Workers' comp guaranty funds become one of the most critical areas for employers, employees and medical providers whenever the unthinkable happens in the claim process.

James Moore

Some states refer to workers' comp guaranty funds as guaranty associations. Each state has its own specific rules and laws on the process of liquidating a failed insurer.

The National Conference of Insurance Guaranty Funds (NCIGF) has a great video on how guaranty funds work overall.

What are workers' comp guaranty funds?

Guaranty funds are called many different names depending on the jurisdiction. These organizations operate in the background until the unthinkable happens with a carrier. 

According to the National Association of Insurance Commissioners (NAIC):

All 50 states, Puerto Rico, the United States Virgin Islands (property/casualty only) and the District of Columbia have a guaranty mechanism in place for the payment of covered claims arising from the insolvency of insurers licensed in their state. Before the creation of guaranty associations, a typical claimant could have waited for years for payment of a claim and then still receive only a fraction of what was due under the terms of the policy or contract. Guaranty associations, subject to statutory limitations, were created to alleviate these problems and ensure the stability of the insurance market.

How are guaranty funds supported?

The funding for these critical organizations comes from essentially every workers' comp policy. If you would like to see it, pull out your workers' comp policy and look for state fund assessment or similar language. The surcharge is usually a small percentage of the policy.

How do claims end up in a guaranty fund?

The usual process starts with a review of a carrier by a state insurance commissioner’s office. These reviews occur at certain times. The failing carrier sometimes will contact the commissioner’s office in case of a serious default.

The commissioner may put the carrier directly into rehabilitation. Some carriers have come out of rehabilitation temporarily. A few have returned to regular operations on a permanent basis. Unfortunately, most do not return from rehabilitation and are placed into receivership.

Receivership equates to the insolvency (bankruptcy) of an insurance carrier. If you would like to see how many carriers have gone into receivership for just one state, check out this listing by Florida of where to find the third-party administrator that has taken over the claims handling for the guaranty fund.

Usually, the guaranty funds subcontract out their claims to a TPA for future handling.

Workers' comp guaranty funds are safety nets

The safety net function provides necessary critical assistance for:

• Injured workers. The benefit payments may be delayed for a short time.  The fund’s choice of TPA takes over as the carrier (of sorts) to pay applicable benefits on a file. The injured worker will likely receive a letter from the fund or TPA letting her know that her benefits are guaranteed even though the carrier is no longer in business.
• Employers. The company does not have to go out of pocket to pay benefits to its injured employees and may receive a refund for part of its premium from the failed carrier.
• Medical and other providers. See the injured workers section above. The providers may not receive a letter from the guaranty fund, depending on the state.

The workers' comp guaranty funds are silent-running organizations that sometimes do not receive enough credit for their very critical function in the claims handling process.

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.