When Is Self-Insurance Allowed

Workers’ compensation is an important part of our legal system.  It provides support and financial assistance for injured employees.  It also provides immunity from additional tort law suits to the employer, except in limited circumstances.  California has the largest workers’ compensation system in the United States.  Under California law, employers are required to carry workers’ compensation insurance.  There are severe civil and criminal consequences for employers who fail to fulfill this responsibility.  There are a few narrow exceptions to this rule, including self-insurance.

Self-insurance means that the employer has assumed the financial risk associated with providing workers’ compensation benefits to their employees who sustain work-related injuries.  Workers’ compensation benefits can include not only the cost of medical treatment for the worker, but also other monthly benefits.  Clearly, this can represent a significant financial burden, especially for smaller businesses.

California law provides that there are strict requirements before a business can qualify to self-insure instead of purchasing a workers’ compensation insurance policy.  A business wanting to qualify for self-insurance must apply to the California Office of Self-Insurance Plans.  The business will have to provide particular information and evidence to support the application. First, the business must have been a legally authorized business form for at least three years.  Next, the business will have to provide three years of certified, independently audited financial statements with the application.  The business will also have to demonstrate it has an acceptable credit rating for three years preceding applying for self-insurance. If the company has subsidiaries, each subsidiary must file its own application.  The application may be filed separately or together with the parent company’s application.  If a current existing company that already has been approved for self-insurance creates a new subsidiary or affiliate, a new application can be filed.  If the parent company can demonstrate solvency, the subsidiary is automatically self-insured for 180 days.  The parent company must file an application for a permanent certificate during that time.

Once an employer is approved by the state to be self-insured, the employer is still subject to state audits.  The audits check for the accuracy of claims reserving practices as well as the correctness of the reported workers’ compensation liabilities.

If you have questions about workers’ compensation and your rights and responsibilities as a business owner, contact us today.  We can talk to you about your business and the workers’ compensation process.

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