Be aware of the risks of a self-insured group for workers comp

You're a business owner, trying to make ends meet. The day's mail brings you a notice from your self-insured workers' comp carrier they're notifying you of a "special assessment" totaling more than $50,000 to cover a reserves shortfall. This is a reality that is all too common today given a lagging economic recovery resulting in decreases in payroll and diminished active membership in self-insured groups.

News in mid-2010 of the seizure of a self-insured construction group program in California should serve as a warning about the inherent risks of these groups. Cash-flow problems surfaced in 2009 as a number of members which once totaled more than 266 either closed their doors or began to secure coverage in the more traditional, more secure private market. The state of California, determining that the group program did not have sufficient assets to cover all of its losses, revoked the self-insured group 's certificate. Worse is the news that the members of the program will be on the hook for shortfalls estimated at between $12 million to $60 million. Even members that were once in the group but had dropped out may also be liable.

Self-insured groups basically pool the risks of a number of employers in an industry (i.e., construction, transportation, restaurants), each of whom puts up collateral to pay for workers'comp claims costs among the members. Members of a self-insured group are "jointly and severally liable" for each other's claims and for the claims of the group as a whole. In other words, participants of the group have become an insurance company. Self-insurance groups must pay and adjust their claims just like any insurance company, and oftentimes they contract with a third party administrator to do so. This administrator must be proficient at estimating claims costs and properly reserving for future claims. Any errors can result in an order from the state to increase its reserves, which means that all group members must produce additional funds.

Unfortunately, the failure of a self-insured group is not an isolated incident. In recent years, seven self-insured groups in New York have defaulted, and litigation continues in the financial failures of self-insured groups in Tennessee, Kentucky, and California. While some small business owners argue that saving money up front on workers' comp premiums outweighs the financial risks posed by membership in a self-insured group, they need to be fully aware of the risks they are taking the failure of the largest company in the group, company downsizing resulting in a reduction in the payroll premiums paid to cover the group's claims, successive years with serious injuries, and the responsibility for paying out claims for up to five years (even if electing to leave the group) when they elect a self-insured group over a strong private carrier.

Mike Dillon is executive director of the Builders Association of Northern Nevada. Contact him at miked@thebuilders.com or 329-4611.