Why Self Insured Groups may not be the answer for your firm.
Recently I have been made aware of a couple of burgeoning Self Insured Groups (SIGs) that are active in the Central San Joaquin Valley. One of them is Agriculture specific, and has had success in the Farm Labor Contractor market locally.
When premiums start to rise (as they are doing right now), these SIGs pop up with promises of lower rates and “profit-sharing” opportunities that always sound attractive to the unsuspecting or unaware employer. This is where the terms Joint and Several come in. Virtually every SIG contract has what is known as a Joint and Several Clause in the contract that pertains to the Liability each party to the contract assumes when they sign it. In Legalese, it looks like this:
“The obligations of the Companies (and of any successor to any of the Companies) to Executive under this Agreement shall be joint and several.”
The Companies it is referring to are the member companies of the group, and the executive in this case would be the SIG Manager, and then the California Self-Insurers’ Security Fund. What its states is that all members of the groups are Joint and Severally liable for the losses of any and all the other members of the SIG. So you are in a big pool and you are cross insuring each other, no matter how the SIG manager explains it to you.
Many bad things can happen in these contracts, here is a list.
- Bankruptcy is declared by one or more large members of the group, leaving the balance of the group to pay for the bankrupt companies claims.
- Losses far exceed expected loss rates and the SIG fails and the total of those losses are divided between the members on top of the premium that they paid for “coverage”.
- Claims handling costs are so high that it is impossible for the group to realize underwriting profit or any profit sharing.
- Rates charged are so unrealistically low that #3 is a sure thing.
- Rates charged are so unrealistically low that #2 is a sure thing.
- SIG fails and claims are parted out to another third party claims administrator who often does not have the members’ interest in mind.
You need to go no further than the 2010/11 failure of the Contractors Access Program SIG to see the finished product of one or all of these things. The 250 Members are going to split up $38,000,000 in claims after the groups failure. That is an average of $152,000 per member company, and many of these were small contractors who had already paid premium for “coverage” and will have to come out of pocket for the liability they assumed under the joint and several clause.
Many SIG insureds have stated that they were unaware of the consequences when they entered into the agreement with their SIG. I believe that, as a recent poll financed by Employers Insurance (an insurer of small businesses) and done by ORC International (polling company) showed that “among current and former SIG members, however, 41% do not realize that they are responsible for the claims generated by employees of other companies within their SIGs”. I find that amazing.
I also find this amazing, “In 2008, 32% of all respondents believed SIG members are not financially responsible for claims of all companies in the SIG. But in 2011, that number had risen to 41%”. So from all the business owners polled, the current or former SIG members actually knew less about the product that they were buying than 3 years ago.
In an age where nearly everything can be made transparent with the help of the internet in a fraction of a second, why is this not known about Self Insured Groups? If you have any questions or comments about SIG’s, please feel free to contact me at firstname.lastname@example.org and we can discuss.