Small Business Owners Unfamiliar With Risks in Self-Insured Groups’ Workers’ Comp Insurance

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 Corp. of Princeton, N.J., for Employers.

Of the 501 small business owners and managers surveyed nationwide, 85 percent reported they had not seen, read, or heard about the closure of several self-insured groups in 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, according to Employers, a Reno, Nev.-based group of insurance companies.
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More than one-half (58 percent) of the 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 one-third (34 percent) 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 percent) 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.

Martin J. Welch, Employers’ president and chief operating officer, said 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 percent of the contributions to the trust set up to pay injured workers would, if the trust develops a deficit, be liable for 8 percent of all injured workers payments for the life of their claims, Employers said.

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 percent discounts over rates charged by traditional carriers, and 20 to 30 percent dividends. The assessments are the subject of continuing litigation in New York state courts. To protect against additional self-insurance group shortfalls, the state currently has in effect a moratorium on the establishment of new self-insured groups, Employers reported.

The ORC survey, commissioned by Employers, 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. For more information, visit www.eig.com.

Source: Employers