The Kentucky Workers’ Compensation Funding Commission (“Financing Commission”) recently announced that it will take regulatory and legislative action to improve transparency and provide clearer guidance to insurers in calculating compensation taxes. workers’ compensation premiums. The announcement came after a recent appeal decision by a Kentucky state court found that an audit decision and tax assessment by the Commission was arbitrary and incompatible with the laws in force.
The state’s lawsuit, as an appeal in an administrative proceeding, involved significant assessments imposed by the Funding Commission following an audit related to the calculation by a group of affiliated insurers of taxes on premiums on workers’ compensation policies with deductible provisions, as well as premium taxes related to certain policyholders’ federal black lung liability. These assessments were overturned in administrative proceedings by the Kentucky Claims Commission, and the Claims Commission’s decision was upheld by the Circuit Court of Franklin County, Kentucky. Kentucky Workers Compensation Funding Commission v. BrickStreet Mutual Insurance Company, et al, No. 20-CI-00306 (Franklin County, Ky Cir. Ct. Jan. 13, 2022). At its meeting on January 26, the Funding Committee decided not to appeal the court’s decision. He also announced efforts to pursue regulatory and legislative changes that apparently seek to address administrative process issues identified and challenged by insurers and upheld by the court ruling.
The court’s decision highlighted a lack of regulatory guidance and statutory authority supporting the Funding Commission’s audit methodology and tax assessment calculations, as well as the interplay of rate regulation and rating rules by another agency. With respect to deductible policies, for example, applicable laws require that premium taxes be calculated on “the premium that would have applied without a deductible”. KRS 342.122(3). The Funding Commission has interpreted this provision to mean that the premium basis should be based on the actual premium adjusted to simply add back any premium credit given for deductible policies, but disregarding any other discounts or credits would apply to no-deductible policies under the rate schedule filed by the insurer and rules filed with the Kentucky Department of Insurance (KDOI). However, no regulation or other official guidance document had defined the calculation methodology used by the Funding Commission. The court held that in the absence of a legally adopted regulation setting out this methodology, the Commission’s position was inconsistent with statutory language, and therefore arbitrary.
The court also rejected the Funding Commission’s imposition of additional taxes and penalties related to federal black lung benefits for certain companies that had purchased state workers’ compensation insurance policies, but who were self-insured under the federal black lung program. The Commission had argued that insurers initially failed to provide adequate proof of policyholders’ self-insured status and that Kentucky law required workers’ compensation insurers to provide coverage for any potential liability of its policyholders. But the court held that the applicable laws only required the payment of premium taxes for the premiums actually received by the insurer, and it was not disputed that the insurers had not received any premiums related to the benefits federal black lung.
The court’s decision involved both substantive administrative law and the primacy of regulation between the Funding Commission and the Kentucky DOI. Recent actions by the Funding Commission suggest that it is working to resolve the issues disputed by insurers and highlighted in the court’s opinion.