FORENSIC ACCOUNTING SERVICE ENGAGEMENTof

ELITE CONTRACTORS TRUST OF NEW YORKfor

THE NEW YORK STATE WORKERS' COMPENSATION BOARD

byLUMSDEN & McCORMICK, LLP

December 31, 2010

FORENSIC ACCOUNTING SERVICE ENGAGEMENT of

ELITE CONTRACTORS TRUST OF NEW YORK for

THE NEW YORK STATE WORKERS' COMPENSATION BOARD by

LUMSDEN & McCORMICK, LLP

CONTENTS

Page EXECUTIVE SUMMARY 1 I. INTRODUCTION

1. Background 6 2. Methodology 8 3. Chronology of Key Events 9

II. OBSERVATIONS

1. Trust Formation and Ongoing Operations 13 2. Board of Trustees 28 3. Administration Fees 35 4. Member Interviews 38 5. Marketing 41 6. Minimum Contribution Amounts 46 7. Underwriting, Including Renewal Process 50 8. Discounts 78 9. Safety Programs 89 10. Excess Insurance 98 11. Integrity of Group Self-Insurance Trust Funds 109 12. Payroll Audits 110 13. Assessments to Members 114 14. Member Dividends 116 15. Corrective Action Plans 120 16. Equity Ratio and Contributions Receivable Subsequently Collected 122 17. Establishment of Yearly Reserves on the Balance Sheet 126 18. Member Deficit 131 19. Claims Handling Procedures/Practices 132 20. Security Deposits 135

FORENSIC ACCOUNTING SERVICE ENGAGEMENT of

ELITE CONTRACTORS TRUST OF NEW YORK for

THE NEW YORK STATE WORKERS' COMPENSATION BOARD by

LUMSDEN & McCORMICK, LLP

CONTENTS, CONTINUED APPENDIX 1. Trust Agreement and Declaration including amendments 1, 3, 4, 5 and 6 2. Joinder and Indemnification Agreement with R.W. Painting, Inc. 3. Service Agreement and unnumbered amendments 4. Bylaws (“Sample Trust ” version) 5. Quality Assurance Claim Audit Report prepared by KBM Management, Inc. 6. Excess insurer promulgated underwriting guidelines for the December 1, 2003- November 30, 2004 policy year 7. Compensation Risk Managers, LLC’s internal underwriting guidelines in effect before 2003 8. Board of Trustees’ Term Information and Meeting Statistics

9. Board of Trustee meeting minutes – June 4, 2002 10. Board of Trustee meeting minutes – December 5, 2002 11. Board of Trustee meeting minutes – December 4, 2003 12. Board of Trustee meeting minutes – June 2, 2004 13. Board of Trustee meeting minutes – December 2, 2004 14. Board of Trustee meeting minutes – June 8, 2005 15. Board of Trustee meeting minutes – December 1, 2005 16. Board of Trustee meeting minutes – June 6, 2006 17. Board of Trustee meeting minutes – December 7, 2006 18. Board of Trustee conference call minutes – March 6, 2007 19. Board of Trustee meeting minutes – June 5, 2007 20. Board of Trustee meeting minutes (draft version) – December 6, 2007 21. Compensation Risk Managers, LLC’s definitions of member safety score (report) card ratings for ELITE Contractors Trust of New York 22. Safety Program Document Statistics

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EXECUTIVE SUMMARY

The main mission of the New York State Workers' Compensation Board (WCB) is to equitably and fairly administer the provisions of the New York State Workers’ Compensation Law. Supplementary responsibilities of the WCB include the approval and ongoing monitoring of self-insured corporations and groups. Self-insured corporations and groups must abide by the Codes, Rules and Regulations of the State of New York (NYCRR). The NYCRR requires group self–insurers to maintain total qualified assets, as defined by NYCRR Part 317 effective January 31, 2001, at least equal to total liabilities. A group self-insurer that does not meet this funding requirement is deemed under funded and may be subject to various sanctions imposed by the WCB such as the limitation of new member admittance, increase of the required security deposit, and the revocation of a group’s privilege to self-insure. As a result of mounting financial deficits incurred by a number of group self-insured trusts, the WCB initiated a process to pursue an independent assessment of both the financial and operational aspects of selected trusts, including those responsible for oversight and management of the trusts. Elite Contractors Trust of New York (ELITE) was created on August 27, 1999 and was managed by a Board of Trustees and Compensation Risk Managers, LLC (CRM), the initial third-party administrator. The Trust was established to offer workers’ compensation coverage to employers engaged in the general construction industry. In December 2005, CRM, along with several related party entities of CRM, were acquired by CRM Holdings, Ltd. through a stock exchange simultaneous with an initial public offering (IPO) of CRM Holdings, Ltd.’s common stock on the NASDAQ National Market. As a result of serious financial difficulties, the WCB formally terminated ELITE’s ability to offer workers’ compensation insurance to its members effective July 16, 2008; however, based on membership status information obtained by L&M, no members had obtained coverage through ELITE subsequent to March 31, 2008. CRM voluntarily surrendered its New York State license to provide third-party administrative services to group self-insured trusts in September 2008. On September 1, 2008, FCS Administrators, Inc. of Williamsville New York took over the administration duties of ELITE from CRM. On April 1, 2010, the WCB assumed control of the Trust’s net liabilities and operations. As a direct result of the insolvency, Lumsden and McCormick, LLP (L&M) was engaged by the WCB through a competitive bid process in 2007 to provide an independent review of ELITE. Our independent review did not formally commence until on or about the date the WCB assumed control of ELITE’s net liabilities and operations on April 1, 2010. Our independent review consisted of three-parts: (1) a financial and forensic accounting review, (2) a performance and operational review and (3) a claims review. This report concentrates on parts 2 and 3, while part 1 was addressed in our Deficit Reconstruction and 2010 Assessment report dated December 15, 2010. This report is intended to provide an overall analysis regarding the reasons behind ELITE’s insolvency including details regarding the procedures performed and the related conclusions reached. The final gross allocable members’ deficit as calculated in our Deficit Reconstruction and 2010 Assessment report amounts to $82,242,027.

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Group self-insured trusts are unique in that each group member must acknowledge and agree to be jointly and severally liable for all expenses and obligations of the fund incurred during its period of membership. By definition, joint and several liability refers to a shared responsibility whereby each debtor (member) can legally be held liable for an entire amount of debt or judgment.

Prior to commencing our document accumulation and analysis, L&M staff met with WCB officials to obtain an overview of the history of ELITE and important details surrounding its insolvency. L&M also met with NCAComp, Inc. (NCAComp), the third-party administrator appointed by the WCB subsequent to its taking control of ELITE’s affairs.

L&M, along with our third-party claims review specialist, read and analyzed vast amounts of documents provided by the WCB and other parties, including Trust governing documents related to ELITE’s formation and ongoing operations.

L&M interviewed many individuals regarding various aspects of ELITE’s operations, including selected members and brokers, representatives of ELITE’s Marketing Broker, and certain members of FCS Administrators, Inc.’s management. Our attempts to interview all the Trustees of ELITE were unsuccessful as they either denied our requests for interviews or did not respond. L&M did not meet with and/or interview CRM officials based on directives from the WCB. Additionally, L&M did not interview the independent accounting (auditing) firm that audited ELITE’s annual financial statements for 2000 through 2006, nor obtain copies of that firm’s workpapers due to its unwillingness to cooperate. L&M did obtain copies of the workpapers prepared by the two CPA firms that audited ELITE’s 2007 and 2008 financial statements. Our attempt to interview ELITE’s actuary for 2001 through 2006 was denied as a result of various lawsuits in process.

L&M engaged an independent actuarial firm to review ELITE’s 2001-2006 actuary reports prepared by SGRisk, LLC, and provide us with an opinion relative to the methods used by SGRisk, LLC to estimate the ultimate incurred losses and related claims liability.

L&M engaged a third party claims review specialist to perform a comprehensive examination of the claims handling process.

Based on our inquiries, observations, document inspections, and discussions with selected members and others, it appears that ELITE and its initial third-party administrator (CRM) had not been in compliance with a number of sections of the NYCRR at various times during the active life of the Trust. Furthermore, the information L&M obtained indicated that ELITE’s Trustees repeatedly failed to execute certain duties and responsibilities promulgated by the governing documents of the Trust. Moreover, the apparent failure of CRM and the Trustees to act with the care, skill, prudence, and diligence expected given the circumstances, resulted in the acceleration of the Trust's deficit and the ultimate downfall of the Trust.

The following is a summary of some of the observations noted and further explained in subsequent sections of this report:

1. ELITE’s Board of Trustees did not appear to exercise its responsibilities to the extent required as delineated in the Trust Agreement and Bylaws (“Sample Trust” version). It is possible the Trust operated for its approximate nine year term of active existence without formally adopting Bylaws. We noted evidence to support the lack of Trustee involvement in many aspects of the operation of the Trust. We believe the apparent failure of the Board of Trustees to exercise its responsibilities contributed greatly to the financial deterioration of the Trust.

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2. L&M questions the financial acumen of the Trustees as a result of what appears to have been a disinterested attitude towards ELITE’s financial results. Had the Trust engaged individuals with more financial and/or governance experience, increased the number of and/or enforced the term limits of the Trustees in order to promote fresh thinking and objectivity, it is possible that (1) the legitimacy of CRM’s claims reserving and excess insurance related practices would have been called into question, (2) excessive discounts and/or credits would have been eliminated, (3) poor performing members would have been terminated and/or terminated earlier, and (4) substandard members would not have been accepted into the Trust.

3. L&M believes that two Trustees’ participation in the initial public offering of CRM Holdings, Ltd. and resulting ownership of stock may have created a conflict of interest.

4. CRM’s extensive involvement in the drafting of the Trust document, Service Agreement and Bylaws (“Sample Trust” version), and its subsequent day to day operation of ELITE’s activities may be perceived as a conflict of interest.

5. The CRM Service Agreement, which we believe is virtually identical to the agreement CRM used for other trust funds it administered, contains several provisions that heavily favor CRM, including the methodology to calculate service fees, the term of the agreement, and its appointment as broker to procure excess insurance and any required surety bond. L&M questions why the fee percentage CRM charged to ELITE was substantially higher than two other CRM trusts that L&M performed forensic accounting services on, when the services CRM provided to all three were identical. L&M determined CRM received approximately $34.8 million in administrative service fees from ELITE.

6. The admission and continuance of some members that did not meet minimum underwriting criteria resulted in the Trust having a number of higher risk members, which contributed greatly to the financial deterioration of ELITE. The Trustees did not appear to approve the acceptance or continuation of members not meeting the Trust’s minimum underwriting criteria, as required by the Trust document and Service Agreement, which essentially resulted in CRM having complete authority for all member acceptance and rejection decisions. We believe only 11% of all involuntary member terminations were for failure to maintain minimum underwriting standards. Evidence suggests CRM consistently refrained from terminating large poor performing members and may have improperly described/classified that certain members were terminated on March 31, 2008 for underwriting reasons in an attempt to increase the recorded number of large poor performing members it had terminated on a cumulative basis. We believe there was a perceived conflict of interest since CRM’s administration fees were directly correlated to the contribution revenue generated by ELITE’s members. For example, the participation of nine members with demolition operations, which violated the Trust’s internal underwriting guidelines and whom L&M believes to have been specifically excluded under certain excess insurer underwriting guidelines, generated an estimated deficiency of contributions over losses and other estimated direct expenses of over $6 million. L&M estimates CRM received approximately $1.19 million in administrative fees as a result of these nine members’ participation in ELITE.

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7. ELITE’s admittance of financially substandard members and its inability to collect contributions due also adversely affected the financial viability of the Trust. ELITE’s bad debt charge-offs (uncollected member contributions) totaling $3.08 million are deemed by L&M to be excessive; they were nearly three times higher (on a percentage of contributions basis) than two other Trusts that insured commercial (for profit) entities L&M performed similar forensic engagements on. L&M believes CRM’s failure to (1) consistently obtain Dun & Bradstreet reports for larger potential members as required under its internal underwriting guidelines, and (2) properly limit membership based on the results of the reports and/or other pertinent member financial information it had obtained contributed to the significant uncollectible contributions of ELITE.

8. The $19.57 million estimated deficiency of contributions over losses and other direct expenses (exclusive of any allocated IBNR and benefit from aggregate excess insurance recoveries) generated by whom L&M believes to be the twelve poorest performing members of the Trust is approximately 36.3% of ELITE’s total comparable September 30, 2010 deficit. Eight of these twelve poor performing members were continuously renewed and remained in ELITE through March 31, 2008, often with discounted contributions, despite their strain on the overall financial condition of the Trust.

9. L&M believes the 32% expense factor used by CRM to estimate non-claim expenses when calculating the estimated profitability by member did not accurately portray the true cost structure of ELITE and may have led to inaccurate decisions regarding member discounts and retention. Using the data contained in the 2001 – 2007 audited financial statements, L&M calculated ELITE’s expense factor to average 52% (or higher) for those years. L&M questions why CRM did not recalculate and adjust the estimated expense factor on an annual basis. The audited financial statements and internal accounting records contained the necessary data to perform this task.

10. The discounts provided to many members, especially during ELITE’s early years, appear excessive. Additionally, the discounts often had no correlation to losses incurred or other member statistics. Furthermore, Trustee member companies appear to have received preferential treatment with respect to discounts as compared to non-Trustee member companies.

11. CRM continued to apply payroll caps when it invoiced selected members in spite of the WCB’s repeated directives dated March 16, 2005 and June 15, 2006 to discontinue that practice. L&M calculated that ELITE’s contribution revenue was reduced by $1.99 million as a result of CRM’s continued allowance of payroll caps for 5 larger sized members (one of which was a Trustee member company) during the three year period April 1, 2005 through March 31, 2008.

12. CRM’s management and the Trustees did not appear to effectively monitor and properly address all members that incurred excessive losses. Prudent actions, such as increasing the net contributions at policy renewal or the ultimate termination of substandard members were not performed consistently over the active life of the Trust.

13. During 2005-2008 CRM invoiced certain members an amount less than the $10,000 minimum contribution applicable to all members. CRM also failed to consistently enforce the minimum contribution in effect during 2002-2008. CRM’s providing certain members

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with preferential treatment decreased ELITE’s contribution revenue by as much as $1.74 million.

14. While the information CRM provided to the Trustees indicated that its safety and loss control programs were operating reasonably well, the overall effectiveness of the programs must be questioned in light of the significant losses incurred by certain members. CRM was inconsistent in mandating and monitoring the proper usage of member safety programs, did not always perform the number of safety visits required per CRM’s Service Plans for the members, and did not terminate numerous members that failed to implement and adhere to recommendations made. Additionally, L&M questions the rationale behind CRM’s judgment that some members did not require safety visits (as explicitly stated in those members’ Service Plans). We believe the overall ineffectiveness of CRM’s safety and loss control programs, including its failure to terminate all members with poor safety records, contributed significantly to ELITE’s deficit.

15. The cost of ELITE’s excess insurance was considerably higher than other trusts not administered by CRM, including those trusts offering group self-insurance to members in similar industries as ELITE. This may be due to excess insurance coverage being provided by certain related parties of CRM, thereby creating a disincentive for CRM to obtain competitive quotes and acquire coverage from the most cost effective carrier. CRM Holdings, Ltd’s 2006 Form 10-K filed with the SEC included the following statements: “We depend on our reinsurance business for a substantial portion of our revenues and profit”, “We may be deemed to have a conflict of interest in concurrently managing groups and placing excess coverage for these groups with Majestic or another U.S. admitted insurer that cedes a part of this excess coverage to Twin Bridges”, and “It is possible that one or more groups could conclude that our acting as manager of the groups and as reinsurance broker for our groups, while also reinsuring a portion of the excess coverage, presents an unacceptable conflict of interest.”

16. L&M became aware of many instances where CRM failed to provide the excess insurance carriers with timely notification of certain claims as required per the excess insurance policies. Accordingly, it appears that CRM did not consistently adhere to the reporting requirements specified in the excess policies. This is a significant potential problem for ELITE as an excess carrier has the ability to deny coverage for any claim exceeding the applicable retention amount if the required notification procedures were not properly adhered to.

17. L&M believes CRM’s policy to cancel members after the second, and not the first, unproductive payroll audit to be imprudent. L&M believes that all, or at least the majority, of the members who did not cooperate with the payroll audit process are those who believed the audit would have resulted in additional contributions owed to ELITE. By waiting until after the second unproductive payroll audit to cancel a member, ELITE most likely provided the member with over two years of coverage at contribution amounts below what they should have been. Additionally, CRM did not consistently follow its policy of cancelling members after two unproductive payroll audits. L&M estimates that CRM received approximately $223,000 in additional administrative fee revenue by not adhering to its own internal policy.

18. The allocation of the $2.5 million dividend in 2004 was not fair and equitable to the all members. In addition, the amount of the dividend should have been reduced based on L&M’s belief that ELITE’s post-dividend equity balance was insufficient in relation to its total revenue and assets, and considering the substantial loss incurred in the prior year. The

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WCB informed L&M that CRM did not provide it with any notification prior to declaring and issuing the dividend.

19. During the period February 11, 2002 – January 22, 2003, CRM surreptitiously failed to comply with a number of directives and restrictions the WCB had imposed on ELITE because it had not met the required regulatory funding position required under the NYCRR.

20. CRM’s methods to estimate incurred losses yielded claim reserves that were significantly understated. Both third party administrators hired after CRM’s termination estimated the Trust’s total incurred losses to be significantly higher ($40.7 million and $21.9 million) than estimated by CRM on the last day it served as ELITE’s administrator (August 31, 2008).

21. The claims reserve liability recorded in 2006 and 2007, the first two years to show substantial net losses, was at or below the low end of the range calculated by the actuary. This understated the ultimate claim related exposure of the Trust and provided an overly optimistic picture of ELITE’s financial condition. This may have been a deliberate attempt to present a more favorable financial position for those years.

22. An independent actuary firm hired by L&M to review the actuary reports of SGRisk, LLC

(the actuary CRM used for ELITE during 2001 – 2006) concluded that adjustments were made to standard actuarial techniques which significantly modified the results. According to the independent actuary, these adjustments were not adequately justified and tended to drive estimated ultimate losses down more often than not.

23. The third party claims review specialist firm engaged by L&M concluded that an excessive

use of independent medical examinations (IME’s), performed by an affiliate of CRM, was present in many claim files reviewed. Payments to this related party of CRM from early 2003 through early 2009 totaled $2.23 million.

I. INTRODUCTION

1. Background

Every employer in New York State is legally required to procure and maintain workers’ compensation coverage for its employees. Most employers have four options to obtain this mandated coverage: participate in a group self-insurance trust, obtain insurance from the New York State Insurance Fund, individually self insure, or obtain insurance from a private commercial carrier. Title 12, Chapter V, Subchapter B of the NYCRR establishes application procedures, qualifications, and responsibilities for any group of employers with the desire to procure the WCB’s approval to operate, as a group self-insurer. The NYCRR provides for WCB oversight over member admittance and termination, trust bylaws, security amounts, capitalization thresholds, excess insurance, types and amounts of investments, actuarial reviews, financial reporting, and marketing. Each group self-insured trust must have a set of documents, including a trust agreement and bylaws, which govern all aspects of the group’s operations, and maintain a trust fund that is financed by contributions and assessments from its members.

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CRM is a third-party trust administrator that began to provide administration services to group self-insured trusts with the formation of ELITE in August 1999. ELITE was the final CRM administered New York group self-insured trust to cease active operations. In September 2008, CRM voluntarily surrendered its New York State license to provide third-party administrative services to group self-insured trusts. During the period of ELITE’s active existence, CRM’s executive officers were comprised of individuals that had significant experience with the formation and management of group self-insured trusts. Evidence suggests that these same executive officers of CRM played an active role in the administration of ELITE. On August 27, 1999, R.W. Painting, Inc. (the initial Trustee), represented by Robert Williams, and Key Bank of New York (Key Bank) executed an agreement and declaration (of trust) establishing ELITE, and it began to offer workers’ compensation insurance coverage to its members on that date. The agreement and declaration (hereinafter referred to as the “Trust document”) outlined the powers, duties, and obligation of the Trustees, and addressed the handling of certain administrative and financial issues. Also on August 27, 1999, ELITE, represented by Robert Williams, and CRM, represented by Martin D. Rakoff, C.E.O., executed a “Service Agreement” that delineated the basic responsibilities and obligations of the third-party administrator and set compensation arrangements thereof. ELITE was established to provide workers’ compensation coverage through a self-insurance program to New York State employers who, according to the Trust document “is classified as one of the following SIC Index Major Construction Groups; 15, 16 or 17, unless otherwise approved by the New York WC Board.” Subsequent amendments to the Trust document added SIC Index Groups 11, 12, 13 and 78. CRM, through a network of independent insurance brokers and agents, solicited employers to join ELITE. L&M estimates the active membership of ELITE peaked during the 2007 - 2008 policy year when approximately 1,400 entities participated in ELITE.

ELITE reported audited cumulative losses of approximately $49,499,000 up to and including the year ended September 30, 2010. During the period August 27, 1999 through August 31, 2008, CRM charged ELITE approximately $34.8 million for services it provided under the Service Agreement. Total member contributions and assessments amounted to approximately $168 million during that same period. L&M assembled the information used to compute the cumulative administration fees charged from several sources, including ELITE’s audited financial statements (2000 - 2008), a general ledger report listing the administration fees paid to FCS Administrators, Inc., and an account trial balance that was provided to us from the independent accounting firm that conducted the 2009 and 2010 financial statement audits. During the period of March 2003 through early 2009, the Trust paid approximately $2.23 million for independent medical examinations to Eimar, LLC, a related party of CRM. L&M believes the Trustees may have been unaware that a related party relationship existed between CRM and Eimar, LLC.

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During 2004 - 2008, ELITE’s excess insurance policies were obtained from carriers that were either affiliated with CRM or had reinsurance arrangements with affiliates of CRM; thus, the placement of the excess insurance policies with these carriers benefited CRM’s owners. Additionally, during these years an affiliate of CRM received the resulting commission from brokering these policies. The WCB engaged L&M in April 2010 to provide both an independent operational assessment of ELITE and to assist in the reconstruction of ELITE’s financial position as of September 30, 2010 and the end of each preceding fiscal year. Since then, L&M has assisted the WCB in its efforts to identify the principal reasons for ELITE’s deficit financial condition. L&M’s methodology and observations are detailed throughout the remainder of this report. 2. Methodology Prior to commencing our document accumulation and analysis, L&M had conferences with employees of the WCB in Albany, New York to gain a better understanding of the critical issues and required procedures. L&M also met with NCAComp, the current administrator appointed by the WCB after ELITE was deemed insolvent. The next step of our independent analysis of ELITE’s operations entailed an in-depth inspection of documents provided by the WCB and others, including the Trust document, Service Agreement, Board of Trustee meeting minutes, Bylaws (“Sample Trust” version), general correspondence, general member files, member claim files (performed by third-party claims review specialist), excess insurance policies, annual audited financial statements and various supporting workpapers, annual payroll audits, annual actuary reports, Desk Audits and Summaries and the Level I reviews performed by the WCB, report issued by Milliman USA regarding the adequacy of ELITE’s 2001 claims reserves, and the “Tier-One” and “Tier-Two” analyses of ELITE’s claims reserves performed by PricewaterhouseCoopers, LLP (PwC). A crucial part of this step included the inspection of a selection of the member files obtained from NCAComp. The analysis of these important documents enabled us to obtain a basic understanding of the duties of the parties involved and an overview of the types of issues we could anticipate encountering during the forensic process. L&M inspected all annual audited financial statements and analyzed selected workpapers for 2007 and 2008 that were prepared by the two independent CPA firms who performed those financial statement audits. We were not provided with any audit workpapers to inspect for the 2000 through 2006 years that were prepared by a different CPA firm who conducted those financial statement audits. L&M repeatedly attempted to contact the six individuals that had served as Trustees to interview them regarding their roles, interactions with CRM, the understanding they had of their fiduciary duties, and various other questions pertaining to the operations of ELITE. All six Trustees refused our numerous attempts to interview them. Our efforts consisted of numerous telephone calls (with voice mails and/or written messages left), letters (including certified versions) and E-mails. We spoke briefly with two of the Trustees (Patrick Murphy and William Pittinger) and subsequently provided them with a set of twenty-one potential interview questions for their perusal. We never spoke with the remaining four Trustees as they ignored all of our contact attempts. The two Trustees whom we provided potential interview questions to both later declined to be interviewed.

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L&M contacted representatives from fifty non-Trustee members, ten of which agreed to be interviewed. L&M interviewed members of FCS Administrators, Inc.’s management. L&M obtained and inspected each of the 2001-2010 actuary reports that were purported to have been used to determine the year-end reserves reported on the audited financial statements. L&M interviewed representatives from the Marketing Broker to determine its role in the formation of and ongoing operations of ELITE. L&M interviewed selected insurance brokers and agents who placed members in ELITE. L&M engaged a third party claims review specialist to perform a comprehensive examination of the claims handling process, part of which included a detailed claims audit on a sample of open and closed claims. L&M engaged an independent actuarial firm to review ELITE’s 2001-2006 actuary reports prepared by SGRisk, LLC, and provide us with an opinion relative to the methods used by SGRisk, LLC to estimate the ultimate incurred losses and related claims liability.

L&M currently provides accounting and tax services to NCAComp, the administrator appointed by the WCB to replace FCS Administrators, Inc. Additionally, L&M provided past accounting and tax services to one of ELITE’s members and FCS Administrators, Inc., ELITE’s administrator from September 1, 2008 through March 31, 2010. The services currently provided or provided in the past by L&M to these entities did not impair our objectivity in performing our procedures and arriving at the conclusions enumerated throughout this and our Deficit Reconstruction and 2010 Assessment report.

3. Chronology of Key Events

August 27, 1999 – ELITE created; both the Trust Agreement/Declaration and Service Agreement between ELITE and CRM executed on this day. ELITE begins formal operations with the admission of its first six members.

October 7, 1999 – Trust Agreement amendment #1 is executed. The amendment changed the formal name of ELITE and set the homogenous requirement of the Trust by limiting participation to only those entities with Standard Industrial Classification (SIC) major group codes of 11, 12, 13, 15, 16 and 17.

April 19, 2001 - Letter from WCB informing CRM that ELITE’s 2000 audited financial statements have not yet been received, thus ELITE not in compliance with NYCRR.

October 16, 2001 – Conference call occurs between WCB, CRM and ELITE’s financial statement auditor. Topics discussed included (1) the significant accumulated deficit of the Trust, (2) lack of segregation of duties at CRM, (3) the reduction in contribution discounts in order to bring the Trust to a fully funded status, (4) issues with certain wording within the surety bond that was posted with the WCB as of that date.

January 31, 2002 – WCB receives mailing from CRM with a cover letter indicating that the required financial and other reports for the September 30, 2001 year-end were enclosed. It was later determined by the WCB that two of the required reports were missing from the mailing. The missing reports were requested and received from CRM at a later date.

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February 8, 2002 - Letter from WCB informing CRM that two items pertaining to the September 2001 year end were not received by January 31, 2002, thus ELITE not in compliance with NYCRR; penalties of $500/day had started to accrue.

February 11, 2002 – WCB freezes ELITE’s ability to solicit and/or add new members due to WCB’s determination that ELITE was underfunded at September 30, 2001 as defined in the NYCRR.

February 18, 2002 – WCB receives letter from independent actuary (Milliman USA) hired by the WCB to review ELITE’s claims reserves that states, in its opinion “some of the assumptions used (by ELITE’s actuary) appear to understate the liabilities of the trusts. Based on our initial review of the actuarial reports, the loss reserve estimates appear to be optimistic.”

March 18, 2002 - WCB sends a cover letter along with a Memorandum of Understanding (MOU) for CRM’s and Trustee signatures that detailed requirements to be followed in order for the restriction on new member solicitation and additions (from February 11, 2002) be lifted. L&M confirmed that the MOU was executed by the WCB on March 27, 2002. Amongst other restrictions, the MOU limited member discounts to 10% for new members, 25% on upcoming renewals, and limits the overall average member discount to 20%.

March 22, 2002 – WCB receives Trust document amendment #3 from CRM. The amendment would allow non-homogeneous companies affiliated with existing members to participate provided their payroll is minor in relation to that of the approved member.

June 3, 2002 – WCB sends letter to CRM that described details of civil penalty of $9,500 assessed as a result of the late filing of September 30, 2001 financial reports. Payment of these penalties received by the WCB on June 20, 2002.

July 11, 2002 – CRM submits proposed Bylaws to the WCB. WCB sends letter to CRM with recommended changes to proposed Bylaws at a later date (September 20, 2002). L&M or the WCB were unable to locate Bylaws that incorporated these recommended changes and/or any that were formally approved by the Board of Trustees.

July 24, 2002 – WCB sends CRM an E-mail indicating that a total of 193 member applications submitted since the March 2002 MOU lacked the required support for discounts (“quote sheets”) as delineated in the agreement.

September 10, 2002 – A WCB prepared funding summary for 2001 indicates a Trust equity ratio of 73.5%.

October 2, 2002 – WCB receives cover letter along with a fully executed “Interim Remediation Plan” from CRM. Amongst other restrictions, the plan limited the weighted average member discount to 18% and new member individual discounts to 18% as well. The plan also limited the policy period for all members to six months, limited the number of new members that could be admitted and forbade the use of any rate adjustments other than the experience modification factor in the determination of a member’s net contribution.

October 3, 2002 - $2,500 penalty paid by CRM for failure to comply with 30 day filing requirement for new member applications.

November 1, 2002 – Amendment #1 to the Service Agreement, which increased the fee charged by CRM from 15% to 17% of manual contributions, takes effect.

November 8, 2002 – WCB informs CRM that it has engaged PwC to perform an actuarial and financial review of the September 30, 2002 reports of ELITE. WCB informs cost of said review is to be borne by ELITE. L&M noted ELITE’s Chairman of the Board of Trustees signature dated November 11, 2002 on a document agreeing to the review.

November 12, 2002 – CRM submits required financial and other reports for the fiscal year ended September 30, 2001 to WCB.

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November 15, 2002 – WCB sends letter to CRM regarding high error rate on new applications submitted for approval (approximately 1/3 of the applications that had been recently submitted to the WCB contained errors). WCB reminded CRM that applications should be reviewed for accuracy prior to submission.

December 2, 2002 – WCB receives letter from CRM that disputes certain results of the PwC review noted above. The letter concludes with CRM President Daniel G. Hickey, Jr. requesting the WCB immediately classify ELITE as fully funded and that the restrictions currently in place be removed.

December 10, 2002 – CRM sends WCB a letter that proposes certain modifications to the October 2, 2002 “Interim Remediation Plan” based on discussion with the WCB, including (1) discount limitations be based on a tiered scale on member contribution, (2) in most cases, a maximum experience modification factor of 1.20, (3) a mandatory safety inspection for prospective members with EMF’s above 1.20 prior to admission and, (4) an increase in the minimum manual contribution from $5,000 to $7,500.

December 18, 2002 – WCB sends CRM a letter modifying and adding additional requirements to the CRM letter of December 10, 2002. It appears the conditions included in this letter were considered final and agreed to by all parties involved and effective as of December 18, 2002.

January 21, 2003 – A WCB prepared funding summary for 2002 indicates a Trust equity ratio of 93.7%.

January 22, 2003 – WCB sends CRM letter releasing all restrictions previously imposed under the “Interim Remediation Plan” dated October 2, 2002 as a result of ELITE being classified as “fully funded” by the WCB as of September 30, 2002. The “fully funded” status was issued shortly after the WCB’s acceptance of PwC’s actuarial and financial review report.

June 9, 2003 - WCB receives Trust Agreement amendment #5 from CRM. The amendment adds SIC code 78 (landscape and horticultural services) as an allowable code for participation.

June 16, 2003 - WCB receives Trust Agreement amendment #4 from CRM. The amendment removes member penalties for voluntary withdrawal from the Trust during the 2nd and 3rd year of participation.

December 1, 2003 – New York Marine and General Insurance Company (New York Marine) began providing specific and aggregate excess insurance to ELITE. Twin Bridges (Bermuda) Ltd., an affiliate of CRM, reinsured 50% through 70% of the liabilities arising from the policies issued by New York Marine through March 31, 2007.

January 26, 2004 – CRM submits required financial and other reports to the WCB for the fiscal year ended September 30, 2003.

July 20, 2004 – A WCB prepared funding summary for 2003 indicates a Trust equity ratio of 93.1%, thus no regulatory funding issues existed at that time.

December 2, 2004 – Dividend of $2.5 million approved by the Trustees. January 31, 2005 – CRM submits required financial and other reports for ELITE to the

WCB for the fiscal year ended September 30, 2004. March 16, 2005 - WCB informs CRM of results of its 2004 Level I review and calculates

ELITE’s equity ratio as 95.9%, thus no regulatory funding issues existed at that time. December 27, 2005 – CRM Holdings, Ltd. initial public offering completed. June 15, 2006 - WCB informs CRM of results of its 2005 Level I review and calculates

ELITE’s equity ratio as 101.3%, thus no regulatory funding issues existed at that time. June 21, 2006 – Amendment #2 to the Service Agreement, which increased the fee charged

by CRM from 17% to 21% of manual contributions on “new business only” takes effect.

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December 7, 2006 – Letter sent from WCB to CRM and ELITE’s Trustees that indicated serious concerns with the accuracy of the reports of ELITE’s actuary (SGRisk, LLC). Its concerns were based on issues noted in a report SGRisk, LLC had provided to the WCB on another self-insured group. The letter’s conclusion stated if a trust continued to use SGRisk, LLC, the WCB would likely require an independent actuarial review with the associated cost to be borne by the trust.

January 30, 2007 – CRM submits required financial and other reports for ELITE to the WCB for the fiscal year ended September 30, 2006.

April 1, 2007 – Majestic, an affiliate of CRM, begins to provide excess insurance to ELITE. June 2007 – PwC issues an “Analysis of Trust’s Loss and Loss Adjustment Reserves Report”

(Tier-Two Report) for ELITE that indicated PwC estimated ELITE’s required reserves (including state assessments) as of September 30, 2006 to be $33.0 million, $10.6 million higher than the $22.4 million estimate produced by SGRisk.

July 26, 2007 - WCB informs CRM of the preliminary results of its 2006 Level I review and calculates ELITE’s equity ratio as 85.0%, thus ELITE deemed underfunded. A final Level I review for ELITE was not released by the WCB for that year.

December 6, 2007 – L&M located 3 Board of Trustee resolutions with this date, but was unable to confirm the formal adoption of said resolutions. The resolutions acted to (1) remove SGRisk, LLC as the Trust’s actuary and appoint EMB America as the replacement, (2) authorize CRM to obtain ELITE Special Funds information from the WCB’s website and (3) allow CRM to distribute all Board of Trustee related correspondence directly to the Marketing Broker.

January 1, 2008 - Amendment #3 to the Service Agreement, which increased the fee charged by CRM from 17% to 18% of manual contributions for “renewal business” and from 21% to 22.5% of manual contributions for “new business”, takes effect. The increase in the fee was in return for CRM agreeing to provide administration services on a “cradle-to-grave” basis for all claims incurred during which CRM was/will be the administrator.

January 24, 2008 – WCB meets with CRM and ELITE’s Trustees to discuss results of an independent actuarial review and possible remediation/assessment plans. ELITE’s equity ratio decreases to 67.3% as of September 30, 2006 after factoring in the additional loss reserves calculated by the independent actuary.

January 25, 2008 – WCB sends letter to ELITE’s Trustees regarding its belief that the Trustees agreed with the results of the independent actuary. In its letter, the WCB also indicated that the Trustees had informed it that they believed the September 30, 2007 financial reports would indicate improvement.

March 31, 2008 – Last day ELITE issued workers’ compensation coverage. April 18, 2008 - WCB informs CRM of the preliminary results of its 2007 Level I review and

calculates ELITE’s equity ratio as 87.1%, thus ELITE deemed underfunded. As a result of ELITE’s termination, a final equity ratio for ELITE was not released by the WCB for this year.

April 18, 2008 – WCB sends letter to Trustees informing them that due to an insufficient number of members (21), its status as a group self-insurer would be terminated.

May 16, 2008 – The WCB sends letter to ELITE’s members informing them that due to an insufficient number of members (21), the Trust’s ability to offer coverage will be terminated effective July 16, 2008. The member records provided to L&M indicate that all members had procured alternative coverage before April 1, 2008.

July 15, 2008 – ELITE’s Chairman of the Board of Trustees signs document formally appointing FCS Administrators, Inc. (FCS) as the new administrator of ELITE.

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September 1, 2008 - FCS replaces CRM as the administrator of ELITE. September 8, 2008 - CRM voluntarily surrendered its New York State license to provide

third-party administrative services to group self-insured trusts. June 2009 – FCS issues assessment invoices to members totaling $37.02 million. December 14, 2009 – Conference call between WCB and the Trustees regarding the current

financial status of ELITE, including projections of its future cash flow. The WCB grants the Trustees an additional four weeks to increase collections and provide cash flow projections. The WCB states during the call that in order for the Trust to stay autonomous, the incoming receipts (on a monthly basis) must equal or exceed benefit payments and other expenses of the Trust.

January 27, 2010 – WCB declares ELITE insolvent and sends letter to Trustees and FCS that effective April 1, 2010, it will assume ELITE’s administration. In the letter, the WCB directed FCS to forward all ELITE records in its possession to NCAComp, Inc., the third-party administrator appointed by the WCB to handle the run-off of ELITE’s liabilities.

April 1, 2010 – The WCB assumes control of the Trust’s liabilities and operations, and subcontracts related responsibilities to NCAComp, Inc.

May 17, 2010 – WCB oversees mailing of interim estimated deficiency assessment invoices totaling $62.29 million to all former ELITE members by NCAComp, Inc. This billing superseded the assessments issued by FCS in June 2009. The mailing included a cover letter from the WCB that included a description of the available payment plan options and reminded the members of their potential responsibilities under the joint and several liability provision.

II. OBSERVATIONS

1. Trust Formation and Ongoing Operations Trust Formation L&M believes ELITE was formed through a relationship between CRM, Vanner Insurance Agency, formerly known as Ralph J. Vanner & Associates, (Vanner) and Vanner’s client and initial Trustee, R.W. Painting, Inc. Vanner was named as the Trust’s Managing General Agent (MGA) and/or a “Trusted Marketing Partner” in many of the numerous marketing related documents obtained by L&M. A MGA is defined as an individual or business appointed by an insurer to solicit applications from agents for insurance contracts and to negotiate insurance contracts on behalf of an insurer and, if authorized to do so by an insurer, to effectuate and countersign insurance contracts. CRM’s internal documents obtained by L&M as a result of forensic procedures performed on another CRM administered trust described the role of the MGA as “the agent who started the business with CRM and with their allegiance to the program entitles them to a commission override on all business written in that program.” We were informed by Vanner that it had never formally agreed to any MGA agreement with CRM for ELITE, and that CRM had executed “marketing agreements” on behalf of ELITE with various insurance agencies across New York State. In addition, Vanner informed us that it was not involved in member underwriting, policy issuance, or the administrative duties that would have normally been the responsibility of an MGA. L&M concurs with Vanner’s assessment of its role as all of the documents we examined indicate that CRM performed these functions/duties for ELITE. The “marketing agreement” between CRM and Vanner provided to L&M by Vanner stated “General agent (Vanner) will receive a 2% override (commission) on all business produced by other agents.” L&M confirmed with Vanner that it had in fact received the

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“2% override” referred to in the agreement. On occasion, we refer to Vanner as the “Marketing Broker” throughout the remainder of this report. During our inspection of ELITE’s Board of Trustees meeting minutes, we noted that two or more representatives of Vanner attended all the Board of Trustees meetings for which we have record of occurring. Copies of the minutes obtained are included in our report as Appendices 9 – 20. We located a web-based brochure on Vanner’s website that indicates Vanner is “partnered with Compensation Risk Managers…and it’s (the Trusts’) members enjoy significant savings compared to traditional insurance carriers’ products.” This wording in this brochure further supports the notion that Vanner was significantly involved with ELITE. We were informed by Ralph J. Vanner, Jr. (the current president of Vanner Insurance Agency), that CRM, along with Vanner’s and various other insurance brokers’ assistance, had formed the Trust. At the request of CRM, Vanner and the various other insurance brokers assembled enough members to obtain the necessary minimum initial contribution level required under WCB regulations. Vanner also informed us that it solicited Robert Williams, the owner of R.W. Painting, Inc., to be the initial Trustee. We were unable corroborate any of this information with Mr. Williams since he did not respond to our repeated requests for an interview. The Trust document (Appendix 1) is an agreement between R. W. Painting, Inc. (the initial Trustee) and Key Bank of New York with an effective date of August 27, 1999. The Trust document contains the undated notarized signatures of Robert Williams and William Bishop, a Vice President of Key Bank of New York. It appears the Trust document was amended a minimum of six times, five of which we were able to obtain and inspect. The nature of each of the Trust document amendments are discussed later in this report section. L&M believes the progression behind the formation of the Trust is significant in that the employers (members), and not the administrator (CRM), should control and play the predominant role over all important aspects of the process. However, in the case of ELITE and the other trusts administered by CRM, we believe CRM may have created the trusts without any input from the members. Evidence suggests that most, if not all, CRM administered trusts were executed by a single Trustee and financial institution, none of whom had any apparent experience in structuring group self-insured trusts for workers’ compensation purposes. Rather, CRM solicited members to participate after they had convinced an initial Trustee, possibly with assistance from the initial Trustee’s insurance broker, to sign the Trust and other significant documents (i.e. - Service Agreement) that CRM had prepared. Attached as Appendix 2 is the Joinder and Indemnification Agreement effective August 27, 1999 between R.W. Painting, Inc. and ELITE. The agreement was signed by Robert Williams on behalf of R.W. Painting, Inc. and by Martin Rakoff, C.E.O. of CRM. The signatures on this document are undated and not notarized, but appear to have been witnessed and acknowledged by an individual with the name of “Sue Hibbard.” We were unable to determine Ms. Hibbard’s relationship to either Robert Williams and/or CRM/Martin Rakoff. Attached as Appendix 3 is the Service Agreement between ELITE and CRM effective August 27, 1999. This document contains the undated and un-notarized signatures of Martin Rakoff, C.E.O. of CRM, and Robert Williams on behalf of R.W. Painting, Inc. The Service Agreement delineated the services the fund administrator (CRM) was to perform and included the contract term and compensation arrangements. It appears the Service Agreement was amended a minimum of three times. The nature of these amendments is discussed in detail in report section “Administration Fees.”

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Attached as Appendix 4 is the only version of Bylaws L&M located and is titled “BYLAWS OF THE Sample Trust.” A member representative informed us during an interview that he had a set of Bylaws for ELITE; however, our repeated attempts to procure a copy of these from him proved to be unsuccessful. It appears this unsigned draft version of Bylaws was submitted in July 2002 by CRM to the WCB for comment relative to ELITE and six other Trusts CRM was currently administering. Based on this submission, it appears CRM was heavily involved with the drafting and finalization of ELITE’s Bylaws. L&M located a letter from the WCB to CRM that proposed a number of amendments to these sample Bylaws in order for them to conform to the requirements stipulated in the NYCRR. L&M noted no mention of Bylaws in the minutes we obtained and was unable to locate a version of Bylaws that was approved and/or adopted by the Board of Trustees. We were informed by the WCB that it had no record of receiving approved/adopted Bylaws for ELITE. Section 317.12 of the NYCRR, effective January 31, 2001, addresses Bylaws of self-insurers. This section of the NYCRR states each group self-insurer must establish written Bylaws, and describes minimum content requirements. Based on our inability to locate final/properly executed Bylaws, it is possible that ELITE did not comply with this section of the NYCRR. L&M noted an inconsistency between the Trust document and Bylaws (“Sample Trust” version) relative to the definition of Trustee. The Trust document appears to define a Trustee as an individual, whereas the Bylaws refer to a Trustee as a participating employer who must appoint a representative to conduct Trust business. Throughout this report, we have taken the position that the language in the Trust document takes precedence over the Bylaws (“Sample Trust” version) and accordingly, refer to the individual as the Trustee rather than the member entity.

As stated previously, our repeated attempts to interview Mr. Williams were unsuccessful. Accordingly, we could not determine the nature of Mr. Williams’ involvement with the preparation of said documents, if any, or if he had read the documents prior to their execution. Additionally, we could not determine if Mr. Williams had engaged independent legal counsel to review these documents and/or the amendments. Independent legal counsel could have provided valuable advice and guidance regarding his responsibilities as the Trustee and the reasonableness of the documents.

Trust Document and Bylaws

The Trust document outlined the powers, duties, and obligations of the Trustees and administrator (CRM), and addressed the handling of certain administrative and financial issues. The Trust document included a preamble and fifteen sections. Some of the sections we considered critical to the operation of the Trust include:

Section II – enumerates certain general requirements of the members, including a clause that limits the membership to entities classified within one of three major Standard Industrial Classification (SIC) codes;

Section III - addresses the appointments to be made by the initial Trustee; Section IV - details the powers, duties and obligations of the Board of Trustees; Section VI - describes miscellaneous provisions such as a hold harmless clause for Trustees

and Trustee election and termination policies; Section VII - delineates the administrator’s responsibilities; Section VIII - Lists employer (member) specific duties and responsibilities, and includes

provisions related to member early termination/cancellation, as well as the methodology used to calculate early termination penalties.

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Section II of the Trust document addressed a number of general membership requirements and issues including:

mandatory execution of certain documents prior to an entity becoming a “Participating Member”;

members shall be limited to those that are classified within one of the following SIC major construction group codes: 15, 16 or 17;

members are to make contributions as determined by the Trustees or administrator sufficient to pay the compensation provided for in the New York State Workers’ Compensation Law;

information regarding the member dispute resolution process.

Section III of the Trust document stated that the (initial) Trustee shall appoint: a Board of Trustees that consisted of up to seven individuals, all of which were employed by

a participating employer (member); a financial institution; the administrator of the Trust. After the above appointments, the initial Trustee delegates its authority to the Board of Trustees and its designees.

Section IV of the Trust document stated the Trustees are: responsible for the investment of Trust assets; to hold regular and special meetings; to collect all amounts and property due the Trust; to settle all claims, debts or damages due or owing to or from the Trust; to perform all acts which are necessary or deemed desirable for the purpose of protecting

the Trust.

Section VI of the Trust document stated: the members and the Trust shall hold harmless each member of the Board of Trustees in his

or her capacity as Trustee; the Trustees are authorized to purchase an insurance policy(ies) to protect them from suits

involving errors and omissions and potential other fiduciary liability; Trustee vacancies are to be filled by a majority vote of the then remaining Trustees; Trustees are to serve for a one year term or until a successor is elected; a Trustee can be removed from office upon a vote of a majority of the remaining Trustees or

75% of active members; the Trustees may never delegate their authority to make investment decisions.

