Tag Archives: private insurance

Home Insurers Ignore Opportunity in Flood

Recently, Munich Re announced its plan to step into the U.S. inland flood market to offer a competitive flood coverage endorsement for participating carriers. This is the second notable entry of international capital into an arena dominated by the federal government.

Munich Re is known as a conservative giant of international reinsurance, so it might seem odd that it is joining the National Flood Insurance Program (NFIP) in covering U.S. flood. A quick look at the opportunity shows why the plan makes sense.

U.S. inland flood insurance is an untapped source of non-correlated premium unlike any other in the world. The market is dominated by an incumbent market maker that is in trouble because it offers an inferior product that cannot price risk correctly (this paper nicely summarizes the problems at NFIP). So, here is what the new entrants are seeing:

  1. Contrary to industry beliefs, flood is insurable. The tools are present to accurately segment risk.
  2. Carriers offering flood capacity will differentiate themselves from competitors. This will give them a leg up on the competition in a market that is highly homogeneous. Carriers not offering flood will likely disappear.
  3. The market is massive, with potentially 130 million homes and tens of billions of dollars at stake.

Let’s go into details.

Capital Into a Ripe Market

The U.S. Flood Market

As most readers of Insurance Thought Leadership already know, many carriers have flood on the drawing board right now. The Munich Re announcement was not really a surprise. We all know there will be more announcements coming soon.

Let’s summarize the market reasons for the groundswell of private insurance in U.S. flood.

The most obvious characteristic of the market is the size. For the sake of this post, we’ll just consider homes and homeowner policies. Whether one considers the number of NFIP policies in force as the market size (about 5.4 million policies in 2014), the number of insurable buildings (133 million homes) or something in between, there is clearly a big market. And the NFIP presents itself as the ideal competitor – big, with a mandate not necessarily compatible with business results.

So, there is no doubt that a market exists. Can it be served? Yes, because the risk can be rated and segmented.

Low-Risk Flood Hazard

To be clear: A low-risk-flood property has a profile with losses estimated to be low-frequency and low-severity. In other words: Expected flood events would rarely happen, and not cause much damage if they do. For many readers, joining the words “low-risk” and “flood” together is an oxymoron. We strongly disagree. Common sense and technology can both illustrate how flood risk can be segmented efficiently and effectively into risk categories that include “low.”

Let’s start with common sense. Flood loss occurs because of three possible types of flood: coastal surge, fluvial/river or rain-induced/pluvial (here is more information on the three types of flood). The vast majority of U.S. homeowners are not close enough to coastal or river flooding to have a loss exposure (here is a blog post that explores the distribution of NFIP policies). Thus, the majority of American homeowners are only exposed to excess surface water getting into the home. We’d be willing to wager that most of the ITL readership does not purchase flood insurance, simply because they don’t need it. That is the common-sense way of thinking of low-risk flood exposure.

How does the technology handle this?

There is software available now that can be used to identify low-risk flood locations (as defined by each carrier), supported by the necessary geospatial data and analytics. Historically, this was not the case, but advances in remote sensing and computing capacity (as we explored here) make it entirely reasonable now, with location-based flood risk assessment the norm in several European countries. Distance to water, elevations, localized topographical analyses and flood models can all be used to assess flood risk with a high degree of confidence. In fact, claims are now best used as a handy ingredient in a flood score rather than as a prime indicator of flood risk.

How to Deliver Flood Insurance in the U.S.

Deliver Flood Insurance to What Kind of Market?

Readers must be wondering at the size of market, because we offered two distinctly different possibilities above – is it about 5 million to 10 million possible policies, or 130 million policies? The difference is huge – the difference is between a niche market and a mass market.

The approach taken by flood insurers thus far is for a niche market. The current approach probably has long-term viability in high-risk flood, and the early movers that are now underwriting there are establishing solid market shares, cherry-picking from the NFIP portfolio.

On a large scale, though, the insurance industry’s approach needs to be for a mass market.

Here is a case study describing the mass market opportunity:

  1. The property is in Orange County, CA, where the climate is temperate and dry, almost borderline desert. El Niño might be coming, but that risk can be built in.
  2. Using InsitePro (see image below), you can see that the property is miles and miles away from any coastal areas, rivers or streams. More importantly, the home is elevated against its surroundings, so water flows away from the property, which is deemed low-risk.
  3. The area has no history of flooding, and this particular community has one of the most modern drainage systems in the state.

map

Screenshot of InsitePro, courtesy of Intermap Technologies. FEMA zones in red and orange

  1. Using Google Maps street view, we can estimate that the property is two to three feet above street level, which adds another layer of safety. Also, this view confirms that the area is essentially flat, so the property is not at the bottom of a bathtub.
  2. And, as with most homes in California, this property has no basement, so if water were to get into the house it would need to keep rising to cause further damage.

