Titles of Regulations: 14VAC5-360. Rules Governing Local Government Group Self-Insurance Pools (amending 14VAC5-360-10 through 14VAC5-360-160, 14VAC5-360-180, 14VAC5-360-190; adding 14VAC5-360-45).

14VAC5-370. Rules Governing Group Self-Insurers of Liability Under the Virginia Workers Compensation Act (amending 14VAC5-370-10 through 14VAC5-370-150, 14VAC5-370-170, 14VAC5-370-180; adding 14VAC5-370-145).

Statutory Authority: §§ 12.1-13 and 38.2-223 of the Code of Virginia.

Public Hearing Information: A public hearing will be scheduled upon request.

Public Comment Deadline: February 1, 2010.

Agency Contact: Raquel C. Pino-Moreno, Principal Insurance Analyst, Bureau of Insurance, State Corporation Commission, P.O. Box 1157, Richmond, VA 23218, telephone (804) 371-9499, FAX (804) 371-9511, or email raquel.pino-moreno@scc.virginia.gov.

Summary:

The proposed amendments provide for the merger of group self-insurance associations, consisting solely of political subdivisions, into local government group self-insurance pools. The proposed revisions are necessary due to Chapter 336 of the 2009 Acts of Assembly, which amended §§ 15.2-2703, 65.2-801 and 65.2-1203 of the Code of Virginia, relating to the merger of group self-insurance associations into local government group self-insurance pools.

AT RICHMOND, DECEMBER 17, 2009

COMMONWEALTH OF VIRGINIA

At the relation of the

STATE CORPORATION COMMISSION

CASE NO. INS-2009-00273

Ex Parte: In the matter of Adopting
Amendments to the Rules Governing Local
Government Group Self-Insurance Pools and
the Rules Governing Group Self-Insurers of Liability
Under the Virginia Workers' Compensation Act

ORDER TO TAKE NOTICE

Section 12.1-13 of the Code of Virginia ("Code") provides that the State Corporation Commission ("Commission") shall have the power to promulgate rules and regulations in the enforcement and administration of all laws within its jurisdiction. Section 38.2-223 of the Code provides that the Commission may issue any rules and regulations necessary or appropriate for the administration and enforcement of Title 38.2 of the Code. The regulations issued by the Commission pursuant to § 38.2-223 of the Code are set forth in Title 14 of the Virginia Administrative Code.

The Bureau of Insurance ("Bureau") has submitted to the Commission proposed amendments to the regulations set forth in Chapters 360 and 370 of Title 14 of the Virginia Administrative Code, entitled "Rules Governing Local Government Group Self-Insurance Pools" and "Rules Governing Group Self-Insurers of Liability Under the Virginia Workers' Compensation Act," respectively. The proposed amendments are necessary due to the passage of House Bill 1756 during the 2009 General Assembly Session, which provides for the merger of group self-insurance associations consisting solely of political subdivisions into local government group self-insurance pools.

The Commission is of the opinion that the proposed amendments submitted by the Bureau should be considered for adoption with an effective date of February 19, 2010.

Accordingly, IT IS ORDERED THAT:

(1) The proposed amendments to the regulations entitled "Rules Governing Local Government Group Self-Insurance Pools" and "Rules Governing Group Self-Insurers of Liability Under the Virginia Workers' Compensation Act," which amend the regulations at 14 VAC 5-360-10 through 14 VAC 5-360-160, 14 VAC 5-360-180, 14 VAC 5-360-190, 14 VAC 5-370-10 through 14 VAC 5-370-150, 14 VAC 5-370-170, and 14 VAC 5-370-180, be attached hereto and made a part hereof.

(2) All interested persons who desire to comment or request a hearing on the proposed amendments to the regulations shall file such comments or hearing requests on or before February 1, 2010, in writing, with Joel H. Peck, Clerk, State Corporation Commission, c/o Document Control Center, 1300 East Main Street, 1st Floor, Richmond, Virginia 23219, and shall refer to Case No. INS-2009-00273. Interested persons desiring to submit comments electronically may do so by following the instructions available at the Commission's website: http://www.scc.virginia.gov/case.

(3) If no written request for a hearing on the proposed amendments to the regulations is filed on or before February 1, 2010, the Commission, upon consideration of any comments submitted in support of or in opposition to the proposed amendments to the regulations, may adopt the proposed amendments to the regulations as submitted by the Bureau.

(4) The Commission's Division of Information Resources shall cause a copy of this Order, together with the proposed amendments to the regulations, to be forwarded to the Virginia Registrar of the Regulations for appropriate publication in the Virginia Register of Regulations and shall make this Order and the attached proposed amendments to the regulations available on the Commission's website, http://www.scc.virginia.gov/case.

(5) AN ATTESTED COPY hereof, together with a copy of the proposed amended regulations, shall be sent by the Clerk of the Commission to the Bureau in care of Deputy Commissioner Douglas C. Stolte, who shall mail a copy of this Order, together with the proposed amended regulations, to all licensed group self-insurance associations, local government group self-insurance pools and other interested parties designated by the Bureau.

(6) The Bureau shall file with the Clerk of the Commission an affidavit of compliance with the notice requirements of paragraph (5) above.

14VAC5-360-10. Purpose.

The purpose of this chapter is to set forth rules, forms and procedural requirements that the Commission commission deems necessary for the approval and monitoring of pools created pursuant to Local Government Group Self-Insurance Pools, Chapter 11.1 (§ 15.1-503.4:1 et seq.) 27 (§ 15.2-2700 et seq.) of Title 15.1 15.2 of the Code of Virginia.

14VAC5-360-20. Definitions.

"Act" means Chapter 11.1 (§ 15.1-503.4:1 et seq.) 27 (§ 15.2-2700 et seq.) of Title 15.1 15.2 of the Code of Virginia.

"Actuary," for coverages other than group life, accident and health, means a person who is a member of the American Academy of Actuaries qualified in loss reserves and rate making according to professional guides, recommendations, interpretations, and opinions of the Academy, or a member of the Casualty Actuarial Society. For group life, accident and health coverages, "actuary," means a person who is a member of the American Academy of Actuaries qualified in group life, accident and health reserves or a fellow of the Society of Actuaries.

"Administrator" means the individual, partnership, corporation or other entity authorized to serve as a representative of a pool and its members in carrying out the policies of the board and managing the pool's activities.

"Commission" means the State Corporation Commission.

"Contribution" means the amount of payments required of each member in order to fund the pool's obligations under the Plan plan.

"Group self-insurance pool" or "pool" means a pool organized by two or more political subdivisions for the purpose of forming a group self-insurance pool to provide for joint or cooperative action relative to their financial and administrative resources for the purpose of providing to the participating political subdivisions risk management and liability insurance coverage for pool members and employees of pool members for acts or omissions arising out of the scope of their employment, including any or all of the following:

1. Casualty insurance, including workers' compensation under the Virginia Workers' Compensation Act (§ 65.2-100 et seq. of the Code of Virginia), employers' liability, general and, professional and public officials liability coverage; but not including group self-insurers of liability under the Virginia Workers' Compensation Act;

2. Property insurance, including marine insurance and inland marine and transportation insurance coverage;

3. Group life, accident and health coverages including hospital, medical, surgical and dental benefits to the employees of member political subdivisions and their dependents;

4. Automobile insurance, including motor vehicle liability insurance coverage and collision and security for motor vehicles owned or operated, as required by Title 46.1 46.2 of the Code of Virginia, and protection against other liability and loss associated with the ownership and use of motor vehicles;

5. Surety and fidelity insurance coverage; and

6. Umbrella and excess insurance coverages.

"Insolvent" means (i) the condition of a pool that has liabilities in excess of assets or (ii) the inability of a pool to pay its obligations as they become due in the usual course of business.

