[Federal Register Volume 70, Number 142 (Tuesday, July 26, 2005)]
[Rules and Regulations]
[Pages 43224-43239]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-14530]



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Part III





Department of Labor





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Employment Standards Administration



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20 CFR Parts 701 and 703



Regulations Implementing the Longshore and Harbor Workers' Compensation 
Act and Related Statutes; Final Rule

  Federal Register / Vol. 70, No. 142 / Tuesday, July 26, 2005 / Rules 
and Regulations  

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DEPARTMENT OF LABOR

Employment Standards Administration

20 CFR Parts 701 and 703

RIN 1215-AB38


Regulations Implementing the Longshore and Harbor Workers' 
Compensation Act and Related Statutes

AGENCY: Employment Standards Administration, Labor.

ACTION: Final rule.

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SUMMARY: This final rule requires each insurance carrier authorized to 
write insurance under the Longshore and Harbor Workers' Compensation 
Act and its extensions (the Defense Base Act; the Outer Continental 
Shelf Lands Act; the Nonappropriated Fund Instrumentalities Act; and 
the District of Columbia Workmen's Compensation Act) to demonstrate to 
the Office of Workers' Compensation Programs (OWCP) that its LHWCA 
obligations are sufficiently secured and, if necessary, to deposit 
security in an amount set by OWCP. This procedure will ensure the 
prompt and continued payment of compensation and medical benefits to 
injured workers and help protect the Longshore special fund's assets 
from consequences flowing from insurance carrier insolvencies. In 
addition, the rule conforms, where appropriate, the rules governing 
OWCP's authorization of employers as self-insurers to the provisions 
governing carrier security deposits.

DATES: This rule is effective August 25, 2005.

FOR FURTHER INFORMATION CONTACT: Michael Niss, Director, Division of 
Longshore and Harbor Workers' Compensation, Office of Workers' 
Compensation Programs, Employment Standards Administration, 202-693-
0038. TTY/TDD callers may dial toll free (877) 889-5627 for further 
information.

SUPPLEMENTARY INFORMATION:

I. Background of This Rulemaking

    On March 15, 2004, the Department issued a Notice of Proposed 
Rulemaking (NPRM) under the Longshore and Harbor Workers' Compensation 
Act, as amended (LHWCA), 33 U.S.C. 901 et seq., proposing rules 
governing insurance carrier security deposits. 69 FR 12218-31 (March 
15, 2004). As explained in the NPRM (69 FR 12218-19 (March 15, 2004)), 
since 1990 the Department has required insurance carriers it has 
authorized to write Longshore coverage to deposit security in an amount 
sufficient to secure the payment of their LHWCA obligations in States 
without guaranty or analogous funds and in States whose funds do not 
fully secure such obligations. The Department waived the deposit 
requirement for carriers with financial security ratings of ``A'' or 
higher issued by the A.M. Best Company. Intervening changes in the 
insurance industry and related insurance rating systems, however, 
prompted the Department to re-examine and reformulate its security 
deposit policy. The NPRM embodied the Department's proposal to revamp 
this policy.
    The NPRM proposed a process by which OWCP would determine: (1) The 
extent of an insurance carrier's unsecured LHWCA obligations; (2) the 
deposit amount necessary to secure those obligations in light of the 
guaranty or analogous funds in the State or States in which the carrier 
writes LHWCA insurance; (3) how such deposit will be held; and (4) when 
OWCP may seize or otherwise use deposited funds. 69 FR 12219 (March 15, 
2004). The proposed rules also eliminated the Department's prior waiver 
policy so that all carriers, regardless of their financial strength, 
would be subject to the deposit requirements. 69 FR 12219 (March 15, 
2004).
    The Department has received five written comments in response to 
the NPRM: two from insurance carriers and one each from an insurance 
carrier association, a Longshore employer association, and a state 
insurance division. The Department has found these comments very 
helpful and, in several important respects, has revised the final rule 
in response.

II. Explanation of Changes

A. Statutory Authority

    Congress granted the Department broad authority to ``administer the 
provisions of [the LHWCA], and for such purpose the Secretary is 
authorized (1) to make such rules and regulations * * * as may be 
necessary in the administration of the Act.'' 33 U.S.C. 939(a). Three 
commenters fully support the Department's efforts to ensure a 
financially sound Longshore program through the proposed rules. Two 
commenters, however, argue that the LHWCA does not grant the Department 
authority to require carriers to post security deposits. They contend 
that section 32 (33 U.S.C. 932, erroneously referenced by the 
commenters as 33 U.S.C. 939) allows the Department to require employers 
who seek to self-insure to deposit security but does not allow 
imposition of a similar requirement on carriers. In these two 
commenters' view, the Department must instead rely on the various State 
regulators' supervision of carriers and those regulators' assessment of 
a carrier's financial strength to ensure solvency and the carrier's 
future ability to meet its obligations.
    The Department disagrees with the commenters' construction of the 
statute and believes it has acted well within its rulemaking authority. 
Section 32 provides, in relevant part:

    (a) Every employer shall secure the payment of compensation 
under this Act--
    (1) By insuring and keeping insured the payment of such 
compensation with any stock company or mutual company or 
association, or with any other person or fund, which such person or 
fund is authorized (A) under the laws of the United States or of any 
State, to insure workmen's compensation, and (B) by the Secretary, 
to insure payment of compensation under this Act; or
    (2) By furnishing satisfactory proof to the Secretary of his 
financial ability to pay such compensation and receiving an 
authorization from the Secretary to pay such compensation directly. 
The Secretary may, as a condition to such authorization, require 
such employer to deposit * * * either an indemnity bond or 
securities * * * in an amount determined by the Secretary, based on 
the employer's financial condition, the employer's previous record 
of payments, and other relevant factors. * * *
    (b) In granting authorization to any carrier to insure payment 
of compensation under this Act the Secretary may take into 
consideration the recommendation of any State authority having 
supervision over carriers or over workmen's compensation. * * * The 
Secretary may suspend or revoke any such authorization for good 
cause shown. * * *

33 U.S.C. 932.
    Section 32 ensures that there is money available to pay 
compensation to an injured worker. United Marine Mutual Indemnity Assn. 
v. Marshall, 510 F.Supp. 34, 36 (N.D. Cal. 1981), affm'd sub nom., 
United Marine Mutual Indemnity Assn. v. Donovan, 701 F.2d 791 (9th Cir. 
1983). The Act seeks ``certain and absolute payment'' of compensation, 
United Marine, 510 F.Supp. at 36, and the ``major guarantee of the 
financial ability of the employer to compensate those injured or killed 
in the scope of employment is found in section 32.'' Id. at 793. As one 
court has noted, ``[i]t is obvious from the language chosen that 
Congress wanted a central approval mechanism to support the fiscal 
soundness of the LHWCA system.'' Id.
    To accomplish these goals, section 32(a)(1)(B) gives the Secretary 
discretion to authorize insurance carriers to write Longshore coverage. 
Apart from

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requiring that the carrier be authorized by a State (or the United 
States) to insure workers' compensation, 33 U.S.C. 932(a)(1)(A), and 
permitting the Secretary to consider a State's recommendation as to the 
insurer's status, 33 U.S.C. 932(b), section 32 grants the Secretary the 
power to authorize carriers without any limitation, description, 
standards, or guidance. The power to authorize necessarily includes the 
power to refuse authorization as well; any other interpretation would 
render meaningless section 32(a)(1)(B)'s grant of authority to the 
Secretary to authorize carriers. Once granted, authorization may be 
suspended or revoked for ``good cause.'' Id. By using broad, undefined 
terms such as ``authorization'' and ``good cause,'' Congress afforded 
the Secretary wide discretion in deciding which carriers should be 
allowed to write Longshore insurance.
    Requiring carriers to post security as a condition of authorization 
to write Longshore insurance is a proper exercise of the Secretary's 
authority under section 32. The deposits fulfill section 32's goal 
because they will prevent interruption in compensation payments and 
medical benefits to injured workers in the event the carrier defaults 
or becomes insolvent. Moreover, the statute does not compel the 
Secretary to authorize any carrier she believes may not be able to meet 
its LHWCA obligations. No conceivable legislative purpose would be 
served, however, by precluding authorization of a carrier who 
demonstrates actual reliability by posting security. In fact, 
permitting the Secretary to require insurance carriers whom she might 
not otherwise authorize to post security enlarges, rather than 
diminishes, the opportunities available to carriers.
    One commenter points to section 32(b), 33 U.S.C. 932(b), and argues 
that Congress intended the Secretary to rely exclusively on the various 
States' supervision of carriers to assure a carrier's future ability to 
meet its LHWCA obligations. The plain terms of the statute, however, 
contradict this interpretation. First, Congress wrote section 32(b) in 
permissive language: ``the Secretary may'' consider a State supervisory 
authority's recommendation in making an authorization decision, but the 
statute does not require her to do so. Second, although State licensure 
is a condition to authorization, 33 U.S.C. 932(a)(1)(A), State approval 
is not sufficient alone because the statute also requires authorization 
by the Secretary to write Longshore insurance. 33 U.S.C. 932(a)(1)(B). 
Indeed, the commenter's view reads Section 32(a)(1)(B) out of the 
statute. The sweeping language of the statute and the sparseness of its 
requisites, coupled with Congress' decision not to make State licensure 
sufficient alone, all suggest congressional intent to permit the 
Secretary to condition authorization on the terms the Secretary 
considers most appropriate.
    One comment states that because the statute expressly permits the 
Secretary to impose a security deposit requirement on employers seeking 
authorization to self-insure, 33 U.S.C. 932(a)(2), but does not include 
the same provision for carriers, Congress intended to preclude the 
Secretary from imposing this condition on carriers. The Department 
disagrees. The statute's express security deposit provision for self-
insurers is logical because Longshore employers, unlike insurers, would 
not have funds put aside to cover their liabilities under the statute. 
Thus, security deposits the Department requires from self-insurers 
under section 32(a)(2) may be the only source of payment available for 
an employer's LHWCA obligations. Insurers, on the other hand, may have 
additional sources for the payment of carrier obligations, such as 
State guaranty funds. The statute therefore appropriately gives the 
Secretary wide latitude to regulate within the carrier authorization 
arena.
    The Secretary could have determined that the steps States take to 
ensure a carrier's fiscal soundness, including any coverage afforded by 
State insurance guaranty funds, were sufficient to fulfill section 32's 
goal of ensuring adequate funds to compensate injured workers. But 
experience has proved that wrong. See generally 69 FR 12218-19 (March 
15, 2004). In 2003 and 2004, 23 carriers authorized to write Longshore 
insurance became insolvent. For one of these carriers, the Department 
has already exhausted the company's $200,000 deposit (made under OWCP's 
existing policy) and is now paying the carrier's remaining obligations 
from the special fund. For two other carriers, whose security deposits 
total approximately $11,000,000, the Department is currently meeting 
the carriers' obligations by using the deposited security. The 
Department anticipates that it will exhaust those funds and will have 
to pay all remaining obligations from the special fund. Had the 
security deposits not been available, the industry as a whole, through 
annual special fund assessments, would have borne the full brunt of 
these insurers' insolvency. See 33 U.S.C. 918(b), 944.
    Moreover, the statute's structure does not reveal congressional 
intent to limit the Secretary's regulatory options by negative 
implication. As already noted, section 32 contains virtually no 
limitations on the Secretary's right to authorize carriers to write 
Longshore coverage. And the Secretary may exercise her right to revoke 
authorization for ``good cause,'' a term of broad compass. Given the 
broad general rulemaking authority conferred on the Secretary by 
section 39(a), and the sweeping authority section 32 gives the 
Secretary to grant or deny carrier authorization, it is 
counterintuitive to draw from Congress' silence a flat prohibition on 
the Secretary's ability to condition a carrier's authorization to write 
Longshore insurance on a deposit of security.
    One comment contends that the proposed rules improperly create an 
``extra-statutory'' funding and payment structure because the Secretary 
has no authority to put seized deposits into the special fund under the 
funding mechanism set out in section 44 of the Act (33 U.S.C. 944), and 
the statute gives the Secretary no obligation or authority to pay for 
insolvent employers or insurers except from the special fund under 
section 18(b) (33 U.S.C. 918(b)). In this same vein, the commenter also 
argues that the Secretary cannot set up a separate guaranty fund for 
Longshore benefits to protect employers from carrier insolvencies.
    The commenter misapprehends the nature of carrier security 
deposits. Security posted by a carrier under OWCP's current policy and 
these final rules is neither allocable to, nor payable from, the 
special fund established by section 44. Instead, the Department treats 
carrier security deposits in the same manner as security deposits made 
by authorized self-insurers, which are not placed in the special fund. 
See 33 U.S.C. 932(a)(2) (as a condition to self-insurer authorization, 
the Secretary may ``require such employer to deposit in a depository 
designated by the Secretary either an indemnity bond or securities * * 
*''). Accordingly, negotiable securities posted by carriers are 
deposited in a Department of Labor Federal Reserve Bank account (now in 
St. Louis, Missouri) and held under sub-accounts the Bank creates in 
the name of each carrier and self-insurer. The Bank pays the carrier 
interest on the deposited securities as it accrues. The Department has 
no authority to disperse funds from these accounts. Letters of credit 
and indemnity bonds posted by carriers are held by OWCP in its 
Washington, DC office.
    In the event the Department redeems the posted security, and the 
security is in the form of a surety bond, the surety will pay claims 
directly. If, however, the