To an underwriter, it should be clear that this home has minimal risk from flooding. As a sanity check, she could compare losses from flood for this property (and properties like it in the community) to other hazards such as fire, earthquake, wind, lightning, theft, vandalism or internal water damage. How do they compare? What are the patterns?

For this specific home, the NFIP premium for flood coverage is $430, which provides $250,000 in building limit and $100,000 in contents protection. The price includes the $25 NFIP surcharge.

This is a mind-boggling amount of premium for the risk imposed. Consider that for roughly the same price you can get a full homeowners policy that covers all of these perils: fire, earthquake, wind, lightning, theft AND MORE! It is crazy to equate the risk of flood to the risk of all those standard homeowner perils, combined! We provided this example to show that even without all the mapping and software tools available for pricing, what we can quickly conclude is that the NFIP pricing for these low-risk policies is absurdly high. Whatever the price “should” be for these types of risks, can you see that it MUST be a fraction of the price of a traditional homeowner’s policy? Don’t believe that either? Consider that the Lloyd’s is marketing its low-risk flood policies as “inexpensive,” and brokers tell us privately that many base-level policies will be 50% to 75% less expensive than NFIP equivalents.

The news gets even better. There are tens of millions of houses like this case example, with technology now available to quickly find them. These risks aren’t the exception; these risks can be a market in their own right. Let the mental arithmetic commence!

Summary: Differentiate or Die!

The Unwanted Commodity

Most consumers of personal lines products don’t have the time or the ability to evaluate an insurance policy to determine whether it provides good value. Regrettably, most agents and brokers don’t have the time to help them either. So, when shopping for a product that they hope they will never use and that they are incapable of truly understanding, consumers will focus on the one thing they do understand: price.

Competing on price becomes a race to the bottom (yay! – another soft market) and to death. But there is an opportunity here – carriers that compete on personal lines/homeowner insurance with benefits that are immediately apparent (like value, flexibility, service, conditions and, inevitably, price) have a rare chance to stake out significant new business, or to solidify their own share.

The flood insurance market is real, and it’s big enough for carriers to establish a healthy and competitive environment where service and quality will stand out, along with price. Carriers that would like to avoid dinosaur status can remain relevant and competitive, with no departure from insurance fundamentals – rate a risk, price it and sell it. It’s obvious, right?

Which carriers will be decisive and bold and begin to differentiate by offering flood capacity? Which carriers will evolve to keep pace or even lead the pack into the next generation of homeowner products? More importantly, which of you will lose market share and cease to exist in 10 years because you didn’t know what innovation looks like?

The Key Choices in Workers’ Comp

Workers’ compensation is a no-fault form of insurance that an employer is legally obligated to secure, providing wage replacement as well as medical, rehabilitation and death (survivor) benefits to employees injured in the course of employment. Workers’ comp is in exchange for mandatory relinquishment of the employee’s right to sue his or her employer for the tort of negligence. The lack of recourse outside the workers’ compensation system is sometimes referred to as “the compensation bargain.” This compromise system also establishes limits on the obligations of employers for these workplace exposures, so that the costs are supposedly more predictable and affordable.

The system is always evolving, and there are key choices in workers’ comp, which I will cover here — and update as the system continues to evolve.

First, some background:

Where did workers’ comp come from?

Workers’ compensation has roots all the way to 2050 B.C., where ancient Sumerian law outlined compensation for injury or impairment involving loss of a worker’s specific body parts. Beginning in the 17th century, most pirate crews, including the one led by English privateer Capt. Henry Morgan, organized fairly sophisticated and favorable benefits for injured crew members. Injured pirates were treated on board and fitted for prosthetics – as popularized in literature and film. Furthermore, they were compensated in pieces of eight depending upon the type and severity of injury. As for modified duty, crew members were oftentimes offered non-physically demanding work on the ship. Such work could include cleaning cannons, cooking meals and washing the ship decks.

In modern times, workers’ comp as we know it today was first modeled in Germany and Prussia in the late 19th century, then adopted in the U.S. in 1908 by the federal government, then in 1911 by Wisconsin. Workers’ comp spread to all states and the District of Columbia by 1948, with Mississippi as the last state to adopt the model.

Why is workers’ comp coverage mandated?

At first, participation in U.S. workers’ compensation programs was voluntary. In 1917, however, after the Supreme Court upheld the constitutionality of compulsory workers’ comp laws, the majority of states then passed legislation that required employers to purchase workers’ compensation coverage for their employees. Requirements varied — and still vary — from state to state. Currently, Texas and Oklahoma have voluntary “opt-out” or “non-subscription” provisions, which allow employers to provide their own formal injury benefit plan options.

How is workers’ comp different from other insurance?