"Member" means a political subdivision which has entered into a member agreement and thereby becomes a member in a group self-insurance pool.

"Member agreement" means the written agreement executed between each member and the pool which sets forth the conditions of membership in the pool, the obligations, if any, of each member to the other members and the terms, coverages, limits, and deductibles of the Plan plan.

"Members' supervisory board" or "board" means the governing authority of the pool selected by the members to be responsible for fixing contributions to the pool, maintaining reserves, levying and collecting assessments for deficiencies, disposing of surpluses, and administration of the pool in the event of termination or insolvency.

"Plan" means the plan of self-insurance offered by the pool to its members as specifically designated in the member agreement.

"Political subdivision" means any county, city, or town, school board, transportation district commission, or any other local governmental authority or local agency or public service corporation owned, operated or controlled by a locality or local government authority, with power to enter into contractual undertakings.

"Service agent" means any individual, partnership, corporation or other entity that may provide any or all of the insurance services including, but not limited to, claims adjustment, safety engineering, compilation of statistics, the preparation of contribution payments, loss reports, and other required self-insurance reports, and the administration of a claims fund.

14VAC5-360-30. Application for license as group self-insurance pool; requirements; approval; review.

A. Two or more political subdivisions may be licensed by the Commission commission as a group self-insurance pool for the purpose of entering into agreements to pool their liabilities under the Act. The application for a license shall be made on a form prescribed by the Commission commission and shall contain answers to all questions and shall be verified by the oath or affidavit of at least one member of the board of the pool, and the administrator.

B. The Commission commission may disapprove an application for the formation of a group self-insurance pool and may suspend or withdraw approval whenever it finds that applicant or pool:

1. Has refused to submit its books, papers, accounts, or affairs to the reasonable inspection of the Commission commission or its representative;

2. Has refused, or its officers or agents have refused, to furnish satisfactory evidence of its financial and business standing or solvency;

3. Is insolvent, or is in such condition that its further transaction of business in this Commonwealth is hazardous to its members and creditors in this Commonwealth, and to the public;

4. Has refused or neglected to pay a valid final judgment against it within 60 days after its rendition;

5. Has violated any law of this Commonwealth or has violated or exceeded the powers granted by its members;

6. Has failed to pay any fees, taxes or charges imposed in this Commonwealth within 60 days after they are due and payable, or within 60 days after final disposition of any legal contest with respect to liability therefor; or

7. Has been found insolvent by a court of any other state, or by the insurance commissioner or other proper officer or agency of any other state, and has been prohibited from doing business in such state.

C. If after review of the pool's application and other additional information required by this chapter, the Commission commission is satisfied that the pool's financial condition and method of operation are such that the pool may reasonably be expected to meet the obligations which it has undertaken, and has fully disclosed to its members or potential members the coverages and obligations of membership in the plan, then the Commission commission shall issue a license to the pool. The Commission commission shall act on the application as promptly as practical under the existing circumstances.

D. If the Commission commission rejects the pool's application, notice shall be served personally, or by certified or registered mail, upon all interested parties stating the reason for the rejection. The pool shall be provided an opportunity to introduce evidence and be heard in a hearing convened within a timely manner. Such hearing may be formal or informal.

14VAC5-360-40. Application for license; additional requirements.

A. An application submitted by a pool shall be accompanied by the following items which shall be subject to the approval of the Commission commission:

1. A copy of the articles of incorporation, constitution, or other instrument which sets forth the powers of the pool.

2. A copy of the bylaws or the governing rules of the proposed pool which may be included as part of the documents provided pursuant to subdivision 1 above of this subsection.

3. A copy of the forms used for the member agreement and power of attorney, if any.

4. A copy of the forms used for the indemnity agreement and power of attorney, if any.

5. A copy of a financial plan which sets forth in general terms:

a. The insurance coverages to be offered by the group self-insurance pool, applicable deductible levels, and the maximum liability which the pool will retain;

b. The amount of reserves to be set aside for the payment of claims;

c. The amount, if any, of specific excess insurance to be purchased by the pool; and

d. The amount, if any, of aggregate excess insurance coverage to be purchased and maintained.

Such items may be contained in other documents submitted to the Commission commission in lieu of inclusion in a financial plan.

5. 6. A copy of a plan of management which provides for all of the following:

a. The means of establishing the governing authority of the pool;

b. The responsibility of the governing authority for fixing contributions to the pool, maintaining reserves, levying and collecting assessments for deficiencies, disposing of surpluses, and administration of the pool in the event of termination or insolvency;

c. The basis upon which new members may be admitted to, and existing members may leave, the pool;

d. The identification of reserves by exposure areas; and

e. Such other provisions as are necessary or desirable for the operation of the pool.

Such items may be contained in other documents in lieu of inclusion in a plan of management.

6. 7. Designation of the initial or interim board and the administrator, together with pertinent biographical information for each member of the board and for the administrator or the principal officers of the corporation serving as administrator. This information is to be submitted on a form prescribed by the Commission commission.

7. 8. The address in this Commonwealth where the books and records of the pool will be maintained at all times.

8. 9. Information showing that the pool has, within its own organization or by contract with an approved service agent, ample facilities and competent personnel to service its program with respect to underwriting matters, compilation of statistics, loss prevention, safety engineering and claims adjusting. Copies of all executed service agreements shall be filed with the Commission commission.

9. 10. A confirmation of a fidelity bond covering the administrator and its employees in a form and amount acceptable to the Commission commission.

10. 11. A projection of administrative expenses for the first year of operation in an amount and as a percentage of the estimated annual contributions.

11. 12. Proof of payment of contributions by members of at least $250,000 25% of its estimated first year's contribution into a designated depository. This amount shall not be less than $250,000.

13. The application shall be accompanied by any other information the commission requires.

B. An application submitted by a group self-insurance pool shall be accompanied by a composite listing of the estimated annual gross contributions to be developed by each organizing member of the pool individually and in the aggregate for the pool. The aggregate amount of annual contributions must be at least $500,000 $ 1 million unless otherwise approved by the Commission commission.

C. Any subsequent revisions to items submitted under the provisions of 14VAC5-360-30 and 14VAC5-360-40 of this chapter shall be filed with and subject to approval by the Commission commission.

14VAC5-360-45. Security deposit requirement.

Each pool licensed by the commission to offer workers compensation shall maintain with the State Treasurer a security deposit of acceptable securities in an amount of $250,000 for the first plan year, or such other amount as the commission prescribes, and for succeeding plan years such amount as the commission deems reasonable taking into account the financial condition of the association and any excess insurance carried by the association. The commission may, from time to time, increase, release, or reduce the security deposit or surety bond requirement. The security deposit shall be subject to the provisions of Article 7 (§ 38.2-1045 et seq.) of Chapter 10 of Title 38.2 of the Code of Virginia.

For the purposes of this chapter, acceptable securities shall be (i) investments allowed by § 2.2-4500 of the Code of Virginia (legal investments for public sinking funds) and § 2.2-4501 of the Code of Virginia (legal investments for other public funds); (ii) securities issued by states, other than Virginia, and their municipalities or political subdivisions rated A or better by Moody's Investors Services, Inc., or Standard and Poor's, Inc.; (iii) revenue bonds rated Aa (AA) or better by Moody's Investors Services, Inc., or Standard and Poor's, Inc. that are bonds issued by municipalities or political subdivisions of this Commonwealth or any other state; (iv) securities issued by the Federal Home Loan Banks; and (v) securities issued by the Federal Intermediate Credit Banks.