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security is in the form of a letter of credit or negotiable securities, 
OWCP deposits the proceeds of the security in an OWCP agency account, 
established by the Treasury Department, so that OWCP may disperse the 
funds when necessary. This agency account also contains, inter alia, 
monies that constitute the section 44 special fund, proceeds of seized 
self-insurer security deposits, and monies payable under the District 
of Columbia Workmen's Compensation Act. The carriers' security proceeds 
are neither part of the section 44 special fund nor pooled to form a 
separate insurance carrier guaranty fund. Instead, like the Federal 
Reserve Bank, OWCP creates sub-accounts for each carrier so that both 
interest on, and payments from, the security deposit proceeds are 
allocated to the individual carrier.
    Security deposits simply provide some measure of assurance that a 
carrier will meet its own payment obligations. These obligations are 
separate from the increased assessment costs the carrier may also bear 
for another carrier's or employer's insolvency when the special fund 
makes payments under Section 18(b). Because OWCP uses a carrier's 
security deposit solely to satisfy the carrier's own liabilities, OWCP 
pays claims from the deposits in the same manner the carrier would. 
Accordingly, OWCP does not require claimants to follow the procedure 
set forth in section 18(b) for payments made from the special fund. If, 
for example, the employer is bankrupt and the carrier was voluntarily 
paying compensation to an injured worker prior to becoming insolvent, 
OWCP will continue those payments on the carrier's behalf if that 
carrier deposited security and continued payments are appropriate. Once 
the security deposit is exhausted, however, the claimant must obtain a 
compensation order before OWCP will make payments from the special fund 
under section 18(b).
    Thus, rather than imposing an independent obligation on the United 
States or seeking to alter the role of the special fund, as the 
commenter suggests, security deposits provide a separate mechanism 
through which a carrier's liabilities may be satisfied. If the carrier 
fully discharges its payment obligations, then OWCP never uses the 
carrier's security deposit and returns it (or any unused portion) to 
the carrier (or its successor in interest) when the carrier ceases 
writing Longshore insurance or becomes insolvent. See Sec. Sec.  
703.209(c) and 703.211(c). For instance, one of the 23 insolvent 
carriers mentioned above had posted a $400,000 deposit in the form of 
negotiable securities. Because the carrier had no remaining LHWCA 
obligations, OWCP returned the deposited securities to the State office 
handling the carrier's liquidation.
    Finally, nothing in the proposed or final rules relieves an 
employer from its payment obligations if its insurer is financially 
incapable of meeting those obligations. See generally 33 U.S.C. 904(a); 
B.S. Costello v. Meagher, 867 F.2d 722 (1st Cir. 1989). In these 
circumstances, OWCP routinely seeks payment from the employer before 
turning to any deposited security. Only if the employer is also unable 
to pay due to insolvency does OWCP use the carrier's deposited 
security. OWCP intends to continue this practice under these rules.

B. Changes Made Between Proposed and Final Rule To Allow Exemption From 
the Deposit Requirements for Certain Carriers

    The proposed rule eliminated OWCP's current practice of exempting 
from the security deposit requirements those carriers who have an ``A'' 
or higher A.M. Best rating. See 69 FR 12218-19 (March 15, 2004). 
Instead, the proposal required all carriers authorized to write 
Longshore insurance, regardless of their financial strength, to deposit 
security based on the amount of their outstanding Longshore obligations 
not otherwise secured by State guaranty funds. Two comments generally 
support this approach. Two other comments, however, object to 
eliminating the exemption and propose alternatives.
    Commenters lodging objections point out that eliminating the 
exemption increases operating costs for the financially strongest 
companies who are exempt under OWCP's current policy. These companies 
pose the least risk to the special fund. The commenters also argue 
against moving away from private insurance carrier rating systems to a 
new system of OWCP's creation because the private rating systems 
provide an objective, verifiable standard for determining whether a 
particular company is financially fit. Thus, rather than eliminating 
the exemption altogether, the commenters recommend that OWCP elevate 
the standard for exempting companies, and they offer a variety of 
suggestions for accomplishing this goal: Raise the required rating 
above the current A.M. Best ``A'' rating; consider ratings from 
multiple recognized carrier rating systems; factor in the carrier's 
overall size, as well as the size of its Longshore exposure; and 
consider the carrier's longevity in the workers' compensation insurance 
market.
    The Department agrees that the strongest carriers should be exempt 
from the security deposit requirements. In implementing this decision, 
the Department has adopted the commenters' suggestion to strengthen the 
criteria for exemption. Under the final rule, carriers awarded the 
highest rating by each of three private insurance carrier rating 
services designated on OWCP's web site--currently, A.M. Best, Standard 
& Poor's, and Weiss Research--for the current rating year and the 
immediately preceding year will be exempt from the security deposit 
requirements. This change is reflected in revisions the Department has 
made to Sec. Sec.  703.203(a) and 703.204(c)(1). The Department 
estimates that 10% of currently authorized carriers will meet the new 
exemption requirements.
    The Department's decision to exempt certain carriers remains 
faithful to the measured approach the Department advocated in the NPRM. 
69 FR 12219 (March 15, 2004). Although exempting even one carrier 
necessarily entails some degree of additional risk for the special 
fund, the Department believes that it has substantially reduced that 
risk by adopting a more stringent financial test for exemption than 
currently used so that only the strongest carriers--those least likely 
to run into financial difficulties--are granted an exemption. Moreover, 
by looking at ratings from three private systems and requiring 
sustained superior financial ratings over a two-year period, the 
Department believes it has minimized the impact of flaws inherent in 
any one static rating scheme for predicting future financial 
performance.
    Granting an exemption to the strongest carriers has additional 
benefits. First, very strong carriers will not be discouraged from 
participating in the Longshore insurance market by the added costs the 
security deposit requirement would impose. Second, OWCP's 
administrative burden will be lessened because it will not have to 
determine security deposit amounts for exempt carriers.
    The Department has responded to the remaining comments in the 
following section-by-section discussion.

C. Section-by-Section Explanation

    The Department received two comments addressing specific sections 
of the proposed rule. The following discussion responds to those 
comments and explains any changes the Department has made in the final 
rules. The Department received no comments concerning, and has made no 
changes to, proposed rule sections not discussed

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here; these sections appear in the final rule as proposed.
20 CFR 701.301(a)(7)
    (a) The Department proposed revising the definition of ``District 
Director'' by adding a sentence stating that ``[a]ny action taken by a 
person under the authority of a district director will be considered 
the action of a deputy commissioner.'' 69 FR 12225 (March 15, 2004). 
The Department added this sentence to clarify that substitution of the 
title ``district director'' for ``deputy commissioner'' did not in any 
way alter OWCP staff members'' authority to act.
    (b) One comment states that this sentence should be removed in 
order to avoid any implication that OWCP claims examiners have the same 
scope of authority as district directors. The Department agrees with 
this comment and has deleted the last sentence from the final rule. The 
Department did not intend to change the scope of authority of either 
district directors or claims examiners. Deleting the last sentence 
removes any implication to the contrary.
20 CFR 703.201
    (a) Section 703.201 provides a general overview of security 
deposits and their purpose. As proposed, it states, in part: ``Security 
deposits secure the payment of benefits when an insurance carrier 
defaults on any of its obligations under the LHWCA, regardless of the 
date such obligations arose.'' 69 FR 12226 (March 15, 2004).
    (b) One comment states that the phrase ``obligations under the 
LHWCA'' is unclear and should be revised. The Department agrees that 
this phrase in the proposed rule could be misconstrued. Accordingly, 
the Department has revised this section in the final rule by including 
specific language clarifying that the phrase ``obligations under the 
LHWCA'' means a carrier's liability for both compensation payments and 
medical benefits, and that such meaning applies to the entire subpart.
    (c) The same comment states that the word ``default'' is unclear 
because it could include situations where a solvent insurer simply 
disputes a claim. The comment suggests that default be expressly 
limited to a carrier's failure ``to timely pay a final judgment against 
the carrier for its obligation to pay benefits under the LHWCA and 
against which there is a right of execution.''
    In both legal and everyday parlance, the term ``default'' is 
commonly understood to mean a failure to meet a legal or contractual 
duty. See, e.g., Black's Law Dictionary (8th Ed. 2004); The New Shorter 
Oxford English Dictionary (1993). Such duty does not arise simply 
because an employer or insurance carrier contests a claim. Instead, it 
arises when a valid compensation order is entered. Under the Longshore 
Act's comprehensive adjudication scheme, claims are initially 
considered by an OWCP district director. 33 U.S.C. 919(c); 20 CFR 
702.311-.317. If the district director is unable to resolve all 
disputed issues to the parties' satisfaction, an administrative law 
judge holds a de novo hearing and issues a compensation order. 33 
U.S.C. 919(d), (e); 20 CFR 702.301, 702.332. Once filed by the district 
director, the administrative law judge's order becomes effective and 
imposes a legal obligation on the employer or carrier to pay any 
compensation awarded, notwithstanding any appeal from the order. 33 
U.S.C. 919(e), 921(a), 921(b)(3); 20 CFR 702.350. Failure to comply 
with this effective order within the statutory 10-day time period 
constitutes a default. 33 U.S.C. 914(f); 20 CFR 702.350.
    To the extent this comment implies that OWCP should be allowed to 
use the posted security only when a carrier fails to satisfy a district 
court order enforcing an underlying compensation order (or, as put by 
the commenter, a ``final judgment * * * against which there is a right 
of execution'') issued under section 18 of the statute, 33 U.S.C. 918, 
the Department rejects the comment. Requiring claimants or the Director 
to go to district court in every case in which a financially troubled 
carrier defaults runs counter to the primary purpose of the security 
deposit requirement: the uninterrupted and prompt payment of 
compensation and medical benefits when a carrier is no longer capable 
of paying. Accordingly, the Department has not changed this portion of 
the rule.
    (d) The Department has also revised the third sentence of this 
regulation for stylistic and grammatical purposes. As proposed, this 
sentence stated that security deposits ``also secure the payment of 
compensation and medical benefits when a carrier with LHWCA obligations 
becomes insolvent in States with no insurance guaranty funds, or with 
guaranty funds that do not fully secure such obligations.'' The final 
rule states more simply and clearly that security deposits ``secure the 
payment of compensation and medical benefits when a carrier becomes 
insolvent and such obligations are not otherwise fully secured by a 
State guaranty fund.''
20 CFR 703.202
    (a) Section 703.202 discusses how the Department will determine 
gaps in State guaranty fund coverage and how it will convey those 
determinations to the public. Specifically, the rule: (1) Outlines 
factors OWCP will consider in determining each State's guaranty fund 
coverage of Longshore obligations; (2) requires OWCP to post its 
findings on the agency's web site, where they will be open for public 
inspection and comment; (3) provides that OWCP will deem 33 % of a 
carrier s Longshore obligations unsecured if the amount of State fund 
coverage cannot be determined or is ambiguous; and (4) states that OWCP 
will revise its findings in response to substantiated public comments 
or for any other relevant reason. 69 FR 12226 (March 15, 2004).
    (b) One comment suggests that OWCP should complete State fund 
reviews and receive public comments before calculating and requiring 
security deposits. The commenter states that this would give State 
legislators and regulators an opportunity to remedy any State guaranty 
fund coverage deficiencies OWCP identifies, thus implying that the need 
for certain security deposits would be eliminated.
    While the Department agrees that public comment on OWCP's State 
guaranty fund evaluations will be helpful, it has not incorporated the 
commenter's proposal in the final rule. The procedure Sec.  703.202 
adopts is a dynamic one: OWCP will revisit its determinations regarding 
State guaranty fund coverage when public comment or other relevant 
information makes a re-determination useful. This can happen before, 
during, or after calculating deposits for insurers on an individual 
basis. At a minimum, though, OWCP will consider each insurer's comments 
prior to setting the required security deposit amount for that company. 
Section 703.203(b) explicitly gives each insurer who disagrees with 
OWCP's assessment of State fund coverage the opportunity to submit 
evidence and/or argument on the question with its security deposit 
application. Thus, although OWCP might make a security deposit 
determination before all public comments are received, it is unlikely 
that general public comments will be more enlightening than information 
offered by insurers with a direct financial stake in the determination.
    Moreover, the regulation's dynamic process is designed to take into 
account actions States may take in response to OWCP's evaluation of 
their guaranty funds' coverage for Longshore claims. The legislative 
process is often protracted, outcomes are uncertain, and OWCP has no 
control over that process in any event. If and when a State alters its 
guaranty fund coverage, that