Workers’ comp is intended to eliminate tort liability litigation arising from employee injuries or work-related diseases by providing wage replacement, vocational rehabilitation and medical benefits to employee injured in the course and scope of their employment. This is intended to minimize worker conflicts and to avoid costly lawsuits. The standard workers’ compensation insurance policy is a unique insurance contract in many respects. Unlike other liability insurance policies, it doesn’t have a dollar amount limit to its primary coverage. The coverage is considered “exclusive remedy,” to deny employees the opportunity to sue their employee. In general, an employee with a work-related illness or injury can get workers’ compensation benefits regardless of who was at fault — the employee, the employer, a coworker, a customer or some other third party.

Why does a workers’ comp policy have two parts?

Part One is the standard workers’ compensation insurance policy (formerly known as Coverage A) that transfers liability for statutory workers’ compensation benefits of an employer to the insurance company. If a state increases benefit levels during the term of the policy, the employer doesn’t have to make any adjustments to the policy. Instead, the policy automatically makes it the responsibility of the insurance company to pay all claims due for workers’ compensation insurance for the named employer in the particular states covered by the policy.

Part Two (formerly known as Coverage B) addresses employers’ liability coverage. This coverage protects the employer against lawsuits brought by the injured employee or the survivor. If an employer is thought to be grossly negligent, the employer runs the risk of being sued for that negligence. Under Part Two of the workers’ comp policy, the employer would be defended in such a suit. If a judgment were rendered against the employer, that judgment would be paid by the workers’ comp coverage, but no more than the limits provide for in the policy. Part Two also insures an employer in cases such as third-party “over suits,” where an injured worker sues a third party and that third party seeks to hold the employer responsible.

How states differ

Examine your company’s possible exposures to workers’ compensation claims from different states. If you have employees who live and work in or who travel to other states, you need to make sure you are properly covered in each state. In most jurisdictions, employers can meet their workers’ compensation obligations by purchasing an insurance policy.

Five states and two U.S. territories (North Dakota, Ohio, Puerto Rico, the U.S. Virgin Islands, Washington, West Virginia and Wyoming) require employers to get coverage exclusively through state-operated (“monopolistic”) funds. If you’re an employer doing business in any of these jurisdictions, you need to obtain coverage from the specified government-run fund unless you’re legally self-insured. A business cannot meet its workers’ compensation obligations in these jurisdictions with private insurance.

Thirteen other states also maintain a state compensation insurance fund, but their state funds compete with private insurance. In these states, an employer has the option (at least theoretically) to use either the state fund or private insurance. Those states that offer employers this option are Arizona, California, Colorado, Idaho, Maryland, Michigan, Minnesota, Montana, New York, Oklahoma, Oregon, Pennsylvania and Utah.

FORMS OF FINANCING WORKERS’ COMP

  1. Fully Insured

There are more than 300 workers’ comp insurers writing policies in the U.S., although many will only provide coverage with a high deductible. Most states have a State Fund Insurance Carrier that is the insurer of last resort and provides fully insured (no deductible) workers’ comp coverage to entities operating in their state. State fund programs are also referred to as the residual markets. They are more commonly known as state insurance funds, assigned risk plans or workers’ compensation pool policies. Generally speaking, state insurance funds are non-profit entities that cost more than private companies (10% to 40% higher premiums) but that guarantee availability of coverage as a “last resort” carrier.

Some common reasons that employers fail to obtain competitive quotes from private carriers include: 1) a high frequency of claims or a high cost of claims; (2) the dangerous nature of the risk or industry (based on codes from the National Council on Compensation Insurance, or NCCI); 3) prior bankruptcies or poor financial status of the business; and 4) prior cancellations because of nonpayment of workers’ compensation premiums.

  1. Group or Association Coverage Plans

In various states, there are options for small to medium-sized companies to obtain group coverage through their industry associations. These options include Self-Insured Groups (SIGs), which provide a true self-insured option. Group members make contributions to the self-insured group, and the self-insured group pays expenses and claims for injured workers.

SIGs directly contract for services normally performed by an insurance company. Services secured on behalf of members include: elected Board of trustees, program administration, safety and loss-control services, third-party administration (TPA), independent accountants and actuaries and excess insurance carrier.

Companies must apply for membership and generally indicate adherence to effective risk management and loss control programs.

  1. Large-Deductible Plans

This is a form of self-insurance where the employer is responsible for reimbursing the insurer for claims up to a certain dollar amount and the insurer is responsible for paying claims in excess of that deductible. The insured funds an account (loss fund) to pay losses, and the insured reimburses the fund as losses are paid. The insured must collateralize, usually by letter of credit, an amount approximately equal to the difference between paid and ultimate losses. The actuary is typically one assigned by the carrier.

With the advent of the high-deductible program in the early ‘9Os, actuarial efforts focused principally on pricing issues. Employers are able to save significant premium expenses if they manage their loss-control and return-to-work programs effectively. The “deductible” is a sum that is subtracted from the insurer’s indemnity or defense obligation under the policy. Importantly, the responsibility for the defense and settlement of each claim rests almost entirely with the insurer, and the insurer typically maintains control over the entire claim process.