Section VII of the Trust document delineated the administrator’s (CRM’s) responsibilities. The responsibilities are verbatim to those listed in the Service Agreement. Note that this section states “no application to the Trust can be accepted by the Administrator, if the applicant does not meet the minimum guidelines established unless said application is first approved by the Board of Trustees”, and “The procurement of the excess insurance shall be subject to the approval of the Board of Trustees.” The Trustees’ and CRM’s non-adherence to these two statements is discussed in report sections “Underwriting, Including Renewal Process” and “Excess Insurance.” The Service Agreement is discussed in detail in report section “Administration Fees.”

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Section VIII discussed employer (member) specific duties and responsibilities, and included: penalties for voluntary termination by a member within the first three years of membership

of between 15% and 35% of annual contributions, and that voluntary termination required 60 days notice;

involuntary termination of the member by the Trustees (not the administrator) if various “events” were to occur such as the breach of any terms within the Joinder and Indemnification Agreement, failure to meet underwriting criteria, or failure to participate in the safety programs promulgated by the Trustees;

a statement regarding member obligations under the Joinder and Indemnification Agreement relative to the members’ joint and several liability for all workers’ compensation and employer liability obligations incurred by the Trust during the term of the member’s participation.

The Trust document appears to have been amended a minimum of six times, five of which are included in Appendix 1. The five amendments we were able to obtain are all un-notarized, and were signed by a representative of Key Bank and the then Chairman of the Board of Trustees of ELITE. Amendments 4 and 6 were to be effective immediately, but because the signatories on the amendment did not date their signatures, it is not possible to determine the actual effective date of these amendments. The date received stamps of June 16, 2003 (amendment 4) and October 30, 2006 (amendment 6) on the WCB’s copy of the amendment may offer an approximation as to their actual effective dates. The Trust document amendments were as follows: #1 - amendment (effective October 7, 1999) changed the name of the Trust from “Elite

Contractors Trust of New York Workers’ Compensation Trust” to “Elite Contractors Trust of New York”, and added SIC index major construction groups 11, 12 and 13.

#2 - unable to locate #3 - amendment (effective January 1, 2002) allowed for subsidiary or affiliate entities of a member

to participate in the Trust without meeting the homogeneity requirements of the Trust. The affiliated member’s payroll could only amount to a minor percentage of the payroll of the approved member. L&M notes that the percentage that constituted minor was not defined in the amendment.

#4 - undated amendment stating that a 35% penalty would be assessed against members exiting the Trust within the 1st year of participation, effective immediately. This amendment appears to eliminate the penalties that were to be assessed on members exiting the Trust in the second and third years of participation as found in the Trust document.

#5 - amendment (effective June 6, 2003) that added an additional SIC industry code (78 – landscape and horticultural services) to the qualifying list for ELITE participation.

#6 - undated amendment granted authority to a specifically named CRM employee to execute forms GSI-1.1 on behalf of the Trust, effective immediately.

As previously noted, we were only able to obtain a “Sample Trust” version of Bylaws to inspect. This version contained fifteen articles, many of which duplicated a number of operating and administrative issues addressed in the Trust document. Highlights of the additional issues addressed in the “Sample Trust” version of Bylaws, including areas that appear to have changed from the Trust document, can be found below:

Article V outlined Trustee terms and stated “each Trustee shall serve for an unlimited period of time”, while the Trust document stated “each Trustee shall serve for a period of one year, or until a successor has been elected and qualified at the annual meeting of the participating members.”

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Article VI stated the Trustees should elect both a Chairman and Secretary-Treasurer. The Chairman’s duties included “organizing and running the Board Meetings” and the Secretary-Treasurer’s duties included “record all votes and the minutes of all proceedings of the Board.”

Article VII indicated the Trustees were to meet a minimum of two times per year. The second meeting was referred to as “the Annual Meeting of the Trust”, with this meeting being when and where the election of next year’s officers was to take place. The Trust document merely stated that regular Trustee meetings were to be held and that an “annual meeting of the participating members” would take place.

Article XI dealt with potential conflict of interest issues and included a directive that the Trustee excuse him/herself from all actions that would have been likely to result in direct financial benefit to him/her, the Trustee’s immediate family, or any entity that the Trustee was affiliated with.

Required Trustee Duties per Trust Document and Bylaws Based on our inspection of Trustee meeting minutes, member files, and WCB correspondence, the following comments can be made regarding the Trustees’ performance relative to certain duties charged under the Trust document and “Sample Trust” version of Bylaws. These duties included the selection of the Trust’s administrator and the negotiation and approval of the ensuing administrative service agreements; the proper execution of the Trust formation documents; the acceptance and/or continuation of members not meeting the minimum underwriting guidelines; approval of excess insurance coverage; organization and oversight of the Board of Trustee meetings; recordation of the minutes of all proceedings of the Board of Trustees; the implementation of appropriate rules and regulations beyond the Trust’s formation documents; investment of Trust assets; and taking appropriate steps to protect Trust assets. Section III of the Trust document delineated the duties of the initial Trustee. These duties included three appointments: (1) Trustees (up to seven), (2) the financial institution to be used by the Trust, and (3) the Trust administrator. It is important to note that we were unable to obtain any minutes for Trustee meetings that may have occurred reasonably close to the Trust’s effective date (August 27, 1999) to assist us in drawing a conclusion regarding these appointments. Additionally and as noted previously, Trustee Williams did not respond to our repeated requests for interviews. As a result, we could not determine, with certainty, the process that occurred leading up to these three appointments, including the nature of Trustee Williams’ involvement, if any. In addition, the remaining five Trustees also refused our repeated interview attempts, so we were unable to inquire if any of them had any knowledge of the history surrounding these appointments. Based on the results of forensic procedures performed by us on two other CRM administered trusts, we believe all, or at least a majority, of the initial Trustees had been asked by representatives of CRM, or their insurance agents/brokers, to serve on the Board of Trustees. In addition, we were informed by Vanner that Trustee Williams was not involved in any way with the selection of the remaining Trustees whose terms of service also began in 1999.

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As noted previously, Key Bank was a party to and signatory on the Trust document and all related amendments. We were unable to question CRM representatives or Trustee Williams regarding the process that concluded with the selection of Key Bank as ELITE’s financial institution. L&M obtained information that indicated six other New York based CRM administered self-insured trusts had also used Key Bank as their financial institution. Given the vast array of financial institutions, L&M finds it highly unlikely that this would have occurred without CRM either (1) directly making the choice or (2) heavily influencing the Trustees’ decision. Based on the above, it appears that CRM either selected Key Bank or had recommended the institution as the preferred choice. Finally, the information we obtained indicates Key Bank was the only financial institution that had been used by the Trust from its inception through September 2007.

In L&M’s opinion, the most important obligation of the initial Trustee’s representative was to appoint the Trust administrator. As explained further in the “Administration Fees” section of our report, the administrator of ELITE was charged with critical duties relative to member acceptance, claims administration, the establishment of claims reserves, and risk management (safety) services. The proper performance of these core services is necessary to ensure the success of a group self-insured trust. L&M’s conclusion in the “Administration Fees” report section indicates that many provisions within the Service Agreement heavily favored CRM. As stated previously, we were unsuccessful in our repeated attempts to speak with Mr. Williams, and it is unclear if he read the Service Agreement and understood the significance of its various terms and/or engaged independent legal counsel to render an opinion on the reasonableness of the document. Due to the heavy slant of the agreement towards CRM, and because ELITE’s Service Agreement is essentially identical to that of other CRM administered trusts, L&M believes (1) CRM or its attorneys authored the Service Agreement and (2) the initial Trustee did not retain independent legal counsel to review the terms of the agreement.

Based on the above, we obtained no evidence to indicate the initial Trustee’s representative had actually appointed the additional Trustees, the financial institution, or ELITE’s administrator. If the initial Trustee did in fact execute the aforementioned appointments, L&M concludes that his review of the contents of the Service Agreement was not performed using the standard of care a reasonably prudent person would have used in a similar situation. This potential lack of verifiable effort by the initial Trustee’s representative also supports considerable involvement by CRM in the formation of, and in all aspects of, the Trust’s operations.

Section IV of the Trust document states “All investment decisions made, pursuant to the terms of this Trust, shall be made by the Board of Trustees”; investments shall include but not be limited to “stocks, bonds, notes, Certificates of Deposit, mutual funds, mortgages and insurance policies/annuities.” Accordingly, it can be concluded that (1) the Trustees were responsible to prudently invest available assets of the Trust and (2) the Trustees had a wide range of investment vehicles to choose from.

We were unable to locate a formal written investment policy in the documents we received from the WCB. We were also unable to question any Trustee(s) in regards to their knowledge of a formal investment policy as all six of ELITE’s Trustees refused our repeated attempts to schedule interviews with them. We asked one of the investment advisors that had serviced the fixed income portion of ELITE’s investment portfolio if he had ever been provided with an investment policy for ELITE. We were informed that, to his knowledge, no written investment policy existed and the guidelines they operated under were verbal. As a result of the above, L&M believes it is very possible that a formal written investment policy did not exist for the Trust at any time during its active existence.

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L&M’s inspection of ELITE’s audited financial statements for the fiscal years ended in 2000 – 2008 revealed that only two years (2000 and 2001) contained no amounts presented as “investments.” The audited financial statements for 2000 and 2001 reported cash and cash equivalents at the end of each year of approximately $817,000 and $4.18 million, respectively. Thus, ELITE had accumulated a significant amount of free cash available for investment during the year ended September 30, 2001. The audited financial statements for the fiscal years ended in 2002 and forward presented varying amounts as investments, some of which were significant. For example, ELITE’s investment balance as a percentage of total assets amounted to between 58% and 61% for the fiscal years ended September 30, 2003 through September 30, 2006. Ten of the twelve Board of Trustee meeting minutes obtained by L&M indicate discussions had occurred in regards to the existing or potential investments of ELITE. The discussions included topics such as the maximum percentages and specific types of investments allowable per the NYCRR, recent historical returns of the investment portfolios, the reason(s) for changes made to the portfolio mix, and forecasts for future returns for the various investments held or to be held in ELITE’s portfolio. The discussion leaders appeared to be representatives of either CRM’s management or the investment advisory firms. L&M noted four instances of Trustee motions (with only three related votes) to transfer additional amounts from ELITE’s operating bank account to the advisory firms for investment. L&M noted no other comments/questions in the minutes from the Trustees relative to investments other than the motions and votes noted above. Representatives from the two investment advisory firms used by ELITE were physically present at a minimum of three of these same meetings. On several occasions, the Trustee meeting minutes alluded to sales presentations by various named investment advisory firms to CRM officials that had either already occurred or had been scheduled. Section VI of the Trust document states “The Board of Trustees may never delegate their authority to make investment decisions regarding the Trust fund assets or the removal and/or appointment of the Financial Institution.” L&M believes the term “Financial Institution” as used in the Trust document refers to both the depository institution used by the Trust for the processing of daily routine transactions as well as the entity(s) charged with custody of the Trust’s investments. The chain of events that ultimately lead to the employment of the two investment advisor firms used by ELITE is unclear. We were unable to successfully question any Trustee(s) in regards to their involvement with the selection of the investment advisor(s) since all six of ELITE’s Trustees refused our repeated attempts to interview them. Based on procedures performed and conclusions reached by us on two other CRM administered trusts that we had previously performed forensic procedures on, we believe CRM either directly chose the investment advisor or greatly influenced the selection process. We obtained three presentation packets we believe the investment advisory firms had used in presentations to CRM and the Trustees. The investment performance and statistics provided in the presentations indicate the performance of ELITE’s investments was comparable to or better than that of the indexes commonly used to judge a portfolio’s performance. Based on the above, it appears ELITE implemented some form of an investment strategy, invested a portion of its liquid assets reasonably early in its existence, maintained at least 50% or more of its total assets as investments for at least four of the nine years of its active existence, and obtained reasonable investment returns compared to indexes commonly used to measure investment performance.

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Our document inspection, including all the Level I reviews performed by the WCB, indicate ELITE had complied with the NYCRR in regards to the types and amounts of investments in all but two years. The Level I reviews for September 30, 2004 and September 30, 2005 provided regulatory adjustments (subtractions) in the amounts of $569,000 and $245,000, respectively, for investments disallowed for various reasons under the NYCRR. In summary, L&M concludes that (1) the Trust may not have had a formal investment policy at any time during its active existence, (2) CRM and/or the Trustees began investing ELITE’s excess cash relatively early (2002) and obtained reasonable rates of return that either mirrored or beat the indexes of similar investments, (3) CRM and the investment advisor firms kept the Trustees informed of what it thought were the most important issues related to ELITE’s investment portfolios, (4) at least on some occasions, the Trustees were actively involved in the decision process surrounding the allocation of additional cash to the investment advisors, and (5) CRM either made or greatly influenced the selection of the investment advisors. Section IV of the Trust document also charged the Trustees with the responsibility to hold regular meetings and call special meetings of the administrator or participating employers as required. The Trust document also alludes to, but does not appear to mandate, an annual meeting of the participating members, at which time the Trustee elections would occur. The “Sample Trust” version of Bylaws state that the Trustees were to meet at least two times per year, with the final meeting of the year serving as the “Annual Meeting of the Trust at which time the Officers shall be elected for the following year.” Included as Appendices 9 – 20 are copies of the Board of Trustee meeting minutes we were able to obtain. As detailed in the previous paragraph, the “Sample Trust” version of Bylaws stated that the officers of the Board of Trustees (Chairman and Secretary-Treasurer) were to be elected on an annual basis. In addition, both this document and the Trust document stated that Board of Trustee vacancies were to be filled by a majority vote of the remaining Trustees. Our inspection of the Board of Trustee meeting minutes produced no evidence to indicate that votes electing Trustees or Board of Trustees officers ever occurred. L&M obtained and inspected twelve sets of Trustee meeting minutes (including one set from a conference call comprised of CRM representatives and three members of ELITE’s Board of Trustees) and four Board of Trustees’ resolutions. Only one of the four Board of Trustees’ resolutions we obtained was executed by a majority of Trustees then in office; the rest were unsigned. Based on notations included in the minutes obtained, L&M believes that at least one additional meeting (in 2003) of the Trustees took place during the period spanning the 2003 through 2008 calendar years. In addition and also based on notations within the meeting minutes we obtained, we believe at least two other Board of Trustees’ resolutions should have been, and perhaps were executed by the Trustees. A review of the meeting attendance records indicates the meetings were attended by between four and nine representatives of CRM and some or all of the then current Trustees. Based on the manner the minutes were recorded, it is often difficult to ascertain with certainty the individual that had made a particular statement; however, it appears that whenever an observation or question was made by an individual other than a representative of CRM, the individual’s name was mentioned. This occurred infrequently within the meeting minutes we obtained and as a result, L&M believes CRM representatives dominated the conversation that occurred at the meetings.

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L&M could not document formal Trustee meetings occurring up to and including the effective date of the Trust (August 27, 1999). In addition, we were unable to document, with certainty, any meetings occurring in 1999, 2000 or 2001. We were informed by the Marketing Broker that Trustee meetings had taken place during those years. The Trust document did not expressly indicate the minimum number of Trustee meetings to be held annually; however, Section VI of that document inferred that an “annual meeting of participating members” was to be held. The “Sample Trust” version of Bylaws was an attachment to a letter from CRM to the WCB dated July 2002, so the requirements for a minimum of two Trustee meetings per year contained in that document would not have applied to the years for which we were unable to ascertain if any meetings had occurred (1999, 2000, and 2001). We were unable to document that two Trustee meetings occurred in 2003, so it is possible the Trustees did not uphold the two meeting frequency requirement as stated in the “Sample Trust” version of Bylaws for that year. The majority of the minutes we obtained were components of the Board of Directors (Trustees) meeting binders we obtained from the Marketing Broker. These binders contained an agenda for the current meeting and a table of contents listing the documents contained in the binder. The documents within the binders usually included the minutes from the prior meeting, Trust financial statements, summarized loss runs by member, generalized claims information and statistics, and various safety and loss control related reports. On occasion, other documents were included in the binders such as marketing brochures, marketing related press releases, safety newsletters previously mailed or to be mailed to members, and charts and other information related to the recent performance of ELITE’s investment portfolios. The binder cover sheet, agenda, table of contents, and many of the documents included for discussion were usually all printed on CRM letterhead indicating in all likelihood CRM had prepared its contents. As previously noted, we were unsuccessful in our repeated attempts to interview ELITE’s Trustees, so we were unable to obtain any of their comments regarding the meetings. As part of forensic procedures performed by L&M on two other CRM administered trusts, L&M interviewed a number of their Trustees. L&M believes that certain comments received from these individuals as related to the general nature of the meetings would also apply to the Trustee meetings conducted for ELITE. L&M was informed by the other trusts’ trustees that:

CRM prepared the meeting agendas and provided all the documents for scheduled discussions;

CRM representatives presided over the meetings, recorded the meeting minutes, and the minutes had been recorded in a reasonably accurate fashion;

No Trustee meetings or conversations of substance took place during the terms of their Trusteeships without CRM representatives present.

As previously noted in this report section, Section VI of the “Sample Trust” version of Bylaws indicates officers of the Board of Trustees included a Chairman and a Secretary-Treasurer. The Chairman was charged with “organizing and running the Board Meetings” and the Secretary-Treasurer’s duties included “record all votes and the minutes of all proceedings of the Board.” Both the individuals L&M believes acted as Chairman of ELITE’s Board of Trustees, Robert Williams and Eugene Clarke, did not respond to our repeated attempts to interview them. As a result, we were unable to confirm our suspicion that they had simply been appointed to the position by CRM. Our suspicion is based on what was uncovered as a result of our forensic procedures on two other CRM administered trusts. None of the documents we inspected throughout our procedures, including all meeting minutes, ever referenced a Secretary-Treasurer position. The “Sample Trust” version of Bylaws indicate the officers had the ability to delegate any of the tasks charged under the

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terms of the Bylaws, however, a letter L&M located from the WCB to CRM commenting on the contents of the “Sample Trust” Bylaws stated the wording allowing delegation of the tasks assigned to the Chairman and Secretary-Treasurer was unacceptable and had to be removed. Based on the above, L&M concludes both individuals that served as Chairman of the Board of Trustees may have breached their fiduciary duty to the Trust based on the apparent failure to organize and run the Board meetings. Additionally, the Secretary-Treasurer position appears to have not been filled and, as a result, the Trustees may have breached their fiduciary duty to the Trust by not electing one as required under the “Sample Trust” version of Bylaws. Conversely, if a Secretary-Treasurer had in fact been elected, the person in that position did not appear to perform the appropriate tasks delineated under the Bylaws. Finally, we were informed during our member interviews that no general meetings of members had ever taken place over the entire active existence of the Trust. In addition, our inspection of member and correspondence files uncovered no evidence to indicate general membership meetings occurred. With respect to the requirement for Trustee votes, L&M notes that the “Sample Trust” version of Bylaws is silent. However, according to the Trust document, four actions appear to have required a formal vote by the Trustees: (1) the amendment of the Trust document, (2) the adoption of Bylaws, (3) the approval of application for membership of a prospective participant that did not meet the minimum underwriting standards of the Trust, and (4) the election/removal of a Trustee. In addition, three other sections of the Trust document include wording that implied the need for Trustee votes including:

Section IV - “All investment decisions made, pursuant to the terms of this Trust, shall be made by the Board of Trustees”;

Section VII - “The procurement of excess insurance shall be subject to the approval of the Board of Trustees”;

Section VIII - “The Board of Trustees, in its sole and absolute discretion, may terminate the membership of a Participating Employer, if any of the following events occur.” “Events” under Section VIII are defined as: - Termination of previously executed Joinder and Indemnification agreement; - Breach of any term of Joinder and Indemnification Agreement by member; - Failure of member to cooperate and participate in safety policies and procedures or to meet any criteria or supply information requested;

- Bankruptcy or other cessation of the member’s business operations; - Failure to cooperate with any claims investigation.

L&M’s inspection of the Trustee meeting minutes and resolutions obtained indicates a total of ten (count excludes the votes to approve prior meeting minutes and meeting adjournments and includes executed versions of Board of Trustee resolutions) Trustee votes occurred at those specific Trustee meetings. The motions and votes included those for:

A dividend payable to members; Transfers of additional funds to ELITE’s investment advisory firms (votes occurred three

times specifically for this purpose); The institution of an 8% surcharge on member invoices to partially offset the New York

State assessment charge; The acceptance of a “Novation Agreement” relative to multiple years of excess insurance

policies; An increase in fees paid to CRM under the Service Agreement;

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The ability for the Chairman of the Board of Trustees to sign the “amendment to the disclosure and consent agreement.” L&M did not obtain the document referred to by this vote;

A resolution granting a specific named individual to execute WCB forms GSI-1.1 on behalf of ELITE.

It should be noted that none of the votes described above pertain to any of the four actions that mandated a vote. As noted previously, the Trust document was amended a minimum of six times. The five (of six) amendments we were able to obtain were all signed by the individual that was serving as the Chairman of the Board of Trustees at that time. We believe three of these amendments were effective during the period for which we obtained minutes to Trustee meetings (2002 – 2007); however, none of the minutes either expressly indicated or implied that a vote had occurred in regards to a proposed Trust document amendment. As a result, L&M believes all six amendments were not approved by a majority of the Trustees, but were simply validated on behalf of the Trust by a single Trustee (the Chairman). It also appears no formal votes took place on any of the three remaining issues that should have required trustee approval. Out of these three issues, L&M believes votes should have occurred on at least two. The first relates to the adoption of Bylaws as required by the NYCRR, and the second relates to potential members that fell outside the minimum underwriting requirements adopted by the Trust. The third issue relates to the election of trustees; however, because it appears the same individuals served as Trustees over the entire period for which we obtained Trustee meeting minutes (2002 – 2007), we do not believe any votes on this potential action should have occurred during this time period. As stated earlier, ELITE may have violated Section 317.12 of the NYCRR due to the apparent absence of formal Bylaws. We noted no mention of Bylaws in minute discussions, were unable to locate a Trustee approved version of Bylaws, and were informed by the WCB that it had no record of receiving approved/adopted Bylaws for ELITE. The apparent failure of ELITE’s Board of Trustees to adopt Bylaws may indicate an intentional disregard to institute mandatory basic trust governing documents as required under the NYCRR. As a result of our forensic procedures, L&M uncovered numerous members that were admitted to ELITE despite not meeting the minimum guidelines in place at the time of its admission. Detailed support for our findings can be found in report section “Underwriting, Including Renewal Process.” While it is possible that the Board of Trustees were unaware CRM had been admitting these members absent its required approval, L&M questions the lack of Trustee curiosity and initiative relative to the quality of specific members (both potential and existing) and the rapid growth of ELITE’s membership. L&M believes that due to the compensation structure of CRM’s Service Agreement, one can argue it was in CRM’s best interest to increase ELITE’s membership. Thus, it is possible CRM did not inform the Trustees of substandard prospects to eliminate the chance for Trustee disapproval, and the related reduction in its potential service fees. To properly monitor member admittance, best practices would dictate that at each meeting the Trustees review a detailed listing of members that had been admitted since the last Trustee meeting. The listing would include certain basic member statistics such as the member’s current experience modification factor, prior year(s) loss ratio, extraordinary circumstances and certain other basic minimum underwriting criteria. L&M believes that had a step such as this been instituted, assuming CRM would have been truthful

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to the Trustees when reporting the statistics requested, the Trustees may have realized improper admissions had been occurring and taken appropriate steps, including the admonishment of CRM and the expulsion of all or at least certain of the members that had been admitted without their required approval. Under the terms of the Service Agreement, CRM’s compensation was based on a percentage of manually rated member contributions. The manually rated contribution is the amount before the application of an applicable experience modification factor and discount(s), if any. Accordingly, future claim related losses or other expenses attributable to individual members and overall member risk had no bearing on CRM’s compensation. This top-line focused methodology may have fed an overly aggressive appetite to increase and maintain membership without the application of adequate underwriting standards. In regard to the implication of required Trustee votes based on our interpretation of wording in the Trust document, we believe only one of the three listed above appeared to have been addressed at least to some extent by the Trustees. On at least three separate occasions, the Trustees moved to and passed the transfer of additional funds to ELITE’s investment advisors. While these actions may not indicate the Trustees adequately upheld all the investment related duties with which they had been charged under Section IV of the Trust document, it could potentially indicate their and/or CRM’s awareness of both the overall importance of this area of ELITE’s operations and related requirements under the Trust document. Based on our review of the Trustee meeting minutes obtained, we believe no votes occurred for either of the two remaining operational areas (excess insurance procurement and termination of a member) where the requirement for a Trustee vote was implied by the Trust document. While the minutes indicated votes had occurred regarding two issues specific to excess insurance, neither involved the approval of the purchase of an excess policy and/or renewal thereof. In regards to termination of members, the minutes indicated CRM had terminated members on numerous occasions; however, these termination discussions were never accompanied by any related discussion and did not appear to be the result of Board of Trustee directives to CRM. The statements made by CRM at Trustee meetings regarding member terminations were usually generic in nature and cited the total number of recently terminated members, but failed to numerically identify the number of members terminated by specific reasons (i.e. non-payment of contributions, poor performance, etc.). In L&M’s opinion, the member terminations noted in the minutes all amounted to CRM simply acting to inform the Trustees of recent actions it had taken. As a result, L&M concludes that the Board of Trustees could have (1) been unaware of its responsibilities to approve excess insurance arrangements and terminate members classified as substandard (deemed by L&M to equate to “not meeting criteria”) and/or uncooperative, or (2) ignored its duties relative to these specific obligations. Section VII of the Trust document and page 3 of the Service Agreement indicate the procurement of the excess insurance was to be approved by the Trustees. Regardless of the requirements within the governing documents of the Trust, best practices would seem to dictate that the purchase of excess insurance is one of the more important duties requiring Trustee involvement, oversight, and approval due to the potential negative consequences imprudent policy terms, the carrier selected, and premium rates could have on the financial viability of the Trust. At each renewal, L&M believes the Trustees should have questioned CRM regarding the potential insurers’ ratings, the types and amounts of deductibles, requested that quotes be solicited from several independent carriers, and reviewed the quotes to ensure reasonable policy costs. Excess insurance policy costs represented the largest expense of ELITE after claims for six of its nearly nine years of active operations. For

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example, ELITE’s excess insurance expense per the 2004 and 2006 audited financial statements totaled $5.53 million and $6.53 million, or approximately 25% of member contributions. Realizing this, L&M would have expected the Trustees to be more vigilant with respect to the excess insurance procurement process, including the demand for meetings with the insurance company’s representatives to better understand all options available. The Board of Trustee meeting minutes L&M obtained named excess insurance carriers and contained various comments regarding the current cost of the insurance compared to the prior year, but never suggested that the formal approval of the policy(s) was necessary or had, in fact, occurred. The Board of Trustee meeting minutes from the June 8, 2005 meeting stated “We have disclosed our reinsurance to all boards before it was placed and our involvement with it.” Because the contents of these minutes were approved by the Trustees at the December 2005 meeting, one can conclude that (1) this statement was true, and (2) although the Trustees may not have formally acted to approve excess policy procurement in 2005 and later years, CRM had provided them with both an overview of actions it had planned relative to ELITE’s excess insurance and a description of related party transactions within the process. Based on their knowledge of both the high cost and potential risk for overcharge as a result of CRM’s related party involvement, L&M would have expected evidence that the Trustees would have entered into/demanded a process that concluded with a document comparing the cost of the excess insurance as provided by the affiliate of CRM to that of several similarly rated commonly known unrelated carriers. This would have provided the Trustees with an opportunity to obtain a general comfort that the cost to the Trust was reasonably similar to that of the open market. Refer to report section “Excess Insurance” for further information pertaining to this topic. In L&M’s opinion, the Trustees had been provided with sufficient information by CRM, both orally and written, that acted as notification that substandard members existed and should have allowed them to identify and characterize specific substandard members. Some of the meeting minutes we obtained provided overviews of the current strategies of CRM’s loss control department and detailed severe injuries that had recently occurred at ELITE’s members. For example, the “Claims Review” section of the June 2, 2004 minutes stated “Named Member, Recovery potential, $532,000 incurred, PPD classification” and “Named Member, Actively seeking third party action, Fell through roof while working, Fatality - $72,500, Co-worker - $272,000.” The following statements from the December 7, 2006 Trustee meeting provide an example of CRM informing the Trustees of how its loss control department was handling poor performing members and also includes generalities regarding recent member claims: “Work with underwriting closely to put plans in place for underperformers”, “Strains and sprains predominant”, and “Since last meeting there has been no severity.” In addition, L&M believes the binders the Trustees received at most, if not all, of the Trustee meetings they attended contained a group “Safety Report Card” that detailed all active members’ safety scores and loss/claim listings by member. A detailed description of the “Safety Report Card” can be found in the “Safety Programs” section of our report. L&M finds it troubling that despite the negativity and significance of the information contained in the minutes, it appears the Trustees never asked CRM for additional details regarding the severe claims, including the names of the applicable members and/or challenged CRM with respect to continuance of these members. The minutes indicate the Trustees had never insisted the offending members’ safety issues be remedied in an accelerated fashion and/or the member(s) be immediately removed from the Trust. L&M believes that insufficient member terminations for underwriting reasons or poor safety records, and lack of Trustee oversight in the areas of member admission and termination, were both major contributing factors to overall claim volume and the Trust’s deficit.

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With respect to the design and implementation of appropriate rules and regulations beyond the Trust formation documents, Section IV of the Trust document empowered the Trustees to “determine all questions, make all decisions and to prescribe changes to the operation of the Trust.” As previously noted, it appears CRM prepared the Trustee meeting agendas, provided all the documents for discussion and presided over the meetings. The attendance records within the meeting minutes we obtained all indicate the number of CRM representatives physically present outnumbered the Trustees. In addition and also previously noted, our inspection of the meeting minutes obtained indicates CRM controlled the discussions and the Trustees rarely commented on recent or planned actions of CRM. In light of the above, L&M questions if the Trustees had a genuine ability to competently and effectively adopt essential rules or supervise the overall affairs of the Trust. In our opinion, many of the matters discussed in this report section exemplify CRM’s control over all functions of the Trust and potentially inadequate oversight by the Trustees. With regard to the duty to take appropriate steps to protect Trust assets, Section IV of the Trust document states the Trustees were to “perform all acts, whether or not expressly authorized, which are necessarily or deemed desirable for the purpose of protecting the Trust Fund.” In L&M’s opinion, the maintenance and preservation would include frequent evaluation of all aspects of the Trust’s ongoing financial operations, including (1) interim and annual financial statements and (2) financial budgets. The Trustee meeting minutes we obtained indicate CRM presented historical financial statements to the Trustees on a regular basis. As a result of their review of the statements, L&M would have expected the Trustees, at a minimum, to have questioned the rationale used by CRM to determine interim and year-end claims reserves and demanded more information regarding the excess insurance procurement process. The minutes indicated the presentations were rarely followed by Trustee questions. Additionally, none of the meeting minutes refer to the existence of any financial budgets. This apparent disinterested attitude towards the financial results of ELITE may call into question the financial acumen of the Trustees relative to the overall operations of self-insured groups. Another critical element of ELITE’s operations having the potential to significantly impact its net assets was the procurement of ancillary services. The Trust document listed a duty of the administrator to employ, on an annual basis, at the Board of Trustees request (1) a certified public accountant (independent auditor) to conduct an audit and prepare required tax returns of the Trust, (2) an independent actuary to calculate an estimate of the claims liability and (3) a claims (payroll) auditor to conduct a payroll audit of each employer. ELITE contracted with Charles E. Hock Associates, Inc. and Overland Solutions, Inc. (formerly known as CP Commercial Specialists), two reputable outside entities to perform needed payroll audit services. L&M was unable to locate any discussions occurring in the meeting minutes obtained regarding appointments of either the independent auditor or actuary. The only comment we noted appeared in the December 6, 2007 meeting minutes and stated “EMB now the actuary on the program.” As previously noted, all of ELITE’s Trustees refused our repeated attempts for interviews so we were unable to question the Trustees regarding their involvement with the procurement of these services. Based on statements obtained from a Trustee of another CRM Trust on which L&M performed similar forensic procedures, L&M believes in all likelihood ELITE’s Trustees were not involved with the appointment of any professional service firms. The Trustee of the other Trust informed L&M that he had never (1) met with the auditors or actuaries, (2) voted on or otherwise approved the CPA firm or the actuary used by the Trust and (3) formally approved a year-end financial statement or actuarial report. L&M obtained information indicating that CRM had used the same independent auditor and actuary for the majority, if not all, of the New York trusts it administered. Based on the

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above, L&M concludes that CRM was solely responsible for the selections, and the Trustees had not been consulted prior to the annual selection of either party. L&M Conclusions

It appears ELITE was created by CRM along with numerous insurance brokers, a single initial Trustee and financial institution. L&M believes ELITE was created without input from any of ELITE’s other charter members and that both the initial Trustee and financial institution did not have any apparent experience in the structuring of group self-insured trusts;

ELITE may have violated Section 317.12 of the NYCRR as a result of the apparent failure of its Trustees to adopt formal Bylaws;

It appears CRM kept the Trustees reasonably informed of what it believed were the most important issues surrounding ELITE’s investment portfolios and evidence suggests the Trustees had voted to transfer excess cash balances to ELITE’s investments;

It appears CRM performed the following in regards to Trustee meetings that occurred over ELITE’s active life (1) determined the agendas, (2) conducted/controlled the actual meetings, and (3) recorded the minutes for the meetings;

The Trustees met regularly (in the presence of CRM) during at least six of the nine years of its active operations;

No general membership meetings occurred during the period August 27, 1999 – March 31, 2008;

L&M questions the financial acumen of the Trustees as a result of what appears to have been a disinterested attitude towards ELITE’s financial results. Had the Trust engaged individuals with more financial and/or governance experience, it is possible that (1) the legitimacy of CRM’s claims reserving and excess insurance related practices would have been called into question, (2) poor performing members would have been terminated and/or terminated earlier and (3) substandard members would not have been accepted into the Trust;

The Trustees, or certain Trustee(s), may have breached their fiduciary duty to the Trust by not adequately performing certain duties charged under the Trust document and “Sample Trust” version of Bylaws, including ratifying matters that required formal Trustee votes and/or approval (i.e. – appointment of a Secretary-Treasurer, excess insurance policy procurement, admission/termination of members outside underwriting criteria) and various additional duties the officers of the Board of Trustees were to perform.

2. Board of Trustees

An active and informed Board of Trustees serves a vital role in the success of a group self-insurance trust. The Trustees represent the group’s members and are expected to take all actions necessary to ensure the proper performance of the trust. Generally speaking, members of a Board of Trustees have a responsibility and must demonstrate an ongoing interest in the affairs of the Trust. It is essential that the Trustees attend meetings consistently and set forth their views on relevant matters so appropriate policy decisions can be reached. Trustees should normally hire the third-party administrator, establish and/or approve (1) Bylaws, (2) qualifications for membership, (3) asset protection policies, and (4) the basis for establishing member contributions and minimum underwriting specifications. In addition, Trustees are usually responsible for such critical functions as approving the hire of professional service firms including auditors and actuaries. Finally, the Trustees must ensure the group trust complies with all relevant statutes and the sections of the

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NYCRR that govern group trusts. Appendix 8 contains a summary of the individuals L&M believes served on the Board of Trustees, and related meeting attendance statistics. Best practices would dictate that Trustees:

Be proactive and ask questions about important matters, even for those not on the meeting’s agenda;

Receive and review relevant materials prior to meetings; Seek the advice of experts (auditors, actuaries, and attorneys) when necessary or appropriate,

with preference towards the Board of Trustees directly engaging the expert, rather than management (the administrator);

Allow sufficient time at meetings for all Trustees to present his/her views and ask questions; Document the governance process by recording adequate minutes that include the issues

discussed and related deliberation. Some indication of the nature of the discussions is warranted, even if no action is ultimately taken. The minutes should reflect the time expended by the Trustees in reviewing critical issues.

As noted in Appendix 8, ELITE had six different Trustees over the period of the Trust’s active existence. The Trust document and Bylaws (“Sample Trust” version) both contain Trustee terms and election/removal procedures, and L&M uncovered an ambiguity between the applicable guidelines present in the documents. The Trust document states “each Trustee shall serve for a period of one year, or until a successor has been elected and qualified at the annual meeting of the participating members”, while the Bylaws (“Sample Trust” version) indicate “each Trustee shall serve for an unlimited period of time.” We obtained a letter from the WCB to CRM stating CRM must modify the Bylaws (“Sample Trust” version) to limit a Trustee’s term to three years. We can only assume CRM would have changed the Bylaws to comply with the directive of the WCB. This ambiguity would have to be judicially resolved if challenged by a Trustee member. The notion that there may not have been annual meetings of participating members is problematic under the Trustee term delineated in the Trust document, since it appears that all of the Trustees held office longer than the maximum three year term allowable under what would have been the edited Bylaws (“Sample Trust” version). The number of Trustees that had served at any one time ranged from four to six. L&M was unable to locate any evidence that those managing the Trust (CRM and the Trustees) diligently recruited additional Trustees on or after April 2007 when the need arose. The June 2007 Trustee meeting minutes indicated that (1) CRM was aware of the WCB’s new requirement regarding a minimum number of Trustees, and (2) CRM was actively recruiting at least two prospects for this purpose. L&M finds it curious that CRM had only been recruiting two additional trustees when it appeared ELITE needed four additional Trustees to reach the minimum of nine per the WCB’s guidance. It should be noted that L&M’s inspection of the December 2007 Board of Trustee meeting minutes uncovered no further discussion on this subject and WCB records do not reflect the addition of any new individuals to ELITE’s Board of Trustees as a result of this guidance. For unknown reason(s), it appears that the addition of Trustees was never a high priority task for either CRM or the existing Trustees. In light of the overall importance of the Trustees in the success of a group self-insurance trust, L&M repeatedly attempted to contact the six individuals that had served as Trustees to interview them regarding their roles, interactions with CRM, and the understanding they had of their duties. As noted below and throughout our report, all six Trustees refused our numerous attempts to interview them. Our efforts consisted of numerous telephone calls (with voice mails and/or written messages

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left), letters (including certified versions) and E-mails. We spoke briefly with two of the Trustees and subsequently provided them with a set of twenty-one potential interview questions for their perusal. We never spoke with the remaining four Trustees since they ignored all of our contact attempts. The two Trustees whom we provided potential interview questions to both later declined to be interviewed. As noted above in report section “Trust Formation and Ongoing Operations”, L&M obtained and inspected twelve sets of Trustee meeting minutes (copies of which are located in Appendices 9 – 20). The content of these minutes is cited or otherwise referenced throughout our report. In general, the Trustee meeting minutes were recorded as “bullet pointed” statements and contain many random thoughts from the various parties who attended. As a result, the Trustee meeting minutes are often difficult to follow. It appears that only six of ten regular meeting minutes (excludes minutes from March 6, 2007 conference call and December 6, 2007 regular meeting) we obtained had been reviewed and formally approved by the Board Trustees. Regarding the minimum number of meetings, the Trust document merely stated that a duty of the Trustees was to hold “regular” meetings and that an “annual meeting of the participating members” would take place. The “Bylaws of the Sample Trust” from 2002 referred to previously in our report indicate the Trustees were to meet a minimum of two times per year. As noted earlier in report Section “Trust Formation and Ongoing Operations”, L&M located a letter from the WCB to CRM that proposed a number of amendments to these sample Bylaws, but we failed to locate a version that incorporated some or all of the proposed changes. The WCB informed us it had no record of Bylaws ever being adopted by the Board of Trustees. The second meeting was referred to as “the Annual Meeting of the Trust” when the election of next year’s officers was to occur. Based on the meeting minutes we obtained, it appears the Trustees met the minimum frequency requirement stated in the “Bylaws of the Sample Trust” of two meetings for 2002, 2004, 2005, 2006 and 2007 while it is possible that the Trustees did not meet the requirement for 2003. As stated previously, we were unable to obtain any minutes for meetings prior to 2002; however, the number of required meetings the Trustees were to hold during this period is unclear since the Trust document simply stated that the Board was to hold an unspecified number of “regular” meetings. As a result of information provided by all the members questioned during the interview process as well as the lack of specific written evidence to prove otherwise, L&M believes no annual membership/participant meetings occurred over the entire active life of ELITE. We have detailed below some of the discussions that occurred at eight of the documented Board of Trustee meetings, and our comments regarding the same:

June 4, 2002 – Statements were made that both the accounting (auditing) and actuarial firms would be present at the next meeting in December 2002. The December 2002 minutes do not list representatives from either firm as being present and L&M believes that auditors or actuaries had never presented to the Trustees at any time over ELITE’s entire active life. Due to the overall significance of the reports of both of these professional service firms, L&M would have expected the Trustees to have required annual presentations by both firms.

December 5, 2002 – Statements are made that the “Trust is fully funded”, “107% funded – trust to equity ratio is 107%”, and “90% is acceptable to Workers’ Compensation Board for trust to equity ratio.” The trust equity ratio (TER) and its importance in the determination of the Trust’s regulatory funding position is discussed for the first time at this meeting. The remaining minutes we obtained repeatedly mention the importance of this issue as it relates to the Trust’s ability to operate free of additional oversight from the WCB. Additional

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information on this topic can be found in report section “Equity Ratio and Contributions Receivable Subsequently Collected.” Statements are made that “Every member should get the annual report”, and “Will forward annual (financial) report at Boards request. All participants in trust are entitled to it.” It appears that CRM believed the reporting of annual financial results to the members was required and was prepared to do so at the direction of the Trustees. The results of our member interviews (See report section entitled “Member Interviews”) indicates only a small percentage of the members (20%) believed they received some type of financial report or related data from the Trust; accordingly, we do not believe that the Trust consistently or ever provided most/all members with financial statements. This subject does not resurface in any subsequent meeting minutes we obtained so it is unclear if the Trustees had informed CRM to intentionally not provide annual financial information to the rank and file members or the apparent misstep of not providing the majority/all of the members annual financial reports was simply an honest oversight by both CRM and/or the Trustees. It should be noted that the lack of reporting of annual financial results to the members of ELITE is consistent with what occurred at two other trusts administered by CRM that L&M performed similar forensic accounting procedures on.

December 4, 2003 – Statement is made that “We have been selective in picking members which has resulted in keeping losses down.” While it is possible this statement could have been at least somewhat factual at the time, L&M questions its truthfulness since our procedures determined that numerous members were admitted to ELITE despite not meeting the minimum underwriting guidelines in place at the time of their admittance. In addition, numerous members continued to participate with discounted contributions despite their poor performance and inability to meet renewal underwriting requirements. The lack of enforcement of minimum underwriting standards is discussed in several sections of our report.

June 2, 2004 – A number of statements insinuating CRM had terminated poor performers are made including “We have scrubbed the books and got rid of the bad business.” As a result of these statements, L&M believes the Trustees were provided with a false impression that CRM had reduced its tolerance for riskier members which resulted in the termination of numerous members. Statistics regarding the loss of members with less than $10,000 in annual contributions and the number (115) of members that had been recently cancelled is reported by CRM to the Trustees. The policy cancellation statistics compiled by L&M for the five month period prior to the meeting indicate the number (115) reported by CRM to the Trustees was reasonable. It is stated that the loss ratio of members with less than $10,000 in annual contributions is less than ½ of 1%. Based on the nature of the employers in ELITE (contractors), L&M questions the accuracy of this statistic since we would have expected a significantly higher loss ratio for any strata of ELITE’s employers. The “Payroll Limitation Program” offered by the New York State Insurance Fund is discussed in conjunction with a proposal for a competitive/similar program devised by CRM for ELITE’s participants. Under CRM’s program, certain members would be offered an additional “credit” (discount) rather than a payroll limitation. L&M determined that 9 members received this credit during the period April 1, 2004 – March 31, 2008. L&M notes that the Trustees never questioned CRM at this meeting (or later meetings) regarding (1) how CRM was going to qualify individual members for the credit, and (2) the financial ability of ELITE to absorb the reduction in net contribution revenue resulting from this selective credit. See the report section entitled “Discounts” for additional information relative to this credit. Statistics are provided by CRM to the Trustees regarding loss control activities including the amount of “service visits” (also known as “site visits”) that had been recently performed. L&M believes these statistics gave the Trustees a false impression that CRM had

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been aggressively performing site visits at members’ facilities and job sites. Although some physical site visits were performed, L&M believes the true quantity is far below what was reported to the Trustees at this and future meetings. It should be noted that one of the Trustees had questioned CRM regarding the lack of a recent site visit at his Company at a previous Board of Trustee meeting. As a result, L&M would have expected that Trustee to be especially suspicious of the site visit statistics provided and potentially challenged their accuracy. See report section “Safety Programs” for additional discussion on the safety and loss control programs of ELITE.

December 2, 2004 – It is stated “No problems” under the Accounts Receivable discussion heading. Although this statement may have been true at the time it was made, L&M disputes the accuracy of the statement when interpolated to ELITE’s entire active life. Based on our analysis of the audited financial statements, we believe the write-off of uncollectible accounts by ELITE were significantly higher than the numerous self-insured groups we have either audited or performed similar forensic accounting procedures on. This matter is further discussed in the report section “Underwriting, Including Renewal Process.” It is stated that the excess policy had been renewed through a competitive bidding process. While this could have been true, the minutes gave no indication that the Trustees were provided with details of the quotes received by CRM or given any opportunity to review and comment on the excess insurance procurement process. L&M believes the cost of ELITE’s excess insurance coverage was excessive compared to other non CRM administered Trusts. This may have been due to the involvement of entities considered related parties of CRM and inadequate oversight of the process by the Trustees. See report sections “Trust Formation and Ongoing Operations” and “Excess Insurance” for further discussion on this issue. A statement is made that the Trustees were satisfied with the quality of ELITE’s loss control. We were informed by FCS Administrators, Inc. (ELITE’s third-party administrator directly following CRM) that the Trustees had conveyed a similar feeling to them regarding ELITE’s safety/loss control programs.

June 8, 2005 - CRM states (1) membership had increased to 889 employers and $29 million in revenue, (2) its goal was to build the Trust to $40 million, and (3) it was going to have a picture taken of the Board of Trustees with an oversized version of the $2.5 million dividend check for marketing purposes. CRM describes the various marketing initiatives it had recently taken or was considering. The above indicates (1) the Trust had grown significantly in five years of active existence, (2) CRM had lofty revenue goals (an increase of 38 % or $11,000,000 from current levels), and (3) CRM thought the recent dividend could be used as a marketing tool to attract new participants. Based on the rapid growth that ELITE had already experienced and what L&M would have expected to be a dwindling population of lower risk potential members, L&M would have expected the Trustees to question CRM on the initial underwriting criteria and techniques being used to evaluate potential members including a possible suggestion that the requirements be tightened. In regards to the $2.5 million dividend, L&M believes CRM probably developed the idea for a substantial dividend and justified it to the Trustees by touting the corporate income tax savings that would result, the positive reaction from current members, and the marketing exposure to potential members. L&M believes the amount of the dividend was excessive given the equity left in ELITE after its payment. L&M notes that this dividend payment was not the first time CRM had used the minimization of corporate income taxes as the main or one of the main reasons for an action it had taken. The WCB informed L&M that CRM did not provide it with any notification prior to declaring and issuing this dividend. See report section entitled “Member Dividends” for further discussion on this issue.

