Large Deductible Workers Comp Not Always A Panacea

I just saw an online blog/press release kind of thing that suggested that large deductible Workers Comp insurance provides "Most Control For Managing Workers Comp".  You can take a look at it here. Myself, I'm not so sure.  Maybe that's because I've been retained as a consultant/expert witness by so many disgruntled employers who have found Large Deductible Workers Comp policies to be something more akin to a money pit than a management tool.

Large Deductible policies make the employer responsible for paying most claims out of pocket, (plus handling charges to the insurer) but leave all power and responsibility for handling and reserving and settling those claims with the insurance company.  That means that the insurance company is now paying claims with someone else's money.  So employers can be subject to some rude surprises when claims costs escalate beyond projections, and they are asked to kick in more money.  And more money.  And yet more money.  So in many cases, employers can't really close the books on the costs of Workers Comp for any given year until three or four or five (sometimes more!) years later.  And estimating what your cost of Workers Comp will be for an upcoming year becomes more of a crapshoot than ever.

Worse, Large Deductible policies are often mind-numbingly complex.  Many of them utilize separate side agreements to spell out the details of what employers will actually owe the insurer, and those side agreements can make the standardized policy language look simple by comparison.  I've been working with Workers Compensation insurance for more than thirty years, and some of the side agreements used by some carriers make my head hurt when I try to read them.

Let me put it this way: one of my hobbies is reading about science and cosmology.  Explaining black hole physics is an easier matter than explaining some of these side agreements.

In some of the legal disputes I've assisted on, the insurers invariably say that the policyholder was a "sophisticated" insurance purchaser.  That always makes me smile to myself, because the complexity of some of these side agreements is far beyond what any normal business person who isn't an insurance professional would likely understand.  But let me assure you, the insurance company underwriters and lawyers who have drafted those side agreements have thought long and hard about the implications of all that dense prose.  Their understanding of what these complicated unilateral contracts contain is normally far in excess of that of even an experienced insurance buyer.

Some side agreements completely negate the effect of experience modification factors in determining final premium.  Others abandon the well established classification system for different workplace exposures that has been used since the earliest days of Workers Compensation insurance.  And these fundamental changes are often poorly understand, if at all, when many employers purchase these policies.

Now, to be fair, not all Large Deductible policies end up badly for the employer.  They can indeed offer genuine cost reductions for certain employers.  But Large Deductible policies also do away with, to a very great extent, the standardization of Workers Comp insurance policies that many employers have come to rely upon.  The details of the side agreements used can vary greatly, and so some Large Deductible policies may be well understood by an employer at the outset, while others can be as confusing as when I try to explain to my wife why you can't really ever see something cross the event horizon of a black hole.  (She's a smart lady, but doesn't share my enthusiasm for general relativity.)

Large Deductible policies certainly have a place in the insurance universe.  They can make sense for some larger employers.  But not always.  And the complexity and non-standardization inherent in these programs just about guarantees that my work as a consultant and expert witness, in cases involving premium disputes for these policies, is not likely to end any time soon.

Now, if you have a few minutes, would you like to hear about how the paradox of a person falling into a black hole may point to the reality of multiple universes?  See, this is because an outside observer will see the unfortunate person falling into the black hole get vaporized, while the person himself will not experience any such vaporization at the event horizon (although later on things get rather unpleasant)...wait.  Why are you gnawing your own arm off to escape?  Would you rather talk about insurance?