Large-deductible programs were slow to find favor in the U.S. In 1990, only six states approved of such deductibles. Currently, at least 45 states utilize large-deductible programs for workers’ compensation.

Deductibles are based on a per claim or per occurrence basis, with self-insured retentions of $100,000 to $1 million. The insurer sets the minimum deductible allowed. Insurers initially developed this program to provide both themselves and insureds certain advantages, including:

  • price flexibility, by passing risk back to the insured
  • reduced residual market charges and premium taxes in some states
  • better cash flow
  • coverage options for aggregate limits
  • broadest choice of insurance carriers
  • the possibility that a separate TPA may be allowed as an option to the carrier
  • that certificates of insurance issued to the employer’s key business partners show full coverage and policy limits

With a well-designed and -managed, loss-sensitive product, companies can potentially lower costs by assuming a greater proportion of their risk. You get increased cash flow and lower costs and improve claims outcomes for the business and its employees. What’s important with a loss-sensitive program is that the organization is committed to fully leveraging the insurer’s loss control, claims, medical and pharmacy management programs.

Additionally, it is critical to choose the right risk-financing structure. That involves having the business itself, you, the agent and the carrier carefully examining the organization’s current financial situation and short- and long-term goals.

Because the carrier is legally responsible for the employer’s claims, the carrier will require collateralization of existing and future claims covered by the policy period. Collateral is usually a letter of credit, surety bond or cash.

Keep in mind, however, that choosing a high retention is all about the frequency and severity of your workers’ comp claims as well as the responsiveness and quality of your claims administrator. In essence, the employer is giving the insurance company an open checkbook with respect to the handling and disposition of claims.

  1. Retrospective (Deferred) Premium Options

Retro programs are written through an endorsement on your large-deductible workers’ comp policy. It is the ultimate amount of money you will owe your carrier for the contract period. It can be broken down into installment payments. It consists of basic premium and converted losses, both of which get adjusted by the tax multiplier, which are the taxes and assessments due to the state. The insurer provides you a written agreement that defines the terms of your contract. It will show the basic and maximum and minimum premium, how the premium will be paid during the policy year, how the retrospective premium will be calculated and, most importantly, when you will be eligible for a premium refund. The agreement also defines any penalties associated with a midterm cancellation of the contract.

The two major retro payment plan options:

A.   Incurred Loss Retro:

You’ll pay the same up front as with a guaranteed-cost program, but you’ll be refunded money if your loss experience is favorable. The risk, however, is having to pay additional premium if your loss experience is unfavorable. The cost of the insurance program is determined by the actual incurred loss experience for a specific policy period. Incurred costs include paid costs as well as future expected costs (reserves). The premium is adjusted annually until all claims are paid and closed.

B.     Paid Loss Retro:

Premiums are determined using paid only loss amounts rather than incurred (reserved amounts). Timing of premium and loss payments are negotiated before inception, and disbursements are made as costs are realized and billed. Because this option is typically the favorite of insureds, this option is typically only offered to large entities paying in excess of $1 million in premium.

How is the basic premium determined?

Basic premium is basically the insurer’s cost of doing business plus expected profitability. The amount is determined by multiplying the standard premium by a percentage called the basic premium factor. This factor varies based on your actual premium size and the amount of risk you are assuming. In general, if you take on more risk for your claims, the amount you will pay for the basic premium decreases.

What are converted losses?

 Converted losses are the total claims, also called incurred losses, adjusted by the tax multiplier (see below) and multiplied by the loss conversion factor (LCF), which is negotiated with you prior to the inception of the coverage. As the loss conversion factor increases, you assume more risk, so the basic premium decreases.

What is the tax multiplier?

This is a factor that is applied to the basic premium and converted losses to cover state taxes and assessments that must be paid by your insurance carrier.

What is the maximum premium?

Maximum premium is the most you will have to pay under a retro plan. It helps protect you by placing a limit on the impact of any substantial losses you could have. It can range from 100% up to 150% of audited standard premium. For example, if the audited standard premium was $100,000, and you selected a 125% max, the most you could pay for the total of all retro charges under the specific contract period is $125,000.

When will my money be returned if losses are low?

After completing the full contract period, the first adjustment for a possible refund is usually calculated six months after the policy expiration date. The premium is adjusted according to the retro formula, using the basic premium, converted incurred losses and taxes. If your claim losses are better than expected, you will get as much as 50% of the total estimated refund. Another adjustment is usually made in 12 months, with as much as 25% of the total estimated refund. The final adjustment is at least 12 months after that, with the final 25%. If, however, you have complex indemnity (lost-time) claims that are unresolved, the adjustments may drag out for years.