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June 6, 2006 – A discussion occurs regarding the current status of the workers’ compensation insurance market with the conclusion that the market was very competitive and the commissions paid by CRM to ELITE’s agents/brokers was below market. As a result of the discussion, a motion was made and passed by the three Trustees present to increase the commissions paid to brokers/agents on all new business by 2%. The commissions paid to brokers/agents was paid by CRM (not directly by ELITE) and funded by a portion of the administrative fees it received. L&M obtained an amendment to the Service Agreement dated June 21, 2006 between ELITE and CRM signed only by the Chairman of the Board of Trustees at that time (Eugene Clarke) that increased the administrative fees from 17% to 21% (an increase of 4%) for all new business. L&M believes this Service Agreement amendment was drafted to accomplish the purpose of the motion passed at the June 6, 2006 Trustee meeting, and accordingly we would have expected an increase of only 2% rather than the 4% noted. As a result of our document inspection and testing performed on administrative fees and commissions, L&M determined that (1) administrative fees to CRM increased by 4 percentage points on new business after that date and, (2) it appears the entire additional 4 percentage points was remitted as additional commission to the producing broker/agent by CRM. It is unclear the nature of the Trustee actions that occurred, if any, between the motion that had been passed at the June 6, 2006 Board of Trustee meeting and the date of the Service Agreement amendment (June 21, 2006) to support the additional 2 percentage points increase in administrative fees to CRM. It is also unclear if the Trustee (Chairman) signing the amendment had read the amendment or otherwise been made aware of the increased percentage (from 2 to 4 percentage points) or if the remaining Trustees approved the increased percentage. Under the claims section of the minutes, it is stated “Eimar bill review - $9.5 million in bills, reduced by almost $7M.” L&M determined Eimar was a related party (common management and/or ownership) of CRM and provided case management, medical bill review, and utilization review services to ELITE. This statement indicates the use of Eimar for medical bill review saved ELITE millions of dollars over an unstated period of time and that the Trustees were made aware that Eimar had been providing services to ELITE. It is unclear if the Trustees knew Eimar was a related party of CRM or how much it was compensated by ELITE for the services it provided. Two Trustees from another self-insured group formerly administered by CRM informed us that they did not recall ever being made aware that a related party relationship had existed between CRM and Eimar. L&M questions the validity of the magnitude of savings reported to the Trustees of $7,000,000, or approximately 74% of the original billings, and is surprised the same was not challenged by the Trustees at this meeting. The outside third-party hired by L&M to review ELITE’s claims handling procedures/practices believes Eimar may have performed and billed ELITE for certain services it deemed were unnecessary. Detailed discussion on Eimar can be found in report section “Claims Handling Procedures/Practices.”

March 6, 2007 – A conference call to discuss the possibility of including an additional charge of 8% of net member contributions for the policy year beginning April 1, 2007 in order to recoup most, if not all, of the increase in the New York State Assessment. The three Trustees on the call voted in favor of the additional charge for a one year period as a separate line item on the invoices, while a fourth Trustee expressed his approval of the motion after the meeting had formally concluded. During the conference call, CRM reported to the Trustees that the 8% is a reasonable estimate for the upcoming contribution year and based on what New York State had billed ELITE for assessments in prior years. According to the minutes of the conference call, a resolution for Board of Trustees signature was to be prepared by CRM and signed by the Trustees. L&M was unable to locate a Board

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of Trustees’ resolution (signed or unsigned) for this purpose and notes that this matter was not mentioned at the next meeting of the Board of Trustees on June 5, 2007. This lack of follow through by the Trustees may be another example of the Trustees’ indifference towards the duties with which they had been charged.

During a discussion in late 2008 between representatives of the WCB, ELITE’s Trustees and the president of FCS, two Trustees disclosed that they had both known Daniel Hickey (not specified whether Sr. or Jr.) since their childhood and that they bought stock in CRM Holdings, Ltd at its initial public offering. L&M believes the Trustees’ ownership of stock in CRM Holdings, Ltd. may have created a conflict of interest. In conclusion, the Trustees had numerous critical duties and fiduciary responsibilities bestowed upon them under the terms of the Trust document and the Bylaws (“Sample Trust” version). It is essential that the Trust engage a sufficient number of Trustees, meetings be attended consistently, and the Trustees set forth their views on matters so appropriate policy decisions can be reached. L&M believes it is possible that the Trustees did not read any or all of the Trust document and Bylaws since their actions indicate they (1) did not understand the significance of their role and related responsibilities, and (2) had enough confidence in CRM, based on their purported expertise and experience in the field, to allow CRM to conduct all the business of ELITE with little or no oversight and/or assistance. Based upon our in-depth analysis of the Board of Trustees meeting minutes, as well as the knowledge we obtained regarding the intricacies of the Trust’s operations, L&M has concluded that the Trustees did not appear to exercise their responsibilities in a manner that a reasonably prudent person would have in similar situations. The bullet points that follow and other information contained throughout this report all lend support to this conclusion.

Our discussion and related conclusions found in report section “Trust Formation and Ongoing Operations” indicate that CRM controlled all aspects of the Board of Trustee meetings and were seldom questioned by the Trustees. The meeting minutes L&M obtained suggest, at most meetings, the Trustees simply acted as a muted audience for CRM’s presentation. Given ELITE’s rapid member and revenue growth, L&M would have expected significant Trustee engagement at the meetings devoted specifically to the review of existing and prospective member quality to obtain reasonable assurance that all participants met minimum underwriting guidelines and were or would be profitable to the Trust.

An increase and/or rotation of Trustees may have enhanced the likelihood that the legitimacy of certain of CRM’s practices would have been questioned. Best practices for effective Boards of Trustees include term limits to promote fresh thinking and objectivity. As noted previously, the maximum term of ELITE’s Trustees in both the Trust document and Bylaws, though conflicting, appeared to be finite. The Trust document stated a term of one year, or until a successor has been elected and qualified at the annual meeting of the participating members, while the Bylaws limited a Trustee’s term to three years. Evidence suggests the Trust violated the terms of both these governing documents since five of the six Trustees of ELITE served from near the date of ELITE’s inception until on or after it ceased offering workers’ compensation insurance. L&M believes that what appears to be a disinterested set of Trustees provided CRM with the ongoing and un-protested ability to control all elements of the Trust’s operations.

L&M questions the accuracy of several statements made by CRM to the Trustees at some of the meetings. In our opinion, the nature of some of the statistics provided to the Trustees was unreasonably positive and we have doubts regarding their truthfulness. L&M is surprised that the Trustees apparently did not question CRM on any of these statements.

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The fact that the Trustees failed to recognize these apparent inaccuracies call into question their ability to adequately oversee the activities of ELITE.

As noted in the previous report section, the Bylaws (“Sample Trust” version) charged the Chairman and Secretary-Treasurer of the Board of Trustees with various meeting related duties, all of which we believe were performed by CRM over the entire active life of the Trust. The duties included the organization and control of the Board meetings and the recordation of the related minutes. It is unclear if the Trustees intentionally disregarded the duties with which they had been charged, or if CRM offered to perform these tasks as a courtesy to the Trustees. In any event, the failure of the Trustees to perform these tasks is further evidence of CRM’s domination over all aspects of the Trust’s operations, with minimal meaningful involvement of the Trustees.

Best practices for businesses and other entities that have annual audited financial statements and actuarial reviews prepared include approval by, and presentation of, the draft reports to the Board of Directors/Trustees. While it appears interim financial statements and claims reserve balances were provided to the Trustees on a periodic basis, it appears they never had the opportunity to read and comment on the annual audited financial statements and actuarial reports, nor had ever been provided with or approved an annual budget. The meeting minutes we inspected do not provide any evidence that the Trustees approved the appointment of the financial statement auditor or actuary, nor did these professional service firms present draft reports at any of these meetings.

As noted previously, CRM distributed interim financial statements to the Trustees, but it appears neither CRM nor the Trustees distributed annual audited financial statements or any other relevant financial information to the majority/all of ELITE’s members. In addition, it appears neither party took the initiative to schedule and hold annual membership meetings. In our opinion, the members of the Trust were entitled to receive periodic financial information and best practices dictate that, at a minimum, annual meetings of the members were in order. This apparent lack of concern for the members, whose interest the Trustees were charged with protecting, produces further evidence to support that a breach of duties by the Trustees may have occurred.

The ownership of stock in CRM Holdings, Ltd. by two Trustees may have created a conflict of interest in their dealings with CRM.

3. Administration Fees Agreement with CRM Introduction ELITE entered into its initial administrative services agreement (Service Agreement) with CRM on August 27, 1999. An undated amendment (amendment #1) to the Service Agreement to increase CRM’s fee from 15% to 17% of manual contributions was executed by the then current four Trustees on dates ranging from November 26, 2001 through December 10, 2001. It is not clear from the amendment the date this change was to be effective; however, a subsequent amendment dated June 21, 2006 (amendment #2) made reference to amendment #1 and listed its effective date as November 1, 2001. Amendment #2 increased CRM’s fee from 17% to 21% of manual contributions “on new business only effective immediately.” A third amendment dated December 27, 2007 (amendment #3) changed CRM’s fee to 18.5% of manual contributions for “renewal business” and 22.5% of manual contributions “for new business during the next five (5) years

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commencing January 1, 2008.” This change in fee percentage was, per the amendment, in return for CRM agreeing to provide administration services on a “cradle-to-grave” basis for all claims incurred during which CRM was/will be the administrator. The initial Service Agreement was executed by Trustee Robert Williams; amendment #1 was executed by Trustees Joseph Wilson, David Derkovitz, Patrick Murphy, and Eugene Clarke; amendments #2 and #3 were executed solely by Trustee Eugene Clarke. CRM’s fees were all a product of manual contribution revenue, which is what the members would have paid based on the undiscounted rates established by New York’s Compensation Insurance Board (CIRB) and an experience modification factor (EMF) of 1.0. The Service Agreement states that this fee was CRM’s compensation for “providing daily management of said Trust for the benefit of all participating employers.” The Service Agreement is virtually identical to those CRM had with other trust funds it administered. Accordingly, one can assume CRM or its attorneys prepared it. All of ELITE’s Trustees declined our repeated attempts to interview them. Therefore, we were unable to confirm our belief that (1) the Trustees did not engage any outside legal counsel to review the Service Agreement and subsequent amendments, and (2) the Trustees did not compare the fee percentage CRM charged ELITE with the fee percentage CRM charged other trusts it administered.

The Service Agreement contains several provisions that heavily favor CRM as discussed below. Services CRM was to Provide under the Service Agreement

The Service Agreement stated CRM will provide a variety of services including: review all potential member applications, and acceptance of such based on qualifications

within the underwriting guidelines; applications falling outside the boundaries of the minimum underwriting guidelines must be approved by the Trustees prior to acceptance;

administer all claims and provide risk management services (CRM had ability to subcontract out both of these services). Administering claims is deemed to refer to necessary and customary administrative and clerical work in connection with each qualified claim including the preparation of checks, vouchers, releases, agreements, and other documents needed to finalize a claim, and maintain documentation of such as required by Workers’ Compensation Law (WC Law);

review claims submitted to determine if they are compensable pursuant to New York State WC Law;

establish and update claims reserves; maintain a file for each claim; provide monthly reports to the Trustees which contain various claims data; comply with excess carrier’s requirements regarding any excess insurance claims; file all reports with the WCB as required by the NYCRR; employ on an annual basis the CPA, the actuary, and the payroll auditor firms.

The above services CRM was responsible to provide generally appear to be normal administrative duties for an administrator. In addition to the above, the Service Agreement states “the Administrator, or its duly licensed designee, shall act as broker of record for the purpose of procuring and maintaining excess insurance and a workers’ compensation surety bond”, and “the cost of the excess insurance and the

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brokerage commissions payable to the Administrator for placing the same shall be borne by the Trust.” This provision that essentially appoints CRM as the broker, in and of itself, can arguably be construed as self-dealing. Term of Agreement The Service Agreement was for the five year term ending August 26, 2004, with automatic renewals for successive five year periods. The three amendments did not change the term of the agreement. While CRM could terminate the Service Agreement for any reason by providing ELITE with 90 days notice, ELITE could terminate the Service Agreement only based upon the occurrence of certain enumerated events, all of which were unlikely to transpire. Fees Charged As noted above, the Service Agreement provided that CRM would initially be paid a fee equal to 15% of manual member contribution revenue, not adjusted member contribution revenue (the actual amount billed to the members). This fee percentage was increased to 17% by amendment #1, 21% for new members by amendment #2, and 18.5% for existing members and 22.5% for new members by amendment #3. Accordingly, ELITE paid administrative fees based on member contributions before any discounts and with all members assigned an experience modification factor of 1.0. Considering most members in group self-insurance trust funds receive a discount from manual rates, basing the administrative fee on pre-discounted contributions did not reflect the true contribution revenue earned by the Trust, and overly benefited CRM. To illustrate this, L&M calculated ELITE’s cumulative manual member contributions as 23% more than cumulative adjusted member contributions. Two individuals with considerable experience in the group self-insured trust field and FCS Administrators, Inc. informed L&M that they do not consider it normal for a group self-insured trust to pay an administrative fee based on manual contribution revenue. Additionally, none of the self-insurance trust funds that L&M performs financial statement audits on incur administrative fees based on manual contribution revenue. The fee CRM charged ELITE to service claims on a life of contract (not cradle-to-grave) basis from November 1, 2001 through December 31, 2007 ranged from 17% to 21% of manual contribution revenue. This is higher than the 15% and 16% of manual contributions CRM charged two other trusts for similar (not cradle-to-grave) administrative services. L&M questions why the fee CRM charged to ELITE was substantially higher than the two other trusts, when the services CRM provided to all three were identical. L&M determined CRM received approximately $34.8 million in administrative service fees from ELITE. We calculated this amount from the balances presented in the 2000 – 2010 audited financial statements and subtracting the amounts paid to FCS as calculated from various 2008 – 2010 general ledger activity reports. Agreements with FCS

ELITE contracted with FCS Administrators, Inc. (FCS) to replace CRM as the Trust’s administrator effective September 1, 2008. This action was probably in response to CRM voluntarily surrendering

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its New York State license to provide third-party administrative services to group self-insured trusts on September 8, 2008. The 2008 Service Agreement with FCS was for a three year term ending August 31, 2011 with a total cost of $975,000 ($419,250 the first year, $331,500 the second year, and $224,250 the third year), and was cancellable by ELITE by providing forty-five days written notice. A revised Service Agreement between ELITE and FCS was entered into on July 1, 2009, which extended the term through September 30, 2014 and increased the fees to FCS. The new fee arrangement was $742,000 for the first year, and each subsequent year decreasing, with the final full year at $257,000. The services FCS was responsible to provide under their Service Agreement generally appear to be normal administrative duties for an administrator. The Service Agreement with FCS was in place until April 1, 2010, on which date the WCB assumed control over ELITE and appointed a publicly procured administrator (NCAComp, Inc.) in accordance with New York State finance law. L&M obtained a schedule from FCS that listed its billings to ELITE under the Service Agreements. FCS’s billings to ELITE agreed to what L&M calculated based on the terms of the agreements. Additionally, L&M reviewed the general ledger detail of ELITE’s management fee expense account for the year ended September 30, 2009, and determined that the activity recorded in the account is consistent with what L&M expected based on the Service Agreements with FCS. L&M Conclusions

The CRM Service Agreement, which we believe is virtually identical to the agreement CRM used for other trust funds it administered, contains several provisions that heavily favor CRM, including the methodology to calculate service fees, the term of the agreement, and its appointment as broker to procure excess insurance and any required surety bond.

L&M questions why the fee percentage CRM charged to ELITE was substantially higher than two other CRM trusts L&M performed similar forensic accounting services on, when the services CRM provided to all three were identical.

4. Member Interviews

As part of the forensic process, L&M attempted to interview numerous non-Trustee members to obtain third party credible information regarding the membership process and the ongoing operations of the Trust. As a first step, we attempted to contact representatives of twenty-five non-Trustee members for the purpose of scheduling interviews. We followed up with additional telephone calls and/or e-mails to all representatives we were unsuccessful communicating with as a result of our initial attempt. Due to lack of responses from our first sample of twenty-five, we attempted to contact representatives from an additional twenty-five non-Trustee members to schedule interviews. As a result of our efforts, we interviewed ten member representatives. All interviews were conducted via telephone conferences. None of the interviewees had legal counsel present during their interview process. The length of participation of the members interviewed range from a minimum of approximately 18 months, to a maximum of almost 8 years.

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We asked the non-Trustee member representatives interviewed questions on a wide variety of topics. The majority of the questions included multiple parts that were dependent on previous answers provided. When appropriate, we tailored the standard questions to incorporate any member specific information obtained through our inspection of WCB correspondence and the member’s file. Additional questions were crafted and posed to selected member representatives when deemed necessary. When appropriate, we incorporated the results of our member interviews in the applicable sections of our report. Some of the questions asked and the related member responses follow:

Q - How the member had been marketed to and the reason(s) why they ultimately joined. A - All indicated that their insurance brokers/agents had marketed the Trust as an alternative to traditional forms of workers’ compensation coverage. The potential cost savings was frequently mentioned by the interviewees as one of, if not the main reason, they had joined the Trust. One of the interviewees stated he had heard that numerous other construction companies in his local area had joined ELITE, and felt his company should do the same.

Q - Whether the meaning of joint and several liability was explained prior to joining the Trust. A - Only three of the ten indicated the joint and several liability provision cited within the various Trust governing documents was explained to them prior to joining. The remaining seven stated that the provision either had not been explained or they were unsure. Two of the three members who indicated awareness of the joint and several provision stated they were not kept apprised of ELITE’s deteriorating financial position, and had they known, would have immediately left the Trust to limit their company's liability. Three of the members who stated that they were never made aware of the joint and several liability provision noted that they became aware of the provision shortly after the Trust’s termination when they received a deficit assessment invoice in the mail explaining why the additional amounts were owed. One of the members’ representatives who stated that his company was never made aware of the joint and several provision noted that he did not receive the joinder and indemnification agreement until 1/29/05, and was asked by CRM to backdate his signature on this document to 1/25/05 (the effective date of coverage). For all seven members that stated the joint and several provision either had not been explained or they were unsure, we located copies of signed joinder and indemnification agreements dated the day they joined ELITE. All of the joinder and indemnification agreements expressly stated the member’s obligations under the provision. As a result, although it is possible that the provision had not been explained, these members should have had an understanding of the provision upon reading the joinder and indemnification agreement.

Q - If the member had been made aware of the minimum underwriting standards of the Trust. A - All stated that they had never been provided with the minimum underwriting standards of the Trust. Nine stated that their broker agent may have received the underwriting standards and various other information that had never been provided to them. L&M notes two of the interviewee companies had a history of extremely poor loss ratios (over 100%); however, neither member was asked to leave the Trust, nor did any conversation occur where their membership was threatened to be terminated if loss ratios did not improve.

Q - Whether they had been invited to attend a general membership meeting at any time during their membership. A - All stated that they had not been made aware of, or formally invited to attend, any general membership meeting.

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Q - If the member had received a joinder and indemnification agreement, service agreement, Trust document, and Bylaws prior to joining the Trust. A - Eight of the representatives stated that they did not receive any of these documents or were unsure if they had received these documents. One representative stated they received all of these documents, while the tenth representative stated they only received the Trust document. One of the representatives stated that his company "never really received much information from the Trust."

Q - If they had ever been offered the opportunity to become a Trustee or vote for Trustees. A - All stated that they were never offered an opportunity to become a Trustee or to participate in a formal vote for Trustees.

Q - If the Trust had regularly reported financial results to them and/or if they were ever made aware of the financial problems of the Trust. A - Two of the ten member representatives believed that they had received financial results on an annual basis; however, the documents received never implied or expressly indicated that ELITE’s financial condition had been deteriorating. Both of these members participated in the Trust during 2006 and 2007, which is the time period that the Trust incurred significant losses. Based on these two member representative’s comments, L&M questions the nature and accuracy of the financial results they had received. The remaining eight member representatives did not recall receiving any type of Trust financial information.

Q - If the member had ever received a dividend from the Trust. A - Only five of the ten representatives interviewed qualified for the dividend that was distributed to certain of ELITE’s members in 2005. Of these five qualifying members, only four of them recall receiving a dividend. All four members reviewed their accounting records to verify that they received the same amount that was distributed to each member per a CRM prepared schedule we inspected. The fifth qualifying representative did not recall receiving a dividend and was unable to verify the receipt of such through a review of their company’s accounting records.

Q - If an initial safety visit with associated recommendations was performed before or around the time they entered the Trust. A - The representatives stated they were either unsure if a pre-membership visit had occurred or that a visit definitely did not occur prior to their company joining ELITE.

Q - If periodic/yearly safety visits with associated recommendations were performed throughout the term of their membership. A - Six of the ten representatives stated routine safety inspections were performed by CRM annually and that recommendations were usually provided to them as a result of the visits. Two representatives stated that they never had a safety visit throughout their entire membership in the Trust, while the remaining two members stated that a single safety visit was all that had been received throughout their entire period of membership in the Trust.

Q - At or around the time the Trust ceased active operations (March 31, 2008), did CRM or their broker recommend a specific replacement insurance carrier for their company to procure its workers’ compensation coverage. A - All ten members were with the Trust when it ceased offering coverage on March 31, 2008, and all stated that CRM did not recommend a replacement insurance carrier; however, many were offered the option, by their brokers, to choose Majestic Insurance Company (Majestic), a related party of CRM, as their new workers’ compensation insurance carrier. Four of these members ultimately switched their coverage to Majestic based on recommendations from their individual brokers.

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5. Marketing

Section 317.18 of the NYCRR, effective January 31, 2001, governs marketing materials of self-insurers. L&M was informed by the WCB that its policy was to defer the effective date of this section of the NYCRR until the Trust’s 2002 fiscal year. The crux of this section of the NYCRR is that all marketing materials should be factual in nature, truthful, supportable, and verifiable, and should not contain any statements that could be considered deceptive, misleading, or coercive.

The minutes of the Board of Trustee meetings we obtained all contained indications that various aspects of the marketing of the Trust had been discussed. Some statements from the minutes (all which appear to be from CRM representatives) are listed below:

December 4, 2003 - “We are missing the boat on larger risks because we do not cap payroll…Not getting spread…Not competitive enough downstate.”

June 2, 2004 - “On bigger accounts we are showing 6-8% savings…They won’t move for that…We are not sure if the large accounts are what we want to go for…$750 is the payroll cap…If we cap payroll, we lose premiums with higher exposure…The CRM marketing budget is just about 400,000…We have scrubbed the books and got rid of the bad business…We conducted focus groups to find out what the market place needs…CRM hired Bob Snashall as a consultant, he is the former NYSWCB Chairman…We plan to inform the marketplace with the funding status of ECTNY (ELITE) and hype that we have been through the level II audit.”

December 2, 2004 – “Tom Vanner believes that the biggest competitor for our trusts is other trusts…We are selling our financial statements when we are marketing the program…We submitted a new ad to run in the PIA and Insurance Advocate which featured ECTNY and all the good news surrounding it…We also sent out a press release featuring it’s no funding issues classification and other good news and benefits of the program…A mass e-mailing was sent out to all brokers detailing the contents of the press release.”

June 8, 2005 - “We are trying to offer a product that differentiates us from the competitors…CRM placed an ad in the Constructioneer which is a trade publication for contractors…We are also continually sending press releases out to get more exposure for CRM and our programs…Also going to print up a large check and get picture of the board members with the oversized dividend check.”

December 1, 2005 – “Continuing to run our brand ads in the Constructioneer…We will continue to do so…Starting to get calls from the ads we are placing in the insurance publications…Press release regarding the dividend was picked up by the Poughkeepsie Journal, Insurance Advocate, Insurance Journal and a few more.”

June 6, 2006 – “New marketing materials have been created…Retention books have also been created to send to existing accounts at renewal to reinforce why CRM is the right choice…Creating co-op materials for brokers to sell the program…Working with MGM insurance on an informative seminar on comp that highlights the ECTNY program.”

December 7, 2006 – “We had a broker meeting in July and CRM introduced some new marketing tools to assist the brokers in selling trusts…We worked with brokers on co-op marketing materials to sell this program specifically…Plan to attend the Construction Expo at the Javits Center again in 2007…CRM plans to attends a new broker show in Westchester to penetrate that market…Strong in Buffalo and Hudson Valley – not much business from Albany to Syracuse…Continue to run ads in the Constructioneer.”

June 5, 2007 – “ECTNY program is well liked by our brokers – approx. 50 brokers representing the program…Working with new PR company to get positive PR into the market place…Attending contractor specific trade shows…Continue to advertise in the

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Constructioneer and Insurance trade publications…Keith Lazarchik selling ECTNY to NJ brokers that have NY contractor business.”

December 6, 2007 – The market is tough right now…There will be bad PR on the trust…We will produce an annual report and give it to any member that requests it…Painfully aware of the regulatory environment – given how tough regs are we are funded, adequately reinsured and conservatively booking contingency reserves…Continue to place ad in the Constructioneer…Market the program at the tradeshows we attend (broker shows)…Heavily focusing on retention on the group…Working on retention books for the 4/1 renewal. They should be ready to distribute to members between Feb and March…Will highlight their results and the services they receive with the trust.”

As a result of the marketing related discussions that occurred in the Board of Trustee meeting minutes and certain documents we believe may have been provided to the Trustees (discussed below), L&M believes the Trustees were kept reasonably aware of how the Trust was being marketed. The above statements indicate (1) CRM had a formal marketing plan and strategy that it occasionally updated and modified as conditions warranted, (2) ELITE was marketed in conventional methods to potential members through insurance and construction related publications, (3) ELITE was marketed to insurance brokers by CRM at trade shows, sales meetings between CRM and its brokers, and in the numerous press releases that touted the positives of participation in ELITE, and (4) CRM’s marketing strategy concentrated on highlighting the financial strength of the trust including its ability to issue dividends to its members. We asked ELITE’s Marketing Broker if it had created or otherwise supplied any of the marketing materials that had been used to advertise the Trust and/or if it had assisted CRM, in any way, to develop the marketing materials for the Trust. The Marketing Broker informed us that the only assistance it had provided to CRM was in the form of “marketing intelligence” such as keeping CRM informed of the nature of commercial carrier activities including current policy pricing. We obtained what appears to be a CRM authored informational pamphlet provided to perspective entities from a member that participated in another CRM administered trust. L&M believes the marketing practices and other information delineated in this informational pamphlet were also used to market ELITE. In the sales and marketing section of the pamphlet, CRM stated “CRM distributes its product only through the independent agent/broker or Industry Specialist” and “Our Sales and Marketing teams work together to offer programs and opportunities.” These programs and opportunities were described as:

Onsite training regarding the basics of group programs, applicable regulations, and CRM and its product offerings

Field sales support Materials and presentations to support their products Information on CRM’s website Attendance at trade shows and seminars Trade journal advertising Mass mailings to promote products and disseminate information on service updates

As noted in the “Member Interviews” section of our report, all the members interviewed indicated that their insurance brokers/agents had marketed the Trust to them as an alternative to traditional

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insurance with the potential cost savings frequently mentioned as greatly influencing their decision to join. As a result of our inspections of the Trustee meeting binders and WCB correspondence, we located numerous informational flyers/brochures, press releases, and other documents we believe were used to market ELITE and CRM’s other trusts to brokers and prospective members. The information included in these documents is generally consistent with our conclusions from our analysis of the minutes of the Board of Trustee meetings as described in items (1) through (4) in a previously paragraph. A number of the documents included quotes from ELITE’s Trustees or members that described their positive experience with the Trust. The documents included those both specific to ELITE and more general in nature that had served to market CRM and all of its administered trusts. Finally, we obtained a document entitled “Marketing Schedule” included with the December 2003 Trustee meeting binder that had been provided by CRM to ELITE’s Trustees. The following summarizes significant marketing related documents located during our inspection of the information described above: Marketing Materials Located Specific to ELITE

Trust “profile sheets” as of numerous dates that included basic information for prospective members including the definition of a group self-insured trust, the accepted SIC/payroll class codes, minimum premium allowed, total membership count and premiums, maximum experience modification factor, and details regarding the excess insurance carrier and coverage. The profile sheets also detailed the numerous benefits of ELITE membership including member ownership/retention of group surplus, free comprehensive safety services, “state of the art” claims services, individual underwriting of each member based on member performance and, “A” rated excess insurance coverage. Finally, the profile sheets state ELITE was formed “to help New York Contractors control the high costs of workers’ compensation insurance.” L&M notes that none of the profile sheets identified the member’s potential joint and several liability as a result of its participation in the trust.

One page press releases (some of which appeared in newspapers, business journals and other printed media) for the 2002, 2003, 2004 and 2007 fiscal years that indicated ELITE’s “fully funded” status. At least one of the press releases (2007) appears to have been issued prior to the WCB’s final determination relative to that year’s annual reports, which when completed, led to the WCB’s issuance of an under-funded classification for ELITE. L&M notes that this 2007 press release cited that ELITE was awaiting the completion of the WCB’s review and related confirmation of its “fully funded” status. One of the press releases touts that ELITE was “The FIRST & ONLY Fully Reviewed Trust by the New York State Workers’ Compensation Board”, while another for the 2003 fiscal year-end states “Our commitment to keeping only the best accounts in the trust ensures financial stability and continued smart growth in 2004 and 2005.”

Two one page press releases and an article appearing in the “Insurance Journal” magazine from July 2005 that detailed ELITE’s $2.5 million dividend as well as the dividends declared for two other CRM administered trusts.

A flyer indicating the reasons ELITE’s “Special Credit Program” for construction employers was superior to contributions calculated under the New York State payroll limitation law. The flyer indicated that ELITE’s program would provide the member with savings equivalent to that calculated under the New York State payroll limitation law with much easier recordkeeping requirements.

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A five page brochure from 2001 that described the benefits of participating in ELITE to potential members including (1) selectivity – only organizations with good claims history and good financial stability will qualify, (2) group purchasing power on claims administration services equating to lower costs and more surplus available for a dividend, (3) the industry’s most in-depth risk management program available, and (4) aggressive claims handling. The brochure indicates that all the above result in improved service and could result in overall cost savings of up to 50%. While this brochure failed to cite specific rate or discount percentages, and no pricing guarantees were made, it is reasonable to believe that the potential cost saving declaration could be misinterpreted as a statement of fact for both current and future contribution years. Item (1) above insinuates that CRM was selective when admitting members to ELITE. As discussed later in report sections “Underwriting Including Renewal Process” and “Discounts”, substandard members (from both a financial and underwriting perspective) were repeatedly admitted to ELITE, continually renewed and, in some cases, offered substantial discounts to remain with the Trust. As a result, it appears these statements may have been false and/or misleading as they were not consistently employed by CRM during ELITE’s underwriting processes.

A one page flyer that focused on ELITE’s “unique blend of cost saving initiatives, claims management and safety programs.”

A one page document entitled “Marketing Schedule” located in a 2003 ELITE Board of Trustee meeting binder that listed six different types of marketing techniques CRM had recently employed and/or planned to employ in the near future for ELITE and included mass mailings, financial related, advertising in newspapers and magazines, attendance at trade shows, and articles written by CRM executives published in magazines and press releases.

A one page document entitled “ECTNY Success Stories” located in a 2006 ELITE Board of Trustee meeting binder that highlighted how CRM, along with its managed care provider, had saved the Trust $50,000 by successfully negotiating down an ELITE claimant’s hospital billing. Additionally, the document also contained two instances where CRM, in collaboration with the New York State Fraud Inspector General’s Office, had criminal charges filed against ELITE claimants for insurance fraud. The document further indicates that for these two cases, ELITE had either received restitution from the claimant or the process to obtain restitution had been initiated.

A pre-June 2003 twelve page PowerPoint presentation obtained from Vanner Insurance Agency believed to have been used specifically by CRM to market ELITE to brokers and their clients. L&M believes the following representations made in the presentation could be construed as false and/or misleading:

- Page 5 of the presentation states: “UP-FRONT PREMIUM DISCOUNTS = 40% - 50%” & “DIVIDENDS = 20% - 40%” Based on the above, L&M computed the potential range of net member annual premiums to be between 30% and 48% of standard (manual rates). In reality, discounts in excess of 40% were rarely issued to members and only two dividends were issued to members during ELITE’s 8.5 year period of active operations. L&M believes the magnitude of the net reduction of premium displayed in the presentation could be considered irrational since the net cash flow generated under even the best scenario (48% of standard manual rates) would have been insufficient to cover the necessary and ordinary expenses of the Trust.

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- Page 6 of the presentation states: “BOARD OF DIRECTORS– QUARTERLY BOARD MEETINGS & “BOARD OF DIRECTORS- UNDERWRITING/DISCOUNTS/DIVIDENDS”

In L&M’s opinion, these statements insinuate that the Board of Trustees had quarterly meetings and were responsible for, or at least somewhat involved with, the underwriting process and the determination of discounts and dividends for ELITE’s members. Evidence suggests the Board of Trustees had never convened on a quarterly basis at anytime over the Trust’s active life. Copies of all minutes we obtained from Board of Trustee meetings are included as appendices to our report. In addition, L&M disputes the notion that the Trustees had been involved with the underwriting of and/or discount determination for individual members. The Trust document specifically stated the administrator had the sole responsibility to accept or reject applications for participation, except those potential participants that failed to meet the minimum underwriting guidelines. Our inspection of the Board of Trustee meeting minutes obtained indicate the Trustees had never been involved with any elements of the initial/renewal underwriting processes instituted by CRM and/or the pricing of any specific members’ contributions. Refer to report sections, “Board of Trustees”, “Underwriting, Including Renewal Process” and “Discounts” for additional information on these topics.

Marketing Materials Located Considered General in Nature Focusing Mainly on CRM and/or its Other Self-insured Groups

An early 2006 newspaper article that described the evolution of CRM’s business including its growth over the last seven years and an overview of the public offering of stock.

A late 2006 press release announcing the closing of the purchase of Embarcadero Insurance Holdings, Inc. As discussed in report section “Excess Insurance”, Embarcadero Insurance Holdings, Inc. owned Majestic Insurance Company, who provided excess insurance to ELITE for the policy year beginning in 2007.

An invitation to an informative seminar held in mid-2006 by CRM and MGM Associates Insurance.

A total of five undated flyers stressing the positive qualities of CRM and its trusts including its “unique blend of cost-saving initiatives, efficient claims service, loss control measures and safety programs”, “financial and risk management platforms that lessen the worries associated with self funded trusts” and “selective underwriting.”

An undated flyer targeting insurance brokers that indicated the workers’ compensation industry in New York is in a state of crisis, and touting CRM’s suite of seven self-insured trusts as a viable option to the more traditional workers’ compensation avenues. The flyer mentioned “significant savings as compared to the traditional insurance product, comprehensive loss control services, state of the art claims services, and ‘A’ rated excess insurance.”

A news release that CRM had formed an affiliation with Snashall Associates, a consulting firm led by former New York State Workers’ Compensation Board Chairman Robert R. Snashall. The main reasons for the affiliation, as provided in the release, were “to enhance member relations and business operations, as well as identify strategic opportunities.” L&M was informed by the WCB that Mr. Snashall terminated his affiliation with CRM shortly

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after the WCB requested he obtain an ethics opinion in regards to the existence of a potential conflict of interest.

Two articles written by CRM CEO Martin D. Rakoff that had been published in the April and July 2005 editions of “Insurance Advocate” magazine. The first article was titled “Self-Insured Trusts: An Alternative to Traditional WC” and the second “In Defense of Self-Insured Trusts.”

A general brochure titled “Compensation Risk Managers, LLC at a Glance” located by L&M in a 2006 ELITE Board of Trustee meeting binder. The brochure provided various statistics and other information regarding CRM, self-inured groups in general, the self-insured groups it was currently administering and a “Myths and Truths” section that included what CRM considered eleven self–insured group related myths and corresponding truths. The brochure cited “Seven Layers of Assurance for CRM Members” that included: (1) State Workers’ Compensation Regulators, (2) Board of Trustees, (3) Independent Accountant & Actuaries, (4) Agents and Brokers, (5) CRM Experience, (6) Excess Insurance, and (7) Surety Bonds.

L&M Conclusions

L&M believes CRM’s marketing strategy for ELITE was similar to that of the other trusts it administered and included conventional practices such as referrals, trade and business/insurance journal advertising, attendance at trade shows, and numerous forms of direct marketing;

The main focus of the majority of the marketing related documents inspected (exclusive of the “Trust profile sheets”) touted the benefits of participation in ELITE including the potential for significant cost savings along with superior safety and claims services;

Certain marketing related documents contained what may be construed as false and/or misleading statements;

The member representatives interviewed all cited the potential cost savings as being an important factor in their decision to join the Trust. Even though the discounts allotted many non-Trustee member companies were not what most would consider unreasonable, CRM may have offered larger discounts than would have been deemed prudent given the quality of the member, and also accepted high risk members. This marketing approach provided membership growth at discounted rates which proved unsupportable over time and contributed to the financial deterioration of the Trust.

6. Minimum Contribution Amounts Existence of Minimum Contribution Amount A minimum contribution requirement appeared to be in effect for all policy periods beginning on or after October 1, 2002. This belief is based on (1) ELITE’s annual profile/member eligibility sheets from 2001-2006 listing “minimum premium allowed: $10,000”, (2) an undated page from marketing materials used by CRM that states all CRM administered trusts have a $10,000 minimum manual premium except the Healthcare group which is $25,000 (L&M believes this material to be from around 2006 based on the contribution revenue listed for three trusts as compared to the amounts reported in their audited financial statements), (3) an undated page listing ELITE’s underwriting guidelines that states “minimum manual premium is $5,000”, (4) ELITE’s 2007-2008 underwriting guidelines that states “the minimum funded contribution is $10,000”, (5) a letter from the CEO of CRM to the WCB dated December 10, 2002 that stated “In an effort to address this concern we have raised the minimum premium the trust will accept to $7,500 from the prior amount which was

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$5,000”, (6) certain members’ deposit premiums (estimated contributions) and final invoices for the 2003 – 2004 and 2004 - 2005 policy periods that listed the minimum contribution amount as either $5,000 or $10,000 on the bottom of the invoice, and (7) a letter from CRM to a member explaining that a payroll auditor will be contacting the member to conduct an audit for the 2007 – 2008 policy period, and that the policy carries a $10,000 minimum contribution amount. The annual profile/member eligibility sheet we obtained for 2001 was dated October 4, 2001. Accordingly it is not clear if a minimum was in effect as of October 1, 2001. L&M did not locate any profile/member eligibility sheets for years prior to 2001, thus we are unable to determine if a minimum contribution threshold was in effect for policy periods commencing before October 1, 2002. L&M noted no instances of a minimum contribution amount being applied to any member policy that commenced before October 1, 2002. Thus, the remainder of our analysis will assume that no minimum contribution amount was in place for periods prior to October 1, 2002. CRM’s Use of Three Minimum Contribution Amounts The majority of the documents noted above reference a $10,000 minimum contribution amount, which conflicts with certain other documents that refer to both a $5,000 and $7,500 minimum contribution amount. L&M uncovered the use of all three minimum contribution amounts for policies beginning on or after October 1, 2002. The time periods of when the various minimums contributions were used are:

October 2002 – March 2005: $5,000 April 2005 – March 2006: $5,000, $7,500, and $10,000 April 2006 – March 2008: $7,500 and $10,000

L&M did not note any reference to minimum contribution amounts in the Board of Trustee meeting minutes we obtained. Additionally, all of ELITE’s Trustees refused our repeated attempts to interview them. Therefore, it is unclear whether the Trustees were aware of CRM’s apparent decision to reduce the minimum contribution from $10,000 to $5,000 for periods prior to April 1, 2005, and to reduce the minimum contribution from $10,000 to $5,000 or $7,500 for certain members after March 2005. We obtained the following documents which reference the minimum contribution amount(s) used by ELITE as of specific dates:

A letter from the CEO of CRM to the WCB dated December 10, 2002 that was written in response to the WCB’s planned sanctions to be effective as of October 1, 2002 (see report section “Corrective Action Plans”) that stated “Howard, we believe the above addresses the two issues Mr. Snashall raised yesterday. The first issue was his concern about smaller contractors. In an effort to address this concern we have raised the minimum premium the trust will accept to $7,500 from the prior amount which was $5,000.” L&M notes that the $5,000 minimum was not increased until April 2005, which is more than two years after CRM informed the WCB that it had raised the minimum.

A series of e-mails dated March 22, 2005 through March 28, 2005 relative to a broker’s request that CRM reduce the $10,000 minimum contribution that was being proposed for two members. The broker stated that if there are no exceptions to the $10,000 minimum, “we will be forced to move both of these accounts out of the trust and find another market with a more “fair” premium charge.” The subsequent internal e-mails between CRM personnel reference a $5,000 minimum database that appeared to contain members who CRM only billed a $5,000 minimum rather than the $10,000 that was noted as being in

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effect. Tom Spendley (CRM’s senior vice president of operations) agreed to “move the accounts to the $5,000 mp database.”

A series of e-mails dated July 13, 2007 through July 16, 2007 relative to a broker’s request that a $7,500 minimum rather than the $10,000 be applied to his client. The subsequent e-mails between CRM personnel reference a $7,500 minimum database, and that no additional accounts can be added to it since CRM’s plan was to eventually eliminate that database and increase the minimum (presumed to be to $10,000) on these accounts. It appears CRM decided to waive the $10,000 minimum contribution requirement for that member.

Based on the above, CRM maintained 2 special databases during 2005-2008 that contained members who were, for whatever reason, given preferential treatment and billed a minimum contribution amount less than the $10,000 minimum that was in effect for all other members. L&M believes CRM’s billing certain members a minimum contribution less than the $10,000 minimum applicable to all other members was unfairly discriminatory and a violation of CRM’s applicable underwriting guideline. Our interviews with selected brokers suggest that some of the brokers were aware of the use of multiple minimum contribution amounts, with one broker specifying that certain members were “grandfathered in” at a lower minimum contribution amount. Various information regarding members who received preferential treatment by being billed a minimum contribution less than the $10,000 minimum for policies effective on or after April 1, 2005 is summarized in Table 1 that follows: Table 1:

# of Members # of Members Additional revenue # of Trustee Members whose minimum whose minimum if $10,000 whose minimum

Policy contribution was contribution was minimum contribution was notperiod $5,000 $7,500 had been enforced $10,000

4/05 - 3/06 82 1 412,500$ -4/06 - 3/07 - 117 292,500 -4/07 - 3/08 - 101 252,500 -

82 219 957,500$ -

Note: # of members whose minimum contribution was not increased to $10,000 excludes members whoterminated coverage during the policy period.

The above table indicates that CRM provided numerous members with preferential treatment by billing them a minimum contribution amount less than the $10,000 minimum that was in effect for all other members for policies effective on or after April 1, 2005, and that this action decreased ELITE’s contribution revenue by as much as $957,500. It is possible that some of the members who were billed a minimum contribution less than $10,000 may have chosen not to participate in ELITE if the $10,000 minimum had been enforced. If that had occurred, then claims expense, CRM’s administration fee, and excess insurance expense would all have also decreased by an amount that could be either more or less than the corresponding contribution revenue decrease. L&M assembled the admission dates for all members we believe received preferential treatment by being billed minimum contributions less than the $10,000 minimum for policies effective on or after April 1, 2005, and determined that the majority had joined ELITE prior to 2003.

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Inconsistent Enforcement of Minimum Contribution Amounts In spite of the fact that CRM was using three different minimum contribution amounts, sometimes all three being used in the same year, L&M still noted many instances where CRM did not apply any minimum contribution to certain members. No documentation was found in the member files to indicate why a minimum was not applied to these members. Table 2 that follows summarizes the number of members who were not billed at least the lowest minimum that CRM used for an applicable policy period based on the final invoices we obtained.

Table 2:

# of Members Additional revenue # of Trustee Members Lowest whose contribution if lowest whose contribution

Policy minimum used was not increased minimum was not increasedperiod that policy period to lowest minimum had been enforced to lowest minimum

10/02 - 3/03 $2,493 69 99,800$ -4/03 - 3/04 $5,000 & $5,013 43 122,100 -4/04 - 3/05 $5,000 88 239,300 -4/05 - 3/06 $5,000 14 61,300 -4/06 - 3/07 $7,500 12 82,700 -4/07 - 3/08 $7,500 6 41,000 -

646,200$

Note:$2,493 minimum used for policy period 10/02 - 3/03 based on $5,000 prorated over 182 days.

$5,000 and $5,013 minimums used for policy period 4/03 - 3/04; $5,013 was based on $5,000multiplied by 366 days/365 days (1 extra day in the formula for leap year).

The above table indicates that CRMs inconsistent application of minimum contribution requirements to all members decreased ELITE’s contribution revenue by at least $646,200. That amount is based on final invoices L&M was able to obtain. L&M believes that the lost revenue may be as high as $781,000 when estimated contributions to members whose final invoices were not obtained are included. It is possible that some of the members who CRM did not apply the minimum contribution to may have chosen not to participate in ELITE if the lowest minimum had been enforced/applied to them. If that had occurred, then claims expense, CRM’s administration fee, and excess insurance expense would all have also decreased by an amount that could be either more or less than the corresponding contribution revenue decrease. L&M Conclusions

CRM used three different minimum contribution amounts ($5,000, $7,500, and $10,000) even though the majority of the documents obtained referenced a $10,000 minimum.

It is unclear if the Trustees were aware of CRM’s apparent decision to reduce the minimum contribution from $10,000 to $5,000 for periods prior to April 1, 2005, and to reduce the minimum contribution from $10,000 to $5,000 or $7,500 for certain members after March 2005.

No Trustee member company benefitted from CRM’s apparent decision to reduce the minimum contribution from $10,000 to $5,000 for periods prior to April 1, 2005, and to reduce the minimum contribution from $10,000 to $5,000 or $7,500 for certain members after March 2005.

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CRM invoiced certain members during 2005-2008 an amount less than the $10,000 minimum applicable to all other members, which was unfairly discriminatory and a violation of CRM’s applicable underwriting guideline.

CRM catalogued the members provided preferential treatment during 2005-2008 as a result of being billed a minimum contribution amount less than the $10,000 minimum on two special databases. CRM’s providing these members with preferential treatment decreased ELITE’s contribution revenue by as much as $957,500.

CRM selectively enforced the minimum contribution requirement for all members. CRM’s inconsistent application of minimum contribution requirements to all members decreased ELITE’s contribution revenue between $646,200 and $781,000.

7. Underwriting, Including Renewal Process

Acceptance and Termination of Members

Based on responsibilities delineated in sections VII and VIII of the Trust document, CRM had been charged with the duty to accept or reject prospective member applications, while the Trustees were to oversee the termination of existing members. However, the Trust document qualified CRM’s authority to admit applicants not meeting the minimum underwriting guidelines by requiring Board of Trustee approval. L&M notes that our inspection of member files and Board of Trustee meeting minutes did not reveal any evidence that the Trustees approved any substandard members for Trust participation. As noted previously, all six Trustees repeatedly refused our attempts to interview them. As a result, we were unable obtain a Trustee(s) perspective relative to the approval processes used for Trust participation. Section VII of the Trust document reads as follows:

“The sole authority to accept or reject a participating employer’s application for participation in the Trust shall be with the Administrator subject to the approval of the New York State WC Board. Every application for acceptance will be reviewed by the Administrator in furtherance of the underwriting guidelines contained within the Trust Agreement. No application to the Trust can be accepted by the Administrator, if the applicant does not meet the minimum guidelines established unless said application is first approved by the Board of Trustees, in accordance with its voting requirements enumerated in the Trust Agreement.”

