Many small-business owners are unaware of the financial risks posed by self-insurance groups, though many say the cheaper premiums outweigh the dangers, according to a recent survey.
Among other risks, 58 percent of small-business owners and managers recently surveyed by Opinion Research said they didn't know that companies belonging to self-insured groups are financially responsible for claims filed by all businesses in their group, not just their own.
Just 34 percent of respondents said they knew they could be legally and financially responsible for workers' compensation claims owed by their self-insurance group, the survey found.
"It may just be that they are not being provided the full story, whether it's from their agent or whether it's from the literature that they're reading," said Martin Welch, president and COO of EMPLOYERS, a Nevada-based group of insurance providers that commissioned the survey.
"Maybe they're choosing not to acknowledge that there is a risk in the name of trying to reduce the cost of running their business," he said.
Other risks associated with self-insurance groups according to the survey include the possible failure of the largest company in the group, successive years with serious injuries, and the responsibility for paying claims for up to five years, even after leaving the group.
Still, 27 percent of survey respondents agreed that saving money on premiums outweighs the financial dangers of joining a self-insured group. Welch cautioned against joining a self-insured group to cut short-term costs.
"You can save money in the short run, but in the long run you are on the hook for a greater liability," he said. "I would say that it's certainly more beneficial to get insured through a carrier."
Unlike self-insured groups, Welch said private insurance carriers assume financial responsibility for policyholders' claims and provide fraud prevention and other critical customer services.
As many as seven self-insured groups failed this year in New York, and litigation is currently being pursued against poorly funded groups in California, Tennessee, and Kentucky.