What Is Workers’ Compensation “Leakage?”

Any business owner can tell you that running a business can be a complex proposition.  Trying to make sure your business conforms with all relevant city, state, and federal laws is an essential step before you even get to the practical aspects of your business, such as ordering inventory, advertising, and deciding when to expand.  Workers’ compensation is a very important part of your business, and the law of California provides that you must pay for workers’ compensation insurance unless you qualify under one of the very few limited exceptions.  Being familiar with the insurance system can help make sure you are properly following the rules and regulations surrounding workers’ compensation.  One major issue faced by workers’ compensation insurance carriers is “leakage.”

Leakage in the workers’ compensation context refers to payment errors.  Overpaying claims represents a major problem and challenge for insurance companies.  In general, leakage is divided into two main categories: hard leakage and soft leakage.

Hard leakage refers to erroneous payments made on claims that should not be covered.  If an insurance company pays out on a claim when the insurance policy had actually lapsed, or it turns out the injury was not compensable under the policy, would be two examples of hard leakage. In other words, hard leakage occurs when a payment is made where no types of coverage existed.

Soft leakage, by contrast, refers to when overpayments have been made on claims that are otherwise valid.  Errors in medical payments or even payments made after a claim is denied or disputed are types of soft leakage.

Another type of leakage that does not fall into either of these precise categories is vendor leakage.  Vendor leakage involves payments to outside vendors.  These would be services that are used in the investigation or in handling claims.  Private investigators, private nurse case managers, or independent medical evaluation companies are some of the most common.

Although employers may not think that these types of leakage should concern them, this is not accurate.  The more leakage an insurance company has, the more likely it will  raise rates later to make up for the unnecessary payments.

If you have questions about your business’s rights and responsibilities, call us today. Contact us today for a consultation to talk about your business.

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