6.	Workers’ Compensation Claims

We are a self-insured employer with respect to workers’ compensation coverage for all our employees (including employees subject to PEO contracts) working in California, Oregon, Maryland, Delaware and Colorado. In the state of Washington, state law allows only our staffing services and management employees to be covered under the Company’s self-insured workers’ compensation program.

The Company also operates Ecole, a wholly owned fully licensed insurance company in Arizona. The insurance company provides workers’ compensation coverage to BBSI’s employees working in Arizona for claims occurring on or after March 1, 2010.

The Company has provided a total of $112.4 million and $70.6 million at December 31, 2013 and 2012, respectively, as an estimated future liability for unsettled workers’ compensation claims liabilities. Included in the foregoing liabilities are insured claims that will be paid by the Company’s former excess workers’ compensation insurer and for which the Company has reported a receivable from the insurer for the insured claims liability. Insured claims totaled $768,000 and $757,000 at December 31, 2013 and 2012, respectively. The estimated liability for unsettled workers’ compensation claims represents management’s best estimate based upon an actuarial valuation provided by an independent actuary. Included in the claims liabilities are case reserve estimates for reported losses, plus additional amounts based on projections for incurred but not reported claims and anticipated increases in case reserve estimates. These estimates also include amounts for unallocated loss adjustment expenses, including legal costs. These estimates are continually reviewed and adjustments to liabilities are reflected in current operating results as they become known.

Liabilities incurred for work-related employee fatalities and for severely injured workers, as determined by the state in which the accident occurred, are recorded either at an agreed lump-sum settlement amount or the net present value of future fixed and determinable payments over the actuarially determined remaining life expectancy of the beneficiary, discounted at a rate that approximates a long-term, high-quality corporate bond rate. Our excess workers’ compensation insurance retention is $5.0 million per occurrence in all our self-insured states, except for Colorado and Maryland where our retention is at $2.0 million and $1.0 million per occurrence, respectively. We present our accrued liabilities for workers’ compensation claims on a gross basis along with a corresponding receivable from our insurers, as we are the primary obligor for payment of the related insured claims. We maintain excess workers’ compensation insurance coverage with ACE Group (“ACE”), between $5.0 million and $15.0 million per occurrence, except in Maryland, where coverage with ACE is between $1.0 million and $25.0 million per occurrence and in Colorado where the coverage with ACE is from $2.0 million to statutory limits per occurrence. Prior to December 1, 2012, similar excess workers’ compensation coverage was through American International Group.

We continue to evaluate the financial capacity of our insurers to assess the recoverability of the related insurer receivables.

At December 31, 2013, our long-term workers’ compensation claims liabilities in the accompanying consolidated balance sheet included $331,000 for work-related fatalities. The aggregate undiscounted payout amount related to the catastrophic injuries and fatalities is $440,000. The discount rates applied to the discounted liabilities range from 4.25% to 9.00%. These rates represented the then-current rates for high quality long-term debt securities available at the date of loss with maturities equal to the length of the payout period to the beneficiaries. The actuarially determined payout periods to the beneficiaries range from 7 to 32 years.

The states of California, Oregon, Maryland, Washington, Delaware and Colorado require us to maintain specified investment balances or other financial instruments, totaling $72.9 million at December 31, 2013 and $26.1 million at December 31, 2012, to cover potential claims losses. In partial satisfaction of these requirements, at December 31, 2013, we have provided surety bonds and standby letters of credit totaling $70.8 million. The investments are included in restricted marketable securities and workers’ compensation deposits in the accompanying consolidated balance sheets. Prior to July 1, 2012, we participated in California’s alternative security program requiring us to pay the State an annual fee, which was determined by several factors, including the amount of a calculated future security deposit and our overall credit rating. The annual fee paid to the State of California for 2011 was $292,000. Effective June 1, 2013, the State of California increased the Company’s surety deposit requirement to $63.9 million (which is included in the total $70.8 million of surety bonds and standby letters or credit), which the Company satisfied through the posting of third party issued surety bonds which are backed by a $12.8 million letter of credit. In conjunction with this letter of credit, the Company posted $12.8 million of certificates of deposit with Wells Fargo as collateral and is included in long-term assets on the consolidated balance sheet.

The following table summarizes the aggregate workers’ compensation reserve activity (in thousands):


	Year Ended December 31,
	2013		2012		2011
Balance at January 1,
Workers’ compensation claims liabilities	$	70,564	$	51,193	$	39,302
Claims expense accrual:
Current year		63,822		38,386		26,161
Prior years		23,445		12,344		9,978

		87,267		50,730		36,139

Claims payments related to:
Current year		10,586		6,746		5,565
Prior years		34,801		24,613		18,683

		45,387		31,359		24,248

Balance at December 31,
Workers’ compensation claims liabilities	$	112,444	$	70,564	$	51,193

Incurred but not reported (IBNR)	$	69,611	$	47,992	$	37,335