Running a business always requires keeping on top of your responsibilities, but that challenge grows when running a business with multiple locations in different states. While some federal laws will govern your business no matter where you’re based, every state you have a location in may have unique laws or restrictions in certain areas, including business insurance coverage.
When buying workers’ compensation insurance to cover your employees, you may choose to purchase your policy or policies from private insurance companies. However, depending on the state, you may have the option to purchase coverage from a state fund—and in four U.S. states, the state fund is your only option.
There are two types of state funds for workers’ compensation insurance: monopolistic state funds and competitive state funds. Knowing the common characteristics, advantages, and disadvantages of these two types of funds can make it easier to get the coverage you need for your business.
Monopolistic vs. Competitive Funds
Competitive state funds are available in more than 20 states. Under this model, the state-funded entity competes with private insurance companies that sell businesses workers’ compensation policies. This allows business owners to comparison shop between different insurers and finds one that works for the size and model of their business.
State governments are invested in ensuring all businesses can find coverage. In many states, the competitive state fund serves as the insurer of last resort or assigned risk plan for businesses that can’t get coverage through another source.
While monopolistic state funds used to be more common, and West Virginia and Nevada recently ended their state monopoly, the policy still exists in four states. If you’re opening a business located in North Dakota, Ohio, Washington, or Wyoming, you’ll want to read up on their state fund policies early in the process.
Monopolistic states require employers to purchase their workers’ compensation insurance directly from a government-sanctioned fund. Private insurers are prohibited from this sector of the market.
Even if you don’t have a business location in a monopolistic state, you may need to purchase a policy through a monopolistic state fund if you employ workers from those states. You’ll have to secure coverage for the rest of your employees with a separate policy.
Why Do Monopolistic State Funds Exist?
While most states have abandoned this policy, four states—along with the territories of Puerto Rico and the U.S. Virgin Islands—show no intention of opening their workers’ comp insurance markers.
Business owners have often advocated for these policies. Opponents of monopolistic state funds typically have the following concerns:
- The inability to shop for the best rates
- Inadequate customer service from the state fund
- The lack of coverage for out-of-state employees
- The inconvenience of working with private insurance companies for other forms of small business insurance but having to work with the state fund for workers’ comp
However, these monopolistic state funds do have some advantages. In competitive funds, it’s common for businesses to choose private insurers, and the state-funded option becomes an insurer of last resort. With state-funded workers’ compensation in a monopolistic state, all businesses are on an equal footing insurance-wise. The state can’t turn a business away as long as it follows pertinent state laws.
What Does This Mean For Multistate Business Owners?
If your business has any dealings with a state with a monopolistic state fund, you may need to purchase a separate policy. If you have an employee who lives in that state, you may need to purchase a policy to ensure they and you are covered in the event of a workplace injury or other workers’ compensation claim.
Suppose your primary location is in the state with a monopolistic fund. In that case, you can start by purchasing a primary policy from the state fund and then purchase coverage from a private insurer outside of the state. But if you’re coming into a new state, don’t assume you’re fully covered—research your state’s policies and make sure no unexpected liabilities come into play while you’re expanding your business.
Make Monopolistic State Funds Work for You
While monopolistic state funds can complicate your business’s insurance needs, there are advantages to dealing with them. Unlike private insurers, you won’t have to win them over to secure coverage. These four states guarantee insurance through the state fund for all complying businesses, and that’s one less wrinkle to deal with as your business grows.