Commitments and Contingencies

6 Months Ended

Jun. 30, 2012

Commitments and Contingencies [Abstract]

Commitments and Contingencies

7.  Commitments and Contingencies

Insperity is a defendant in various lawsuits and claims arising in the normal course of business.  Management believes it has valid defenses in these cases and is defending them vigorously.  While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations.

Pennsylvania Sales Taxes

Pennsylvania imposes a sales tax on "help supply services."  The Pennsylvania Department of Revenue ("Department") has maintained that PEO services constitute help supply services and are subject to the tax.  On February 21, 2012, the Pennsylvania Supreme Court ("Supreme Court") affirmed the Appeals Court decision in the matter titled All Staffing vs. Commonwealth of Pennsylvania, which ruled that PEO services are not subject to the Pennsylvania sales tax.

We have filed two refund claims totaling $2.9 million with the Department for the sales taxes paid in error for the period April 1, 2007 through December 31, 2009.  In the second quarter of 2012, we received a letter from the Pennsylvania Board of Finance and Revenue in response to one of the two refund requests affirming that our PEO services are not subject to sales tax, and therefore, we are entitled to the sales tax refund.  We are still awaiting written confirmation on the second refund request; however, given that the facts and circumstances are virtually identical except for the amount of the refund claim, and considering this information in connection with the Supreme Court ruling, we have recognized a $2.9 million receivable and a corresponding reduction to payroll tax expense, a component of direct costs, in the second quarter of 2012.

Kemper Insurance Companies

In 2003, facing continued capital constraints and a series of downgrades from various rating agencies, our former workers' compensation insurance carrier for the two-year period ended September 2003, Lumbermens Mutual Casualty Company, formerly known as Kemper, ("Lumbermens Mutual") made the decision to substantially cease underwriting operations and voluntarily entered into "run-off."   In July 2012, Lumbermens Mutual announced that an agreed order of rehabilitation had been entered against it in Cook County, Illinois.  Under the order, the Director of the Illinois Department of Insurance was vested with control over company's property and decision-making.  The Director has publicly announced that while claims will continue to be paid during the rehabilitation process, he intends to use the rehabilitation period to work with state guaranty associations to prepare for the orderly transition of claim handling responsibilities to such funds once an Order of Liquidation is entered.  After this transition process has been completed, the Director has stated that he intends to file a verified complaint for liquidation.

Guaranty associations are non-profit organizations created by statute for the purpose of protecting policyholders from severe financial losses and preventing delays in claim payment due to the insolvency of an insurer. They do this by assuming responsibility for the payment of claims that would otherwise have been paid by the insurer had it not become insolvent. Each state has one or more guaranty association(s), with each association handling certain types of insurance. Insurance companies are required to be members of the state guaranty association as a condition of being licensed to do business in the state.

The guaranty associations in some states, including Texas, may assert that state law allows them to return the liability for open claims under such policies to an insured with a net worth exceeding certain specified levels. We encountered this assertion when another former insurance carrier, Reliance Insurance Company ("Reliance"), was placed into liquidation in 2001.  In that case, the Texas state guaranty association asserted that it was entitled to full reimbursement from us for workers' compensation benefits paid by the association.  Although we settled that dispute within the limits of insurance coverage we had secured to cover potential claims returned to us related to the Reliance policies, we have no similar insurance coverage for the Lumbermens Mutual claims.  If and when an Order of Liquidation is enetered and if one or more states were to assert that liability for open claims with Lumbermens Mutual should be returned to us, we may be required to make a payment to the state covering estimated claims attributable to us.  We estimate the outstanding claims to range from $2.9 million to $5.0 million as of June 30, 2012.  Any such payment would reduce net income, which may have a material adverse effect on net income in the reported period.