14VAC5-360-50. Investments.

The board of a pool may, in its discretion, invest funds in any type of investments authorized by §§ 38.2-14115 38.2-1415, 38.2-1418, 38.2-1419, 38.2-1421, and 38.2-1432 of the Code of Virginia. Investments may also include (i) investments allowed by § 2.1-327 § 2.2-4500 of the Code of Virginia (legal investments for public sinking funds) and § 2.1-328 § 2.2-4501 of the Code of Virginia (legal investments for other public funds), (ii) securities issued by states, other than Virginia, and their municipalities or political subdivisions rated A or better by Moody's Investors Services, Inc., or Standard and Poor's, Inc., (iii) revenue bonds rated Aa (AA) or better by Moody's Investors Services, Inc., or Standard and Poor's, Inc. that are bonds issued by municipalities or political subdivisions of this Commonwealth or any other state, (iv) securities issued by the Federal Home Loan Banks, and (v) securities issued by the Federal Intermediate Credit Banks. Other investments may be made subject to the approval of the Commission commission. All such investments shall be authorized or approved by the board in the manner contemplated by the provisions of § 38.2-1408 of the Code of Virginia.

14VAC5-360-60. Filing of reports; examination by Commission commission.

A. Each pool shall file annually with the Commission commission and with the members of the pool within 120 days six months after the end of the pool's fiscal year, audited financial statements reports for the most recently completed fiscal year certified by an independent certified public accountant. The financial statement report shall be considered filed on the date the statement report was sent by mail as shown by the postmark. If the pool fails to file such audited financial statements reports, the Commission commission may perform the audit and the pool shall reimburse the Commission commission for such cost.

1. The audited financial statement report shall contain a report in detail of the pool's assets, outstanding liabilities, including the amount of claims paid to date and current reserves for losses, revenues and disbursements during the year, the investments of the pool's assets and all other information which the Commission commission may deem necessary to secure a full and accurate knowledge of the financial affairs and condition of the pool. The working papers of the certified public accountant and other records pertaining to the preparation of the audited financial statements reports may be reviewed by the Commission commission.

2. The audited financial statement report shall be signed on behalf of the pool by two duly authorized officers or a duly authorized officer and the administrator.

3. The Commission commission shall also devise a uniform accounting system to be used by the pool.

4. In addition to the annual audited financial statement report, the Commission commission may require any pool to file additional financial information, including interim financial reports and additional reports, exhibits or statements considered necessary to secure complete information concerning the condition, solvency, experience, transactions or affairs of the pool. The Commission commission shall establish reasonable deadlines for filing these additional reports, exhibits or statements and may require verification as the Commission commission shall designate.

B. The pool must retain and have available for examination by the Commission commission:

1. All executed copies of the application of each political subdivision for membership in the pool; and

2. A certified copy of each political subdivision's resolution authorizing membership in the pool.

C. Any person who knowingly or willfully makes or files any false or fraudulent statement, report or other instrument shall be charged with a Class 5 felony. If convicted, such person shall be guilty of a Class 5 felony.

D. The Commission commission may examine the affairs, transactions, accounts, records, and assets of the pool as often as it deems necessary. The manner and frequency in which the examination of financial condition shall be conducted and the release of any reports of financial condition shall be as provided in Article 4 (§ 38.2-1317 et seq.) of Chapter 13 of Title 38.2 of the Code of Virginia.

14VAC5-360-70. Reserves.

A. Every pool shall calculate the amount reasonably determined to be sufficient to provide for the payment of every loss or claim whether reported or unreported, arising on or prior to the date of any annual or other statement report and it shall maintain a reserve liability in an amount estimated in the aggregate to provide for the payment of all such losses or claims and any expenses related thereto.

B. Each pool shall maintain reserves equal to the unearned portion of the gross contribution or assessment, if any, on unexpired or unterminated risks.

C. Reserves for coverages based on life expectancy shall be computed according to tables of mortality and rates of interest prescribed in Title 38.2 of the Code of Virginia. The pool shall maintain an active life reserve for accident and health coverages which shall place a sound value on its liabilities under such risks and shall not be less in the aggregate than the pro rata gross unearned contributions for such coverages.

D. Every pool may receive credit for insurance or reinsurance recoverable from an insurance company licensed to transact such insurance in this Commonwealth, or any state of the United States or the District of Columbia and meeting the standards of solvency at least equal to those required in this Commonwealth. A pool may receive credit for insurance or reinsurance with any other insurer to the extent that funds are withheld as security for the payment of obligations thereunder if such funds are held subject to withdrawal by and are under the control of the pool. Such funds may include letters of credit subject to the approval of the Commission commission. Credit may be received for insurance or reinsurance recoverable on the basis of an agreement entered into with individual unincorporated underwriters having a trusteed surplus of at least $100,000,000.

E. Credit may be received for insurance or reinsurance when the contract is:

1. Not cancellable or terminable for any reason except upon not less than 60 days written notice sent by registered or certified mail to (i) the pool and (ii) the Commission commission;

2. Automatically renewable at the expiration of the policy period except upon 60 days written notice sent by registered or certified mail to (i) the pool, and (ii) the Commission commission.

F. No more than one pool, which shall be defined as the named insured, shall be covered by any contract or policy of excess liability insurance. Any contract of insurance or reinsurance shall be payable by the assuming insurer on the basis of the liability of the pool under the contract or contracts assumed without diminution because of the insolvency of the pool.

G. Copies of the complete contracts or policies of insurance or reinsurance, with all endorsements thereto entered into by the pool for the benefit of the pool, shall be filed with the Commission commission.

H. No pool shall expose itself to any loss on any one risk or hazard in an amount exceeding 10% of the aggregate annual contribution, unless authorized by the Commission commission.

14VAC5-360-80. Responsibilities of members' supervisory board.

A. The members' supervisory board shall be responsible for holding and managing the assets of and directing the affairs of the pool and shall be elected in the manner prescribed by the pool's governing instruments. At least a majority of the board must shall be members of the pool, but a board member shall not be an owner, officer or employee of any service agent, its parent or any of its affiliated companies, under contract with the pool.

B. The board shall fix contributions to the pool and supervise the finances of the pool and the pool's operations to the extent necessary to assure conformity with law, this chapter, the member agreement, and the pool's governing instruments.

C. The board shall take all necessary precautions to safeguard the assets of the pool, including, but not limited to, the following:

1. Doing all acts necessary to assure that each member continues to be able to fulfill the obligations of membership; and also reporting promptly to the Commission commission any grounds or change in circumstances which may affect the pool's ability to meet its obligations such as withdrawal of a member;

2. Designating an administrator to administer the affairs of the pool, to carry out the policies established by the board and to provide day to day management of the pool. The administrator shall furnish a fidelity bond in an amount sufficient to protect the pool against the misappropriation or misuse of any monies or securities. Evidence of the bond shall be filed with the Commission commission, said bond being one of the conditions required for licensing of the pool. The administrator shall not be an owner, officer or employee of any service agent, its parent or any of its affiliated companies, any of which are under contract with the pool;

3. Retaining control of all monies collected for the pool and the disbursement of such monies by the pool. All assets of the pool shall remain in the custody of the board or the authorized administrator. However, a claims fund for payment of benefits due and other related expenses may be established for the use of any authorized service agent; and

4. Actively collecting delinquent accounts resulting from any past due contributions by members. Any member of a pool who fails to make the required contributions after due notice may be declared ineligible for the self-insurance privilege until this past due account, including cost of collection, has been paid or adequately provided for.