  1. Captive Insurance

A captive insurance company is an insurance company formed by a business owner to insure the risks of related or affiliated businesses. A captive permits a business to manage its risks while potentially providing substantial benefits to that related business. More than 75% of the Fortune 500 now utilize some form of captive insurance, but captives are usually not a viable alternative for most small to medium-sized companies.

Is a captive still a viable alternative?

The number of captive insurance entities is growing worldwide. Today, nearly 10,000 businesses in the world employ some form of captive insurance coverage. Those totals are expected to triple over the next 10 years as more companies further examine comprehensive and well-targeted risk-management plans. More than 5,750 large companies have their wholly owned captive insurance entities that were formed to insure the risks of the parent company and its subsidiaries.

What risks does a captive typically underwrite?

Captives are formed in 30 domestic locations (state) or in foreign (“off-shore”) domiciles like Bermuda and the Cayman Islands. Vermont is the most popular state. Each domicile has its own set of laws and regulations. To be successful, captives usually cover disparate types of risk, with a good geographical or industry spread. Captives are intended to build financial strength over time and help insulate the parent company from price fluctuations in the traditional insurance market. Increasingly, captives’ owners are also looking to their captive to provide broader coverage, including unusual or emerging risks, where risk transfer is either expensive or unavailable.

The type of risks that captives cover is expanding rapidly, from the more common property damage and casualty coverage, to employee benefits, environmental, cyber, business interruption and other non-traditional covers like operational risk and supply chain. Captives typically provide large companies an opportunity to insure against risks that are generally uninsurable or exotic.

Are there different types of captives?

There are at least 10 types of legal insurance captives, including:

  • Pure captives (single parent)
  • Industry group captives
  • Agency captives
  • Association captives
  • Risk-retention groups (RRGs)
  • Rent-a-Captives
  • Segregated and protected cell captives
  • Special-purpose reinsurance captives
  • Series LLC captives
  • Internal Revenue Code 831b captives.

How is workers’ comp coverage provided in each state?

A commercial insurance company (“fronting company”), licensed in the state where a risk to be insured is located, issues its policy to the insured. That risk is then fully transferred from the fronting company back to the captive insurance company through a reinsurance agreement, known as a fronting agreement. Thus, the insured obtains a policy issued on the paper of the commercial insurance company.

The cost varies for a fronting carrier, which legally assumes the workers’ comp risk it fronts, in the event of default by the captive. The fronting company will almost always require collateral to secure the captive’s obligations to the fronting company under the fronting agreement, in addition to a 4% to 10% fee.

Is there a tax advantage to using captives?

While the tax advantages from captive arrangements should never be at the top of any company’s list, captives can offer accelerated premium deductions, unlike most self-insurance programs. However, if the IRS believes that a captive has been established purely for tax purposes, the agency may challenge the captive status of the company. Comprehensive documentation of the objectives of the captive structure is important.

  1. Self- Insurance

A self-insured workers’ comp program is one where the employer sets aside an amount to provide for any workers’ comp claims and associated expenses—losses that could ordinarily be covered under an insurance program. Self-insurance is a means of capturing the cash flow benefits of unpaid loss reserves and offers the possibility of reducing expenses typically incorporated within a traditional insurance program. It involves a formal decision to retain risk rather than transfer (insure) and allows the employer to pay workers’ comp associated expenses as incurred.

A self-insured workers’ comp plan is one in which the employer has legal approval from the one or more states to assume the financial risk for providing workers’ comp benefits to its employees. In practical terms, self-insured employers pay the cost of each claim “out of pocket” as necessary. The employer maintains its ability to settle or adjudicate each claim within its self-insured retention – assuming it has excess insurance.

Importantly, key decisions, including which vendors to use to treat injured workers and to administer claims, remain with the employer and not an insurer.

How many employers currently operate a self-insured workers’ comp program? 

It is estimated that more than 6,000 corporations and their subsidiaries nationwide operate self-insured workers’ comp programs. Many other smaller employers participate in Self-Insured Groups (SIGs), where they pool their risks with other companies.

How large do you have to be to self-insure?

Each state sets its own minimum standards for eligibility. For example, in California, you only need to have at least $5 million in shareholder equity and a net profit of $500,000 per year for the last five years. Eligibility is not based on the number of claims.

Keep in mind that each state is a distinct entity, so a company might be self-insured in one state where it has a high concentration of employees and have a large-deductible policy in another state with fewer employees.

Does the state require collateralization?

Every state, except California and North Carolina, has mandatory minimum security deposits that consist of: letters of credit, surety bonds, securities or cash. In many states, the amount posted by the self-insured is less that that required by an insurer or captive.

Can self-insured employers protect themselves against unpredicted or catastrophic claims?

