Small Business Owners Unfamiliar with Risks Involved in Workers' Compensation Insurance from Self-Insured Groups

Small business owners are not fully aware of the financial risks involved in obtaining workers’ compensation insurance through self-insured groups, according to the results of the most recent Small Business Opinion Poll conducted by Opinion Research Corporation (ORC) of Princeton, N.J.

Of the 501 small business owners and managers surveyed nationwide, 85% reported they had not seen, read, or heard about the closure of several self-insured groups over the past year. Seven such trusts failed this year in New York, and litigation continues in the financial failures of self-insured groups in Tennessee, Kentucky and California.

Over one half (58%) of the small business survey respondents reported they are unaware that companies belonging to self-insured groups remain financially responsible—often for years—for the claims of all companies in their group, not just their own businesses.

Only a third (34%) of respondents realize they could be legally and financially responsible for the entire costs of workers’ compensation claims owed by their self-insured group.

Yet more than a quarter (27%) of small businesspeople taking the survey agreed that saving money up front on workers’ compensation insurance premiums outweighs the financial risks posed by membership in a self-insured group.

“Hard-working small business owners understandably keep an eye on the cost of their workers’ compensation insurance. However, they also need to be fully aware of the risk they are taking when they elect a self-insured group over a strong private carrier. There can be a costly difference between the two. A small business belonging to a self-insured group may find itself on the hook for the financial obligations arising from other members’ claims,” explained Martin J. Welch, President and Chief Operating Officer for EMPLOYERS, the Reno, Nev.-based group of insurance companies which commissioned the survey. Welch added that, “Private, traditionally structured insurance carriers assume financial responsibility for policyholders’ claims, and strategically position themselves and their policyholders to benefit from effective loss control, fraud prevention, and other critical customer services.”

Among the possible financial dangers associated with self-insurance are: failure of the largest company in the group, successive years with serious injuries, and the responsibility for paying out claims for up to five years—even if a small business leaves a group. Self-insured group members also assume “joint and several liability,” sharing liability among members on a pro-rata basis. For example, in a worst case scenario, a small business which pays 8% of the contributions to the trust set up to pay injured workers would, if the trust develops a deficit, be liable for 8% of all injured workers payments for the life of their claims.

Failures among self-insured groups in at least four states over the past decade remain in the news as litigation involving underfunded groups in New York, California, Tennessee and Kentucky continues to work its way through regulatory channels and state court systems.

In New York, the default earlier this year of seven self-insured trusts with an estimated $363 million in unfunded liabilities forced the state’s Workers’ Compensation Board to begin assessing self-insured group members for payments to continue protecting injured workers. Among those faced with the burden of covering self-insured groups’ shortfalls are members of the Healthcare Industry Trust of New York, Public Entity Trust of New York, Trade Industry Workers Compensation Trust for Manufacturers, and others. Before the collapse, members of these self-insured groups had been receiving 20% discounts over rates charged by traditional carriers, and 20-30% dividends—basically premium refunds. The assessments are the subject of continuing litigation in New York state courts. In order to protect against additional self-insurance group shortfalls, the state currently has in effect a moratorium on the establishment of new self-insured groups.

California’s insurance market saw more than two dozen workers’ compensation companies fail as the market tightened in 2002, but has witnessed recent regrowth in the number of self-insured groups. In the past three years, the number of California’s self-insured groups has jumped from five to 29, each now overseen by the state’s Department of Industrial Relations.

The self-insured group serving the Tennessee Restaurant Association earlier this year was forced to cover a $4.8 million shortfall in a workers’ compensation fund that the state alleged was mismanaged. More than 560 restaurateurs across Tennessee were ordered by a judge in January to pay money to bolster the self-insurance group’s trust fund. Regulators alleged that the entity formed to run the trust received excessive administrative fees and dipped into reserves without authorization.

In Kentucky, members of the failed self-insured group AIK Comp were ordered to pay a $90.7 million assessment ordered by the Franklin Circuit Court. State regulators were forced to take over the failed AIK Comp group in 2004 when a net worth deficit resulted from group officials undercharging members for premiums to cover claims. The court gave members 60 days to pay 80 percent of their $90.7 million assessment to cover the group’s net work deficit and pay injured workers for their claims. Member businesses unable to pay were charged monthly interest and also were liable for the cost of collection efforts, including attorneys’ fees.

The ORC survey, commissioned by EMPLOYERS, America’s small business insurance specialist, sampled 501 owners or managers of small businesses with 1-99 employees. Data was collected through telephone interviews during the period August 14-22, 2008, and results have a +/- 4.8% margin of error. The sample is stratified across business size and industry grouping. More than half of survey results were drawn from businesses with 19 or fewer employees in manufacturing/construction, transportation/ communication, wholesale/retail, financial services, or personal/professional services businesses.

Copyright © 2008 EMPLOYERS. All rights reserved. EMPLOYERS and America’s small business insurance specialist. are registered trademarks of Employers Insurance Company of Nevada. Workers’ compensation insurance and services are offered through Employers Insurance Company of Nevada and Employers Compensation Insurance Company. Coverage is not available in all jurisdictions.