An acquaintance of mine recently relayed an incident that involved his newly licensed teenager "totaling" the family vehicle. Fortunately, no one was injured. The tragedy of this situation was that the vehicle had just been removed from the family’s auto insurance policy. Insuring a vehicle for a newly licensed 16-year-old may seem like a no-brainer to most people, but if you are part of a family financially impacted by a recent company layoff, as my acquaintance is, you may be faced with some tough decisions in order to reduce costs.

The financial crisis is driving many employers to cut back to the bare necessities. Employers looking for ways to reduce their expenditures may be tempted to overlook the importance of workers’ compensation insurance when defining what the "bare necessities" of their operations entail. But foregoing workers’ compensation coverage could prove to be catastrophic for a company that is ill-equipped to respond to their employees’ work-related injuries.

Before taking the potentially dangerous step of eliminating workers’ compensation coverage, businesses should consider some safer ways to cut costs:

Verify employees are properly classified.
Workers’ compensation rates are based on the level of risk associated with job positions. Misclassification of employees could result in a company paying too much for coverage.

Determine if payroll estimates are accurate.
Has there been a significant reduction in workforce or operations not currently reflected in payroll estimates? Can any eligible payroll be excluded from the premium calculations? Texas employers may have the option to include or exclude owners and executive officers from the workers’ compensation policy depending on the legal structure of the business. Also, depending on the insurance carrier’s guidelines and the state’s definition of "employee," contract labor may be eligible for exclusion if the policyholder has obtained and verified certificates of insurance for insured contractors.

Review the policy to determine if any other policy changes can be made to reduce premium.
The policyholder may be able to reduce their workers’ compensation costs by reducing policy limits or by removing coverages that were added for an additional fee and are no longer necessary such as Waivers of Subrogation or USL&H coverages.

Look into adding or adjusting the deductible.
Certain employers can reduce their premiums if they are willing to reimburse the insurance carrier for a portion of the claims costs. Texas employers with an annual premium of $5,000 or more are eligible for a deductible plan. Typically, the higher the deductible, the less premium the company will pay.

Set up a risk management or loss prevention program.
Insurance carriers look favorably upon policyholders with successful loss prevention programs in place and will often offer lower rates. An improvement in the policyholder’s losses helps control claims costs by reducing or eliminating severity of work-related accidents. In addition, the policyholder may be eligible for schedule rating or premium credits and other incentive programs available from the insurance carrier.

The decision to eliminate critical insurance coverages may help reduce expenses, but it can leave a company exposed to unlimited liability and possible punitive damages that negate any savings initially realized. As companies tighten their belts, they should look for ways to adjust spending that will not leave them more vulnerable in an already financially volatile time.