The Hidden Dangers of Workers’ Comp Exclusions

The Hidden Dangers of Workers’ Comp Exclusions

There’s a dangerous trend among decision-makers in California’s closely held corporations. Charged with reducing operating expenses while continuing to provide state-mandated insurance coverage, many opt to exclude corporate officers from their company’s workers’ compensation policy. To the decision-maker, this is simply a calculated method of controlling expenses—one of the many risks inherent in the nature of doing business. In this particular case, however, they’re overlooking the potential for serious legal and financial trouble.

Policy Limitations

The problem stems from the way most companies source their insurance policies. The majority of employers have one insurance advisor who provides workers’ compensation insurance, and a second advisor who provides group medical and other employee benefits. In most cases, these advisors never communicate, let alone collaborate, in an effort to help their mutual client understand the exclusions and limitations imposed by each insurance program. This means it’s up to the employer to (a) recognize these problems, and (b) devise a strategy to address them.

Without the kind of expert guidance provided by financial advisors, many employers aren’t equipped to do that. Instead, they opt for the solution that lets them pay lower premiums: excluding corporate officers from their workers’ comp policies. Here are just a few of the reasons employers offer to justify this approach:

  • Our premiums are too high.
  • We’ve never had an officer injury and don’t expect to in our type of business.
  • We have group medical coverage, so we’ll just depend upon that should an excluded officer become injured on the clock and require medical treatment.

So what’s the main problem with this strategy? Group medical plans contain legal language specifically designed to prevent the plan from having to pay workers’ compensation benefits. Workers’ comp contracts do likewise for non-employment-related injuries and illnesses.

It’s possible that a company could finesse a small work-related injury in order to get it approved by their group medical insurance provider. However, this is unlikely to happen with a larger procedure. Large medical procedures are typically reviewed at a much higher level—by the group insurance’s management—to determine the procedure’s financial impact to the organization at large. If they believe there’s a way to have a third party help pay for the cost of medical treatment, they will seek out ways to do so.

Practical Applications

Suppose an excluded officer sustains a major injury on the job. He or she will probably be responsible for the cost of any immediate medical care as well as ongoing treatment. These expenses could be a financial “killer”—unpaid medical bills remain the number one cause of individual bankruptcies, according to studies by Harvard (2007) and NerdWallet, a consumer awareness group (2013).

Alternatively, should the employer be responsible for payment, that employer’s earnings could take a big hit. Those bills could be a financial “killer” for the company, too, depending on its size and earnings.

This example illustrates the potential process of such a claim:

  • An on-the-clock auto accident results in serious injury to a corporate officer who is excluded from the company’s workers’ comp policy. As a result, there is no coverage provided to pay for any medical or related treatment.
  • The company’s group medical plan provides the injured officer’s treatment. More than likely, they will also look for ways to recover their costs from another party.
  • These other parties could include the injured officer, the employer, or another party that may have contributed to the injury.

That’s not the only problem an employer could face. Imagine how you would react if you found yourself in this situation—faced with a large bill you thought would be paid by your employer’s workers’ comp policy, your group medical plan, or your employer. It’s easy to see why an employee might take legal action, resulting in financial and legal trouble for the employer.

Also, what happens if the injured employee learns he or she can’t work during recovery? What if, during that time, he or she receives neither pay nor workers’ comp disability payments? This only adds to the employee’s financial burden, making bankruptcy and/or legal action a real possibility. There’s another grim possibility to cover, too—what if the accident results in the employee’s death? What if no death benefits are paid to the employee’s family?

Each of these scenarios represents a serious risk that could outweigh the simple goal of cost reduction. Excluding corporate officers from a workers’ comp policy is not a decision to be taken lightly or without the expert advice of a financial advisor. Employers are advised to conduct a risk-cost analysis to determine whether they should move forward with this strategy.

Our complimentary Risk & Threat Assessment can help make sure your company protects its employees and its tangible assets. For a free analysis, call 1-800-823-4852 x 8758 or email tbone@isuors.com for more information.

 

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Contact

Tom Bone
Risk Insurance Advisor
ISU Insurance Services
2266 Lava Ridge Court
Roseville, California 95661
Phone 916.960.8758 or 800.823.4852 ext. 8758
Fax 916.773.4484
Mobile 925.285.6790
Email tbone@risksnthreatsmatter.com
License #0306692

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