Is State Fund the Best Workers Comp Option For Small California Contractors?

In working with small California contractors establishing or upgrading their workers comp programs, we often find that many contractors assume State Fund is the least expensive insurance option because they’re a state run program that subsidizes the cost of workers comp insurance. While mostly untrue, this common misconception can actually lead some employers to pay dramatically higher workers comp premiums in some situations. To understand why, it’s important to understand what State Fund is and the important role they play in the California workers comp insurance marketplace.

What is State Fund Insurance?

State Fund insurance is a non-profit entity that was established by the California state legislature in 1914 following the passage of the Boynton Act, which mandated that all California employers provide workers compensation benefits for injured employees. The California State Fund was established to provide a source of workers comp insurance when business owners are unable to purchase insurance in the private marketplace, yet are required by law to have coverage. While established by the legislature, State Fund is actually a private enterprise that operates without financial assistance from the government. As a private venture that must generate an underwriting profit to stay above water, yet unable to turn away even the highest risk ventures, State Fund generally must have workers comp rates among the highest in the industry. However, higher than average base rates should not imply that State Fund is a poor alternative for workers compensation insurance. To understand why, we need to discuss the critical role State Fund plays in the California contractors workers comp marketplace.

What role does State Fund play in the contractor’s insurance marketplace?

Contractors as a group are one of the highest risk employers of any occupation. Given the highly competitive nature and slim profit margins for workers compensation insurers, insurance companies enter and leave the marketplace on a regular basis. At times, State Fund has insured well over 50% of all California contractors, while today, that figure is dramatically lower.

State Fund plays the important role of being an insurance backstop when the private insurance marketplace fails to provide competitive insurance options for some employers. With this in mind, State Fund can be a quality alternative for employers that have few employees, adverse claims history, or very high risk occupations combined with any of the previously mentioned factors that could prevent other workers comp carriers from actively seeking the business. However, even if an employer possesses one or more of the aforementioned high risk characteristics, each employer’s situation is invariably unique and it’s advisable to explore all insurance options available before making any final decision on a workers comp program.

For small contractors, what is the best option for workers comp insurance?

The best option for small contractors is to work with a quality insurance advisor that can help identify the best insurance options available based upon all characteristics of an employer. If you are with State Fund or are considering them as your workers comp carrier, it’s advisable to consider obtaining a “broker of record” letter from an agent you trust and is appointed with State Fund. The cost of State Fund insurance is the same going direct as through your own agent, but a quality agent can reevaluate your account on renewal to make sure you’re getting the best value in your workers comp program as circumstances change over time. In addition, a quality agent will also help implement loss prevention programs for small businesses that don’t have the luxury of an in house HR department. The value added by a quality agent can help reduce workplace injuries and in the process, implement safety procedures that will also reduce workers compensation premiums.

Though not discussed at length in this article, several factors aside from price influence the value each workers comp insurer brings to the table. While insurance rates are important, there are many other factors to consider when purchasing workers comp insurance such as a carriers loss prevention programs, adjuster workloads and claims administration guidelines. Each of these can have a dramatic impact aside from price in the final value obtained from your workers comp investment.