D. The board shall assure that, for workers' compensation liability, payroll verifications of all members of the pools are completed within 180 days after the close of a plan year and the board shall require that efforts are made to collect any additional amounts due within 30 days of the completion of each audit.

E. Neither the board nor the administrator shall use any of the monies collected for any purpose unrelated to securing the members' liability or other rights and obligations under the member agreement and any administrative or other necessary expenses of the pool. Further, the board shall be prohibited from borrowing any monies from the pool or in the name of the pool without advising the Commission commission of the nature and purpose of the loan and obtaining the Commission's commission's approval.

E. F. The board may dispose of any surplus as provided in 14VAC5-360-100 hereof.

F. G. The board shall assure that the office of the administrator of the pool and all pertinent records necessary to verify the accuracy and completeness of all reports submitted to the Commission commission are maintained within this Commonwealth.

G. H. The board may adopt its own rules and procedures as considered necessary for the operation of the pool provided these rules and procedures are not inconsistent with the Act and this chapter.

H. I. The board may designate a service agent or agents.

14VAC5-360-90. Contribution requirements.

A. For the purpose of funding the liability of a pool the members shall make contributions to the pool in the manner prescribed in the member agreement.

B. For the purpose of funding the workers' compensation liability of a pool, the members shall make contributions to the pool based on annual payrolls for all employees of each member using rates and stock or nonstock discounts as adopted by the board and approved by the commission. The rates to be used are those in effect as of the inception of each pool's fiscal year. A plan that allows for consideration of past experience in developing a factor to be applied to a member's contribution may be used provided this plan has been approved by the commission.

Nothing contained herein shall be construed to prevent a pool from filing with the commission its own rates or a deviation from these rates or an alternative method of determining contributions that may be used upon approval by the commission.

C. At the effective date of a pool's license, $250,000 shall have been paid into a designated depository. The balance of the first year's contributions shall be paid no later than the end of the ninth month of the pool's fiscal year, either in quarterly or monthly installments at the discretion of the board. For each subsequent year of operation of the pool, the payment schedule shall provide for annual or periodic payments in intervals no more frequently than once a month, at the discretion of the board.

C. D. Each pool shall file with the Commission commission the basis for establishing the annual contributions of its members. Such contributions must be based on reasonable assumptions and certified by an actuary or other person satisfactory to the Commission commission as to the sufficiency of such contributions. This subsection shall not apply to a pool's workers' compensation business.

D. E. The total amount of each member's annual contribution to the pool shall be certified by the board to the governing body of each member at least one month prior to the beginning of the next fiscal year, if practical.

E. F. Each pool may levy upon its members an additional assessment whenever needed to supplement the pool's surplus to assure payment of its obligations. A member may be assessed for any fiscal year during which the member participated in the pool. Such assessment may be made after the end of the pool's fiscal year and after the member has discontinued membership in the pool.

1. The pool may assess each participating member an additional proportionate amount, as provided in the pool's member agreement or as provided in the pool's plan filed with the Commission commission to correct a deficit condition.

2. The board shall submit to the Commission commission a report of the causes of the pool's insufficiency, the assessments necessary to replenish it and the steps taken to prevent a recurrence of such circumstances.

14VAC5-360-100. Distribution of surplus funds.

Any surplus accumulated within a pool's fiscal year, as determined from the annual audited financial statement report, may be declared refundable by the board. No distribution of the surplus funds shall be made earlier than 12 months following the end of the pool's fiscal year for which a surplus was declared. Such distribution shall not be made until certified by an actuary and the plan has been filed with the Commission commission.

Surplus accumulated within a pool's fiscal year shall be used exclusively for the benefit of those members belonging to the pool during that year. The accounting for each pool's fiscal year shall be separate for each year.

Notwithstanding the foregoing paragraph, the Commission commission may require, and shall permit upon application of the pool that does not write workers' compensation, that 5.0%, or such greater an amount as the board may elect, of a pool's surplus accumulated within a fiscal year be allocated to a restricted surplus account at the end of that year. The restricted surplus is to be used at the direction of the pool's board subject to the approval of the Commission commission.

However, for pools that have been merged into by a group self-insurance association consisting solely of political subdivisions licensed pursuant to § 65.2-802 of the Code of Virginia, the commission shall require that 1.0% or more of a pool's earned contributions for each fiscal accounting period be allocated to a contingency reserve. The contingency reserve is to be used at the direction of the pool's board subject to the approval of the commission. When the commission is satisfied that the contingency reserve is adequate for the needs of the pool, adjustments may be made by the commission as necessary to the contingency reserve or to contributions to the contingency reserve to maintain it at an established amount.

14VAC5-360-110. Member agreement.

A. Every member of a group self-insurance pool shall execute a member agreement which shall set forth the rights, privileges and obligations of the member, and the terms, coverages, limits, and deductibles of the Plan plan. This agreement shall be subject to the approval of the Commission commission and shall provide for, in substance, the following:

1. Election by pool members of a governing authority for the pool, a majority of whom shall be elected or appointed officials of pool members;

2. A requirement that the members' supervisory board designate and appoint an administrator empowered to accept service of process on behalf of the pool and authorized to act for and bind the pool and members in all transactions relating to or arising out of the operation of the pool;

3. The right of substitution of the administrator and revocation of the power of attorney and rights thereunder;

4. A financial plan or plan of risk management which is further described in 14VAC5-360-40 A 4 of this chapter 5;

5. A management plan which is further described in 14VAC5-360-40 A 5 of this chapter 6;

6. A requirement that the pool, at the request of a member, provide without unreasonable delay, to any person designated by the member, proof of the coverages provided by the pool, including any insurance or reinsurance, applicable deductible levels and the maximum liability which the pool will retain; and

7. For group life, accident and health coverages, a requirement that the pool provide to each covered pool member and to employees of pool members a certificate setting forth (i) the coverage, including any limitations, reductions and exclusions applicable to the coverage provided; (ii) to whom benefits are payable; and (iii) any family member or dependent's coverage.

Such member agreement may also contain such other provisions not inconsistent with law or this chapter.

B. The first page of the member agreement shall include a summary that shall disclose:

1. In regard to coverage:

a. The coverages provided;

b. The period of the coverage;

c. The amount of the deductible, if any, per claim or in the aggregate; and

d. For each coverage, the maximum amount of coverage to be borne by the pool.

2. In regard to the contribution:

a. The contribution and dates payments are due for the political subdivision to become a member of the pool;

b. The basis upon which each member's contribution is determined; and

c. Whether any additional assessments of the members may be made.

3. In regard to excess coverage of the pool: 'a. A description of the excess coverage for the pool as to its coverage per occurrence, coverage per occurrence per person, if appropriate, and in the aggregate for each coverage offered; and

b. A statement that there is no excess coverage for the pool if the pool has not obtained such coverage.

4. The name of the proposed service agent.

C. The member agreement shall include a prominent disclosure notice that must be signed by a duly authorized officer of the political subdivision. The disclosure notice shall use the following or substantially similar language:

A local government group self-insurance pool is not protected by any Virginia insurance guaranty association against default due to insolvency. In the event of insolvency, members and persons filing claims against members may be unable to collect any amount owed to them by the pool regardless of the terms of the member agreement. In the event the pool is in a deficit position, a member may be liable for any and all unpaid claims against such member.

With regards to workers' compensation liability, each member agrees to assume and discharge, jointly and severally, any liability under the Virginia Workers' Compensation Act of any and all employers party to such agreement and which provides that, in addition to the rights of the pool, in the event of failure of the pool to enforce such rights after reasonable notice to the pool, the commission shall have the right independently to enforce on behalf of the pool the joint and several liability of its members under the Virginia Workers' Compensation Act and the liability of members for any unpaid contributions and assessments.

