Workers Compensation - Small Deductible Plans
For Each Loss, You Must Reimburse Your Insurer the Deductible
One way small business owners can reduce their worker's compensation premium is to enroll in a small deductible plan. These plans enable employers to save money on workers compensation costs by assuming some of the risk of future losses.
Small workers compensation deductible plans are available in many, but not all, states. The rules vary. Some states require workers compensation insurers to offer their policyholders a small deductible plan. Other states permit, but don't require, insurers to offer such a plan. Still other states require insurers to provide a deductible only if the policyholder requests one. If an insurer offers a plan, the employer is not obligated to accept it.
Some state deductible plans have eligibility requirements. For instance, participants might be subject to a minimum annual premium. In addition, some might be required to provide evidence of financial security, such as an irrevocable letter of credit. Some states permit insurers to determine eligibility based on their own criteria.
In many states, deductibles are permitted only on policies written in the voluntary market. However, some states also allow small deductibles on policies written through the state assigned risk program.
How They Work
A small workers compensation deductible is similar to the deductible found in an auto physical damage or commercial property policy. Depending on the state, a deductible may apply to medical expenses only or to both medical and indemnity (disability) expenses. It may either include or exclude loss adjustment expenses.
A deductible represents the amount of each loss that you (the employer) must pay for each claim. Typically, your insurer pays the full amount of the loss and then bills you for the deductible. For example, suppose your workers compensation policy includes a $1,000 deductible that applies to medical costs only. If a claim generates $5,000 in medical expenses, your insurer will pay the $5,000 loss and you will reimburse the company for the $1,000 deductible amount.
A small deductible does not affect the claims adjustment process. If a claim occurs, your insurer will investigate the injury, pay providers for medical treatment, and make disability payments to eligible workers. The insurer will then bill you for the deductible portion of the claim.
What is a "Small" Deductible?
Depending on the state, a "small" deductible may $100 or $75,000 but is typically between $500 and $5,000. Many states provide options within a range, such as $500 through $2,500 at $500 increments. Some states permit insurers to offer additional choices (like a $7,500 deductible) with approval from the state regulatory agency.
Many states offer a large deductible plan, a type of self-insurance. Large deductible plans are intended for big employers that have the financial capacity to pay a substantial portion of losses out of pocket. A large deductible is often $100,000 or more.
The discount you receive for a small deductible depends on the size of the deductible you choose. A $2,500 deductible will provide you a larger credit than a $500 deductible.
Some deductible plans also consider the type of business you operate. In workers compensation insurance, employers are categorized into one or more classifications. Each classification represents a type of business operation and is identified by a four-digit code. Under some small deductible plans, employers are divided into hazard groups based on their classification codes. Low-hazard classifications receive a bigger credit than high-hazard ones. For example, clerical office workers (a low hazard class) will receive a larger credit than tree trimmers (a high hazard class). The hazard group to which an employer is assigned is generally determined by its governing classification (the classification that best describes the business).
States vary in the way they calculate experience modifiers for employers in deductible plans. Some states utilize the gross amount of each loss (including losses within the deductible) for experience rating. Other states use the net amount (excluding the losses within the deductible). If two employers incur the same losses but one is in a "net state" while the other is in a "gross state", the one in the "net state" will generally have a lower experience modifier than the other.
Nonpayment of Deductible
For each loss you incur, you are obligated to reimburse your insurer the amount of the deductible. In most states, failure to reimburse the deductible amount is treated in the same manner as failure to pay the premium. This means that the insurer may cancel your policy for nonpayment as long as it provides you the number of days' notice required by law.