How Compulsory and Voluntary Excess Affect Workers’ Compensation Insurance

Workers’ compensation insurance is essential for protecting employees from work-related injuries or illnesses, as mandated by law for most employers. Within this coverage, the concept of “excess” functions similarly to a deductible, requiring businesses to cover a portion of the claim costs. 

Compulsory excess is a predetermined amount set by the insurer that businesses must pay toward each claim. This helps mitigate small claims and encourages responsible risk management. 

In contrast, voluntary excess allows businesses to choose a higher amount to pay out of pocket. This can lower insurance premiums but increase the financial risk for larger claims. Balancing these factors is crucial for businesses to manage their insurance costs while ensuring adequate coverage for employee protection.

Understanding Compulsory Excess

Compulsory insurance excess is a fixed amount mandated by law that an employer must pay out of pocket for each workers’ compensation claim. According to a post by Nuts About Money, the compulsory excess amount is set by your insurer and is non-adjustable. It aims to encourage employers to prioritize workplace safety and reduce the frequency of claims. 

For instance, a state might set a compulsory excess of $500 for each claim. This means the employer must cover the initial $500 of medical bills and lost wages from an injury before the insurance coverage kicks in. In some regions, compulsory excess may apply differently depending on the claim type.

Impact of Compulsory Excess

A higher compulsory excess can incentivize employers to implement stricter safety protocols, such as mandatory safety training programs and regular equipment inspections. According to Prescient National, this reduces the likelihood of claims while promoting a culture of safety within the workplace. 

It also discourages frivolous claims, as employers share some of the initial financial burden. This can help to keep overall insurance costs lower for everyone involved. However, a high compulsory excess might delay medical treatment for employees if they hesitate to file a claim due to upfront costs.

In such scenarios, an employee might prioritize covering the cost themselves or delay seeking treatment. This can potentially worsen the injury and lead to more complex medical issues down the line. 

NIH also notes that in case of injuries such as fractures, delaying treatment can result in complications like improper healing or long-term disability.

Choosing Voluntary Excess

Voluntary excess is an optional deductible offered by some insurers. Employers can lower their insurance premiums by increasing the voluntary excess. This strategy suits businesses with a good claims history and strong safety measures in place. 

For example, a company with a clean safety record might choose a voluntary excess of $2,000 on top of the compulsory excess. This can lead to significant premium savings. However, choosing a high voluntary excess can put a strain on cash flow if a significant claim arises. 

If a key employee suffers an injury with over $10,000 in medical bills, the employer must cover the initial $500 compulsory excess. Additionally, they would need to cover the $2,000 voluntary excess, totaling $2,500 in out-of-pocket expenses. 

This could impact the company’s financial health, especially for smaller businesses. Forbes also notes that around 20% of small businesses and startups struggle with cash flow and end up failing. This highlights the potential burden of a high voluntary excess on such businesses.

Weighing the Options

The decision between a higher voluntary excess and a lower premium depends on an employer’s risk tolerance and financial stability. Businesses with a history of low claims and a comfortable financial buffer can benefit from a higher voluntary excess. Conversely, those with a riskier work environment or limited cash reserves may be better off with a lower voluntary excess, despite a higher premium. 

A construction company with a history of frequent on-site accidents might prioritize lower upfront costs, even if it means paying a higher premium. This can help with immediate cash flow but may not be the most cost-effective strategy in the long run.

Consulting a Broker

Workers’ compensation insurance can be complex, and navigating excess options requires careful consideration. Consulting a qualified insurance broker can be invaluable. They can assess your business’s specific needs, claims history, and risk profile to recommend the optimal compulsory and voluntary excess combination. 

A broker can also explain the implications of different excess choices and help you find the right balance between affordability and risk protection. Brokers can stay updated on the latest regulations and industry trends, ensuring your business has the most appropriate coverage in place.

FAQs

What is a waiver of compulsory excess?

A waiver of compulsory excess means the insurer agrees to cover the compulsory excess amount, typically in specific situations. This waiver eliminates the employer’s financial responsibility for the initial part of a claim. It is often provided under certain conditions or as part of an insurance policy benefit.

Do I have to pay the excess if I am not at fault?

Yes, you typically must pay the excess even if you are not at fault. The excess is the portion of the claim you are responsible for, regardless of fault. However, you may be able to recover this amount if the responsible party reimburses you.

What is a voluntary excess discount in insurance?

A voluntary excess discount reduces your insurance premium when you agree to cover a higher excess amount. This means you pay more out-of-pocket before the insurer pays. The discount reflects the lower risk for the insurer due to the increased excess you assume.

Workers’ compensation insurance offers a safety net for employees while reducing financial risk for employers. Understanding compulsory and voluntary excess allows businesses to strike a balance between affordability and employee well-being. 

Careful consideration of claims history, risk tolerance, and cash flow is crucial. Consulting a broker can ensure employers navigate these options effectively and secure the most suitable coverage for their specific needs.