The member agreement may also contain such other provisions not inconsistent with law or this chapter.

14VAC5-360-120. Servicing of pool.

A. A service agent for a licensed group self-insurance pool shall apply for and shall be subject to the approval of the Commission commission before entering into a contract with a pool and shall satisfy to the Commission commission that it has adequate facilities and competent personnel to fulfill its obligations to the pool and this chapter.

B. A service agent shall maintain a resident agent in this Commonwealth and that agent shall be authorized to act for the service agent on any and all matters covered by the service agreement. All books and records relating to the servicing of the pool shall be maintained in Virginia.

C. A service agent shall file with the Commission commission copies of all contracts entered into with the pool as they relate to the services to be performed. The service contract must state that the service agent agrees to handle all claims covered by the service agreement incurred during the contract period to their conclusion without additional compensation unless approval to transfer them is obtained from the Commission commission prior to such transfer.

D. The service agent shall furnish a fidelity bond covering its employees in an amount sufficient to protect all monies placed in the claims fund.

E. Upon satisfactory compliance with the above provisions, a certificate of approval as a recognized and authorized service agent shall be issued to the applicant. Failure to comply with any of the foregoing rules or any order of the Commission commission within the time prescribed shall be considered justification for withdrawing the certificate of approval. The Commission commission shall give 10 days prior notice of such withdrawal. The notice shall be served personally, or by certified or registered mail, upon all interested parties setting forth the reasons for withdrawal, and providing the service agent an opportunity to introduce evidence and be heard. If, after a hearing, which may be formal or informal, the service agent's certificate of approval is revoked this revocation shall become effective 30 days after issuance of the Commission's commission's order or within such shorter or longer period as the Commission commission may consider necessary to protect the interests of the pool, its members and their employees.

F. Each individual, partnership, corporation or other entity approved to act as a service agent for a pool may be required to file with the Commission commission an annual statement of financial condition within four months of the completion of its fiscal year.

G. The pool may through its own personnel provide the services performed by a service agent upon approval by the Commission commission.

14VAC5-360-130. Handling of pool deficit.

If a group self-insurance pool is in a deficit condition, the pool shall promptly file with the Commission commission a financial plan to correct the deficit condition. If the plan is found to be unacceptable by the Commission commission and written notice, thereof, is given to the governing authority of the pool, delinquency proceedings may be commenced and conducted by the Commission commission in accordance with the provisions of Chapter 15 (§ 38.2-1500 et seq.) of Title 38.2 of the Code of Virginia.

14VAC5-360-140. Termination of pool members.

A. A member who fails to make timely contribution payments as provided by the board may be terminated after 10 days written notice has been given to the member and the Commission commission. A member can be terminated without cause after 30 days written notice has been given to the member.

B. For workers' compensation liability, no member agreement shall be cancelled or nonrenewed except on 30 days notice to the member and the Workers' Compensation Commission, unless the member has obtained other insurance and the Workers' Compensation Commission is notified of that fact by the insurer assuming the risk, or unless, in the event of cancellation, said cancellation is for nonpayment of contributions; then 10 days notice shall be given the member and the Workers' Compensation Commission.

C. The pool shall remain liable for all claims applicable to the period during which the political subdivision was a member of the pool, including the period required for termination of membership.

14VAC5-360-150. Terms of license; voluntary dissolution of pool; merger of pools mergers.

A. A pool's license shall remain in effect until terminated at the request of the board or revoked by the Commission commission pursuant to 14VAC5-360-160.

B. Before a pool can voluntarily dissolve, it must present a plan of dissolution to the Commission commission for approval. Such a plan shall provide for the payment of all incurred losses and expenses of the fund and its members, including all incurred but not reported losses, as certified by an actuary, to the extent of the pool's assets. No assets of the pool may be used for any other purpose until payment of all such losses and expenses is provided for.

C. Subject to the approval of the Commission commission, a pool may merge with another local government group self-insurance pool if the resulting pool assumes in full all obligations of the merging pools. The Commission commission may hold a hearing on the merger and shall do so if any party, including a member of either pool, so requests.

D. Subject to the approval of the commission, a group self-insurance association consisting solely of political subdivisions licensed pursuant to § 65.2-802 of the Code of Virginia may merge with a pool pursuant to § 15.2-2703 of the Code of Virginia if the resulting pool assumes in full all obligations of the group self-insurance association. The commission may hold a hearing on the merger and shall do so if any party, including a member of the group self-insurance association or pool, so requests.

14VAC5-360-160. Revocation or suspension of self-insurance license.

A. The Commission commission may suspend or withdraw a pool's license as provided for in 14VAC5-360-30 B of this chapter.

B. The Commission commission shall give 10 days prior notice to a pool of the proposed suspension or revocation. The notice shall be served personally, or by certified or registered mail, upon all interested parties and shall state the reasons for the proposed suspension or revocation and provide the pool with an opportunity to introduce evidence and be heard. If after a hearing, which may be formal or informal, the pool's license is suspended or revoked, such action shall become effective 30 days after the Commission's commission's order is issued.

C. Any suspension may be terminated by the Commission commission upon proof by the pool that the original reasons for suspension have been satisfactorily corrected, and that the pool continues to meet all other requirements for a license.

14VAC5-360-180. Penalties.

Penalties for failure to comply with this chapter may include (i) suspension or revocation of the pool's license as provided in 14VAC5-360-160 of this chapter, or (ii) a monetary fine of not more than $5,000, or (iii) both.

14VAC5-360-190. Severability.

If any provisions provision of this chapter, or the application of it thereof to any person or circumstances, circumstance is for any reason held to be invalid, such invalidity shall not affect other provisions of this the remainder of the chapter which can be given effect without the invalid provision or, and the application, and to that end the provisions of this chapter are severable of the provision to other persons or circumstances shall not be affected thereby.

14VAC5-370-10. Purpose.

The purpose of this chapter is to set forth rules, forms and procedural requirements that the Commission commission deems necessary to carry out the provisions of § 65.2-802 of the Code of Virginia.

14VAC5-370-20. Definitions.

"Act" means the Virginia Workers' Compensation Act as provided by Title 65.2 of the Code of Virginia.

"Administrator" means the individual, partnership or corporation authorized to serve as a representative of an association and its members in carrying out the policies of the board and managing the association's activities.

"Commission" means State Corporation Commission.

"Common interest" means employers engaged in the same or substantially similar industry, trade, commerce or profession, including political subdivisions of this Commonwealth. Notwithstanding the foregoing, an employer seeking membership in an association licensed on and before July 1, 2000, has a common interest if the industry, trade, commerce, profession or other business activity of such employer is the same or substantially similar to the business activity of an employer that was a member of the association on and before July 1, 2000. If an association is licensed by the Commission commission, different businesses which are owned or controlled by a member of the association are eligible for membership in such association.

"Contributions" means the amount of payments required of each member in order to fund the association's obligations under the Act.

"Employer" shall have the definition provided by § 65.2-101 of the Code of Virginia.

"Group self-insurance association" or "association" means an association organized by two or more employers having a common interest that have entered into agreements to pool their liabilities under the Virginia Workers' Compensation Act.

"Indemnity agreement and power of attorney" means the written agreement executed by each member of the association in which each member (i) agrees to assume and discharge, jointly and severally, any liability under the Act of any and all members party to such agreement and (ii) grants the administrator power of attorney to act for and bind the members in all transactions relating to or arising out of the operations of the association.

