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State Funds

Their Purpose and Impact

AASCIF

THE AMERICAN ASSOCIATION

OF

STATE COMPENSATION INSURANCE FUNDS

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Development of Workers' Compensation and the Creation of State Funds

Workers' compensation is essentially a product of the industrial
revolution. That revolution demonstrated the inequity of the early
common law and employer liability remedies for injured workers.

By the early 1900s the inadequacy of these legal remedies was
becoming common knowledge. The practice of basing liability on
negligence was no longer justifiable in a time when many jobs were
recognized to involve certain inherent but often unpredictable
hazards. Compensation for injuries was usually insufficient, never
consistent, and always uncertain. Painfully slow court procedures
in most States delayed settlements. The system was wasteful because
of high and excessive insurance carrier overhead. Labor relations
during this period deteriorated because the system promoted antag-
onism between employers and wage earners. There was also little
financial stimulus for employers to seek methods of accident
prevention. And, finally, society was becoming increasingly dis-
turbed by the burden of charity for uncompensated injured workers.
It became evident that a new approach was needed. This approach
took the form of workers' compensation laws.

It was intended that workers' compensation laws would provide
prompt, equitable, guaranteed relief to the injured worker,
irrespective of fault. In return, the employer would be protected.
against catastrophic loss by a stated liability for specified benefits.
However, even the costs associated with one severe injury could be
beyond the financial capability of many employers, particularly
the small employers. It was also apparent that benefits under this new
system would be paid to the injured worker or his dependents over
a long period of time, and the problem of guaranteeing continuation
of benefits existed when an employer went out of business or owner-
ship of the firm changed hands. It was evident that only a few very
large employers had the financial capacity and long-range stability
to assume this liability themselves. For the vast majority of employ-
ers, it would be necessary, as well as desirable, to purchase insurance
protection against this statutorily imposed liability. Through
insurance, the risk coud be spread and benefits guaranteed to the
injured worker irrespective of the life of the firm.

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Many legislators, employers, and others were concerned over the ramification of subjecting employers to a statutory liability that required insurance protection as the only feasible method of meeting this liability. Would individual employers or categories of employers be forced to quit business if insurance carriers refused them coverage? What if the premium rates were so excessive as to impose serious financial burden on many employers and possibly adversely affect the State economy? Was it equitable to allow private insurance carriers, in business to produce a profit, to make large profits when employers had no options because the liability was imposed through statute? These concerns were based on extensive experience and data developed under employer liability statutes. For example, in New York in 1908, it was found that only 37 cents of every premium dollar went for the payment of benefits to the injured worker; in Iowa, only 28 cents went for the payment of benefits.1

The early laws creating workers' compensation responded to the unique problems associated with providing insurance coverage by establishing State workers' compensation insurance Funds. It was intended that State Funds would provide a guaranteed source of insurance coverage and operate on a non--profit basis. These State Funds would protect employers from the uncertainties inherent in the underwriting decisions of private insurers based on the profit motive, as well as guarantee that workers' compensation insurance would be provided to employers at the lowest possible cost. Recognition of the need to establish a workers' compensation system brought with it a responsibility to provide an effective, efficient, and equitable delivery system. In recognizing this responsibility, 18 States established State Funds in their workers' compensation laws between 1911 and 1925.2

1. Herman and Anne Somers, Workmen's Compensation (New York: Wylie and Sons, 1954), 24.

2. David McCahan, State Insurance in the United States (Philadelphia: U. of Pennsylvania Press, 1929), 6-7.

Workers' Compensation Systems

The establishment of State Funds meant that employers finally had an alternative for insuring their workers compensation liability. Today, where an employer is required or elects to provide workers' compensation insurance, he may insure through a private carrier or through a State Fund if one is available in his State. In those States that permit self-insurance the employer may assume the liability for providing the statutorily determined benefits himself.

Not all of these options are available in all States or Territories. Guam and Texas require that an employer insure his liability with a private carrier. Eight jurisdictions, counting Puerto Rico and the Virgin Islands, have an exclusive State Fund and require all employers to insure with it, except that three also permit self-insurance. Thirty-two jurisdictions allow selfinsurance coverage or coverage through private carriers. Twelve States offer all three options, viz., self-insurance, insurance through a competitive State Fund, or insurance through private carriers. (In Canada, all Provinces have boards or commissions with complete jurisdictional and administrative powers or matters relating to workers' compensation. These boards are similar in concept and organization to exclusive Funds.) Exhibit 1 identifies States and Territories by type of coverage permitted. Exhibit 2 denotes those States that have competitive and exclusive Funds.

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