Chapter 16 Risks Related to the Job: Workers’ Compensation and Unemployment Compensation

1. Chapter 16 Risks Related to the Job: Workers’ Compensation and Unemployment Compensation

2. 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

3. 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.

4. 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

5. 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.

6. 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.

7. 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

8. Figure 16.3 - Workers’ Compensation Medical Severity*

9. Table 16.1 - Hypothetical Examples of Texas Workers’ Compensation Income Calculations

10. How Benefits are Provided • Workers’ Compensation Insurance • Employer’s Risk • Self-Insurance • State Funds • Second-Injury Funds

11. Workers’ Compensation Insurance • Coverage • The workers’ compensation and employers’ liability policy has three parts. • Workers’ Compensation • Employers’ Liability • Other States Insurance

12. 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

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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

21. Workers’ Compensation Issues • Black lung • The Americans with Disabilities Act (ADA) • Ergonomics

22. 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.

23. 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.

24. 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.

25. 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.

26. 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.

27. 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.

28. 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.