating the bond, which was effective April 16, 2008, is authorized by RCW 51.14.040 and as well as by paragraph 11 of the bond. The Department did not take action against the bond at that time, noting that companies are able to reorganize under a Chapter 11 bankruptcy while remaining in business and meeting their financial obligations.

On April 20, 2009, the Chapter 11 bankruptcy was converted to a Chapter 7 bankruptcy. Avado had no remaining assets and the company was dissolved. It is undisputed that Avado had no open claims, no claims have been opened since, and no claim costs have been unsatisfied.

In a letter to GAIC dated July 9, 2009, from Larry J. Wilkinson, a Certification Service Manager for the Department of Labor and Industries, formal demand was made for the penal sum of the bond in the amount of $250,000 in accordance with the provisions of the bond. In correspondence with the Department, GAIC disputed their obligation to forfeit the penal sum. On July 29, 2009, the Department issued an Order and Notice to GAIC for the penal sum of the bond, citing as its authority RCW 51.14.020(2), which stipulates in part: "In the event of a default the self insurer loses all right and title to, any interest in, and any right to control the surety." The Order [3] and Notice reaffirmed the demand made on July 9, 2009, that the penal sum was to be paid no later than August 21, 2009. GAIC filed this appeal from the Department's demand, arguing that Avado is not in default because there have never been any uncompensated claim costs.

WAC 296-15-125(1) describes a default as occurring when a self-insured employer no longer provides benefits to its injured workers in accordance with Title 51 of the Revised Code of Washington. A default can be a voluntary action of the self-insured employer, or an action brought on by the employer's inability to pay the obligation. Similarly, Black's Law Dictionary 712 (7th ed. 1999), defines "default" as the "the omission or failure to perform a legal or contractual duty, especially the failure to pay a debt when due."

We are not convinced that a self-insured employer is in default as that term is contemplated by statute or is commonly used when, as here, there are no unpaid obligations when the discharge is granted and the company dissolved. We are convinced however, that under the terms of the bond, GAIC is obligated to the Department for the penal sum of the bond in the amount of $250,000. The Self-Insurer's Bond executed by Avado and GAIC and accepted by the Department of Labor and Industries, requires in the relevant portion of paragraph 6 of the bond, that if the principal becomes insolvent, the surety becomes liable to the Department of Labor and Industries to the extent of the bond without regard to any proceedings for liquidation of the principal.

On April 20, 2009, United States Bankruptcy Judge Mary F. Walrath, for the District of Delaware, granted the Debtor's Motion to Convert Cases from Chapter 11 to Chapter 7 of the Bankruptcy Code in Case No. 07-11276. Avado Brands, Inc., the principal, became insolvent no later than April 20, 2009, when that motion was granted.

The obligation of the surety as set forth in the bond is clear and unambiguous. Upon insolvency, the surety is liable to the Department to the extent of the bond.

Self-insured employers in the State of Washington are responsible for future costs of any claim that occurred during the time they held self-insured status and GAIC, as surety for Avado, is liable for those costs if Avado defaults on payment. It is not unusual for an injured worker to reopen a claim upon a showing of worsening, or for an occupational disease to be diagnosed well after exposure to the conditions that resulted in the disease. Because Avado no longer holds the status of a self-insured employer, is insolvent, and no longer in existence, the Department is responsible for administration of claims pursuant to RCW 51.14.060. The contractual obligation assumed by GAIC to surrender the penal sum of the bond to the Department if the principal became insolvent, is consistent with the Department's obligation to administer claims as necessary in the future. [4]

The Department is entitled to the penal sum of the bond in the amount of $250,000. The Order and Notice dated July 29, 2009, is correct and is affirmed.

FINDINGS OF FACT

1. The Department of Labor and Industries made a formal demand upon Great American Insurance Company (GAIC), as the surety for the principal, Avado Brands, Inc., in Bond No FS 133 97 14, for the penal sum of $250,000, by letter dated July 9, 2009. GAIC filed a Protest and Request for Reconsideration to the demand on July 28, 2009.

On July 29, 2009, the Department issued its Order and Notice in which it reaffirmed the demand of July 9, 2009, with payment of $250,000 due no later than August 21, 2009. On November 23, 2009, GAIC, filed a Notice of Appeal with the Board of Industrial Insurance Appeals from the July 29, 2009 Order and Notice. On December 23, 2009, January 4, 2010 and January 12, 2010, the Board issued Orders Extending Time to Act on Appeal for an Additional Ten Days. On January 12, 2010, the Board issued an Order Granting Appeal Subject to Proof of Timeliness.

2. On March 7, 2005, Avado Brands, Inc., as principal, and Great American Insurance Company, as surety, posted Self-Insurer's Bond No. FS 133 97 14 in the penal sum of $250,000, which was accepted by the Department of Labor and Industries on March 23, 2005.

3. Self-Insurer's Bond No. FS 133 97 14, paragraph 6, requires that if the principal shall become insolvent, the surety becomes liable to the Department of Labor and Industries to the extent of the bond without regard to any proceedings for the liquidation of the bond.

4. In early 2008, Avado Brands, Inc., filed for a Chapter 11 bankruptcy. On March 10, 2008, GAIC notified the Department that the bond would terminate 30 days after the notice of termination was received by the Department. That action was taken in accordance with RCW 51.14.040 and paragraph 11 of the bond. The bond terminated on April 16, 2008.

5. On April 20, 2009, the Honorable Mary F. Walrath, United States Bankruptcy Judge for the District of Delaware, granted the Debtor's Motion to Convert Cases from Chapter 11 to Chapter 7 of the Bankruptcy Code in Case No. 07-11276.

6. By letter dated July 9, 2009, to GAIC, Larry J. Wilkinson, Department of Labor and Industries Certification Services Manager Self-Insurance, notified GAIC that the Department had received notification from the Chapter 7 trustee, that Avado Brands would not be able to continue to provide any future benefits that might become due under its former self-insurance obligation and that in accordance with the provisions of the bond, formal demand was made for the entire penal sum of $250,000. The letter did not have language informing the recipient of a deadline for disputing the demand as required by RCW 51.52.050(1). [5]

7. On July 29, 2009, the Department issued its Order and Notice in which it demanded payment of the penal sum of the bond in the amount of $250,000, no later than August 21, 2009. The Order and Notice did not have language informing the recipient of a deadline for disputing the demand as required by RCW 51.52.050(1).

8. Avado has no open claims and no claim costs have been unsatisfied.

9. The pleadings, affidavits and exhibits submitted by each party in support of its motion for summary judgment, demonstrate there is no genuine issue as to any material fact.

CONCLUSIONS OF LAW

1. The Board of Industrial Insurance Appeals has jurisdiction over the parties and the subject matter of this appeal, which was timely filed.

2. The parties are entitled to a decision as a matter of law as contemplated by CR 56.

3. Avado Brands, Inc. became insolvent no later than July 20, 2009.

4. Pursuant to Self-Insurer's Bond No. FS 133 97 14, provision 6, GAIC is liable to the Department of Labor and Industries, for the penal sum of $250,000, when Avado Brands, Inc., became insolvent as a result of its bankruptcy action.

5. The Order and Notice issued by the Department of Labor and Industries on July 29, 2009, in which the Department demanded payment from Great American Insurance Company of the penal sum of $250,000 of Bond No. FS 133 97 14, is correct and is affirmed.

Dated: February 14, 2011.

 

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