James E. Burbott, II, General Counsel
WesCorp Federal Credit Union
924 Overland Court
San Dimas, California 91 TT3-1750
Re: Participation in California Workers' Compensation Self Insured Group.
Dear Mr. Burbott:
You have informed us of your plans to join with five California state-chartered credit unions to form a Self Insured Group (SIG) to secure your workers' compensation (WC) obligations under California law. Based on your representations, and as discussed below, we believe it is permissible under the Federal Credit Union Act and National Credit Union Administration (NCUA) regulations for you to participate in the SIG.
California generally requires that entities organized or doing business in California provide their employees with WC coverage. Employers may satisfy this requirement in various ways, including purchasing insurance from a state-operated insurance fund; purchasing insurance from private insurers; or by self-insuring, either individually or in a SIG. With the state's approval, a group of entities may form a SIG by organizing and capitalizing a nonprofit California mutual benefit corporation. The corporation pools its capital and pays the WC claims made by the organizers' employees. If the corporation is unable to pay any WC claims, the organizers are jointly and severally liable for these claims. The organizers may purchase excess insurance to protect against unusual claims volume, and WesCorp plans to do so. WesCorp believes that it will save money on WC costs through this SIG approach.
A federal credit union (FCU) may, as part of its employee compensation package, offer various forms of insurance to its employees, including life, health, and disability. Generally, the FCU will purchase this insurance coverage from third-party insurance companies. As discussed in OGC opinion letter 95-1148, FCUs may assume some of this potential insurance liability, but only if the arrangement satisfies certain specified requirements, including the placement of limits on the FCU's liability risk through the purchase of sufficient excess insurance coverage. You represent that WesCorp will be protected by excess insurance coverage that limits its potential WC claims to $2,000,000 a year, and that the SIG arrangement otherwise satisfies the requirements of OGC opinion letter 95-1148.
As you recognized in your letter to us, the formation and funding of the mutual benefit corporation raises another issue. Section 107(7) of the Federal Credit Union Act provides that FCUs may invest in organizations which are associated with the routine operation of credit unions, but may not "invest in the shares, stocks, or obligations of an insurance company ... or any other similar organization ... except as otherwise expressly authorized by this Act." 12 U.S.C. §1757(7)(1). We refer to the investment authority in §107(7) as the "leeway provision." The statutory exceptions to the leeway provision, including the prohibition on investment in insurance companies, are restated in §704.11 (e) of the corporate rule. 12 C.F.R. §704.11(e).
In the enclosed OGC opinion letter from Timothy McCollum to Steve Bisker, dated April 21, 1988, we stated that the leeway provision's prohibition on investment would prevent an FCU from owning stock in a credit union service organization that owned stock in a life insurance underwriter. We recognized, however, that the acquisition of shares, stocks, or obligations in an insurance company would not be an investment subject to the prohibitions of the leeway provision "if the acquisition is a form of payment or is in substance a security deposit for obtaining [permissible services for the credit union]." Id. Similarly, and based on your representations, we do not believe that the funds WesCorp will provide to the mutual benefit corporation are an "investment" as that term is used in the leeway provision. WesCorp's intent in participating in the SIG is to obtain a service, that is, state-mandated WC coverage for its employees, in the most economical way possible. You state that the SIG will be organized so that WesCorp "cannot receive any dollar benefit [from its participation] greater than that which was contributed and/or paid on an annual basis." Since there is no possibility of any profit or positive return on WesCorp's contributions, in the form of dividends or interest in excess of WesCorp's contributions, its contributions to the SIG are not an investment subject to the leeway provision or §704.11 (e) of the corporate rule.
Sheila A. Albin
Associate General Counsel