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alteration will be considered in the security deposit calculation 
process.
20 CFR 703.203
    (a) Section 703.203 requires carriers to apply annually for a 
security deposit determination and prescribes the information the 
application must include. In addition to reporting its outstanding 
Longshore Act liabilities, the subsection (a)(2) of the proposed rule 
required each carrier to include a statement either ``[o]f the deposit 
amount it believes will fully secure its obligations'' or ``[t]hat it 
has sufficient assets or other means to fully secure its obligations.'' 
69 FR 12227 (March 15, 2004).
    (b) One commenter states that the proposed rule does not clearly 
explain: (1) How an insurance carrier ``fully secures'' its 
obligations; (2) what factors a carrier should consider in suggesting a 
security deposit amount that will fully secure its liability; and (3) 
how a carrier determines whether it has sufficient assets to secure its 
obligations. The Department has reconsidered proposed subsection (a)(2) 
and determined that a carrier should not be required either to suggest 
a security deposit amount or to state that it has sufficient assets to 
fully secure its obligations. The statement the proposed rule describes 
is superfluous and unnecessary to the security deposit determination 
process set forth in the final rules. Accordingly, the Department has 
deleted these requirements. This change will make the application 
process simpler because the carrier need only supply very limited, 
clearly defined information: (1) A statement of its outstanding 
liabilities on a state-by-state basis; (2) other specific information 
OWCP requests; and (3) if the carrier wishes, evidence and/or argument 
regarding OWCP's evaluation of relevant State guaranty funds. Moreover, 
given the changes the Department has made to Sec.  703.204 (see 
discussion below), a carrier generally will not be asked to submit 
voluminous financial information because it will no longer be 
necessary.
    (c) The final version of Sec.  703.203 adds a new subsection (a)(1) 
to implement the Department's decision to exempt the financially 
strongest carriers from the security deposit requirement. In order to 
obtain this exemption, a carrier must submit, as part of its annual 
application, documentation from three OWCP-designated private insurance 
rating organizations demonstrating the rating each service awarded the 
carrier for both the current year and the immediately preceding year. 
The carrier must receive the highest rating each service awards for 
both years in order to qualify for the exemption. OWCP will make an 
exemption decision each year. Thus, an exempt carrier whose rating is 
downgraded by any one of the rating services the following year will be 
required to deposit security. The carrier may again qualify for an 
exemption, but only after it has demonstrated sustained superior 
financial performance by receiving the highest ratings from the three 
designated rating organizations for two consecutive years.
    Currently, OWCP has designated A.M. Best, Standard & Poor's, and 
Weiss Research as the three private rating services it will use. The 
rule does not name these rating services; instead, the rule requires 
OWCP to publish the services it selects by posting their names on the 
agency's web site. This procedure will give OWCP the option of 
selecting different rating services from time to time without having to 
engage in a new rulemaking. A variety of factors may lead OWCP to 
change its selections. For instance, a selected service could change 
its name or corporate form, or even go out of business. By the same 
token, new rating services that prove to be reliable may enter the 
market. The procedure the rule adopts allows OWCP the flexibility to 
make changes as the agency deems necessary. Subsection (a)(2) of the 
final rule also clarifies that a carrier seeking an exemption based on 
its financial standing need not include a statement of its outstanding 
LHWCA liabilities with its application unless OWCP denies its exemption 
request.
20 CFR 703.204
    (a) This section sets forth the process OWCP will follow in 
determining the security deposit amount for each carrier.
    (b) Proposed Sec.  703.204(b) lists a variety of factors, most 
financial in nature, that OWCP could evaluate and consider in making 
its determination. These factors include the carrier's: (1) Financial 
strength; (2) insureds' strength; (3) reinsurance protection; (4) 
surplus and recent settlements; (5) amount of business written through 
the National Reinsurance Pool; (6) deductibles secured by letters of 
credit; (7) reduced exposure; (8) increases in capitalization; (9) 
State guaranty fund coverage for its LHWCA obligations; and (10) 
expansion of business into States without guaranty fund coverage for 
Longshore obligations. 69 FR 12227 (March 15, 2004).
    One comment states that evaluation of these factors requires highly 
technical expertise in both insurance company and general financial 
analysis. The factors encompass voluminous information that is often 
confidential and difficult, if not impossible, to present in a 
meaningful way. The commenter contends that private insurance rating 
organizations are in a better position to conduct this analysis. In 
addition, the commenter notes that it is unclear whether OWCP intends 
to consider these factors as they pertain only to the carrier's 
Longshore business or its business as a whole.
    The Department agrees with this comment. Accordingly, it has made 
substantial revisions in the final rule. OWCP has insufficient 
resources to conduct a financial evaluation of each carrier that 
matches the breadth and depth of recognized private rating 
organizations' evaluations. Moreover, a survey of private 
organizations' rating methodology documents verifies that they consider 
many of the same financial factors listed in the proposed rule.
    Thus, the Department agrees that it should rely on insurance rating 
organizations for a picture of each carrier's financial health and has 
eliminated those factors already considered by the rating organizations 
from the list in Sec.  703.204(b). There is one exception. The final 
rule retains consideration of the strength of a carrier's insureds in 
the Longshore industry. Because a carrier's insolvency does not absolve 
an employer of its own liabilities under the LHWCA, the size and 
financial strength of the employers a carrier insures is an important 
consideration in determining the special fund's risk in the event the 
carrier becomes insolvent. If the employer is financially capable of 
meeting its LHWCA obligations, notwithstanding its carrier's 
insolvency, the risk to the special fund is diminished. In some 
instances, the strength of a carrier's insureds is also relevant to the 
amount of coverage a State guaranty fund affords. For example, some 
State guaranty funds will not pay any of an insolvent carrier's 
obligations where the insured employer is insolvent as well; as a 
result, the special fund's risk increases.
    The final rule also adds a variety of Longshore-insurance-related 
factors that fall within OWCP's particular expertise as administrator 
of the program. The Department drew two of these factors--a carrier's 
longevity in the Longshore insurance market and Longshore claim-payment 
history--from the comments discussing criteria for exempting carriers 
from the security deposit requirements. While a reliable payment 
history of significant duration does not guarantee future performance, 
this information is nevertheless a helpful indicator for OWCP in 
setting the

[[Page 43229]]

security deposit amount for a particular carrier.
    The Department has also deleted from Sec.  703.204(b) language 
regarding the deposit amount suggested by the insurance carrier. See 69 
FR 12227 (March 15, 2004). This language is no longer necessary in 
light of the Department's revisions to proposed Sec.  703.203 explained 
above.
    (c) Proposed Sec.  703.204(c) provides that OWCP will require all 
carriers that write LHWCA insurance in States without complete guaranty 
fund coverage identified under Sec.  703.202(b) to deposit security for 
their unsecured LHWCA obligations. For each carrier who writes more 
than an insignificant or incidental amount of LHWCA insurance, OWCP 
will fix a security deposit amount between 33\1/3\% and 100% of the 
carrier's outstanding LHWCA obligations in each State. 69 FR 12227 
(March 15, 2004).
    One comment states that Sec.  703.204(c) is unclear. The commenter 
suggests that the rule be revised to clarify that: (1) OWCP will 
require a security deposit for only those obligations not covered by 
State guaranty funds; (2) the 33\1/3\% minimum deposit applies only to 
that portion of a carrier's Longshore obligations not covered by State 
guaranty funds; and (3) OWCP will consider the factors set forth in 
Sec.  703.204(b) in making its security deposit determination. The 
commenter's first two points have merit. Accordingly, the Department 
has revised the final rule by breaking Sec.  703.204(c) into three 
subparts. Subpart (1) implements the Department's decision to exempt 
from the security deposit requirements those carriers awarded the 
highest financial ratings for both the current rating year and the 
immediately preceding year from the three rating organizations selected 
by OWCP. Subpart (2) clarifies that carriers whose LHWCA obligations 
are fully secured by State guaranty funds will not be required to 
deposit security. Subpart (3) contains language similar to proposed 
Sec.  703.204(c), but specifically qualifies the phrase ``outstanding 
LHWCA obligations'' by adding ``not secured by a State guaranty fund.'' 
The Department does not believe any change to the proposed rule is 
necessary in response to the commenter's third point because Sec.  
703.204(b) makes clear that OWCP may consider the factors listed in 
that subsection in rendering a security deposit determination (i.e., 
``The Branch may consider a number of factors in setting the security 
deposit amount, including. * * *'' Sec.  703.204(b).).
    One comment asks whether a carrier must make a pledge or other 
assurance that it will meet its payment obligations in addition to the 
security deposit if that deposit is less than 100% of its outstanding 
obligations. The Department does not believe an additional pledge or 
other guaranty is necessary. The statute already requires each carrier 
to meet its payment obligations, regardless of the amount of security a 
carrier deposits.
20 CFR 703.205
    (a) Section 703.205(a) requires each carrier to execute an 
Agreement and Undertaking containing terms set forth in the regulation. 
As proposed, these terms give OWCP authority to act upon any deposited 
security when ``[t]he carrier fails to renew any deposited letter of 
credit or substitute acceptable securities in their place'' or ``[t]he 
carrier fails to renew any deposited negotiable securities at maturity 
or substitute acceptable securities in their place.'' 69 FR 12227 
(March 15, 2004) (proposed Sec.  703.205(a)(2)(ii), (iii)).
    One comment suggests that proposed Sec.  703.205(a)(2)(ii) be 
rewritten to clarify that a carrier may substitute a new letter of 
credit or a bond, in addition to negotiable securities, in lieu of 
renewing any deposited letter of credit. This comment has merit. As 
proposed, Sec.  703.205(a)(2)(ii) could be read to foreclose a 
carrier's ability to use a new letter of credit or an indemnity bond to 
secure its obligations. Proposed Sec.  703.205(a)(2)(iii) similarly 
could be read to preclude a carrier from substituting a letter of 
credit or an indemnity bond for matured securities. The Department does 
not wish to restrict a carrier's ability to shift among approved forms 
of security as the carrier deems necessary. Accordingly, the Department 
has revised both Sec.  703.205(a)(2)(ii) and (iii) to make clear that a 
carrier may substitute approved forms of security for others that have 
reached maturity or expired. As set forth below, the Department has 
also revised several other regulations that contain the same language 
as proposed Sec. Sec.  703.205(a)(2)(ii) and (iii).
    (b) Proposed Sec.  703.205(a)(2)(iii) requires that the carrier 
either renew matured negotiable securities or substitute acceptable 
securities in their place. 69 FR 12227 (March 15, 2004). One commenter 
contends this provision is unnecessary because the Treasury 
Department's regulations, which govern the conduct of the custodian of 
the deposited securities (e.g. the Federal Reserve Bank), prohibit 
release of the principal to the carrier unless OWCP consents or the 
carrier provides substitute securities. The commenter misconstrues this 
provision's point. The rule requires that carriers authorize OWCP to 
take possession of their security deposits under certain conditions. 
Thus, unlike the Treasury Department's rule, which governs the 
custodian's conduct, Sec.  703.205(a)(2)(iii) governs the carrier's 
obligations and OWCP's rights with respect to the deposited security. 
The regulation is therefore appropriate and necessary.
    (c) The Department has also corrected a typographical error that 
appeared in the proposed rule. As proposed, Sec.  703.205's 
introductory paragraph cross-referenced Sec.  703.203 when referring to 
OWCP's decision fixing a carrier's required security deposit amount. 69 
FR 12227 (March 15, 2004). The regulation governing OWCP's decision, 
however, is Sec.  703.204. Accordingly, the final rule contains the 
correct cross-reference to Sec.  703.204.
20 CFR 703.207
    (a) Proposed Sec.  703.207 cross-references the Treasury 
Department's regulations to define the types of negotiable securities a 
carrier may post. The rule states that if a carrier elects to use 
negotiable securities, the carrier ``shall deposit any negotiable 
securities acceptable as security for the deposit of public monies of 
the United States under regulations issued by the Secretary of the 
Treasury. (See 31 CFR part 225.)'' 69 FR 12228 (March 15, 2004).
    (b) One comment objects to this provision on the ground that the 
Treasury Department's regulations appear inapplicable. The commenter 
states that those regulations define ``bond'' as a written instrument 
that guarantees fulfillment of an obligation to the United States. From 
this premise, the commenter contends that because the statute does not 
place any financial obligations on the United States, the Treasury 
Department's rules are not applicable. The Department disagrees. As the 
statutorily designated administrator of the LHWCA invested with broad 
rulemaking authority, 33 U.S.C. 939(a), 944(a), the Secretary (and, 
thus, the United States) has a direct interest in ensuring that the 
statute's primary goal is met. That goal is the prompt and certain 
payment of compensation and medical benefits to injured workers and 
their families. Taking steps to safeguard the Longshore program's 
fiscal vitality by requiring insurers to deposit security furthers that 
goal. The Treasury Department rule referred to by the commenter does 
not lead to a different conclusion. That rule specifically pertains to 
obligations to the United States--the sort of obligation these rules 
impose on insurance

