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Managing Employee Injury Risks: Financing • All states require the employer to insure the workers compensation exposure or to qualify as a self-insurer. • Usually, only the largest firms self-insure, and even in these instances, some form of catastrophe coverage is normally purchased. • In addition to the liability imposed on the employer under the workers compensation laws, injury to employees may be a source of liability in still another way--a suit at common law. 27-1 Managing Employee Injury Risks: Financing • Although the workers compensation system was intended as an exclusive remedy for injured workers, there are several situations in which an employer may be sued for injury to an employee. • Some form of coverage may be needed to defend the employer in the event of such suits, and also to pay any resulting judgments. 27-2 Managing Employee Injury Risks: Financing • Workers compensation benefits may be paid directly out of the firm's own income or assets (we will call this self-insurance), or through insurance. • Self-insurance is permitted in all states except North Dakota, Texas (except for public bodies), Wyoming, Guam, Puerto Rico, and the Virgin Islands. 27-3 Workers Compensation Insurance • Workers compensation insurance—like general liability and auto liability insurance—undertakes to pay those sums for which the insured is legally liable, that fall within the insuring agreements of the contract. • In the case of workers compensation insurance, the liability covered is the insured's liability under the workers compensation law of one or more states. 27-4 The Workers Compensation and Employers Liability Policy • Coverage is standardized by law, and all insurers use essentially identical contracts. • The National Council on Compensation Insurance (NCCI), the national advisory organization for workers compensation insurance, developed and files the Workers Compensation and Employers Liability Insurance Policy (WCELIP) policy for approval by the states. 27-5 Part One: Workers Compensation Insurance • The workers compensation insuring agreement obligates the insurer to pay sums the insured is legally obligated to pay under the workers compensation law of the state or states listed in the declarations. • There are no exclusions under the workers compensation coverage and there is no maximum limit on the amount payable. 27-6 Part One: Workers Compensation Insurance • In a legal sense, the workers compensation portion of the policy is not simply an agreement to pay benefits on behalf of the insured. • It goes beyond indemnifying the insured and makes the insurer directly and primarily liable to employees for benefits, even though such employees are not named in the policy. 27-7 Statutory Provision • A "Statutory Provision" in the policy in effect incorporates the provisions of the workers compensation law of the designated state into the contract, just as if it had been fully written into the policy. • As respects the insurer's obligation to employees, it is never a defense to a compensation claim that the policy is not written broadly enough or that the insured violated a policy provision. 27-8 Statutory Provision • While the insurer's liability to the employee is governed by the workers compensation law, the insurer's liability to the employer is governed by the policy terms. • The insurer may recover from the employer amounts that would not have been paid except for the unique position of the employee as a direct beneficiary under the policy. 27-9 Part Two: Employers Liability Insurance • The Employers Liability Insurance provides protection for common law suits by employees who suffer bodily injury. • The standard limits for Employers Liability coverage, which may be increased for an additional premium, are $100,000 per accident, $100,000 per employee for occupational disease, and $500,000 aggregate for occupational disease. 27-10 Part Two: Employers Liability Insurance • Originally, Employers Liability coverage was considered to be primarily a defense coverage. • Because workers compensation was intended as an exclusive remedy, suits by employees were once considered unlikely. • As a result of erosion of the exclusive remedy theory of workers compensation, Employers Liability coverage can no longer be considered merely a defense coverage. 27-11 Erosion of the Exclusive Remedy Doctrine • Attacks on the exclusive remedy theory of employer protection have come in several forms. • Some states permit the spouse of an injured worker to bring action against the employer for the spouse's loss (as opposed to the loss suffered by the insured worker). 27-12 Third-Party Over Suits • Third-party over suits arise when an employee is injured in the course of employment, and the injury is caused by a negligent third party. • The employee collects workers compensation from the employer, but also brings a tort action against the third party. • The third party, being held liable, seeks to pass a part of the liability on to the employer, usually arguing that the employer's negligence was partly responsible for the injury. 27-13 Dual Capacity • Another doctrine under which employees have been permitted to recover from the employer in a common law suit is "dual capacity." • The dual capacity doctrine permits the employee to bring action against the employer if the employer was acting in a different capacity at the time of the injury. 27-14 Dual Capacity • A classic illustration of this doctrine arose in connection with a hospital employer providing medical treatment to an injured employee. • The court held that the employee had two relationships with the hospital; that of employee and that of patient. • While the employee was barred from bringing suit as an employee, he could sue as a patient. 