Can Purchasing Disability Insurance Lower Your Workers Comp Claim Costs?

I'm always a bit skeptical when companies report the results of self-serving surveys. AFLAC, you know, the duck-spokesman company, published a survey indicating that when companies offer disability insurance coverage their workers compensation claims go down by 42%.  The specifics in the survey revealed:

• 42% of all companies providing voluntary accident and disability insurance report declines in their workers' comp claims—some of up to 50%.

• Roughly 17% of employers offering voluntary accident insurance and 15% of those offering disability saw claims declines of 25% to 49%. The declines were most frequent for large employers, 55% of whom noted a corresponding decline in workers' compensation claims. 34% of small- and medium-sized companies reported the same results.

Is this really true?  Can simply purchasing disability insurance really lower the number of workers compensation claims?  Forgive me for immediately thinking that this sounds a bit like the marketing strategy of snake oil salesman.  “By one bottle of this magic elixir and it cures everything from rheumatism to scarlet fever.”

I can think of 3 reasons why the equation of “purchasing disability insurance = lower workers comp costs” may not be a valid equation.  

1. Lower claims may NOT amount to lower costs

In the exposure mod rating game, there is no question that lowering the number of claims can reduce the E-Mod and result in lower premiums.  However, just because the claims are lower does not automatically mean that the costs are lower.

For example, if the claims reduced by the purchase of disability insurance were small medical-only claims or small lost-time claims, this would reduce the actual number of claims but it may not have much of an effect on the E-Mod of a large company that also has more serious injuries.  Sure, the number of claims may have went down, but if Acme Corp.'s comp costs stayed the same because of the presence of larger or more serious claims, does that really amount to a substantive benefit?

2. Disability insurance cost vs. realized savings

What this survey doesn't tell us is how much companies had to spend on disability insurance coverage to realize the savings in workers comp costs. In other words, did Acme Company have to spend an additional $100,000 for the disability insurance coverage in order to save $40,000 in workers comp costs?  If so, that doesn't seem like much of a bargain - - spending $100,000 to save $40,000 (unless we use U.S. Federal Government Math where such an equation is touted as a benefit!)

The survey didn't give us this information probably because the costs to purchase disability insurance coverage would be different for every company surveyed, as would the savings (if any) from the alleged reduction in workers compensation claims.  Nevertheless, I don't see how we can determine the validity of the “purchasing disability insurance = lower workers comp costs” equation unless we know the ratio of dollars spent on disability insurance vs. the dollars saved in workers comp costs.

3. Why would injured workers leave money on the table?

Let's assume that Joe Sixpack is injured on the job.  If his employer, Acme Company, has both disability insurance and workers comp coverage, Joe now has a choice of how he seeks payment for medical care and payment of lost wages.  The implied argument from the survey is that if Mr. Sixpack has the choice between the two, he will presumable choose disability insurance over workers comp, thereby reducing the number of comp claims for Acme Company.

But wait…does disability insurance pay for permanent partial disability benefits?  Does disability insurance pay for permanent total disability?  Does disability insurance pay benefits longer than the term specified in the policy?

Obviously, the answer to these questions could be varied.  However, in most states, workers compensation coverage would pay an injured worker a lot more money than the type of disability coverage referenced in the survey.  I'm not attempting to argue that injured workers SHOULD choose workers comp over disability insurance - - but I am pointing out that claimants will typically choose whichever type of benefit that will pay him the most money.  If that turns out to be workers comp, then it is doubtful that claimants would be so magnanimous as to choose to file a claim through disability insurance if a workers comp claim would pay provide him with more benefits.

Finally, the state where Joe Sixpack may allow him to file a comp claim AFTER he gets benefits through his disability insurance coverage.  At this point, the presence of the disability insurance wouldn't even amount to a reduction in claims if Mr. Sixpack pursues both claims.

Bottom line - - if you are considering the purchase of disability insurance coverage because it may decrease your workers comp costs, make sure the math works for your situation.  Ducks are cute but I don't trust their math skills.

About the Author

J. BRADLEY YOUNG is a partner with the St. Louis, Missouri law firm of Harris, Dowell, Fisher & Harris, where he is the manager of the Worker's Compensation Defense Group and represents self-insured companies and insurance carriers in the defense of workers' compensation claims in both Missouri and Illinois.  Brad is a frequent Conference Speaker and can be regularly heard on KMOX radio in St. Louis discussing a wide variety of legal topics.  You can email Brad at byoung@hdfh.com .

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