[[Page 43230]]

carriers--as opposed to obligations of the United States--those duties 
the United States owes to other entities. Obligations to the United 
States--the kind governed by this regulation--squarely fall within the 
Treasury Department's rules. See 31 CFR 225.2 (``Bond means an executed 
written instrument, which guarantees the fulfillment of an obligation 
to the United States and sets forth the terms, conditions, and 
stipulations of the obligation.'')
    To the extent this comment relates to the Department's authority to 
require carriers to post security deposits, the Department has 
responded fully in the Statutory Authority discussion above. 
Accordingly, the Department rejects this comment and has made no 
changes in the final rule.
20 CFR 703.208
    (a) This section provides that a carrier who chooses to secure its 
Longshore obligations with negotiable securities must deposit the 
securities with a Federal Reserve bank or the Treasurer of the United 
States. As proposed, this rule also sets forth OWCP's discretionary 
authority to authorize the securities' custodian to pay interest 
accrued on the deposited securities to the carrier. 69 FR 12228 (March 
15, 2004).
    (b) One comment states that the rule should be revised to require 
OWCP to direct interest payments to the carrier unless the carrier has 
defaulted on its Longshore obligations. OWCP currently directs the 
Federal Reserve bank to pay accrued interest on deposited negotiable 
securities to the carrier absent other specific instructions. OWCP does 
not plan to depart from its current practice under the new rules. The 
Department has therefore revised Sec.  703.208 to reflect that interest 
accruing on deposited negotiable securities will be paid to the carrier 
unless any of the conditions set forth in Sec.  703.211(a) occur (i.e. 
the conditions that allow OWCP to seize a carrier's security deposit 
and/or use its proceeds).
20 CFR 703.209
    (a) Proposed Sec.  703.209 proscribes substitution of ``an 
indemnity bond, letters of credit or negotiable securities deposited by 
an insurance carrier under the regulations in this part'' without OWCP 
authorization. This regulation also explains how carriers may apply to 
withdraw their security deposits when they have ceased writing 
Longshore insurance. 69 FR 12228 (March 15, 2004).
    (b) One comment suggests that for carriers who secure their 
obligations with negotiable securities, the Department should include 
in the rule a list of acceptable securities that a carrier could 
substitute without OWCP's consent. The commenter notes that this would 
reduce the administrative burden on OWCP and carriers alike.
    The Department agrees in principal with this comment. Section 
703.207 limits the types of negotiable securities a carrier may use to 
those approved by the Treasury Department. Because the approved list of 
securities and their valuations change over time, the Treasury 
Department has eliminated from its regulations all mention of 
acceptable classes of securities. It has opted instead to put this 
information in other documents (e.g. Treasury Department circulars) and 
to post it on the Treasury Department's Web site. Thus, it would not be 
advisable for the Department to promulgate a rule containing a list of 
acceptable substitute securities.
    Nevertheless, the Treasury Department's regulations governing the 
conduct of the custodian (e.g. a Federal Reserve Bank holding the 
carrier's deposited securities) allow the custodian to release proceeds 
from matured securities to the depositor without specific instructions 
from the agency, but only if the depositor substitutes Treasury 
Department-approved securities in their place. 31 CFR 225.7(c). Because 
the custodian will allow substitution only with approved negotiable 
securities, a carrier need not seek the Department's approval in those 
circumstances. To implement this change in the final rule, the 
Department has: (1) Limited Sec.  703.209(a) to requirements regarding 
substitution of security; (2) added language to Sec.  703.209(a) to 
allow different treatment for substitution of negotiable securities; 
(3) moved language regarding withdrawal of security from proposed Sec.  
703.209(a) to Sec.  703.209(b); and (4) renumbered proposed Sec.  
703.209(b) as Sec.  703.209(c).
20 CFR 703.211
    For the reasons set forth in paragraph (a) of the discussion of 
comments received regarding Sec.  703.205(a)(2)(ii) and (iii), the 
Department has revised Sec. Sec.  703.211(a)(2) and (3) in the same 
manner.
20 CFR 703.301
    (a) Section 703.301 discusses the Department's authority to 
authorize employers to self-insure. As proposed, the rule allows the 
Department to authorize any employer who furnishes ``satisfactory proof 
of its ability to pay compensation directly, and who agrees to 
immediately cancel any existing insurance policy when OWCP approves the 
employer's application to be self-insured.''
    (b) Although the Department received no comments on this section, 
the Department realized in finalizing the rule that the phrase 
``immediately cancel any existing insurance policy'' could be construed 
more broadly than intended. For instance, the phrase could be read as 
requiring an employer to cancel any excess or catastrophic insurance it 
may have to cover its Longshore obligations, a reading that would be 
contrary to other regulations authorizing the Department to require a 
self-insurer to carry catastrophic coverage. See, e.g., Sec.  
703.304(a)(6). To avoid confusion, the Department has added language to 
Sec.  703.301 clarifying that an approved self-insurer must agree to 
cancel existing insurance policies covering its Longshore obligations 
but may continue to carry excess or catastrophic coverage it chooses 
(or is required by the Department) to purchase.
20 CFR 703.304
    For the reasons set forth in paragraph (a) of the discussion of 
comments received regarding Sec.  703.205(a)(2)(ii) and (iii), the 
Department has revised Sec.  703.304(a)(4)(ii) and (iii) in the same 
manner. The Department has also added a comma after the phrase ``in a 
form prescribed and provided by OWCP'' in Sec.  703.304(a) for 
grammatical purposes.
20 CFR 703.307
    For the reasons set forth in the discussion of comments received 
regarding Sec.  703.208, the Department has revised Sec.  703.307 in 
the same manner.
20 CFR 703.308
    For the reasons set forth in the discussion of comments received 
regarding Sec.  703.209, the Department has revised Sec.  703.308 in 
the same manner.
20 CFR 703.310
    For the reasons set forth in paragraph (a) of the discussion of 
comments received regarding Sec.  703.205(a)(2)(ii) and (iii), the 
Department has revised Sec. Sec.  703.310(a)(2) and (3) in the same 
manner.

III. Executive Order 12866 (Regulatory Planning and Review)

    The Office of Management and Budget (OMB) has determined that this 
rule is a ``significant regulatory action'' under section 3(f)(4) of 
Executive Order 12866. Under that section, a ``significant regulatory 
action'' includes one that ``raise[s] novel legal or policy issues 
arising out of legal mandates, the President's priorities, or the 
principles

[[Page 43231]]

set forth in this Executive order.'' Accordingly, OMB has reviewed this 
rule.
    In adopting this final rule, the Department considered several 
alternatives set forth in the NPRM. 69 FR 12219 (March 15, 2004). The 
Department considered requiring all carriers to fully secure their 
LHWCA obligations. This approach would place the risk of insolvency on 
the failed insurer rather than the surviving, healthy members of the 
insurance industry and self-insured employers through special fund 
assessments. 33 U.S.C. 944(c)(2). The Department rejected this 
approach, however, because it might lead some insurance carriers to 
leave the market and would duplicate, at least to some extent, the 
reserve requirements imposed by State insurance regulators.
    Another alternative the Department considered but rejected was to 
use the existing special fund as an overall guaranty fund for all LHWCA 
claims. Although easy to administer, this approach would likely create 
negative incentives for prudent fiscal responsibility in the insurance 
industry.
    Thus, the Department proposed a third approach in the NPRM. The 
proposed rules required all authorized insurance carriers to post 
security deposits, but only where there was no adequate State guaranty 
fund and only in amounts that reflected the actual risk of loss to the 
special fund. 69 FR 12226-12228 (March 15, 2004). As discussed in 
detail above, the Department has adopted this approach in the final 
rule, with the addition of an exemption from the security deposit 
requirements for the financially strongest carriers.
    The benefits of this rule are numerous. First, security deposits 
will ensure that the Longshore Act's primary purpose--the prompt 
payment of compensation and medical benefits to injured workers and 
their survivors--is fulfilled, notwithstanding an insurance carrier's 
insolvency.
    Second, security deposits protect both healthy members of the 
insurance industry and the special fund. The special fund's costs, 
which are calculated and assessed against authorized Longshore 
insurance carriers and self-insured employers each year, are primarily 
incurred for compensation payments in two circumstances: (1) When a 
carrier (and the employer it insured) or a self-insurer is insolvent; 
and (2) when a carrier or employer is entitled to relief under 33 
U.S.C. 908(f) (second-injury fund). Security deposits will avoid 
draining the special fund's available resources in the event a carrier 
becomes insolvent. Moreover, as many industry members recognized in 
responding to the Department's request for information published in the 
Federal Register on February 22, 2002 (67 FR 8450), requiring 
authorized carriers to fully secure their LHWCA obligations obviates 
the need to collect annual special fund assessments from healthy 
carriers to pay for the insolvency of weaker carriers. See 69 FR 12219 
(March 15, 2004). Because the requirement that liabilities be fully 
secured should decrease the fund's costs for benefits paid on behalf of 
insolvent carriers, the special fund assessments levied against 
carriers and self-insured employers are expected to decrease 
commensurately.
    Third, security deposits protect the special fund from the 
unpredictable future, including the inherent inability of any static 
rating scheme to accurately predict the future financial stability of 
an insurance carrier, and the potential for catastrophic losses beyond 
the carrier's control (e.g. natural disasters, acts of terrorism) in 
the shipping and shipbuilding industries. See 69 FR 12219 (March 15, 
2004).
    By providing three methods for meeting the security deposit 
requirements, the final rules allow carriers to manage the direct costs 
associated with posting security by choosing an appropriate financial 
instrument. A carrier who deposits negotiable securities, for instance, 
continues to own the negotiable securities (subject to OWCP's security 
interest) and receive the income generated by them. See Sec.  703.208. 
The majority of carriers have chosen this method for securing their 
LHWCA obligations under OWCP's current policy. A carrier may also elect 
to purchase an indemnity bond or letter of credit to meet its security 
deposit obligation. As noted in the NPRM, the Department estimates a 
$400,000 bond would require only a small initial cash outlay of 
approximately $6,000-$8,000 at typical current rates. See 69 FR 12223 
(March 15, 2004).
    In sum, the final rule balances the interests of insurance 
carriers, Longshore Act claimants, and the Department. The rule exempts 
from the deposit requirements those insurance carriers with the highest 
financial ratings who demonstrate solid financial strength, and limits 
the number of remaining carriers who must post deposits to those 
carriers operating in States with inadequate guaranty funds. At the 
same time, the rule meets the Department's objectives of protecting the 
special fund from insurance carrier insolvency and ensuring the prompt 
and continued payment of compensation and medical benefits to injured 
workers.

