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W.C.
Safety Groups In New York Seen As Safer, More Beneficial Than
Self-Insured Trusts
By Adam Friedlander
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Safety Groups and Self-Insured Trusts
both seek to reduce Workers' Compensation premiums, but Self-Insured Trusts
are far riskier and have not delivered the savings of State Fund Safety
Groups. Self-Insured Trusts, which benefit from the illusions of control
and freedom from the inefficiencies of "the system," induce
business owners to blindly disregard their significant risks.
The shared objective of Self-Insured
Trusts and Safety Groups is to pool premiums of similar safety conscious
insureds, and after deducting claims and expenses, return profits, if any,
back to members. Both operate under the jurisdiction of the New York
Workers Compensation Board, and both are subject to judgments based upon
the same criteria. In addition, both are equally vulnerable to systemic
inefficiencies: employee-friendly judgments, unscrupulous claimants,
physicians and attorneys, and fraud.
Their approach to reducing worker's compensation
premiums differs dramatically. State Fund Safety Groups are fully insured,
guarantee maximum premiums, and have a long history of delivering
market-leading savings. Self-Insured Trusts, on the other hand, are not
fully insured, maximum premiums are not guaranteed, and in their brief
history have proven more costly.
"Self-Insured" is not just a
marketing name, but the real thing, exposing members to a liability of
potentially disastrous proportions. According to the Workers' Compensation
Law, Self-Insured Trust members must be jointly and severally liable, and
consequently must make security deposits, or file an acceptable surety
bond, or provide an irrevocable letter of credit to join. That's because
each member of a Trust is liable for all unpaid claims incurred during
their membership. Joint and several liability survives a member's
termination from the Trust. In addition, the insolvency of other members of
the Trust increases the remaining members' burden of liability.
Trust members assume greater risk at a
higher cost than comparable risk-free State Fund Safety Groups. the
assumption of risk inherent in Self-Insured Trusts might be worthwhile in
states that lack New
York's
competitive marketplace. New York's business owners have many fully insured low
cost alternatives, minimizing the need to assume the risks of Self-Insured
Trusts.
A
Case In Point
Jane A. Halbritter, President of
Stonehedge Nursing Home, and a member of a Self-Insured Trust from
1992-1995, shares her experience: "As part of our Trust agreement, we
were required to post a $120,000 security deposit, the balance of which is
not refundable until 27 months after the final claim is paid. We were
quoted a very attractive rate which, frankly, induced us to join... within
a year, the rate quickly escalated over 125 percent. Little did we know,
the worst was yet to come. Two years after leaving the Trust, we were told
we owed them an exit balance of $147,475... even more shocking was a letter
we received six months later stating our exit balance was now $481, 857.
It's anyone's guess what the final cost will be. But one thing is for sure
- the final cost will far exceed what we would have paid had we stayed with
the State Insurance Fund. Perhaps even more troubling is the fact that we
also discovered that it is virtually impossible to be released from our
joint and several liability clause. Even though I had an attorney review
the Trust agreement, we never grasped the nature of that
responsibility."
Trusts may have favorable loss experience
in their formative years, before claims have had time to develop their
ultimate costs. Some Self-Insured Trusts purchase reinsurance, which
increases premiums, in order to limit the damage from a large single claim
or high frequency of claims. But in the event that claims are not
completely covered by Trust assets or reinsurance, members are assessed
based on their proportionate share of premiums paid to the Trust.
Consequently, discounts and dividends from Self-Insured Trusts have
permanent "strings attached," an unlimited liability that should
be reflected on members' balance sheets. At risk is the financial survival
of members of Self-Insured Trusts.
According to H. Neal Conolly, Executive
Director of the State Insurance Fund, "The State Fund has admitted
assets in excess of $8.5 billion dollars. Moreover, unlike any other
insurance company, the State Insurance Fund provides an insurance policy
that fully absolves the employer from any possible future liability for a
claim, a contractual obligation that no other insurance company or Trust
can make."
State Fund Safety Groups offer advance
discounts up to 40 percent and dividends up to 60 percent, which can never
be assessed. Safety conscious members continue to benefit from credit
experience modifications published by the New York Compensation Insurance
Rating Board, unlike Self-Insured Trust members who forfeit their
experience modifications. State Fund Safety Groups' long history of
unparalleled dividends is a result of their low cost structure, effective
claims management and loss control, and specialized services rendered by
group managers.
Yet some business owners still join
Self-Insured Trusts despite their many substantial risks including
self-insurance, joint and several liability, higher operating expenses,
loss of experience modifications and higher non-guaranteed premiums. The
dubious logic reflects a false sense of control, perhaps due to a lack of
awareness that Trusts still operate within "the system." Others
are attracted by illustrations of up front savings that are merely
non-guaranteed projections of current premiums, based upon unstated
optimistic assumptions of future claims and expenses, rarely mentioning the
inherent risks of self-insurance.
Some unfairly blame the State Fund for
systemic problems. Under new management, today's State Fund is customer
focused and firmly committed to re-engineering itself from head to toe. The
Fund has purchased state-of-the-art technology, improved billing, enhanced
claims administration, offers Internet access, provides laptops and voice
activated software, along with improved strategies for payroll auditors and
loss control specialists. State Fund employees are embracing the change and
are visibly "empowered." Policyholders and brokers will notice
the numerous improvements.
The risks of Self-Insured Trusts far
exceed the rewards. It's ironic that while prominent carriers are raising
workers' compensation premiums in New York due to high claims and expense,
non-insurance related business owners are "betting the farm" by
forming an insurance company with unknown partners and unlimited liability.
State Fund Safety Groups offer a unique combination of security and
savings, enabling members to focus on their business.
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Features
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N.Y.
State
Fund
Safety Groups
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Self-Insured
Trusts
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Fully Insured
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Yes
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No
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Joint & Several Liability
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No
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Yes
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Potential for Assessments
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No
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Yes
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Premium Guaranteed
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Yes
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No
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Dividend History
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Yes-up to 70 yrs.
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Generally new
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Financial Disclosure by Members
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No
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Yes
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Bond/Letter of Credit to join
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No
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Yes
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Experience Mod. Maintained
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Yes
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No
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N.Y.S. Assessments
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Yes
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Yes
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Fees to Brokers
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Yes
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Yes
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Substantial Exit Fees
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No
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Usually
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