Most states, except California, require self-insureds to purchase statutory (no limit) excess insurance from a state-licensed workers’ comp insurer. Where available, a negotiated, aggregate stop-loss (“attachment point”) endorsement protects an employer to a specific policy period dollar cap regardless of the per-claim self-insured retention or number of claims incurred.

Is self-insurance typically only used by large entities?

No. Employers of all sizes typically choose to self-insure because it gives them the greatest opportunity of any workers’ comp funding alternative to manage their own destiny. A self-insured can control its costs by choosing and managing various program vendors and by implementing a wide variety of loss-prevention and return-to-work programs that serve to greatly reduce workers’ comp claims. Self-insureds choose program components that they feel are the most cost-effective and responsive.

Who administers claims for self-insured workers’ compensation programs?

Self-insured employers can either administer the claims in-house (if allowed by the state) or subcontract to a TPA. Other medical treatment or claim-related services can be “unbundled,” or obtained through TPA contractual services.

  1. Opting Out of Workers Comp

The opt-out concept is appealing to those who believe that statutory workers’ comp systems are hopelessly complicated, burdensome to both employers and their injured employees and out of touch. Privatized opt-out programs are intended to better integrate into the matrix of existing employee health plans and benefits.

Just two states have laws that allow employers to opt out of the state-regulated system: Texas and Oklahoma.  Texas has always had this law, with 114,000 employers (about 1/3 of the total employers) choosing to forgo workers’ comp coverage. Oklahoma recently adopted a variation where employers can choose an alternative to workers’ comp coverage.

Practically speaking, “Opt-Out” (“non-subscription”) gives employers enormous discretion to decide under what circumstances to compensate an injured worker under the employer’s own benefit plan. To protect the employer from most negligence lawsuits, as a condition of employment the employer can force the employee to sign a contract so all cases are resolved through an employer-designed, secret arbitration system rather than in court.

One crucial aspect is the adoption of federal standards under the Employee Retirement Income Security Act of 1974 (ERISA) for administering work-injury benefits. A state insurance or self-insured guarantee fund would not back up an opt-out employer that defaults.

With continuing legal challenges to workers’ compensation, including recent lawsuits against Uber and Lyft seeking court approval to mandate workers’ compensation benefits for “app assigned” work, traditional workers’ comp may give way to modern versions of the opt-out programs. The goal would be to create a more seamless benefit program that participants hope will take out the litigation components that have haunted the “no-fault compensation bargain” that began just more than 100 years ago.

States of Confusion: Workers Comp Extraterritorial Issues

As states passed workers compensation laws, each state established its own system. This resulted in a mishmash of laws, benefits, compensability and eligibility from state to state. Courts have ruled that a state has the right to apply its own workers compensation rules and standards to each case. Hence, most states simply don’t care what other states allow, only what is required under their workers compensation laws. There is little meaningful cooperation or coordination among states. Challenges for agents, employers, insurance companies and adjusters include understanding:

  • When coverage is required in jurisdictions where the employer has operations or employees working, living or traveling in or through.
  • How coverage is provided for various jurisdictions.
  • What jurisdictional benefits an employee can collect.

The policy

The two items that reference what states are insured under a workers compensation policy are 3.A. and 3.C. on the information page. (Federal coverage can only be added by endorsement.) 3.A. is fairly simple. The insurance agent for the employer instructs the insurance carrier to list the states where the employer operates when the policy goes into effect or is renewed. 3.C. is a safety net – at least most of the time. That item lists states where an employer expects it may have employees traveling to or through or working in. If an employer begins work in any state listed in 3.C. after the effective date of the policy, all provisions of the policy apply as though the state were listed in 3.A. Notice must be given “at once” if work begins in any state listed in 3.C., although “at once” is not defined in the policy. If the employer has work in any state listed in 3.C. on the effective date of the policy, coverage will not be afforded for that state unless the carrier is notified within 30 days.

It should be noted the insurance policy does not determine what law applies at the time of injury. The law determines what is payable. In addition, note that the workers compensation policy does not apply to Ohio, North Dakota, Washington and Wyoming, “monopolistic” states where coverage may only be purchased from the state. Although larger employers may self-insure in Ohio and Washington (but not North Dakota or Wyoming), no private insurance carrier can write workers compensation coverage for an employer.

It would seem the safe bet is to add all states except monopolistic states to 3.A. However, most underwriters are unwilling to do this or even add the ideal wording for 3.C.: “All states, U.S. territories and possessions except Washington, Wyoming, North Dakota, Ohio, Puerto Rico and the U.S. Virgin Islands and states designated in Item 3.A. of this Information Page.” The reason for the underwriters’ unwillingness varies. Common reasons underwriters provide include:

Licensing issue

The insurer is not licensed in all states. Many regional insurers are only licensed in a handful of states while other carriers may only be licensed in one state…often for strategic reasons. Carriers frequently assert it is impossible — and possibly illegal — to list a state they are not licensed in (even though policies contain wording whose clear intent is to allow carriers to pay benefits in states where they are not licensed).