27-15 Employers Liability Coverage The insuring agreement of the Employers Liability section of the policy makes specific references to such suits, indicating that coverage is provided for damages under • the doctrine of dual capacity, • claims in third-party over suits, and • damages for loss of care and consequential bodily injury to relatives of an injured employee. 27-16 Part Three: Other States Insurance • Protects against liability under workers compensation laws of states in which the employer does not expect to have employees, but where a workers compensation obligation could conceivably be incurred. • Some laws impose liability on an employer who is located in another state if an out-of-state employee is injured while working in the state. 27-17 Coverage for Benefits in Other States • The Other States Insurance extends the policy to provide workers compensation benefits in any state listed in the declarations for Other States Coverage if the employer becomes liable under the law of such state. • Other States Insurance does not apply to states with monopolistic state funds (Nevada, North Dakota, Ohio, Washington, West Virginia, and Wyoming). 27-18 Workers Compensation Endorsements • The WCELIP is sometimes modified by endorsement to provide coverage for workers compensation benefits and for employers liability exposures that are not covered under the basic policy itself. • Various federal acts apply to railroads, work on the continental shelf, maritime activities, and members of the merchant marine. 27-19 Voluntary Compensation Insurance • Voluntary Compensation Insurance is an optional coverage that may be added when an employer wishes to provide workers compensation benefits to employees even though the law does not require payment of benefits to such employees. 27-20 Employers Liability (Stop Gap) Endorsement • The Employers Liability Endorsement (also called “Stop Gap Coverage”) may be used to provide Employers Liability coverage in a state or states-including the monopolistic-fund states--in which the policy does not provide workers compensation coverage. • Employers whose operations are confined to the monopolistic-fund states use a different Stop Gap endorsement which is added to the general liability policy. 27-21 Monopolistic-Fund State Coverage • The states of Nevada, North Dakota, Ohio, Washington, West Virginia, and Wyoming (also all provinces of Canada) have monopolistic state funds and do not allow private insurance. • Some insurers will endorse the WCELIP to provide indemnification for any loss inadvertently incurred in monopolistic fund states prior to the insured's knowledge of any such exposure or requirement to insure in the fund. 27-22 Endorsements for Federal Laws • Federal Coal Mine Act Endorsement • The Federal Employers Liability Act • U.S. Longshore and Harbor Workers Compensation Act • The Defense Base Act • The Nonappropriated Fund Instrumentalities Act • The Outer Continental Shelf Lands Act 27-23 Maritime Employment Endorsement • Liability to members of the crew of a ship is covered under admiralty law and under an amendment to the Federal Employers Liability Act, called the Jones Act. • Prior to the Jones Act, a sailor's only recourse for for injury was through the admiralty courts. • The Jones Act gives the injured sailor a choice between admiralty law and suit in a federal court. 27-24 Maritime Employment Endorsement • Liability to the master or member of the crew of a vessel is specifically excluded under the Employers Liability Coverage of the WCELIP. • When a maritime exposure exists, it must be covered by endorsement to the WCELIP. • Coverage applies only within the continental United States, Alaska, and Hawaii, and Canada, and while sailing ports of these territories. • (Maritime Coverage for other territories is written as a part of the Protection and Indemnity coverage of the ocean marine policy.) 27-25 Workers Compensation Rating Plans • The standard advisory organization for workers compensation insurance is the NCCI. • The Basic Manual for Workers Compensation and Employers Liability Insurance is the NCCI's compilation of rules, classifications and basic rates for workers compensation insurance approved and issued by the director of insurance. 27-26 Standard Premium & Guaranteed Cost Plans • The standard approach to workers compensation rating is the guaranteed cost plan. • This is the premium generated by the insured's payroll and rates, modified to reflect experience for those risks subject to experience rating. • Rates are published per $100 of payroll for hundreds of different occupational categories. • These rates multiplied by the insured's projected payroll figures develop the standard premium. 27-27 Standard Premium & Guaranteed Cost Plans • The premium is adjusted at the end of the policy period, when actual payroll is multiplied by the rates in force to determine the final premium. • Changes in rates during the policy period that result from changes in benefit levels apply to policies already in force. • A "guaranteed cost" premium is "guaranteed" in the sense that it is subject to change only if rates change or if actual payroll differs from the estimated payroll. 27-28 Experience Rating • The insured's manual premium may be modified by an experience rating factor to reflect the past loss experience of the firm. • Experience rating is a mandatory feature which applies to all employers who generate a specified premium (generally $2,500). • The purpose of experience rating is to modify the rating structure of individual insureds to reflect their better-than-average or worse-than-average expected losses. 