All private employers across US states (except for Texas) are required to have a workers’ compensation insurance program in place. Now, the terms of this policy may vary among states, but the ultimate aim is to ensure that workers’ safety is taken care of.
In some industries, workplace hazards or occupational dangers are many. According to the National Safety Council, the construction industry saw the maximum number of occupational deaths in 2022. Also, the healthcare and education industries experienced the highest number of non-fatal injuries.
Other industry verticals where employee safety and health are often at risk include agriculture, mining, forestry, logistics, and fishing. The employer is obligated to undertake necessary practices for worker safety (including training and strict adherence to protocols).
However, accidents still happen, and when they do, workers’ compensation offers much-needed coverage. The only problem is that self-insured businesses may face losses that go above and beyond their original policy. What are they to do when this happens?
Here’s where an excess policy enters the picture. In this article, we will discuss in detail what excess coverage in workers’ compensation means, along with its benefits.
What is Excess Coverage over Workers’ Compensation Policy?
Each state’s workers’ compensation law is different and may require specific coverage. All self-insured private employers need to adhere to their respective state’s workers’ compensation law. An employer can face losses above and beyond the statutory applicable limits of their policy.
What are they to do in such cases? They might be looking at potential losses if it were not for excess insurance coverage. Also known as stop-loss insurance, an excess policy puts a limit on the employer’s out-of-pocket expenses for losses incurred during workplace injuries.
This insurance can be divided into two categories – specific excess and aggregate excess. The former applies to a single claim in which the employer may mitigate financial struggles through a fixed cap on the amount they must pay during a loss occurrence.
As for aggregate excess coverage, it caps the total amount an employer must pay during the policy period. As a result, the business stays protected against numerous claims. Ideally, employers must invest in both forms of excess to protect their financial stability.
This will also place a maximum on the financial liability during the policy period. Both types of excess will be reimbursed by the insurer.
Benefits of Excess Insurance
Now, let’s dive into the three major benefits of excess coverage policy.
Sufficient Liability Coverage
As mentioned earlier, the workers’ compensation policies will provide the employer with limited liability coverage (depending on the state’s specified limits). Now, it is true that a company’s robust safety training and protocols can prevent too many workplace accidents.
However, the truth is that even one such incident is one too many. Plus, there is no way of knowing in advance what each accident’s aftermath and associated costs will be. Without sufficient coverage, the employer will be looking at major (and costly) lawsuits.
Excess coverage makes up for the worker’s compensation’s insufficient liability coverage. Beyond a specific limit, the employer is not obligated to cover the losses involved.
Limited Financial Exposure Per Loss
This benefit of an excess policy stems directly from the previous one. In the unfortunate event of an occupational hazard, the employer is at risk of bearing the financial burden. If it’s a single worker who has sustained minor injuries, the workers’ compensation policy will take care of it.
Now, imagine a whole different scenario – a fire breaks out inside a manufacturing facility, thereby claiming the lives of some workers and severely injuring some others. This is a classic example of a multi-fatality incident.
According to the Bureau of Labor Statistics (BLS), multi-fatality incidents are commonplace. Plus, there were 5,486 fatal occupational accidents in 2022.
In such a case, the total costs may exceed the coverage of the self-insured workers’ compensation program. Any excess over the original will become an out-of-pocket expense for the employer.
This may threaten their financial position and market reputation. With an excess policy, they can limit their financial exposure per case of loss. On the whole, the (total) costs will be reduced significantly.
Moreover, Prescient National states that excess coverage enables the employer to pay claims as they come. This helps in capturing the cash flow benefits of unpaid loss reserves maintained for future claims.
Legal Compliance
A third benefit or reason every self-insured employer must have an excess workers’ compensation policy is simply to comply with their state’s law. Like the workers’ compensation program, US states (except for California) require employers to buy a statutory excess policy.
In states where an excess policy is mandatory, employers must purchase the same from an insurer licensed by the state. Without such a policy in place, employers run the risk of heavy fines (penalties) or even jail time.
In the final analysis, it is of primary importance to discover whether a self-funded plan would be suitable for any business. It is only possible to determine this after an in-depth analysis of risk appetite, financial stability, and the availability of internal/external support systems. So, it is important to choose a workers’ compensation provider carefully.