October 22, 2014
Ebola and Beyond: Protecting Self-Insured Work Comp Plans
Epidemic diseases require careful thinking, and terms of coverage vary widely.
Epidemic diseases such as Ebola present a significant threat to the safety of both victims of the disease and the individuals who come into contact with those who are infected. Even with advanced medical facilities and protocols, healthcare workers are particularly vulnerable to outbreaks of infectious diseases because they work in close proximity to the victims for extended periods. Further, the facilities themselves tend to be densely populated with workers who run the risk of secondary exposure from medical equipment and other workers who may have been exposed to the disease. Self-insured workers’ compensation plans are very popular among the large health facilities that are likely to deal with these outbreaks. It is therefore important for risk managers and hospital executives at these facilities to not only prevent these infectious diseases from spreading to their employees, but to protect the hospital financially if such an outbreak does occur.
An excess workers’ compensation policy provides reimbursement to self-insured employers for any workers’ compensation claim that exceeds the policy’s self-insured retention (SIR). Under most policies, a claim is defined as an occurrence or event that causes a loss. This provision allows the self-insured employer to combine the losses from multiple individuals injured in the same event under a single SIR rather than individually for each employee. Most policies however, require a separate SIR per employee for claims of occupational disease and illness. Therefore, if 10 employees contract the same disease in the course of their employment, the self-insured employer would be required to retain the SIR 10 times (once for each employee) under most basic policy forms. Clearly, this is an area of potential concern for self-insurers especially because most excess workers’ compensation carriers require minimum SIRs of $500,000 (or more).
To help self-insured employers manage the expense of occupational disease claims, many excess workers’ compensation carriers offer a communicable disease coverage either as part of their policy form or as an endorsement to the underlying policy. A communicable disease coverage combines the losses of multiple employees suffering from the same disease or illness under a single claim and, therefore, a single SIR. Unfortunately for self-insurers, not all communicable disease coverage is created equally. Unlike traditional workers’ compensation policies, where carriers use the same policy form, each excess workers’ compensation policy is unique.
My current excess policy has a communicable disease endorsement, so I don’t need to worry… right?
Just because an excess workers’ compensation policy contains a communicable disease provision doesn’t mean the policyholder is fully protected from this exposure. Communicable disease coverage is unique to the underlying policies to which it is attached and the carriers that issue them. In many instances, the only consistency between various carriers’ coverage forms for this potentially serious exposure is the name of the coverage itself.
Each communicable disease coverage has its own set of definitions, rules and limitations, so it’s important for the policyholder to understand the key provisions that determine how the coverage is triggered and how it responds to potential claims. In general, communicable disease coverage can be compared using four basic criteria: covered diseases, transmission sources, symptom manifestation and coverage limits.
What’s in a name?
The definition of a communicable disease is extremely important. Some coverage forms define communicable disease in very broad terms while others define such illnesses very narrowly. Forms that use the terms “disease” or “illness” generically but do not specifically enumerate covered or excluded diseases are most favorable to the policyholder. Forms with non-specific definitions can provide the policyholder with coverage for virtually any type of work-related communicable disease ranging from the common cold to meningitis.
Some carriers’ communicable disease forms will specifically list the names or types of diseases that will be covered or the types of diseases that will be excluded under the policy. Much like a named-peril insurance policy, a communicable disease form that lists specific illnesses will only respond if two or more employees contracted a disease that was listed on the coverage form. If the policyholder suffers a claim that does not appear on the list of covered diseases, it’s not likely to be subject to the communicable disease coverage. Narrow definitions of covered losses can be particularly problematic when an outbreak of a previously unknown illness occurs. Again, if it isn’t listed, it’s probably not covered. Conversely, coverage forms that exclude specific diseases not only prevent the self-insurer from seeking coverage for such losses under the communicable disease provisions but may also exclude coverage under the basic occupational illness section of the underlying excess workers’ compensation policy, as well.
Consider the source
One of the few universal components among communicable disease coverage forms is that the disease must be transmittable between individuals to be covered. Diseases such as black lung and asbestosis are often considered to be occupational illnesses but are not subject to communicable disease coverage because they cannot be transmitted from person to person. These specific diseases can only be contracted by prolonged exposure to coal dust and asbestos, respectively, and not merely by being in close contact with someone suffering from those diseases.