IV. Information Collection Requirements (Subject to the Paperwork 
Reduction Act)

    As explained in the NPRM, the Department submitted several new 
collections of information contained in the proposed rules to the 
Office of Management and Budget (OMB) for review in accordance with the 
Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et seq., and its 
implementing regulations at 5 CFR part 1320. 69 FR 12221-22 (March 15, 
2004). The new information collection requirements are found in 
Sec. Sec.  703.2, 703.203, 703.204, 703.205, 703.209, 703.210, 703.212, 
703.303 and 703.304.
    With the exception of Sec. Sec.  703.303 and 703.304, these 
collections relate to information insurance carriers are required to 
submit as part of the authorization process for writing LHWCA 
insurance, and as part of the process by which OWCP decides both the 
extent of an authorized insurance carrier's unsecured LHWCA obligations 
and the amount of the required security deposit. To implement these new 
collections, the Department proposed creating two new forms for 
insurance carriers (LS-276 and LS-275 IC). 69 FR 12221 (March 15, 
2004). The information collections established in Sec. Sec.  703.303 
and 703.304 relate to the security a self-insured employer deposits to 
secure its payment of compensation under the LHWCA and its extensions. 
To implement these collections, the Department proposed one new form 
for self-insurers (Form LS-275 SI). 69 FR 12221 (March 15, 2004).
    Burden estimates. (1) Form LS-276, Application for Security Deposit 
Determination. As fully explained in the NPRM, approximately 385 
insurance carriers annually will file Form LS-276. The Department 
estimates that on average, it will take a carrier one hour to collect 
the information, complete Form LS-276 and mail it. Thus, the total 
annual hour burden is estimated to be 385 hours. The Department also 
estimates respondents' total annual operating and maintenance (printing 
and mailing) costs to be $163.80. 69 FR 12221 (March 15, 2004).
    (2) LS-275 IC, Agreement and Undertaking (Insurance Carrier); LS-
276 SI, Agreement and Undertaking (Self-Insured Employer). As fully 
explained in the NPRM, the Department estimates that approximately 343 
(or 50%) of all authorized insurance carriers and self-insurers 
annually will complete and file Form LS-275 IC or LS-275 SI. The

[[Page 43232]]

Department estimates that on average, it will take a respondent 15 
minutes to locate the information, complete form LS-275 IC or LS-275 SI 
and mail it. Thus, the total annual hour burden is estimated to be 
85.75 hours. The Department also estimates respondents' total annual 
operating and maintenance (printing and mailing) costs to be $145.60. 
69 FR 12222 (March 15, 2004).
    The Department invited public comment on the new information 
collection requirements. 69 FR 12218, 12221 (March 15, 2004). No 
comments were received. OMB subsequently approved the use of the three 
new forms under OMB No. 1215-0204 until June 30, 2007, provided that 
the Department reports on the viability of developing criteria to 
exempt financially secure carriers from making a security deposit when 
it renews these collections of information in 2007.
    Changes made between the proposed and final rules in response to 
public comment require a minor revision to Form LS-276, Application for 
Security Deposit Determination. Under the final rules, any carrier 
seeking an exemption from the security deposit requirements must submit 
documentation establishing its current rating and its rating for the 
immediately preceding year from each of three private insurance rating 
services designated by the Department. The Department intends to revise 
Form LS-276 to: (1) Allow a carrier to indicate that it is seeking an 
exemption; and (2) notify the carrier that it must submit the required 
ratings from private insurance rating services with its application. 
The Department believes this new reporting requirement will result in 
only de minimus increases in the cost and time burdens estimated for 
completing Form LS-276 that the Department set forth in the NPRM's 
preamble. 69 FR 12221 (March 15, 2004).

V. Regulatory Flexibility Act and Executive Order 13272 (Proper 
Consideration of Small Entities in Agency Rulemaking)

    The Regulatory Flexibility Act of 1980, as amended (5 U.S.C. 601 et 
seq.), requires an agency to prepare regulatory flexibility analyses 
when it proposes regulations that will have ``a significant economic 
impact on a substantial number of small entities,'' or to certify that 
the proposed regulations will have no such impact, and to make the 
analyses or certification available for public comment. For the reasons 
set forth in the NPRM, the Department determined that a complete 
regulatory flexibility analysis was not necessary, and certified that 
the proposed rules would not have a significant economic impact on a 
substantial number of small entities. 69 FR 12222-23. The Department 
invited public comment on the certification and delivered a copy of the 
NPRM to the Chief Counsel for Advocacy of the Small Business 
Administration.
    The Department has received no comments responding to the 
certification or its underlying factual basis. Accordingly, for the 
reasons stated in the NPRM, the Assistant Secretary of Labor for 
Employment Standards again certifies that this rule will not have a 
significant economic impact on a substantial number of small entities. 
As a result, no regulatory impact analysis is required.

List of Subjects

20 CFR Part 701

    Longshore and harbor workers, Organization and functions 
(government agencies), Workers' compensation.

20 CFR Part 703

    Bonds, Insurance companies, Longshore and harbor workers, Reporting 
and recordkeeping requirements, Securities, Workers' compensation.

0
For the reasons set forth in the preamble, title 20, Chapter VI, 
Subchapter A of the Code of Federal Regulations is amended to read as 
follows:

PART 701--GENERAL PROVISIONS, DEFINITIONS AND USE OF TERMS

0
1. The authority citation for Part 701 is revised to read as follows: 
Authority: 5 U.S.C. 301 and 8171 et seq.; 33 U.S.C. 939; 36 D.C. Code 
501 et seq.; 42 U.S.C. 1651 et seq.; 43 U.S.C. 1331; Reorganization 
Plan No. 6 of 1950, 15 FR 3174, 3 CFR, 1949-1953 Comp., p. 1004, 64 
Stat. 1263.

0
2. Revise Sec.  701.101 to read as follows:


Sec.  701.101  Scope of this subchapter and subchapter B.

    (a) This subchapter contains the regulations governing the 
administration of the Longshore and Harbor Workers' Compensation Act, 
as amended (LHWCA), 33 U.S.C. 901 et seq., except activities, pursuant 
to 33 U.S.C. 941, assigned to the Assistant Secretary of Labor for 
Occupational Safety and Health. It also contains the regulations 
governing the administration of the direct extensions of the LHWCA: the 
Defense Base Act (DBA), 42 U.S.C. 1651 et seq.; the Outer Continental 
Shelf Lands Act (OCSLA), 43 U.S.C. 1331; and the Nonappropriated Fund 
Instrumentalities Act (NFIA), 5 U.S.C. 8171 et seq.
    (b) The regulations in this subchapter also apply to claims filed 
under the District of Columbia Workmen's Compensation Act (DCCA), 36 
D.C. Code 501 et seq. That law applies to all claims for injuries or 
deaths based on employment events that occurred prior to July 26, 1982, 
the effective date of the District of Columbia Workers' Compensation 
Act, as amended (D.C. Code 32-1501 et seq.).
    (c) The regulations governing the administration of the Black Lung 
Benefits Program are in subchapter B of this chapter.

0
3. Revise Sec.  701.102 to read as follows:


Sec.  701.102  Organization of this subchapter.

    Part 701 provides a general description of the regulations in this 
subchapter; sets forth information regarding the persons and agencies 
within the Department of Labor authorized by the Secretary of Labor to 
administer the Longshore and Harbor Workers' Compensation Act, its 
extensions and the regulations in this subchapter; and defines and 
clarifies use of specific terms in the several parts of this 
subchapter. Part 702 of this subchapter contains the general 
administrative regulations governing claims filed under the LHWCA. Part 
703 of this subchapter contains the regulations governing insurance 
carrier authorizations, insurance carrier security deposits, self-
insurer authorizations, and certificates of compliance with the 
insurance regulations, as required by sections 32 and 37 of the LHWCA 
(33 U.S.C. 932, 937). Because the extensions of the LHWCA (see Sec.  
701.101) incorporate by reference nearly all the provisions of the 
LHWCA, the regulations in parts 701, 702 and 703 also apply to the 
administration of the extensions (DBA, DCCA, OCSLA, and NFIA), unless 
otherwise noted. Part 704 of this subchapter contains the exceptions to 
the general applicability of parts 702 and 703 for the DBA, the DCCA, 
the OCSLA, and the NFIA.

0
4. Revise Sec.  701.201 to read as follows:


Sec.  701.201  Office of Workers' Compensation Programs.

    The Office of Workers' Compensation Programs (OWCP) is responsible 
for administering the LHWCA and its extensions (see 20 CFR 1.2(e)). The 
regulations in subchapter A of chapter I of this title (20 CFR part 1) 
describe OWCP's establishment within the Employment Standards 
Administration, the functions assigned to it by the Assistant Secretary 
of Labor for

[[Page 43233]]

Employment Standards, and how those functions were performed before 
OWCP's establishment.


Sec.  701.202  [Reserved]


Sec.  701.203  [Reserved]

0
5. Remove and reserve Sec. Sec.  701.202 and 701.203.

0
6. Amend Sec.  701.301 by revising paragraphs (a)(1), (a)(5), (a)(6), 
(a)(7), (a)(8), (a)(9), (a)(10), (a)(12)(i)(B), (a)(12)(ii)(A) and 
(a)(12)(iii)(E) to read as follows:


Sec.  701.301  Definitions and use of terms.

    (a) * * *
    (1) Act or LHWCA means the Longshore and Harbor Workers' 
Compensation Act, as amended (33 U.S.C. 901 et seq.), and includes the 
provisions of any statutory extension of such Act (see Sec.  701.101(a) 
and (b)) pursuant to which compensation on account of an injury is 
sought.
* * * * *
    (5) Office of Workers' Compensation Programs or OWCP or the Office 
means the Office of Workers' Compensation Programs within the 
Employment Standards Administration, referred to in Sec.  701.201 and 
described more fully in part 1 of this title. The term Office of 
Workmen's Compensation Programs shall have the same meaning as Office 
of Workers' Compensation Programs (see 20 CFR 1.6(b)).
    (6) Director means the Director of OWCP, or his or her authorized 
representative.
    (7) District Director means a person appointed as provided in 
sections 39 and 40 of the LHWCA or his or her designee, authorized to 
perform functions with respect to the processing and determination of 
claims for compensation under the LHWCA and its extensions as provided 
therein and under this subchapter. The term District Director is 
substituted for the term Deputy Commissioner used in the statute. This 
substitution is for administrative purposes only and in no way affects 
the power or authority of the position as established in the statute.
    (8) Administrative Law Judge means a person appointed as provided 
in 5 U.S.C. 3105 and subpart B of 5 CFR part 930, who is qualified to 
preside at hearings under 5 U.S.C. 557 and is empowered by the 
Secretary to conduct formal hearings whenever necessary in respect of 
any claim for compensation arising under the LHWCA and its extensions.
    (9) Chief Administrative Law Judge means the Chief Judge of the 
Office of Administrative Law Judges, United States Department of Labor, 
whose office is at the location set forth in 29 CFR 18.3(a).
    (10) Board or Benefits Review Board means the Benefits Review Board 
established by section 21 of the LHWCA (33 U.S.C. 921) as amended and 
constituted and functioning pursuant to the provisions of chapter VII 
of this title and Secretary of Labor's Order No. 38-72 (38 FR 90), 
whose office is at the location set forth in 20 CFR 802.204.
* * * * *
    (12) * * *
    (i) * * *
    (B) Any harbor worker, including a ship repairer, shipbuilder and 
shipbreaker; and
* * * * *
    (ii) * * *
    (A) A master or member of a crew of any vessel; or
* * * * *
    (iii) * * *
    (E) Aquaculture workers, meaning those employed by commercial 
enterprises involved in the controlled cultivation and harvest of 
aquatic plants and animals, including the cleaning, processing or 
canning of fish and fish products, the cultivation and harvesting of 
shellfish, and the controlled growing and harvesting of other aquatic 
species; or
* * * * *

PART 703--INSURANCE REGULATIONS

0
7. The authority citation for Part 703 is revised to read as follows:

    Authority:  5 U.S.C. 301 and 8171 et seq.; 31 U.S.C. 9701; 33 
U.S.C. 932 and 939; 36 D.C. Code 501 et seq.; 42 U.S.C. 1651 et 
seq.; 43 U.S.C. 1331; Reorganization Plan No. 6 of 1950, 15 FR 3174, 
3 CFR, 1949-1953 Comp., p. 1004, 64 Stat. 1263; Secretary's Order 4-
2001, 66 FR 29656.