"Member" or "member in good standing" means an employer party to an indemnity agreement for membership in a group self-insurance association who has been approved in accordance with the requirements of 14VAC5-370-50.

"Members' supervisory board," or "board," means the representative body selected by the members to be responsible for holding and managing the assets and directing the affairs of the association and for assuring that the association, through its members, is financially sound and able to meet its obligations under the Act.

"Service agent" means any individual, partnership or corporation that may provide services including, but not limited to, claims adjustment, safety engineering, compilation of statistics and the preparation of contribution payment and loss reports, preparation of other required self-insurance reports and the administration of a claims fund.

14VAC5-370-30. Application for license as group self-insurance association requirements; approval; review.

Two or more employers having a common interest may be licensed by the Commission commission as a group self-insurance association for the purpose of entering into agreements to pool their liabilities under the Act. The application for a license shall be made on the form prescribed by the Commission commission and shall contain answers to all questions and shall be verified by the oath or affidavit of at least one member of the board of the association and the administrator.

If, after review of the association's application as well as the additional information required by 14VAC5-370-40 of this chapter, the Commission commission is satisfied that it has satisfactory proof of (i) the solvency of each member of the association, (ii) the financial ability of each employer to meet its obligations as a member and (iii) the ability of the association to pay or cause to be paid the compensation in the amount and manner and when due as provided for in the Act, the Commission commission may issue a license to the association.

The license may be revoked if the association fails to comply with all conditions and requirements set forth in this chapter and the Act.

Continuance of the license will require that the association maintain and produce on request by the Commission commission evidence of continuing compliance with any requirements imposed under 14VAC5-370-60 of this chapter.

14VAC5-370-40. Application for license as group self-insurance association; additional requirements.

A. An application submitted by a group self-insurance association shall be accompanied by the following items. These items shall be subject to the approval of the Commission commission:

1. A copy of the members' indemnity agreement and power of attorney required by 14VAC5-370-120 of this chapter binding the association and each member of the association, jointly and severally, to comply with the provisions of the Act and copies of any other governing instruments of the proposed group self-insurance association;

2. An executed copy of the application of each employer for membership in the association on the effective date of the license of the association;

3. Financial statements of all applicants for membership showing that the membership of the proposed association has a combined net worth of at least one million dollars. Political subdivisions of this Commonwealth may combine to form associations without complying with this requirement;

4. Proof of payment by each member of at least 25% of its estimated first year's contribution into a designated depository;

5. A confirmation of excess insurance, if excess insurance is required, by a licensed insurer in an amount acceptable to the Commission commission which complies with the requirements set forth in 14VAC5-370-90 of this chapter. However, the Commission commission at its discretion may allow this insurance to be placed with an approved surplus lines insurer;

6. Designation of the board and of the administrator of the association, together with properly executed biographical affidavits for each member of the board and for the administrator or the principal officers of a corporation serving as an administrator. Affidavits are to be submitted on a form prescribed by the Commission commission;

7. The address in this Commonwealth where the books and records of the pool will be maintained at all times;

8. Information showing that the association has, within its own organization or by contract with an approved service agent, adequate facilities and competent personnel to service its program with respect to underwriting matters, claims adjusting, and industrial safety engineering. Copies of all executed servicing agreements shall be filed with the Commission commission;

8. 9. A confirmation of a fidelity bond in a form and amount acceptable to the Commission commission;

9. 10. Deposit of securities or a surety bond with the State Treasurer in an amount acceptable to the Commission commission in accordance with the requirements of 14VAC5-370-60 of this chapter;

10. 11. A projection of administrative expenses for the first year of operation in an amount and as a percentage of the estimated annual contributions;

11. 12. A statement regarding the type of business and guidelines to be used to determine common interest; and

12. 13. A copy of the association's contracts with the service agent and the administrator which sets forth the terms and obligations of the agreement.

B. An application submitted by a group self-insurance association shall be accompanied by all of the following:

1. A composite listing of the estimated annual gross contribution to be developed by each member of the association individually and in the aggregate for the association, which, in the aggregate, shall be not less than $350,000 $500,000 for each of the association's first two years and thereafter for subsequent years shall be not less than $500,000 $1 million, provided that this latter requirement shall not apply to groups licensed prior to May 1, 1988; and

2. The application shall be accompanied by any other information the Commission commission requires.

C. Any subsequent revisions to items submitted under the provisions of 14VAC5-370-30 and 14VAC5-370-40 of this chapter section will be filed with and subject to approval by the Commission commission. Any subsequent revisions of the items in subsection B of this section will be filed with the Commission commission.

14VAC5-370-50. Approval of members of association.

Application for membership in an association shall be made on a form approved by the Commission commission. The application shall include (i) acknowledgement of the execution of the indemnity agreement and power of attorney required by 14VAC5-370-120 of this chapter, (ii) the applicant's current financial statement report on a form approved by the Commission commission demonstrating the solvency of the applicant and its financial ability to meet its obligations as a member and (iii) the approval by or on behalf of the board of the applicant's membership. A copy of the completed application shall be filed with the Commission commission by the board within seven days after the effective date of coverage whereupon the Commission commission shall be deemed to have granted authorization for the applicant to become a member of the association as of such effective date. The Commission commission may, after notice to an association, require that applications for membership in such association be approved by the Commission commission before the applicant may become a member of the association. The association shall at all times have in its possession, in a form acceptable to the Commission commission, a current financial statement report for each member. The requirement for having a current financial statement report as a condition of membership or otherwise shall not apply to governmental entities which are not required by law to have an annual audit performed.

The Commission commission may, at any time, withdraw approval of any member after giving proper notice if the Commission commission determines that the member is not in compliance with this chapter. Prior to withdrawal of approval by the Commission commission or any revocation or termination by the association, the member will be considered to be a member in good standing with the association. Any member who cannot demonstrate its solvency and its financial ability to meet its obligations as a member shall be removed from membership in the association by the board.

14VAC5-370-60. Security deposit and surety bond requirement.

A. Except as provided in subsection B of this section, each group self-insurance association licensed by the Commission commission shall maintain with the State Treasurer a security deposit of acceptable securities or surety bond in an amount of $250,000 for the first plan year, or such other amount as the Commission commission prescribes, and for succeeding plan years such amount as the Commission commission deems reasonable taking into account the financial condition of the association and any excess insurance carried by the association. The Commission commission may, from time to time, increase, release or reduce the security deposit or surety bond requirement. The security deposit or surety bond shall be held by the State Treasurer pursuant to § 65.2-801 C of the Code of Virginia, and so far as not inconsistent with the provisions of the Act or these regulations shall be subject to the provisions of Article 7 (§ 38.2-1045 et seq.) of Chapter 10 of Title 38.2 of the Code of Virginia.

For the purposes of this chapter, acceptable securities shall be (i) investments allowed by § 2.1-327 § 2.2-4500 of the Code of Virginia (legal investments for public sinking funds) and § 2.1-328 § 2.2-4501 of the Code of Virginia (legal investments for other public funds), (ii) securities issued by states, other than Virginia, and their municipalities or political subdivisions rated A or better by Moody's Investors Services, Inc., or Standard and Poor's, Inc., (iii) revenue bonds rated Aa (AA) or better by Moody's Investors Services, Inc., or Standard and Poor's, Inc. that are bonds issued by municipalities or political subdivisions of this Commonwealth or any other state, (iv) securities issued by the Federal Home Loan Banks, and (v) securities issued by the Federal Intermediate Credit Banks.