27-29 Experience Rating • Losses incurred during the period of experience (usually 3 years) are compared with average losses for the insured’s classification. • The resulting "experience modification" is a ratio applied to manual rates. • If the experience modification is .90, the premium charged will be 10% lower than the manual. • If the experience modification is 1.25, a surcharge (debit) over the manual premium will be imposed. 27-30 Participating or Dividend Plans • A participating or dividend plan is similar to a guaranteed cost plan, except a dividend may be returned as a result of good loss experience. • No penalty is levied if loss experience is poor. • Generally, the dividend is based on the experience of the insurer for all workers compensation insureds in the state. 27-31 Retention Programs • Basically, a retention program is a type of dividend plan where the dividend is determined by the indivdiual insured’s experience. • The insurer determines "retention" for its expenses and profit, expressed as a percentage of the standard premium (say, 20 to 30%). • The excess of the premium over the retention and losses (with an allowance for loss adjustment) is returned to the insured as a dividend. 27-32 Retrospective Rating Plans • A retrospective rating plan is much like a retention plan, the difference being that under a retrospectively rated plan, the insured will be penalized for poor experience. • Retrospective rating is like a cost plus contract, and bases the insured's premium for the current period on actual losses in the current period. 27-33 Workers Comp Assigned Risk Plans • Workers compensation assigned risk plans provide those employers who are unable to secure coverage in the voluntary market with a means of insuring their operations through a designated insurer. • Applicants are “assigned” to insurers based on their fraction of the total workers compensation premium written in the state. 27-34 Employee Leasing and Workers Compensation • Employee leasing arrangements were conceived as a means through which an employer could avoid the administrative details associated with the employment of a workforce. • This is done by transferring the firm’s employees to a labor contractor, who in theory becomes their employer. • The employees are then leased back to the labor contractor’s client, the previous employer of the leased employees. 27-35 NCCI Employee Leasing Rule • NCCI rules require that whoever is the employer at common law should purchase workers compensation coverage for leased employees. • The labor contractor must provide its workers compensation insurer with proof that the client has secured its workers compensation obligations for the leased workers. • If the labor contractor fails to provide such evidence, it will be charged for the workers compensation for the employees. 27-36 Employee Leasing and Experience Rating • Employee leasing has been used in some cases to undermine the experience rating process. • Labor contractors have marketed their services by representing to employers that the employers may escape their experience modification factors through the device of employee leasing. • An insured with a high experience modifier transfers its employees to a new leasing company and then leases them back, without an experience penalty. 27-37 Assigned Risk Exception to General Rule • NCCI has added an exception to the rule for leased workers under the Workers Compensation Assigned Risk Plans over which it exercises jurisdiction. • This rule provides that workers compensation coverage for leased employees shall be provided under the workers compensation insurance plan by a policy issued in the name of the client company. 27-38 Self-Insurance and Workers Compensation • Private employers are permitted to self-insure the workers compensation exposure in all states except North Dakota, Wyoming, and Texas. • The workers compensation exposure is more frequently self-insured than any other corporate exposure. 27-39 Self-Insurance and Workers Compensation The popularity of self-insurance as a method of dealing with the workers compensation exposure is due to three reasons • it is characterized by a high frequency of loss, • benefits are defined by statute and thus limited, • it generates more premiums that most other lines of casualty insurance. 27-40 Workers Compensation Excess Insurance • Most insurers also arrange some form of excess workers compensation coverage to protect against catastrophic loss. • The usual excess workers compensation coverage is written with a $250,000 self-insured retention and a maximum limit ranging from $1 million to $5 million. 27-41 The Workers Compensation Crisis • In the 1980s, the workers compensation system created new challenges for employers, their workers, and the insurance industry. • Almost everyone associated with the system voiced dissatisfaction with the way the system has developed, and the term "crisis" is increasingly used in discussions of workers compensation. 27-42 Causes of the Crisis Three factors combined to create the almost universal dissatisfaction with the current status of the workers compensation system. soaring benefit levels increased litigation rigid rate regulation 27-43 Workers Compensation and 24-Hour Coverage • Increasingly, employers and insurers are experimenting with 24-hour coverage plans that combine workers compensation benefits with employee benefit coverage for off the job injuries. • There are many who believe that programs of this type will become the norm rather than the exception. 27-44