Find out if your employer is allowed to self-insure for workers’ compensation
Arizona workers’ compensation laws require most employers in the state to provide benefits to their employees in the event of a work-related injury or illness, even if they only have 1 employee. Most employers will comply by paying for workers’ compensation insurance from a third-party provider, but a few companies are eligible to self-insure.
Workers’ compensation benefits paid to injured employees include compensation for lost income, work-related medical and rehabilitation treatment (including travel expenses to/from doctor’s appointments), vocational expenses and death benefits. These benefits must be paid regardless of who is at fault for the accident.
What if a company fails to provide workers’ compensation?
If an employer fails to pay required workers’ compensation benefits, they can be charged with a Class 6 Felony. Offenders can be imprisoned from 4 months up to 2 years. The employer can also be charged with a misdemeanor.
The Industrial Commission of Arizona (ICA) usually imposes a fine between $1,000 and $10,000, depending on the number of violations. The ICA can also file with the courts for an injunction that could shut down an employer’s business.
In addition, an injured employee can file a civil suit for damages against the uninsured employer. Moreover, an uninsured employer can be liable for more damages than those covered by workers’ compensation insurance. For example, workers’ compensation insurance doesn’t cover pain and suffering, which can be awarded in a civil suit.
An injured employee who works for an uninsured employer can also apply to the ICA Special Fund for compensation. If accepted, then the ICA can sue the employer to recover the Special Fund’s payout, plus a 10 percent premium.
A delinquent employer who does later get the required workers’ compensation coverage will probably pay higher premiums.
Workers’ compensation self-insurance rules
Arizona Revised Statutes §23-961 allows employers to satisfy the workers’ compensation requirements by:
- Buying and maintaining a workers’ compensation insurance policy from an insurance carrier authorized by the ICA Director of Insurance.
- Demonstrating to the ICA proof of financial ability to pay the workers’ compensation. They can do that through a workers’ compensation pool approved by the ICA.
Lone self-insurance qualifications
An employer seeking authority for self-insured workers’ compensation must apply to the Self-Insurance Office of the ICA. The minimum qualifications for lone self-insurance authority are:
- Annual payroll of at least $2,000,000,
- Total assets of $50,000,000 (or a cash flow ratio of at least 0.25), and
- Must have conducted business in Arizona for at least 5 years.
All self-insured employers must:
- Complete and file an Annual Medical Report
- Pay an Administrative Fund Tax of not more than 3 percent of the premiums that would have been paid by the employer if it had been fully insured by an insurance carrier
- Pay a Special Fund Tax
- Pay an Apportionment Tax
Alternative self-insurance pool
Rather than complying with the onerous requirements for lone self-insurance authority, an employer can alternatively join a self-insurance pool as provided in ARS §23-961.1. It must consist of 2 or more employers in similar industries. In addition:
- Each member must have been in business for at least 5 consecutive years, and
- The members combined must have paid at least $750,000 for insurance premiums for the year preceding the formation of the pool.
The members of the pool are jointly and severally liable for the liabilities of the pool.
What are the advantages to self-insuring for workers’ compensation?
A self-insured employer can save money compared to paying for coverage from third-party insurance. In other words, self-insured employers typically pay out less in claims than they would otherwise be paying for insurance premiums. They also have more control over the claims process, such as which claims and which treatments are denied or paid.
In April 2021, S.B. 1042 was signed into law. This law changed the reimbursement rules for prescription medications by allowing them to be dispensed by mail-order pharmacies. However, drug provider kickbacks to prescribing doctors are prohibited.
The new act also allows self-insured employers to direct medical, surgical or hospital care of injured workers. Many self-insured employers were already doing this, but the new legislation officially codified the practice.
The measures adopted by the new legislation will further enhance the advantages to self-insured employers. Self-insurance pools offer some of the risk-spreading elements of third-party insurance. Under the new legislation, they will have even more control over the delivery of workers’ compensation benefits.
In that regard, however, some employees may see their employer wielding more control over their healthcare following a work-related injury or occupational illness. Before the new rules, self-insured employers exercised discretion and authority that would otherwise be the domain of presumably unbiased insurance companies. That condition is further exacerbated by the new rules.
The ICA publishes a list of authorized self-insured employers in Arizona on their website:
https://www.azica.gov/obtaining-workers-compensation-coverage-information
On this page, you can also access their web service for verifying employer coverage.