L&M notes that language, almost identical to the above, is included in the Service Agreement while the Bylaws (“Sample Trust” version) were silent in regards to the creation and maintenance of any underwriting guidelines. Underwriting Guidelines L&M’s inspection of the Trust document revealed the following statement that could be considered an underwriting guideline: “Each member of the Elite Contractors Trust is classified as one of the following SIC Index Major Construction Groups; 15, 16 or 17, unless otherwise approved by the New York WC Board.” The Trust document was subsequently amended two times whereby additional SIC codes were added to those listed as allowable. Trust document amendment #1, dated October 7, 1999, added major SIC codes 11, 12 and 13 (miners and oil/gas extraction), while Trust document amendment #5 dated June 6, 2003 added major SIC code 78 (landscape and horticultural services). L&M notes that major SIC code 11 does/did not exist; however, we believe CRM may have actually meant to have included major SIC code 10 (metal mining) instead of 11. While L&M believes SIC code 78 to be at least somewhat consistent to the homogeneity of the Trust, we

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question the logic and rationale behind the addition of companies involved in mining and oil/gas extraction. In our opinion, these industries are not within the realm of those that a reasonable individual would consider to be “contractors.” In addition, most mining/drilling operations were specifically excluded under most, if not all, of the excess insurance policies, which we believe warrants further questioning of the underlying intent of CRM to allow these types of companies to participate. L&M notes that both sets of CRM internal underwriting guidelines obtained by us (2003 and 2007 versions) failed to list SIC codes 10, 11, 12 and 13 as allowable. Consequently, L&M is unsure if the 1999 Trust document amendment to include these SIC codes was formally rescinded at a later date or if CRM had erred and these SIC codes were inadvertently left out of the underwriting guidelines. Our forensic procedures did not identify any participants in ELITE that could be considered a mining or extraction company. There were no underwriting guidelines present in the Service Agreement and related amendments. Additionally, L&M did not locate or otherwise become aware of any underwriting guidelines during our inspection of member files and WCB correspondence, or as a result of our interviews with member representatives. The Trustee meeting minutes L&M obtained contained no evidence of formal discussions or related vote adopting a set of minimum underwriting guidelines to be used by the Trust. The underwriting related discussions noted by L&M in the meeting minutes included broad statistics such as the current average contribution discount and number of members CRM had recently cancelled/terminated, and occasionally mentioned underwriting issues specific to selected members. L&M obtained documents that included underwriting guidelines for the Trust as of various dates. The documents were procured from various sources and included two sets of detailed CRM authored internal guidelines, excess insurer promulgated guidelines and summarized guidelines that had been used for marketing of ELITE to insurance agents and brokers (“Profile Sheets”). The two sets of CRM authored internal underwriting guidelines were in effect sometime prior to 2003 and for the policy year April 1, 2007 through March 31, 2008, while the excess insurer promulgated guidelines are from six different policy years of ELITE’s active existence. It appears the 2007 CRM internal underwriting guidelines were revised significantly from the older version primarily to capture excess insurer promulgated guidelines. The Profile Sheets include some, but not all, of the minimum underwriting related eligibility factors prospective members had to meet. We examined and summarized these documents to obtain an overall sense of the significant underwriting requirements that had been in place over the active life of the Trust. One set of excess insurer promulgated underwriting guidelines and one set of CRM’s internal underwriting guidelines are included in our report as Appendices 6 and 7, respectively. The Trust’s significant underwriting guidelines are listed and addressed later in this report section. CRM Prescribed Underwriting Forms During our inspection of member files, L&M noted the presence of numerous CRM prescribed forms relative to the underwriting of both new and renewal business. Based on the quantity of prescribed forms and their design, it appears CRM invested considerable effort to implement a quality control system in an attempt to carry out its administrative duties relative to initial and renewal underwriting. The date each form had been implemented by CRM was unclear; however, we noted several of the prescribed forms had been in use as far back as 1999. A listing of certain of these prescribed forms follows:

New Business Checklist Processing Checklist New Business

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Administrative Checklist New Business Underwriting Form Marketing/Underwriting Checklist Renewal Underwriting Worksheet UTA Renewal Checklist Renewal Profitability Calculation 4 or 5 Year Loss Analysis Reports Underwriting Referral Form Underwriting Alert Form Underwriting Action Request Form

These prescribed forms included both fill-ins and check-offs for underwriting and administrative matters deemed significant by CRM, as well as signature/initial areas for management approval. The information that was to be completed included data L&M would deem useful to estimate a member’s contribution, including summarized loss information, the experience modification factor (EMF), and a safety report card rating. The prescribed check-off forms were designed primarily to ensure certain information had been received and considered by the underwriter(s). The following general comments can be made regarding the prescribed underwriting related forms we located in member files:

Complete sets of the prescribed underwriting forms were not present in a number of the member files inspected. L&M cautions that this may be due to CRM’s elimination or combination of certain prescribed forms over time, and certain forms used only in specific circumstances.

Quite often a prescribed form acknowledged a violation of an underwriting requirement, but failed to indicate how the deficiency was resolved. For example, we noted a “Processing Checklist New Business” form dated December 5, 2000 that queried if a new member’s payroll class codes fell within the underwriting requirements of the Trust; if answered “no”, the preparer was to list those classifications that failed to qualify. The example then listed two unqualified payroll class codes, but neglected to indicate the course(s) of action that was taken by CRM to resolve the issue.

Many of the forms were incomplete, some of which may be attributable to certain fill-ins or check-offs being non-applicable. However, L&M noted blank check-offs for items we deem significant including receipt of (1) prior year’s policy declarations, (2) financial statements, (3) signed joinder and indemnification agreement, (4) loss runs, and (5) member admittance approval from the excess insurer. It is evident from our file inspections that CRM had often never obtained much of the data listed as required on certain of the prescribed forms.

The Renewal Underwriting Worksheets regularly had handwritten and/or typed revisions to renewal EMFs or discounts with either no explanation to justify its usage or a simple statement such as “Per TS” (Tom Spendley, CRM’s senior vice president of underwriting).

Quite often, the New Business Underwriting Form and the Renewal Underwriting Worksheet would not contain the necessary management/supervisor sign-offs required by the form, or would contain just a typed sign-off indicating that the contents of the form had been approved by a responsible individual. The typed sign-offs appear to have been prepared by an individual other than the named signer, thus do not provide evidence that the applicable form was reviewed and approved.

The overall quantity and quality of the documents that supported the initial underwriting decision, especially in the early years of ELITE’s existence, was poor to non-existent. We

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asked FCS for its opinion regarding CRM’s enforcement of minimum underwriting guidelines and were informed that it would be “impossible to add members at the pace they did with the staffing they had and perform proper underwriting.” As a result, it is possible insufficient staffing levels of CRM relative to the rapid growth in ELITE’s membership may have at least contributed to the lack of underwriting documentation noted by L&M.

CRM Factor to Estimate Non-claim Expenses L&M analyzed the logic CRM used to prepare both the New Business Underwriting Form and the Renewal Underwriting Worksheet and recalculated several of these worksheets. L&M noted that CRM used a 32% expense factor to estimate non-claim expenses to calculate profitability by member. Through our document inspection, L&M confirmed that CRM used this 32% factor in its calculations for all policy periods beginning after September 30, 2001. Using the data contained in the 2001 – 2007 audited financial statements, L&M calculated non-claim expenses to average 52% of adjusted member contribution revenue (excluding member assessment revenue) during this 7 year period, with each year ranging between 38% and 57%. Accordingly, the 32% “estimated expense factor” used by CRM on the Renewal Profitability Calculation worksheets was significantly below what L&M calculated using data contained in the audited financial statements. Additionally, a portion of assessment expense was recorded as claims expense in the 2001 – 2007 audited financial statements. The L&M calculated average of non-claim expenses increased to 54% for this period after making this reclassification. Under either calculation, L&M’s conclusion is that CRM’s 32% non-claim expense factor failed to accurately portray the true cost structure of ELITE. L&M was unable to determine how CRM computed the 32% expense factor it had used. In light of the variable nature of the Trust’s non-claim costs, L&M questions why CRM would not have recalculated and adjusted the estimated expense factor on an annual basis. Both the audited financial statements and internal accounting records contained the necessary data to perform this task annually. L&M believes the use of this flawed expense factor resulted in CRM’s conclusions on member profitability to have been overly optimistic at best, and may in turn have led to inaccurate decisions regarding member discounts and retention. Top 12 Deficit Members We obtained a cumulative summary loss report by member from NCAComp as of September 30, 2010. This report only reflected case basis reserves and did not include any provision for IBNR or any benefit of estimated recoveries from aggregate excess insurance. Table 3 that follows was derived from this report and various other sources, and lists the twelve members L&M believes to have the largest estimated deficiency of contributions over losses and other estimated direct expenses (exclusive of any allocated IBNR from aggregate excess insurance recoveries). Included in estimated other direct expenses are New York State assessments, CRM’s administrative fees, and excess insurance. Trust members are referenced by an associated alpha character in this and other subsequent sections of our report. Member references are consistent throughout the remainder of our report. We obtained the reason for termination for these twelve members (Member’s A - L) from the GSI-3.1 forms, (Notice of Termination of Employer’s Participation in Group Self-Insurance Plan) that were submitted to the WCB by CRM. As noted below in Table 3, eight of these twelve members participated until March 31, 2008, the date ELITE ceased offering coverage. Of the remaining four members, two were cancelled for non-payment of contributions, one was terminated by the

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Trust/administrator for underwriting reasons, and one left voluntarily. In our opinion, the fact that eight or two-thirds of these poor performing members participated until ELITE no longer offered coverage is evidence that CRM failed to consistently enforce prudent underwriting standards. Table 3:

EstimatedCumulative Deficiency of

Losses ContributionsCumulative Incurred Estimated Over Losses

Contributions Net of Specific Other and Other Entrance Termination Over Life Excess Insurance Direct Estimated

Member Date Date of Trust as of 9/30/10 Expenses Direct ExpensesA 04/04/06 03/31/08 123,970$ 1,977,960$ 555,297$ (2,409,287)$ B 12/24/00 03/31/08 3,134,635 3,195,045 2,285,226 (2,345,636) C 01/25/05 03/31/08 1,478,005 2,517,206 1,264,845 (2,304,046) D 04/01/01 03/31/08 3,201,731 3,062,119 2,142,273 (2,002,661) E 11/15/03 02/14/05 235,695 1,326,994 576,382 (1,667,681) F 10/10/01 02/09/07 1,512,784 1,978,407 1,145,099 (1,610,722) G 10/01/01 03/31/08 565,136 1,319,129 753,648 (1,507,641) H 06/13/01 10/01/02 451,389 1,203,160 584,302 (1,336,073) I 11/20/00 10/23/01 302,762 883,005 549,029 (1,129,272) J 07/01/03 03/31/08 38,369 911,875 244,467 (1,117,973)

K* 01/01/00 03/31/08 1,150,950 1,309,173 956,196 (1,114,419) L** 04/01/00 03/31/08 1,167,327 1,352,089 839,973 (1,024,735)

13,362,753$ 21,036,162$ 11,896,737$ (19,570,146)$

*Trustee Member Company** Member had a slight gap in coverage in 2005 The $19.57 million estimated deficiency of contributions over losses and other estimated direct expenses generated by members A through L, exclusive of any allocated IBNR and benefit of estimated recoveries from aggregate excess insurance recoveries, is approximately 36.3% of ELITE’s total comparable gross modified member’s deficit as of September 30, 2010 before any allocated IBNR and estimated aggregate excess insurance recoveries. Testing Of Compliance with Underwriting Guidelines The significant underwriting guidelines of the Trust are summarized below. The underwriting guidelines identified may constitute CRM internal, excess insurer promulgated, or both.

1) Minimum manually rated contribution ranging between $5,000 and $10,000. 2) Members with a manual contribution of $150,000 or higher must be referred to the excess

insurance carrier (for policy years 2003 – 2007). 3) Acceptable Standard Industry Codes (SIC) are 15, 16, 17 and 78. If the prospective

member’s SIC Code is not one of the above, it must be declined. Acceptable payroll classifications are identified on the ELITE Profile Sheet. Payroll classifications are identified as being either acceptable or unacceptable by the excess insurance carriers. Any payroll

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classification that is not listed as acceptable on the Profile Sheet must be referred to CRM’s senior vice president of underwriting (Tom Spendley) for approval. One of the biographies located by L&M for Mr. Spendley indicated that he was the CRM executive responsible for underwriting.

4) Maximum EMFs ranged from 1.20 to 1.40. All members and prospects with EMFs exceeding the then current maximum(s) were to be referred to Tom Spendley and/or the excess insurer for approval.

5) Members with a single claim exceeding various amounts ($50,000, $75,000 or $100,000) must be referred for approval. In some cases, the referral appeared to be internal only (to Tom Spendley), while in others the referral was both internal and/or to the excess insurer carrier.

6) A Dun & Bradstreet report must be obtained for all prospects with a manual contribution of $25,000 or higher. If the financial rating is poor, the prospect must be declined or referred to Tom Spendley for approval (effective beginning sometime in 2003).

7) Any members with loss ratios over 70% (or 75%, depending on the year) must be referred to Tom Spendley and/or the excess insurance carrier.

8) The following classifications are automatic declines if the predominant payroll is in this class: Subcontracted work over 50% of their operations.

9) A loss control safety program that has been approved by the various excess insurers will be developed and implemented for all members (excess insurer guideline only).

10) A loss control inspection will be conducted on every account upon binding (effective, April 1, 2007).

In conjunction with our analysis of the guidelines, we asked an individual with considerable experience in the group self-insured trust field for his opinion whether the underwriting guidelines appeared to conform to industry standards and included any provisions that may be considered aggressive, unusual, or irresponsible. The individual stated, in his opinion, the majority of the guidelines were acceptable except for:

The underwriting guidelines’ initial EMF of 1.20 - 1.40 appears high, with 1.00 being a more reasonable maximum acceptable factor for new members;

The maximum acceptable loss ratio of 70% (or 75%) is excessive; a ratio at or around 50% would have been more in line with group self-insured trust industry standards.

Several of the underwriting guidelines listed above indicate that exceptions were to be referred to Tom Spendley, CRM’s senior vice president of underwriting. In L&M’s opinion, this practice extends significant leeway and judgment to the underwriting process and increased the likelihood that a substandard member would be admitted strictly to generate additional administration fees for CRM. Exceptions made to the established minimum guidelines should have been extremely limited, with the logic and reasoning behind the underwriting decision fully documented in writing. L&M inspected a selection of member files to ascertain compliance with the above underwriting guidelines. The members chosen varied in respect to contribution size, Trust entrance dates, and the length of Trust membership. Our inspections included member files for Trustee member companies and included an evaluation of all pertinent documents contained in the member files selected. Our procedures also included a search and accompanying retrieval of relevant WCB provided documents related to underwriting. The documents obtained from the WCB enhanced our knowledge regarding CRM’s underwriting practices and the underwriting restrictions that had been imposed on ELITE from time to time by the WCB, and were valuable in the formation of our opinions.

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One should note that members described within this section and throughout the remainder of our report may have not met or otherwise violated one or more of the underwriting guidelines at various times throughout their membership. Each report section is independent, meaning the testing performed and the conclusions reached relate solely to the attribute(s) tested within that section. The results of our testing of adherence to the above underwriting guidelines on a selection of the Trust’s members can be found below. Guideline (1) - Minimum manually rated contribution ranging between $5,000 and $10,000. Section 6 of our report entitled “Minimum Contribution Amounts” addresses the procedures we performed and the conclusions reached regarding CRM’s enforcement of the various minimum manual contribution amounts cited in ELITE’s underwriting related documents. Guideline (2) - Members with a manual contribution of $150,000 or higher must be referred to the excess insurance carrier (for policy years 2003 – 2007). It is unclear if this excess insurer referral guideline was to be applied only to new members or renewals as well. L&M located various documents in member files, including broker and excess insurer correspondence which indicated CRM’s awareness of this requirement. Prescribed underwriting forms often contained notes indicating excess insurer approval was requested and received. L&M’s review of the contributions of all members indicates manual contributions exceeded $150,000 a total of 170 times during the contribution years that began in 2003 through 2007. Guideline (3) – Acceptable Standard Industry Codes (SIC) are 15, 16, 17 and 78. If the prospective member’s SIC Code is not one of the above, it must be declined. Acceptable payroll classifications are identified on the ELITE Profile Sheet. Payroll classifications are identified as being either acceptable or unacceptable by the excess insurance carriers. Any payroll classification that is not listed as acceptable on the Profile Sheet must be referred to CRM’s senior vice president of underwriting (Tom Spendley) for approval. A SIC code represents a category within the Standard Industrial Classification System established to classify all industries in the United States economy, with the first two-digits designating each major industry group. The internal underwriting guidelines and Trust document (including amendments) obtained listed specific allowable SIC codes and stated that exceptions must be declined. As a result of our inspection of members’ files, we believe at least five members of ELITE were admitted with unqualified SIC Codes. L&M determined that none of these five members were affiliates/subsidiaries that could have been accepted regardless of their lack of homogeneity as a result of Trust document amendment #3. We were unable to locate any documents that supported the admission of these members into ELITE. Four of the five members we believe fell outside of the realm of acceptable SICs incurred little or no losses; therefore, despite their improper admittance, their participation in ELITE benefited the financial health of the Trust. The fifth member had significant losses; however, we believe its participation did not have a significant negative impact on ELITE because the member had an even larger amount of contribution revenue.

The first company had a SIC of 6514 - Operators of Dwellings Other Than Apartment Buildings. CRM became aware of the non-homogeneity shortly after wrongly admitting the member, and informed the WCB it had erred and that the member would not be renewed. Contrary

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to the information provided to the WCB, L&M noted that the member was renewed for a successive three month period prior to being terminated and its coverage transferred to another CRM Trust.

The second company had a SIC of 3996 - Establishments primarily engaged in manufacturing linoleum, asphalted-felt-base, and other hard surface floor coverings, not elsewhere classified. Our review of the member’s file indicated a substantial amount of payroll allocated to asphalt smelting operations (considered manufacturing). In addition, one of the member’s payroll codes listed was un-allowed and another payroll code required a loss control inspection prior to admittance. No loss control documents were located in the member’s file. This member participated for approximately 2 years and three months before leaving voluntarily.

The third and fourth companies had SICs of 8711 - Establishments primarily engaged in providing professional engineering services. Our inspection of the members’ files and the members’ current internet websites indicate both provide consulting engineering services to the transportation and telecommunication industries. While the predominant payroll code(s) provided by the members are within the realm of those accepted, we believe this type of entity was not a proper fit for ELITE. One of these members participated for approximately 7 years before leaving voluntarily, while the other was a charter member of ELITE and participated until March 31, 2008 when ELITE ceased offering coverage.

The fifth company had a SIC of 8713 - Establishments primarily engaged in providing professional land, water, and aerial surveying services. While the predominant payroll code provided by the member was within the realm of those accepted, we believe this type of entity was not a proper fit for ELITE. This member was a charter member of ELITE and participated until March 31, 2008 when ELITE ceased offering coverage.

The CRM internal underwriting guidelines referenced the Trust’s Profile Sheets for acceptable payroll class codes. Depending on the year issued, the Profile Sheets listed no more than 60 acceptable payroll class codes, some of which mandated a loss control inspection of the member be performed prior to the release of a quote and others were acceptable only on a secondary basis. Amendment #3 to the Trust document states “it is hereby agreed to accept subsidiary or affiliate entities of approved members that do not meet the homogeneity of the trust. However, this will only be approved on an ‘incidental’ basis, where the subsidiary or affiliate company’s payroll represents a minor percentage of the total payroll for the approved member.” We were unable to obtain any indication of the amount of payroll CRM considered “minor.” Through our member file inspection, we determined that the terms of this Trust amendment may have been violated on at least two occasions. Various documents located in the member files for two sets of affiliated entities revealed the amount of subsidiary/affiliate payroll consisted of between 80% and 100% of the total payroll of the affiliated group. It is obvious these percentages represent more than a “minor” percentage of the combined affiliated group. A subsidiary of the first affiliated group listed a SIC of 1522, General Contractors, which was inconsistent with its predominant payroll code of woodenware manufacturing. Based on this inconsistency, we believe the subsidiary was non-homogeneous. The subsidiary’s payroll totaled 80% of the combined entity. The second set of affiliated entities we deem to have violated this requirement was a group consisting of the insured and two affiliates. On the payroll audit for the policy period that began April 1, 2006, the insured was indicated as having no payroll, while its affiliates reported combined payroll of $282,760. One of the affiliates listed a SIC of 1751, Carpentry Work, while the other

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listed 4212, Local Trucking Without Storage. We noted only approximately 22% of the combined payroll of the affiliates was in acceptable payroll class codes and as a result, deem both affiliates to be non-homogeneous. As noted above, excess insurer promulgated underwriting guidelines listed both acceptable and unacceptable payroll classifications, while ELITE’s Profile Sheets usually only listed those that were acceptable. L&M’s comparison of the applicable guidelines to the payroll class codes provided by selected members uncovered numerous instances when payroll class codes (1) were unacceptable, (2) were only allowable as secondary codes, or (3) required a loss control pre-inspection of the member prior to admittance. We noted more than sixty instances when either the (1) payroll codes provided by members were not listed as acceptable on ELITE’s Profile Sheets, or (2) payroll codes allowable only on a secondary basis were in fact the primary (predominant) payroll code for the member. In many of these cases, unacceptable payroll codes were either the predominant payroll code and/or otherwise comprised a substantial portion of the total payroll for the member. We estimated the financial deficit of all the members identified as participating in ELITE despite not meeting payroll class code guidelines to be approximately $1.02 million, exclusive of any allocation of IBNR and aggregate excess insurance recoveries. L&M estimates CRM received approximately $1.28 million in administrative fees as a result of these members participation in ELITE. Examples of unacceptable payroll codes listed on approved member applications include: #6229 – irrigation or drainage system construction and drivers and #6400 – fence erection – metal. While these and certain other unallowable codes noted by us appear to be reasonable for certain contractors, CRM and/or the excess insurer had decided to decline membership to any entities that had payroll classified to these codes. Payroll code #5606 – construction supervisor – is example of a payroll code allowable only on a secondary basis, and #4000 – sand or gravel digging or drivers is one that required a loss control pre-inspection prior to binding. In regards to the payroll codes only allowable on a secondary basis, we noted many instances where these codes were either the only ones or the predominant payroll code provided by the member. Our member file inspections also uncovered instances where a payroll code provided by the member mandated a loss control pre-inspection. Evidence suggests CRM’s adherence to the pre-inspection requirement was sporadic at best, as we noted several occasions where the mandatory pre-inspection was not completed until months after the member’s participation had already commenced. See report section “Safety Programs” for further analysis and testing of CRM’s safety programs. Based on the above, we conclude numerous participants in ELITE may not have met the homogeneity requirements as set forth in both the Trust document (including amendments) and CRM’s internal underwriting guidelines. This conclusion is derived from CRM’s lack of enforcement of both the SIC and payroll code requirements during the initial and renewal underwriting processes. We calculated the estimated financial impact of all the members (including those we believe were profitable) identified by us as wrongfully participating in ELITE due to unqualified SIC and/or payroll codes as generating a deficit of approximately $876,000 exclusive of any allocation of IBNR and aggregate excess insurance recoveries. L&M estimates CRM received approximately $1.36 million in administrative fees as a result of these members participation in ELITE.

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Guideline (4) – Maximum EMFs ranged from 1.20 to 1.40. All members and prospects with EMFs exceeding the then current maximum(s) were to be referred to Tom Spendley and/or the excess insurer for approval. The experience modification factor (EMF) represents a unique mathematical formula that compares an employer’s loss history to industry averages over a prior period of years, most commonly three years. Calculation of the EMF is complex, but the underlying theory and purpose of the formula is straight forward. The EMF is a multiplier used against the employer’s manually rated contribution to calculate the final contribution. An EMF of 1.00 represents the employer’s industry average. When the employer’s loss history is lower than its industry’s average, the EMF will be less than 1.00 and acts to reduce the final contribution when multiplied against the employer’s manually rated contribution. Thus, an employer is rewarded for efforts to reduce work place injuries. When losses are higher than industry average, the EMF will exceed 1.00. The result is a higher contribution, with the intention that this additional contribution will act as an incentive for the employer to reduce work place injuries. L&M did not recalculate the EMFs used by CRM to determine the final yearly contribution for members due to both the complexity of the calculation and the lack of accurate periodic loss data generated by CRM for members. L&M noted that the maximum EMF allowable (prior to referral) per CRM’s internal underwriting guidelines and Profile Sheets was at times more conservative than the allowable EMF per the excess insurer underwriting guidelines. CRM’s internal documents including the Profile Sheets indicated an acceptable maximum EMF of 1.20 to 1.25, while the excess insurer guidelines list acceptable maximums of 1.30 (2003, 2004, and 2005) and 1.40 (2006). Our procedures revealed 139 instances where members were admitted and/or renewed with a higher EMF than the maximum allowable (prior to referral) per CRM’s internal underwriting guidelines. Of these 139 instances, we noted 17 times when the EMF exceeded 1.50, which is far in excess of the 1.20 or 1.25 that had been allowable under CRM’s internal underwriting guidelines and Profile Sheets. In most cases, L&M was unable to locate substantive documentation to support the rationale CRM used to justify the members’ admittance to ELITE or the renewal of the existing policy. These 139 instances included Members B, D, and H of Table 3. We noted EMFs exceeding the maximums allowable a total of ten times for these three members. We inspected a sample of the member files for members with an EMF of over 1.50 to determine the nature of the process CRM may have used to review the specific circumstances surrounding each EMF and how it ultimately concluded that the member was able to participate in ELITE. Some of the members entered ELITE with an EMF in excess of the maximum allowable, while others breached the maximum at the time of a policy renewal. Certain of the prescribed forms used by CRM to track both the receipt of requested documents and tasks to be performed included sign-offs for CRM’s Underwriting Department, Tom Spendley, and reinsurer approval. These forms also indicated the maximum allowable EMF at that time (prior to referral) and stated that any factors above the maximum allowable must be referred. While L&M was able to identify that a referral process had at least been initiated for some of the excessive EMFs noted, the vast majority of the cases lacked any evidence to support a formal referral had occurred either internally within CRM or to the current excess insurer. The majority of the time, the forms would simply list the member’s EMF, and the associated approval/referral sign-offs were left blank.

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We performed procedures to determine if member files contained documents that supported the EMFs used by CRM to calculate member final contribution invoices. We inspected the files for a sample of members that met all of the following criteria: (1) the member joined ELITE between January 1, 2001 and December 31, 2003, (2) the member participated through the last policy period ELITE offered coverage (April 1, 2007 - March 31, 2008), and (3) the member’s cumulative adjusted contributions exceeded $290,000 over its entire membership term. The members inspected accounted for a total of 160 individual billing periods. For each of the 160 unique individual billing periods, we attempted to locate documentation within the member’s file that supported the EMF used in the calculation of the final contribution. Of the 160 billing periods inspected:

7 instances lacked documentation to support the EMF used by CRM to invoice the member; 6 of these cases used the same EMF as the previous billing period, and in the 7th case, the EMF changed from the previous billing period.

19 instances where documentation indicated CRM was unable to obtain the necessary prior policy year(s) payroll and/or loss information to promulgate an EMF for the member. In the majority of these cases, an EMF of 1.0 was used to calculate the member’s contribution. CRM’s lack of ability to calculate EMF’s further supports the notion that it often failed to obtain adequate information at the time the account was originally underwritten to properly analyze and conclude on the risk of the member.

13 instances when CRM used 1.0 as the EMF because the member had not been in existence long enough for an EMF to be promulgated. An individual with considerable experience in the group self-insured trust field informed L&M that this practice is generally acceptable, but only for the first three years of a member’s existence. In 3 of these 13 instances, L&M found that CRM failed to calculate an EMF for the member even though the entity had participated in ELITE for more than three years.

Several other instances when an EMF of 1.0 or an estimated EMF was used. CRM cited various reasons on underwriting forms to justify the factor ultimately used.

3 instances when the EMF used on the invoice had been improperly rounded. 1 instance when a larger member’s first year EMF (.75) was provided to CRM by its broker

which CRM used for invoicing purposes without verifying its accuracy. A letter to CRM from the member’s broker shortly after its admittance stated CRM had agreed to continue to use this same EMF for the following policy year as well. Documents located in the file suggest CRM promulgated an EMF of 1.22 at or around the date of the first policy renewal and attempted to invoice the member using the higher EMF. It appears the member’s broker contacted CRM regarding the invoice and negotiated the EMF back down to a factor (.76) similar to that agreed to previously by CRM. A revised invoice was issued to the member by CRM lowering the EMF from 1.22 to .76 for this 12 month policy. Additionally, CRM continued to apply the same artificially low EMF to its invoicing of the member’s subsequent 6 month policy. L&M believes this improper reduction of the member’s EMF by CRM for this 18 month period decreased ELITE’s contribution revenue by approximately $143,000. L&M estimates CRM received approximately $29,000 in administrative fees as a result of this member’s participation in ELITE for that 18 month period.

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1 instance when a broker requested two members who had been previously invoiced separately be combined for the upcoming policy year. As part of the renewal negotiation between CRM and the broker, CRM agreed to use the lower of the two EMFs to invoice the combined entities. The EMFs prior to the combined invoicing were 1.0 and .84, and it is unclear how much this action reduced ELITE’s contribution revenue.

We would like to make the following additional comments regarding the outcome of the procedures we performed relative to EMFs:

Our procedures uncovered the usage of the same EMF for consecutive years when computing the final contribution invoice. An individual with considerable experience in the group self-insured trust field informed L&M that it is not normal practice to maintain the same EMF for several years since the factor is a rolling mechanical computation while assigning an EMF of 1.0 to very small members and those with an insufficient claims history are acceptable industry practices. While some consecutive 1.0 EMF instances noted by us related to members that had recently begun business and, as a result, the experience data necessary to calculate an EMF was unavailable, the majority appeared to originate from CRM’s apathetic attitude towards the usage of an updated/proper factor and/or unintentional errors made when the final contribution invoices were prepared. Our procedures revealed approximately 3,200 instances where the same EMF was used to compute a member’s final contribution invoice for at least two consecutive policy years. Of the 3,200 cases, there were 2,450 instances of the same EMF for two consecutive years, 400 instances of the same EMF for three consecutive years, 220 instances of the same EMF for four consecutive years, 75 instances of the same EMF for five consecutive years, 50 instances of the same EMF for six consecutive years, and 5 instances of the same EMF for seven or more consecutive years. Five of the six Trustee member companies had the same EMF’s used to compute their final invoices for two or more consecutive years. It is unclear if this perceived improper practice ultimately led to the under-invoicing of certain members.

We noted verbiage on member documents from different years stating that a member’s failure to produce the necessary documents for CRM to promulgate an EMF would either (1) result in the member being assigned the “universal” EMF of 1.0, or (2) result in the use of an EMF 10% higher than the previous year for the current year. L&M is surprised by the leniency of this policy as the Trust document stated a member could be terminated if it failed “to meet any criteria or supply information required including underwriting criteria to the Board of Trustees.” Based on the significance of the EMF in the calculation of a member’s contribution and a desire to be fair to all participants, L&M would have expected CRM to have had less tolerance for uncooperative members.

L&M noted two consecutive policy years where the EMF used by CRM for billing a Trustee member company was lower than that supported by documents located in the member’s file, which essentially amounted to an additional discount provided the Trustee member company in those years. It appears CRM had calculated an EMF of 1.14 for the first year and 1.06 for the second, but instead used an EMF of .99 for both years. The following typed statement in bold appeared on the second year’s Renewal Underwriting Worksheet which we believe indicates a management override of the calculated EMF for that year “Per TS (Tom Spendley, EM (EMF) to remain as expiring.” We calculated the additional discount provided the Trustee member company (and related decrease in ELITE’s contribution revenue) as a result of CRM’s use of inappropriate EMFs for this member to be approximately $23,000. While L&M determined that the Trustee member representative from this company acquired stock in CRM after it went public in December 2005, the date

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of the stock acquisition was subsequent to the two policy periods in which an inappropriate EMF was used.

In its calculation of the EMF for one member for the policy period beginning April 1, 2006, CRM reduced incurred losses by what it termed a “shock loss.” This action lowered the EMF used for invoicing purposes from its previously calculated 1.58 to 1.20. An individual with considerable experience in the group self-insured trust field informed L&M that this practice is improper since the EMF calculation takes these types of losses into consideration. This improper action reduced ELITE’s contribution revenue over a two policy period by approximately $23,000.

The EMF’s used by CRM on all contribution invoices for Trustee companies appear to have been within the underwriting guidelines in place during the applicable policy year.

We noted one member’s EMF was 2.06 for the policy year beginning April 1, 2004. This EMF if nearly twice the maximum allowable for that year as listed in CRM’s internal underwriting guidelines, and we were unable to locate documents to support the rationale used by CRM to justify this member’s participation. L&M estimates CRM received approximately $7,000 in administrative fees as a result of this member’s participation in ELITE during that year.

L&M noted two instances (one in 2001 and 2006) when a CRM underwriter questioned the accuracy of Member F’s EMF due the size of the losses. In either case, it is unclear how this issue was addressed by CRM’s Underwriting Department since it did not appear that the EMF was subsequently changed/corrected. This may be further evidence of CRM’s potential use of improper EMF’s that may have reduced contribution revenue.

We noted several instances when the EMFs used to invoice members were lower than the documented EMFs and many instances when the same EMF was used for consecutive years. These perceived improper billing practices may have reduced the overall net contribution income that ELITE would have otherwise received. Finally, CRM’s failure to consistently enforce the maximum EMF provisions contained in the underwriting guidelines allowed substandard members to participate in ELITE and adversely affect the ongoing financial viability of the Trust. Guideline (5) – Members with a single claim exceeding various amounts ($50,000, $75,000 or $100,000) must be referred for approval. L&M was unable to determine if this guideline was to be applied only to the underwriting of new participants, or to renewals as well. L&M was informed by an individual with considerable experience in the group self-insured trust field that this requirement would have most likely been applicable to new applicants only. The New Business Underwriting Forms had check-offs for referrals deemed necessary by the individuals at CRM responsible for the underwriting of the policies. Evidence obtained as a result of our file inspections indicate CRM was aware of this specific referral requirement since we noted numerous written requests to the excess insurer seeking approval of prospects that had breached the various single claim limits. However, we also noted many occasions when the referral check-offs were either blank or signed off with a note such as “no referral needed” even though claim/loss related documents located by L&M indicated a referral was necessary. Based on our limited file inspections of new member underwriting documents, we believe CRM may have only complied with this referral requirement 60% of the time.

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Our member file review uncovered a Trustee member company with a significantly large single claim two years prior to its January 1, 2000 entrance into ELITE. This member is identified as Member K on Table 3. We were unable to locate evidence to support a referral to ELITE’s excess insurer prior to the admission of this member. A document dated March 6, 2007 containing summarized loss statistics of this Trustee member company was located by L&M. The document indicated that while insured by ELITE, this Trustee member company had incurred six claims of over $50,000 (three of which were over $175,000) during the policy period ended September 30, 2002, one during the policy year ended September 30, 2001, and one in the policy period ended April 30, 2003. Our review of documents in this member’s file indicates no referrals to the excess insurer were performed during the entire period of this member’s participation. Despite these significant claims, this Trustee member company was continually renewed at discounts of 30% or more and received an additional discount as a result of payroll limitations. Guideline (6) – A Dun & Bradstreet report must be obtained for all prospects with a manual contribution of $25,000 or higher. If the financial rating is poor, the prospect must be declined or referred to Tom Spendley for approval (effective beginning sometime in 2003). A Dun & Bradstreet (D&B) report rates companies based on estimated financial strength, promptness of payments to vendors, and capital adequacy, and also includes various other statistical data, such as financial performance ratios of similar companies. D&B reports are rated on a scale of 1 (low risk) to 5 (high risk). L&M deems scores of 4 (significant risk) and 5 (high risk) to be a “poor” financial rating. We believe this was an underwriting requirement since a poor D&B rating indicates an increased likelihood a member may fail to pay their contributions. L&M’s inspection of selected member files revealed limited financial information had been obtained by CRM for ELITE’s members. Some members had full sets of CPA prepared financial statements, while others had tax returns or member prepared financial statements; however, the majority of the member files failed to contain any substantive amount of financial information. We inspected a selection of member files to determine CRM’s compliance with this underwriting standard, including adherence to its internal referral requirement. The results of our selected member file inspections indicated 17% of those required to have a D&B report did not have one present. Of the 83% of member files that had D&B reports present, approximately 31% had poor ratings. While we noted some instances where the members with poor ratings were referred to Tom Spendley, his approval would usually only consist of a simple sign-off and included no accompanying analysis to justify the member’s admittance. The New Business Underwriting Forms we located for members with poor ratings would list the rating in the appropriate area, but failed to include the results of any additional investigation by the underwriter that would support an admission decision. As a result, it appears CRM’s thirst for additional administrative fees far outweighed the prospect of potential members’ inability to meet their financial obligations and the resulting charge-offs of uncollectible contributions. Based on data presented in the ELITE’s audited financial statements and general ledger, L&M calculated ELITE’s cumulative uncollectible contribution charge-offs through 2009 as $3,076,000. L&M compared ELITE’s bad debt charge-offs as a percentage of contribution revenue to that of two other terminated self-insured trusts that had also insured commercial (for profit) entities.

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ELITE’s percentage of 1.83% was almost three times higher than the average bad debt charge-off percentage of the two other trusts. L&M believes these deemed excessive write-offs may have resulted from CRM either not consistently performing appropriate credit analysis on ELITE’s members and/or admitting members with poor D&B report ratings. It should be noted that more than 38% of the members in our selection that had poor D&B ratings appeared to have been terminated by CRM for non-payment of contributions. L&M assembled the reasons for terminations listed on all 1,331 GSI-3.1 forms provided to the WCB by CRM for members that had terminated participation before March 31, 2008. Of the 1,331 GSI-1.1 forms, 692 or approximately 52% indicated a member’s termination was due to non-payment of contributions. While it is unknown how many of these members ultimately failed to subsequently pay the amounts owed, these statistics offer further evidence of inadequate evaluation of the creditworthiness of ELITE’s members by CRM. Guideline (7) - Any members with loss ratios over 70% (or 75%, depending on the year) must be referred to Tom Spendley and/or the excess insurance carrier. L&M finds it odd that the underwriting guidelines did not specify the number of policy periods (usually years) to be included in the loss ratio calculation used for initial or renewal underwriting purposes. L&M noted that CRM had regularly used loss data from the prior four or five year period when calculating the ratio. L&M noted loss ratio statistics appeared in various formats on several prescribed forms; however, the most comprehensive summarized analysis of member loss data was present on the 4 (or 5) year loss analysis report (loss analysis report). It appears that the preparation of a loss analysis was part of the initial and renewal underwriting process, and included as part of an overall package to support its underwriting decision. Our member file inspections of Members A through E of Table 3, all six Trustee files, and numerous other files revealed the following:

Member A's loss analysis calculated by CRM on February 16, 2008 for renewal underwriting purposes for what would have been the policy year beginning April 1, 2008 indicated it had a 117% loss ratio for the 2007-2008 policy year. Despite the large current single year loss ratio, the account appears to have been approved by Kathy Fiorio (an underwriting manager at CRM) with a 15% discount for the policy year that would have begun April 1, 2008. Of additional concern to L&M is the initial underwriting of the member in 2006 noted that the member had just recently begun operations. The excess insurer underwriting guidelines in effect when the member was admitted stated "New business is acceptable; however, must be stringently underwritten." While the guidelines did not define the term “stringently underwritten”, L&M would have expected CRM to have performed additional underwriting procedures over and above those normally performed. An example of an additional procedure CRM could have performed is a pre-binding loss control inspection with admittance contingent on a grade of satisfactory or better. The member’s New Business Underwriting Form indicated that a referral to the excess insurer and a pre-entrance loss control were both unnecessary. L&M believes CRM never conducted a Loss Control Site Survey on this member’s operations. L&M was unable to determine the nature of the

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“stringent” underwriting procedures performed by CRM, if any, to assess and ultimately conclude on the potential risk of the member. The member participated until ELITE ceased offering coverage on March 31, 2008.

Member B's 4 year loss analysis indicated a 76% loss ratio for the 3 year period prior to entering the Trust, including one year with a loss ratio of 146%. The New Business Processing Checklist failed to reference the loss ratio, and the sign-offs for CRM’s Underwriting Department’s approval were blank. L&M located numerous 4 year loss analyses indicating single year loss ratios over 75%. We were unable to locate documentation to indicate the member had been approved by Tom Spendley, any other member of CRM’s executive management, or the excess insurer. L&M located several Loss Control Site Surveys and Renewal Underwriting Worksheets noting the dangerous nature of Member B's operations. Despite the fact that CRM surcharged Member B’s contributions for four out of its eight policy years of participation, L&M questions how CRM justified the admission and continued participation of the member. This member participated until ELITE ceased offering coverage on March 31, 2008. L&M estimates CRM received approximately $639,000 in administrative fees as a result of this member’s participation in ELITE.

Member C's loss analysis report used by CRM for its April 1, 2007 renewal indicated a 207% loss ratio for its first year in the trust and a 70% 5 year historical loss ratio. In addition, the loss analysis report indicated Member C had recently suffered six losses over $50,000 with two of the six being over $235,000. Its Renewal Underwriting Worksheet for the same policy period stated that Member C had cancelled CRM’s last scheduled two Loss Control Site Surveys and the underwriter recommended to non-renew "due to overall loss history with trust, being unprofitable and uncooperative with LC (Loss Control)." The Renewal Profitability Calculation Worksheet prepared by CRM for use at the member’s April 1, 2007 renewal estimated the member had incurred a deficit (after application of CRM’s flawed expense factor of 32% and the subtraction of trended losses) in the prior policy year of over $300,000. Despite the large single and five year historical loss ratios, the numerous significant individual losses, the perceived recent unprofitability of the member and the recommendation of the CRM staff underwriter, the renewal was approved by Tom Spendley with a 15% discount. L&M believes CRM did not perform any Loss Control Surveys from April 1, 2007 through March 31, 2008. We obtained internal CRM correspondence dated after the Renewal Underwriting Worksheet and related loss analysis, but before the formal renewal, discussing CRM's competition with another carrier over this account. Fearful of losing the member to the competition, CRM increased Member C's discount from 15% to 25%, which amounted to an additional discount of $68,000. CRM’s administrative fee on Member C’s participation for that year was approximately $119,000. As noted previously, since CRM’s fee was based on manual contributions, its fee was not reduced by increased discounts granted to members. This member participated until ELITE ceased offering coverage on March 31, 2008.

Member D's loss analysis report used by CRM for its April 1, 2007 renewal indicated single year loss ratios of 198% and 79% for the 2005-2006 and 2004-2005 policy periods and a 4 year historical loss ratio of 85%. The account was renewed with a 10% discount based on an approval by Tom Spendley. This member voluntarily left the Trust on March 31, 2008.

Member E's 2003 New Business Underwriting Form stated the prospective member was referred to CRM's excess insurance carrier due to numerous individual losses over $50,000, and that the carrier approved its admittance into ELITE. The 4 year loss

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analysis report used by CRM for Member E’s initial underwriting indicated a 4 year historical loss ratio of 63%; however, three out of the four years had single year loss ratios over 75%. Even though the member had technically met the maximum loss ratio underwriting requirement at admission, L&M is unsure as to the appeal of having this member join ELITE, other than the estimated $47,000 annual administrative fees CRM would earn from this member’s participation. Upon admission, this member was granted consecutive 20% discounts for the two policy periods (15 months total) it participated in ELITE. The member’s coverage was terminated by CRM on February 14, 2005 for non-payment of contributions.

Our file inspection indicates that five of the six trustees had a loss ratio of 70% or greater (single year and/or 3 to 5 year averages) on at least one occasion during their participation. Many of the single year ratios exceeded 100%, which amounted to ELITE running a deficit on the particular member even prior to the payment of CRM’s administrative fees and all other overhead expenses. Evidence suggests that one of these five companies had a single year loss ratio of 296% for its last full policy year prior to entering the Trust (valued as of 2 years after entering ELITE) and 478% for the ELITE policy year ended March 31, 2006. We were unable to locate any documents within this Trustee member company’s file that cited the rationale and/or special circumstances that justified this member’s admittance and/or continued participation. Despite certain years of poor performance, this member participated in ELITE for its entire active existence of 8.5 years while never receiving a discount lower than 30%. It is important to note that the owner of this member served as ELITE’s Chairman of the Board of Trustees for most of its active existence.

A member L&M calculated as having the fifteenth largest estimated deficiency of contributions over losses and other estimated direct expenses (exclusive of any allocated IBNR and estimated recoveries from aggregate excess insurance) was admitted in 2000 with both a loss ratio and an EMF that violated ELITE’s minimum underwriting criteria. L&M believes the maximum allowable EMF and loss ratio at the time of this member’s admittance (per CRM’s internal underwriting guidelines) was 1.20 and 70%, respectively. On the date of admittance, this member’s EMF was 1.33 and its 3 year historical loss ratio was 85%. A loss analysis calculated as of June 4, 2002 showed a 287% loss ratio for this member’s first thirteen months of participation in ELITE and a six year historical loss ratio of 100%. The member was continually renewed, often with discounts, and its contributions were never surcharged. On its Renewal Underwriting Worksheet for the April 1, 2004 renewal, it is noted this member’s EMF dropped from 1.67 to 1.30 and the loss ratio had been gradually decreasing from year to year (L&M notes the loss ratio was listed as 99% on the worksheet). On its 2004 renewal date, both the member’s loss ratio and EMF exceeded the maximum allowable per CRM’s underwriting guidelines. A handwritten comment was written on the bottom of worksheet by Tom Spendley that stated “Seems like account is making good strides. We stuck with account through bad times. Let’s reap some rewards in good times.” In L&M’s opinion, a loss ratio of 99% hardly indicates “good times.” L&M estimates CRM collected approximately $312,000 in administrative fees as a result of this member’s participation in ELITE. In L&M’s opinion, this statement evidences CRM’s propensity to disregard poor member statistics by knowingly admitting and continually renewing substandard accounts.

A relatively small member’s loss ratio analysis indicated this member’s historical 2 year loss ratio was 493% for the two year period prior to entering the Trust. An undated 4

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year loss analysis report indicated a single year loss ratio of approximately 1,200% for the first year it participated in ELITE. The 4 year loss analysis indicated losses for the year of approximately $180,000, while contributions were only $15,000. This member participated in ELITE for approximately 5.5 years, with discounted contributions as high as 40%, before leaving voluntarily.

