Insurance Substitutes for Workers' Compensation

Workers' compensation alternatives are available in some states.scaffolding workers image by Greg Pickens from Fotolia.com

If you own a business, chances are high that you have had to deal with workers' compensation. Each state is responsible for setting its own workers' compensation rules. Some states like Wisconsin do not permit any alternatives aside from the traditional insurance policy, while in Texas coverage is generally elective. Even among states that do permit alternatives, there are no consistent guidelines as to what exactly constitutes alternative coverage. While this lack of streamlined insurance options can at times be confusing, depending on where you live, you may be able to identify a course of action that best fits your company's needs.

Group Self-Insurance

Groups of employers can form their own self-insurance funds when allowed by state law, such as in Alabama and Texas. These funds consist of two or more employers who pool their workers' compensation risks and share the associated costs. For many businesses, this is a cost-effective alternative to purchasing an insurance policy. However, fund managers generally determine whether or not to renew your business's membership each year, so you are not guaranteed participation.

Some states, including California, Texas and New York, permit individual businesses to self-insure. Each state that allows this sets its own criteria for eligibility, but general requirements include a high business net worth and a consistently positive net income. You can remain self-insured as long as your business meets the state's criteria. However, since there is no lifetime cap on medical benefits for beneficiaries, you expose your business to unlimited potential liability when you self-insure.

As a hybrid alternative to workers' compensation, Alabama allows the Self-Insured Workers' Compensation Fund to offer insurance policies to members of the Baldwin County Economic Development Alliance on a not-for-profit basis. Most states also have a state-sponsored fund that provides insurance to employers who do not otherwise qualify for private insurance. The criteria to participate in these alternative policies vary from state to state.