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AUSTIN, Texas-Some Texas employers will receive sizable checks from insurers as their share of refunds from the state's workers compensation residual market if a proposed rule is adopted this week.

In its current form, the rule would require workers comp insurers to share residual market refunds with policyholders that bought retrospectively rated policies between May 1, 1991, and Dec. 31, 1994.

Insurers, however, are fighting refunds to policyholders, calling the measure unfair.

Texas Insurance Commissioner Elton Bomer is expected to decide Tuesday whether to adopt, reject or modify the rule proposed by the Workers' Compensation Division of the Texas Department of Insurance.

The Workers' Compensation Division was unable to say how much the rebates to policyholders might total, but a lawsuit filed to recover the charges from insurers said as much as $140 million could be owed.

"It's really speculation on anyone's part," said Scott M. Clearman, an attorney with McClanahan & Clearman L.L.P. in Houston. Mr. Clearman filed suit in state District Court in Travis County earlier this year on behalf of some Texas employers seeking the refunds.

Insurers received $718.5 million in refunds from the residual market for the years 1991 to 1994: $253.9 million for 1991, $315 million for 1992, $132.4 million for 1993 and $17.2 million for 1994.

Under the proposed rule, the Insurance Department would develop a formula to calculate the refunds to eligible employers.

Rules adopted in 1991 allowed insurers to charge retrospectively rated policyholders a factor for the assessments paid to cover deficits in the state's residual market, the Texas Workers' Compensation Insurance Facility. The charge was optional for part of 1991 and was mandatory from 1992 to 1994.

The residual market's deficit, however, turned to a surplus for the underwriting year 1991 following reforms of the state's workers compensation system. The residual market has reported a surplus for each underwriting year since then.

The state insurance code requires that the residual market return premiums and surplus to insurers for the years that it generates a surplus, according to Nancy Moore, deputy commissioner at the Texas Department of Insurance.

The Workers Compensation Division wants insurers to share with policyholders some of the $718.5 million returned to them. Since the policyholders would have been assessed additional premium had the fund suffered a deficit in those years, the policyholders should share in the refunds, the division says.

Insurers, however, contend that at least for the years 1991 and 1992 there should be no payments to retrospectively rated policyholders because the department had already barred the pass through of assessments or rebates for those years.

The department ordered that the factor for the residual market assessment for those years be zero, which insurers argue applies equally to shares of refunds as it does to assessments.

Risk managers that attended a hearing last week on the proposed rule "made it clear that they felt it was unfair that insurance carriers are keeping this money," said Frances C. Oliver, risk manager at Centex Corp. in Dallas.

Ms. Oliver said her employer, a residential and commercial construction company, is owed at least $100,000 in premium refunds.

"My position is that there can be no doubt in anybody's mind that if there had been a shortfall, the insurance companies would not have waited four or five years to get the authority to pass those assessments along," agreed James E. Green, risk manager at Fort Worth-based Justin Industries Inc.

Mr. Green said he believes it is "fair and appropriate that insurance companies provide pro-rata refunds with reasonable interest to those of us who were taking the risk on the other side" by agreeing to pay an assessment if deficits were recorded.

He said Justin probably is owed around $200,000 in refunds of residual market premiums.

Insurers claim adoption of the proposed rule in its current form is unfair and illegal.

To implement the rule would force undue hardship on Texas workers comp insurers and could throw the market into an availability crisis, John B. Lennes Jr., vp of the Alliance of American Insurers, said at last week's hearing.

"There is no basis, either in law or fact, for attempting to enact regulations that would undo a prior contract," Mr. Lennes said. "Adoption of the rule would violate sound public policy and applicable constitutional provisions."

"The Texas Department of Insurance should not attempt to change what was and is an equitable law and rule, reasonably applied to a crisis situation of multibillion-dollar deficits," Mr. Lennes noted. "It makes no sense to mandate returns of surplus from the same overall transaction which will surely show a net deficit."

"Insurers paid over $2 billion in deficit assessments to shore up the Texas workers compensation system," said Forrest C. Roan, Texas counsel for the American Insurance Assn. "They later got back $718 million in surplus rebates from the facility, but that still leaves insurance companies $1.285 billion in the hole" for the period 1985 to 1995.

The Texas Workers' Compensation Insurance Facility stopped writing coverage at the end of 1993 and is running off its business. It did show a surplus for 1994 for policies that expired in 1994.

It was replaced by the Texas Workers' Compensation Insurance Fund as the residual market in 1994.

Mr. Roan maintained that it would be inequitable to force insurers to share the refunds with policyholders.

"For businesses, getting these rebates would be a windfall," he testified. "For insurance companies that supported the Texas market in the bad times, it would be unfair."

The AIA, however, is not contesting payment of rebates to policyholders for 1993 and 1994, when insurers received $149.6 million from the facility.

Mr. Lennes said the Alliance has "taken a position that goes a little bit further" and is contesting refunds to policyholders from underwriting years 1993 and 1994.

It would be illegal to retroactively impair contracts written in 1993 and 1994 between insurers and policyholders and formed under rules in place at the time, he argued. The rules that allowed insurers to pass through losses did not address returning surpluses to policyholders through rebates, he said.

Mr. Roan asked the Insurance Department to give insurers a reasonable time to comply if rebates are ordered.

The proposed rule would require insurers to calculate and return the premiums to employers within 90 days of the rule's effective date. Insurers also would be required to send the department a report listing all employers that received a refund, the amount and date it was sent.