In addition to the above, we noted well over 100 further instances when members had either poor single or multi-year loss ratios that exceeded the allowable ratio in effect for the applicable year. In many of these cases, the members were renewed with discounted contributions.

L&M calculated that CRM received approximately $1.39 million in administrative fees from Members A through E’s participation in ELITE, who on a combined basis, accounted for approximately 20% of ELITE’s gross modified members’ deficit before any allocated IBNR and estimated aggregate excess insurance recoveries. L&M obtained a summation of a discussion that occurred in late 2008 between the WCB and a representative of Midlands Management Corporation of New York, hereinafter referred to as “Midlands”, (an insurance broker used to procure excess insurance for CRM administered funds, who also assisted CRM with the formation of Twin Bridges). During this discussion, the representative from Midlands stated the Hickeys (assumed by L&M to mean both Daniel Sr. and Daniel Jr.) were just “salesman types” that loosened the trusts’ (all CRM trusts) underwriting requirements to increase their administrative fees and brokerage commissions. The Midlands representative indicated that this behavior led to the addition of members with high accident rates. Later in the meeting, the Midlands representative reiterated his belief of the poor member quality within the CRM trusts when stating that the Hickey’s (CRM) sought the contribution revenue generated by new member additions to offset the rapid depletion that had been occurring (or should have been occurring) in the trusts’ loss reserves. He concluded by stating “so the loss ratio ballooned to 300%” and “the Hickeys became greedy when they could have done well for themselves by properly administering the trusts, but they wanted to do really well by extracting every dollar that they could from the trusts.” L&M believes the statement regarding the 300% loss ratio was/is an exaggeration; even though certain individual members had loss ratios of 300%, the overall Trust average at any given time was much less than this. However, one can conclude from this insurance expert’s comments that, in his opinion, (1) CRM’s thirst for additional member contribution revenue precipitated the admittance of substandard/risky members, (2) the loss ratio(s) of the members within the CRM trusts had increased as a result of this practice, which negatively effected the trusts’ reserves and, (3) the Hickeys’ (CRM’s) greed forced them to abandon normal and proper administrative/underwriting procedures to obtain additional cash flows for its trusts. Based on the above, L&M concludes that CRM’s apparent overriding desire to increase membership and related contribution revenue far outstripped the best practice of properly using a conventional analysis of a member’s historical losses as part of its underwriting processes. We believe CRM’s admission and continuous renewal of many members with loss ratios exceeding the maximums allowable per the underwriting guidelines (70%/ 75%) was detrimental to the finances of ELITE. Guideline (8) - The following classifications are automatic declines if the predominant payroll is in this class: Subcontracted work over 50% of their operations. The compulsory/automatic declination guideline (above) was effective for some period prior to December 1, 2003. On December 1, 2003, an excess insurer promulgated guideline became

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effective that reduced the underwriting action necessary for members not meeting the criteria from an automatic declination to an excess insurer referral. Our file inspections uncovered numerous instances when a member appeared to violate this guideline. As detailed below, the action taken by CRM subsequent to becoming aware of a member’s failure to meet this guideline varied greatly. On some of these occasions, the member was non-renewed, but in many instances the member continued to participate despite CRM’s awareness that the member had been or was currently subcontracting in excess of 50% of their operations. L&M believes this underwriting guideline was instituted to minimize the risk that ELITE’s coverage and liability could ever be extended to any uninsured subcontractors its members used. This extension is legally possible even if it is agreed in writing that the subcontractor is independent and no employer/employee relationship between the member and its subcontractors exists. L&M noted one instance where an ELITE member was legally obligated to cover a claim of an employee from one of its subcontractors. Per NCAComp, the total incurred cost of this claim as of October 31, 2010 is $134,000. Most of the members that participated in ELITE despite violating this guideline were financially beneficial to ELITE since they incurred little or no losses. However, we estimate one member that had subcontracted over 50% of its operations generated a deficit of approximately $62,000 exclusive of any allocation of IBNR and aggregate excess insurance recoveries. Below are selected instances when members were either admitted and/or were renewed despite CRM’s knowledge that the member failed to meet this underwriting guideline.

We located internal CRM correspondence from September 2005 indicating a member should be non-renewed on April 1, 2006 because it is currently subcontracting over 90% of its work. It is mentioned later in the correspondence that because its “exposures are controlled and safety procedures are enforced”, renewal of the policy could still be an option. Another document in the member’s file indicated CRM was aware of the subcontracting exposure on the account since it was written in 2002. The underwriting guidelines in effect when the account was written in 2002 stated that members with a subcontractor percentage over 50% were subject to an automatic declination. We were unable to locate any “New Business Underwriting Forms” for this member or any acknowledgments from excess insurance carriers approving its initial or continued participation. Despite its high percentage of subcontracted work, the member was renewed by CRM on April 1, 2006 and April 1, 2007. We estimate this member generated approximately $58,000 in administrative fees for CRM.

Pre-admission date member file documents located for a member admitted on March 19, 2006 indicate that its participation had originally been automatically declined because it subcontracted 75% of its operations. We were unable to locate any documents to support the eventual admission of the member. A CRM Interoffice Underwriting Referral document dated just prior to the April 1, 2007 renewal indicates CRM was aware that it failed to obtain excess insurer approval when it had originally bound the account in 2006. We located both a February 2007 e-mail request from CRM to the excess insurance broker requesting approval of the member for the upcoming renewal and a formal disapproval of the request from the excess insurance broker. The policy was renewed by CRM effective April 1, 2007. We located a handwritten note on another document in the file that stated “this account is approved for 4-1-07 w/Majestic Insurance Company”, but question both the origin and reliability of the statement.

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We were unable to obtain a copy of the excess insurance policy purchased by ELITE from the Majestic Insurance Company; as a result, we are unaware if the policy’s limitations/exclusions were the same or similar to those in place for all other years. L&M believes this member was ultimately renewed primarily due to pressure exerted on CRM from the member’s insurance agent. We located an e-mail from the member’s broker to CRM that stressed the high quality of both the member and its subcontractors along with the notion that the member is a “strong advocate of our agency and of CRM in the local construction circles.” Most disconcerting to L&M is a CRM Interoffice Underwriting Referral document from a CRM underwriting manager to Tom Spendley that stated the account had not been approved by the excess insurance broker and “the bottom line is that this doesn’t fit the program and I have hard time justifying allowing these GCs (general contractors) to be written for the broker we already have a few too many on the books for them as it is.” This statement infers that the broker had pressured CRM to allow numerous other members to participate despite their not meeting this particular underwriting requirement.

A member was admitted by CRM in December 2004 shortly after the member’s broker responded to numerous questions from CRM regarding its application for coverage. The broker’s response to a CRM question regarding the percentage of the member’s work that was subcontracted out was “the amount is less than 5%.” Our inspection of that period’s final invoice as prepared by CRM based on the results of the payroll audit indicate the amount of uninsured subcontracted exposure was 69% of the member’s exposure. CRM threatened the member with termination, but allowed it to participate for another year based on a letter it had received from the member that it had recently hired employees. The member was terminated by CRM after its second year of participation as a result of its loss control department’s determination that the member was currently subcontracting 80-90% of its operations.

Member G’s name include the words “General Contractor”, and CRM’s Risk Analysis Summary for Member G from August 2002 indicated the company was in fact a general contractor. By definition, a general contractor is the entity with main responsibility for the construction project who hires all of the subcontractors and suppliers for a project. It is capable of performing construction work as a contractor with overall responsibility for the satisfactory completion of a project using its own forces to perform or supervise part of the work. With this in mind, one would expect a sizable portion of most general contractor’s operations to involve the use of subcontractors. Various documents in Member G’s file from as early as 2004 indicate CRM was aware this member may have been subcontracting more than 50% of its operations. Percentages of 50%, 60% and 75% appeared on documents in this member’s file. The payroll auditor noted on its 2005 and 2007 payroll audits that the member had used between 79 and 94 subcontractors, respectively. We were unable to locate any support for subcontract percentages for Member G for years prior to 2004; however, it is possible the member may have breached the maximum allowable percentage of 50% at or near the date of its admission. At the very least this member violated the underwriting guideline in three different years. L&M was unable to locate evidence to support a referral ever being made to the excess insurer for this member.

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The above indicates that CRM was not consistent in its underwriting treatment of members that subcontracted a significant percentage of their operations. While it appears these members’ participation, exclusive of Member G, were not financially detrimental to ELITE, it serves as yet another example of the irregular application of underwriting guidelines to the participants. Guideline (9) – A loss control safety program that has been approved by the various excess insurers will be developed and implemented for all members (excess insurer guideline only). While Section 8 of our report entitled “Safety Programs” addresses the significant details of the risk management/safety programs that appear to have been used by the Trust, we would like to convey the following additional safety related issues as a result of our file inspections of the members identified in Table 3:

We believe the Table 3 member with the largest deficiency of contributions over losses and other direct expenses (Member A) was never physically visited (main facility and/or job site) by CRM’s Loss Control Department. We believe this deficiency may have led CRM to inaccurately conclude on the quality of the member’s safety program and procedures.

When the member joined ELITE in April 2006, the member had been legally formed, but had yet to begin active operations. It is important to note the underwriting requirements of ELITE’s excess insurer for 2006 stated “New business is acceptable; however, must be stringently underwritten. Principal must have at least five years experience in the same industry.” As a result, L&M would have expected CRM to have used extraordinary care and attentiveness when it originally underwrote the member. Approximately one week after the member began to participate in ELITE, a telephone discussion took place between a CRM senior loss control consultant and an executive/owner of Member A regarding its operations and safety program. As a result of the discussion, a “Risk Analysis Summary”, “Completed Work Record”, “Service Plan” and “Recommendation Form” were completed by CRM’s loss control consultant. L&M questions how the loss control consultant could have justified the completion of all the forms on a forward looking basis solely on the representations of the individual interviewed. The forms alluded to how safety issues were purportedly going to be handled once Member A commenced operations. The loss control consultant had even prepared the “Safety Report Card” section of the Risk Analysis Summary and graded Member A as an average risk based on the discussion he had with the executive/owner of the member. The Loss Control Consultant stated in the Risk Analysis Summary that a jobsite survey was needed in order to verify his belief that proper safety controls would be in place. A formal request for a jobsite survey/inspection within 60 days was made of the member by CRM at the time of the initial safety discussion. L&M noted a letter to the executive/owner approximately 5 weeks later indicating the jobsite survey had yet to occur and that CRM had been waiting for the location of a jobsite. L&M believes that the jobsite inspection never occurred as (1) no evidence existed in the member file to support its occurrence, and (2) the Renewal Underwriting Worksheet prepared by CRM in March 2007 for the April 1, 2007 renewal policy indicated that it had not occurred. The April 1, 2007 Renewal Underwriting Worksheet indicated (1) a “favorable” loss control inspection, (2) the member had no claims to date (3) CRM’s management approval of the renewal with a 15% discount, and (4) the underwriter was going to “check with loss control within the next few months to see if (the jobsite survey was) completed.” In L&M’s opinion, CRM’s underwriting department had relied on erroneous safety documentation at the time it formed its April 1, 2007 renewal

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underwriting decision. In addition, we do not understand how CRM’s underwriting department could justify the policy renewal when the jobsite survey was 10 months overdue. Had the Loss Control Consultant been persistent and completed the jobsite inspection/survey in the original 60 day timeline, it is possible the deficient safety practices that caused or at least contributed to the member’s high claims would have been identified and corrected and/or the member terminated due to its non compliance with CRM’s safety program. Either of these actions would have resulted in a reduction in ELITE’s total deficit.

A loss control survey/inspection was performed by CRM in November 2001 on Member F shortly after it entered ELITE. The Risk Analysis Summary prepared by CRM as a result of its loss control survey/inspection indicated (1) the member had recently been fined by OSHA for lack of employee fall protection, (2) a disciplinary program for safety rule violators recommended by CRM’s loss control department would be difficult to institute as a result of its unionized employees, (3) for these and other reasons the member was not a good risk, and (4) another visit would be scheduled to review these concerns with the supervisor. L&M located a letter from CRM’s Underwriting Department to the member’s broker dated April 2004 stating that the member’s first two years of loss experience with CRM were unfavorable and because the last loss control survey was in November 2001, she had recently requested an updated loss inspection be performed to see if the recommendations made in 2001 had been made. L&M was surprised that thirty months had passed without CRM contacting the member to schedule a follow up visit from its initial 2001 site visit. As noted repeatedly by L&M in report section 8 entitled “Safety Programs”, this intentional lack of follow-up by CRM’s loss control department on members with known safety deficiencies was prevalent and undoubtedly led to increased claims by most, if not all, of those members directly affected by CRM’s lackadaisical attitude.

Guideline (10) - A loss control inspection will be conducted on every account upon binding (effective, April 1, 2007). This guideline was included in a set of underwriting guidelines provided by ELITE to the WCB in January 2008. To determine CRM’s compliance with this guideline, we inspected a selection of files for members entering ELITE after April 1, 2007. Our member file inspections indicated lackluster compliance with this guideline at best. Details of the results of our file inspections follow:

The “New Business Underwriting Form” located for 80% of the files we inspected stated that a pre-binding loss control was not even ordered, a direct conflict with this guideline. The remaining 20% of the forms stated an inspection was to be ordered upon binding; however, no evidence was located in the members’ files that one was ever completed.

40% of the member files inspected contained evidence that loss control inspections eventually occurred; however, the inspections were between one and three months after the accounts had already been bound.

Demolition Operations

The excess insurance policies for many of the years of ELITE’s existence, as well as the CRM internal underwriting guidelines, excluded certain types of businesses/activities from participation due to the increased claim risk inherent with the nature of their operations. While it appears in most cases CRM followed the excess insurer requirements by not admitting businesses specifically excluded under the policies, we noted inconsistent underwriting treatment of one type of business by CRM. The business operations in question involve the demolition and/or wrecking of buildings.

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The CRM internal underwriting guidelines we obtained from prior to 2003 stated “The following classifications are automatic declines if the predominant payroll is in this class: Demolition.” The CRM internal underwriting guidelines we obtained from 2007 stated: “The following classifications are automatic declines: Demolition- Exterior (Interior demolition will be considered on a case by case basis).” The excess insurance policies obtained by L&M for coverage during the period December 1, 2003 through April 1, 2007 specifically excluded numerous types of businesses and stated “The following types of businesses are also excluded: wrecking/demolition of buildings/structures in excess of two stories.” We were unable to obtain the policy information that detailed excess insurer member type restrictions (if any) that were in place for the other policy years. It is important to note that the excess insurer exclusion did not differentiate between exterior and interior demolition. L&M believes CRM may have finally realized in 2007 that both current and former members were interior demolition companies, and as a result, modified its internal underwriting guidelines to allow for their participation. Reasonable common sense would dictate, even absent excess insurer restrictions for companies with demolition operations, that extreme care would be imperative during the initial and renewal underwriting processes for members with these types of business operations. L&M would have expected most or all of the potential members falling into this category would have been declined coverage due to the significant risk inherent in their operations. L&M believes Members B, D and H of Table 3, along with at least six other members, had operations that one could reasonably classify as being demolition related. It is important to note that all three of these members (B, D, and H of Table 3) were admitted to ELITE when their predominant payroll code (5610 – Cleaners/Debris removal) was an acceptable class code. In October 2002, CRM modified its internal underwriting guidelines to restrict payroll code 5610 as allowable only on a secondary basis. As a result, regardless of whether or not these companies’ operations were “demolition” operations, they should have been terminated upon not meeting the modified internal underwriting guidelines relative to allowable predominant payroll code(s).

On its GSI-1.1, Member B listed it’s SIC code as 1795 – Wrecking and Demolition Work, and its predominant payroll code was 5610 – Cleaners/Debris Removal. L&M notes the payroll class code with the second highest portion (29%) of total payroll was listed as #5703 – Building Raising or Moving and Drivers. A Risk Analysis Summary prepared by CRM’s loss control department in 2004 states “This is an internal removal company and a container carting company. They will send crews of 4 to 10 workers to remove walls, ceilings and floors. They will demolish the interiors or buildings that are being changed or renovated. They mainly use hand tools in the demolition. Crow bars and sledge hammers. This is a demolition company. They were put on the OSHA 14000 list of companies with the worst ratio of lost time claims for TWO YEARS IN A ROW. But their loss ratio is (only) 15%. I think this is just a very fortunate stretch and that this company has the potential to have large claims and severity. They have a core of 60 steady employees but the remainder is filled with union employees that may or may not be there tomorrow. So 50% of their workforce (although allegedly skilled) is transient. The work is by nature dangerous.” Based on the above, it is obvious (1) this member’s operations included demolition operations, and (2) the member constituted undue risk for ELITE due to its inherently dangerous operations in combination with its transient workforce. On its GSI-1.1, Member D listed it’s SIC code as 1795 – Wrecking and Demolition Work, and its predominant payroll code was 5610 – Cleaners. A Risk Analysis Summary prepared by CRM’s loss control department in 2003 states “(Member D) is a demolition contractor. They knock down walls in building interiors and remove flooring, ceiling tiles, dead wiring and do a gut demolition.

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Sometimes wi(n)dows are also removed. The walls are knocked down using sledge hammers, winches and come alongs. Some floor removal jobs require the use of jack hammers. There is a fall potential from removing windows. The(y) would wear safety harnesses connected to life lines. The debris is carted away by another one of the insured’s companies which we do not insure at this time.” Based on the above, it is obvious (1) this member’s operations included demolition operations, and (2) the member constituted undue risk for ELITE due to its inherently dangerous operations.

The SIC code used by Member H on its GSI-1.1 was 1751 – Carpentry. L&M questions the validity of this SIC code since this description is inconsistent with the predominant payroll code used on its GSI-1.1 of 5610 – Cleaners. The member’s GSI-1.1 listed 84% of its total payroll under payroll code 5610, while less than ¼ of 1% was under code 5403 – carpentry. A Risk Analysis Summary from 2002 prepared by CRM’s loss control department states “The work involves interior demolition of commercial buildings. They knock down walls, ceiling and remove the floor covering to complete a gut demolition of the interior. After the material is knocked down or removed, they remove the debris and bring it to a dump site. The demolition is done manually with crow bars, wire cutter and burning torches. The work is dusty, dirty and noisy and the nature of the work is conducive to injuries. Unanticipated events can take place during demolition operations.” Based on the above, it is obvious (1) this member’s operations included demolition operations, and (2) the member constituted undue risk for ELITE due to its inherently dangerous operations. The other six members we believe to have demolition operations as a result of our inspection of the SIC codes and payroll codes on their GSI-1.1’s were of various contribution size, and participated for various lengths of time.

Per the GSI-3.1 filed with the WCB by CRM, Member H was terminated on October 1, 2002 because it “does not meet the underwriting guidelines, specifically the New Jersey location and demolition operations.” L&M located an E-mail from CRM to the member’s broker from around the date of termination that stated “The operation of demolition is not something we are looking to cover. It is an excluded class of business by our reinsurance carrier.” L&M did not become aware of any other members with demolition related operations which were terminated by CRM for underwriting reasons, including members B and D of Table 3. It is unclear why CRM chose to selectively enforce the excess insurer restriction, albeit after wrongly admitting the member, on only one occasion.

Based on the above, L&M believes at least 9 members with demolition operations had wrongly participated in ELITE. Several of these members incurred significant losses, and as a result were financially detrimental to ELITE. On a combined basis, we calculated these nine members generated an estimated deficiency of contributions over losses and other estimated direct expenses of over $6,000,000 (exclusive of any allocated IBNR and benefit of estimated recoveries from aggregate excess insurance), which approximates 11% of ELITE’s September 30, 2010 gross modified members’ deficit before any IBNR and benefit of estimated recoveries from aggregate excess insurance. L&M estimates CRM received approximately $1,193,000 in administrative fees as a result of these members’ participation in ELITE.

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Other Noteworthy Underwriting Related Findings

We noted a small member (less than $20,000 in annual contributions) that was admitted in March 2007 and terminated approximately 6 months later in August 2007 for underwriting reasons. Our review of this member’s file indicated four claims (including one fatality) that had originated from the same accident. The claims are the result of a motor vehicle accident, and as such were not directly related to the normal physical work performed by the employees. Loss runs noted in the file for the 4 ½ year period prior to membership indicate the member had incurred no losses during that entire period of time. Based on the above, it appears that CRM’s underwriting decision to admit the member was reasonable based on its recent lack of losses, however we would like to note the following: - The member’s “New Business Underwriting Form” stated the following (in bold

letters) “There are no safety efforts- no safety programs, no safety training, no safety meetings, no equipment safe guards, no accident investigations. If account is bound, a formal safety program and safety efforts must be formed within 60 days of the effective date.”

- CRM made four phone calls to the member and one to the member’s broker during the first 86 days of the member’s participation in an attempt to set up a loss control appointment with the member. All of these attempts proved unsuccessful.

If CRM had adhered to its mandate and terminated the member after 60 days (or even 86 days) of non compliance with CRM’s loss control program, the member would not have been a participant of ELITE on the day of the accident, which would have resulted in a reduction in ELITE’s deficit by approximately $137,000.

A statement is made at a Trustee meeting that loss experience on smaller contractors is “great.” It is unclear to L&M what metrics CRM used to determine what constituted a “small contractor”; however, based on our procedures we conclude that this statement would not be accurate for many of ELITE’s smaller ($10,000 or less in adjusted annual contribution) members. Numerous members we inspected in this contribution range had cumulative and/or single year loss ratios in excess of the maximum per the underwriting guidelines.

The brokers L&M interviewed indicated they did not believe the members they placed in ELITE to be above average risk contractor companies. Additionally, 70% noted that CRM did reject some applicants they attempted to place with ELITE.

We summarized the termination reasons listed by CRM on the GSI-3.1 Forms for all the members of ELITE and noted only approximately 11% were identified as underwriting related. The remainder indicated the terminations were either voluntary (61%) including the cessation of ELITE offering insurance as of March 31, 2008 or for other involuntary reasons such as non-payment of contributions (28%). The above percentages classify all the members who terminated coverage on March 31 2008 as voluntarily even though it is possible CRM may have terminated some of these members for underwriting reasons had ELITE offered coverage after March 31, 2008. Had we been able to obtain the information necessary to properly classify all of these members, the percentage of members terminated for underwriting reasons may have been slightly higher than that reported by us. In any case, the fact that only 11% of member terminations were for failure to maintain minimum underwriting standards lends additional support to our belief that CRM neglected to terminate all poor performing members.

We calculated various contribution data for (1) all of ELITE’s members, (2) members terminated before March 31, 2008 for underwriting reasons, and (3) the 52 members that

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were listed as being terminated for underwriting reasons on the last day ELITE offered coverage (March 31, 2008). Our consideration of this data exposed the following interesting comparisons: - The average annual member contribution amounted to approximately (1) $22,800 for

all members, (2) $16,100 for members terminated for underwriting reasons prior to March 31, 2008, and (3) $38,100 for members terminated for underwriting reasons on March 31, 2008. L&M believes the above averages demonstrate that, in general, members terminated by CRM for underwriting reasons during ELITE’s active life tended to be smaller in contribution size. In addition, the average annual contribution of the members terminated for underwriting reasons on March 31, 2008 was over double that of members terminated for similar reasons while ELITE had active operations. L&M questions why CRM noted on the GSI-3.1 forms that 52 members were being cancelled for underwriting reasons on March 31, 2008 when it was aware the Trust would not be providing coverage past that date. L&M believes it is possible that CRM prepared the GSI-3.1 forms to indicate those 52 members were terminated for underwriting reasons in an attempt to inflate the termination statistics (cumulative/annual/other) it would report to the Trustees or other interested parties.

- Only 14 members with average annual contributions of over $75,000 had been terminated by CRM for underwriting reasons prior to March 31, 2008 (total period of over 8 ½ years), while a total of 11 with average annual contributions of over $75,000 were terminated for that same reason on March 31, 2008.

In L&M’s opinion, the above indicates (1) CRM consistently refrained from terminating large poor performing members, (2) CRM may have prepared the GSI-3.1 forms to indicate 52 members were terminated for underwriting reasons on March 31, 2008 in an attempt to inflate the termination statistics (cumulative/annual/other) it would report to the Trustees or other interested parties relative to the gross number of members and/or number of large poor performing members it had terminated over the entire life of ELITE for underwriting reasons.

In April 2003, CRM received conditional approval from its excess insurer to admit the member with the fifth largest deficiency of contributions over losses and other direct expenses (Member E in Table 3). The member was approved for participation subject to “favorable loss control.” L&M believes this conditional approval meant the member’s participation hinged on an overall favorable conclusion drawn by CRM’s loss control department from an expedited analysis of the member’s safety policies and procedures.

Loss control documents from approximately one month after the member’s conditional admittance indicate a comprehensive safety analysis of the member’s operations had just been completed. It is unclear if the excess insurer had required CRM to submit any or all of these documents to support its safety related analysis and no evidence was located by us suggesting that documents were provided to the excess carrier. Some of the comments noted by CRM on its safety related prescribed forms at this time include: - “The account is proactive in safety” - “Management is very proactive” - “The jobsite survey found no improperly controlled exposures” - “Safety equipment and safe work procedures are enforced” - “Management is receptive to loss control” - “They have formal safety programs designed specifically for each project to address

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the applicable exposures” - “They investigate every accident and implement corrective actions” - “I did not find any safety deficiencies and therefore I have no recommendation at this time” Based on the above, one would conclude the member was cognizant of and appreciated the importance of safety in the workplace and practiced average to above average safety procedures. Loss control documents from approximately sixteen months after the member’s admittance (around the date of the member’s voluntary termination) indicate CRM had just completed another safety analysis of the member’s operations. Some of the comments noted by CRM on its safety related prescribed forms at this time include: - “The insured has no accident investigation program in effect” - “Management is very lax when an accident occurs” - “Leadership is informal and generally ineffective” - “The Company president was not available for comment” - “Managements safety leadership needs improvement and this will be judged upon the cooperation I receive” Based on the above, most would conclude the member displayed a lackadaisical attitude towards safety, had not implemented the proper procedures related to accident investigations, and its overall safety grade would range from below average to poor. L&M seriously questions the legitimacy of CRM’s initial safety analysis as we find it highly unlikely that the member’s safety policies/procedures could have deteriorated to the extent indicated in such a short period of time (15 months). L&M believes the fact that the member was a larger member (net contributions of over $100,000 per policy year), and the significant administrative fees generated for CRM as a result, may have influenced CRM’s ability to be objective when performing its initial safety analysis. It is possible this potential lack of objectivity may have resulted in CRM intentionally preparing an erroneous initial safety assessment report to secure the excess insurer’s approval for the member’s participation.

L&M’s Overall Conclusions

Based on a lack of evidence to suggest otherwise, L&M believes the internal underwriting requirements of ELITE were established by CRM with no input from the Trustees. This is consistent with our findings on two other CRM trusts on which we performed similar forensic engagements.

At least two of the minimum underwriting guidelines used by ELITE were deemed aggressive when compared to industry standards, including the maximum experience modification factor and the maximum loss ratio.

We could not obtain evidence to indicate the Trustees formally approved applicants that did not meet the minimum underwriting guidelines of the Trust. Trustee approval of substandard applicants was required under Section VII of the Trust document.

The prescribed forms used by CRM for the initial and renewal underwriting of members would often (1) be incomplete, (2) contain unanswered queries, (3) incorporate unexplained handwritten revisions, (4) not be consistently approved by management as required by CRM’s internal quality control standards, and (5) fail to indicate the

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justification for admitting a member who violated one or more of ELITE’s underwriting guidelines.

The 32% factor used by CRM to estimate non-claim expenses to calculate member profitability was 20 to 22 percentage points lower than that calculated by L&M. The use of this inadequate expense factor may have led to inaccurate decisions regarding member discounts and retention.

The $19.57 million estimated deficiency of contributions over losses and other direct expenses (exclusive of any allocated IBNR and benefit from aggregate excess insurance recoveries) generated by whom L&M believes to be the twelve poorest performing members of the Trust is approximately 36.3% of ELITE’s total comparable September 30, 2010 deficit. Eight of these twelve poor performing members were continuously renewed and remained in ELITE through March 31, 2008, often with discounted contributions, despite their strain on the overall financial condition of the Trust. Of the four members who left before March 31, 2008, the GSI-3.1 forms indicate that two were cancelled for non-payment of contributions, one for underwriting reasons, and one left voluntarily.

Numerous members may have entered the Trust without meeting the minimum underwriting guidelines in effect at the time of their admittance. Participation of members that L&M believes failed to meet the homogeneity guidelines (SIC and/or predominant payroll codes) established for ELITE negatively affected its financial position by generating a deficit of approximately $876,000 on a combined basis. L&M estimates CRM received approximately $1.36 million in administrative fees as a result of these members’ participation in ELITE.

L&M noted several instances when the EMFs used to invoice members were lower than the documented EMFs, and 3,200 instances when the same EMF was used for two to seven consecutive years. These perceived improper billing practices may have reduced the overall net contribution income that ELITE would have otherwise received.

CRM’s failure to consistently enforce the maximum EMF provisions contained in the underwriting guidelines allowed substandard members to participate in ELITE and adversely affected the ongoing financial viability of the Trust.

CRM’s apparent overriding desire to increase membership and related contribution revenue often far outstripped the best practice of properly using a conventional analysis of a member’s historical losses as part of its underwriting processes. We believe CRM’s admission and continuous renewal of many members with loss ratios exceeding the maximums allowable per the underwriting guidelines (70%/75%) contributed to ELITE’s deficit.

L&M believes a fair summary of the 2008 discussion between a member of Midlands’ management and the WCB is that the Midlands’ representative believes (1) CRM’s thirst for additional member contribution revenue precipitated the admittance of substandard/risky members, (2) the loss ratio(s) of the members within the CRM trusts had increased dramatically as a result of this practice and negatively effected the Trusts’ reserves and, (3) the Hickeys’ (CRM) greed forced them to abandon normal and proper administrative/underwriting procedures to obtain additional cash flows for its trusts.

ELITE’s admittance of financially substandard members and its inability to collect contributions due also adversely affected the financial viability of the Trust. ELITE’s bad debt charge-offs (uncollected member contributions) totaling $3,076,000 are deemed by L&M to be excessive since they were nearly three times higher (on a percentage of contributions basis) than that of two other trusts that insured commercial (for profit) entities that we performed similar forensic engagements on. L&M believes CRM’s

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failure to obtain and/or limit membership based on the results of the D&B reports required under the underwriting guidelines contributed to the significant uncollectible contributions.

The participation of nine members with demolition operations, which violated the Trust’s internal underwriting guidelines and whom L&M believes were specifically excluded under certain excess insurer underwriting guidelines, adversely affected the financial viability of ELITE by generating an estimated deficiency of contributions over losses and other estimated direct expenses of over $6 million. L&M estimates CRM received approximately $1.19 million in administrative fees as a result of these nine members’ participation in ELITE.

The fact that only 11% of member terminations prior to March 31, 2008 were for failure to maintain minimum underwriting standards lends additional support to our belief that CRM neglected to effectively terminate poor performing members.

CRM consistently refrained from terminating large poor performing members and may have prepared the GSI-3.1 forms to indicate 52 members were terminated for underwriting reasons on March 31, 2008 in an attempt to increase both the overall number of participants and the number of large poor performing members it had terminated over the entire life of ELITE for underwriting reasons.

The use of potentially imprudent underwriting guidelines and improper member admittance/termination decisions contributed greatly to the financial deterioration of the Trust.

8. Discounts Introduction The success of a workers’ compensation self-insured group insurance trust hinges on its ability to attract and maintain members with low loss rates. Due to the extreme competitive nature of the marketplace, premium discounts were and are still used in combination with other incentives to recruit new members. Prudent business practice suggests that the range of discounts extended to individual members be a function of overall member quality, including individual loss histories, EMFs, and the insured’s cooperation with the safety and other loss prevention programs promulgated by the trust. L&M could not determine if CRM had a prescribed methodology in place to determine individual member discounts since we did not locate documents to illustrate how member discounts had been determined, and we were unable to interview CRM officials. Evidence noted in marketing materials used by the Trust and information extracted from Trustee meeting minutes suggests that offering initial and continuing discounts was one of the primary methods used by CRM to entice potential members to join and remain in ELITE. In the early stages of a trust’s existence, prudent business practice suggests the marketing of competitive discounts with the potential for members to earn dividends in later years based on the overall financial performance of the fund. This approach is logical since it creates a buffer for the vast amount of unknowns, including lack of claims history, loss development, investment returns, and member growth rates for the trust. ELITE’s Trust document states “a participating member shall make contributions to the Trust in cash and securities as is computed and required (by) the Board of Trustees or Administrator sufficient to secure their liability to pay the compensation provided for in New York State Workers’

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Compensation Law.” Similarly, Section 317.7(a) of the NYCRR, effective January 31, 2001, addresses member contribution rates by stating “the contribution rates utilized by a group self-insurer shall not be inadequate, unfairly discriminatory, destructive of competition or detrimental to the solvency of a group.” The Service Agreement is silent relative to rate setting responsibilities. L&M’s inspection of documents suggests that CRM assumed the responsibility to assign member discounts and, as noted below, had generally kept the Trustees apprised of the range of discounts offered. Our inspection of available Trustee meeting minutes and other documents contained limited information regarding the methodology followed by CRM to determine and assign individual member discounts. L&M believes ELITE’s member discounts (predominantly involving new members) were restricted as a result of directives from the WCB during the period February 11, 2002 through January 22, 2003. L&M believes that ELITE failed to comply with certain of the directives and have detailed the testing performed to support our conclusion in report section “Corrective Action Plans.” Standard discounts and other contribution credits (“premium”, “construction class” and “payroll limitation”) offered by the Trust, when combined, resulted in some members receiving discounts as high as 60% in the early years of the Trust. In addition, selected members had their payroll “capped”, which effectively amounted to an additional contribution discount. The WCB stated very clearly in the following notation included in the Trust’s 2004 and 2005 Level I reviews (dated March 16, 2005 and June 15, 2006) that ELITE should discontinue the use of payroll caps: “Minutes submitted as required by the WCB, refer to the possible use of payroll caps. The WCB is not in the practice of allowing the imposition of payroll caps when computing member’s contribution. If this was implemented, the use of payroll caps by this trust should be eliminated.” L&M believes that CRM continued to use payroll caps for selected members after the WCB instructed CRM to discontinue that practice. L&M reviewed the payroll audits for the 35 members that had a manual contribution exceeding $150,000 for any of the policy years ended in 2005 – 2008, and determined that five of these members had their payroll capped for each of the three policy years ended 2006-2008. L&M calculated that ELITE’s contribution revenue was reduced by $1.99 million as a result of CRM allowing payroll caps for these five members during the three year period April 1, 2005 through March 31, 2008. One of the five members was a Trustee member company who L&M believes generated the 11th biggest loss for the Trust. None of the other Trustee member companies who participated in ELITE during that three year period appear to have had their payroll capped. ELITE was similar to other CRM trusts in that it initially offered what many would consider exceptional policy pricing incentives to entice members to join. Accordingly, L&M believes the standard discounts offered over the life of ELITE were somewhat consistent with some or all of the other CRM administered Trusts. In addition to discounts being discussed somewhat regularly at Trustee meetings, L&M believes ELITE’s Trustees were occasionally provided with CRM prepared “Manual Contribution Reports” that included discounts by member and a calculation of the weighted average discount at the time of printing. L&M located several of these reports in the Board of Trustee meeting binders referred to above in report section “Trust Formation and Ongoing Operations.” In general, it appears CRM kept the Trustees informed of both average and specific discounts ELITE’s members received. As previously stated, we were unsuccessful in our repeated attempts to interview ELITE’s Trustees. As a result, we were unable to obtain the Trustees’ perspective on the rationale used by CRM to assign member discounts or determine if the Trustees had any input on the selection of member discounts.

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L&M uncovered what can be described as a “founding member discount” on another CRM administered trust as a result of similar forensic accounting procedures performed on that trust. This discount was alluded to in an interview with one of that trust’s Trustees. This additional discount was allocated solely to the initial members of that trust (all Trustee companies) since they had all been deemed entitled to receive a higher discount than all other members as a result of this distinction. Table 5, later in this report section, indicates that ELITE’s Trustees may have received similar preferential treatment. Trustee Meeting Minutes and Analysis thereof Some statements made (all but one from CRM representatives) at Board of Trustee meetings relative to discounts or contribution rates are listed below.

December 5, 2002 - “Smaller contractors are written at 6%.” December 5, 2002 – “Small accounts that are written at 6% brought the average discount

down.” December 5, 2002 – “Renewed at 15%, it should have been 25%, funded 2.2 million that

didn’t have to.” This statement appears to have been made by a representative of ELITE’s Marketing Broker.

December 4, 2003 – “We are missing the boat on larger risks because we do not cap payroll, not getting spread, not competitive enough downstate.”

December 4, 2003 – “Capping payroll can be done on a case by case basis.” June 2, 2004 – “State Fund Limitation Program – Down to $750 per week, CRM is trying to

devise a plan to be competitive with this program and still maintain our underwriting integrity, we will use a payroll limitation credit – this will be simpler than the state fund program.”

June 2, 2004 –“Simplify recordkeeping for employers, we won’t increase audit costs, account must provide us with most recent audit and determine average weekly wage, if average weekly wage is over $1,250 we will consider it for the payroll limitation program, we will manage this program on an account by account basis, we are informing brokers of this program.”

December 2, 2004 – “The Underwriting Department is looking at each account and making sure mod and discount relate.”

June 8, 2005 – “Weighted average discount is 14.6%.” December 1, 2005 – “Weighted average discounts is 13%.” December 7, 2006 – “12.5% weighted average discount.” June 5, 2007 – “Average discount at 12%.” December 6, 2007 - “Will be able to move forward with a weighted average discount of 14%

with new rate cut.” December 6, 2007 - “WAD (weighted average discount) is 13% can go to 25% but are not.”

L&M analyzed various data to determine the accuracy of certain statements made at the Trustee meetings detailed above and have formulated the following observations as a result:

The two statements made at the December 5, 2002 meeting insinuating that smaller members were generally only offered 6% discounts are unsupported by the statistics generated as a result of our compilation and analysis of member billing information. We noted no specific member with a 6% discount for the policy period that began October 1, 2002, and we calculated the average and weighted average discount for that policy period to be 5.5% and 15.1%, respectively.

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The statement made at the December 5, 2002 meeting indicating a renewal discount rate of 15% (assumed to be weighted average) appears reasonable as it corresponds to the weighted average calculated by L&M for the policy period ended March 31, 2003 in Table 5 that follows. ELITE was operating under an MOU on the date of this Trustee meeting that limited the weighted average discount to 18%.

Four statements were made at the December 4, 2003 and June 2, 2004 meetings relating to “payroll caps”, “payroll limitation credits” and “payroll limitation programs.” Our member billing review uncovered that selected members received these or other uniquely named credits in addition to the standard discount offered all members. For example, L&M determined that at least 14 members (includes 3 Trustee member companies) for the policy period ended September 30, 2000, 7 members (includes 1 Trustee member company) for the policy period ended September 30, 2001, and 7 members for the policy period ended March 31, 2006 received some form of an additional credit. We also located evidence in the member files that CRM provided a payroll cap to selected members. It appears the availability of a payroll cap was eliminated for the vast majority of ELITE’s members, effective April 1, 2003, however evidence suggests it remained available to certain Trustees and other members subsequent to that date.

Similar to the standard member discount, the additional credits were direct reductions from the member contribution ultimately due and listed as a separate line item on member invoices. In general, it appears only larger members that had received any of these on their previous year’s policy or had their agents inquire about the availability of any additional discounts/credits were given an opportunity to qualify for and potentially receive any of these non-standard credits or the payroll cap. We believe the total dollar amount of additional credits granted to members of ELITE over the lifetime of the Trust amounts to approximately $500,000.

We dispute the accuracy of the statement made at the December 2, 2004 Trustee meeting that CRM’s “Underwriting Department is looking at each account and making sure mod and discount relate.” It is important to note that while the excessive contribution discounts granted to certain of ELITE’s members was detrimental to the financial status of the Trust, they did not reduce the administrative fee payable to CRM since its fee was based on manual (not adjusted) contribution amounts. Two individuals with considerable experience in the group self-insured trust field and FCS Administrators, Inc. informed L&M that they do not consider it normal for a group self-insured trust to pay an administrative fee based on manual contribution revenue.

In order to investigate the validity of this statement, we sorted all the “mods” (Experience Modification Factors/EMFs) of 1.0 and above and the related discount by member for the policy periods ended March 31, 2005 and 2006. Experience Modification Factors and their relation to member underwriting are discussed in detail in report section “Underwriting, Including Renewal Process.” Table 4 that follows provides statistics supporting our opinion that CRM failed to properly correlate EMFs to discounts for all members:

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Table 4:

1.0 & 1.10 1.11 & 1.20 1.21 & 1.30 Over 1.30Policy period ended 3/31/05:

High 36% 25% 25% 15%Low (10%) (9%) (20%) 0%

Average 8% 5% 7% 4%Member Count 58 28 12 7

Policy period ended 3/31/06:High 36% 20% 25% 5%Low (10%) 0% (7.5%) 0%

Average 9% 5% 6% 2%Member Count 55 23 5 3

Range of and average discounts (surcharges) for EMFs between:

L&M would have expected a much smaller range of discounts/surcharges within each EMF classification and a decline in average discounts as EMFs increased. Based on the above, the average discount actually increased as EMFs rose from the 1.11-1.20 to the 1.21-1.30 range. This discount increase is counterintuitive since the larger the EMF, the more unfavorable a member’s past loss history is when compared to an industry average. Based on the above and the specific example cited in the next sentence, it appears CRM exercised great freedom when determining the amount of discount to grant similar quality members. For example, we noted two members in 2005 with substantially identical EMFs of 1.24 and 1.23 who were treated significantly differently; the first member received a 20% discount and the second was surcharged 20%. CRM’s Profile Sheets for 2005 and 2006 listed maximum allowable EMFs as 1.20. Table 4 above indicates 27 instances where members participated during those policy periods despite having EMFs that exceeded CRM’s established maximum. It is unclear how CRM justified these members’ continued participation in ELITE. We discussed the assignment of member discounts with a member of NCAComp’s executive management. This individual stated that even though his company does not specifically use member EMFs to determine discounts for its trusts’ members, the methodology of using EMFs, if properly and consistently applied, is logical and a reasonable industry practice. An example was then provided to L&M displaying how his company would have applied an EMF based discount methodology to all of ELITE’s members (regardless of size) had it been the administrator of ELITE during its active years. The example assigned member discounts (surcharges) as follows: (1) members with an EMF below .90 would be given a 10% discount, (2) members with an EMF between .91 and 1.0 would be given a 5% discount, (3) members with an EMF between 1.01 and 1.10 would receive no discount, and (4) members with an EMF between 1.11 and 1.20 would be surcharged 5%. Evidence suggests that CRM often determined discounts/surcharges as a function of pressure exerted on it by members’ agents/brokers as well as its own internal desire to maintain or potentially increase its administrative fees. Increased discounts as a result of negotiations between members and/or their agents are discussed later in this report section. Our file and document inspections failed to produce a written document which equated a range of member discounts to member EMFs, loss ratios and/or any other risk based metric (or combination thereof). In our opinion, it is evident CRM failed to consistently follow a

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philosophy that made sure “mod and discount relate” by decreasing discounts (or increasing surcharges) for all members’ who’s EMF had increased.

The last six bullet points on page 80 mention average discounts of ELITE’s members as of specific dates and a projected future average. Our comparison of the averages cited in these bullet points was fairly consistent to the weighted averages we calculated in Table 5, below.

The following can be concluded from the above:

Some of the statements made at the Board of Trustees meetings are inconsistent with our findings;

CRM was generally cognizant of the policy pricing techniques used by its competition and strived to offer the lowest overall contribution rate to both prospective and existing members;

On at least one occasion, the minutes alluded to the notion that the assignment of discounts was based on member quality. However, L&M believes CRM did not consistently use a logical systematic philosophy to determine discounts, and as a result, many member discounts appear excessive since they were arbitrarily assigned without strict regard to individual member attributes. This methodology contributed to the financial deterioration of the Trust;

CRM exercised considerable freedoms when setting individual member discounts; The importance of discounts to current and prospective members and their impact on the

financial condition of the Trust represented an ongoing dilemma for CRM and the Trustees. Member Discount (Surcharge) Statistics and Analysis Thereof Table 5 that follows provides discount related statistics compiled from our assembly of the final invoices or other alternative billing information for all members by policy period:

Table 5:

# of # of Non-Trustee Trustee

Members Members Minimum Weighted Average With With Discount % Number Average Discount % Average

Policy Discount Discount Max. (Maximum of Discount % for all Discount %Period of 25% of 25% Disc. % Surcharge) Members for all Non-Trustee for TrusteeEnded or More or More Noted* Noted Surcharged Members** Members Members9/00 65 of 84 6 of 6 60 15 None 41.6 39.3 42.59/01 134 of 224 6 of 6 60 (30) 4 37.7 28.0 40.59/02 113 of 924 5 of 6 40 (30) 10 24.0 8.1 33.33/03 48 of 1005 4 of 5 35 (30) 10 15.1 5.5 29.03/04 82 of 925 5 of 5 35 (107) 9 16.1 6.2 29.03/05 30 of 895 4 of 5 38 (93) 11 14.1 6.1 30.03/06 32 of 985 4 of 5 38 (20) 6 14.5 6.1 29.03/07 19 of 1155 4 of 5 35 (20) 10 13.6 5.8 28.03/08 18 of 1245 4 of 5 43 (10) 8 13.3 5.4 28.0

*Inclusive of generic premium, payroll limitation and/or construction class premium credits**Calculated using member contributions based on manual rates

Based on the statistics in the table above, it appears:

Member discounts (inclusive of premium, payroll limitation, and construction class credits) ranged from 0% to 60%, and certain poor performing members were surcharged from 10% to 107% during 2001 – 2008. We asked an individual with considerable experience in the group self-insured trust field for his opinion about discounts at or exceeding 30% and were informed “There is no possible justification for such a discount. It is affront to every other

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trust participant.” We also asked FCS for its opinion regarding the reasonableness of the discounts granted ELITE’s members and were informed “40% is ridiculous and unheard of. Any discount above 15% is excessive.” FCS stated that contractors had unique risks including an above average use of family member employees and independent contractor issues.

Selected members received discounts (inclusive of premium, payroll limitation, and construction class credits) of 60% in the first and second year of ELITE’s operations; while discounts at that level were entirely eliminated for the 2002 billing period and thereafter;

The number of members surcharged each year ranged from none to eleven; The average discounts provided Trustee member companies exceeded the average to non-

Trustee member companies each period, with the spread being in excess of twenty percentage points for each policy period during 2002 - 2008;

The average discount offered Trustee member companies only decreased by 7 percentage points from the 2001 to 2002 policy period, while the average discounts offered to non-Trustee member companies decreased by nearly 20 percentage points. For the 2002 – 2008 policy periods, the average discount provided the Trustee members was approximately five times that provided to non-Trustee members. Based on this data and the information provided in the bullet point directly above, it appears ELITE’s Trustee member companies may have received preferential treatment in regards to discounts. L&M notes that this apparent preferential treatment may be considered unfairly discriminatory pursuant to Section 317.7(a) of the NYCRR, effective January 31, 2001.

