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Moore: Large-Deductible Workers' Comp Policies: Paying 50% of Expenses?

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We often perform workers' comp policy reviews as part of our premium reduction consultant services. Large-deductible workers' comp policies usually have a deductible amount ranging from $100,000 (the minimum) to $5 million.   

James Moore

James Moore

The most popular retention level (think car insurance deductible) is $250,000. J&L has reviewed many insureds with a $250,000 deductible. 

One would have to ask: If an insured has a deductible over $1 million, why not just pursue self-insurance?

Large-deductible policies = hybrid agreements 

Large-deductible workers' comp policies consist of hybrid agreements. Some policies include side agreements. The side agreements may cover many specifics of the large-deductible policy.

These agreements can be complicated at times. One area that stands out on a large-deductible policy is the handling of allocated adjustment expenses.  

The insured clients often discover they are paying for 50% or more of the expenses than an insured with a regular no-deductible policy that pays only premiums.   

ALAE does not count in the experience modification factors.  

The insureds sometimes do not realize they are paying for something that can be extremely costly.    

What are allocated adjustment expenses? 

Allocated adjustment expenses are defined as any expense the insurance carrier incurs when paying for the adjustment of the claim. ALAE can be an expensive part of the claim.  

In California, the allocated adjustment expenses cost as much as the indemnity and medical benefits combined.   

Allocated adjustment expenses are usually:

  • Private investigators. 
  • Defense attorneys.
  • Rehabilitation nurses (a debated item).
  • Bill review. 
  • Medical network fees.
  • By agreement.

The exact ALAE expenses may not be spelled out in the large-deductible policy or contract.  

The expenses are usually listed on a loss run in the third column. They are denoted as expenses on most loss runs. Check out any loss run, and you will see them. Large-deductible workers' comp loss runs usually show the same three columns: indemnity, medical and expenses.   

Where are allocated expenses in large-deductible workers' comp policies?

The reason this article appears before you came from one of our clients who renewed on July 1. The client is a governmental agency. Its policy runs from July 1 to July 1 of each year.  

The large-deductible agreement was forwarded to J&L at 4 p.m. on June 29. Ouch! We found the 50% agreement in a side agreement. How did we find it so fast? We used the best workers' comp policy review tool in existence.

We then asked for 10 years of loss run data. When we reviewed the allocated expenses, they were not that high, so the impact of the workers' comp large-deductible allocated expense was not that significant. We had to use a few homegrown actuarial tools to forecast their next three years of expenses adjusting for inflation, especially medical.

Are large-deductible workers' comp programs worth it? 

Many of our clients have benefitted from using these programs. No one says insurance carriers are trying to pull a fast one with the 50% ALAE reimbursement. Just remember before you sign up with these programs that you read everything very carefully and ask a ton of questions. 

You must live with your large-deductible workers' comp program. Make it work for your company.  

This blog post is provided by James Moore, AIC, MBA, ChFC, ARM, and is republished with permission from J&L Risk Management Consultants. Visit the full website at www.cutcompcosts.com.

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