Purchasing worker’s compensation insurance can be costly and confusing. Many companies aren’t even sure if they need it.
As a general rule, companies with five or more employees must provide worker’s compensation insurance coverage. Contractors, however, need coverage if they have one employee or more. Missouri defines an employee as full-time, part-time, seasonal or temporary. Exposures outside of Missouri must be insured through a traditional workers’ compensation policy or an acceptable alternative.
Farm laborers, domestic servants, certain real estate agents and direct sellers and commercial motor-carrier owner-operators are exempt by The Missouri Worker’s Compensation Act. If you are a sole proprietor or partner, you aren’t personally covered unless you elect to be. On the other hand, close family member-employees and members of limited liability companies are presumed to be covered unless they opt out.
Employers that don’t have the required number of employees, or who have employees in the exempt categories may nevertheless “elect” to come under the law. Exempt employers that decide not to purchase workers’ comp insurance, or self-insure, remain exposed to civil lawsuits brought by employees who are injured during work.
What are My Purchase Options?
You have two options when you purchase worker’s compensation insurance. You can buy workers’ comp insurance from a private insurer or, if you can meet the requirements of the Division of Workers’ Compensation, or you can self-insure as an individual business or a member of a self-insured group.
Traditional Insurance Carriers
Many employers purchase worker’s comp insurance from an insurance carrier just like they would buy other liability insurance. The remaining employers who are not self-insured may potentially be insured through the residual market, commonly known as the assigned risk pool or “pool.” Employers in the pool usually consist of those employers who have trouble finding coverage in the voluntary market and those with small premiums (under $10,000).
An alternative to purchasing a worker’s compensation insurance policy, employers and groups of employers may apply to the Division of Workers’ Compensation to self-insure their workers’ compensation obligations. Application can be made through the Division’s Insurance Unit. The Insurance Unit functions as the chief underwriter, regulator and auditor for the self-insurance program. There are two types of self-insurance, individual and group trusts. An employer wishing to self-insure must have the financial capability to meet financial obligations of work-related injuries. If not, it will directly impact the entire financial stability of the company. A potential advantage of self-insuring is reduced costs.
Before deciding to self-insure, here are some considerations:
- You must be committed to controlling workers’ compensation costs. Self-insurance is a long-term method for funding an employer’s workers’ compensation liability. It may take you a few years to realize the benefits.
- Examine the financial feasibility of self-insuring. For some, it may be more costly than a traditional workers’ compensation policy.
- Does it fit into your corporate philosophy? Are you willing to assume the risk?
- Consider your exposure. Some exposures are extremely high risk and better handled through a traditional insurance policy.
Pros & Cons of Self-Insuring Your Worker’s Compensation Insurance
- An employer that successfully self-insures has active loss control program and services. These programs provide employees with safer work environments and help improve the employer’s profits through reduced losses.
- You hire a third party claims administrator, which may help reduce overall costs of a case
- There is potential cost savings associated with self-insurance. You keep the underwriting profit.
- You may improve your cash flow and realize the time value of money since funds are paid out as bills and benefits payments, instead of lump sum premium payments.
- You have great control over your workers’ compensation costs, and are in a better position to be proactive.
- As a self-insurer, you may have to bear the cost of a catastrophic injury or higher-than-expected loss. This can directly affect your bottom line.
- There is an application process and annual filing requirements contained in the regulations in which you need to comply.
- Before self-insurance is granted, you must provide security in an amount determined by the Division of Labor, but not less than $200,000. This must be in the form of a surety bond, letter of credit, or the deposit of certain securities in escrow.
- There may be loss of tax deductions. You can only deduct your actual expenses and paid losses. Reserves for future workers’ compensation payments must be listed on your balance sheet as a liability.
For more information about how you can obtain the most cost effective worker’s compensation insurance, contact Joe Bosse at NEC Insurance at email@example.com, 636.271.2481, or visit NECins.com for more information.
NEC Insurance is one of the largest independent insurance brokers in Missouri offering business and personal insurance, financial services, and risk prevention. For more information visit www.necins.com or call 636.271.2481.