Author: VU Faculty
Most businesses today are looking for ways to cut expenses in order to bolster the bottom line. The following "Ask an Expert" question illustrates one tactic being used: "If an owner of a business excludes himself from WC coverage and he is injured on the job, will his medical insurance respond?"
"If an owner of a business excludes himself from workers compensation coverage and he is injured on the job, will his medical insurance respond?"
This is an important question because, given today's dire economic conditions, most businesses and consumers are looking for ways to cut their insurance costs. Unfortunately, this could be a potentially catastrophic way to do it. The reasons are outlined below by the VU faculty. However, before we move on, one quick note....
IMPORTANT: We often get questions like, "Will his medical/homeowners/BOP/auto insurance respond?" Keep in mind that when we get question like that, all we can do is respond in generalities and/or reference ISO forms. It is impossible to provide substantive and definitive answers to very broad, general questions. In this case, there are many types of "medical insurance" and policies within each type. The only way to answer coverage questions is by close examination of the policy form(s) involved. For that reason, we ask users of our "Ask an Expert" service to provide specific ISO form numbers (including edition dates) or email non-ISO forms.
Of course, without the health insurance policy it would be difficult to answer this definitely. The policy might have an occupational exclusion or exclude loss that should be covered by workers compensation.
I know that this issue arose in in my state as, for the first time in late 2002, the WC law was changed to allow certain officers of a corporation to “opt out” and for sole proprietors and partnerships to “opt in” to the workers’ compensation system. A major health insurer had a policy provision that its health coverage did not apply if an employee was “eligible” for workers’ compensation benefits.
Initially, the health insurer interpreted “eligible” to mean that the person had the option to purchase workers’ compensation. However, later on I believe that the health insurer, after an uproar, changed its interpretation of “eligible” to mean the injured person had the right to collect WC benefits at the time of the injury.
This is anecdotal, but I think the lesson is to find out from each specific health insurer how they will treat injured persons who chose to exempt themselves from WC benefits.
I know some policies exclude coverage if covered by WC or if they’re “required by law” to be covered. A statutory election to not be covered wouldn’t trigger the exclusion. But it depends on the specific medical policy.
1. Medical plans exclude expenses covered under workers' compensation.
2. In self funded medical plans, the reinsurance providers exclude expenses covered under workers' compensation.
3. State statutes related to exemption from workers' compensation vary by state. You can have an officer exempt in one location and not in another. There is plenty of room for problems.
4. I had a recent occasion to see the outcome of a corporate plane crash that contained officers from two companies suffering permanently disabling injuries. One company exempted their officers and the other did not. Workers' compensation paid the medical AND major league costs for rehabilitation. The rehabilitation included extended stays in assisted living facilities. The health plan paid the medical but did not pay out of hospital rehab. The WC medical was UNLIMITED; the health medical was limited.
We use this frequently. It follows the same train of thought in which general liability insurance excludes auto exposures - there is another coverage specifically designed for that exposure. Medical insurance often excludes compensable injuries, meaning job-related, whether such injuries are insured or not.
Assume that the exec is injured in an auto accident while on the job. If his leg is broken, the health carrier will probably pay the claim and never look back. More frequently, however, they are now sending a form letter asking for details of how the injury occurred. If the job-related aspect is divulged, all bets are off.
Now assume that the exec is severely injured, in a coma and the medical bills are hundreds of thousands of dollars. That's when insurance companies get serious about claim investigation. All it would take is discovery of the job-related activity and they save a small fortune through denial.
Who wants to take such of a chance when the cost to insure an exec with workers' comp is so minimal in cost?
With so many variables, it just isn't worth the risk to save very little - usually $300-400 per exec per year (in Texas, at least).
While it is not my impression that health insurance policies typically include such exclusions, they are not unheard of. Also, I note that in many states, rxecutive officers are subject to the WC law but may opt out, while partners and sole proprietors are not subject to the law but may opt in. Depending on what the business owner calls himself (and is), it may be that the medical policy differentiates. For example, if you deliberately opt out of WC coverage, this affirmative action may restrict medical insurance coverage to a greater degree than not opting in. The policy will be key.
This has been a topic of debate for many years. The shareholder employee, partner or sole proprietor who opts out of WC needs to secure written confirmation from his personal medical insurance provider that the provider will pay for losses incurred during the course of employment (WC). Many medical insurance policies exclude coverage for loss that COULD HAVE BEEN covered by WC. Logic dictates that a personal medical insurance should not provide coverage for on-the-job injuries because the rate charged does not contemplate insuring WC claims. Here is an example.
