Work injured employees of self-insured businesses, and workers compensation claimants being handled by insurance carriers, generally have little to fear should the employer or insurance carrier go bankrupt. Every state and all levels of government have two safety nets, the State Guaranty Funds and Self-Insurers’ Security Funds.
Facts Regarding Guaranty & Security Funds:
- These funds step in immediately to take over the handling, paying and settling of claims, and they maintain coverage to protect the corporation or insurance carrier.
- Both are financed by assessment against self-insured employers and insurance companies. Assessments are based on multiple calculations established and regulated by the States and Governments.
Operational Practices When Carrier Goes Bankrupt:
The Funds are designed, by statute, to protect employee benefits much like the Federal Deposit Insurance Corporation protects the public deposits in banks. This is extended to lifetime and death cases.
Sometimes Guaranty Funds transfer cases to solvent carriers. However, in most instances they retain enough insurance company employees to maintain polices, coverages and claims. This includes gathering in unpaid premium, and following for proper reinsurance.
As policies expire and claims are finalized, the attending staff is reduced. Some employees go on to other jobs immediately while others go on unemployment benefits until they obtain replacement jobs. During this period the retained employees are actually state employees. They receive all the employment benefits the state has in place. As a result of this operation, the retained employees do not suffer economically.
Claims are investigated, documented, processed, and disposed of with all the same dispatch as though the claim unit was still solvent. Subrogation cases are placed on lien for recovery. Non-compensability, fraud, and any illegal conversion are pursued. Fraud recoveries are collected. All controverted cases are pressed for judicial remedy. Claimant attorney fees honored are maintained as usual.
Some Guaranty Funds maintain the legal defense attorneys the carrier used. Others transfer the cases to State Employed Attorneys designated to handle legal workers’ compensation issues.
For the most part claimants seldom realize the carrier no longer handles or pays the claim. The speed and dispatch for handling workers’ compensation cases is considered to be highly efficient.
Possible Problems:
While the system generally operates with efficiency, there are a few possible downsides. A notable downside is that most funds do not have a cash reserve and are funded on a pay as you go system. In other words, assessments are not prepaid. Therefore, payments to claimants or medical providers might fall behind until funds catch up to payments due.
Another strain could develop if the number of carrier or employer failures or bankruptcies suddenly surged.
According to online reviews, and reports, there is an average of two insurance companies a year. If you go online and type in “Insurance Company Bankruptcy”, you will be directed to various sources for information. There are related sites that address Obamacare impact, Annuities, Accident and Health Carriers, as well as many other lines that employers might be concerned with.
Some Reasons for Insurance Company failure are:
- Poor Underwriting by insuring high risk entities
- Underfunded premiums
- Poor Investing
- Excessive Premium Discounts
- Failure to properly reserve for losses
- Not perusing 3rd party recoveries
- Poor investigations allowing claims that might otherwise be defendable
- Shrinking markets
- Poor Fraud Prosecution and Recovery
- Under funded or not reinsured for catastrophic losses
- Inept staffing
- Economic impact or collapse
Summary:
The system has been pretty effective and serves its function well. Most workers compensation claimants have had little, if any, loss of workers compensation benefits and service due to carrier or self-insurer bankruptcy.
AM Best is one of the industry watch dogs that tracks insurance carriers for solvency and performance. Their rating system is a bench mark that should be reviewed periodically.
Author Michael Stack, Principal, COMPClub, Amaxx LLC. He is an expert in workers compensation cost containment systems and helps employers reduce their work comp costs by 20% to 50%. He works as a consultant to large and mid-market clients, is co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and is founder of COMPClub, an exclusive member training program on workers compensation cost containment best practices. Through these platforms he is in the trenches on a working together with clients to implement and define best practices, which allows him to continuously be at the forefront of innovation and thought leadership in workers’ compensation cost containment. Contact: mstack@reduceyourworkerscomp.com.
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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.
