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RISK MANAGEMENT FOR ENTERPRISES AND INDIVIDUALS Chapter 16 Risks Related to the Job: Workers’ Compensation and Unemployment Compensation
1 - 2 © 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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
1 - 3 © 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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.
1 - 4 © 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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 Workers’ Compensation Laws And Benefits
1 - 5 © 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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. Workers’ Compensation Laws And Benefits
1 - 6 © 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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. Workers’ Compensation Laws And Benefits
1 - 7 © 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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 Workers’ Compensation Laws And Benefits
1 - 8 © 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. Figure Workers’ Compensation Medical Severity*
1 - 9 © 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. Table Hypothetical Examples of Texas Workers’ Compensation Income Calculations
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. How Benefits are Provided Workers’ Compensation Insurance Employer’s Risk Self-Insurance State Funds Second-Injury Funds
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. Workers’ Compensation Insurance Coverage The workers’ compensation and employers’ liability policy has three parts. Workers’ Compensation Employers’ Liability Other States Insurance
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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 Workers’ Compensation Insurance
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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. Workers’ Compensation Insurance
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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. Workers’ Compensation Insurance
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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.
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. Self-Insurance All types of self-insurance require the use of stop- loss 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.
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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.
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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.
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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.
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. Workers’ Compensation Issues Black lung The Americans with Disabilities Act (ADA) Ergonomics
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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. Unemployment Compensation
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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. Unemployment Compensation
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. To qualify for benefits, unemployed workers must fulfill certain conditions. Unemployed workers may be disqualified from benefits even if they meet the qualifications described. Unemployment Compensation
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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. Unemployment Compensation
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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. Unemployment Compensation
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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.
© 2010 Flat World Knowledge, Inc © 2010 Flat World Knowledge, Inc. 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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