The weighted average discount percentage far exceeds the normal (un-weighted) average in all but the initial year of the Trust’s existence. This statistic indicates that larger members were provided with higher discounts than the smaller members of the Trust. We calculated the weighted average discount for the 250 smallest members in ELITE for the policy period ended March 31, 2004 as being only 1.4% as compared to 16.1% for the entire membership. While these statistics may not provide concrete proof that CRM intentionally and always provided preferential pricing to the larger members of ELITE, it does provide evidence that a member’s contribution size played at least some role in the determination of the discount granted. Similarly to the larger discounts offered to Trustee member companies, this apparent preferential treatment may be considered unfairly discriminatory pursuant to Section 317.7(a) of the NYCRR, effective January 31, 2001. L&M believes CRM’s administration fee being a product of contribution revenue may have stimulated this type of behavior since it was in CRM’s best interest to retain large members.

L&M inspected the member files for several members that had been surcharged in one or more years to recover documents indentifying the reason(s) behind the surcharge and how the percentage had been determined. The documentation located suggests:

The application of a surcharge appeared logical for reasons including high loss ratios in year(s) prior to entering or occurring during the member’s participation in ELITE, observations from CRM’s loss control representatives related to significant member risk, and overall conclusions by CRM regarding risks inherent in certain member’s operations;

The surcharge percentages appeared to have been selected haphazardly whereby no formal mechanical calculation was performed. This is evidenced by the fact that the surcharges were often in increments of five percentage points, meaning they were 5%, 10%, 20%, and so forth. Additionally, the percentage was simply listed on an underwriting related document with comments such as (1) “Apply 10% Debit”, (2) “Debit - 10%” and (3) “Keep debit at 20%.”

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Analysis of Members with Largest Estimated Deficiency of Contributions over Losses and Other Estimated Direct Expenses Below are the EMFs and discounts provided to five of the members with the largest estimated deficiency of contributions over losses and other direct expenses as per Table 3: Table 6:

Disc. Disc. Disc. Disc. Disc. Disc. Disc. Disc. Disc.

Member (Sur.) EMF (Sur.) EMF (Sur.) EMF (Sur.) EMF (Sur.) EMF (Sur.) EMF (Sur.) EMF (Sur.) EMF (Sur.) EMFB 40% 1.43 (10%) 1.43 (10%) 1.00 (10%) 1.00 (10%) 0.88 (10%) 1.04 7% 1.06 10% 0.97

D (25%) 1.89 (25%) 1.89 (20%) 1.23 (20%) 1.23 (20%) 1.23 (20%) 0.94 (20%) 0.95 (10%) 1.29

G 40% 0.86 35% 0.90 35% 0.84 25% 1.00 25% 1.01 22% 0.90 20% 0.83

J 0% 1.00 10% 1.00 10% 1.00 10% 1.00 10% 0.90 K* 40% 0.89 40% 0.93 35% 0.94 30% 1.01 30% 1.01 35% 0.99 30% 0.99 30% 0.83 30% 0.82

*Trustee Member Company

|--------------------------------------------------Contribution Year Beginning in-----------------------------------------------------|1999 2000 20072005 20062003 20042001 2002

Table 6 indicates that two out of five of these members received discounts, some of which L&M deems excessive, for all years they had participated in the Trust. It should be noted that one of the two that received a discount for all years of its membership was a Trustee member company. The table also reveals the following:

Three of the five members received a 40% discount in their first year of membership; Members B and D were admitted despite having EMFs in excess of the maximum of 1.25

allowable under CRM’s internal underwriting guidelines. L&M failed to locate documents in the member file that discussed the member’s poor EMFs and the logic ultimately used by CRM to justify their admission to ELITE;

Even though Members B and D were admitted in the same year with reasonably similar (poor) EMF’s, the fact that their contributions were discounted/surcharged so dramatically different by CRM (65% spread between the two) exemplifies the freedom used by CRM when it assigned discounts/surcharges to individual members. It is problematic that Member B was admitted to the Trust with excessively discounted (not surcharged) contributions. Additionally, in 2005 despite all five members having EMFs in a relatively tight range of each other (.94 - 1.04), the discounts/surcharges applied to the individual members varied by 50 percentage points. Based on the above and the considerable range of EMF’s and discounts present in the table, it is evident CRM did not use EMF’s in any logical/rational fashion to determine the discounts/surcharges it applied to individual members;

Trustee member company K received a discount of 30% or more over its entire period of participation.

L&M cautions that EMFs are generally considered lagging indicators and are the product of a detailed computation that includes many variables, and are only as accurate as the inputs used. Conversely, yearly loss ratios are a straight forward computation whereby yearly losses (paid and estimated amounts to be paid) for a member are divided by member contributions for the year and present a snapshot of a member’s current profitability and possible trends. It is noted in report section “Claims Handling Procedures/Practices” that KBM Management, Inc. (the licensed employment benefit and risk management company contracted by L&M to perform the claims review) stated both CRM and FCS had employed the practice of step-reserving which resulted in the underreporting of claims related expenses and liabilities. Inadequate claims reserving practices is

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also discussed in report section “Establishment of Yearly Reserves on the Balance Sheet.” Claims expense is a factor in the calculation of both the EMF and the yearly loss ratios, and as a result, L&M questions the accuracy of both of these fundamental tools used by CRM in the underwriting and billing processes for the Trust. L&M was able to obtain certain loss analysis reports and other loss related data as of September 30, 2010 and various dates during the periods Members D, G, and K participated in ELITE. We were unable to locate complete sets of loss analysis reports for any of these members. As noted in the report section “Underwriting, Including Renewal Process”, CRM’s internal underwriting guidelines indicated that members with loss ratios over a certain percentage (70% or 75%) were subject to special underwriting reviews. The loss analysis reports we were able to locate indicate that Members G and K had loss ratios for at least two contribution years that were in excess of these maximums. We located an incomplete version of a 4 year loss analysis prepared by CRM at the time of Member D’s first renewal that included the handwritten note “prior year loss runs incomplete & out of date (payments only/no incurred position).” L&M could not locate documents in Member D’s file that included its loss ratio at the date of its admittance. L&M is puzzled as to how CRM initially underwrote the member without this mandatory information. Based on the size of Member D’s EMF at admittance (1.89), L&M suspects its loss ratio at admittance far exceeded the 70% maximum allowable on the date of its admission under CRM’s internal underwriting guidelines. As a result, L&M believes Member D was admitted despite breaching the maximum loss ratio underwriting guideline that was in effect on the date of its admission. Discount and loss data for members D, G, and K are as follows: Table 7:

ComparableLoss Ratio Amount

Reported by Discount % Cumulative of CumulativeCRM for (Surcharge %) Discount Incurred Losses Incurred Losses

Year Ratio Provided in Discount % (Surcharge) Discount Prior to Breach Prior to BreachExceeded Year Maximum Applied in Provided Provided in per CRM per NCACompMaximum Loss Ratio was Subsequent in year Subsequent Loss Summary Loss Summary

Member Allowed Breached Year breached Year Report* Report (9/30/10)D** 102% (10%) N/A ($59,031) N/A $1,449,874 $2,626,093G 126% 35% 25% $18,407 $34,453 $184,388 $209,482K (Trustee) 95% 35% 30% $54,796 $45,403 $657,831 $1,710,420

* Losses were from various periods of time, usually 3 or 4 years. Some reports included partial years.

**Member participated in ELITE for 7 years and did not breach the maximum loss ratio until early 2008 based on CRM Loss Summary Reports located by L&M in member's file.

The following can be concluded from Table 7: The extreme discrepancies between the losses on the CRM Loss Summary Reports and

comparable amounts per NCAComp for Members D and K are specific examples that support L&M’s prior conclusion that CRM may have often used inaccurate data to assess member performance. The cumulative losses estimated by NCAComp as of September 30, 2010 for Members’ D and K on Table 7 are 1.8 and 2.6 times higher, respectively, than the comparable amounts used by CRM to evaluate these members during the policy renewal process. The process to initially establish and subsequently adjust individual claims reserves involves estimates and is inherently imprecise; however L&M believes differences as

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significant as these call into question the reserving methodology used by CRM and if whether the recordation of deficient claims reserves was deliberate. Additionally, as noted in report section “Establishment of Yearly Reserves on the Balance Sheet”, NCAComp increased the total estimated losses by 50% from what CRM estimated as of August 31, 2008. This also supports our overall conclusion that CRM under-reserved for claims and claims related expenses which may have led to the use of inaccurate statistics to review member performance.

Members G and K continued to receive significant contribution discounts in the year that followed a breach of the maximum loss ratio set forth in CRM’s internal underwriting guidelines.

The dollar amount of discounts and surcharges assigned to certain larger members were significant and had a material effect on the financial performance of ELITE.

Other Significant Information Pertaining to Discounts Provided to ELITE’s Members

Our document and file inspections uncovered the following additional information we consider noteworthy relative to the discounts provided to ELITE’s members:

We obtained evidence that numerous members had received a higher discount as a result of negotiations between their agents/brokers and CRM. While we observed two instances where CRM refused to succumb to the pressure of a member’s broker/agent to increase a discount, this action appears to be more an exception than the rule. The rationale cited on the correspondence between the agents/brokers and CRM that supported the request for an increase in discount varied widely but would often mention the low losses (sometimes zero) of the member. Other reasons noted by L&M include: - need to remain competitive with various named commercial carriers and/or the New

York State Insurance Fund; - to partially offset the New York State Assessment surcharge billed to the member; - notion that member’s management was starting a new company, which may also become

a member of a CRM trust, thereby generating additional member contributions (and associated administration fees for CRM);

- lower EMF than the previous year.

While L&M understands the competitive nature of the marketplace and that certain of the discount increases may have been justified, we question those provided to offset the New York State surcharge and as result of the member’s broker/agent tempting CRM with the potential for additional revenue from a new related party member. Granting a larger discount to offset the surcharge imposed on all members is counterproductive and defeats the whole purpose of the surcharge, while the potential for an additional member and its associated revenue is insufficient by and of itself to justify an increase in the referring member’s discount.

L&M notes that one of the members that received a higher discount as a result of negotiations between its broker/agent continued to receive this higher than average discount even after a large claim was filed by one of its employees in 2005. This member’s contributions totaled $114,692, while its total incurred losses amounted to $173,500 (estimated as of 7/31/10 per NCAComp’s loss run). This member’s participation in ELITE cost the remaining members in excess of $58,000 (prior to any allocation of other direct expenses, IBNR and aggregate excess insurance recoveries) and generated $24,700 in administrative service fees for CRM.

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Our inspection of a large member file (total contributions of over $2.1 million) indicated that despite having a year-to-date loss ratio of 112% for the policy year ended in 2006, CRM bowed to the pressure of the member’s agent and increased the discount provided at renewal from 15% to 20%. An internal CRM E-mail dated approximately three months prior to the renewal date of the policy of April 1, 2006 stated that (1) the member had not cooperated with safety recommendations made, (2) the year-to-date loss ratio was 112% and the overall (cumulative) loss ratio was 31%, and (3) the tentative discount had been decreased from 15% to 12% as a result of these factors. The 8% increase in discount (12% to 20%) granted the member amounted to approximately $26,500. Later in the e-mail, the author (a CRM underwriter) stated that the discount could be increased due to the member’s premium size; pending compliance with the safety related directives previously provided by CRM’s loss control department. Another E-mail from the same day discussed the risk of the account leaving for another self-insured group and the member’s agent’s desire for an increase in the discount. Being that the member was uncooperative and performing poorly, L&M questions the logic used by CRM to justify increasing the discount. In our opinion, this type of behavior further exemplifies CRM’s thirst for larger contribution accounts and its willingness to ignore both its own internal underwriting guidelines and common sense to attract and/or retain such members.

For its first contribution year, one member had significantly different discount/surcharge percentages recorded on the various documents within its member file. This member is designated as Member B in Tables 3 and 6. Based on internal CRM correspondence, correspondence between CRM and the member’s broker, and other documents located in the member file, it appears a quote/declaration had been issued using a 15% surcharge and a deposit paid by the member to CRM based on the amounts per that invoice. However, numerous other documents present in the file indicate a discount of 40% was ultimately used by CRM on the final invoice to the member after the annual payroll audit had been completed. We were unable to locate any documents in the member file that explained the progression from the contribution surcharge originally quoted to the discount ultimately granted. The reduction in the net contribution received by ELITE as a result of this 55% swing in discount/surcharge percentage amounts to $276,000. We contacted the member’s company’s office manager and were informed that she did not have any recollection of what may have transpired for that year, and that she assumes the change was a result of interaction between her company’s broker and CRM. Our attempts to contact the member’s broker to obtain additional information on this issue were unsuccessful. We are not aware of any circumstance that could possibly justify such a large fluctuation in discount/surcharge for a member in a single year, and as a result, are suspicious of the motivation supporting the change.

L&M’s Conclusions Member discounts (inclusive of premium, payroll limitation, and construction class credits)

ranged from 0% to 60% and certain poor performing members were surcharged from 10% to 107% during 2001 – 2008. We asked an individual with considerable experience in the group self-insured trust field for his opinion about discounts at or exceeding 30% and were informed “There is no possible justification for such a discount. It is affront to every other trust participant.”

The premium, payroll limitation, and construction class credits were generally only provided to larger members that had received these on their previous year’s policy or had their agents inquire about the availability of any additional discounts/credits. L&M calculated the total amount of these additional credits to approximate $500,000.

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The Trustees were not responsible for rate setting; however, it appears CRM made an effort to keep the Trustees current on overall discounts offered.

The size of the discounts (on a percentage basis) provided to the majority of ELITE’s members in its earlier years may be considered excessive.

Some of the statements made at the Board of Trustees meetings regarding discounts are inconsistent with our findings.

CRM used considerable discretion to apply discounts and surcharges to individual members. Evidence suggests that CRM often determined discounts/surcharges as a function of pressure exerted on it by members’ agents/brokers.

Member discounts often had no correlation to the EMFs or losses incurred by the individual member. For example, we noted two members in 2005 with substantially identical EMFs of 1.24 and 1.23 who were treated significantly differently; the first member received a 20% discount and the second was surcharged 20%.

Both Trustee member companies and members with significant contributions appear to have received preferential treatment with respect to discounts as compared to the general membership of the Trust.

CRM continued to use payroll caps for selected members in spite of the WCB’s repeated directive to discontinue that practice. L&M calculated that ELITE’s contribution revenue was reduced by $1.99 million as a result of CRM allowing payroll caps for five larger sized members (one of which was a Trustee member company) during the three year period April 1, 2005 through March 31, 2008.

The 15% surcharge initially quoted to and apparently billed to and agreed to by Member B in Tables 3 and 6 for the 2000-2001 policy period was inexplicably later changed to a 40% discount to this member. This suspicious change resulted in a $276,000 reduction in ELITE’s contribution revenue for the 2001-2002 policy period.

CRM was cognizant of the policy pricing techniques used by its competition including the use of discounts, and strived to offer the lowest overall contribution rate to both prospective and existing members.

Certain members continued to receive significant contribution discounts in the year that followed a breach of the maximum loss ratio set forth in CRM’s internal underwriting guidelines.

The ratios and factors that had been used by CRM for underwriting purposes to evaluate member quality was suspect due to the inaccuracy of the underlying data used in its calculations.

9. Safety Programs The implementation of a comprehensive safety program is generally recognized in the workers’ compensation industry as a best practice for organizations to help minimize their exposure to losses. Statistics indicate that employers who take advantage of safety services obtain a reduction in workplace injuries, and for many of them, the reduction is significant. Section 317.4(2) of the NYCRR (effective January 31, 2001) requires “new” self-insured employer groups to provide the WCB’s chair with a description of the safety program, if any, for the Trust. The WCB informed us that it has no record of receiving a description of ELITE’s safety program from CRM or the Trustees; most likely a result of the Trust being formed prior to January 31, 2001.

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The Trust document states “Upon admission to the Trust, the Administrator, or Administrator’s duly qualified sub-contractor, shall administer all Worker’s Compensation claims and provide Risk Management Services on behalf of the participating employer.” The amendments to the Trust document, Bylaws (“Sample Trust” version), and Joinder and Indemnification Agreement were all silent with regard to responsibilities for risk management, loss control, and other programs such as site visits to discuss claims and recommend corrective safety measures. Based on the above, it appears CRM was solely responsible for the administration of the safety programs of the Trust. Our inspection of available Trustee meeting minutes uncovered the following noteworthy items related to member safety policies and procedures:

December 5, 2002: It is stated that loss control is “performing well”, a CD (compact disc) regarding safety was sent to all members, and CRM was to perform free training for ELITE’s members on a regional basis. A Trustee (Patrick Murphy) indicates an inspection had not been done at his company for over a year. An individual from CRM states he will follow up with the Trustee on this deficiency. Statements are made that (1) small contractor’s loss experience is great (deemed by L&M to mean a positive for the Trust/much better than the average member’s loss experience), (2) they (CRM) are very concerned that exposure listed by brokers on smaller accounts may not be accurate, and (3) smaller members not meeting certain criteria will be contacted and inspected in approximately 45 days. As noted in report section, “Underwriting, Including Renewal Process”, L&M believes many of the smaller members were detrimental to the ongoing financial stability of ELITE.

June 2, 2004: Statement is made that “we will continue to conduct phone surveys.” L&M frequently noted instances when CRM’s loss control department engaged in phone conversations with members to discuss claims and various other aspects of its business operations. As a result of these conversations, it appears CRM would occasionally complete all or some of the safety/loss control documents noted in Appendix 22. CRM informed the Trustees that over 470 service (safety) visits were made, including 430 to job sites. The period of time during which these visits were purported to have occurred is not included in the minutes. As discussed later in this report section, evidence suggests the number of safety visits actually performed on many members is below the quantity deemed necessary per CRM’s own service plan for the member. The following statements are made, “We would like the program to run at the 3.5 range (loss control report card score)”, “The 3.1 range is driven by the smaller contractors”, and “We have an informal but adequate safety program for smaller accounts.” The “loss control report card score”, hereinafter referred to as the “Member Safety Report Card Rating” is discussed in more detail later in this report section. It appears CRM’s overall opinion of ELITE’s smaller members may have diminished since the December 2, 2002 meeting due to poor safety scores and/or other substandard statistics. L&M questions why CRM would not have instituted a formal safety program for ELITE’s smaller members since it knew these members, as a whole, were performing poorly.

December 4, 2004: It was stated that loss control newsletters would be sent out on a quarterly basis to members. L&M obtained five unique loss control newsletters from binders that had been provided to the Trustees at meetings. The newsletters we obtained were dated March 2005, July 2005, October 2005, December 2005, and March 2006. The newsletters contained general safety tips and advice such as working with electric tools and hazardous materials, preventing slips, trips and falls, and ladder safety. We did not locate any newsletters in the member files or in any of the other materials inspected. As a part of our overall forensic procedures, we interviewed ten members. Only three of these members

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remembered receiving these quarterly newsletters. Thus, it is unclear if CRM distributed the newsletters to all members or how long the distribution may have occurred.

June 8, 2005: It is stated that 425 loss control (safety) visits were made during the period 4/1/04 – 3/31/05 averaging 5 hours each (total of 2,125 hours) amounting to a total value to ELITE of $318,750. Being that member loss control services were part of the services to be provided by CRM in return for its standard administration fee, the dollar value assigned the service ($318,750) appears to have been an attempt by CRM to boast about the intrinsic/true value of this particular service to ELITE’s Trustees.

December 1, 2005: Statements are made that there had been 156 hours of service and CRM had seven “safety people” on staff. The period of time the hours of service accumulated over is noted in the minutes as 1/1/05 – 6/30/05. It appears the number of hours devoted by CRM to safety visits decreased dramatically (over 85% on an annualized basis) as compared to values reported to the Trustees at the June 8, 2005 meeting. Since ELITE had over 1,000 active members on that date, L&M questions how CRM could have adequately serviced the safety needs of ELITE’s membership during this six month period by expending only 156 hours.

June 6, 2006: It is stated ELITE’s overall Member Safety Report Card Rating remained at 3.1 (same as reported to the Trustees at the June 2, 2004 meeting and considered slightly above average by CRM) and that 228 loss control (safety) visits had been made over an unspecified six month period.

December 7, 2006: Statements are made that (1) the safety program for ELITE is performing well, (2) frequency of claims has improved, (3) loss control is working closely with underwriting to put a remediation plan(s) in place for underperformers, and (4) a special edition safety newsletter addressing winter safety along with a snow thrower safety poster had been recently provided by CRM to ELITE’s members. L&M was unable to determine the nature of the remediation plan(s), which members CRM had planned to target with the plan(s), if and when the plan(s) were implemented, and their ultimate success. L&M notes that no updates of the status the remediation plan(s) were provided to the Trustees by CRM at subsequent meetings for which we obtained minutes.

June 5, 2007: It is stated ELITE’s overall Member Safety Report Card Rating remained at 3.1 (same as reported to the Trustees at the June 2, 2004 and June 6, 2006 meetings) and that 169 loss control (safety) visits were made with a total value to ELITE amounting to $126,750. The period during which these visits were purported to have occurred is not included in the minutes. L&M notes this is the final mention of the overall Member Safety Report Card Rating in the minutes we obtained. CRM’s target of an overall 3.5 rating (per the June 2, 2004 minutes) was never achieved. It is unclear how much, if at all, the slight increase in the rating that CRM had desired to achieve would have lessened the severity and/or claim frequency of ELITE’s membership, and positively impacted its financial condition. Finally, L&M finds it somewhat improbable that ELITE’s overall Member Safety Report Card rating had actually remained at 3.1 as reported by CRM to the Trustees in the minutes we obtained for the period June 2, 2004 through June 5, 2007.

December 5, 2007: It is stated 335 loss control (safety) visits had been performed, the number of visits had increased, and that the “Trust (is) performing well.” The period during which these visits were purported to have occurred is not included in the minutes. The Trustees were provided with a copy of the last safety newsletter that had apparently been provided to the membership, and were informed that another safety newsletter would be mailed to members within a few weeks.

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In summary, the minutes we obtained indicate CRM provided the Trustees with (1) an ongoing impression that ELITE’s safety and loss control programs operated reasonably well, (2) the number of safety visits it had purportedly recently performed, (3) periodic updates of the overall safety grade of ELITE’s membership, (4) information relative to purported increases in the monitoring of member safety programs, i.e. special inspections of smaller members and the development of safety related remediation plan(s), (5) the safety related educational materials it had supposedly provided ELITE’s members, i.e. safety newsletters, and (6) CRM sought to devise remediation plans for poor performing members. The minutes obtained were absent discussions of a specific member’s safety record or safety report card grade. If these discussions had occurred, it would have alerted the Trustees to those members that should have possibly been removed from the Trust. Based on the above, L&M concludes that the Trustees, though informed, did not appear to be actively involved in the development and monitoring of the overall safety policies and procedures of the Trust. As previously noted, L&M located numerous underwriting guidelines promulgated by ELITE’s excess insurance carriers, two unique versions of CRM’s internally developed underwriting guidelines, and various other documents that identified guidelines on a piecemeal basis. The excess insurer guidelines stated “It is understood that prior to binding said fund, a loss control safety program will be developed and implemented for all members that has been approved by Midlands/Clarendon/NY Magic.” We were informed by the WCB that it had never received a written description of the loss control/safety program for ELITE and could not locate an excess insurance carrier approved prototype loss control safety program; however, evidence suggests CRM had a member safety program in place in 2001 based on the number of loss control documents located in the member files from that year. We obtained what appears to be a CRM authored informational pamphlet prepared for prospective members from a member that joined another CRM administered trust on July 1, 2003. The Loss Control section within the pamphlet states “Specialized loss control training programs will be offered free of charge to members” and that members would receive “safety needs assessments” and “annual service plans.” This pamphlet also states that there will be a "heavy emphasis on training" of members in hopes to "engineer the hazard from the job." This pamphlet also listed five loss control related member documents including a Risk Analysis Summary, Service Plan, Recommendation Form, Follow up Letter, and a Member Safety Report Card. We inspected many member files for information related to the safety and loss control programs to determine implementation statistics. We concentrated our efforts on trustee member companies, members that had significant losses, and members that had poor safety report card grades. We inspected these member files for the five loss control documents previously noted. The results of these file inspections can be found in Appendix 22. Four of the members in Appendix 22 are also included in Table 3 of Section 7 of this report and are cross referenced as follows with the first designation being from Table 3 and the second from Appendix 22: A=6, B=8, D=7, K=5. As further detailed below, our inspection of the member files suggests adherence to the loss control/safety programs set forth by CRM was inconsistent at best.

The “Risk Analysis Summary” contained sections for description of operations, underwriting alerts, loss analysis, management evaluation, and concluded with an assessment of the overall risk of the member. Our member file inspections provided what we would consider general consistencies in both the comments made and conclusions reached by CRM as a result of the safety inspections. These comments and conclusions included the mention of risks inherent within the construction industry, that current management of the member was

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committed to increasing safety awareness, and overall risk of the member was average. Of the seventy eight loss control job site visits observed in the member files inspected, we were only able to locate forty eight Risk Analysis Summaries.

The “Service Plan” contained a listing of the site(s) where loss control safety visits were conducted, special attention/underwriter requests, special claims considerations, and the number of safety visits to be performed annually. We noted the special attention/underwriter request and special claims considerations sections were left blank on most of the Service Plans located in the member files that were inspected. Out of the twenty two member files inspected, only seventeen had at least one Service Plan located in the file. The Service Plans we inspected for the seventeen members indicated a range of one to six safety visits per year to be performed by CRM. For those seventeen members, we were only able to document three instances where CRM followed their Service Plan by performing the specified number of periodic visits noted in the plan. Two of these three instances when the Service Plan was followed, the Service Plan called for zero visits per year. L&M questions CRM’s decision that safety visits to certain members were not necessary. We were informed by an individual with considerable experience in the group self-insured trust field hat all members should receive safety visits, regardless of the member’s size or past loss history. It should be noted that one of the members that had zero scheduled visits per year had the 14th largest total incurred losses (approximately $1,015,000) of all members that had participated in the Trust as per a loss run report obtained by L&M dated April 2010. For purposes of our testing, we also considered telephone calls or office visits to the member as loss control site visits in regards to fulfilling the Service Plan. L&M believes, and common sense dictates, that field site visits are far superior to telephone conversations to determine compliance with applicable safety standards and/or safety related recommendations. Statistics for ELITE indicate that the majority of large dollar workers' compensation claims originated from accidents occurring at job sites. Of the documentation we observed to support 164 safety visits by CRM in the twenty two member files we inspected (see Appendix 22), only 78 were actual job site visits, while the remaining 86 “visits” were either telephone calls or visits to the member's main facilities. We also noted in all cases except one, the Service Plan was not implemented immediately upon acceptance of the member into ELITE. For eleven of the seventeen members that had Service Plans, the initial Service Plan located in the member file was dated two years or more after the member had entered the Trust. Best practices dictate the performance of a detailed analysis of all members' safety procedures prior to acceptance or shortly after admittance into the Trust. This action may have exposed the prospective/admitted members that had unsatisfactory and/or non existent safety policies, and allowed CRM to expeditiously respond to these issues. L&M noted that seven of the seventeen member files that had Service Plans included letters to the member or internal CRM correspondence indicating that a future job site visit would occur in a specified time period; however, the member files failed to contain evidence to support the occurrence of these job site visits within this specified time period. Our sample of twenty two members identified a minimum of five members that did not cooperate with CRM employees. These members failed to respond to CRM’s repeated attempts to schedule safety/site visits. One of these members that did not cooperate was Member 2, a Trustee. L&M questions (1) how CRM could have adequately evaluated the quality and implementation of these members’ safety programs (if any) without on-site evaluations, and (2) why these members were allowed to remain in the Trust.

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The “Recommendation Form” listed CRM’s recommendations to reduce injuries at member facilities and job sites. In some occasions, it appeared the member may have been mailed a self-addressed stamped envelope for the member to respond within 60 days with a report of the actions planned and/or implemented to address the recommendations. In the majority of the files inspected, we were unable to locate members’ replies to CRM’s recommendations, and in only a few cases noted evidence where CRM informed members that a report detailing the corrective actions taken/to be taken was overdue. L&M questions what appears to be a lackadaisical attitude by CRM to follow up on safety related recommendations it had made. L&M believes CRM’s lack of persistence in this core area of administration allowed certain members to continue unsafe/unsound practices and may have led to additional claims which negatively affected the ongoing financial health of ELITE.

The “Follow up Letter” highlighted a recent CRM safety visit to the member’s facilities, job site, or safety related telephone conversation. In some cases, this letter identified the date of a future visit. The letter was general in nature and appears to have included the Recommendation Form (noted above) as an attachment when mailed. We were able to locate all but five Follow up Letters identified in the member files we inspected. We noted Follow up Letters were missing for seven safety related telephone conferences or visits to the member's main facility.

The “Member Safety Report Card” was completed as a product of site visits and contained a point based rating for specific categories including management leadership, formal safety program, job safety inspections, tool box safety meetings, annual performance review, claims management, and personal protective equipment. A copy of CRM’s definitions for each of the ratings within each specific category is included in our report as Appendix 21. It appears an average rating of 3.0 was determined to be the minimum acceptable average by CRM, with an average rating of 3.5 to be the desired target for ELITE. Out of the twenty-two member files we inspected, twenty had at least one report card present. On at least one occasion, five of these members were graded as below average (poor) risks. Two of the five members that received below average (poor) risk grades improved their grade to average risk during their time in the Trust while the other three remained at below average (poor) risk ratings. These three members are identified as Members 7, 18, and 22 in Appendix 22. For the remainder of this section our reference to specific members will coincide with the member identification numbers used in Appendix 22. All report cards (total of fourteen) located for Members 7, 18, and 22 had below average (poor) risk rating. Given that CRM repeatedly acknowledged and documented the potential seriousness of Members 7, 18, and 22’s deficient safety practices, L&M questions why they were allowed to participate in ELITE for an extended period (as these members all participated for six or more years).

As noted in previous sections of this report, all six Trustees repeatedly refused our interview attempts. As detailed in report section “Member Interviews”, we conducted interviews with ten members (four are included in our Member sample in Appendix 22), and posed questions regarding the safety programs and other loss control activities that had been administered by CRM. We have highlighted some of their responses below:

None of the members indicated an initial safety inspection of their facilities as being performed prior to them entering the Trust. Nine of the members also indicated that an initial safety inspection did not occur until long after they had joined. One member indicated that an initial safety inspection occurred within the two month period subsequent to joining.

Two members indicated that either periodic safety inspections were not performed, or they were unsure if any had been performed; while two others indicated that a safety inspection

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was done only once during their entire membership period. The remaining six members noted safety inspections occurred multiple times throughout their participation in ELITE. Nine of the members received safety recommendations from CRM, but four of these nine stated CRM never followed up with them to determine if the recommendations had been implemented. The other five members noted that CRM’s practice was to follow up on recommendations during the next safety inspection. The tenth member never received any recommendations.

Seven of the members interviewed indicated they had not been provided with sample/prototype safety policies/programs promulgated by the Trust or any safety newsletters (purported to have been provided to members quarterly per the minute’s summary above). The remaining three members recalled the occasional receipt of some of these documents.

The results of the member interviews indicate that (1) safety inspections/site visits were not performed often or at all prior to being accepted for participation into the Trust, (2) subsequent safety inspections were not always performed on a regular and/or timely basis, (3) CRM’s practices to monitor member implementation of recommendations made was deficient, and (4) some members may not have been provided with the sample/prototype safety policies promulgated by the Trust or safety newsletters. We would like to highlight the following additional issues noted as result of our inspection of the selected member files:

Extreme inconsistencies were noted in the number of safety visits per year between members. Some members had numerous visits during a year, including some in excess of the number of visits required by the Service Plan, while others had none. For example, Member 5’s Service Plan indicated two visits per year, yet it had twenty-four total visits (nineteen of them being job site visits), or almost twice the required amount in an eighty seven month period. L&M questions CRM’s rationale to visit one member in excess of its Service Plan, and only visit other members such as Members 13, 16, 17, 18, 19, and 21 a total of five times on a combined basis throughout their entire time in the Trust (approximately 38 years combined).

We viewed an undated Loss Control Request form from 2007 in Member 18's file noting that a loss control report needed to be updated immediately as one had not been done since 2001. The request form stated there had been large claims for this member in the past and that a reasonable safety program existed. There was no documentation in the member file dated subsequent to this request to suggest a safety visit had occurred in response to this request.

Numerous documents authored by CRM employees noting that Trustee Pittinger, from Member 2, failed to return phone calls from CRM's safety coordinator. It appears CRM had the desire to obtain an update of previously noted safety issues and schedule a job site safety visit. Documentation in the member file suggests a full year lapsed before CRM’s safety and loss control department had successful contact with Trustee Pittinger. Four phone calls were made during this time period documenting unsuccessful attempts to make contact. L&M was unable to locate any evidence to indicate CRM had threatened this member with termination due to its lack of cooperation with CRM’s safety and loss control department. This could be indicative of (1) preferential treatment provided the Trustee and/or (2) CRM’s thirst for member contribution revenue far outweighed the use of prudent underwriting practices.

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Based on our inspection of the twenty two member files, many instances were noted where CRM employees made attempts to schedule or otherwise organize job site visits; however, members would not respond with requested information to allow for the scheduling of the visit. L&M questions why members that were so unresponsive to reasonable requests were allowed to remain in the Trust. It is possible some or all of these members may have intentionally avoided a job site visit to eliminate or at least reduce the probability that CRM would formally recognize their deficient safety procedures.

Some of CRM's Loss Control philosophies included a "heavy emphasis on training" and to "engineer the hazard from the job" by using "specialized loss control training programs." Based on our inspection of the twenty two member files, we could only document three safety training classes that occurred for members. CRM had made safety videos available and other safety information through its Website; however, we would have expected a higher frequency of actual classes if CRM truly placed such an emphasis on training.

A letter dated December 10, 2002 from CRM to the WCB stated we have "built in a safety inspection for all accounts with an experience modification factor above 1.2 prior to approval." L&M believes this letter alerted the WCB that CRM had tightened its inspection policies by making a safety inspection mandatory for all prospective members with an experience modification factor above 1.2 prior to admittance. We believe at least six members joined the Trust subsequent to the date of this letter with an experience modification above 1.2. We did not locate documentation to support these members having a safety inspection prior to their acceptance into the Trust. Four of these members had an inspection within the following two months of acceptance, while the fifth had its first safety inspection approximately eight months subsequent to joining. The sixth member was accepted into ELITE on February 1, 2008 and never received a safety inspection.

For the twenty-two members included in Appendix 22, we summarized the reasons for termination from ELITE as provided to the WCB on these members’ GSI-3.1 forms. Of the twenty-two members, only three had indications present on its GSI-3.1 form that it had been terminated involuntarily for underwriting reasons (which L&M believes relates, in most cases, to high losses in comparison to contributions, which in turn can be attributed to substandard member safety polices and/or enforcement thereof). Out of the remaining nineteen members, eighteen terminated voluntarily and one was terminated involuntarily for non-payment of contributions. In L&M’s opinion, these statistics further support CRM’s reluctance to terminate members for any reason, including poor safety records.

L&M located a 2003 letter from a CRM Loss Control Consultant to ELITE’s member with the second largest estimated deficiency of contributions over losses (Member B on Table 3) that discussed the nature and results of a recent meeting that had taken place. Also included in that letter were the following statements: “As we discussed, your company is on the OSHA (Occupational Safety & Health Administration) 14000. This is a listing of the companies that have the highest lost time claims ratio. This is the second year you are on the list. OSHA will visit 1000 of the companies on this list. You should have all your written programs and policies in order.” L&M’s further research identified this member, as well as at least one other member of ELITE, as also on this list for 2007. As a result, it appears Member B appeared on OSHA’s list of 14,000 companies with the worst ratio of lost time claims a minimum of three times. We could not determine if CRM was aware the other member of ELITE had appeared on the 2007 OSHA list. L&M believes the other member that appeared on OSHA’s 2007 list was also detrimental to the financial health of ELITE as we calculated its estimated

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deficiency of contributions over losses and other direct expenses (exclusive of any allocated IBNR and benefit from aggregate excess insurance recoveries) to approximate $460,000. Member B’s inclusion on these dubious listings appeared on various other documents in the member’s file. L&M’s inspection of Member B’s safety related documents uncovered numerous other negative issues relative to the safety policies and risk of the member including what CRM deemed to be “serious safety recommendations”, the member not cooperating with CRM’s attempts to schedule safety training as early as 2003 and the “potential to have claims of large frequency and severity.” The member was admitted and continually renewed by CRM despite what L&M deems overwhelming evidence that Member B displayed characteristics that represented an unreasonable amount of risk for ELITE. Since a goal of a self-insured trust should be to have quality members with below average risk and a good claims history, L&M questions the rationale used by CRM and/or the Trustees to justify both this member’s original admittance and continued participation in ELITE. L&M notes Member B was the third largest member of ELITE (based on cumulative contributions) and CRM received approximately $533,000 in administrative fees as a result of its participation.

L&M’s Conclusions

The Trustees were not involved with the design and implementation of safety policies for Trust members.

The information CRM provided to the Trustees indicated that its safety and loss control programs operated reasonably well.

CRM admitted certain members despite an apparent knowledge that serious safety issues existed at or around the date of admission.

The overall effectiveness of the safety program to reduce member employee injuries and related claims expenses must be questioned in light of the significant losses incurred by certain members.

While it appears CRM had safety programs in place for Trust membership; it inconsistently mandated and monitored the proper usage of the program by members, did not always perform the number of safety visits required per CRM’s own Service Plan for the member, and did not remove some members that failed to implement and adhere to recommendations.

CRM failed to terminate some members who did not cooperate/respond to its repeated attempts to schedule safety/site visits. L&M believes that some or all of these members intentionally avoided the scheduling of safety visits to reduce or eliminate the probability that CRM would detect deficient safety procedures that could be costly to correct.

We question the rationale behind CRM’s judgment that some members did not require safety visits (per those members’ Service Plans).

The documentation we obtained to support 164 safety visits performed by CRM indicates that only 78 were actual job site visits while the other 86 were either telephone calls or visits to the members’ main facilities. Knowing that the majority of large dollar claims originate from accidents occurring at job sites, we question why less than half of the 164 safety visits we identified for the members sampled were performed at the members’ job sites.

None of the members we interviewed indicated an initial safety inspection was performed prior to their entering the Trust, and 9 of 10 (90%) stated that one had not been conducted until long after they had joined. L&M believes best practices dictate the performance of an initial safety inspection prior to the formal admittance of a member. This action may have

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identified the riskier members that potentially should not be admitted and/or at least given CRM the opportunity to properly monitor these members subsequent to their admittance.

We noted only one instance where a member’s Service Plan was implemented immediately upon their acceptance into ELITE. 65% of the Service Plans we examined were dated two years or more after the member entered ELITE. L&M believes best practices dictate the implementation of the Service Plan (and any and all other member safety monitoring procedures) at the time of or shortly after member admittance. This would have given CRM the opportunity to identify and respond expeditiously to potentially risky members.

The reluctance to terminate members with poor safety records contributed to the Trust’s significant deficit.

10. Excess Insurance Introduction Section 317.10 of the NYCRR, effective January 31, 2001, requires group self-insurers to maintain excess insurance (also known as stop-loss and reinsurance) to reduce the exposure of the group self-insurer to workers’ compensation claims and employers’ liability. The excess insurance must be in a form approved by the superintendent of insurance and from a carrier licensed by the superintendent of insurance to write excess insurance in New York with respect to workers’ compensation and employer’s liability insurance. The retention levels for the excess insurance shall be in an amount acceptable to the chair. Section 317.2(f) of the NYCRR, effective January 31, 2001, states “the excess insurance may be specific, aggregate, or other insurance, singly or in combination, in amounts and form acceptable to the chair.” Additionally, group self-insurers must file certificates with the WCB providing evidence that appropriate excess insurance has been obtained, and must immediately notify the WCB of any changes in the excess coverage. The WCB requires group self-insurers to obtain specific excess insurance, but does not require aggregate excess insurance to be in place. Summary of ELITE’s Coverage

L&M obtained information pertaining to the excess coverage maintained by ELITE from the WCB and NCAComp. A summary of the coverage follows:

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Table 8:

Estimated PolicyPolicy Period Carrier Retention Limit Retention Limit

8/27/99 - 5/31/00 Frontier 300,000$ statutory $1,729,000 5,000,000$

6/1/00 - 11/30/01 General Security 300,000 statutory 5,701,000 5,000,000

12/1/01 - 11/30/02 General Security 300,000 4,700,000$ 1st layer 15,065,000 5,000,000 12/1/01 - 11/30/02 Midwest 5,000,000 statutory 2nd layer

12/1/02 - 11/30/03 Clarendon 400,000 statutory 1st layer 24,803,000 2,000,000 12/1/02 - 11/30/03 Midwest 2nd layer 26,803,000 3,000,000

12/1/03 - 11/30/04 NY Marine 500,000 500,000 1st layer 38,500,000 2,000,000 12/1/03 - 11/30/04 Clarendon 1,000,000 statutory 2nd layer

12/1/04 - 3/31/06 NY Marine 500,000 500,000 1st layer 55,137,000 2,000,000 12/1/04 - 3/31/06 Clarendon 1,000,000 statutory 2nd layer

4/1/06 - 3/31/07 NY Marine 500,000 statutory 56,059,000 2,000,000

4/1/07 - 3/31/08 Majestic 500,000 statutory 39,074,000 2,000,000

Specific Aggregate

The New York Insurance Department placed Frontier Insurance Company (Frontier) in rehabilitation on October 15, 2001. It is unclear what effect, if any, this will have on ELITE’s ability to collect on any specific or aggregate claims applicable to the August 27, 1999 – May 31, 2000 period. Policyholder’s Reporting Requirements Under Excess Insurance Policies The policy information we received for Frontier, General Security Insurance Company (General Security), the Midwest Employers Casualty Company (Midwest), Clarendon National Insurance Company (Clarendon), and the New York Marine and General Insurance Company (NY Marine) excess policies required the claim reporting requirements by the policy holder as noted below. L&M could not obtain a copy of ELITE’s policy with Majestic Insurance Company (Majestic).

Frontier Prompt written notice for any claim, award, judgment, or suit which (or might in the

future) exceeds 50% of the specific retention amount. Provide written notice within 60 days for any accident that involves a fatality, serious

head or spinal cord injury, serious burn, or amputation. Prompt written notice of any claim in which it appears reasonably likely the injured

employee’s disability will exceed 52 weeks.

General Security Prompt written notice for any claim, award, judgment, or suit which (or might in the

future) exceeds 50% of the specific retention amount. Prompt written notice for any accident that involves a fatality, serious head injury,

spinal cord injury, serious burn, amputation, or causes serious injury to two or more employees.

Prompt written notice of any claim in which it appears reasonably likely the injured employee’s disability will exceed 52 weeks.

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Provide insurer with a quarterly report that provides various information with respect to all claims.

Midwest

Prompt written notice for any claim, award, judgment, or suit which (or might in the future) exceeds 50% of the specific retention amount.

Provide written notice within 30 days for any accident that involves a fatality, brain or spinal cord injury, serious burn, amputation, and/or permanent and total disability, as defined.

Written notice of any claim in which the injured employee’s disability exceeds 52 weeks.

Written notice within 30 days of any occurrence which causes injury to two or more employees (effective as of December 1, 2002).

Provide insurer with a quarterly report that provides various information with respect to all claims.

Clarendon

Written notice for any claim, award, judgment, or suit which (or might in the future) exceeds 50% of the specific retention amount.

Prompt written notice for any accident that involves a brain or spinal cord injury, blindness, serious burn, disability for a period of nine months or more, and/or permanent and total disability, as defined.

Provide a detailed report showing amounts disbursed for claims during the policy period and estimated reserves for outstanding claims, and separate such between those claims that are below and those that are above the specific retention amount. This report must be provided within 20 days after the end of each calendar quarter.

NY Marine

Immediate notification for any claims which, in the Trust’s opinion, is likely to exceed $250,000 (for 2003-2004 and 2004-2006 policy periods) or $100,000 (for 2006-2007 policy period). This notification must be in writing for the 2006-2007 policy period.

Immediate notification of each claim whose paid medical bills exceed $35,000 – for 2003-2004 and 2004-2006 policy periods only.

Immediate notification of each claim which involves serious injury (as defined by NY Marine). This notification must be in writing for the 2006-2007 policy period.

Immediate written notice of any occurrence which causes serious injury to two or more employees – for 2006-2007 policy period only.

Immediate written notice for any claim that is or expected to be over the retention amount – for 2006-2007 policy period only.

Provide insurer with a quarterly report that provides various information with respect to all claims. This report must be provided within 30 days (for 2003-2004 and 2004-2006 policy periods) or 20 days (for 2006-2007 policy period) after the end of each calendar quarter.

Provide insurer with a quarterly report that provides a summary of amounts paid above the specific and aggregate retention amounts. This report must be provided within 60 days after the end of each calendar quarter. This applies to 2003-2004 and 2005-2005 policy periods only.

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CRM’s Adherence to Reporting Requirements Under Excess Insurance Policies Section VII of the Trust document and section 11 of the initial Service Agreement with CRM state “it shall be the obligation and responsibility of the Administrator (CRM) to comply with the excess insurance carrier’s requirements.” The CPA firm that performed the 2000 - 2006 financial statement audits of ELITE indicated in its 2006 workpapers for its audits of two other CRM administered trusts that CRM’s reinsurance coordinator printed out and reviewed the loss runs monthly; once a file (claim) was reported to the reinsurer, updates are sent to the carrier every 90 days. The documentation above appears to indicate that CRM had procedures in place to notify the excess insurance carriers. However, members of FCS’s management indicated to L&M that they came across many, possibly one hundred or more, claims where CRM failed to put the excess carrier on notice or provide the required updates. Additionally, L&M obtained letters sent from Midlands Claim Administrators, Inc. (the agent for Clarendon) to CRM stating Clarendon disclaimed coverage on ten claims because CRM did not provide Clarendon with timely notification as required under the policies. These ten letters were in response to ten initial notifications by CRM on July 14 – 16, 2008, pertaining to accidents occurring April 2003 through January 2006. While the cost for each of these ten claims is currently estimated to be below the applicable retention amount within the corresponding Clarendon policy, this provides further proof that CRM failed to adhere to the reporting requirements specified in the excess policies. L&M obtained a copy of the CRM generated 2,394 page loss run report from FCS that provided detailed claims information as of August 31, 2008 (the day before FCS replaced CRM as ELITE’s administrator). L&M selected ten claims from the first 1,196 pages of the report that required notification to the excess insurance carrier. L&M could not obtain documentation to indicate whether CRM provided the excess carriers with the notification for four of the ten claims as required by the applicable excess insurance policies. Additionally, L&M could not determine if CRM’s notification to the excess insurance carriers was made timely as specified in the policies, nor whether CRM provided the excess carriers with the required quarterly/annual reports as noted above. An excess insurance carrier can deny coverage for a claim where the required notification procedures were not followed. L&M also found documentation to indicate that FCS provided the insurance carriers with initial and updated information pertaining to six of the ten claims noted above, four of which are included in the six that CRM also reported to the carriers. In the event that FCS’s notification was the first report provided to the excess carriers, it is possible the excess carriers could deny coverage if it is deemed CRM should have provided the notification in a prior period, resulting in FCS’s initial notification not deemed timely based on the terms of the policy. FCS explained to L&M it has an automated system to alert designated employees when a claim exceeds 50% of the specific excess retention amount. This system, in conjunction with its policy to notify carriers regarding all catastrophic claims, and a diary system used to provide carriers with updates, allows FCS to adhere to the excess carriers’ requirements for initial and ongoing notification.

