For the most part, businesses across the United States obtain their workers’ compensation coverage through private insurers. This helps reimburse employees for recovery expenses due to work-related injuries and illnesses. Workers’ comp also shields an employer from further liability suits.
However, several states present an alternative to independent insurers. Instead, they distribute workers’ compensation via a state-funded program.
Normally, a state fund is run by an Office of Worker Compensation Programs (OWCP) or a State Insurance Compensation Fund (SCIF). They handle the payment of premiums by the companies that join and the distribution of damages to those who file. Though they work under the auspices of the government, these state funds are normally deemed private companies.
There are two types of workers’ compensation state funds:
States that have a monopolistic fund only provide workers’ compensation through their own policies. They don’t allow other insurers outside of their network to offer this form of insurance to companies. Currently, North Dakota, Ohio, Wyoming, and Washington have monopolistic workers’ compensation funds.
States with competitive funds give businesses the option to purchase workers’ compensation from them or private insurers. These state funds offer rates that are competitive with other commercial businesses. In addition, they provide government protections against insurer closings that could result in a loss of coverage. Currently, nearly two dozen states offer competitive workers’ compensation state funds.
Issues have been reported about the coverage and service of monopolistic state funds. Among them are:
The inability to compare quotes with private insurers.
Inconsistent customer service for both claimants and employers.
Lack of necessary funds to cover reimbursements.
Workers’ compensation class codes tend not to match those established by the insurance industry.
In states with a monopolistic fund, workers’ compensation only covers reimbursement for an employee’s medical costs and loss of income. However, it doesn’t protect the employer from their worker suing them in court. This is something that is normally part of a commercial workers’ compensation program.
Thus, to avoid bankruptcy or closure due to excessive court fees and reparations, businesses in monopolistic fund states should purchase stop gap coverage to handle additional liabilities. This form of rider picks up reimbursement for legal fees and the reimbursements that come from rulings.
Since monopolistic funds don’t have to worry about competition, their rates can be higher for companies. However, as they’re built under a government infrastructure, there are limitations applied. This avoids the risk of insured parties suing them over unrealistic costs.
Conversely, competitive state funds tend to work within market rates to determine their cost ranges. In this scenario, they want to encourage businesses in the state to work with them instead of private companies. Thus, their premiums, limits, and options can be the same or better than other insurers.