The term “transmission” (or some similar term) appears in all communicable disease forms, but the manner in which the disease is transmitted is far more important. Generally speaking, some policies require a disease to be transmitted directly from one person to another to qualify for communicable disease coverage while others allow for both direct and indirect transmissions. Indirect transmissions are commonly referred to as source-to-source exposures. Forms that require a disease to be transmitted directly from person to person are far more restrictive than those that permit diseases to be transmitted from source-to-source. For example, if a group of hospital workers contracts swine flu after being exposed to an infected patient or even another co-worker who was previously exposed, the incident would likely be covered under both the person-to-person and source-to-source rules. If, however, a janitor and a nurse contracted swine flu after handling a soiled pillowcase, communicable disease coverage would only be triggered under a policy with a source-to-source provision because the individuals contracted the disease from an object and not directly from another person.
Tell me the truth – how long do I have?
Communicable disease coverages typically require individuals to contract the same disease or manifest symptoms within a specified period to be eligible for the coverage. If two employees treat a patient suffering from SARS and both exhibit symptoms of the disease a couple of days later, this would likely meet the coverage triggers required under most communicable disease forms. Conversely, if one employee develops SARS within a few days of exposure and the second begins to exhibit symptoms eight weeks later, the communicable disease coverage would be unlikely to respond. The incubation period for this particular disease is normally seven days, therefore, even though both employees ultimately contracted the same disease, it is highly unlikely that they contracted it from the same exposure. Thus, their claims would not be combinable.
Illnesses with long incubation periods are sometimes more difficult to classify under communicable disease coverages because of the time constraints required under some forms. Some forms set forth very specific time frames in terms of hours or days between the time when a group of employees is first exposed to a particular disease and the time the symptoms manifest. Coverage forms that allow symptoms to be manifested at some point during the policy period are generally more favorable to the policyholder. Such forms can combine losses for a successive string of employees infected by one another over a prolonged period (weeks or even months) as long as the infections took place during the policy period and their respective illnesses can be traced back to the same original source.
One potential downside to the policy period provision can occur when the event straddles two different policy periods. If an infection occurs during one policy period and continues to affect employees through a second policy period, it is likely that two separate claims would be developed, thus requiring the employer to satisfy the SIR twice. In this instance, the communicable disease coverage from the first policy would respond to the employees who exhibited symptoms from the time of exposure up until the end of the policy period. Any employees who exhibit new symptoms after the effective date of the new policy period would constitute a separate claim under the new policy’s communicable disease coverage.
Take it to the limit
Coverage extensions and endorsements sometimes share the same limits as the underlying policies to which they are attached. In other cases, coverage extensions carry their own limits in addition to the underlying policy limits or sub-limits, which may erode the underlying excess policy’s shared limit. These limits can be provided on an occurrence basis, aggregated basis or both. Communicable disease forms that carry coverage limits outside of the underlying policy’s basic limits can pose a very significant (and hidden) exposure to the policyholder and therefore should be examined closely.
If communicable disease coverage shares its limits with the underlying policy, the policyholder need only determine an adequate coverage limit for the underlying policy. If, however, the communicable disease coverage carries its own limits, it’s important for the policyholder to make certain those limits will provide adequate protection in the event of a loss.
In some instances, communicable disease coverage can carry per-occurrence or aggregated limits as low as $1 million. Although the policyholder gets the benefit of combining multiple claimants under a single SIR, the collective losses can also serve to erode the occurrence limit very quickly, especially for diseases that require significant amounts of treatment and lost time. Aggregated limits are typically shared over the course of a policy period and are likewise eroded by each communicable disease claim filed during the policy period, thus leaving less coverage available for future claims. More importantly, once the limit is exhausted under communicable disease coverage, any amounts exceeding the coverage limit would be ineligible for reimbursement under the communicable disease coverage and possibly the underlying excess policy, as well. Depending on the circumstances of a given loss and the coverage provided under the applicable communicable disease form, it is possible that the communicable disease coverage could actually end up costing the employer more than a basic, unendorsed policy.
That’s great information, but what can I do with it?
Many excess insurance carriers do allow at least some flexibility in the coverage they offer. In many instances, limits are negotiable on the underlying coverage, and those limits can sometimes be increased even after the policy has been issued. There may be an additional premium required to add communicable disease coverage to an underlying excess policy or to increase the limits on existing communicable disease coverage but the cost is typically modest as compared to the excess policy and the overall self-insurance program. Self-insurers may also want to consider adding aggregate excess coverage to limit the collective unreimbursed costs resulting from multiple occupational disease or communicable disease claims occurring during a single policy period.
Lastly, it may be prudent for self-insurers to take the terms and limitations of various communicable disease coverage forms into consideration when choosing an excess workers’ compensation policy. Epidemic diseases represent potentially one of the greatest financial risks to self-insured employers with exposures to such claims, especially hospitals and other healthcare providers. It is therefore important for those self-insured employers to make the communicable disease and occupational disease coverage a priority and not simply an add-on. Again, not all communicable disease coverage forms are created equally. Choose carefully.