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Comparison of ELITE’s Excess Insurance Cost with Other Trust Funds

L&M received a schedule from the WCB that summarized 59 active group self-insurer’s excess insurance expense as a percentage of contribution revenue for 2003 – 2006. Additionally, the schedule listed the 2006 retention level for the groups’ specific reinsurance and included other trusts with members in the construction field. As noted above, ELITE had $500,000 retention on its 2004 – 2006 specific excess reinsurance policies. L&M used this information and compared ELITE’s excess insurance expense to other trusts that CRM administered, as well as against other trusts not administered by CRM. The information from the WCB did not indicate what the retention amounts were for 2004 and 2005. However, most trust funds do not frequently change specific retention amounts. Accordingly, L&M assumed the retention amounts listed for 2006 were the same for 2004 and 2005 in the below analysis.

Table 9:

Retention amount noted as $500,000 for 20062006 2005 2004

ELITE 24.7% 26.1% 25.5%

Average of 5 other trusts administered by CRM 22.1% 24.4% 25.4%

Average of 7 trusts not administered by CRM 12.4% 13.9% 13.1%

Highest of the 7 trusts not administered by CRM 21.1% 21.5% 24.0%

Retention amount noted as $400,000 for 2006

Average of 14 (13 for 2004) trusts not administered by CRM 12.0% 9.7% 8.9%

Highest of the 14 (13 for 2004) trusts not administered by CRM 26.6% 14.9% 14.4% Based on Table 9, the excess insurance cost (as a percentage of member contribution revenue) of ELITE and the other five trusts administered by CRM were all considerably higher than the average of the other seven trusts not administered by CRM. Additionally, L&M calculated the average of all funds that had a smaller retention amount ($400,000) and noted this was also less than the percentage for the CRM trusts. L&M noted only one instance for 2004 through 2006 where another trust not administered by CRM included in the 21 (20 for 2004) noted above had a percentage at least equal to ELITE’s or the average of the other trusts administered by CRM. The cost of excess coverage depends on the payroll class code categorization of the trust members’ employees. Accordingly, this is an important consideration when comparing the percentages. However, since ELITE and the other CRM administered trusts were compared to the average of a significant number (20 or 21) of other trusts, L&M believes some generalizations can be made when comparing the data. The information provided by the WCB did not denote which funds had aggregate excess insurance in place. This could potentially explain part of the variance if ELITE and the other CRM administered trusts had aggregate excess insurance in place and few of the other 21 (20 for 2004) funds had aggregate coverage.

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The summary of ELITE’s excess coverage shows it had aggregate excess insurance in place for 2004 – 2006. Accordingly, this could potentially explain why ELITE’s percentage for 2004 - 2006 is approximately double that of the other non-CRM administered funds (that are assumed to have had a $400,000 or $500,000 retention amount) if a significant portion of the non-CRM administered funds did not have aggregate coverage. L&M also obtained information for the other five trust funds administered by CRM that show these trust funds all had aggregate in place for 2006, and four of the five had aggregate for 2004 and 2005. Two individuals with considerable experience in the group self-insured trust field contacted by L&M indicated that there is no “rule of thumb” to estimate the cost of aggregate coverage as a percentage of specific coverage. The estimates they provided to L&M indicate that the cost of aggregate could range from 30% to 100% of the cost of specific. L&M believes the transactions described below with parties related to CRM may also explain the differences in percentages between CRM administered trusts and those administered by others. Transactions between ELITE and Related Parties of CRM Twin Bridges (Bermuda) Ltd. ELITE’s 2004 – 2006 audited financial statements disclosed “the administrator is also affiliated with a captive insurance entity which participates in reinsurance coverage for the Trust.” The 2003 and 2004 audited combined financial statements for CRM and Affiliates disclosed:

Twin Bridges (Bermuda) Ltd. (Twin Bridges) in substance had identical beneficial ownership and management as CRM;

Twin Bridges entered into a reinsurance arrangement with NY Marine whereby Twin Bridges reinsured 50% of the liabilities arising from policies issued by NY Marine to self-insured groups administered by CRM;

In return, Twin Bridges received 50% of the premiums paid to NY Marine by these self-insured groups;

NY Marine retains 31% of the premiums due to Twin Bridges to cover acquisition, general and administrative, and other expenses;

NY Marine pays a 20% commission to CRM for any excess coverage placed with it by CRM. The 2005 and 2006 audited consolidated financial statements for CRM Holdings, Ltd. (the ultimate parent company owner of CRM) disclosed the following:

Twin Bridges is owned by CRM Holdings, Ltd.; Twin Bridges entered into a new reinsurance agreement in December 2005 with NY Marine

whereby the liabilities assumed will increase to 70%, in return Twin Bridges will receive 70% of the premiums paid to NY Marine by the self-insured groups administered by CRM;

The amount of the premium due Twin Bridges retained by NY Marine to cover acquisition, general and administrative, and other expenses was reduced to 27% under the December 2005 agreement;

The commission paid by NY Marine to CRM for any excess coverage placed with it by CRM was reduced to 15% under the December 2005 agreement.

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The 2007 audited consolidated financial statements for CRM Holdings, Ltd. (the ultimate parent company owner of CRM) disclosed the following:

The December 2005 agreement Between Twin Bridges and NY Marine was terminated as to new business and will operate on a run-off basis;

Effective January 1, 2007, Majestic Insurance Company (Majestic) will provide excess coverage to the groups;

Twin Bridges reinsured 90% of the liabilities arising from policies issued by Majestic to self-insured groups administered by CRM;

In return, Twin Bridges received 90% of the premiums paid to Majestic by the self-insured groups;

Majestic retains 15% of the premiums due to Twin Bridges to cover acquisition, general and administrative, and other expenses;

Majestic pays a 10% commission to CRM for any excess coverage placed with it by CRM.

The 2005 Form 10-K for CRM Holdings, Ltd. filed with the Securities and Exchange Commission (SEC) disclosed “NY Marine & General currently provides the excess coverage for 13 of our 14 groups.” L&M believes an independent and reasonable individual would view this as near monopolization of the excess insurance coverage for CRM’s trusts, and expect that NY Marine was providing CRM with the best or at least very competitive rates.

However, the arrangement between NY Marine and Twin Bridges (an affiliate of CRM) created a potential conflict of interest whereby the ownership interest of CRM benefitted from NY Marine being the excess insurance carrier for ELITE and most of the other trusts administered by CRM. Accordingly, one can infer there was an indirect financial incentive to have NY Marine as ELITE’s excess insurance carrier for 2004 - 2006, thus creating a disincentive to obtain other competitive quotes for the excess insurance coverage. Additionally, one can assume NY Marine was aware of this relationship, thereby concluding it would most likely be chosen to provide the excess insurance absent competitive pricing pressures. This could potentially explain why ELITE’s excess insurance as a percentage of contribution revenue was considerably higher than other trusts not administered by CRM.

In the 2004 - 2006 Level I reviews, the WCB made reference to the disclosures in ELITE’s 2004 - 2006 audited financial statements relative to ELITE’s purchase of excess insurance through an affiliate of CRM, and that CRM is affiliated with a captive insurance entity that participated in providing the reinsurance for the Trust. In these same Level I reviews, the WCB recommended that ELITE’s Trustees obtain more information regarding the Trust’s procurement of excess coverage, since the Trustees needed to fully understand the relationship that existed between CRM and the reinsurer to ensure the best terms were obtained. Majestic The audited consolidated financial statements for CRM Holdings, Ltd. (the ultimate parent company owner of CRM) included in the 2006 and 2007 Form 10-K filings with the SEC disclosed that in November 2006, CRM USA Holdings (CRM’s parent company) acquired Embarcadero Insurance Holdings, Inc., which owned Majestic. Accordingly, as of November 2006, CRM and Majestic were both entities ultimately owned by CRM Holdings, Ltd. As noted in the table summarizing ELITE’s excess insurance coverage, Majestic provided ELITE’s specific and aggregate excess insurance coverage beginning April 1, 2007.

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Compensation Risk Managers Agency Captive, LLC As noted below, both the Trust document and Service Agreement included a provision to allow CRM or its designee to broker the transaction of obtaining excess insurance. ELITE’s 2004 – 2006 audited financial statements disclosed in the “Reinsurance” note that “reinsurance is purchased through a licensed insurance agency affiliated with the third-party administrator.” The 2003 and 2004 audited combined financial statements for Compensation Risk Managers, LLC and Affiliates disclosed that an entity named Compensation Risk Managers Agency Captive, LLC (Agency Captive) is a licensed insurance broker that shares common ownership with CRM, and that Agency Captive holds the brokerage license CRM uses to place the excess coverage with self-insured groups administered by CRM. Agency Captive received the brokerage commissions which were remitted later to CRM as applicable. The bullet points noted in the above “Twin Bridges (Bermuda) Ltd.” section indicates NY Marine paid a 20% or 15% commission to CRM for any excess coverage placed by CRM with it, and Majestic paid a 10% commission to CRM for any excess coverage placed by CRM with it. Since Agency Captive holds the brokerage license CRM used to place excess insurance, L&M believes the commissions would have been paid to Agency Captive who in turn remitted them to CRM. L&M contacted two individuals with considerable experience in the group self-insured trust field about the reasonableness of the commission rates paid by the carriers to CRM. One responded that the commission rates paid “are not unusual, although the 15% is more common, making 20% somewhat high.” The second responded “For reinsurance policies these are normal. The 20% is at the high end of the scale but not too high.” Information in CRM Holdings, Ltd. 2006 Form 10-K CRM Holdings, Ltd.’s Form 10-K filed with the SEC included the following statements:

“The self-insured groups are required to purchase excess workers’ compensation coverage to cover claims that exceed a threshold established by state law or regulation…We currently reinsure a substantial portion of this excess coverage for 12 of our 14 groups”;

“We also act as a broker and place this excess insurance coverage and any required surety bonds for the groups”;

“We depend on our reinsurance business for a substantial portion of our revenues and profits”;

“Our reinsurance segment accounted for approximately…73% of our income before taxes for the year ended December 31, 2006 and approximately…28% of our income before taxes for the year ended December 31, 2005”;

“We may be deemed to have a conflict of interest in concurrently managing groups and placing excess coverage for these groups with Majestic or another U.S. admitted insurer that cedes a part of this excess coverage to Twin Bridges”;

“It is possible that one or more of our groups could conclude that our acting as manager of the groups and as reinsurance broker for our groups, while also reinsuring a portion of the excess coverage, presents an unacceptable conflict of interest.”

In light of the above, a significant financial incentive existed for CRM to have the groups it administered purchase excess insurance from an affiliate. Additionally, CRM was cognizant of the potential conflict of interest that existed with regard to these transactions.

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The aforementioned Form 10-K also disclosed that a group of commonly owned former members of CRM’s largest trust filed suit against CRM and the trust alleging, among other things, that CRM had engaged in self dealing and committed a breach of fiduciary duty owed to them in connection with the placement of reinsurance for the members of the trust. The suit was settled, and CRM agreed to retroactively reduce administration fees to that trust by $162,500. CRM and Trustee Responsibilities Section VII of the Trust document and page 3 of the Service Agreement with CRM states “the Administrator, or its duly licensed designee, shall act as broker of record for the purpose of procuring and maintaining excess insurance and a workers’ compensation surety bond in amounts and forms required by the Trust Agreement.” This same section also states “the procurement of the excess insurance shall be subject to the approval of the Board of Trustees.” The twelve Board of Trustee meeting minutes L&M obtained included surprisingly few notations with respect to discussions pertaining to excess insurance. The notations present include (1) a lack of carriers willing to write excess insurance for the Trust, (2) a shift of coverage from Midwest to NY Marine and Clarendon because Midwest sought to reduce its exposure, (3) the liability for the first $500,000 of coverage is split between NY Marine and CRM, (4) a 9% reduction in premiums, (5) put the December 1, 2004 coverage out to bid, stayed with NY Marine and Clarendon, most companies declined to bid or some wanted to bid on it in pieces, the costs are down due to favorable experience, and the Trustees should consider the need to continue aggregate coverage, (6) CRM acquiring Majestic, (7) novation agreement (discussed in detail in following section). L&M would have expected much more trustee discussion and spirited debate pertaining to this area considering it was the largest expense after claims and assessments.

L&M only noted one instance where it was noted that ELITE had obtained competitive quotes/put their coverage out to bid (the December 2, 2004 meeting). The meeting took place one day after the new policy period began, therefore if competitive quotes were actually received/the coverage was put out to bid, it would appear from the minutes that CRM evaluated the quotations and made the decision themselves. There is no indication that further information was provided to the Trustees, nor that the Trustees asked for further information/explanation. There was no change in the excess carriers during the period this applied to.

ELITE’s Trustees declined our repeated attempts to interview them. Therefore, we were unable to confirm our belief that (1) the Trustees had little or no input relative to the carriers selected, (2) the procurement of the excess insurance was not subject to the approval of the Trustees as required in accordance with the Trust document, (3) few if any competitive quotes were obtained, and (4) the Trustees involvement and oversight of CRM in this significant area was extremely limited. Assignment, Assumption and Novation Agreement On June 5, 2007 an Assignment, Assumption and Novation Agreement (Novation Agreement) was executed between NY Marine, Majestic, and ELITE which resulted in NY Marine’s assignment of its rights, duties, and obligations relative to ELITE’s December 1, 2003 – March 31, 2007 excess specific and aggregate insurance policies to Majestic for an undisclosed sum. Trustee Eugene Clarke executed the agreement on behalf of ELITE. L&M believes ELITE had to agree to the Novation Agreement because it changed the insurance carrier required to perform under ELITE’s December 2003 – March 2007 excess insurance policies.

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The minutes from the June 5, 2007 Board of Trustees’ meeting states “NYMAGIC (NY Marine) excess losses will be novated into Majestic…NYMAGIC is leaving the comp market – they want reserve for losses off (their) balance sheet and they asked Majestic to take over liability – this will allow control over the claims…Gene motions to accept the novation agreement…Joe Wilson seconded…all in favor – yes.” As noted above, it appears the June 5, 2007 Trustee meeting was the first time this topic was discussed. L&M finds it troubling there was no mention or discussion of this unusual transaction in any earlier meeting minutes we obtained, specifically the December 7, 2006 and March 6, 2007 meetings. The tone of the language appearing in the June 5, 2007 meeting minutes suggests that CRM had already made the decision to accept the proposal (“NYMAGIC excess losses will be novated into Majestic”), and an agreement was already drawn and ready for the Trustees to approve (“Gene motions to accept the novation agreement”). L&M would have expected additional discussion from the Trustees relative to this proposed agreement. As previously noted, all of ELITE’s Trustees declined our repeated attempts to interview them. Therefore, we were unable to determine if the Trustees obtained and reviewed the AM Best or some other similar insurance rating of Majestic before signing the document to ensure the proposed replacement carrier was financially sound. The President of FCS noted in an e-mail to the WCB regarding the novation agreement that “The policies (with NY Marine) appear to literally have been turned over to Majestic including the entire tail. This is very unusual to say the least. I have never seen a transaction like this in my many years of underwriting.” L&M believes the Trustees had a fiduciary duty to closely scrutinize this transaction to ensure, at a minimum, that ELITE’s proposed replacement carrier (Majestic, a related party company of CRM) did not have a rating below the current carrier (NY Marine), which could impact ELITE’s ability to collect on potential future claims. Discussion Between ELITE’s Trustees, a Representative of FCS, and the WCB L&M obtained a summation of a discussion between ELITE’s Trustees, Kathy Camp (President of FCS) and the WCB that took place in late 2008. Some of the more significant issues raised and the answers provided by the Trustees to selected questions posed by the WCB during the discussion follow:

The Trustees were aware that Twin Bridges was a reinsurer that was owned by CRM’s principals.

CRM disclosed at a Board of Trustee meeting that it had a related party relationship with Majestic, with whom CRM was placing ELITE’s excess insurance coverage.

CRM told the Trustees that using Majestic would remove the uncertainty of having to obtain coverage in a shrinking reinsurance market every year.

The Trustees were not sure if competitive bids were obtained for the excess coverage. The Trustees were aware that CRM received a commission for placing ELITE’s excess

coverage with Majestic. They were also aware of the commission splitting arrangement for certain Clarendon policies between CRM and Collins and Associates, the excess lines broker.

The Trustees were aware of the Novation Agreement under which Majestic took over the excess coverage from NY Marine.

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Two Trustees admitted they had known Daniel Hickey (not specified whether Sr. or Jr.) since childhood, and that they bought stock in CRM Holdings, Ltd. when it went public.

Discussion Between a Representative of Midlands Management Corporation of New York, Inc. and the WCB L&M obtained a summation of a discussion between Thomas Hamill, Vice President of Midlands Management Corporation of New York, Inc. (Midlands), and the WCB that took place in late 2008. Midlands was the insurance broker used by CRM to procure excess insurance for CRM administered funds. Midlands also assisted CRM with the formation of Twin Bridges. Some of Mr. Hamill’s responses to the questions posed by the WCB during the discussion were:

Generally, the Trustees of ELITE knew that Majestic and Twin Bridges were under CRM’s corporate umbrella, and that they provided ELITE with insurance services.

CRM Holdings acquired Majestic around June 2006. The Hickeys (deemed to refer to Daniel Sr. and Daniel Jr.) used Majestic to take over the CRM administered trusts’ policies upon renewal.

The Novation Agreement between NY Marine and Majestic was very unusual. Majestic had a lower AM Best Rating than NY Marine. He denied having a financial interest in, receiving payments from, serving as an owner,

board member, or officer of CRM Holdings, Majestic, Twin Bridges, or any of their subsidiaries.

The above bullets indicate the Trustees were aware that Twin Bridges and Majestic were related parties to CRM. The fact that the Trustees did not know whether competitive bids were obtained for the excess coverage supports L&M’s previously noted belief that few if any competitive quotes were obtained. The revelation that two Trustees owned stock in CRM Holdings is deemed a potential conflict of interest by L&M that was previously discussed in report section “Board of Trustees.” L&M’s Conclusions

L&M became aware of ten instances where Clarendon disclaimed coverage with respect to a claim because CRM had not provided it with timely notification of the claim as required under the excess policies. Additionally, L&M could not obtain documentation to indicate whether CRM provided the excess carriers with the required notification for four of ten claims requiring such selected by L&M, nor whether CRM provided the excess carriers with the required quarterly and/or annual reports specified in the excess insurance policies. Finally, members of FCS’s management indicated to L&M that they came across many, possibly one hundred or more, claims where CRM failed to put the excess carrier on notice or provide the required updates. It appears CRM did not consistently adhere to the reporting requirements specified in the excess policies. This is a significant potential problem for ELITE since an excess carrier has the ability to deny coverage for claims that exceeded the applicable retention amount, if the required notification procedures were not properly followed.

Based on information obtained from the WCB, ELITE’s cost of excess insurance as a percentage of contribution revenue for 2004 - 2006 was approximately twice as much as 21 (20 for 2004) other funds not administered by CRM that we assumed to have had similar or better specific excess insurance coverage. ELITE had aggregate coverage in place for 2004 – 2006; we obtained no information to indicate which, if any, of the other 21 (20 for 2004) non-CRM administered funds had aggregate coverage. This large discrepancy could

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potentially be explained if a significant portion or all of the other 21 (20 for 2004) non-CRM administered funds did not have aggregate coverage.

CRM Holdings, Ltd. depended on the reinsurance business for a substantial portion of its consolidated revenue and profits.

The arrangement between NY Marine and Twin Bridges (an affiliate of CRM) created a potential conflict of interest whereby the ownership interests of CRM benefitted from NY Marine being the excess insurance carrier for ELITE and the majority of other trusts administered by CRM. Accordingly, one can infer there was an indirect financial incentive to have NY Marine as ELITE’s excess insurance carrier for 2004 - 2006, thus creating a disincentive to obtain other competitive quotes for the excess insurance coverage. Additionally, one can assume NY Marine was aware of this relationship, thereby concluding it would likely be chosen to provide the excess insurance, absent competitive pricing pressures. This could potentially explain why ELITE’s excess insurance as a percentage of contribution revenue was considerably higher than other trusts not administered by CRM.

The fact that Majestic, ELITE’s excess insurance carrier from April 2007 through March 2008, was owned by CRM’s ultimate parent company created another potential conflict of interest for CRM in carrying out its administration of ELITE. One can also infer there was an indirect financial incentive to have Majestic as ELITE’s excess insurance carrier for 2007 and 2008, thus creating a disincentive to obtain other competitive quotes for the excess insurance coverage.

The Trustees knew that Majestic and Twin Bridges were under CRM’s corporate umbrella, and provided ELITE with excess insurance.

Two Trustees appear to have owned stock in CRM Holdings. This is deemed a potential conflict of interest by L&M.

Based on the Board of Trustee meeting minutes obtained, it appears the Trustees did not approve the procurement of the excess insurance policies as required by the Trust document.

The Trustee meeting minutes indicate that few, if any, competitive bids for excess insurance coverage had ever been solicited to assure ELITE obtained the most advantageous pricing available.

The Trustees who approved the Novation Agreement may not have adequately exercised their fiduciary duties by carefully scrutinizing the transaction to ensure, at a minimum, the proposed replacement carrier’s (Majestic, a related party of CRM) insurance rating was not less than the current carrier’s insurance rating.

11. Integrity of Group Self-Insurance Trust Funds

Section 317.8 of the NYCRR states the group self-insurer shall not commingle its trust assets with those of any member, nor shall the funds dedicated to the payment of a group self-insurer’s costs be commingled with any other funds. Additionally, the group self-insurer, its trustees, and its group administrator shall:

Make every effort to preserve the integrity, strength, and liquidity of the group’s fund so as to permit the timely and complete payment of all group claims and other liabilities;

Not use any of the funds collected from group members or earned by the trust for any purpose not directly related to trust obligations;

Not borrow money from the trust fund or in the name of the trust; Not permit any lending, issuance of debt, or other forms of obligations.

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L&M was informed by NCAComp that it had copies of the majority of ELITE’s monthly bank statements for the period January 2000 through March 2008. L&M judgmentally selected four test months from the period noted above to determine if the account balances included amounts and/or transactions attributable to other entities. L&M judgmentally selected checks that cleared from each of the four monthly statements selected and traced the activity to ELITE’s claims and non-claim check registers we obtained. We were unable to obtain the non-claim check register for one of the four months selected for testing; as a substitute procedure we traced the applicable checks to ELITE’s general ledger activity. All forty checks were listed in ELITE’s check registers and/or general ledger activity; thus it appears all of the transactions in the selected bank statements were for ELITE. Accordingly, it does not appear that other entities’ cash balances were commingled with ELITE’s during the months chosen for testing. 12. Payroll Audits

An annual payroll audit for each member is a generally accepted industry practice. The payroll audit provides a means to reconcile member contributions based on estimated payroll, to those based on actual payroll. ELITE appeared to require annual payroll audits following the Trust’s fiscal year end. L&M concluded this based on Section VII of the Trust document that refers to the administrator hiring an outside entity to conduct a payroll audit of each employer, and the Service Agreement with CRM which stated that CRM shall, on an annual basis, employ on behalf of the Trust, professionals to conduct a payroll audit of each participating employer. ELITE contracted with Charles E. Hock Associates, Inc. and Overland Solutions, Inc. (formerly known as CP Commercial Specialists), two reputable outside entities to perform these services. Charles E. Hock Associates, Inc. performed the payroll audits for the 2000 and 2001 years while Overland Solutions, Inc. was used from 2002 on.

The payroll audit process results in a report generated by the payroll auditor which determines the applicable payroll by class code for the member during the period requested (generally a one year period). CRM used this data to calculate a final invoice for the member that would result in either an additional contribution due or an overpayment to be refunded or applied against future amounts billed.

Based on the number of member years, there should have been approximately 7,800 member payroll audits performed throughout the life of the trust. We obtained all of the member files from NCAComp and inspected all of the documents within each member file to locate the payroll audits.

We could not obtain approximately 600 of the expected payroll audits, thus, we have no evidence to indicate whether those were performed. In addition, we obtained documentation that indicated approximately 1,400 of the payroll audits attempted were deemed unproductive, and the report was written to indicate such. An unproductive payroll audit means the payroll auditor was unsuccessful in its attempts to perform the payroll audit. A common reason given by the payroll auditor was repeated unsuccessful attempts to contact management. The only unproductive payroll audit

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pertaining to a Trustee member company that L&M noted was the 2007 – 2008 period for R.W. Painting, Inc.

Approximately 300 of the unproductive payroll audits relate to the 2007 – 2008 policy period. L&M was not surprised that numerous unproductive payroll audits were noted for ELITE’s final policy term since those audits were performed months after ELITE ceased providing workers’ compensation coverage. Because ELITE could no longer threaten members with expulsion from the Trust if they refused to submit to the payroll audit, CRM lost the leverage it previously had to ensure members cooperated with the payroll auditors. L&M believes it is logical to assume that all, or at least most, members uncooperative with the payroll audit process are those that have either knowingly or unknowingly underestimated their applicable payroll used to invoice them during their coverage period, and expect to owe additional contributions as a result of the payroll audit.

The minutes from the December 2, 2004 Trustees meeting stated “Some members have not been agreeable to let auditors (the payroll auditors) in the front door…Second non productive audit we will cancel them.”

L&M questions why CRM’s policy was to cancel members after the second unproductive payroll audit; L&M would have expected that members would have been cancelled after the first unproductive payroll audit. As previously stated, L&M believes that all, or at least the majority, of the members who did not cooperate with the payroll audit process are those who believed the audit would have resulted in additional contributions owed to ELITE. CRM should have realized this and immediately terminated those members since ELITE was most likely providing workers’ compensation coverage to these members without collecting adequate contribution amounts. By waiting until after the second unproductive payroll audit to cancel a member, ELITE most likely provided the member with over two years of coverage at contribution amounts below what they should have been. We estimate that there were approximately 170 instances where members had two consecutive unproductive payroll audits followed by the member either leaving ELITE or complying with the payroll audit requirement the following year. Based on the data we compiled during our inspection of 1,100 of the approximately 2,700 member files, we noted 46 instances where the payroll auditor was unsuccessful in conducting a payroll audit of a member for three or more consecutive periods. The number of members and the consecutive number of periods without a payroll audit were:

30 for three consecutive periods 13 for four consecutive periods 3 for five consecutive periods

Five of the above forty six members were in ELITE until it ceased providing workers’ compensation coverage, thus it is possible that they may have been allowed to remain in the Trust for additional periods without allowing the auditors to conduct a payroll audit if ELITE had continued to provide coverage after March 31, 2008. Based upon our inspection of approximately 40% of the member files, where we noted 46 instances where CRM did not adhere to its policy to cancel members after the second non productive payroll audit, we conclude that CRM was inconsistent in adhering to its internal policy. L&M is not able to quantify the damages suffered by the Trust resulting from, nor the reason(s) behind, CRM’s non compliance with this established requirement. However, by not cancelling the members after the second period of unproductive payroll audits, CRM was paid approximately

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$89,000 of management fees on approximately $526,000 of member contributions based on our review of approximately 40% of the member files. Interpolation of the $89,000 management fee revenue above to the entire population results in the estimate that CRM, in total, received approximately $223,000 in additional management fee revenue by not cancelling members after a second consecutive unproductive payroll audit. L&M reviewed the GSI-3.1 forms prepared for the 41 (of the 46 above noted) members who left ELITE before March 31, 2008. A summary of the explanations noted on the forms relative to the reason for the members’ termination follows:

26 for non payment of contributions 2 due to the member going out of business 1 at the member’s request 12 for underwriting reasons

The termination reasons noted on the GSI-3.1 forms indicate only about 30% of the members with three or more consecutive periods of unproductive payroll audits that left ELITE before March 31, 2008 were removed for underwriting reasons, which L&M deems to equate to not cooperating with the payroll audit process. Based upon the above, L&M wonders if the 26 members who were terminated for non payment of contributions would have been allowed to remain in the Trust if they had paid their contribution invoices. L&M believes the results of our procedures supports the conclusion that CRM was inconsistent in enforcing its policy that members with two unproductive payroll audits be cancelled, and the inconsistent enforcement of the policy may have been due to CRM putting its own interests ahead of ELITE’s. Our inspection of the payroll audits and correspondence between members/brokers, CRM, and the payroll auditors uncovered the following additional items:

Nine instances where CRM used payroll class codes different from what the payroll auditor noted should be used in determining the members’ final contribution amounts. Additional documents relative to some of the nine instances indicate CRM did not disagree with the payroll auditor, but still decided to use the different class codes on the final contribution invoices. The net result of these nine differences was that ELITE under billed the applicable members by $84,300. In one of the above nine instances, the payroll auditor became aware that the member used the incorrect payroll class code during the payroll audit for the 2005 – 2006 policy period. However, a CRM inter-office memo dated January 14, 2006 states that the member’s policies since April 2002 had used an incorrect class code for the drivers, and “I’m thinking we wrote it that way intentionally, as the rates for (class code) 7380 are lower.” If that CRM employee’s suspicion is correct, and CRM intentionally wrote the policy using an incorrect payroll class code from inception (2002), then the $84,300 cumulative member under-billing noted above would increase to $204,600 (to account for the errors in prior years that the payroll auditor did not initially discover).

One instance where the covered payroll for two different class codes were reversed, meaning the payroll for class code 5491 was charged to class code 5474, and the payroll for class code 5474 was charged to code 5491. This resulted in under billing the member $4,500.

One member’s average annual contributions were $5,400 during the 1/13/02 – 3/31/04 period of three consecutive unproductive payroll audits. The following year the member complied with the payroll audit requirement, and its contribution totaled $32,300. The member once again did not comply with the payroll audit requirement for the next three

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years, and accordingly, its average annual contributions (totaling $6,900) were based on its declaration statements since there were no payroll audits performed. We question (1) why the member was allowed to stay in the Trust until the end (March 31, 2008) while only allowing one of seven attempted payroll audits to be performed, and (2) why CRM did not increase this member’s estimated contributions paid during the last three year period it participated in ELITE to approximate the $32,300 contribution calculated based on the only payroll audit performed. It is unreasonable this member was billed only 20% of the audited contribution amount for each on the three years subsequent to its sole payroll audit.

We traced all data contained in the payroll audits obtained to amounts used to generate the final invoices, and noted only a few minor differences between the audited payroll figures and the amounts CRM included on the members’ final invoices (exclusive of the items noted in two of the bullet points directly above). L&M’s Conclusions

In summary, L&M obtained approximately 91% (5,800 of 6,400) of the estimated completed payroll audits that were performed over the active life of the Trust. Additionally, approximately 1,400 payroll audits attempted were unproductive, which means the payroll auditor unsuccessfully attempted to perform the payroll audit. A common reason given by the payroll auditor was repeated unsuccessful attempts to contact management.

In general, CRM applied the results of the payroll audits in an appropriate and consistent manner when calculating members’ final contribution invoices.

L&M questions why CRM’s policy was to cancel members after the second, and not the first, unproductive payroll audit. L&M believes that all, or at least the majority, of the members who did not cooperate with the payroll audit process are those who believed the audit would result in additional contributions owed to ELITE. CRM should have realized this and immediately terminated those members since ELITE was most likely providing workers’ compensation coverage to these members without collecting adequate contribution amounts. By waiting until after the second non productive payroll audit to cancel a member, ELITE most likely provided the member with over two years of coverage at contribution amounts below what they should have been.

CRM did not consistently follow its policy to cancel members after two unproductive payroll audits. L&M estimates CRM received approximately $223,000 in additional management fee revenue by not adhering to its own internal policy.

Nine instances were noted where CRM used payroll class codes different from what the payroll auditor noted should be used to determine the members’ final contribution amounts. Additional documents relative to some of the nine instances indicate CRM did not disagree with the payroll auditor, but still decided to use the different payroll class codes on the final contribution invoices, perhaps to avoid large member contribution increases. The net result of these nine differences was that ELITE under billed the applicable members by $84,300. However, a CRM inter-office memo dated January 14, 2006 pertaining to one of the nine members noted above states that the member’s policies since April 2002 had used an incorrect class code for the drivers, and “I’m thinking we wrote it that way intentionally, as the rates for (class code) 7380 are lower.” If that CRM employee’s suspicion is correct, and CRM intentionally wrote the policy using an incorrect payroll class code from inception, then the $84,300 cumulative member under-billing noted above would increase to $204,600 (to account for the errors in prior years that the payroll auditor did not initially discover).

One member’s average annual contributions were $5,400 during the 1/13/02 – 3/31/04 period of three consecutive unproductive payroll audits. The following year the member

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complied with the payroll audit requirement, and its contribution totaled $32,300. The member once again did not comply with the payroll audit requirement for the next three years, and accordingly, its average annual contributions (totaling $6,900) were based on its declaration statements since there were no payroll audits performed. We question (1) why the member was allowed to stay in the Trust until the end (March 31, 2008) while only allowing one of seven attempted payroll audits to be performed, and (2) why CRM did not increase this member’s estimated contributions paid during the last three year period it participated in ELITE to approximate the $32,300 contribution calculated based on the only payroll audit performed. It is unreasonable this member was billed only 20% of the audited contribution amount for each of the three years subsequent to its sole payroll audit.

13. Assessments to Members

Section 317.9 of the NYCRR, effective January 31, 2001, lists actions an under-funded trust fund (as defined in Section 317.6 of the NYCRR) may be required to take, at the discretion of the WCB’s Chair. Among these actions is the requirement to levy an assessment upon the group members to make up the deficiency.

The Trust document does not specifically address the subject of assessments to members; however Section II states “A participating member shall make contributions to the Trust in cash and securities as is computed and required (by) the Board of Trustees or Administrator sufficient to secure their liability to pay the compensation provided for in New York State Workers’ Compensation Law.” Additionally, Section IV of the Trust document, and article III of the Bylaws (“Sample Trust” version) grants the Trustees the authority to “perform all acts, whether or not expressly authorized, which are necessarily (necessary) or deemed desirable for the purpose of protecting the Trust Fund.” By signing the Joinder and Indemnification agreement, each member agreed to be bound by the terms of the Trust document. 2007 Assessment Information in the 2000 – 2008 audited financial statements indicates that assessment revenue was recognized in 2007. The audited financial statements for 2000 – 2006 and 2008 did not contain any information to suggest that an assessment was issued during those years. Additionally, L&M’s inspection of members’ final invoices revealed that only the April 1, 2007 - March 31, 2008 policy year included a separate line item for an assessment billing. The term “assessments” was used in the audited financial statements and Board of Trustees meeting minutes; however, these assessments may be more accurately characterized as a surcharge on member contributions or an additional billing to members designed to improve the Trust’s financial position by billing a portion of the state assessments to members. For purposes of the remainder this report, we will continue to refer to these as assessments. A discussion of this 2007 assessment follows. The March 6, 2007 Trustee meeting board minutes document a discussion pertaining to an increase in the state assessment expense, and the desire to pass a portion of the increase on to the members by levying an eight percent assessment charge on adjusted contributions for policy period April 1, 2007 – March 31, 2008. A motion to “institute the 8% increase as a line item on member invoices

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as of 4/1/07, with the stipulation that it is for one year and the issue will be reviewed before the 4/1/08 renewal” was voted on and passed. L&M obtained a letter sent to the members from CRM dated March 13, 2007 signed by the Chief Executive Officer of CRM and Eugene Clarke, the chairman of the Board of Trustees, that informed the members of the 8% assessment surcharge to be added to contribution invoices for the 2007-2008 policy year. The letter noted the reason for the assessment surcharge as the Trust passing on to the members a portion of the increase in the New York State assessment expense invoiced to ELITE by the WCB. A “New York State Assessment” equal to 8% of the members’ adjusted contribution was added to member invoices for the April 1, 2007 – March 31, 2008 policy term. The cumulative amount of this assessment billed to members was approximately $2,504,000. This member assessment may also have been in response to ELITE’s deteriorating financial position as reported in the September 30, 2006 audited financial statements that indicate the Trust’s equity decreased $2,753,000 during that year from $840,000 to a deficit of $1,913,000. L&M reviewed all final invoices and/or declaration statements for the 2007-2008 policy period and noted all members whose 2007-2008 policy period began on or after April 1, 2007 were charged the 8% assessment. Based on the $2,753,000 decrease in equity realized for fiscal year 2006, and the accumulated equity deficit balance of $1,913,000 at September 30, 2006, L&M believes the $2,504,000 assessment was an adequate response to substantially improve ELITE’s financial position. 2009 Assessment FCS replaced CRM as the Trust’s administrator on September 1, 2008, and in June 2009 issued a $37,016,000 assessment to members based on deficits incurred pertaining to the 2002 – 2007 years. The methodology used by FCS to allocate that assessment to the members was based on an individual member’s portion of total member contributions for an applicable year times the estimated deficit for that same year. L&M reviewed the logic of, and some of the specific calculations supporting the allocations to each member, and concluded that the methodology to allocate the cumulative deficit to the members to be systematic and rational. The 2009 assessment issued by FCS was subsequently superseded by a $62,285,000 interim estimated deficiency assessment issued by the WCB in May 2010. L&M’s Overall Conclusions

The $2,504,000 assessment balance applicable to the 2007 – 2008 policy year appeared to be fair and equitable to the members since all members whose 2007-2008 policy period began on or after April 1, 2007 were billed the 8% assessment surcharge.

Based on the $2,753,000 decrease in equity realized for fiscal year 2006, and the accumulated equity deficit balance of $1,913,000 at September 30, 2006, L&M believes the $2,504,000 assessment added to member invoices appeared to be an adequate response to substantially improve ELITE’s financial position.

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Based on (1) statements in the March 6, 2007 Board of Trustees meeting minutes, (2) a letter dated March 13, 2007 from CRM and the Chairman of the Board of Trustees to the members which stated that the 8% surcharge added to the members 2007-2008 policy period contributions was ELITE passing on a portion of the increase in the WCB assessment expense to its members, and (3) the 8% surcharge added to the members’ invoices defined as “New York State Assessment” on the invoices, L&M believes the assessments billed to members were the Trust’s attempt to recoup/bill to the members a portion of the assessment expense billed to ELITE by the WCB.

The methodology used by FCS to allocate the 2009 assessment billed to members who participated during the 2002 – 2007 years appears to be systematic and rational.

14. Member Dividends Introduction Section 317.8(e) of the NYCRR, effective January 31, 2001, does not allow a trust fund to pay dividends to members if the distributions result in total assets (as defined in section 317.2 of the NYCRR) being less than total liabilities. Accordingly, a trust fund determined to be under-funded based on the WCB’s calculation of its regulatory funding position (hereafter referred to as “equity ratio”) is precluded from issuing dividends. L&M inspected the annual audited financial statements for 2000 – 2008, and noted member dividends were presented for two of the years, $99,121 in 2000 and $2,500,000 in 2004. Each of these is discussed below. Dividend in Year 2000 The audited financial statements for the year ended August 31, 2000 listed a “Members’ Dividends” expense of $99,121 and a corresponding liability titled “Members’ Dividends Payable” of the same amount. Note 1 to the 2000 audited financial statements disclosed “It is the policy of the Trust to distribute the excess of revenues over expenditures to its members.” The net income was shown as zero in these same financial statements. Thus, it appears that $99,121 was the amount of ELITE’s net income before any dividend expense, and a dividend of $99,121 was accrued to reduce the net income to zero. L&M questions the prudency of a policy whereby no equity is retained in an entity. L&M was not able to locate documents or Trustee meeting minutes to indicate how the dividend was allocated to the participating members in 2000. Change in Dividend Policy The 2001 audited financial statements reflected a net income of approximately $100,000 and no dividend expense was shown. Note 1 to the 2001 audited financial statements continued to disclose that “It is the policy of the Trust to distribute the excess of revenues over expenditures to its members”; however, it appears this policy was changed or no longer followed since a $100,000

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dividend was not recorded in 2001. The audited financial statements for the years after 2001 did not disclose this policy. Accordingly, it appears the policy changed during 2001, and the disclosure for 2000 was mistakenly left in the 2001 audited financial statements. There was no mention of dividends or a change in the dividend policy in the April 16, 2001 or any other Trustee meeting minutes. Dividend in Year 2004 The audited financial statements for the year ended September 30, 2004 listed a “Members’ Dividends” expense of $2,500,000 and a corresponding liability titled “Dividends Payable to Members” of the same amount. A letter from CRM to the Trustees dated November 23, 2004 that accompanied the September 30, 2004 internally prepared financial statements stated that ELITE’s 2004 net income of $2,544,892 (before any dividend expense) was after the establishment of a claims reserve liability at the high end of the actuarial estimated range, and “we recommend that the ECTNY Board declare a dividend of $2,500,000…the calculation of each member’s share will be based on cumulative contributions by each continuing member in proportion to total contributions.” The internal financial statements were prepared as if the $2,500,000 dividend would be approved, and displayed a $472,000 ending equity position. The letter closed with a recommendation that the Trustees “pass a resolution at the 12/2/04 meeting declaring the dividend.” The minutes from the Trustee meetings from June 2, 2004 and December 2, 2004 listed the following comments: “We need to get tax advice on the dividend” and “Dividend distribution is at the discretion of the board…we are trying to pay a dividend but still leave enough reserves to account for adverse losses…if we pay out the dividend, the program will only pay taxes on $44,000, if we do not declare a dividend we will have to pay taxes on the surplus…Gene Clark made a motion to make dividend date as of March 31 for active members…Pat Murphy seconded…All on favor…Resolution to follow - $2.5 million dividend…Dividend will be 10-11% of this year’s premium for members that have been in the program from day one.” Based on the discussion in the Trustee meeting minutes L&M obtained, the tax savings resulting from issuing a dividend to the members appeared to be a significant factor in the decision to issue a dividend. After the $2,500,000 dividend expense, the net income for 2004 was $20,000, and the ending members’ equity was $415,800. L&M believes a strong argument can be made that the $415,800 members’ equity balance at September 30, 2004 was insufficient for a trust that had $21.7 million of contribution revenue, $22.4 million of assets, and a $684,000 loss in the prior year. Accordingly, L&M would have expected some documentation in the December 2, 2004 minutes to indicate a discussion among the Trustees relative to the adequacy of the expected ending equity balance and different (lower) proposed dividend amounts. The WCB informed L&M that CRM did not provide it with any notification prior to declaring and issuing this dividend.

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Allocation of $2,500,000 Dividend to Eligible Members A letter dated May 31, 2005 was sent to the then current members from CRM informing the members that (1) a $2,500,000 dividend had been declared, (2) current members in good standing qualify for a portion of it, and (3) allocation will be based on total contributions from each member through March 31, 2004 to total cumulative contributions from all members through March 31, 2004. The criteria above indicate all qualifying members participated in the dividend regardless of a member’s claims experience. Thus, no distinction was made between a member with a low loss ratio and one with a high loss ratio. This logic seems counter intuitive to L&M since members with high loss ratios would not have contributed to the deemed surplus that was being returned, but rather collectively generated losses for the Trust. L&M would have expected that an additional criteria factoring in loss ratios would have been considered to determine those members who are eligible to participate in the $2,500,000 dividend. L&M obtained a schedule prepared by CRM to allocate the dividend to the members. The data descriptions on the schedule indicate that contributions from January 1, 2001 through March 31, 2004 were used by CRM to allocate the dividend, not total contributions from each member from date of participation through March 31, 2004 as was noted in the above referenced letter. However, L&M noted above that a $99,121 dividend expense was reflected on the August 31, 2000 audited financial statements. Thus, in theory the members who participated during the year ended August 31, 2000 already received a dividend pertaining to that year’s results. Accordingly, L&M believes contributions for that year were appropriately omitted from the calculation to allocate the $2,500,000 dividend. However, L&M believes contributions for the period beginning September 1, 2000 rather than January 1, 2001 should have been used to allocate the dividend. Also, since the dividend recorded as a liability as of September 30, 2004 is better categorized as a return of contributions to members rather than an equity transaction, L&M questions why it was allocated to members existing as of May 31, 2005 rather than members as of September 30, 2004. This resulted in members who were participants in ELITE at September 30, 2004, but had terminated coverage prior to May 31, 2005, not receiving any portion of the dividend.

L&M performed the following test work pertaining to the $2,500,000 dividend: Selected five members who left ELITE between October 1, 2004 and May 31, 2005, and

noted they were properly (based on CRM's criteria) excluded from the CRM prepared schedule listing members who were allocated a portion of the $2,500,000 dividend.

Selected five members who left ELITE after May 31, 2005 and noted that they were properly (based on CRM's criteria) included on the schedule that listed the members who received a portion of the dividend.

Selected eight members who left ELITE during the year ended September 30, 2004. None of these members should have received any portion of the dividend based on the criteria established by CRM and/or the Trustees. We noted that one of the eight members was incorrectly (based on CRM's criteria) included in the group of participants who shared in the dividend. The member who incorrectly (based on CRM's criteria) received a dividend was not a Trustee member company.

Compared the cumulative contributions for three members on the CRM prepared dividend allocation schedule to an L&M calculated estimate using the final billing invoices. All calculated variances were deemed reasonable based on the differences between the periods

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per the final billing invoices and the January 1, 2001 – March 31, 2004 period used for the dividend allocation.

Examined the termination dates of the six Trustee member companies and noted that the five who received a dividend were all participants of ELITE as of May 31, 2005, thereby making them eligible to participate in the dividend.

Because members who participated through September 30, 2004 but left before May 31, 2005 were excluded from participating in the $2,500,000 dividend and at least one member who received a dividend was ineligible based on the criteria established by CRM and/or the Trustees, L&M concludes the allocation of the dividend was not fair and equitable to the members.

Other Dividends

Based on a review of the audited financial statements for 2005 – 2008, the Level I review reports prepared by the WCB for 2005 – 2007, Trustee meeting minutes obtained by L&M, and various documents from the WCB, L&M did not uncover the issuance of member dividends other than those noted above. Additionally, our interviews of the member representatives did not denote other dividends issued to members. Compliance with NYCRR

The WCB’s Level I review for September 30, 2004 deemed ELITE to have “no funding issue”, thus ELITE appeared in compliance with that provision of the NYCRR. However, the WCB informed L&M that CRM did not provide it with any notification prior to declaring and issuing the dividend. L&M’s Conclusions

L&M questions the prudency of the policy for 2000 whereby dividends were issued to members to the extent necessary to eliminate net income, thus resulting in no equity retained by ELITE.