Surety bonds deposited pursuant to this section shall be issued by an insurer duly licensed in this Commonwealth to transact a surety business and shall not either directly or indirectly be under the same ownership or management as the principal on such bonds. The surety bond shall be designated as applying to agreements approved or awards by the Virginia Workers' Compensation Commission made at any time on account of injuries or deaths occurring during the continuance of the principal's license and the continuance of the bond.

In addition to the minimum security deposit or surety bond required by this section, the Commission commission may require additional securities or surety it considers appropriate after giving consideration to such factors as excess insurance and the financial ability of the group to meet its obligations under the Act.

B. As an alternative to the security deposit or surety bond required by subsection A of this section, a group self-insurance association may have an appropriate endorsement attached to its contracts for excess insurance as required in 14VAC5-370-90 of this chapter. The endorsement must provide that in the event the group self-insurance association fails to pay to any employee or dependent of any employee any compensation provided by the Act, the excess coverage insurer will become liable immediately for 100% of the compensation and will make payment as directed by the Virginia Worker's Compensation Commission.

C. Any deposit made with the State Treasurer prior to May 1, 1988 must be maintained with the State Treasurer until specifically released in writing by the Commission commission.

14VAC5-370-70. Investment.

The board of an association may, in its discretion, invest funds in any type of investments authorized by §§ 38.2-1415, 38.2-1418, 38.2-1419, 38.2-1421, 38.2-1432 of the Code of Virginia and 14VAC5-370-60 of this chapter. Other investments may be made subject to the approval of the Commission commission. All such investments shall be authorized or approved by the board in the manner contemplated by the provisions of § 38.2-1408 of the Code of Virginia.

14VAC5-370-80. Filing of reports.

Each association shall file annually with the Commission commission on or before March 1, of each year an annual statement showing its financial operations and condition for the most recently completed calendar year. The Commission commission, for good cause, may extend the time for filing the annual statement by not more than 60 days. In addition, each association shall furnish a copy of an audited statement report of its financial operations and conditions prepared by an independent Certified Public Accountant certified public accountant within six months of the end of the association's fiscal period.

The annual statement shall contain a report in detail of the association's assets, liabilities, revenues and disbursements during the year, and all other information which the Commission commission may deem necessary to secure a full and accurate knowledge of the financial affairs and condition of the association.

The Commission commission may prescribe the form of the annual statement and of any necessary schedules and exhibits. In addition to the annual statement, the Commission commission may require any association to file timely additional financial information, including interim financial reports.

14VAC5-370-90. Contracts for excess insurance.

Specific and aggregate excess insurance may be required as a condition for licensing a group self-insurance association and shall be subject to the following requirements:

1. No contract or policy of excess liability insurance shall be recognized by the Commission commission in considering the ability of an applicant to fulfill its financial obligations under the Act unless this contract or policy:

a. Is issued by an insurer licensed or approved by the Commission commission. However, the Commission commission at its discretion may allow this insurance to be placed with an approved surplus lines insurer;

b. Is not cancellable or terminable for any reason except upon 60 days written notice sent by registered or certified mail to:

(1) The association; and

(2) The Commission commission.

c. Is automatically renewable at the expiration of the policy period except upon 60 days written notice sent, by registered or certified mail to:

(1) The association; and

(2) The Commission commission.

2. If the contract or policy contains any type of commutation clause, it shall provide in substance:

a. That any commutation effected under the policy shall not relieve the underwriter or underwriters of further liability in respect to claims and expenses unknown at the time of such commutation or in regard to claims apparently closed but which may be subsequently revived by or through a competent authority; and

b. That in the event the underwriter proposes to settle liability to the association for any future payments payable as compensation for injuries occurring during the term of the policy by the payment of a lump sum to be fixed as provided in the commutation clause of the policy, not less than 30 days' days prior notice of this commutation shall be given to the Commission commission by registered or certified mail by the underwriter or its agent.

3. In the event any commutation is effected, the Commission commission shall have the right to direct that this sum either:

a. Be placed in trust for the benefit of the injured employee or dependent entitled to the future payment of benefits, or

b. Be invested by the association in the manner permitted by 14VAC5-370-70 of this chapter and held along with any income or gains from the investments in a special reserve subject to further order of the Commission commission to assure the future payment of compensation to the employee or dependent entitled to the compensation.

4. No more than one association, which shall be defined as the named insured, shall be covered by any contract or policy of excess liability insurance. Any reinsurance contract issued on any contract or policy of excess liability shall contain a clause providing that, (i) the reinsurance is written expressly for, and for the protection of, the named insured, and (ii) in the event of the aggregate and/or specific excess underwriter's going into liquidation or being otherwise unable to pay to the named insured, the reinsurer of the aggregate and/or specific excess underwriter will pay benefits as may be due under the terms of the reinsurance contract directly to the named insured;

5. Copies of the complete contracts or policies of excess liability insurance, complete with all endorsements thereto, shall be filed with the Commission commission.

The Commission commission may release the association from the excess insurance requirement if the contingency reserve established by the association is in an amount determined by the Commission commission to be adequate.

14VAC5-370-100. Responsibilities of members' supervisory board.

The members' supervisory board shall be responsible for holding and managing the assets and directing the affairs of the association and shall be elected in the manner prescribed by the association's governing instruments. At least 3/4 of the board must be members of the association, but a supervisory board member shall not be an owner, officer or employee of any service organization, its parent or any of its affiliated companies, under contract with the association. The board shall supervise the finances of the association and the association's operations to the extent necessary to assure conformity with law, this chapter, the members' indemnity agreement and power of attorney, and the association's governing instruments. The members' supervisory board shall take all necessary precautions to safeguard the assets of the association, including, but not limited to, the following:

1. Monitoring the financial condition of each member of the association (unless proof of financial condition is not required under 14VAC5-370-40 A 3), and doing all other acts necessary to assure that each member continues to be able to fulfill the obligations of membership; and also reporting promptly to the Commission commission any grounds for believing that a change in any member's financial condition, withdrawal of a member, or any other circumstances affecting the association's ability to meet its obligations;

2. Designating an administrator to administer the affairs of the association, who shall furnish a fidelity bond with the association as obligee, in an amount sufficient to protect the association against the misappropriation or misuse of any monies or securities. The amount of the bond shall be determined by the Commission commission and evidence of the bond shall be filed with the Commission commission, said bond being one of the conditions required for licensing of the association. The administrator shall not be an owner, officer or employee of any service agent, its parent or any of its affiliated companies, any of which are under contract with the association;

3. Retaining control of all monies collected for the association and the disbursement of such monies by the association. All assets of the association shall remain in the custody of the board or the authorized administrator. However, a claims fund for payment of benefits due and other related expenses may be established for the use of any authorized service agent;

4. Active efforts to collect delinquent accounts resulting from any past due contributions by members. The board shall terminate in the manner provided by § 65.2-804 B of the Code of Virginia any member delinquent for more than 30 days in the payment of any subscription charge or assessment billed to such member;

5. The members' supervisory board or the administrator shall not use any of the monies collected for any purpose unrelated to securing the members' liability under the Act. Further, they shall be prohibited from borrowing any monies from the association or in the name of the association without advising the Commission commission of the nature and purpose of the loan and obtaining Commission commission approval;

6. The members' supervisory board shall assure that the office of the administrator of the association and all pertinent records necessary to verify the accuracy and completeness of all reports submitted to the Commission commission are maintained within this Commonwealth;

7. The members' supervisory board shall assure that payroll verifications of all members of the associations are completed within 180 days after the close of a plan year and the board shall require that efforts are made to collect any additional amounts due within 30 days of the completion of each audit; and

8. The members' supervisory board may adopt its own rules and procedures as considered necessary for the operation of the association provided these rules and procedures are not inconsistent with § 65.2-802 of the Code of Virginia and this chapter.

