Across the country, employees are protected against the financial hardships associated with workplace injuries by insurance plans known as workers’ compensation insurance. This specialized form of insurance provides coverage for the medical expenses and lost wages an injured worker might experience after an injury. Workers’ comp represents a significant expense for employers, and there are times when these plans are insufficient to cover catastrophic or unexpected injury claims. To protect the business and its employees, a form of additional coverage known as excess workers’ compensation insurance may be available.
What is Excess Workers’ Compensation Insurance?
According to the International Risk Management Institute (IRMI), excess workers’ compensation insurance is defined as a type of insurance coverage available for business interests that choose to self-insure against workers compensation loss exposures. The typical insured under this form of insurance is a small business that carries its own workers’ compensation insurance policy. The purpose of this specialized and additional form of insurance is to provide coverage in excess of limits of ordinary workers’ comp policies, such as high claims frequencies or single catastrophic claims that threaten the financial stability of smaller companies.
There are two primary categories of excess workers’ comp:
- Specific coverage, which controls the severity of losses by putting a pre-specified cap on the losses the insured must pay for a single claim occurrence.
- Aggregate coverage, which mitigates loss frequency by providing coverage once a cumulative per-occurrence limit on losses has been reached.
Why Should a Business Obtain Excess Workers’ Compensation?
There are several distinct advantages of excess workers’ compensation insurance, particularly for smaller businesses that may not have the financial means to cover against excessive claims or single catastrophic claims, such as an employee killed or permanently disabled on the job. Advantages of these plans include:
- Providing flexible coverage for self-insurers, especially for those companies that would not be able to self-insure without an excess coverage policy in place.
- Claims management for catastrophic workplace incidents.
- Risk management, especially in managing and controlling hazards in the workplace.
- Reducing expenses associated with traditional workers’ compensation insurance programs.
Smaller businesses that have higher-than-expected risk exposures, such as companies in potentially hazardous industry sectors like agriculture or manufacturing, may desire the extra protection afforded by an excess workers’ comp policy.
Challenges for Underwriters
Excess workers’ compensation insurance can be valuable for smaller businesses that choose to self-insure their workers’ comp coverage. Unfortunately, there may be significant challenges, both in obtaining this coverage and for those underwriters who write excess policies.
Today, fewer underwriters offer excess workers’ compensation insurance as a stand-alone policy. This coverage is usually bundled with other commercial business insurance plans. The reason for this is simple: catastrophic worker injury or death claims may remain open for long periods of time – sometimes decades. In a 2012 Securities and Exchange Commission filing by a major insurance underwriter, the company admitted that long claim length and risk exposures caused the company to cease writing stand-along excess policies.
Rising expenses, especially arising from issues such as a decline in worker fitness/health due to diseases like obesity or heart conditions as well as increased Medicare set-aside requirements, have forced underwriters to increase excess workers’ compensation costs. In some cases, these increased expenses have effectively shut the door on coverage for smaller companies that cannot afford the high premiums. In order to continue writing excess policies, underwriters often have to have their clients assume greater retentions to mitigate high claim risks.
Excess workers’ compensation insurance is valuable for many smaller companies, and it is imperative that the insurance industry find solutions to improve coverage ability and to help keep expenses in line with what insureds can pay for this coverage.
About Caitlin Morgan
Caitlin Morgan specializes in insuring assisted living facilities and nursing homes and can assist you in providing insurance and risk management services for this niche market. Give us a call to learn more about our programs at 877.226.1027.