Small Business Ignores Risk With Comp Self-Insure Groups: Survey

Small business owners are not fully aware of the financial risks involved in obtaining workers' compensation insurance through self-insured groups, according to a new survey by a Nevada-based comp insurer.

The research for the Small Business Opinion Poll was conducted by Opinion Research Corporation of Princeton, N.J., for Reno, Nev.-based Employers Insurance Company of Nevada.

In addition to the survey, the company released a statement listing a variety of self-insured groups in various states that have run into difficulties.

According to Employers, 501 small business owners and managers throughout the nation took part in the survey.

Of those respondents, 85 percent 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.

Fifty-eight percent 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 34 percent of respondents realized they could be legally and financially responsible for the entire cost of workers' comp claims owed by their self-insured group.

Yet 27 percent of small business people taking the survey agreed that saving money upfront on workers' comp insurance premiums outweighs the financial risks posed by membership in a self-insured group.

Martin J. Welch, president and chief operating officer for the Employers group of insurance companies, said: "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."

He added: "A small business belonging to a self-insured group may find itself on the hook for the financial obligations arising from other members' claims. 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, according to Employers.

Self-insured group members also assume "joint and several liability," sharing liability among members on a pro-rata basis, according to Employers.

As an example, the company said, 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.

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, Employers noted.

In New York, the default earlier this year of seven self-insured trusts with an estimated $363 million in unfunded liabilities forced the state Workers' Compensation Board to begin assessing self-insured group members for payments to continue protecting injured workers.

Some groups objected and have sued the board as a result.

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, according to Employers, members of these self-insured groups had been receiving 20 percent discounts over rates charged by traditional carriers, and 20-30 percent 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 re-growth in the number of self-insured groups, according to Employers.

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 company said.

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 worth 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 sampled 501 owners or managers of small businesses with one to 99 employees. Data was collected through telephone interviews during Aug. 14-22, and results have a 4.8 percent plus or minus margin of error.

The sample is stratified across business size and industry grouping. More than half of the 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.