As many small business owners are learning the hard way, insurance trusts may not offer enough savings to offset the risks. This discovery comes on the heels of $600 million tab being issued to small business owners who invested in insurance trusts managed by Compensation Risk Managers (CRM). As it turns out, CRM may not be worthy of the trust placed in them by business owners.
What is an insurance trust?
To better understand what is going on with CRM and small business owners, you must first understand the nature of an insurance trust. Employers can pay tens of thousands of dollars each year to cover workers compensation premiums. This is necessary to ensure workers are provided adequate coverage for lost wages and medical expenses should they suffer an injury due to an accident in the workplace. To save money and still provide this coverage, some small business owners opt to pay premiums which are invested and managed by a trust. If an injured worker has a claim, the funds are paid out of the trust to cover expenses.
What went wrong?
The problem in the case of CRM is when companies pay into the trust that do not have a great safety record and the number of claims filed rise. In a recent article appearing on crainsnewyork.com, it appears the management of the trust is also in question. In fact, the state has named CRM in a lawsuit. As stated in the article, “In a lawsuit, the state alleged that CRM executives enticed new business to maximize their management fees even at the expense of the trusts they were hired to safeguard, and maintained shadowy corporate structures that went unnoticed by the state workers’ compensation board charged with regulating a booming industry.”
Who pays the price?
Although the state names CRM in the lawsuit, the business owners who invested in the trust will pay the biggest price. The state is holding the businesses responsible and as such subject to penalties and even lawsuits themselves if they fail to pay the deficit of $600 million resulting from the now insolvent trusts.