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The study was commissioned by EMPLOYERS, a Reno, Nev.-based group of insurance companies. Researchers surveyed more than 500 small business owners and managers nationwide on the issue of comp coverage and self-insured groups. The topic has generated significant interest in recent months in the workers' comp community after the default of seven self-insured trusts in New York earlier this year. In addition, litigation continues in the financial failures of self-insured groups in Tennessee, Kentucky and California.

Despite these high-profile failures, 85 percent of respondents indicated that they had not seen, read or heard about the closure of several self-insured groups over the past year. More than one-half (58 percent) of respondents reported that they were 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.

"Hardworking small business owners understandably keep an eye on the cost of their workers' compensation insurance," said Martin J. Welch, president and chief operating officer for EMPLOYERS. "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. 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."

According to EMPLOYERS, several possible financial dangers are associated with self-insurance, including 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.

Welch said 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.

High-profile failures remain a concern. Failures among self-insured groups in at least four states over the past decade remain in the news, as litigation involving underfunded groups continues to work its way through regulatory channels and state court systems. These cases include:

New York. The default earlier this year of seven self-insured trusts with an estimated $363 million in unfunded liabilities forced the New York State 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, and Trade Industry Workers Compensation Trust for Manufacturers. Prior to the collapse, members of these self-insured groups had been receiving 20 percent discounts over rates charged by traditional carriers, and 20 percent to 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 has in effect a moratorium on the establishment of new self-insured groups.

California. California's insurance market saw more than two dozen workers' comp 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.

Tennessee. Earlier this year, the self-insured group serving the Tennessee Restaurant Association was forced to cover a $4.8 million shortfall in a workers' comp fund that the state alleged was mismanaged. More than 560 restaurateurs across the state 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.

Kentucky. 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 attorney's fees.

November 4, 2008

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