Workers Compensation Assigned Risk Plans
Workers compensation insurance is mandatory in most states. Yet, some employers are unable to purchase this coverage from a standard insurer. They submit one application after another, but no insurer will issue a policy. What can they do? Fortunately, most employers have another option. They can purchase a policy from their state's assigned risk plan.
Why Coverage May be Hard to Obtain
When an employer has difficulty obtaining a workers compensation policy, it typically has one or more of the following characteristics.
- Poor Loss History The company has experienced numerous small claims or a few large ones. To an underwriter, a poor loss history is a sign that the employer lacks an adequate safety program.
- New Business Insurers rely on loss histories to predict future loss experience. To insure a new company, which has no loss history, insurers must take a gamble that loss experience will be good. Some insurers are unwilling to take that chance.
- Very Small Business A very small company may employ only a few workers. A tiny workforce will likely generate a small workers compensation premium. An insurer may consider the premium too small in relation to the risk of claims.
- Hazardous Occupation Some business operations are inherently dangerous for employees. Examples are roofing, tree pruning, bridge painting and steel erection. When employees performing such activities are injured, the injuries tend to be severe. Severe injuries lead to large workers compensation claims. Thus, many insurers will not provide workers compensation coverage to employers in risky occupations.
Assigned Risk Plan
Because some employers are unable to obtain workers compensation coverage in the voluntary market, each state has established an assigned risk plan. An assigned risk plan is the market of last resort. It is a source of coverage for employers that have no alternative. Assigned risk plans are also called the residual market.
Assigned risk plans vary from state to state. In some states the assigned risk plan is administered by the NCCI. In other states the plan may be administered by a designated insurer, the state insurance fund, or the state rating bureau.
Most states require insurers that offer workers compensation coverage in the voluntary market to participate in the residual market as well. Insurers may be required to join a state reinsurance pool or to insure a certain percentage of assigned risk policyholders. Insurers in a reinsurance pool share premiums and losses generated by policyholders in the assigned risk plan.
How to Obtain Coverage
Notify your insurance agent if you are unable to obtain workers compensation coverage. He or she may submit an application on your behalf to your state assigned risk plan. If you don't have an agent, you can obtain information about your state's assigned risk plan by contacting your state insurance department or workers compensation rating bureau.
Note that an assigned risk plan will not accept your application if you owe any outstanding premium to a workers compensation insurer. Also, you must have applied for coverage and been denied by one or more insurers (the number varies by state).
For policyholders, state assigned risk plans have several disadvantages.
- Cost Employers insured by assigned risk plans pay higher rates than those insured in the voluntary market. Policyholders whose experience modifier is greater than 1.0 may also be subject to a surcharge. In addition, most assigned risk plans do not provide a premium discount (a type of discount provided on larger premiums).
- No Choice of Insurer Policyholders in an assigned risk plan cannot choose their insurer. Instead, they are assigned to an insurer that issues and services their policy.
- No Payment Plan Assigned risk plans to do not normally offer a payment plan. Policyholders are required to pay their premium upfront.
- Less coverage An assigned risk plan may use a policy form that is not as broad as the standard form used in the voluntary market. This is especially true when policies are issued by state insurance funds. Such policies typically limit coverage to injuries sustained in that state. They may provide no coverage for injuries incurred elsewhere.