Underwriting considerations

The insurance carrier may not want to provide insurance in certain states it considers more challenging from a workers compensation standpoint or because carriers do not want to write in states where they have little or no claims adjusting experience, established provider networks and knowledge of the nuances of the law.

Underwriters’ lack of awareness or knowledge

Underwriters are not claims adjusters and do not always have a full understanding  of workers compensation’s jurisdictional complexity and the employer’s risk (no coverage) and agents’ risk (errors and omission claims) for not securing coverage for all states with potential exposure. Agents are often told the employer does not need coverage in the state in which the agent is requesting coverage — which the home or primary state benefits will pay. However, the chance that an employee will be successful in securing another state’s benefits — even if the employee is only there temporarily — is just too much of a risk.

Physical location

Carrier underwriters frequently cite the “physical location” — actually needing an address — as a roadblock to adding a state to 3.A. The National Council for Compensation Insurance (NCCI) has rules on this issue. Most states that follow NCCI rules allow entry of “no business location” — but not all.  States that follow NCCI rules (including the independent bureaus like Texas) will often modify some rules. Arizona, Kentucky, Montana and Texas do not allow “no business location.” It is a regulatory reporting issue. Possible solutions to secure 3.A. coverage include:

  • Providing an entry of “Any Street, Any Town” or “No Specific Location, Any City” for the state. Many carriers will use this.
  • Using an employee’s home address in the state if there is an employee working from home there.
  • Using the agent/brokers address if they have an office there.

Compliance

Only Texas and New Jersey have workers compensation laws that are elective. New Jersey employers still, in effect, cannot go without workers compensation insurance. In Texas, any employer can “unsubscribe” to the workers compensation system and “go bare” and be subject to the tort system. All other states require employers to purchase workers compensation insurance for their employees or qualify for self-insurance.

Which benefits apply? 

If an employer has employees traveling on a limited basis from their home states, the headquarters state may have established a time limit on coverage for out-of-state injuries. The most common limit is six months. This may be written into the statute or may be silent, but over time case law has made determinations. In other words, if an employee usually worked in Michigan but spent three months working on assignment in Kentucky and was injured in Kentucky, the employee would most likely still be eligible for Michigan benefits. In states with a timeline, an employee working in another state for more than the designated duration is no longer entitled to benefits in the home state, but the employee is probably entitled to the compensation in the state in which he or she is currently working.

One of the most important factors is that an employee injured outside of his state of residence may have selection of remedies (benefits) if he lives in one state and works in another. The Michigan employee injured in Kentucky may want Kentucky benefits because Kentucky has lifetime medical and Michigan does not. Or, an employee may have been injured on the way to work, and the state where she was injured does not allow for workers compensation in this circumstance even though this would be a compensable injury in the employee’s headquarters state. Perhaps there is a disqualification in one state because of, for example, an employee’s intoxication that would not be a disqualifier in another state. In addition, the maximum amount of income benefits available to employees varies considerably from state to state.

Piggybacking benefits

Piggybacking occurs when an employee files in one state and then in another state where he qualifies for additional benefits. What is allowed in additional payments will depend on the circumstances of the claim and the states involved. This issue has become particularly dangerous for employers that have not arranged coverage in other states because they are unaware there is an exposure there. The employer then becomes liable for the benefits due in the uninsured state, including all costs to adjust and defend the claim if litigated.

Typically, if an employee collects benefits in one state and is successful in perfecting a claim in another state with higher benefits, the benefits collected in the first state are offset from the second state’s benefits payment. For example, assume an employee collects $10,000 from Indiana then files in Illinois, which grants $18,000. Only the difference between $18,000 and $10,000, or an additional $8,000, would be paid. Employers with employees in both “wage-loss” and “impairment” states face an additional challenge: Employees could qualify for both states’ benefits with no offsets.

Most states don’t care what other states have allowed, only what is required under their laws. If the employee collected under another state’s law but qualifies in our state for additional benefits, well, so be it. If an employee has traveled to, through or lived or worked in another state to create a “substantial” relationship with the state, there is a very good chance he or she will be granted workers compensation benefits in that state.

State statutes, case law, common law and tests

State statutes, case law or the common law in a jurisdiction may influence what benefits an employee may collect. Various criteria that may apply include:

  • State of hire
  • State of residence
  • State of primary employment
  • State of pay
  • State of injury
  • State in agreement between employer and employee (unique to Ohio, and only Ohio and Indiana recognize the agreement)

The “WALSH” test is a good guide to questions to ask, in order of importance:

W   Worked – Where did the employee work most of the time?

A    Accident – Where did the accident occur?

L    Lived – Where is the employee’s home?