14VAC5-370-110. Advance contribution requirements and distribution of surplus funds.

A.1. For the purpose of funding the liability of the association, the members shall make contributions to the association based on annual payrolls for all employees of each member, except for executive officers where the payroll is to be limited to a maximum of $300 per week, using rates and stock or non- stock discounts as adopted by the board and approved by the Commission commission. The rates to be used are those in effect as of the inception of each association's fiscal year. A plan which allows for consideration of past experience in developing a factor to be applied to a member's contribution may be used provided this plan has been approved by the Commission commission.

Nothing contained herein shall be construed to prevent an association from filing with the Commission commission its own rates or a deviation from these rates or an alternative method of determining contributions which may be used upon approval by the Commission commission.

2. At the effective date of the license of an association, at least 25% of the first year's estimated annual contribution payable by each member of the association shall have been paid into a designated depository. The balance of the first year's annual contributions shall be paid no later than the end of the ninth month of the association year. For each subsequent year of operation of the association, the payment schedule shall provide an advance payment of at least 15% of the estimated annual contribution with the balance payable not later than the end of the tenth month. At no time shall the member's combined payments be less than the total earned estimated annual contribution due at that time.

B. Any surplus assets (i.e. those assets in excess of the amount necessary to fulfill all obligations under the Act and this chapter) accumulated within an association year may be declared refundable by the board. The board shall establish the plan and the dates for payment of these excess assets. Payment of this surplus shall not be made until approved by the Commission commission.

However, the Commission commission shall require that 3.0% or more of an association's earned contributions for each fiscal accounting period be allocated to a contingency reserve. The contingency reserve is to be used at the direction of the association's board subject to the approval of the Commission commission. When the Commission commission is satisfied that the contingency reserve is adequate for the needs of the association, adjustments may be made by the Commission commission as necessary to the contingency reserve or to contributions to the contingency reserve to maintain it at an established amount.

14VAC5-370-120. Indemnity agreement and power of attorney.

Every member of a group self-insurance association shall execute an indemnity agreement and power of attorney which shall set forth the rights, privileges and obligations of the member and the association and the powers and duties of the administrator. The indemnity agreement and power of attorney shall be subject to the approval of the Commission commission and shall contain in substance the following provisions:

1. An agreement under which each member agrees to assume and discharge, jointly and severally, any liability under the Act of any and all employers party to such agreement and which provides that, in addition to the rights of the association, in the event of failure of the association to enforce such rights after reasonable notice to the association, the Commission commission shall have the right independently to enforce on behalf of the association the joint and several liability of its members under the Act and the liability of members for any unpaid contributions and assessments;

2. Provisions requiring that the members' supervisory board designate and appoint an administrator empowered to accept service of process on behalf of the association and authorized to act for and bind the association and members in all transactions relating to or arising out of the operation of the association; and

3. Provisions for the right of substitution of the administrator and revocation of the power of attorney and rights thereunder.

All indemnity agreements shall be brought into conformity with the requirements of this section on or before July 1, 1989.

Such indemnity agreement may also contain such other provisions not inconsistent with law or this chapter.

14VAC5-370-130. Servicing of association.

A service agent for a licensed workers' compensation group self-insurance association shall apply and shall be subject to the approval of the Commission commission before entering into a contract with an association and shall satisfy the Commission commission that it has adequate facilities and competent personnel to fulfill its obligations to the association and this chapter.

A service agent shall maintain a resident agent in this Commonwealth and that agent shall be authorized to act for the service agent on any and all matters covered by the Act and the Rules rules and Regulations regulations of the Commission commission.

A service agent shall provide to the commission the address in this Commonwealth where the books and records of the association will be maintained at all times.

A service agent shall file with the Commission commission copies of all contracts entered into with the association as they relate to the services to be performed. These contracts shall provide for services necessary to fulfill the employer's obligations under the Act and the Rules rules and Regulations regulations of the Commission commission. In addition, any service contract or letter of intent must state that the servicing organization agrees to handle all claims incurred during the contract period to their conclusion without further remuneration unless approval to transfer them is obtained from the Commission commission prior to such transfer.

The service organization shall furnish a fidelity bond covering its employees, with the association as obligee, in an amount sufficient to protect all monies placed in the claims fund. However, if the bond required of the administrator also covers the monies in the claims fund, a separate bond shall not be required of the servicing organization with respect to the claims fund.

Upon satisfactory compliance with the above provisions, a certificate of approval as a recognized and authorized service agent shall be issued to the applicant. Failure to comply with any of the foregoing rules or any order of the Commission commission within the time prescribed shall be considered justification for withdrawing the certificate of approval. The Commission commission shall give 10 days' days prior notice of such withdrawal. The notice shall be served personally, or by certified or registered mail, upon all interested parties setting forth the reasons for withdrawal and providing the service agent an opportunity to introduce evidence and be heard. If, after a hearing, which may be formal or informal, the service agent's certificate of approval is revoked this revocation shall become effective 30 days after issuance of the Commission's commission's order or within such shorter or longer period as the Commission commission may consider necessary to protect the interest of the association, its members and their employees.

Each individual, partnership, or corporation approved to act as a service agent for an association shall file with the Commission commission an annual statement, in a form acceptable to the Commission commission, of its financial condition within four months of the completion of its fiscal year.

14VAC5-370-140. Termination of members of association.

No member of an association may be terminated unless at least 30 days written notice has been given to the member, the Commission commission, and the Virginia Workers' Compensation Commission, except as provided in § 65.2-804 of the Code of Virginia.

The association shall remain liable for all claims applicable to the period during which an employer was a member of an association, including the 30 day period required for termination of membership or for a lesser period as provided by § 65.2-804 of the Code of Virginia.

14VAC5-370-145. Mergers.

Subject to the approval of the commission, an association consisting solely of political subdivisions may merge with a local government group self-insurance pool pursuant to § 15.2-2703 of the Code of Virginia if the resulting pool assumes in full all obligations of the association. The commission may hold a hearing on the merger and shall do so if any party, including a member of the association or local government group self-insurance pool, so requests.

14VAC5-370-150. Revocation of self-insurance license.

The Commission commission may revoke an association's license if:

1. The association no longer meets the standards required for the issuance of its license; or

2. The association fails to comply with this chapter, the provisions of the Act or an order of the Commission commission.

The Commission commission shall give 10 days' days prior notice of the proposed revocation to the association. The notice shall be served personally, or by certified or registered mail, upon all interested parties stating the reasons for the proposed revocation and providing the association an opportunity to introduce evidence and be heard. If, after a hearing, which may be formal or informal, the association's license is revoked, this revocation shall become effective 30 days after the Commission's commission’s order is issued.

14VAC5-370-170. Examination of association.

If the Commission commission considers it expedient for the protection of the interests of the citizens of this Commonwealth, it may make or direct to be made a financial condition examination into the affairs of any association, or service agent licensed or approved in this Commonwealth.

The manner and frequency in which the examination of financial condition shall be conducted and the release of any reports of financial condition shall be as provided in Article 4 (§ 38.2-1317 et seq.) of Chapter 13 of Title 38.2 of the Code of Virginia.

14VAC5-370-180. Severability.

If any provisions of this chapter, or the application of it thereof to any person or circumstances, circumstances is held to be invalid, such invalidity shall not affect other provisions or applications the remainder of this the chapter which can be given effect without the invalid provision or application, and to that end the provisions of this chapter are severable application of the provision to other persons or circumstances shall not be affected thereby.