Although every contractor knows the benefits of Workers’ Compensation insurance, its cost can be a bitter pill to swallow. While it may seem advantageous to find a creative solution, cutting corners by enrolling in a self insured workers comp plan is not usually the best business move.
What is a Self Insured Workers Compensation?
“A self-insured Workers’ Compensation plan (or a self-funded plan as it is also called) is one in which the employer assumes the financial risk for providing Workers’ Compensation benefits to its employees,” according to the Self-Insurance Institute of America. “In practical terms, self-insured employers pay the cost of each claim ‘out of pocket’ as they are incurred instead of paying a fixed premium to an insurance carrier or to a state-sponsored Workers’ Compensation fund.”
How it Works
Self insured workers comp is different from other types of Workers’ Compensation insurance, because it gives employers the responsibility of paying for their own claims. In order to limit the amount of money paid out for the most expensive claims, many self-insureds purchase excess workers’ compensation insurance.
Contractors who self insure still must follow applicable Workers’ Compensation laws.
Why Self Insurance isn’t Always a Good Deal
By enrolling in self insured workers comp, you assume the risk of paying for your employees’ claim costs. In the event of a serious employee injury, you must have the cash on hand to meet this obligation.
Self insurance is generally not a viable option for small companies and contracting businesses who have limited cash flow. In fact, many states have minimum net worth requirements to be eligible to self insure a Workers’ Compensation program.
Self insured workers comp could also potentially cause you big problems if your company is hit with a wave of claims in a short period of time. In this case, your workers comp expenses could greatly exceed what you have budgeted for it, causing serious financial issues.
In order for your self insurance program to work, you will also need additional services, including these four:
- Medical knowledge to evaluate and process claims.
- Legal judgment to assess the merits and potential costs of litigated claims.
- Actuarial assistance to forecast loss projections.
- Safety and loss control programs.
If it sounds like self insurance isn’t right for your company, there are other Workers’ Compensation options available. Contact Contractors Insurance today to learn more about business insurance coverage.