Insurance deductibles are a common feature for property coverages such as Comprehensive and Collision coverage on an auto, or coverage on a building or personal property. They are less common for coverages applying to bodily injuries. However, some employers are finding that Workers Compensation deductibles make financial sense for their organizations. The options vary from state to state and among insurance companies; before deciding whether to accept a deductible program, a business should learn the alternatives and the consequences of each.
Small deductibles are those ranging from $100 to $10,000 or more, depending on the particular state’s laws. They might apply to medical benefits, indemnity benefits (which compensate an injured worker for lost wages), or both, again depending on the laws of the state. For example, Colorado law permits small deductibles of $500 to $5,000 applied to both types of claims, while Hawaii allows $100 to $10,000 applied only to medical benefits. Some states, such as Hawaii, require insurance companies to offer small deductibles, some require them to offer deductibles upon the employer’s request (Pennsylvania), and others require an offer only if the insurance company determines that the employer can handle it financially (Colorado). The employer receives a small premium discount. Depending on state law, insurance companies may report losses to rating bureaus on a “gross” basis (not reduced by the deductible) or on a “net” basis (reduced by the deductible). The amount reported impacts the employer’s experience modification.
Some insurance companies offer “medium” deductibles, which range from $10,000 to $75,000. No states require the companies to offer these plans; employers who want them must negotiate them with the companies.
Large deductibles are those of $100,000 or more per claim. Some states limit the types of employers that can buy large deductible programs, usually by standard premium size (for example, Florida requires a minimum premium of $500,000). States may also set the minimum deductible on either a flat dollar basis ($100,000 per claim in Florida) or on a percentage basis (40% of standard manual premium in Alabama). While the employer is in effect self-insuring some claims, the insurance company performs the actual claim handling, pays the amounts due, and bills the employer for reimbursement. The policy may include an aggregate deductible which is the most the employer will pay for the policy term, regardless of the number of claims. Some large deductibles make the employer responsible for some or all allocated expenses, such as the cost of legal counsel. This arrangement gives the employer some control over choice of counsel and claim settlement.
To ensure that the employer under a large deductible plan will be able to pay the reimbursement, the insurance company requires the employer to put up security. The company may require the employer to set up an escrow account with a balance large enough to cover a few months’ estimated average claims. It may also require the employer to obtain a bank letter of credit, guaranteeing that the bank will honor the employer’s checks. Like an insurance policy, a letter of credit is a promise of future performance with no up-front expenditures, so the amount guaranteed may be the predicted loss amounts for the entire policy term.
Deductible plans can improve employers’ cash flow, reduce their insurance premiums, provide increased tax deductions, and give them more control over their Workers Compensation costs. However, they are appropriate only for employers that can afford the potentially large cash reserves required. Any employer contemplating a deductible plan should implement an effective workplace safety program — and consult with our professional insurance agents who can identify and explain the alternatives.
