RISK MANAGEMENT FOR ENTERPRISES
AND INDIVIDUALS
Chapter 16
Risks Related to the Job:
Workers’ Compensation and
Unemployment Compensation
Learning Objectives
In this chapter, we elaborate on the following:
History of workers’ compensation
Legal enactment of workers’ compensation
Benefits provided under workers’ compensation
Ways that workers’ compensation benefits are
distributed
Issues that workers’ compensation insurers must
contend with
Features of unemployment compensation
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Workers’ Compensation Laws And
Benefits
Workers’ compensation: A system to enforce a
series of state laws that requires employers to pay
workers for their work-related injuries and
illnesses with no relationship to who caused the
injury or illness.
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Workers’ Compensation Laws And
Benefits
History and Purpose
A major barrier to payment was that a worker had to
prove an injury was the fault of his or her employer to
recover damages.
The injured employee’s ability to recover damages was
hindered further by the fact that even a negligent
employer could use three common law defenses to
disavow liability for workers’ injuries
The fellow-servant rule
The doctrine of assumption of risk
The doctrine of contributory negligence
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Workers’ Compensation Laws And
Benefits
During the latter part of the nineteenth century, various
employer liability laws were adopted to modify
existing laws and improve the legal position of injured
workers.
U.S. jurisdictions developed the concept of workers’
compensation that compensated workers without the
requirement that employers’ negligence must be
proved.
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Workers’ Compensation Laws And
Benefits
Coverage
Is either inclusive or exclusive.
Is compulsory or elective, depending on state law.
Most laws provide coverage only for injuries arising
out of and in the course of employment.
All work-related injuries are covered, even if they are
due to employee negligence.
Every state provides benefits for occupational disease.
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Workers’ Compensation Laws And
Benefits
Workers’ compensation laws provide for four
types of benefits:
Medical; Survivors’ Benefits; Rehabilitation
Income Replacement (indemnity benefits): The amount
and duration of indemnity payments depend on the
following factors:
Whether the disability is total or partial, and temporary or
permanent
The employee’s compensation
Each state’s maximum duration of benefits
The waiting period
Cost-of-living adjustments
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Figure 16.3 - Workers’ Compensation
Medical Severity*
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Table 16.1 - Hypothetical Examples of Texas
Workers’ Compensation Income Calculations
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How Benefits are Provided
Workers’ Compensation Insurance
Employer’s Risk
Self-Insurance
State Funds
Second-Injury Funds
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Workers’ Compensation Insurance
Coverage
The workers’ compensation and employers’ liability
policy has three parts.
Workers’ Compensation
Employers’ Liability
Other States Insurance
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Workers’ Compensation Insurance
Cost
The premium for workers’ compensation insurance
typically is based on the payroll paid by the employer.
Factors Affecting Rate
Degree of hazard of the occupational classification
The nature of the law and its administration
Prior losses
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Workers’ Compensation Insurance
Loss Prevention and Reduction
The first consideration is to reduce frequency by
preventing accidents.
Accident frequency cannot be reduced to zero because
not all losses can be prevented.
After an employee has suffered an injury, action may
reduce the loss through immediate medical attention,
care for the injured employee, and rehabilitation.
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Workers’ Compensation Insurance
Residual Market
Various residual market mechanisms, such as assigned
risk pools and reinsurance facilities, allow employers
that are considered uninsurable access to workers’
compensation insurance.
Eighteen jurisdictions have state-operated workers’
compensation funds in which the state government is
responsible for collecting workers’ compensation
founds and distributing benefits.
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Employer’s Risk
Industrial accidents create two possible losses for
employers:
Employers are responsible to employees covered by
the workers’ compensation law for the benefits
required by law.
They may become liable for injuries to employees not
covered by the law.
Where permitted, self-insurance of this exposure is
common.
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Self-Insurance
All types of self-insurance require the use of stoploss coverage through reinsurance.
Most employers who decide to self-insure use
third-party administrators to administer the claims
or contract with an insurer to provide
administrative services only.
Self-insuring reduces benefits only if you or your
outside self-insurance administrator will settle
claims more efficiently than your insurer.
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Insurance or Self-Insurance?
If your firm is large enough to self-insure, your
workers’ compensation premium is experience
rated.
In choosing between insurance and self-insurance,
you should consider the experience rating plans
provided by insurers, as well as the advantages
and disadvantages of self-insurance.
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State Funds
State funds are similar to private insurers except
that they are operated by an agency of the state
government.
Most are concerned only with benefit payments
under the workers’ compensation law and do not
assume the employers’ liability risk.
Cost comparisons between commercial insurers
and state funds are difficult because the state fund
may be subsidized.
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Second-Injury Funds
Second-injury fund: Fund that reimburses an
insurer (or employer) that pays a workman’s
compensation benefit to an employee who suffers
more than one job-related injury.
Are financed in a variety of ways.
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Workers’ Compensation Issues
As noted by the National Council of
Compensation Insurance (NCCI), the following
are challenging issues faced by the industry:
Catastrophes such as terrorism
Cost drivers and reform
Capacity
Adequate reserves
Privacy
Erosion of exclusive remedy and scope of coverage
Mental health claims
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Workers’ Compensation Issues
Black lung
The Americans with Disabilities Act (ADA)
Ergonomics
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Unemployment Compensation
Unemployment compensation programs pay
weekly cash benefits to workers who are
involuntarily unemployed.
State unemployment compensation programs were
established as a result of federal legislation.
The federal tax applies to firms that have one or
more employees in each of twenty weeks during a
calendar year, or firms that pay $1,500 or more in
wages during any calendar quarter.
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Unemployment Compensation
The federal law established minimum standards
for coverage and benefits.
The amount of the weekly benefit payment a
worker may receive through unemployment
compensation varies according to the benefit
formula in the law of each state.
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Unemployment Compensation
To qualify for benefits, unemployed workers must
fulfill certain conditions.
Unemployed workers may be disqualified from
benefits even if they meet the qualifications
described.
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Unemployment Compensation
Most unemployment compensation insurance is
noncontributory: employers pay all the cost in
most states.
The Federal Unemployment Tax Act (FUTA)
places a tax on employers at the rate of 6.2 percent
of workers’ pay in covered jobs, excluding
anything over $7,000 paid to a worker in a year for
the purpose of financing unemployment
compensation.
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Unemployment Compensation
All states have experience rating; that is, they
reduce the contribution of employers whose
workers have little unemployment.
This system encourages employers to reduce
unemployment and stabilize employment to the
extent that they can.
The federal portion of the unemployment
compensation insurance program is administered
by the Employment and Training Administration
in the Department of Labor.
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Summary
Workers’ compensation was developed as a
compromise that would force employers to cover
employees’ injuries regardless of cause.
Workers’ compensation laws are inclusive or
exclusive, compulsory or elective.
Benefits provided under workers’ compensation
are medical, income replacement, survivors’
benefits, and rehabilitation.
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Summary
Workers’ compensation benefits can be distributed
through private insurance, residual markets, state
funds, self-insurance, and second-injury funds.
Workers’ compensation insurers must contend
with several issues such as cost drivers and
reform, erosion of exclusive remedy, and scope of
coverage.
Unemployment compensation programs pay
weekly cash benefits to workers who are
involuntarily unemployed.
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