0
8. Amend Part 703 by redesignating Sec. Sec.  703.001 through 703.003 
as Sec. Sec.  703.1 through 703.3 and designating them as new ``Subpart 
A--General,'' by designating center heading ``Authorization of 
Insurance Carriers'' as ``Subpart B--Authorization of Insurance 
Carriers,'' and revising newly designated subpart A to read as follows:

Subpart A--General

Sec.
703.1 Scope of part.
703.2 Forms.
703.3 Failure to secure coverage; penalties.

Subpart B--Authorization of Insurance Carriers

* * * * *

Subpart A--General


Sec.  703.1  Scope of part.

    Part 703 governs insurance carrier authorizations, insurance 
carrier security deposits, self-insurer authorizations, and 
certificates of compliance with the insurance regulations. These 
provisions are required by the LHWCA and apply to the extensions of the 
LHWCA except as otherwise provided in part 704 of this subchapter.


Sec.  703.2  Forms.

    (a) Any information required by the regulations in this part to be 
submitted to OWCP must be submitted on forms the Director authorizes 
from time to time for such purpose. Persons submitting forms may not 
modify the forms or use substitute forms without OWCP's approval.

------------------------------------------------------------------------
              Form No.                               Title
------------------------------------------------------------------------
(1) LS-271..........................  Application for Self-Insurance.
(2) LS-274..........................  Report of Injury Experience.
(3) LS-275 SI.......................  Self-Insurer's Agreement and
                                       Undertaking.
(4) LS-275 IC.......................  Insurance Carrier's Agreement and
                                       Undertaking.
(5) LS-276..........................  Application for Security Deposit
                                       Determination.
(6) LS-405..........................  Indemnity Bond.
(7) LS-570..........................  Card Report of Insurance.
------------------------------------------------------------------------

    (b) Copies of the forms listed in this section are available for 
public inspection at the Office of Workers' Compensation Programs, 
Employment Standards Administration, U.S. Department of Labor, 
Washington, D.C. 20210. They may also be obtained from OWCP district 
offices and on the Internet at http://www.dol.gov/esa/owcp/dlhwc/lsforms.htm.


Sec.  703.3  Failure to secure coverage; penalties.

    (a) Each employer must secure the payment of compensation under the 
Act either through an authorized insurance carrier or by becoming an 
authorized self-insurer under section 32(a)(1) or (2) of the Act (33 
U.S.C. 932(a)(1) or (2)). An employer who fails to comply with these 
provisions is subject, upon conviction, to a fine of not more than 
$10,000, or by imprisonment for not more than one year, or both. Where 
the employer is a corporation, the president, secretary and treasurer 
each will also be subject to this fine and/or imprisonment, in addition 
to the fine against the corporation, and each is severally personally 
liable, jointly with the corporation, for all compensation or other 
benefits payable under the Act while the corporation fails to secure 
the payment of compensation.

[[Page 43234]]

    (b) Any employer who willingly and knowingly transfers, sells, 
encumbers, assigns or in any manner disposes of, conceals, secretes, or 
destroys any property belonging to the employer after an employee 
sustains an injury covered by the Act, with the intent to avoid payment 
of compensation under the Act to that employee or his/her dependents, 
shall be guilty of a misdemeanor and punished, upon conviction, by a 
fine of not more than $10,000 and/or imprisonment for one year. Where 
the employer is a corporation, the president, secretary and treasurer 
are also severally liable to imprisonment and, along with the 
corporation, jointly liable for the fine.

0
9. Amend Part 703 by adding new ``Subpart C--Insurance Carrier Security 
Deposit Requirements'' (consisting of Sec. Sec.  703.201 through 
703.213), designating the center heading ``Authorization of Self-
Insurers'' as ``Subpart D--Authorization of Self-Insurers,'' 
designating center heading ``Issuance of Certificates of Compliance,'' 
as ``Subpart E--Issuance of Certificates of Compliance,'' and revising 
new Subpart D.
    The addition and revision read as follows:
Subpart C--Insurance Carrier Security Deposit Requirements
Sec.
703.201 Deposits of security by insurance carriers.
703.202 Identification of significant gaps in State guaranty fund 
coverage for LHWCA obligations.
703.203 Application for security deposit determination; information 
to be submitted; other requirements.
703.204 Decision on insurance carrier's application; minimum amount 
of deposit.
703.205 Filing of Agreement and Undertaking; deposit of security.
703.206 [Reserved]
703.207 Kinds of negotiable securities that may be deposited; 
conditions of deposit; acceptance of deposits.
703.208 Deposits of negotiable securities with Federal Reserve banks 
or the Treasurer of the United States; interest thereon.
703.209 Substitution and withdrawal of indemnity bond, letters of 
credit or negotiable securities.
703.210 Increase or reduction in security deposit amount.
703.211 Authority to seize security deposit; use and/or return of 
proceeds.
703.212 Required reports; examination of insurance carrier accounts.
703.213 Failure to comply.
Subpart D--Authorization of Self-Insurers
703.301 Employers who may be authorized as self-insurers.
703.302 Application for authority to become a self-insurer; how 
filed; information to be submitted; other requirements.
703.303 Decision on employer's application.
703.304 Filing of Agreement and Undertaking; deposit of security.
703.305 [Reserved]
703.306 Kinds of negotiable securities that may be deposited; 
conditions of deposit; acceptance of deposits.
703.307 Deposits of negotiable securities with Federal Reserve banks 
or the Treasurer of the United States; interest thereon.
703.308 Substitution and withdrawal of indemnity bond, letters of 
credit or negotiable securities.
703.309 Increase or reduction in the amount of indemnity bond, 
letters of credit or negotiable securities.
703.310 Authority to seize security deposit; use and/or return of 
proceeds.
703.311 Required reports; examination of self-insurer accounts.
703.312 Period of authorization as self-insurer.
703.313 Revocation of authorization to self-insure.

Subpart E--Issuance of Certificates of Compliance

* * * * *

Subpart C--Insurance Carrier Security Deposit Requirements


Sec.  703.201  Deposits of security by insurance carriers.

    The regulations in this subpart require certain insurance carriers 
to deposit security in the form of indemnity bonds, letters of credit 
or negotiable securities (chosen at the option of the carrier) of a 
kind and in an amount determined by the Office, and prescribe the 
conditions under which deposits must be made. Security deposits secure 
the payment of compensation and medical benefits when an insurance 
carrier defaults on any of its obligations under the LHWCA, regardless 
of the date such obligations arose. They also secure the payment of 
compensation and medical benefits when a carrier becomes insolvent and 
such obligations are not otherwise fully secured by a State guaranty 
fund. Any gap in State guaranty fund coverage will have a direct effect 
on the amount of security the Office will require a carrier to post. As 
used in this subpart, the terms ``obligations under the Act'' and 
``LHWCA obligations'' mean a carrier's liability for compensation 
payments and medical benefits arising under the Longshore and Harbor 
Workers' Compensation Act and any of its extensions.


Sec.  703.202  Identification of significant gaps in State guaranty 
fund coverage for LHWCA obligations.

    (a) In determining the amount of a carrier's required security 
deposit, the Office will consider the extent to which a State guaranty 
fund secures the insurance carrier's LHWCA obligations in that State. 
When evaluating State guaranty funds, the Office may consider a number 
of factors including, but not limited to--
    (1) Limits on weekly benefit amounts;
    (2) Limits on aggregate maximum benefit amounts;
    (3) Time limits on coverage;
    (4) Ocean marine exclusions;
    (5) Employer size and viability provisions; and
    (6) Financial strength of the State guaranty fund itself.
    (b) OWCP will identify States without guaranty funds and States 
with guaranty funds that do not fully and immediately secure LHWCA 
obligations and will post its findings on the Internet at http://www.dol.gov/esa/owcp/dlhwc/lstable.htm. These findings will indicate 
the extent of any partial or total gap in coverage provided by a State 
guaranty fund, and they will be open for inspection and comment by all 
interested parties. If the extent of coverage a particular State 
guaranty fund provides either cannot be determined or is ambiguous, 
OWCP will deem one third (33\1/3\ percent) of a carrier's LHWCA 
obligations in that State to be unsecured. OWCP will revise its 
findings from time to time, in response to substantiated public 
comments it receives or for any other reasons it considers relevant.


Sec.  703.203  Application for security deposit determination; 
information to be submitted; other requirements.

    (a) Each insurance carrier authorized by OWCP to write insurance 
under the LHWCA or any of its extensions, and each insurance carrier 
seeking initial authorization to write such insurance, must apply 
annually, on a schedule set by OWCP, for a determination of the extent 
of its unsecured obligations and the security deposit required. The 
application must be addressed to the Branch of Financial Management and 
Insurance (Branch) within OWCP's Division of Longshore and Harbor 
Workers' Compensation, and be made on a form provided by OWCP. The 
application must contain the following:
    (1) Any carrier seeking an exemption from the security deposit 
requirements based on its financial standing (see Sec.  703.204(c)(1)) 
must submit documentation establishing the carrier's current rating and 
its rating for the

[[Page 43235]]

immediately preceding year from each insurance rating service 
designated by the Branch and posted on the Internet at http://www.dol.gov/esa/owcp/dlhwc/lstable.htm.
    (2) All other carriers, and any carrier whose exemption request 
under paragraph (a)(1) of this section has been denied, must provide--
    (i) A statement of the carrier's outstanding liabilities under the 
LHWCA or any of its extensions for its LHWCA obligations for each State 
in which the obligations arise; and
    (ii) Any other information the Branch requests to enable it to give 
the application adequate consideration including, but not limited to, 
the reports set forth at Sec.  703.212.
    (b) If the carrier disagrees with any of OWCP's findings regarding 
State guaranty funds made under Sec.  703.202(b) as they exist when it 
submits its application, the carrier may submit a statement of its 
unsecured obligations based on a different conclusion regarding the 
extent of coverage afforded by one or more State guaranty funds. The 
carrier must submit evidence and/or argument with its application 
sufficient to establish that such conclusion is correct.
    (c) The carrier must sign and swear to the application. If the 
carrier is not an individual, the carrier's duly authorized officer 
must sign and swear to the application and list his or her official 
designation. If the carrier is a corporation, the officer must also 
affix the corporate seal.
    (d) At any time after filing an application, the carrier must 
inform the Branch immediately of any material changes that may have 
rendered its application incomplete, inaccurate or misleading.
    (e) By filing an application, the carrier consents to be bound by 
and to comply with the regulations and requirements in this part.


Sec.  703.204  Decision on insurance carrier's application; minimum 
amount of deposit.

    (a) The Branch will issue a decision on the application determining 
the extent of an insurance carrier's unsecured LHWCA obligations and 
fixing the amount of security the carrier must deposit to fully secure 
payment of its unsecured obligations. The Branch will transmit its 
decision to the applicant in a way it considers appropriate.
    (b) The Branch may consider a number of factors in setting the 
security deposit amount including, but not limited to, the--
    (1) Financial strength of the carrier as determined by private 
insurance rating organizations;
    (2) Financial strength of the carrier's insureds in the Longshore 
industry;
    (3) Extent to which State guaranty funds secure the carrier's LHWCA 
obligations in the event the carrier defaults on its obligations or 
becomes insolvent;
    (4) Carrier's longevity in writing LHWCA or other workers' 
compensation coverage;
    (5) Extent of carrier's exposure for LHWCA coverage; and
    (6) Carrier's payment history in satisfying its LHWCA obligations.
    (c) In setting the security deposit amount, the Branch will follow 
these criteria:
    (1) Carriers who hold the highest rating awarded by each of the 
three insurance rating services designated by the Branch and posted on 
the Internet at http://www.dol.gov/esa/owcp/dlhwc/lstable.htm for both 
the current rating year and the immediately preceding year will not be 
required to deposit security.
    (2) Carriers whose LHWCA obligations are fully secured by one or 
more State guaranty funds, as evaluated by OWCP under Sec.  703.202 of 
this subpart, will not be required to deposit security.
    (3) The Branch will require all carriers not meeting the 
requirements of paragraphs (c)(1) or (2) of this section to deposit 
security for their LHWCA obligations not secured by a State guaranty 
fund, as evaluated by OWCP under Sec.  703.202 of this subpart. For 
carriers that write only an insignificant or incidental amount of LHWCA 
insurance, the Branch will require a deposit in an amount determined by 
the Branch from time to time. For all other carriers, the Branch will 
require a minimum deposit of one third (33\1/3\ percent) of a carrier s 
outstanding LHWCA obligations not secured by a State guaranty fund, but 
may require a deposit up to an amount equal to the carrier's total 
outstanding LHWCA obligations (100 percent) not secured by a State 
guaranty fund.
    (d) If a carrier believes that a lesser deposit would fully secure 
its LHWCA obligations, the carrier may request a hearing before the 
Director of the Division of Longshore and Harbor Workers' Compensation 
(Longshore Director) or the Longshore Director's representative. 
Requests for hearing must be in writing and sent to the Branch within 
10 days of the date of the Branch's decision. The carrier may submit 
new evidence and/or argument in support of its challenge to the 
Branch's decision and must provide any additional documentation OWCP 
requests. The Longshore Director or his representative will notify the 
carrier of the hearing date within 10 days of receiving the request. 
The Longshore Director or his representative will issue the final 
agency decision on the application within 60 days of the hearing date, 
or, where evidence is submitted after the hearing, within 60 days of 
the receipt of such evidence, but no later than 180 days after 
receiving the carrier's request for a hearing.