S    Salaried – Where is the employee getting paid from?

H    Hired – Where was the contract of hire initiated?

Just about all jurisdictions indicate an employee is entitled to the benefits of their state if the employee was working principally localized in the state, was working under a contract of hire made in the state or was domiciled in the state at the time of the accident. This is why “worked” and “accident” are given the most weight.

Reciprocity

Several states will reciprocate another state’s extraterritorial provisions. Each state has its own reciprocal agreements, with as few as a half-dozen states or as many as 30. For as many states that cooperate with reciprocity, just as many states will not.

In addition, not all reciprocity agreements address the “claims” aspect of compliance. In other words, the reciprocity means the employer does not have to secure “coverage” for an employee temporarily in another state; however, it does not mean that the employee could not pursue a claim in that state. If the employer was relying on the reciprocity provisions of the state law and did not secure coverage in that other state, the employer may be without coverage for that state and may also become “non-compliant” with the state and be subject to fines. The employer (or its agent) has decided to rely on the employee accepting his home state benefits. If the injured employee goes back to her home state for benefits, no harm, no foul.  However, if the employee perfects a claim in another state or in some instances simply chooses to file a claim in that state, then the employer would be considered a non-complying employer and could be subject to penalties.

Washington does not reciprocate in construction employment unless there is an agreement in place. Washington has these agreements with Oregon, Idaho, North Dakota, South Dakota, Montana, Wyoming and Nevada.

Some specifics

Massachusetts, Nevada, New Hampshire New Mexico, New York, Montana, and Wisconsin require coverage in 3.A.

Kentucky allows no exceptions for family members, temporary, part time or out-of-state employers performing any work in the state of Kentucky. Kentucky does not accept the Ohio C110 form.

New York made a significant change in its workers compensation law [Section 6 of the 2007 Reform Act (A.6163/S.3322)] that affected employers if they conducted any work in New York or employed any person whose duties involve activities that took place in New York. Effective Feb. 1, 2011, the New York board clarified coverage requirements. Detailed information can be found on the New York Workers Compensation Board’s website: http://www.wcb.ny.gov/content/main/onthejob/CoverageSituations/outOfStateEmployers.jsp

Florida, Nevada and Montana require all employers working in the construction industry to have specific coverage for their state in 3.A. Ohio and Washington require that employers purchase coverage from the state for all employers working in the construction industry. Otherwise, Florida, Nevada, Montana, Ohio and Washington will honor coverage for temporary work from other jurisdictions. Florida also requires the coverage be written with a licensed Florida carrier. 3.A. coverage status is required for any employer having three or more employees in New Mexico and Wisconsin even on a temporary basis.

The standard workers compensation policy exclusion for bodily injury occurring outside the U.S., its territories or possessions and Canada does not apply to bodily injury to a citizen or resident of the U.S. or Canada who is temporarily outside these countries. State workers compensation will apply, however, for those employers that have employees regularly traveling out of the country; the Foreign Workers Compensation and Employers Liability endorsement should be added to their workers compensation policy. This endorsement is used for U.S.-hired employees who are traveling or residing temporarily outside the U.S. The coverage is limited to 90 days. For employees out of the country for long periods or permanently, coverage needs to be arranged under an international policy.

The extraterritorial issues arise because many states — Alabama, Alaska, California, Connecticut, Delaware, Georgia, Illinois, Indiana, Iowa, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee and Wisconsin — permit concurrent jurisdiction between State and Longshore coverage. Some states — notably Florida, Louisiana, Maryland, Mississippi, New Jersey, Texas, Virginia and Washington —  do not permit this concurrent jurisdiction, and Longshore becomes the sole remedy. In concurrent jurisdictions, the employee can file in both state and federal court, and the employer must defend both.

Summary

  • Recognize that having employees who work, live or are temporarily traveling to or through other states creates premium and coverage challenges for employers and agents.
  • Take time to understand the rules of the state where there is potential exposure.
  • States requiring coverage in 3.A. for some or all situations tend to be strict and impose severe penalties for non-compliance. Many carriers are often aware of the challenges these states present and will work with the agent/employer and add on an “if any” exposure basis.
  • Always attempt to secure the broadest coverage possible under the workers compensation policy, adding to 3.A. as many states with even minimal exposure. As a fallback, get the state in 3.C.
  • Obtain coverage for operations in monopolistic states separately.
  • Address out-of-state exposures when insured by a state-specific state fund or regional carrier that only writes in one or a few states. Remember, the 3.C. wording is designed to pay benefits — by reimbursing the employer — if the carrier cannot pay directly to the employee.
  • Check for employees traveling out of the country and arrange to expand coverage with the foreign endorsement or through an international policy.
  • Check with a marine expert to assess the exposure to the Longshore Act and whether coverage is required.  Longshore is very employee-friendly.

The white paper on which this article was based can be found here.