When it comes to workers’ compensation, employer coverage requirements vary from state-to-state, but are mandatory in most states. For employers, it’s important to obtain workers’ compensation coverage that meets state obligations and covers the costs in the event that an employee is injured or becomes ill on the job without it being excessively high. Let’s now go over two common types of workers’ compensation coverage and how they differ.
According to the International Risk Management Institute (IRMI), the voluntary market is defined as “a group of insurers that elect to write insurance in a competitive environment retaining the right to accept and reject business submitted.” This tends to be the preferred form of workers’ compensation because it’s usually less expensive because insurance companies are taking on less risk.
Employers that are able to get coverage from a voluntary market provider typically meet the following criteria:
- They have been in business for at least three years
- They have safe working conditions, and workers aren’t subjected to any major hazards
- They have no previous claims or losses
- They have been insured for at least three years with no gaps in their coverage
- They have a reputation for a low employee turnover rate
Assigned Risk Plan
The IRMI defines an assigned risk plan as “a method of providing insurance required by state insurance codes for those risks that are unacceptable in the normal insurance market.” This is reserved for businesses that are unable to get insured in the voluntary market because they are high risk in the eyes voluntary market providers. As a result, this type of workers’ compensation can translate into a considerably higher premium.
Here are some examples of why employers may be limited to an assigned market plan:
- They have been in business for less than three years
- Their employees consistently work in hazardous conditions, and there’s an ever-present threat of injury or illness (e.g. roofing contractors and industrial machinists)
- They have a history of previous claims or losses
- They have not had prior coverage
- They have a reputation for a high employee turnover rate
The bottom line is that companies that look reasonably attractive to insurance providers can usually get coverage from the voluntary market, and the majority of employers fall into this category. However, when a company doesn’t look attractive to insurers and is unable to obtain coverage through the voluntary market, then it may be forced to get coverage through the assigned risk market.
This is basically a last resort scenario for three reasons. First, employers can expect to pay a higher premium and may be subject to surcharges. Second, the assigned risk plans in some states only offer coverage for that specific state. If an employee travels outside that state (e.g. long-haul truckers), then coverage can be jeopardized. Thirds, they may have little to no choice in terms of choosing an insurer.
When looking for workers’ compensation, it’s ideal to obtain voluntary market coverage if at all possible. However, if a business is “stuck in the assigned risk pool,” it should strive to improve safety, minimize hazards and control losses.