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Understanding the Financial Risks and Legal Responsibilities of Self-Insured Groups for Workers’ Compensation

The closures of self-insured groups (SIGs) in California and New York over the past few years illustrates the inherent risks that self-insurance groups for workers’ compensation pose to small businesses. However, more than half of small business owners (58 percent) nationwide are unaware that companies belonging to self-insured groups may remain financially responsible – often for years – for the claims of all companies in their group, not just their own businesses. This is according to the Small Business Opinion Poll conducted by Opinion Research Corporation in August 2008.

When asked about the closure of several self-insured groups over the past year, 85 percent of small business owners and managers surveyed said they were unaware of such closings. In 2009, CRM Holdings confirmed the closure of California’s Preferred Auto Dealers’ Self-Insured Program and the Vintners and Independent Producers Self Insurance Program of California, a wine-making industry group. Add to this the fact that seven SIGs failed in New York in 2008, and it’s safe to conclude that SIG failure represents a disturbing, national trend.

Businesses today are closely evaluating all possible cost-cutting measures to reduce operating expenses. And while close and continuous examination of such costs is smart business, many small businesses are often lured by self-insurance’s promise of lower costs, unknowingly exposing their companies to increased risk. Unfortunately, some choose SIGs without understanding the collective financial risk and liability they may incur should other group members default or if the group is forced to close.

Self-Insured Groups vs. Strong Private Carrier

The most recent American Jurisprudence treatise published on Insurance law states that “So-called ‘self-insurance’ is not insurance at all, but rather is the antithesis of insurance.” Rather than shifting a company’s risk to a third-party insurer, the company has chosen to retain the risk of loss, and injured employees must pursue their claims against the employer or the self-insured group association.

Conversely, employers choosing coverage from private, traditionally structured carriers are relieved from bearing the costs of accident claims because the benefits must be provided by the private carrier. Private insurers assume the financial responsibility for policyholders’ claims, and strategically position them to benefit from effective loss control, fraud prevention, and other critical professional insurance services. Although SIGs do present increased risk and liability, there are some groups that do operate successfully.

Selecting Workers’ Compensation Coverage

When selecting a workers’ compensation carrier, cost is certainly important, but it’s also important for businesses to consider whether they are leveraging value-added programs such as accident prevention savings offered by service-oriented carriers and whether they could be unknowingly putting their bottom line at risk. Price logically serves as a deciding factor in many day-to-day business circumstances, but when it comes to insurance, a workers’ compensation carrier’s focus on safety, fraud, managed care and ability to execute a three-point contact between the employer, injured worker and physician provide added value that better protects businesses for the future.

The following are questions businesses should ask when selecting workers’ compensation coverage or if they are already a member of or are considering leaving a self-insured group.

Ten Questions Businesses Need to Ask about Workers’ Comp Coverage

  1. What accident prevention or other value-added services do I receive along with my workers’ compensation insurance coverage?
  2. Does my workers’ compensation carrier have sufficient experience within my industry?
  3. Are there workplace safety, accident investigation and fraud prevention tools available?
  4. Does my carrier offer access to an online safety library that I can use to build my own safety program?
  5. Is my carrier financially strong and dedicated to remaining in my state’s insurance marketplace?
  6. Can I get a flexible payment plan from my workers’ compensation carrier?
  7. Can I combine my workers’ compensation insurance premium payments with my existing payroll system or healthcare insurance?
  8. How fairly and efficiently does my workers’ compensation insurance carrier handle claims?
  9. Does my carrier offer a medical provider network that can help me manage the medical costs associated with an injured worker’s claim?
  10. Does my workers’ compensation insurer have multi-state capabilities to service my growing business?

Ten Questions Businesses Should Ask Their Self-Insured Group Administrator

  1. How well funded is my self-insured group?
  2. How many claims have occurred while my company has been a member?
  3. What is the expected lifetime cost of each of these claims?
  4. What does “joint and several liability” mean to my business?
  5. What is my company’s exposure if another member of my self-insured group has a claim?
  6. Can a claimant sue my company for the full cost of a claim?
  7. Could my annual premiums be negatively impacted if another self-insured group in my state goes out of business?
  8. What liabilities does my company have if I leave my self-insured group?
  9. What are the legal requirements of leaving a self insured group?
  10. Will I need to reinsure any costs related to claims that occurred while I was part of the self insured group?