Employee A owns 11% of the plumbing company. Employee B owns 9% of the plumbing company. A opts out of WC coverage. Since A and B perform the same duties, exposure to a WC loss is identical. A & B each pay a $5,000 annual premium for personal medical insurance. Additionally, B is charged a WC premium of $5,000. If the personal medical insurance provides coverage for on-the-job injuries for A (effectively a 24/7 policy disregarding differences in benefits), then A pays $5,000 a year for insurance and B pays $10,000 a year for the same coverage.
Assuming the medical insurance provider cannot make a profit charging a $5,000 premium, and the WC carrier cannot make a profit charging a $5,000 premium, how can anyone argue that the medical insurance provider can make a profit by charging A only $5,000 to insure both on-the-job and off-the-job losses? This is why 24/7 policies cannot save premium dollars. The cost of a 24/7 policy must equal the sum of the personal medical insurance premium and the WC premium, since the insurer is assuming the exposure for both forms of losses.
It's a very complicated, and state-specific, question. In our state, we never recommend exclusion from WC because of the benefits could exceed those available under a health policy. Besides, some health carriers, especially the small group carriers, require that all eligible persons (including owners) be covered by WC
In our state, we asked the medical insurance carriers (Blue Cross, United Health, etc.) to put in writing their policy for instances where the executive officers made the decision to eliminate themselves from the WC coverage. The medical insurance providers all responded that their policies provide coverage for injuries that arising out of a work related incident for anyone that is not covered by WC (either because the state statute does not apply to them or they voluntarily eliminated themselves). You need to check this out for your state and under individual plans.
I can tell you that it is possible for the group health to have an exclusion for WC claims, even if the corporate officer declined the WC coverage. But I do not think it is normal. You need the A&H producer on your policy to tell you what it states.
Probably, but the medical insurance policy will govern and we don’t have a copy of that. It’s not uncommon for executives to do this to keep WC costs low due to their high salaries (though the removal of their payroll can cause experience mods to go up) and the availability of preferred L&H benefits. If the medical insurance in question has an employment-related injury exclusion, he could be in trouble, but that’s probably unlikely. It might have an exclusion for WC benefits that are actually payable or required by law to be payable. The only way to know for sure is to run the question by the medical insurer and/or read the policy.
Virtually all medical policies I've seen exclude coverage if WC or similar benefits apply. I've seen some that exclude coverage if WC benefits are "required by law to be provided." Some have very broad exclusions that apply to ANY employment-related injuries. So, the only way to answer your question is to examine each policy.
Another thing to consider is the WC insurance itself. Officers are typically excluded via use of the NCCI WC 00 03 08 - Partners, Officers And Others Exclusion Endorsement. One important provision is this one: "You will reimburse us for any payment we must make because of bodily injury to such persons." After catastrophic injury, you may have officers claiming they mistakenly exempted themselves or that it was done so fraudulently. If the insurer is required to provide coverage, the employer could find itself bankrupt if it has to reimburse the insurer.
Health insurance policies often have employment exclusions. For examples, check out Crawford v. Prudential Ins. Co. of America (Kansas Court of Appeals, 1989), MacArthur v. Massachusetts Hosp. Serv. (Massachuetts Court of Appeals, 1962), and Nallan v. Union Labor Life Ins. Co. (New York Court of Appeals, 1977), just to name a few.
Here's some additional information for you.
- All Medicare Supplement programs expressly exclude work related injuries. These are federal rules and not state rules. A number of executives in the exempt executive WC categories may be on Medicare Supplements as it is much less expensive than group health insurance.
- ALL of the self-funded Stop Loss policies I've seen expressly exclude work related injuries. Let me add that I've seen only a small number. Further, Stop Loss providers are quite often ruthless bastards. Many of the most price competitive are the most ruthless.
- The Blue Cross grant of coverage referenced in the VU article differs markedly from what I've received. All references to Blue Cross expressly excluded work related injuries to anyone eligible for coverage under Workers' Compensation.
- My pool is small, but the responses involve programs covering millions of people. Only one included coverage for work related injuries for an individual eligible for Workers' Compensation. This came from a state where Workers' Compensation is very strictly enforced.
I believe there has been a sea change in health plans excluding work related injuries and no one has figured it out.
Let me suggest you poll your agents and seek wording addressing work related injuries, eligibility for Workers' Compensation, individual health plans, group insurance policies, and Stop Loss policies. In addition, obtain coverage language from health plans that are fully self-insured.
Last Updated: June 8, 2013