Sec.  703.205  Filing of Agreement and Undertaking; deposit of 
security.

    Within 45 days of the date on which the insurance carrier receives 
the Branch's decision (or, if the carrier requests a hearing, a period 
set by the Longshore Director or the Longshore Director's 
representative) determining the extent of its unsecured LHWCA 
obligations and fixing the required security deposit amount (see Sec.  
703.204), the carrier must:
    (a) Execute and file with the Branch an Agreement and Undertaking, 
in a form prescribed and provided by OWCP, in which the carrier shall 
agree to--
    (1) Deposit with the Branch indemnity bonds or letters of credit in 
the amount fixed by the Office, or deposit negotiable securities under 
Sec. Sec.  703.207 and 703.208 in that amount;
    (2) Authorize the Branch, at its discretion, to bring suit under 
any deposited indemnity bond or to draw upon any deposited letters of 
credit, as appropriate under the terms of the security instrument, or 
to collect the interest and principal as they become due on any 
deposited negotiable securities and to sell or otherwise liquidate such 
negotiable securities or any part thereof when--
    (i) The carrier defaults on any of its LHWCA obligations;
    (ii) The carrier fails to renew any deposited letter of credit or 
substitute a new letter of credit, indemnity bond or acceptable 
negotiable securities in its place;
    (iii) The carrier fails to renew any deposited negotiable 
securities at maturity or substitute a letter of credit, indemnity bond 
or acceptable negotiable securities in their place;
    (iv) State insolvency proceedings are initiated against the 
carrier; or
    (v) The carrier fails to comply with any of the terms of the 
Agreement and Undertaking; and
    (3) Authorize the Branch, at its discretion, to pay such ongoing 
claims of the carrier as it may find to be due

[[Page 43236]]

and payable from the proceeds of the deposited security;
    (b) Give security in the amount fixed in the Office's decision:
    (1) In the form of an indemnity bond with sureties satisfactory to 
the Branch and in such form, and containing such provisions, as the 
Branch may prescribe: Provided, That only surety companies approved by 
the United States Treasury Department under the laws of the United 
States and the rules and regulations governing bonding companies may 
act as sureties on such indemnity bonds (see Department of Treasury's 
Circular-570), and that a surety company that is a corporate subsidiary 
of an insurance carrier may not act as surety on such carrier's 
indemnity bond;
    (2) In the form of letters of credit issued by a financial 
institution satisfactory to the Branch and upon which the Branch may 
draw; or
    (3) By a deposit of negotiable securities with a Federal Reserve 
Bank or the Treasurer of the United States in compliance with 
Sec. Sec.  703.207 and 703.208.


Sec.  703.206  [Reserved]


Sec.  703.207  Kinds of negotiable securities that may be deposited; 
conditions of deposit; acceptance of deposits.

    An insurance carrier electing to deposit negotiable securities to 
secure its obligations under the Act in the amount fixed by the Office 
under the regulations in this part shall deposit any negotiable 
securities acceptable as security for the deposit of public monies of 
the United States under regulations issued by the Secretary of the 
Treasury. (See 31 CFR part 225.) The approval, valuation, acceptance, 
and custody of such securities is hereby committed to the several 
Federal Reserve Banks and the Treasurer of the United States.


Sec.  703.208  Deposits of negotiable securities with Federal Reserve 
banks or the Treasurer of the United States; interest thereon.

    Deposits of negotiable securities provided for by the regulations 
in this part must be made with any Federal Reserve bank or any branch 
of a Federal Reserve bank designated by the Branch, or the Treasurer of 
the United States, and must be held subject to the order of the Branch. 
The Branch will authorize the insurance carrier to collect interest on 
the securities it deposits unless any of the conditions set forth at 
Sec.  703.211(a) occur.


Sec.  703.209  Substitution and withdrawal of indemnity bond, letters 
of credit or negotiable securities.

    (a) A carrier may not substitute other security for any indemnity 
bond or letters of credit deposited under the regulations in this part 
except when authorized by the Branch. A carrier may, however, 
substitute negotiable securities acceptable under the regulations in 
this part for previously-deposited negotiable securities without the 
Branch's prior approval.
    (b) A carrier that has ceased to write insurance under the Act may 
apply to the Branch for withdrawal of its security deposit. The carrier 
must file with its application a sworn statement setting forth--
    (1) A list of all cases in each State in which the carrier is 
paying compensation, together with the names of the employees and other 
beneficiaries, a description of causes of injury or death, and a 
statement of the amount of compensation paid;
    (2) A similar list of all pending cases in which the carrier has 
not yet paid compensation; and
    (3) A similar list of all cases in which injury or death has 
occurred within one year before such application or in which the last 
payment of compensation was made within one year before such 
application.
    (c) The Branch may authorize withdrawal of previously-deposited 
indemnity bonds, letters of credit and negotiable securities that, in 
the opinion of the Branch, are not necessary to provide adequate 
security for the payment of the carrier's outstanding and potential 
LHWCA liabilities. No withdrawals will be authorized unless there has 
been no claim activity involving the carrier for a minimum of five 
years, and the Branch is reasonably certain that no further claims will 
arise.


Sec.  703.210  Increase or reduction in security deposit amount.

    (a) Whenever the Office considers the security deposited by an 
insurance carrier insufficient to fully secure the carrier's LHWCA 
obligations, the carrier must, upon demand by the Branch, deposit 
additional security in accordance with the regulations in this part in 
an amount fixed by the Branch. The Branch will issue its decision 
requiring additional security in accordance with Sec.  703.204, and the 
procedures set forth at Sec. Sec.  703.204(d) and 703.205 for 
requesting a hearing and complying with the Office's decision will 
apply as appropriate.
    (b) The Branch may reduce the required security at any time on its 
own initiative, or upon application of a carrier, when in the Branch's 
opinion the facts warrant a reduction. A carrier seeking a reduction 
must furnish any information the Office requests regarding its 
outstanding LHWCA obligations for any State in which it does business, 
its obligations not secured by a State guaranty fund in each of these 
States, and any other evidence as the Branch considers necessary.


Sec.  703.211  Authority to seize security deposit; use and/or return 
of proceeds.

    (a) The Office may take any of the actions set forth in paragraph 
(b) of this section when an insurance carrier--
    (1) Defaults on any of its LHWCA obligations;
    (2) Fails to renew any deposited letter of credit or substitute a 
new letter of credit, indemnity bond or acceptable negotiable 
securities in its place;
    (3) Fails to renew any deposited negotiable securities at maturity 
or substitute a letter of credit, indemnity bond or acceptable 
negotiable securities in their place;
    (4) Has State insolvency proceedings initiated against it; or
    (5) Fails to comply with any of the terms of the Agreement and 
Undertaking.
    (b) When any of the conditions set forth in paragraph (a) of this 
section occur, the Office may, within its discretion and as appropriate 
to the security instrument--
    (1) Bring suit under any indemnity bond;
    (2) Draw upon any letters of credit;
    (3) Seize any negotiable securities, collect the interest and 
principal as they may become due, and sell or otherwise liquidate the 
negotiable securities or any part thereof.
    (c) When the Office, within its discretion, determines that it no 
longer needs to collect the interest and principal of any negotiable 
securities seized pursuant to paragraphs (a) and (b) of this section, 
or to retain the proceeds of their sale, it must return any of the 
carrier's negotiable securities still in its possession and any 
remaining proceeds of their sale.


Sec.  703.212  Required reports; examination of insurance carrier 
accounts.

    (a) Upon the Office's request, each insurance carrier must submit 
the following reports:
    (1) A certified financial statement of the carrier's assets and 
liabilities, or a balance sheet.
    (2) A sworn statement showing the extent of the carrier's unsecured 
LHWCA obligations for each State in which it is authorized to write 
insurance under the LHWCA or any of its extensions.

[[Page 43237]]

    (3) A sworn statement reporting the carrier's open cases as of the 
date of such report, listing by State all death and injury cases, 
together with a report of the status of all outstanding claims.
    (b) Whenever it considers necessary, the Office may inspect or 
examine a carrier's books of account, records, and other papers to 
verify any financial statement or other information the carrier 
furnished to the Office in any statement or report required by this 
section, or any other section of the regulations in this part. The 
carrier must permit the Office or its duly authorized representative to 
make the inspection or examination. Alternatively, the Office may 
accept an adequate independent audit by a certified public accountant.


Sec.  703.213  Failure to comply.

    The Office may suspend or revoke a carrier's certificate of 
authority to write LHWCA insurance under Sec.  703.106 when the carrier 
fails to comply with any of the requirements of this part.

Subpart D--Authorization of Self-Insurers


Sec.  703.301  Employers who may be authorized as self-insurers.

    The regulations in this subpart set forth procedures for 
authorizing employers to self-insure the payment of compensation under 
the Longshore and Harbor Workers' Compensation Act, or its extensions. 
The Office may authorize any employer to self-insure who, pursuant to 
the regulations in this part, furnishes to the Office satisfactory 
proof of its ability to pay compensation directly, and who agrees to 
immediately cancel any existing insurance policy covering its Longshore 
obligations (except for excess or catastrophic workers' compensation 
insurance, see Sec. Sec.  703.302(a)(6), 703.304(a)(6)) when OWCP 
approves the employer's application to be self-insured. The regulations 
require self-insurers to deposit security in the form of an indemnity 
bond, letters of credit or negotiable securities (at the option of the 
employer) of a kind and in an amount determined by the Office, and 
prescribe the conditions under which such deposits shall be made. The 
term ``self-insurer'' as used in these regulations means any employer 
securing the payment of compensation under the LHWCA or its extensions 
in accordance with the provisions of 33 U.S.C. 932(a)(2) and these 
regulations.


Sec.  703.302  Application for authority to become a self-insurer; how 
filed; information to be submitted; other requirements.

    (a) Any employer may apply to become an authorized self-insurer. 
The application must be addressed to the Branch of Financial Management 
and Insurance (Branch) within OWCP's Division of Longshore and Harbor 
Workers' Compensation, and be made on a form provided by OWCP. The 
application must contain--
    (1) A statement of the employer's total payroll for the 12 months 
before the application date;
    (2) A statement of the average number of employees engaged in 
employment within the purview of the LHWCA or any of its extensions for 
the 12 months before the application date;
    (3) A statement of the number of injuries to such employees 
resulting in disability of more than 7 days' duration, or in death, 
during each of the 5 years before the application date;
    (4) A certified financial report for each of the three years before 
the application date;
    (5) A description of the facilities maintained or the arrangements 
made for the medical and hospital care of injured employees;
    (6) A statement describing the provisions and maximum amount of any 
excess or catastrophic insurance; and
    (7) Any other information the Branch requests to enable it to give 
the application adequate consideration including, but not limited to, 
the reports set forth at Sec.  703.310.
    (b) The employer must sign and swear to the application. If the 
employer is not an individual, the employer's duly authorized officer 
must sign and swear to the application and list his or her official 
designation. If the employer is a corporation, the officer must also 
affix the corporate seal.
    (c) At any time after filing an application, the employer must 
inform the Branch immediately of any material changes that may have 
rendered its application incomplete, inaccurate or misleading.
    (d) By filing an application, the employer consents to be bound by 
and to comply with the regulations and requirements in this part.