A Member’s loss ratio should have been an additional criteria to determine eligibility to participate in the $2,500,000 dividend since a member with a high loss ratio would not have contributed to the deemed surplus returned to the members.

We believe the $415,800 members’ equity balance at September 30, 2004 after the $2,500,000 dividend expense was insufficient for a trust that had $21.7 million of contribution revenue, $22.4 million of assets, and a $684,000 loss in the prior year. Accordingly, we believe the dividend should have been reduced.

Based on the fact that members who participated through September 30, 2004, but left before May 31, 2005, were excluded from participating in the $2,500,000 dividend, coupled with L&M noting that at least one member who received a dividend was ineligible based on the criteria established by CRM and/or the Trustees, L&M concludes that the allocation of the dividend was not fair and equitable to the members.

It appears no preferential treatment was given to the Trustee member companies relative to their eligibility to participate in the 2004 dividend totaling $2,500,000.

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15. Corrective Action Plans Introduction Section 317.9 of the NYCRR, effective January 31, 2001, grants the WCB Chair the authority to require a fund’s trustees and/or administrator to prepare a written plan that details the actions that will be taken to restore a fund’s financial stability. Regulatory Funding Position not met for 2001 The 2001 funding summary performed by the WCB resulted in the WCB’s determination that ELITE did not meet the required regulatory funding position (was under-funded) as of September 30, 2001. The WCB responded to this regulatory funding deficit by sending a letter dated February 11, 2002 to all of ELITE’s Trustees to notify them of its determination, and imposed sanctions which included the suspension of ELITE’s ability to add members and the requirement to provide the WCB with member specific data including losses, discounts, and experience modification factors. On March 18, 2002, the WCB and ELITE entered into a Memorandum of Understanding (MOU), under which the WCB agreed to lift the no new member restriction imposed on February 11, 2002. The MOU contained numerous terms, one of which was that new members may not be given discounts above 10% without the WCB’s approval. On September 20, 2002 the WCB sent a letter to CRM indicating that the results of an independent actuarial study by Milliman USA as of September 30, 2001 confirmed the WCB’s assessment that ELITE was under funded. The letter later stated “however, a formal remediation plan has been held in abeyance due to the fact that the end of the current fiscal year (September 30, 2002) is imminent.” The letter also stated that until a formal remediation plan was in place (which would require ELITE to suspend adding any new members), if determined to be necessary based on ELITE’s regulatory funding position at September 30, 2002, a revised MOU would be in place effective October 1, 2002, whose terms included:

New member policies or existing member renewals effective on or after that date could only be for a six month period, and the weighted average discount rate of such may not exceed 18%.

New member admissions are limited to no more than ten per month, and collectively may not exceed thirty for the period the revised MOU is in effect.

New member admissions are further limited such that their combined annual contributions cannot exceed 1% of the total contributions of all other members.

Individual discount rates provided to new members may not exceed 18%. In a letter dated September 23, 2002, CRM responded to the WCB’s limitation on the number and size of new members by stating “the Memorandum of Understanding (MOU) received by our offices this morning is not in the best interest of ECTNY…ECTNY was able to write $6,168,000 worth of business under the previous Memorandum of Understanding; all at an average weighted discount of 5.01%...Denial of new business at this level of discount severely threatens the trust and weakens its financial viability. ECTNY is effectively building surplus for its members and must be allowed to continue to do so.” In a letter dated September 25, 2002, the WCB responded to CRM’s letter by reaffirming its position relative to the restrictions on new members previously imposed.

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On December 10, 2002, a revision was made to the September 20, 2002 MOU that stated for the period December 10, 2002 through January 31, 2003: (1) the number of new members cannot exceed 100 without the WCB’s approval, (2) the experience modification factor for new members cannot exceed 1.20, (3) the discount rate provided to new members with manual premiums between $7,500 - $15,000 cannot exceed 7%, (4) the discount rate provided to new members with manual premiums between $15,001 - $100,000 cannot exceed 10%, and (5) the discount rate provided to new members with manual premiums over $100,000 cannot exceed 16%. On January 22, 2003 the WCB determined that ELITE was fully funded at September 30, 2002 on a regulatory funding basis, and lifted all restrictions previously imposed by the MOUs. Compliance with the WCB’s Directives and Restrictions L&M tested ELITE’s compliance with certain of the restrictions imposed by the WCB noted in the previous section. The results of our testing follows:

No new members from February 11, 2002 – March 17, 2002 based on WCB letter dated February 11, 2002. L&M found this restriction was violated since 35 members were added with an effective date during this period.

Discounts to new members joining from March 18, 2002 – September 19, 2002 cannot exceed 10% per MOU dated March 18, 2002. L&M found this restriction was violated since two members added during this period received discounts of 20%.

The policy term of all new members joining on or after October 1, 2002 can only be for six months. This was effective for the period October 1, 2002 – December 9, 2002 per the MOU accompanying the WCB’s letter to CRM dated September 20, 2002. L&M found this provision was violated since 2 members who joined during that period were given policy terms of ten months and 1 year.

During the period October 1, 2002 – December 9, 2002, the number of new members added cannot exceed 30, and the individual discounts to each cannot exceed 18%. These restrictions were included in the MOU accompanying the WCB’s letter to CRM dated September 20, 2002. L&M believes that ELITE complied with both of these restrictions.

No more than 10 new members can be added per month during the period October 1, 2002 – December 9, 2002. This restriction was included in the MOU accompanying the WCB’s letter to CRM dated September 20, 2002. L&M found that ELITE violated this restriction since 22 members were added during the month of October 2002, 8 of which were related parties to other members. Even if CRM deemed the 8 related entities to not count toward the limit, 14 non-related members were added during that month (which exceeds the limitation of 10 imposed by the WCB).

New members cannot exceed 100, and the experience modification factor of each new member cannot exceed 1.20. These restrictions existed during the period December 10, 2002 – January 22, 2003 per the revisions to the MOU outlined in the WCB’s letter dated December 10, 2002. L&M found that ELITE complied with both of these restrictions.

New members during the period December 10, 2002 – January 22, 2003 cannot be given discounts exceeding (1) 7% for those whose manual contribution is between $7,500 -$15,000, (2) 10% for those whose manual contribution is between $15,001 - $100,000, and (3) 16% for those whose manual contribution exceeds $100,000. L&M found this restriction was violated since two members with manual contributions between $7,500 - $15,000 received 10% discounts.

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The results of our compliance testing noted above may indicate a disregard for WCB issued directives. With the exception of the number of new member additions, we believe the WCB would not have had sufficient information to determine or otherwise been made aware of ELITE’s non-compliance with the above noted restrictions. Regulatory Funding Position met for 2002 - 2005 The 2002 funding summary and the 2003 – 2005 Level I reviews performed by the WCB reported no regulatory funding issues for ELITE. Accordingly, no corrective action / remediation plan existed during this period. Regulatory Funding Position not met for 2006 and 2007 The 2006 and 2007 Level I reviews performed by the WCB resulted in the determination that ELITE did not meet the required regulatory funding position (was under-funded) as of September 30, 2006 and 2007. L&M searched through correspondence and documents obtained from the WCB and failed to locate a corrective action plan(s). Further correspondence from the WCB to L&M indicated it did not require ELITE to prepare a comprehensive action plan subsequent to the 2006 and 2007 Level I reviews since those draft reports were never issued as final (due to the timing of PricewaterhouseCoopers, LLP completing its “tier two” report - see report section “Establishment of Yearly Reserves on the Balance Sheet”) and because the Trust ceased operations shortly thereafter. L&M’s Conclusions

ELITE did not meet the required regulatory funding position as of September 30, 2001, which resulted in the imposition of various WCB imposed restrictions during the period February 11, 2002 – January 22, 2003. CRM failed to comply with a number of the restrictions, which may indicate a disregard for WCB issued directives.

16. Equity Ratio and Contributions Receivable Subsequently Collected Equity Ratio Section 317.6 of the NYCRR, effective January 31, 2001, requires group self-insurers to maintain qualifying trust assets at least equal to all trust liabilities. Thus, group self-insurers must maintain a regulatory funding position (hereafter referred to as “equity ratio”) of at least 100%. A group self-insurer that does not meet this funding requirement is deemed under-funded and may be subject to sanctions imposed by the WCB such as those involving new member admittance, security deposits, and the revocation of the group’s privilege to self-insure. However, the WCB’s policy during 2000 – 2008 was to impose sanctions only on those under-funded groups whose equity ratio fell below 90%. Thus, the WCB considered groups with a 90% or better equity ratio to have no funding issues. Section 317.2(n) of the NYCRR, effective January 31, 2001, excludes member contributions receivable from assets used to calculate the equity ratio of a trust fund. However, the WCB’s policy considers member contributions receivable collected within 90 days of a trust fund’s fiscal year end as an allowable asset provided these collections directly relate to the receivable presented on the year end financial statements.

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Discussions by CRM and ELITE’s Board of Trustees Pertaining to the Equity Ratio

CRM and the Board of Trustees were cognizant of the NYCRR’s equity ratio requirement, and they focused on meeting this requirement based on the following notations in the Board of Trustees meeting minutes obtained by L&M:

December 5, 2002 – “Trust is fully funded…trust to equity ratio is 107%...90% is acceptable to Workers’ Compensation Board for trust to equity ratio”

June 2, 2004 – “The Trust is trending favorably…The Trust equity ratio is 103% up from 97%...Using 2003 NYS development factors (they are higher than 2002) and we are still at a 103% Trust Equity Ratio…Level II audit has been completed and the trust is funded…We are using the top of the actuarial range and the program is still at a 103% Trust Equity Ratio”

December 2, 2004 - “We can only use cash and cash equivalents to calculate the Trust Equity Ratio (TER)…As of December 31, 2004 the WCB will require all programs to be at a 100% TER”

June 8, 2005 – “Trust Equity ratio at 102% after dividend distribution…Reply back in March from comp board they adjusted our ratio (deemed to mean trust equity ratio) down to 95%”

December 1, 2005 – “Need to be above 100% trust equity ratio…Currently at 103%” March 6, 2007 – “The financials submitted look very good with a trust equity ratio of 93%” December 6, 2007 – “TER is 84.7%”

Contributions Receivable Subsequently Collected

The member premium receivable disclosures, as well as the supplementary information contained in the 2004-2007 audited financial statements, identified the amounts collected on contributions receivable during the first 90 days of the subsequent year. Additionally, the 2001 funding summary stated ELITE’s certified public accountant verified the amount of contributions receivable that had been collected within 90 days after the Trust’s 2001 year end. The WCB used that information to calculate ELITE’s equity ratio in the 2004-2007 Level I reviews. Note that the 2006 and 2007 Level I reviews we reference are labeled as drafts since final versions were never issued due to the timing of PricewaterhouseCoopers, LLP completing its “tier two” report (see report section “Establishment of Yearly Reserves on the Balance Sheet”) as well as the WCB’s termination of ELITE’s status as a group self-insurer. No Level I review was performed for 2001 - 2003; however, the WCB prepared a funding summary that calculated the equity ratio for those years. Equity Ratio Calculated, and Funding Position as Determined by the WCB A table identifying subsequent receipts, equity ratios and funding status for each of the above fiscal years per the 2001 - 2003 funding summaries and the 2004 – 2007 Level I reviews follows:

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Table 10:

Member Contribution Contributions EquityReceivables Collected Ratio as Funding Position per

Trust Year- Reflected in Year Within 90 Calculated WCB as Based onEnded End Financial Days by the Section 317.6 of the

September 30, Statement Reported as WCB NYCRR2001 1,409,119$ 213,743$ 73.5% Under funded2002 127,296 N/A 93.7% No funding Issue2003 1,048,940 N/A 93.1% No funding Issue2004 1,125,136 679,373 95.9% No funding Issue2005 1,721,265 1,494,482 101.3% No funding Issue2006 1,815,106 1,600,285 85.0% Under funded2007 2,497,059 2,260,063 87.1% Under funded

Conclusions Pertaining to 2002 The WCB did not allow any portion of the 2002 contribution receivable in its calculation of ELITE’s equity ratio since it did not receive verification as to the amount collected during the first 90 days of the subsequent year. As noted in report section “Establishment of Yearly Reserves on the Balance Sheet”, a liability for unallocated loss adjustment expense (ULAE) was not recognized in ELITE’s 2002 audited financial statements used by the WCB to calculate ELITE’s equity ratio. If an estimated ULAE equal to 5% of the recorded claims liability (net of accrued assessments included in such) had been recognized in the September 30, 2002 audited financial statements, ELITE’s equity ratio would have decreased to 91.6%, still resulting in a “no funding issue” designation. Conclusions Pertaining to 2003 The WCB did not allow any potion of the 2003 contribution receivable in its calculation of ELITE’s equity ratio since it did not receive verification that the amount collected during the first 90 days of the subsequent year related to the receivable balance at September 30, 2003. As noted in report section “Establishment of Yearly Reserves on the Balance Sheet”, a liability for ULAE was not recognized in ELITE’s 2003 audited financial statements used by the WCB to calculate ELITE’s equity ratio. If an estimated ULAE equal to 5% of the recorded claims liability (net of accrued assessments included in such) had been reflected at September 30, 2003, ELITE’s equity ratio would have decreased to 90.4%, still resulting in a “no funding issue” designation. Conclusions Pertaining to 2004 As noted in report section “Establishment of Yearly Reserves on the Balance Sheet”, a liability for ULAE was not recognized in ELITE’s 2004 audited financial statements used by the WCB to calculate ELITE’s equity ratio. If an estimated ULAE equal to 5% of the recorded claims liability (net of accrued assessments included in such) had been reflected at September 30, 2004, ELITE’s equity ratio would have decreased to 93.4%, still resulting in a “no funding issue” designation.

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Conclusions Pertaining to 2005 As noted in report section “Establishment of Yearly Reserves on the Balance Sheet”, a liability for ULAE was not recognized in ELITE’s 2005 audited financial statements used by the WCB to calculate ELITE’s equity ratio. If an estimated ULAE equal to 5% of the recorded claims liability (net of accrued assessments included in such) had been reflected at September 30, 2005, ELITE’s equity ratio would have decreased to 98.6%, still resulting in a “no funding issue” designation. Conclusions Pertaining to 2006 The WCB calculated ELITE’s equity ratio as 85.0% at September 30, 2006 while a schedule in the 2006 audited financial statements indicate CRM believed it to be 93.1%. The reason for the difference, as explained in the WCB’s Level I review, was because the WCB excluding the $2,740,179 excess insurance recoverable asset to calculate the equity ratio since one of ELITE’s excess carriers was not deemed adequately financially positioned, and the WCB was not able to determine what portion of the $2,740,179 related to ELITE’s other excess carriers. As noted in report section “Establishment of Yearly Reserves on the Balance Sheet”, a liability for ULAE was not recognized in ELITE’s 2006 audited financial statements used by the WCB to calculate ELITE’s equity ratio. If an estimated ULAE equal to 5% of the recorded claims liability (net of accrued assessments included in such) had been reflected at September 30, 2006, ELITE’s equity ratio would have decreased to 82.8%, still resulting in an “under funded” designation. Conclusions Pertaining to 2007 As noted in report section “Establishment of Yearly Reserves on the Balance Sheet”, the Trust’s actuary calculated the ULAE liability at $109,000 relative to services to be performed by CRM during the period October 1, 2007 through December 31, 2007 relating to claims incurred before October 1, 2007. No ULAE liability was deemed present for administrative services to be performed after December 31, 2007 since the new Service Agreement with CRM effective January 1, 2008 stated CRM’s administration will be cradle-to grave, and the cradle-to-grave services apply to all claims occurring during CRM’s past and future term of service. The December 6, 2007 Trustee meeting minutes state CRM’s agreement was amended to increase their fee in return for their servicing the claims on a cradle-to-grave basis, resulting in the elimination of a potential ULAE liability of $2,700,000 (“$20M of reserves has $2.7M for ULAE…CRM will amend contract to run claims cradle to grave by increasing administrative fee 1.5%...By doing this $2.7M can come off liabilities”). The rationale behind the amendment (eliminating the ULAE liability estimated to be $2,700,000) could be an indication of what CRM was willing to do to improve/meet the WCB’s equity ratio. L&M’s Overall Conclusions

The minutes of the Board of Trustees meetings noted above demonstrate that CRM and the Trustees were concerned and focused on meeting the WCB’s required 90% equity ratio.

A liability for unallocated loss adjustment expense (ULAE) was not recognized in ELITE’s 2002 – 2006 audited financial statements. If an estimated ULAE equal to 5% of the recorded claims liability had been properly reflected in the 2002 – 2005 financial statements, then ELITE’s equity ratio for each of those years would have decreased; however, it would have remained above 90% for each respective year. Accordingly, ELITE would still have received a “no funding issue” designation from the WCB for the 2002 – 2005 years.

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17. Establishment of Yearly Reserves on the Balance Sheet L&M compared the balance of the unpaid losses and loss adjustment expenses (hereafter referred to as “claims reserves”) reported in the annual audited financial statements for 2001 – 2007 with the claims reserves calculated in the annual actuary reports. L&M did not include 2008 in the following analysis since that audit was performed after the Trust ceased providing ongoing workers’ compensation coverage. ELITE used the actuary firms SGRisk, LLC (SGRisk) and EMB America LLC (EMB) to perform the actuarial calculation of the claims reserves for the 2001 - 2007 years. SGRisk performed the 2001 – 2006 calculation while EMB did 2007. It should be noted that the Service Agreement specified CRM was responsible for employing the actuary firm. We were informed by the WCB that CRM used SGRisk for all New York trusts it administered. The following table compares the actuarially calculated claims reserves (including state assessments) to the net balance recorded by ELITE as reflected in the audited financial statements. Note that the 2006 and 2007 balance sheet liability reflected below is net of the excess insurance recoverable asset recorded that the actuary netted out in calculating its estimated liability. Footnote number 4 in both the 2006 and 2007 audited financial statements disclose the net balance sheet liability.

Table 11 :(000 omitted)

2001 2002 2003 2004 2005 2006 2007

Actuary SGRisk SGRisk SGRisk SGRisk SGRisk SGRisk EMB

Actuarial Range :Low 3,560$ 6,076$ 11,556$ 12,449$ 16,090$ 21,273$ 32,010$ Expected 3,955$ 6,750$ 12,840$ 13,104$ 16,937$ 22,393$ 33,694$ High 4,351$ 7,426$ 14,124$ 13,759$ 17,784$ 23,512$ 37,064$

Discount rate used 6% 5% 5% 5% 5% 5% 5%

Claims Reserves on Balance Sheet 4,250$ 6,751$ 12,700$ 13,700$ 16,950$ 21,273$ 31,907$

The table indicates the following with respect to the claims liability balances recorded compared to that calculated by the actuary:

2001 - a liability almost equal to the high end of the range was recorded; 2002 - a liability equal to the expected amount was recorded; 2003 - the $12,700,00 recorded was $140,000 below the expected; 2004 - the $13,700,00 recorded was slightly below the high end of the range; 2005 - an amount slightly above the expected was recorded; 2006 - a liability equal to the low end of the range was recorded; 2007 - a liability $103,000 below the low end of the range was recorded.

The above items indicate significant fluctuation during the 2001 – 2005 years whereby ELITE’s recorded liability fell within the actuarial calculated range. Additionally, the liability recorded for the Trust’s last full two years of operations (2006 and 2007) was at or below the low end of the range calculated by the actuary.

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The audited financial statements for 2001 - 2004 disclosed what the actuarially calculated range of the claims liability was (the low to high). This disclosure was not made for 2005, 2006, and 2007. L&M finds it curious that the disclosure was omitted for the two years where the amount recorded by ELITE was at or below the low end of the range as calculated by the actuary. L&M made numerous attempts to interview the former Trustees of ELITE to inquire about the procedures for selecting the claims reserves balance to record. None of the Trustees agreed to be interviewed and/or responded to our repeated attempts to interview them. L&M noted only one instance in the Trustee meeting minutes obtained that indicated the Trustees had input relative to the reserve level selected by ELITE. The December 4, 2003 Trustee meeting minutes state “Using the most conservative loss estimate allowed it (to) generates 1 million loss for the year…Board (of Trustees) to determine reserve number…the board approves Joe Taylor’s (from CRM) methodology of keeping tax liability down by using the high end of the actuarial range.” However, if this discussion related to September 30, 2003 (likely given this meeting was in December 2003), then the claims reserve agreed to by the Trustees was not recorded since ELITE recorded a liability $1.4 million less than that reflected by the high end of the actuarial range.

Some other comments relative to claim reserves noted in the minutes include: June 2, 2004 – “We can’t develop away the losses any higher than we are…we are using the

top of the actuarial range” December 2, 2004 – “We are at the high end of the actuarial range…If we use a number

below the midpoint of the actuarial range the WCB will look closely at our financials and they do not look upon that favorably”

June 8, 2005 – “We try to minimize profits by boosting up reserves…Booked $10MM of development on top of the $5MM of case reserves…We used slightly above the mid point of the actuarial range”

December 1, 2005 – “Using mid range of actuarial range - another $800,000 would bring us to the top end of the range”

June 5, 2007 – “Loss reserves increased from $24M to $28.6M…Increase in claims reserve – want to be properly reserved due to settlement of claims…Have strengthened the trust reserves – more aggressive in structured settlements”

The minutes in 2004 and 2005 appear to indicate CRM chose the claims reserves balance to record, and the minimization of income taxes greatly influenced the claims reserves balance recorded. There was no indication in the March 6, 2007 and the June 5, 2007 minutes that CRM communicated to the Trustees that the claims reserve balance recorded at September 30, 2006 was the low end of the actuarial range. Prior minutes all note CRM communicated to the Trustees the value the claims reserve had been recorded at (top end or midpoint of actuarial range). L&M finds it interesting that the minutes indicate CRM communicating the claims reserve levels to the Trustees when it was good news (mid to high point), but not when it was bad (low point used). The claims reserves balance calculated by SGRisk for 2001 – 2006 did not include an estimate for unallocated loss adjustment expense (ULAE). SGRisk disclosed that no liability for estimated ULAE was included for ELITE because the administration fees paid to CRM were for the life of the claim, also known as “cradle-to-grave.” L&M reviewed the Service Agreement in place during 2001 – 2006, and did not note language to indicate that the agreement was on a life-of-claim (cradle-to-grave) basis; rather, the Service Agreement appears to be on a life-of-contract basis. Thus, the 2001 – 2006 estimated liability range calculated by SGRisk was understated since no ULAE had been

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included. L&M is not sure if the CPA firm who conducted the 2001 – 2006 financial statement audits documented this as an issue. A written summary of a conference call between members of CRM, the WCB, and ELITE’s financial statement auditors on October 16, 2001 indicates a WCB inquiry as to why no ULAE was included in SGRisk’s actuary report was replied to by CRM, who explained “due to the nature of the agreement between CRM and the trust (Cradle-to-Grave), there is no need for ULAE.” SGRisk disclosed in its 2006 calendar-year actuary reports for two other CRM administered trusts that its past understanding was incorrect since CRM now asserts that its administration fees are on a life-of-contract basis. No such notation was made by SGRisk in its September 30, 2006 actuary report for ELITE. However, this new information may have come to SGRisk’s attention between the time ELITE’s 2006 actuary report was issued in January 2007 and the issuance of the other two trusts’ actuary reports in May 2007. Thus, the 2002 – 2006 estimated liability range calculated by SGRisk was understated since no ULAE had been included in such. The 2007 actuary report prepared by EMB included an estimate for ULAE relative to services to be performed by CRM during the period October 1, 2007 through December 31, 2007. The estimate of ULAE was only for the period through December 31, 2007 since the new Service Agreement with CRM effective January 1, 2008 stated that CRM’s administration will be cradle-to-grave, and the cradle-to-grave services apply to all claims occurring during CRM’s past and future term of service. As stated above, ELITE used SGRisk as its actuary firm for 2001 – 2006. The WCB hired Milliman USA, an actuarial firm, to review SGRisk’s 2001 actuary report. Milliman USA’s report concluded that some of the assumptions used by SGRisk appear to understate the claims reserve liability, resulting in an optimistic claims reserve estimate. L&M also obtained documentation to indicate the WCB also hired PricewaterhouseCoopers, LLP (PwC) to review SGRisk’s 2002 actuary report. The documentation states that PwC believes SGRisk’s estimated claims liability for 2002 to be understated by 30%. The WCB issued a letter to ELITE’s Trustees dated December 5, 2006 that stated information had come to its attention which raised significant concerns about the accuracy of the actuarial reports SGRisk had prepared for all trust funds. As a result, the WCB required an independent actuarial review be performed for ELITE as of September 30, 2006. The December 6, 2007 Trustee meeting minutes state “EMB now the actuary on the program.” Additionally, an unsigned Trustee resolution dated December 7, 2007 was located by L&M which replaced SGRisk with EMB. While L&M did not locate documentation to explain the reason for the change in actuarial firms, it is reasonable that ELITE responded to the WCB’s concerns by replacing SGRisk with a different actuary firm. ELITE, at the direction of the WCB, contracted with PwC in 2007 to perform “tier one” and “tier two” analyses of ELITE’s claims reserves for 2006 by examining the actuary reports prepared for 2003 – 2006, and performing various calculations using the actuary reports, various loss run reports generated by CRM, the 2005 and 2006 audited financial statements, claim data in electronic format, and a NCCI Statistical Bulletin that contained the New York Compensation Insurance Rating Board loss development factors.

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The findings reached by PwC’s “tier one” analysis indicated that additional work was required to determine if the claims reserves for 2006 calculated by SGRisk were reasonable. This additional work resulted in PwC performing a “tier two” analysis. PwC’s calculation of the estimated discounted claims reserve liability (including state assessments) for 2006 in its “tier two” analysis was $33.0 million; $10.6 million higher than SGRisk’s expected estimate of $22.4 million. The increase of $10.6 million was primarily because PwC estimated higher ultimate losses for the 2001 through 2006 policy years, accounted for a ULAE reserve, and used a different discount rate to present value the total claims reserve liability. PwC noted one reason for its estimate of the ultimate losses for the 2001 through 2006 policy years being higher than SGRisk’s was because PwC used data through September 2007, with the reported and paid losses subsequent to September 30, 2006 being significantly greater than previously expected. L&M obtained a letter dated January 25, 2008 from the WCB to ELITE’s Trustees that indicated a meeting took place between both parties to discuss the results of PwC’s “tier two” analysis. The letter stated the Trustees did not dispute the conclusion that the claims reserves included in the 2006 financial statements were inadequate. As previously noted, ELITE hired a different actuary (EMB) to calculate the claims reserves for 2007. EMB’s calculations resulted in a $12.6 million (22%) increase in the estimated total ultimate incurred losses for claims through September 30, 2006 as compared to SGRisk’s estimates in its 2006 actuary report. ELITE used the actuarial firm By The Numbers Actuarial Consulting, Inc. (By The Numbers) to calculate its claims reserves for 2008. By The Numbers’ estimate of total ultimate incurred losses for claims through September 30, 2006 was $26.8 million (46%) higher than originally estimated by SGRisk in its 2006 actuary report. As highlighted above, the calculations of three different actuarial firms’ (PwC, EMB, and By The Numbers) calculations result in significant increases to estimated total ultimate incurred losses for claims through September 30, 2006 as compared to the estimates calculated by SGRisk in its September 30, 2006 actuary report. L&M contacted and posed various questions to the president of SGRisk, the actuary who signed the cover letters we obtained that accompanied SGRisk’s reports. The actuary referred our questions to the attorney representing SGRisk, who suggested all information requests to SGRisk be made as formal discovery requests in the applicable litigation actions pending with respect to the trusts administered by CRM. L&M had prior communications with SGRisk’s president pursuant to two other CRM administered trust funds that L&M performed forensic accounting procedures on, during which he indicated he never owned stock in CRM Holdings, Ltd., SGRisk was independent of, and never felt pressured by, CRM to modify their actuarial assumptions or methods so as to arrive at a lower estimate of total incurred losses, and that it was routine for SGRisk to discuss its estimates with its clients after a draft report was issued. Additional information that the actuary provided to L&M relative to the aforementioned other CRM administered trusts includes:

SGRisk did not present any of its reports to the Trustees; rather, the reports were only presented to CRM.

When asked if subsequent changes were made to the estimates used to calculate the draft reports provided to CRM, he replied “After discussions and sometimes visits to the CRM office in Poughkeepsie, SGRisk made changes to its estimates, either upward or downward,

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when SGRisk believed such changes were warranted by the discussions, additional information or data received by SGRisk from CRM. In many instances, SGRisk did not change its initial estimates. In some instances, estimates were revised upward; in some, downward. SGRisk only made changes if it believed such changes were indicated.”

When further questioned whether the changes resulted in the actuarially calculated liability being reduced more often than not, he replied “I do not recall whether such revisions were primarily upward or downward.”

The president of SGRisk chose to not answer our question regarding his awareness of the WCB’s requirement that funds must meet a 90% liquidity ratio (regulatory funding position) for a trust to be deemed “no funding issue.”

While this information obtained from SGRisk’s president was specific to two other CRM administered trusts, L&M believes it is reasonable that some or all of the above information would also apply to SGRisk’s dealings with ELITE. L&M hired an actuary firm to review ELITE’s 2001 – 2006 actuary reports prepared by SGRisk, and provide an opinion relative to the methods used by SGRisk to estimate the ultimate incurred losses and related claims reserve liability. Our actuary firm indicated that SGRisk made adjustments to standard actuarial techniques that significantly modified the results. These adjustments were not adequately justified and tended to drive estimated ultimate losses down more often than not. Additionally, the firm stated SGRisk never once used paid development methods to calculate the liability, which are generally preferred when reserve strengthening is suspected (which SGRisk stated was happening in every report from 2002 through 2006). The overall conclusion it reached was that the estimates contained in the 2001 - 2006 reports generally were in the lower end of the range of what it would consider reasonable. FCS Administrators, Inc. (FCS) was hired by ELITE to replace CRM effective September 1, 2008. FCS subsequently received information from CRM relative to the open claims, and adjusted the estimated incurred losses for individual claims based on its professional judgment. FCS was replaced by NCAComp, Inc. (NCAComp) effective April 1, 2010 at the WCB’s directive due to its policy that a new administrator be appointed for all trusts it assumes control of. NCAComp received information from FCS relative to the open claims, and has changed reserves as necessary based on its professional judgment. L&M obtained a loss run report from FCS that detailed the total incurred losses (paid as of that date and estimated amounts to be paid in the future) estimated by CRM as of August 31, 2008, which was the day before CRM was replaced by FCS. This loss run reflected all accidents occurring on and before July 16, 2008 (the date ELITE ceased active operations). FCS indicated to L&M that CRM increased ELITE’s reserves by approximately $17 million in March/April 2008. Accordingly, the August 31, 2008 loss run included this significant adjustment CRM made approximately four months prior. L&M compared the August 31, 2008 report to a similar loss run report obtained from NCAComp as of October 12, 2010 that detailed the total incurred losses as estimated by NCAComp, and noted that the total incurred losses increased by approximately $40,727,000, which is 50% higher than estimated by CRM at August 31, 2008. Additionally, L&M obtained a loss run report from NCAComp as of March 31, 2010 that detailed the total incurred losses as estimated by FCS, and noted that FCS’s estimate of total incurred was also substantially ($21,889,000 or 27%) higher than estimated by CRM at August 31, 2008.

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The incurred losses estimated by NCAComp as of October 12, 2010 are an estimate; however, the October 12, 2010 report indicates the cumulative amount paid on claims through October 12, 2010 is approximately 98% of the total incurred losses estimated by CRM as of August 31, 2008. Thus, it appears that CRM’s August 31, 2008 estimate was clearly understated, since that estimate would indicate that as of October 12, 2010, there was only another $1,532,000 to be paid until all of the claims were closed, which equals approximately only two months based on the $987,000 of average total monthly cash disbursements for claims during the year ended March 31, 2010. Based on the above, it appears CRM significantly under reserved for future claim liabilities. As noted in report section “Claims Handling Procedures/Practices”, L&M’s third-party claims review specialist noted numerous instances where CRM continued to use a “step reserving” method to establish the claims reserves after a final outcome could be predicted. This practice resulted in an understatement of the applicable claim’s reserves. L&M’s Conclusions

L&M noted only one instance in the Trustee meeting minutes to indicate the Trustees had input as to what was recorded as the year end estimate of claims reserves; accordingly, it appears CRM primarily decided the claims liability amount to record.

CRM recorded the claims reserve liability during 2001 – 2005 close to or in excess of the actuarially calculated expected amount. We believe tax minimization was the main reason for recognizing an amount in excess of actuarially calculated expected amount for at least two of those years.

The claims reserve liability recorded in 2006 and 2007, the first two years to show substantial net losses, was at or below the low end of the range calculated by the actuary. This may have been an attempt to display an improved financial position for those years.

An independent actuary firm hired by the WCB to review SGRisk’s 2001 actuary report concluded that some of the assumptions used by SGRisk appear to understate the claims reserve liability, resulting in an optimistic claims reserve estimate. A different actuary firm hired by the WCB to review SGRisk’s 2002 actuary report concluded that it believes SGRisk’s estimated claims liability to be understated by 30%.

An independent actuary firm hired by L&M to review the actuary reports of SGRisk, LLC (the actuary CRM used for ELITE during 2001 – 2006) concluded that adjustments were made to standard actuarial techniques which significantly modified the results. These adjustments were not adequately justified and tended to drive estimated ultimate losses down more often than not.

A liability for ULAE was not reflected in the 2001 – 2006 actuary reports, nor does it appear to have been included in the claims liability reflected in the corresponding audited financial statements.

NCAComp’s estimate of total incurred losses is $40.7 million (50%) higher than CRM’s comparable amount. Accordingly, CRM’s methods to estimate incurred losses yielded claim reserves that were significantly understated.

CRM continued to use “step reserving” after a final outcome could be predicted, thus resulting in the understatement of related claims expenses and liabilities.

18. Member Deficit As previously noted in the “Executive Summary” section of this report, each of ELITE’s members is jointly and severally liable for the deficits incurred by the Trust during the years of membership in

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the Trust. Joint and several liability is a legal obligation whereby an entity may be liable for the payment of the total judgment even if that entity is only partially responsible for the losses and obligations. Payment of the entire judgment can be demanded from any or all of the parties held liable under this provision. The provision was expressly stated in the Trust Agreement and the Joinder and Indemnification Agreements signed by all members of ELITE. Under a separate engagement with the WCB, L&M performed certain procedures to reconstruct and allocate the deficits incurred by ELITE over the period of its active existence. The objective of that engagement was to assist the WCB compute each member’s proportionate share of the cumulative deficit, which the WCB would subsequently use to support an additional assessment to the members. As explained in ELITE’s “Deficit Reconstruction and 2010 Assessment” report, certain operating expenses incurred by ELITE subsequent to September 30, 2010 were included in the calculation of the gross modified members’ deficit in that report. These expenses related to the preparation of the 2009 and 2010 financial statement audits and related corporate income tax returns, preparation of the 2009 and 2010 actuary reports, the forensic accounting services relative to the deficit reconstruction and allocation, an operational and performance review, and a claims review. The inclusion of these expenses increased the deficit by approximately $319,000 over the previously reported audited cumulative deficit. Finally, the $32,982,865 deferred income tax asset recognized relative to the future estimated income tax benefit of ELITE’s net operating loss carryforward was eliminated at the direction of the WCB since it does not result in cash to satisfy the Trust’s obligations; rather, it will result in a reduction of future years’ income taxes that would otherwise be due.

Table 12 below details the reconstructed gross modified members’ deficit of $82,242,027 by Trust fiscal years ended. Please refer to L&M’s “Deficit Reconstruction and 2010 Assessment” report dated December 15, 2010 for additional information regarding the methodology and assumptions used to compute the deficits identified in the table that follows.

Table 12:

Gross ModifiedYear-Ended in Members' Deficit

2000 258,825$ 2001 372,993 2002 7,798,251 2003 7,394,172 2004 7,318,470 2005 14,270,227 2006 12,608,200 2007 12,378,262 2008 19,842,627

Total 82,242,027$

19. Claims Handling Procedures/Practices

The handling and processing of claims is an integral part of the administration process. As discussed in report section “Administration Fees”, ELITE’s Service Agreement with CRM (in effect from August 27, 1999 through August 31, 2008) indicated CRM was responsible for all aspects of the claims handling process. FCS Administrators, Inc. (FCS), who replaced CRM on September 1,

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2008, also had a written Service Agreement with ELITE which stated that FCS was essentially responsible for all aspects of the claims handling process. FCS remained the administrator through March 31, 2010, the day after which the WCB assumed control of the Trust and appointed NCAComp as the administrator.

L&M engaged KBM Management, Inc. (KBM), a licensed employment benefit and risk management company that provides claim management quality assurance audits, to review a sample of ELITE’s claims files to determine the effectiveness of the overall claims handling process, including but not limited to whether: (1) claims were handled pursuant to CRM’s and FCS’s established written policies and industry standards, (2) claims and related expenses paid were supported by written documentation, (3) benefits were paid timely and as prescribed by law, (4) CRM and FCS applied for reimbursement from the Second Injury Fund, and (5) the claims reserving procedures were reasonable based on known facts and circumstances. KBM performed various procedures on 31 claims totaling approximately $6,977,000, which represents 5% of ELITE’s $141,964,000 reallocated cumulative claims expense. KBM issued a quality assurance claim audit report relative to the procedures performed and conclusions reached. A copy of its report is included as Appendix 5. Some of the specific deficiencies noted and conclusions reached by KBM as a result of its audit are:

The transfer of claim data from FCS to NCAComp often appeared incomplete and poorly organized. Some or all of this may be due to a poor transfer of data from CRM to FCS.

Invoices to support expenditures could not be located in numerous instances. At best this could be the result of an incomplete transfer of data from FCS to NCAComp, or at worst suggest fraudulent payments.

Excessive use by CRM of independent medical examinations (IMEs), performed by an affiliate of CRM, was noted in many files. This is explained in more detail under the “Eimar, LLC” section that follows.

Of the three claims that were settled by CRM, two appear to be for an excessive amount while the third was for an amount favorable to ELITE.

Of the three claims that were settled by FCS, two appear to be for an excessive amount while the third appears to be for a reasonable amount.

One instance was noted where CRM timely filed for reimbursement through the Special Disability Fund (Section 15-8) of the New York State Workers’ Compensation Law, however the necessary follow up by CRM and/or FCS was not completed (such as obtaining the claimant’s prior medical records) to obtain a concession from The Special Disability Fund. The potential cost to ELITE for not having this claim approved for reimbursement under Section 15-8 may be as much as $300,000. Another instance was noted where FCS timely filed for reimbursement through Section 15-8 of the New York State Workers’ Compensation Law, however FCS failed to obtain the required M&S statement (usually from the physician performing an IME) by the due date. The potential cost to ELITE for not having this claim approved for reimbursement under Section 15-8 could not be estimated at this time by KBM. L&M was informed by FCS that based on the construction nature of the Trust, it believes many more open claims would be eligible for Section 15-8 relief compared to the 10 out of 940 open claims that CRM identified for Section 15-8 relief. The potential cost to ELITE as a result of CRM’s potential failure to apply for reimbursement under Section 15-8 on these claims is unknown.

FCS was notified by the Office of Fraud Inspection in January 2009 that a claimant may be working at another job. FCS initiated a fraud investigation in March 2009, but apparently

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never followed through with and completed its probe. NCAComp reinitiated the fraud investigation after it took over administration of ELITE.

FCS was successful in its attempts to suspend one claimant’s future medical treatment after the claimant refused to have an IME.

Ten of the thirty-one files reviewed indicated that “step reserving” was used by CRM (8 instances) and FCS (3 instances). Step reserving is the practice of increasing claim reserves in small increments instead of reserving for the most probable outcome. Many administrators use step reserving in the early phase of a claim since all facts may not be known at that time, but full reserves should be established once a final outcome can be estimated. CRM and FCS continued to use step reserving after a final outcome could be predicted.

The reserves established for seven of the open files reviewed appeared reasonable, while one was slightly under reserved and the other five appeared over reserved. It is important to note that KBM reviewed the reserves established as of August 2010, and NCAComp had not completed the process of evaluating and adjusting (if necessary) the existing reserve for each claim until October 2010. Accordingly, it is possible the claims deemed by KBM to be either under or over reserved were corrected after KBM’s claims audit was completed.

Overpayments to claimants, medical care providers, and other vendors totaling $10,500 were noted ($8,300 by CRM and $2,200 by FCS). The reasons for the overpayments primarily included CRM’s miscalculation of the average weekly wage of a claimant, and duplicate payments by CRM and FCS for claimants’ medical care and prescriptions.

530 instances (327 by CRM and 203 by FCS) were noted where disbursements were not paid within 45 days of invoice receipt as required by New York State Workers’ Compensation Law. The significant number of disbursements paid late potentially subjects ELITE to penalties and suggests poor overall administration.

Numerous penalties totaling $14,900 were assessed to CRM and $200 to FCS primarily related to non-timely payment of claimant awards and medical bills, and non-timely filing of various forms with the WCB. While these penalties are the responsibility of the administrators, it appears ELITE incorrectly paid $450 of the amount.

KBM concluded was that the accuracy of CRM’s and FCS’s claims processing system was below industry averages, which require 99% financial accuracy and 95% procedural accuracy. The deficiencies found suggest a reduction in ELITE’s claims expense would have occurred had the claims been properly administered. Eimar, LLC The third item noted above was CRM’s deemed excessive use of IME’s, which are important tools in the administrations of claims. An IME is performed by a doctor who has not been previously involved in a patient’s care. An IME is initially requested by an administrator to determine the cause, extent, and medical treatment of an injury. Subsequent periodic IMEs may be obtained to determine if a worker has reached maximum medical benefit from treatment, and if any permanent impairment remains after treatment. Certain of ELITE’s claimants’ IMEs were performed by Eimar, LLC (Eimar), an entity incorporated in New York State in 2001. Eimar also provided case management, medical bill review, and utilization review services to ELITE. CRM Holdings, LTD’s December 31, 2005 Form 10-K filed with the SEC indicated that Eimar was owned by CRM’s parent company (CRM USA Holdings, Inc.). The state of Delaware’s Department of State website indicates that CRM USA Holdings, Inc.

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was incorporated December 19, 2005. The 2005 Form 10-K also noted that Eimar began providing services to CRM’s group self-insured trusts in 2002. ELITE’s 2004 - 2007 audited financial statements disclosed that the Trust used an affiliate of CRM to provide various services including IMEs, claim management, and medical billing reviews. Additionally, the 2003 and 2004 audited combined financial statements of CRM and affiliates include the operations and balances of Eimar since it was disclosed that Eimar essentially had identical beneficial ownership and management as CRM. Based on a report from ELITE’s claims system L&M received from NCAComp, payments to Eimar commenced in March 2003 and totaled $2,231,000 through early 2009. The majority of the disbursements to Eimar were through late 2008, although we did note a few checks after that period through early 2009. FCS indicated to us that Eimar was no longer used once FCS took over as administrator effective September 1, 2008. It is reasonable that disbursements to Eimar subsequent to September 1, 2008 would have been for services rendered by Eimar prior to that date. The fees ELITE paid to Eimar from 2003 through December 18, 2005 directly benefited CRM’s owners, while fees paid after December 18, 2005 directly benefited CRM’s parent company. One can infer there was an indirect financial incentive for CRM to use Eimar’s services as often as possible. This apparent conflict of interest, coupled with KBM’s conclusion that ELITE paid for IMEs deemed unnecessary, could lead to the conclusion that CRM put its own interest ahead of ELITE’s. L&M did not note information in the Trustee meeting minutes we obtained to indicate CRM informed the Trustees that Eimar was a related party to CRM. The only time we see Eimar mentioned was in the December 7, 2006 minutes which stated “Eimar bill review - $9.5 million in bills, reduced by almost $7M.” L&M believes it would have been CRM’s fiduciary duty to disclose to the Trustees that Eimar was a related party of CRM. As previously noted, all of ELITE’s Trustees refused our repeated attempts to interview them. Accordingly, we were unable to ascertain if they had ever been informed of Eimar’s relationship to CRM. As noted above, ELITE’s 2004 – 2007 audited financial statements disclosed that the Trust used an affiliate of CRM to perform IMEs. It is unknown why the 2003 audited financial statements failed to disclose that fact. 20. Security Deposits Section 317.5 of the NYCRR (Section 315.3 of the NYCRR before January 31, 2001) requires group self-insurers to post a security deposit with the WCB’s Chair in the form of securities, cash, a surety bond, or an irrevocable letter of credit in an amount specified by the WCB. Cash or securities sent to the WCB as a security deposit, or assets securing (collateralizing) a surety bond or letter of credit, are excluded as an asset in the WCB’s calculation of a fund’s regulatory funding position (hereafter referred to as “equity ratio”). Based on data obtained from the WCB, information disclosed in ELITE’s 2000 – 2008 annual audited financial statements, and the Level I reviews, ELITE’s security deposit requirement was met as follows:

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8/27/99 through 3/24/02 – a $624,000 surety bond from United States Fidelity & Guaranty Company was issued to the WCB.

3/25/02 through 3/21/04 – a $624,000 surety bond from Westchester Fire Insurance Company (Westchester) was issued to the WCB. A letter from Westchester to the WCB dated September 22, 2002 indicates the surety bond is not collateralized, although the carrier has the right to require that it be collateralized, and will provide the WCB with 10 days notice should it do such.

3/22/04 through 5/5/05 – a $750,000 surety bond from Westchester was issued to the WCB. A letter from Westchester to the WCB dated September 20, 2002 indicates the surety bond is not collateralized, although the carrier has the right to require that it be collateralized, and will provide the WCB with 10 days notice should it do such. The increase in the surety bond amount was required as a result of ELITE increasing its specific excess insurance retention from $300,000 to $500,000.

5/6/05 through 6/12/05 - a $624,000 surety bond from Westchester Fire Insurance Company (Westchester) was issued to the WCB. A letter from Westchester to the WCB dated September 22, 2002 indicates the surety bond is not collateralized, although the carrier has the right to require that it be collateralized, and will provide the WCB with 10 days notice should it do such. This $624,000 amount was issued in error; it was supposed to be for $750,000. This was corrected with a replacement surety bond effective as of June 13, 2005.

6/13/05 through 12/31/07 - a $750,000 surety bond from Westchester was issued to the WCB. The 2007 audited financial statements disclosed that during the year ended September 30, 2007 a $150,000 security deposit was posted with the bond issuer.

1/1/08 through 1/28/10 - a $780,000 surety bond from Westchester was issued to the WCB. The 2008 audited financial statements include a $150,000 deposit as an asset on the balance sheet and disclose that the $780,000 surety bond is collateralized by the Trust’s assets.

The WCB sent what it believed to be all documents necessary to make a $780,000 claim on the bond to Westchester for the payment of claims incurred by ELITE through July 16, 2008, and in March 2010 received $780,000 on the bond. Westchester subsequently took possession of the deposit (balance of $157,557) due to its payment on the bond. Accordingly, ELITE recognized in 2010 a $157,557 expense resulting from the forfeiture of the deposit asset. The WCB remitted the $780,000 it collected on the bond to ELITE, which ELITE recorded as contribution revenue from the WCB.