Workers’ compensation is that insurance that most businesses in the United States are required to obtain to protect their employees. While it’s not mandatory to buy this insurance in all states, it might be in yours. Before you make the decision to buy your business’ protection, you should know what it is and how to buy it. If you fall into one of several categories, you might find that you can’t be approved for any of the more attractive plans on the market.

In these instances, you’ll have to buy coverage from the “assigned risk plan.” Like most states’ high-risk health plans, this category of insurance coverage costs more per employee and it covers less.

Here’s a short laundry list of circumstances that may force your company into the assigned risk pool: your business is new; you have a poor loss history; your business occupation is hazardous, or you are a very small company. Even if you fit into only one or two of these categories, you may be able to improve your coverage picture.

Why Coverage Might be Hard to Get

For the above-listed reasons, you may not be able to obtain a workers’ compensation insurance policy on the regular market. If you’ve tried to obtain a standard plan from a standard insurer, only to be repeatedly turned down, it’s time to look at the characteristics of your company:

  • New business. You don’t have any history of insurance losses, so it’s difficult for an insurer to predict what your company’s loss experience will be. Even if you think, “Well, they should just take a risk on us because we’re so careful,” it just doesn’t work that way. You’re going to be looking long and hard to find any insurance provider who may be willing to take a chance on your company. Until you’ve been in business for a while will your company develop a loss history.
  • Poor loss history. Your company may have been in existence for a while. However, your employees may have had several accidents, forcing you to file several claims against your policy. Even if you believe you’re taking care of your employees or that they are taking care on the job, an insurer may look twice at you before deciding you’re just not worth the risk. If you haven’t established a good safety program, this will be especially valid.
  • Small company size. If this has you shrugging in confusion, you’re not alone. Even if you have a good loss history or you’ve been around for a while, having too few employees means that your premium (from a standard insurer) would just be too small. Insurers who look at the size of your premium and compare it to the risk of claims being filed against the policy may decide not to run the risk.
  • Your business is in a hazardous occupation category. It’s really ironic, because your employees are going to the ones who need coverage the most. Let’s take this just one step further. No matter what your company’s occupation is, when your employees get hurt, they are likely to suffer from severe injuries. Their claims are going to be much bigger than others. So, even though your employees may not file that many claims, those claims will be huge. Roofers, tree pruning specialists, steel erecting companies and bridge painting, among others, fall into the “hazardous occupation” category.

On the other hand, a workers’ compensation client which is not in an assigned risk plan has been in business for longer than three years. It has maintained insurance coverage with no coverage lapses within the past three years. Employee turnover is low. This company has not had any workers claims filed against it. It has proved it has a safe and organized workspace. Its Experience Modification Rate (EMI) is low. Finally, its workplace operations are not high-hazard.

Assigned Risk Plan

Assigned Risk or Residual Market is considered to be a delivery mechanism that an organization in your state or an advisory organization provides.

Workers’ compensation regulations are regulated by each individual state. A few federal statutes exist, but these are reserved only for employees who fall under federal employment.

A workers’ compensation insurance policy that falls into the “assigned risk” category may look just like any other workers’ compensation insurance plan. Small differences between standard workers’ compensation pans and assigned risk plans do exist, but you really need to know what to look for.

You may know that you bought an assigned risk plan. If not, check with your state’s insurance regulators, especially if your premiums seem higher than what other companies in your area are paying.

You have some other avenues of action available to you as well. Look for plans outside your assigned risk plan. Consider bringing in an employee leasing company.

Get in contact with direct-writing insurance companies and see if they have anything else you can buy. Talk to other insurance agents. Get in contact with employee leasing companies.

You’re going to refer specific employees (whom you have already hired) to an employee leasing agency, which is similar to a temporary employment agency.

In employee leasing, you send your employees to the leasing company. This company hires them and leases them back to you. By doing so, your company saves precious funds on workers’ compensation coverage. While you pay a leasing fee to the employee leasing company, that is oftentimes less than your workers’ compensation premium. The leasing fee may also include the cost of payroll and an administration fee.

This means that your employees are actually employed by the leasing company, which now shares the cost of workers’ compensation with your company. If your company is very small or very new, this can mean the difference between staying open or closing your doors.

Above all, don’t let the search be only your agent’s job. You take on some of the responsibility for looking for regular workers’ compensation plans as well.

When you’ve been put into an assigned risk plan, your state may administer it. This is the plan you get when your agent has not been able to find anything not in the assigned risk category. You may also hear it referred to as the “residual market.”

Your state may require the company that provided your assigned risk coverage to provide regular workers’ compensation plans as well. Or they may be compelled to take part in what’s called a “state reinsurance pool.” This opens your company up to shared premiums and losses by other policyholders in the same plan that you have.

How to Get Coverage

Once you learn that you won’t be able to obtain workers’ compensation coverage in the regular market, you’ll have to buy an assigned risk plan.

Let your insurance agent know you haven’t been able to buy a regular workers’ compensation insurance plan. Your agent may be the same one who sold you your automobile insurance or even your homeowners insurance. They should have access to the state-run assigned risk plans. They will immediately know that your company falls into the assigned risk category, which helps them narrow down the pool of plans available to your company. Once they find the assigned risk plan that best fits your company’s needs, they’ll submit an application.

If you have been trying to apply for workers’ compensation, you must be denied by at least one insurer for a regular plan. The number of denials varies from state to state.

Reduce your workers’ compensation premium if it comes from an assigned risk plan. One allowable way of doing so is to use employee leasing (explained earlier).

Advantages and Disadvantages

Because you haven’t been able to get into a regular workers’ compensation plan sold on the open market (a voluntary market provider). Each provider in this market essentially gets to choose the clients to whom they will provide coverage.

This means that clients in the assigned risk pool are going to be there involuntarily. Here’s why.

  • Mandatory loss sensitive rating. If your calculated premium is high (over $200,000), then the guaranteed cost option will not be available to your company. Because of this, your policy will be written on a “loss sensitive” rating plan basis. You will be responsible for covering actual losses incurred under any claims. That’s not good.
  • High rates. These are not competitive rates, which will be much lower. Insurers consider companies in the assigned risk pool to have something wrong within the structure of their company that makes them a higher risk. Higher risk means higher premiums.
  • ARAP Factor. Assigned Risk Adjustment Program rating factor gets applied to your premium, just like the experience rating factor. The maximum rating is usually 25 percent.
  • No Insurance Company Choice. You won’t be able to shop around for the insurance company you like the best. This will be assigned to you, period.
  • Limited Pay Plan Options. You won’t have the option of paying monthly or quarterly. Instead, you’ll have to pay your entire premium in full.

In short, you have no advantages that you can claim when you are put into an assigned risk pool. Because of at least one characteristic of your company, a traditional insurer does not want to take the risk of insuring your company—it’s worried that, sometime down the road, it will be required to pay out a large claim. If, for instance, your company has existed for less than three years, insurance providers just don’t know enough about your firm to take that calculated risk on it. Even if your business provides writing and editing services, which aren’t considered to be risky, its youth is a mark against it. Over time, you may be able to rectify some of these negativities, such as company age and number of employees, your insurability will improve. Poor loss history and hazardous occupation will be harder to rectify.