Your clients, or even your own firm, may be considering self-insuring to cover costs normally covered by health or workers’ compensation insurance, but a recent poll shows that there’s a certain amount of ignorance about the responsibilities and liabilities of a self-insured group’s member firms—and that ignorance is growing.
It may seem like the ideal answer in a time of rising insurance premiums: join an SIG to avoid ever-escalating payments to outside companies for employee health insurance or workers’ comp coverage. But there are caveats, too. In November 2010, the Contractors Access Program (CAP), a self-insured group of 252 small businesses that had gathered together to provide their own workers’ compensation coverage through pooled resources, was declared in default by the California Department of Industrial Relations. That left member businesses—small contracting companies—on the hook for some $38 million in workers’ compensation claims. The declaration was a wake-up call for many of the member businesses, which have been embroiled since in negotiating a court settlement for claims that otherwise could continue to be a drain on them for years.
In April of this year, the California Self-Insurers’ Security Fund assumed liability for payment of another SIG’s workers’ comp liabilities, those of Mainstay Business Solutions. In this case the liabilities were estimated at $16.5 million.
The poll, designed to determine small business owners’ knowledge and understanding of SIGs, was commissioned by Employers, a company that provides insurance coverage to small businesses, and conducted by ORC International. The findings are a bit disturbing, considering the proportion of current and former SIG members who apparently do not understand what they are liable for.
Among small business owners overall, the poll showed some 53% are mostly ignorant of how SIGs work. Among current and former SIG members, however, 41% do not realize that they are responsible for the claims generated by employees of other companies within their SIGs. In 2008, 32% of all respondents believed SIG members are not financially responsible for claims of all companies in the SIG. But in 2011, that number had risen to 40%.
Other statistics include those current and former SIG members unaware of what they must do in order to leave an SIG (43% do not know they must provide reinsurance, a bond or a letter of credit); those who believe they can only be sued for a portion of the entire cost of claims of the group (34%); those who don’t believe they will continue to be financially responsible for claims that occurred during their membership once they leave the group (31%); and those who don’t believe that individual SIG members can be sued for the total workers’ compensation expenses owed by the group as a whole (32%).
SIG responsibilities don’t go away, even if a company leaves an SIG or the SIG itself is dismantled. Risks of an SIG include outright failure, as well as the resulting obligation of its member companies to honor claims regardless of their own size or cash flow. Therefore, many factors, such as size, strength and cash flow—not just its own, but of other member firms—must be considered when a business owner is deciding whether to self-insure. Otherwise, the company could end up a member of a failing SIG and remain obligated for claims, sometimes for years, and perhaps from employees not even of its own firm.
If a client is considering an SIG, his research had best be thorough or his business may be left with a financial mess to clean up, even if his business leaves the group. Exiting an SIG does not absolve a company of responsibility for claims dating from the company’s membership. Workers’ comp issues can persist for years, and if a business owner is unaware of his responsibilities and obligations, he could find that the cost of self-insuring is far higher than the premiums for conventional insurance.