Sec.  703.303  Decision on employer's application.

    (a) The Branch will issue a decision granting or denying the 
employer's application to be an authorized self-insurer. If the Branch 
grants the application, the decision will fix the amount of security 
the employer must deposit. The Branch will transmit its decision to the 
employer in a way it considers appropriate.
    (b) The employer is authorized to self-insure beginning with the 
date of the Branch's decision. Each grant of authority to self-insure 
is conditioned, however, upon the employer's execution and filing of an 
Agreement and Undertaking and deposit of the security fixed in the 
decision in the form and within the time limits required by Sec.  
703.304. In the event the employer fails to comply with the 
requirements set forth in Sec.  703.304, its authorization to self-
insure will be considered never to have been effective, and the 
employer will be subject to appropriate penalties for failure to secure 
its LHWCA obligations.
    (c) The Branch will require security in the amount it considers 
necessary to fully secure the employer's LHWCA obligations. When fixing 
the amount of security, the Branch may consider a number of factors 
including, but not limited to, the--
    (1) Employer's overall financial standing;
    (2) Nature of the employer's work;
    (3) Hazard of the work in which the employees are employed;
    (4) Employer's payroll amount for employees engaged in employment 
within the purview of the Act; and
    (5) Employer's accident record as shown in the application and the 
Office's records.
    (d) If an employer believes that the Branch incorrectly denied its 
application to self-insure, or that a lesser security deposit would 
fully secure its LHWCA obligations, the employer may request a hearing 
before the Director of the Division of Longshore and Harbor Workers' 
Compensation (Longshore Director) or the Longshore Director's 
representative. Requests for hearing must be in writing and sent to the 
Branch within ten days of the date of the Branch's decision. The 
employer may submit new evidence and/or argument in support of its 
challenge to the Branch's decision and must provide any additional 
documentation OWCP requests. The Longshore Director or his 
representative will notify the employer of the hearing date within 10 
days of receiving the request. The Longshore Director or his 
representative will issue the final agency decision on the application 
within 60 days of the hearing date, or, where evidence is submitted 
after the hearing, within 60 days of the receipt of such evidence, but 
no later than 180 days after receiving the employer's request for a 
hearing.

[[Page 43238]]

Sec.  703.304  Filing of Agreement and Undertaking; deposit of 
security.

    Within 45 days of the date on which the employer receives the 
Branch's decision (or, if the employer requests a hearing, a period set 
by the Longshore Director or the Longshore Director's representative) 
granting its application to self-insure and fixing the required 
security deposit amount (see Sec.  703.303), the employer must:
    (a) Execute and file with the Branch an Agreement and Undertaking, 
in a form prescribed and provided by OWCP, in which the employer shall 
agree to:
    (1) Pay when due, as required by the provisions of the Act, all 
compensation payable on account of injury or death of any of its 
employees injured within the purview of the Act;
    (2) Furnish medical, surgical, hospital, and other attendance, 
treatment and care as required by the Act;
    (3) Deposit with the Branch indemnity bonds or letters of credit in 
the amount fixed by the Office, or deposit negotiable securities under 
Sec. Sec.  703.306 and 703.307 in that amount;
    (4) Authorize the Branch, at its discretion, to bring suit under 
any deposited indemnity bond or to draw upon any deposited letters of 
credit, as appropriate under the terms of the security instrument, or 
to collect the interest and principal as they become due on any 
deposited negotiable securities and to seize and sell or otherwise 
liquidate such negotiable securities or any part thereof when the 
employer:
    (i) Defaults on any of its LHWCA obligations;
    (ii) Fails to renew any deposited letter of credit or substitute a 
new letter of credit, indemnity bond or acceptable negotiable 
securities in its place;
    (iii) Fails to renew any deposited negotiable securities at 
maturity or substitute a letter of credit, indemnity bond or acceptable 
negotiable securities in their place; or
    (iv) Fails to comply with any of the terms of the Agreement and 
Undertaking;
    (5) Authorize the Branch, at its discretion, to pay such 
compensation, medical, and other expenses and any accrued penalties 
imposed by law as it may find to be due and payable from the proceeds 
of the deposited security; and
    (6) Obtain and maintain, if required by the Office, excess or 
catastrophic insurance in amounts to be determined by the Office.
    (b) Give security in the amount fixed in the Office's decision:
    (1) In the form of an indemnity bond with sureties satisfactory to 
the Office, and in such form and containing such provisions as the 
Office may prescribe: Provided, That only surety companies approved by 
the United States Treasury Department under the laws of the United 
States and the rules and regulations governing bonding companies may 
act as sureties on such indemnity bonds (see Department of Treasury's 
Circular-570);
    (2) In the form of letters of credit issued by a financial 
institution satisfactory to the Branch and upon which the Branch may 
draw; or,
    (3) By a deposit of negotiable securities with a Federal Reserve 
Bank or the Treasurer of the United States in compliance with 
Sec. Sec.  703.306 and 703.307.


Sec.  703.305  [Reserved]


Sec.  703.306  Kinds of negotiable securities that may be deposited; 
conditions of deposit; acceptance of deposits.

    A self-insurer or a self-insurer applicant electing to deposit 
negotiable securities to secure its obligations under the Act in the 
amount fixed by the Office under the regulations in this part shall 
deposit any negotiable securities acceptable as security for the 
deposit of public monies of the United States under regulations issued 
by the Secretary of the Treasury. (See 31 CFR part 225.) The approval, 
valuation, acceptance, and custody of such securities is hereby 
committed to the several Federal Reserve Banks and the Treasurer of the 
United States.


Sec.  703.307  Deposits of negotiable securities with Federal Reserve 
banks or the Treasurer of the United States; interest thereon.

    Deposits of negotiable securities provided for by the regulations 
in this part shall be made with any Federal Reserve bank or any branch 
of a Federal Reserve bank designated by the Office, or the Treasurer of 
the United States, and shall be held subject to the order of the 
Office. The Office will authorize the self-insurer to collect interest 
on the securities deposited by it unless any of the conditions set 
forth at Sec.  703.304(a)(4) occur.


Sec.  703.308  Substitution and withdrawal of indemnity bond, letters 
of credit or negotiable securities.

    (a) A self-insurer may not substitute other security for any 
indemnity bond or letters of credit deposited under the regulations in 
this part except when authorized by the Office. A self-insurer may, 
however, substitute negotiable securities acceptable under the 
regulations in this part for previously-deposited negotiable securities 
without the Office's prior approval.
    (b) A self-insurer discontinuing business, discontinuing operations 
within the purview of the Act, or securing the payment of compensation 
by commercial insurance under the provisions of the Act may apply to 
the Office for the withdrawal of the security it provided under the 
regulations in this part. The self-insurer must file with its 
application a sworn statement setting forth--
    (1) A list of all cases in each compensation district in which the 
self-insurer is paying compensation, together with the names of the 
employees and other beneficiaries, a description of causes of injury or 
death, and a statement of the amount of compensation paid;
    (2) A similar list of all pending cases in which the self-insurer 
has not yet paid compensation; and
    (3) A similar list of all cases in which injury or death has 
occurred within one year before such application or in which the last 
payment of compensation was made within one year before such 
application.
    (c) The Office may authorize withdrawal of previously-deposited 
indemnity bonds, letters of credit and negotiable securities that, in 
the opinion of the Office, are not necessary to provide adequate 
security for the payment of the self-insurer's outstanding and 
potential LHWCA obligations. No withdrawals will be authorized unless 
there has been no claim activity involving the self-insurer for a 
minimum of five years, and the Office is reasonably certain no further 
claims will arise.


Sec.  703.309  Increase or reduction in the amount of indemnity bond, 
letters of credit or negotiable securities.

    (a) Whenever the Office considers the principal sum of the 
indemnity bond or letters of credit filed or the amount of the 
negotiable securities deposited by a self-insurer insufficient to fully 
secure the self-insurer's LHWCA obligations, the self-insurer must, 
upon demand by the Office, deposit additional security in accordance 
with the regulations in this part in an amount fixed by the Branch. The 
Branch will issue its decision requiring additional security in 
accordance with Sec.  703.303, and the procedures set forth at 
Sec. Sec.  703.303(d) and 703.304 for requesting a hearing and 
complying with the Office's decision will apply as appropriate.
    (b) The Office may reduce the required security at any time on its 
own initiative, or upon application of a self-

[[Page 43239]]

insurer, when in the Office's opinion the facts warrant a reduction. A 
self-insurer seeking a reduction must furnish any information the 
Office requests regarding its current affairs, the nature and hazard of 
the work of its employees, the amount of its payroll for employees 
engaged in maritime employment within the purview of the Act, its 
financial condition, its accident experience, a record of compensation 
payments it has made, and any other evidence the Branch considers 
necessary.


Sec.  703.310  Authority to seize security deposit; use and/or return 
of proceeds.

    (a) The Office may take any of the actions set forth in paragraph 
(b) of this section when a self-insurer--
    (1) Defaults on any of its LHWCA obligations;
    (2) Fails to renew any deposited letter of credit or substitute a 
new letter of credit, indemnity bond or acceptable negotiable 
securities in its place;
    (3) Fails to renew any deposited negotiable securities at maturity 
or substitute a letter of credit, indemnity bond or acceptable 
negotiable securities in their place; or
    (4) Fails to comply with any of the terms of the Agreement and 
Undertaking.
    (b) When any of the conditions set forth in paragraph (a) of this 
section occur, the Office may, within its discretion and as appropriate 
to the security instrument--
    (1) Bring suit under any indemnity bond;
    (2) Draw upon any letters of credit;
    (3) Seize any negotiable securities, collect the interest and 
principal as they may become due, and sell or otherwise liquidate the 
negotiable securities or any part thereof.
    (c) When the Office, within its discretion, determines that it no 
longer needs to collect the interest and principal of any negotiable 
securities seized pursuant to paragraphs (a) and (b) of this section, 
or to retain the proceeds of their sale, it must return any of the 
employer's negotiable securities still in its possession and any 
remaining proceeds of their sale.


Sec.  703.311  Required reports; examination of self-insurer accounts.

    (a) Upon the Office's request, each self-insurer must submit the 
following reports:
    (1) A certified financial statement of the self-insurer's assets 
and liabilities, or a balance sheet.
    (2) A sworn statement showing by classifications the payroll of 
employees of the self-insurer who are engaged in employment within the 
purview of the LHWCA or any of its extensions.
    (3) A sworn statement covering the six-month period preceding the 
date of such report, listing by compensation districts all death and 
injury cases which have occurred during such period, together with a 
report of the status of all outstanding claims showing the particulars 
of each case.
    (b) Whenever it considers necessary, the Office may inspect or 
examine a self-insurer's books of account, records, and other papers to 
verify any financial statement or other information the self-insurer 
furnished to the Office in any report required by this section, or any 
other section of the regulations in this part. The self-insurer must 
permit the Office or its duly authorized representative to make the 
inspection or examination. Alternatively, the Office may accept an 
adequate report of a certified public accountant.


Sec.  703.312  Period of authorization as self-insurer.

    (a) Self-insurance authorizations will remain in effect for so long 
as the self-insurer complies with the requirements of the Act, the 
regulations in this part, and OWCP.
    (b) A self-insurer who has secured its liability by depositing an 
indemnity bond with the Office will, on or about May 10 of each year, 
receive from the Office a form for executing a bond that will continue 
its self-insurance authorization. The submission of such bond, duly 
executed in the amount indicated by the Office, will be deemed a 
condition of the continuing authorization.


Sec.  703.313  Revocation of authorization to self-insure.

    The Office may for good cause shown suspend or revoke the 
authorization of any self-insurer. Failure by a self-insurer to comply 
with any provision or requirement of law or of the regulations in this 
part, or with any lawful order or communication of the Office, or the 
failure or insolvency of the surety on its indemnity bond, or 
impairment of financial responsibility of such self-insurer, shall be 
deemed good cause for suspension or revocation.

    Signed at Washington, DC, this 18th day of July, 2005.
Victoria A. Lipnic,
Assistant Secretary for Employment Standards.
[FR Doc. 05-14530 Filed 7-25-05; 8:45 am]
BILLING CODE 4510-CF-P