by Steven Greenhouse

State officials say they may have to create a $200 million emergency fund to finance workers’ compensation benefits for thousands of injured New Yorkers because 12 trusts that provided insurance to their employers have failed financially.

The self-insured trusts provide workers’ compensation insurance to groups of small- to medium-size employers in the same industry, and the failure of so many of them in recent months has sparked fears of a cutoff in benefits to thousands of injured workers. It has also generated criticism that the State Workers’ Compensation Board was lax in regulating the trusts. There are 50 group trusts remaining in the state that provide insurance to more than 20,000 businesses with a total of about 500,000 employees.

Legislators are seeking to negotiate a rescue plan with Gov. David A. Paterson and business and labor leaders. Officials with the compensation board said that under the law, the board would be responsible for the unfunded liabilities of the trusts and would have to pay more than $65 million a year for several years.

Brian M. Keegan, a spokesman for the board, denied that its oversight was inadequate and said the crisis was largely caused by the unforeseen failure of eight trusts administered by one company, Compensation Risk Management.

Earlier this month, C.R.M. agreed to surrender its license as a third-party insurance administrator in New York after Zachary S. Weiss, chairman of the compensation board, accused the company of giving false information to the board, not cooperating with an audit and routinely failing to set aside adequate reserves for claims. The board also fined C.R.M. $55,000 but declined to make the reason public.

Board officials said they were stunned to discover that the insurance reserves of one C.R.M. trust had plunged to 40 percent of liabilities from 90 percent a few months earlier.

The compensation board moved to close most of the trusts when it saw how far behind they were in funding their liabilities.

“It’s definitely a unique situation we encountered with C.R.M.,” Mr. Keegan said. “This shouldn’t be attributed to a lack of regulatory oversight.”

Attorney General Andrew M. Cuomo has subpoenaed documents from one of the C.R.M. trusts as part of what state officials say is a continuing investigation. Mr. Cuomo’s office declined comment.

Eric Egeland, the vice president of C.R.M.’s New York trusts, said the company was cooperating fully with state officials. He added that C.R.M. was being unfairly singled out and that many other trusts have failed over the years.

Mr. Egeland said the problems in C.R.M.’s trusts were caused by an unexpected increase in workers’ compensation liabilities and fast-rising medical costs. He said the eight trusts could not increase reserves fast enough in response to their increased liabilities because of recent state-ordered cuts in workers’ compensation premiums — cuts that other insurers say have not created problems for them in maintaining adequate reserves.

But C.R.M. faces widespread accusations that its executives were overpaid and that it offered premiums that were far too low as a way of wooing businesses.

“We need to look into whether there were some real culprits here,” said State Senator John J. Bonacic, a Hudson Valley Republican who is one of the chief negotiators on a rescue plan.

The four other failed trusts covered manufacturers and health care facilities.

Businesses participating in well-funded trusts complain that the compensation board is seeking to force them to provide money for a rescue plan.

“It’s really a case of several extremely bad apples and a lax regulator,” said Kenneth Adams, the president of the Business Council of New York State, the largest business association here.

For decades, thousands of New York companies have shunned traditional insurance companies for workers’ compensation policies and formed self-insured trusts with other employers in their industries. About 35 percent of the state’s businesses are self-insured for workers’ compensation coverage, and one-fifth of those companies use group trusts.

While the State Insurance Department regulates workers’ compensation carriers, the compensation board oversees the group trusts.

“Although the group trusts have grown to the size of mutual insurance companies, they’re not regulated like mutual insurance companies,” said said Art Wilcox, the New York State A.F.L.-C.I.O.’s top official on workers’ compensation issues. “When group trusts started, they were a great idea. Employers got together for reasons of pooling resources and providing good benefits without having to pay for insurance company profits. But once these trusts were established, vendors saw an opportunity to serve as administrators to these groups and make money in every imaginable way.”

Mr. Wilcox predicted that other trusts will go under, pointing to state figures showing that 22 of the state’s 50 group trusts have not fully financed their reserves and that 10 of them have less than 90 percent of desired reserves.

Among the trusts that closed were the Health Care Industry Trust, with 465 members and 1,700 workers’ compensation claims; the Transportation Industry Trust, with 830 members and 700 claims; and the Wholesale and Retail Trust, with 904 members and 75 claims.

The compensation board has taken over some of the failed trusts and will soon take over all 12. The businesses that used those trusts will have to seek other sources for their workers’ coverage. The board is required by law to pay the workers’ claims (medical bills and indemnity benefits) that are owed by the failed trusts.

Because of a cash squeeze caused by the failed trusts, the board has ordered the state’s 50 other group trusts to pay emergency assessments totaling tens of millions of dollars. Board officials said that state law authorizes them to impose assessments to generate the money to pay the failed trusts’ claims.

But 13 healthy group trusts have sued the board, saying that it has no right to force them to contribute. A state judge has granted a temporary injunction in the case, saying that the 13 trusts and the employers who use them do not have to pay the emergency assessments.

The litigation has spurred fears that payments of the failed trusts’ obligations to injured workers may have to be cut off unless the State Legislature approves an emergency fund.

“I do believe it’s going to take an infusion of some state money to get us through this,” Senator Bonacic said. “We have to come up with a plan that won’t penalize the good trusts.”

Mr. Wilcox, of the A.F.L.-C.I.O., said, “We’re probably looking at a shortfall of $100 million for each of the next three years, and the question is, where do you come up with $100 million to solve the cash flow problem?”

Officials with the compensation board said they hoped to repay any emergency assessments from the healthy trusts after employers in the failed trusts paid the millions of dollars that the board had ordered them to provide to help pay off their claim obligations.

Maynard A. Darrow, the chief executive of Darlind Construction in LaGrangeville, near Poughkeepsie, said he was angry that the compensation board had not imposed a stiffer fine on C.R.M.

“We’re really ripped about what went on here, and the lack of penalties,” said Mr. Darrow, whose company belongs to a trust that has been asked to pay a special assessment. “C.R.M. has assets, yet there are no regulations that allow the workers’ comp board to go after those assets.”

Mr. Darrow said that any emergency plan approved in Albany should give the State Insurance Department responsibility for regulating group trusts.

“The workers’ comp board has been asked to do a job that they’re not trained or prepared to do,” he said.

Board officials said that they had adopted tougher funding rules for group trusts in 2003, and that was one reason for the trusts’ failure.

“We support increased regulation in this area,” said Mr. Adams, of the Business Council. “That’s not something you hear me say every day.”