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GROUP SELF-INSURANCE?
THE DOWNSIDE OF
GROUP SELF-INSURANCE
IN WORKERS’COMPENSATION
UNDERSTANDING JOINT & SEVERAL LIABILITY
BY: KATHLEEN M. CARROLL, ESQ., MANAGING DIRECTOR, GUY CARPENTER & COMPANY
AN EMPLOYER’S obligation to provide workers’ compensation
insurance can be satisfied in one of two ways:
• by purchasing an insurance policy from
a licensed insurance company
• by self-insuring, either individually or in a group
As you know, when a policy is purchased, the employer transfers
its risk for employment-related losses to the insurer and incurs no
further liability. Should the insurer become insolvent, claims are
paid by a guaranty association.
In contrast, if an employer elects to self-insure, liability stays
with the employer or group of employers. It is not transferred.
While group self-insurance may seem like an attractive option, one
feature of this coverage may give rise to concern for employers and
for their employees—joint and several liability.
Generally speaking, joint and several liability means two or
more persons are fully responsible equally for the liability. When
companies participate in a Self-Insurance Group (SIG), they need
to keep in mind that assets are limited to those in the SIG pool and
the degree of fault doesn’t matter in some jurisdictions. It’s possible
those assets will be insufficient to pay a judgment. Further, if the
pool itself becomes insolvent, there is no
guaranty fund backstop to pay all or part
of an award.
Because a SIG continues to be liable
for workers’ compensation benefits,
the law imposes stringent financial
requirements in all states that permit self-
insurance. For example, all members of a
SIG must provide annual audited financial
statements, a balance sheet, and a
statement of operations for the preceding
year for evaluation by the commissioner of insurance.
Each SIG must also provide a form of payment guaranty. The amount
is equal to the group’s self-insured retention or is determined by the
commissioner in the form of a surety bond, securities, or cash. Self-
insurers must purchase excess insurance above their retention. A group
must also enter into an indemnification agreement providing for joint and
several liability.
A team is only as strong as its weakest member. If one member of the
group experiences a financial distress or bankruptcy, it may be unable
to pay its share of the SIG retention. If the amount of collateral provided
by way of the guaranty is insufficient, joint and several liability is then
triggered. That results in an assessment levied on all remaining group
members. And that assessment could well exceed the premium the
participants would have paid for insurance coverage, not to mention the
costs of establishing the SIG, complying with all regulatory requirements,
and the fees associated with obtaining the bond or other security.
On the surface, self-insurance may look enticing. But the unforeseen
liability that could arise as a result of joint and several liability should give
employers pause.
KATHLEEN M. CARROLL is a Managing Director of Guy Carpenter & Company.
Katie advises brokers and clients with respect to reinsurance contracts and program
design, insurance regulatory issues, reinsurance collections and coverage matters.
Previously, she was Senior Vice President and General Counsel at Chartwell Re
Corporation, an insurance holding company. Katie began her legal career at the
Hartford Group and served in positions of increasing responsibility at the American
Insurance Association, Swiss Reinsurance Group and NAC Re Corporation. She is
a graduate of Providence College and served as an officer in the U.S. Army before
attending Loyola University School of Law. Katie is a frequent speaker at industry
seminars and was the recipient of both the 2006 Lifetime Achievement Award for
excellence in insurance education jointly conferred by the Insurance Education
Institute and the Reinsurance Association of America (RAA) and the 2010 Educator of
the Year conferred by the RAA. She has over 35 years’ experience in the insurance/
reinsurance industry.
Statements or analysis concerning or incorporating tax, accounting, regulatory or legal matters should be understood to be general observations or applications based solely on our experience as reinsurance
brokers and risk consultants and may not be relied upon as tax, accounting, regulatory or legal advice, which we are not authorized to provide. All such matters should be reviewed with the client’s own qualified advisors
in these areas. Views expressed herein are the author’s own and do not represent the views of Guy Carpenter
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