Kentucky School Board Insurance Trust Members to Receive $5 Million Disbursement

by Mandy Hicks

An additional $5 million is in the process of being disbursed to Kentucky school systems and colleges that were assessed in 2014 to rehabilitate the Kentucky School Boards Insurance Trust (KSBIT).  This is the result, in part, of a lawsuit and settlement handled by English, Lucas, Priest & Owsley attorneys, Michael Owsley and Sarah Jarboe, both of whom are partners in the firm. They worked with attorneys from the Kentucky Department of Insurance (DOI) and Public Protection Cabinet to achieve this outcome.

The lawsuit and settlement already brought about a $1 million payout to these school entities in 2016, $1.8 million in 2018, and avoided an additional $8 million assessment of former KSBIT members. The additional $5 million refund will be divided among the former KSBIT members in proportion to their pro rata share of the total 2014 assessment.

“This comes as welcome news for Kentucky schools,” says attorney Sarah Jarboe. “We expect the funds to be fully disbursed to the school systems by April 12.  Mike Owsley and I, on behalf of Green River Regional Educational Cooperative and its member districts, continue to work closely with the DOI and Public Protection Cabinet to ensure that the former KSBIT members are refunded as much money as possible under the terms of the settlement agreement.”

Lawsuit stems from self-insurance funds

The lawsuit stems from $8 million Surplus Notes provided eight years ago to two self-insurance funds within KSBIT.  At the time, KSBIT had a deficit in its Workers’ Compensation Fund and Property and Liability Fund.

The Kentucky League of Cities Insurance Services Association provided the funding for the Surplus Notes. Under the terms of the Surplus Notes, repayment of the $8 million principal and interest was only allowed if the KSBIT Funds had a surplus in excess of $2 million.

KSBIT’s deficit continued to grow until 2013, at which point the KSBIT Funds entered into rehabilitation and the Commissioner of the DOI took over management of the Funds as rehabilitator. Former KSBIT members, including the majority of Kentucky’s school districts and colleges, were assessed approximately $49 million in 2014 to pay for all legal liabilities and obligations of the funds.

The now-settled litigation involved the question of whether a second assessment of $8 million was necessary to repay the Surplus Notes and whether KSBIT was due a refund of approximately $1.2 million of interest payments collected by the Kentucky League of Cities. The Kentucky League of Cities, some of its member cities, and KSBIT argued for assessment of the $8 million and against repayment of the $1.2 million, while the Department of Insurance and Green River Regional Educational Cooperative (GRREC), an intervening party in the lawsuit, took the opposing view.

In 2015, the Franklin Circuit Court entered summary judgment in favor of GRREC, represented by Michael Owsley and Sarah Jarboe, and the DOI. The court held that the plain terms of the note did not allow for repayment of the $8 million Surplus Notes through assessment of the KSBIT members and that the $1.2 million of interest was improperly collected and should be repaid to KSBIT.

The Kentucky League of Cities and other parties in the lawsuit appealed the decision to the Kentucky Court of Appeals. A settlement was reached in 2016, at which time $1 million was disbursed to the former KSBIT members who were assessed in the 2014 rehabilitation of the KSBIT Funds.  The second disbursement was a $1.8 million payout of funds to assessed schools and school-related entities in 2018.

The source of the majority of the current $5 million refund is Kentucky Employers’ Mutual Insurance (KEMI).  In November 2014, KEMI assumed the liabilities of the KSBIT Workers’ Compensation Fund and took over claims administration.  For its services, assessment payments made by former KSBIT Workers’ Compensation members have been transferred to KEMI.  As part of this arrangement, KEMI agreed to return any amount of transfer (assessment) payments that exceed its costs and liabilities.  Based on an actuarial report, KEMI has determined that excess assets exist.  While the amount is not fully known as a result of outstanding claims that remain open, KEMI is now returning $4,772,135.00.  Once KEMI returns funds to KSBIT, it cannot seek to get the money back, even if actuarial changes occur.

Additionally, the KSBIT Funds have excess equity of $227,865 that can be returned to the KSBIT members under the terms of the Surplus Notes settlement agreement.  This brings the total proposed additional distribution to $5 million.

This refund will be the third distribution, totaling $7.8 million, made to the school districts in accordance with the settlement of the Surplus Notes case.