Large Deductible Workers Compensation Policies Not a Panacea for Employers
Many larger employers now purchase Large Deductible Workers Compensation insurance policies. They should do with eyes wide open about the benefits and potential pitfalls of such policies.
Large Deductible Workers Compensation insurance policies have become an increasingly common policy format for many larger employers in the U.S. Such policies feature deductibles that range from $100,000 per claim to $1,000,000 per claim, providing employers with much of the cost-saving potential of self-insurance while still retaining the multiple-state benefits and automatic regulatory approval inherent in an insurance contract.
At its heart, Large Deductible Workers Compensation insurance has a simple concept: the insured employer will reimburse the insurer for the cost of each claim, up to a stated limit, in exchange for significantly discounted premium charges. In actual practice, though, Large Deductible Workers Compensation insurance policies can be far from simple, with significant potential for unexpected costs and disputes between the insured employer and the insurance company.
One common area of contention arises from the fact that while the employer is obligated to pay the costs of claims under the deductible limit, it is the insurance company that retains responsibility and authority over how those claims are adjusted, reserved, and settled. Employers sometimes are frustrated over what they perceive as the willingness of the insurer to allow claims costs to become excessive, because the cost of the claims is being passed directly onto the policyholder.
Additionally, purchasing Large Deductible Workers Compensation insurance means that the actual cost of a year's insurance can be adjusted significantly for years after the policy ends. It can be frustrating for an insured employer to be asked to pay significant additional amounts of money for a policy that ended several years ago. But if claims costs increase over time (which is common for Workers Compensation claims, which are notorious for having a "long tail") the insurer will bill the employer for reimbursement for those higher claims costs, plus handling fees.
Insurers also can become frustrated with Large Deductible Workers Compensation policies, as the insurer is legally obligated to pay claims covered by the policies whether or not the insured employer reimburses them promptly. This can contribute to a contentious relationship between insurer and insured, with each side feeling the other has taken unfair advantage.
Beyond this potential for discord over claims, Large Deductible policies have another aspect that can prove problematic for employers: their complexity. Although the underlying principle of these policies is simple, the actual agreements between insurer and insured on such policies can be dauntingly complex. And unlike the standardized language of more traditional types of Workers Compensation insurance policies, Large Deductible policies often feature side agreements that are far from standardized. Thus even relatively sophisticated purchasers of Workers Compensation insurance may sometimes not understand all the details adequately before agreeing to the coverage.
Some side agreements used on these policies effectively eliminate the operation of experience modification factors that historically have been an important aspect of Workers Compensation insurance premiums. Other side agreements eliminate the impact of the Workers Compensation classification system, substituting a unified overall rate that would not be allowed under the standardized Workers Compensation insurance policy. Some side agreements may restate premium charges in such a way as to contradict the actual policy terms, without being endorsed onto the policies. Conflicts can thus be baked into the insurance program from the outset, if the terms of the side agreements alter the provisions of the insurance policy without being endorsed onto the policy.
So while Large Deductible Workers Compensation insurance policies can offer significant benefits to larger employers, they can also increase the inherent complexity of premium computation and raise the odds that insurer and insured will ultimately disagree over what the cost of the insurance should ultimately be.
ABOUT THE AUTHOR: Edward J. Priz, CPCU, APA
Edward J. Priz has worked in the insurance field since 1976, initially as an agent/ broker and then, since the early 1980's, as a consultant on proper Workers Compensation insurance cost and coverage. He is the author of three books on proper Workers Compensation premiums and audits, and has been retained as an expert by policyholders, insurers, and insurance agencies.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.