State insurance funds are government-run organizations that provide workers’ compensation insurance to other businesses for a fee. In some states, employers must pay into these state insurance funds and use their services when purchasing workers’ compensation insurance. Employers in North Dakota, Ohio, Washington, and Wyoming, for example, must choose a state insurer for their coverage. 

State funds were established to provide workers’ compensation coverage exclusively. Washington was the first of the US states to offer workers’ compensation coverage, followed by Michigan, in 1911 and 1912 respectively.  

Private insurance carriers also offer workers’ compensation insurance to enterprises for a fee. Similar to home or auto insurance, these private carriers operate as part of a competitive market, and market workers’ compensation policies based on US labor market factors like service, price, or expertise. Employers purchase policies based on a premium calculated to reflect their risk. These private insurance policies will either have a deductible or require the insurer to pay the full cost of benefits to the worker (self insurance). Using the deductible, private carriers can offer flexibility to the buyer, allowing them a measure of self-insurance before the carrier-provided policy kicks in. Many states allow a deductible on a workers’ compensation policy. 

Outside of the states mentioned above (which are served by exclusively state funds), private insurance carriers offer their services and policies alongside state organizations as part of a competitive market.

“The Great Tradeoff” and the establishment of state funds

In early 1911, employers were already facing a number of workplace accidents and related challenges. A fire at the Triangle Shirtwaist Company was responsible for the deaths of 146 employees, which were largely preventable. Following the event, legal scholar Crystal Eastman published Work Accidents and the Law, which laid the foundation for future reforms and ultimately the future of workers’ comp. 

Attempts to create a state fund floundered in the US until an agreement was made in 1911. In the “great trade off,” employers agreed to cover the cost of medical care for the employee, lost wages, and rehabilitation regardless of who was at fault. The employee, in turn, gave up their right to sue. The compromise helped to establish the first state insurance funds (and workers’ compensation as a whole!).

Key differences between state insurance funds and private carriers

1. Availability of coverage and private/state alternatives 

Not all states have a state fund. In fact, many state funds have only emerged in the last few decades: Mondana, Rhode Island, and Kentucky state workers’ compensation funds were created in the early 1990s. Some states have taken a different approach as well, such as CompSource Oklahoma, a state fund that went private and became CompSource Mutual Insurance Company in 2015.

Private insurers are not required to accept all applications. In the event that an enterprise is deemed too risky, or offering workers’ compensation insurance for the industry is unaffordable, the enterprise is able to use the state fund as an alternative. In this situation, even high-risk employers can afford to provide workers’ compensation coverage to employees, which is a win-win for workers. State funds, which are usually not for profit organizations, will write the policy, which helps more workers obtain coverage at the end of the day. 

2. Price

The price for workers’ compensation insurance in a given state depends both on the industry and on the employer. The average wages in the state, as well as the economic makeup of the state’s businesses, will determine how much or how little employers will pay for the coverage. If the state’s private insurers are too expensive for a company to use, the business might be able to use a state fund to provide coverage for their employees. 

However, state funds aren’t always the cheapest option. State funds are often nonprofit agencies, which means they need to break even in order to remain viable. In order to cover each employer who needs insurance (even the risky ones), rates are kept low, but not so low as to make the organization a charity.

3. Claims processing times 

While private and state funds may be similar in pricing, the number and complexity of claims will vary by state. Just like other parties in the workers’ compensation industry, both state and private insurers are facing increasingly complex workers’ compensation claims and high claim volume. State funds often offer coverage even when private funds deem it too risky. This coverage can strain the resources of the state fund, especially when state funds may have added layers of procedure or paperwork that the private fund does not. Limited competition, thanks to their role as an alternative insurer, can also contribute to longer processing times. As private carriers allow buyers to self-insure up to a deductible amount, they may also see fewer claims. 

For both state and private carriers, workers’ compensation offers employees and employers some peace of mind. While private carriers can offer greater options, and state funds can offer alternative insurer compatibility, the choice will ultimately be up to the specific business, area, and industry at hand.