Thirty seven (37) states have approved, in some form through legislation, the use of deductible plans on workers compensation policies. Out of those thirty seven (37), twenty two (22) require insurance companies offer employers some form of deductible plan. In this post we’ll learn some of the basics of workers compensation deductible plans, what they are, how they work and who should consider using one.
To begin, all deductible plans are subject to workers compensation laws and rules of individual states. State workers compensation legislation is where you’ll find the authorization for use of these plans. For those states where NCCI is the rating authority, you can refer to their manuals and guides.
There are three basic types of deductible plans:
- Small Deductible
- Intermediate Deductible
- Large Deductible
And while all three operate in similar ways their application to any particular employer are as different as night and day. Simply put, they are not meant to be used for everyone!
The Small Deductible Plan – These plans are typically identified as those using a deductible ranging from $100 to $20,000. Most of the twenty two (22) state mandatory offer plans are of this type.
The Intermediate Deductible Plan – These plans typically use deductibles ranging from $10,000 to $75,000 or more. These are not found to be required under the mandatory offer type of plan and are normally negotiated with the insurance company. It is common with this type of plan that an insurance company will require some form of collateral or establishment of an escrow account from the employer. Most of the time this is in the form of a bank letter of credit or some type of bonding.
The Large Deductible Plan – It’s not uncommon to see these deductibles range from $100,000 to $500,000 or more. They are not mandatory. Some states do not allow these plans but it’s more typical that you will find most states will have a minimum premium level before an employer can qualify to use one. Typical minimum premiums to qualify are $100,000 however some states require $500,000. These are sophisticated plans allowing an employer to use an insurance companies experience in administration of claims, retain most of their actual claim cost while providing protection from the shock loss situation. These plans are only written after financial investigation by the insurance company into the employers ability to repay the deductibles. They will require security in the form of a letter of credit and/or the establishment of an escrow account. You’ll find the insurance company will also establish requirements for acceptability of the bank or financial institution issuing the letter of credit.
How Workers Compensation Deductible Plans Work- Workers compensation claims can be divided into two basic groups:
- Indemnity – Or payment for an injured workers lost wages
- Medical – Or payment for an injured workers medical bills incurred
When an employer signs up to use a deductible plan the insurance company will handle all claims just like they would have under a fully insured guaranteed plan. Meaning the insurance company will make all payments for the injured worker as provided for under statute. Once payments have been made, the insurance company will then turn to their policyholder/employer, request payment and collect the agreed deductible. Some states allow the deductible to be applied to both indemnity and medical while others will only allow it to be applied to medical. Again, this is governed by individual state statute. So in short, the insurance company pays the claim then goes back to the employer with a bill for the deductible.
Benefits of Using a Deductible Plan –
- For the small employer – a small deductible plan allows them to participate in the costs of their workers comp program on a limited basis while enjoying a deductible premium credit.
- For experience rated employers – There are two types of reporting requirements; Gross and Net. This refers to how claims under a deductible will be reported to a rating bureau. Gross reporting is where the full amount of the claim is reported with no reduction for the deductible. This means the deductible has no effect on an employers experience rate calculation. Net reporting is where the claim dollars reported are those less the deductible amount meaning the deductible part of the claim will not have an effect on the experience rate calculation.
- For large employers – Those using Intermmediate or Large Deductible Plans should be sophisticated employers with sophisticated loss control programs. Those who have control over their claims and who have the ability to utilize these plans to help with cash flow, reduced premium and possible tax advantages.
Problems Associated with Using a Deductible Plan –
- The shock of having to pay the insurance company the deductible – Unfortunately some employers go into deductible plans with the idea that they will never incur a claim so they will never have to pay the deductible. This is a BAD IDEA! Small employers are enticed by the idea of premium savings Does it make sense for an employer with a guaranteed premium of $20,000 sign up for a $5,000 deductible plan, save $1,000 in premium but be faced with repaying the insurance company $5000 when a claim occurs? Just be careful!
- Collection of the Deductible – Most states include some provision that when an employer does not pay the deductible then the insurance company can cancel the employers policy for non-payment of premium. And of course the insurance company will pursue collection!
- Payment of claims – Claims are handled by the insurance company claim department. There is a potential for disagreement as to how claims are processed and paid.
Deductible plans for workers comp can be a handy tool for controlling costs associated with a workers compensation program. But like most things while there are benefits there are also associated problems. If considering one of these plans be sure to work with a knowledgeable insurance professional, get all the facts and make the best decision for your business!
Hope this helps out! Thanks!