Workers Compensation - Small Deductible Plans

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One option for reducing your workers compensation premium is to enroll in a small deductible plan. These plans are available in many states.

How They Work

A small workers compensation deductible is similar to the deductibles used in commercial property and auto physical damage insurance. The deductible represents the amount of each loss that you (the policyholder) pay out of pocket. For example, suppose that your workers compensation deductible is $1,000 on medical costs only.

If a claim generates $5,000 in medical costs, your portion of the loss will be $1,000. Your insurer will pay the remaining $4,000.

Under a small deductible program, you assume a portion of each loss in exchange for a reduction in your premium. A deductible typically applies to each claim. Depending on the state, it may apply to medical expenses only or to both medical and indemnity (disability) expenses. Some states allow you to include loss adjustment expenses as well.

A small deductible does not affect the claim handling process. Your insurer manages the claim in the normal manner. It investigates the injury or illness, and pays providers for medical treatment. It pays disability benefits to eligible workers. If a covered claim involves a lawsuit, the insurer pays defense costs and the damages awarded to the employee. The insurer then bills you for the deductible portion of the claim.

Eligibility

In some states, workers compensation insurers are obligated to offer a small deductible plan to all employers.

In other states, insurers are permitted, but not required, to offer a deductible. In still other states, insurers must provide a deductible only if the policyholder requests one.

Small deductible plans may have eligibility requirements. For instance, state law may require a minimum annual premium, such as $5,000.

Some states require the policyholder to provide security, such as an irrevocable letter of credit. In some states, insurers may determine eligibility based on their own underwriting rules.

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.

Size of Deductible

What constitutes a "small" deductible varies from state to state. It may be as small as $100 or as large as $75,000. Generally, a small deductible ranges from $500 to $5,000. Many states specify certain options, such as $500 through $2,500 at $500 increments. In some states, insurers may offer additional options (such as $7,500 deductible) if they obtain approval from the state regulatory agency.

Many states offer large deductible plans. A large deductible is a type of self-insurance. Large deductible plans have different requirements than their small deductible counterparts. 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 typically $100,000 or more.

Premium Credit

The discount you receive for a small deductible depends largely on two factors.

The first is the deductible you choose. A $2,500 deductible will provide you a larger credit than a $500 deductible. 

The second factor is the type of business you operate. In workers compensation insurance, employers are assigned one or more classifications. Each classification has a unique four-digit code. Under many 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 class code assigned the hazard group is typically the governing classification (the classification that best describes your business).

Experience Rating

States vary in the way they calculate experience modifiers for employers in deductible plans.

In some states, the entire loss amount, including the portion within the deductible, is included for experience rating. Other states do not include the deductible amount. When payments you make within the deductible are not included in the experience rating formula, your experience modifier will generally be lower than it would be in the absence of the deductible.

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.