Claims Against the Claims Handlers Under Large Deductible Workers’ Compensation Insurance Policies

David A. Shaneyfelt

David A. Shaneyfelt represents businesses in disputes against insurance companies under a variety of policies, including employment practices, general liability, directors and officers, and worker’s compensation. A former trial attorney with the U.S. Department of Justice in Washington, D.C., he practices with The Alvarez Firm in Calabasas, California – www.alvarezfirm.com.

Large deductible workers’ compensation insurance policies arose in the late 1980s and early 1990s following a market crisis in which employers were unable to obtain required workers’ compensation coverage from private insurers. The concept is simple. Employers can greatly reduce the amount of workers’ compensation premiums they pay for employees if they agree to assume a large portion of the risk themselves—through a "high deductible" (commonly between $250,000 and $500,000)—after which insurance assumes exposure for amounts above that deductible.¹

Under this notion, incentives exist for both employers and insurance companies to control costs incurred in managing workers’ compensation claims. Because the employer is assuming risk on a dollar-for-dollar basis up to the limit of a high deductible, the employer has an incentive to ensure that workers’ compensation claims are handled reasonably. Moreover, the employer has an incentive to keep the claim from exceeding the deductible, because the employer’s subsequent risk ratings will normally increase when a claim exceeds the deductible, which will translate into higher premiums in subsequent policy periods. At the same time, once a claim exceeds the deductible, the insurance company has an incentive to handle the claim reasonably, because it is absorbing costs above the deductible.