In light of the recent decision by the California Supreme Court regarding the appeal of Proposition 22 (Prop 22), this article delves into the existing requirements for occupational accident insurance for transportation network companies (TNCs) and delivery network companies (DNCs) and compares them to workers’ compensation insurance. We also examine the potential impacts of implementing comprehensive workers' compensation coverage and provide strategic considerations for these companies to proactively prepare for possible outcomes.

Background on California’s Prop 22 and occupational accident coverage for app-based drivers

Workers’ compensation insurance is established to protect employees by providing medical and indemnity benefits in the event of work-related injuries or illnesses, without employees necessitating legal action against the employer to prove negligence or wrongdoing. Independent contractors, being self-employed, typically fall outside the workers’ compensation system. There has been ongoing debate at the state level regarding the classification of app-based drivers, specifically whether they should be considered employees or independent contractors.

Assembly Bill 5 (AB 5) was enacted in 2019 in California and became effective on January 1, 2020, to address issues related to worker classification. AB 5 mandates the use of the "ABC test"¹ to ascertain whether workers are classified as employees or independent contractors for the purposes of the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission wage orders.

Prop 22, a ballot measure passed by California voters in November 2020, established app-based transportation (rideshare) and delivery drivers as independent contractors. It also introduced specific labor and wage policies tailored to app-based drivers and companies.² Among other provisions, Prop 22 requires TNCs and DNCs to carry, provide, or make available to their app-based drivers:

• Occupational accidental medical expense coverage
• Occupational disability income/lost income coverage
• Accidental death coverage for the benefit of a driver’s spouse and dependents in an amount sufficient to cover burial costs³

Since its passage, Prop 22 has faced a continuous series of legal challenges. In May 2024, the California Supreme Court heard oral arguments from both proponents and opponents of the measure. The ruling was issued on July 25, 2024 to upheld the independent contractor status of gig workers. It stated that Prop 22 “does not itself restrict the Legislature’s authority to enact workers’ compensation legislation.” ⁴

Difference between occupational accident insurance and workers’ compensation insurance

Occupational accident insurance offers coverage that is comparable to workers' compensation, though there are notable differences. Please refer to the table in Figure 1 for a detailed comparison.

Due to its greater flexibility in coverage compared to workers' compensation, occupational accident insurance is generally less costly because of more limited benefits. This type of insurance is commonly utilized by trucking owner-operators, as well as in the courier and transportation sectors.

Current workers’ compensations benefits in California

Depending on the circumstances of the injury or illness, injured workers in California are entitled to specific benefits as structured by workers’ compensation insurance.¹² There are five basic types of workers’ compensation benefits that include medical care, temporary disability benefits, permanent disability benefits, supplemental job displacement benefits, and death benefits. Injured workers may be entitled to one or more of these benefits.

• Medical care: Injured workers are entitled to receive all medical treatment reasonably required to cure or relieve the effects of a work-related injury or illness. There is no cap on workers’ compensation medical benefits in terms of medical expenses in California. The medical expenses for most severe workers’ compensation claims in California have cost in excess of $1 million due to catastrophic injuries.
• Temporary disability: This benefit helps partially replace wages lost as a result of the injury or illness. The benefits are designed to replace two-thirds of lost wages, up to the current maximum prescribed by law. For dates of injury on or after January 1, 2024, the maximum amount is $1,619.15 per week.¹³
• Permanent disability: The amount the employee receives is based on a formula that considers the extent of the physical injury or disfigurement, the age of the employee when injured, the employee’s occupation, the date of injury, an apportionment, and an adjustment factor that takes into account the injured worker’s loss of future earning capacity. The minimum and maximum benefit amounts are set by law.
• Supplemental job displacement benefit: This benefit is a nontransferable voucher (redeemable for up to $6,000) for education-related retraining and/or skill enhancement.
• Death benefits: Reasonable burial expenses are paid up to the current maximum set by law. Additionally, qualified surviving dependents may receive support payments for a period of time. These benefit payments are usually paid at the same weekly rate as the maximum temporary disability benefit. The total death benefit amount of support payments depends on the number of dependents and whether they are partially or totally dependent.

What if full-scale workers’ compensation insurance is mandated for California’s app-based drivers?

The above sections examined the difference in benefits to workers in case of occupational accident insurance and workers’ compensation insurance, and how these two insurance coverages are structured differently. Let us now examine the important considerations and impacts of a scenario in which full-scale workers' compensation insurance is mandated for TNC and DNC drivers.

• The risk profile and associated costs of the existing company-wide workers' compensation policies for TNCs and DNCs would undergo significant changes. This shift is due to the substantial differences in risk between the already covered office workers in tech corporate environments and the would-be covered gig workers driving for TNCs and DNCs. The table in Figure 3 shows the pure premium rate (i.e., loss cost)¹⁴ effective since September 1, 2023, per the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) classification.

• Considering their extensive workforces, TNCs and DNCs should thoroughly explore the entire spectrum of insurance program options. These options include purchasing coverage with deductibles, retrospective rating plans, self-insurance with excess policies, and captive insurance. Key factors to consider include collateral requirements, the financial ratings of admitted insurers, and the choice between bundling or unbundling coverages, among other risk management considerations.
• Risk management is a critical component in controlling insurance costs and will become even more significant when dealing with extensive workers' compensation programs. It is advisable to consider partnering with a claims third-party administrator (TPA) that possesses the scale and expertise to manage these claims effectively. Additionally, proactively promoting safety and providing training for gig workers are essential investments that are likely to yield substantial long-term benefits.
• Experience rating will play a crucial role in premium calculation. However, given that workers' compensation was not previously mandated for gig workers, there is an absence of relevant historical workers' compensation claims data. It is worth considering whether the existing occupational accident and commercial auto loss histories could serve as indicators of workers' compensation risks. Additionally, determining the appropriate conversion metrics between trips or miles and payroll exposure measures will be essential. However, data from other lines of business is currently outside the normal workers’ compensation rating methodology.
• Opting for deductible plans, retrospective rating, or self-insurance may prove more cost-effective than purchasing comprehensive coverage from insurers. However, this approach entails that TNCs and DNCs retain a portion of the risk internally, which would be recorded as a liability on the balance sheet. It is advisable to conduct quarterly actuarial studies to monitor loss experience and provide the most current actuarial estimates of unpaid loss and loss adjustment expense liabilities for accurate financial reporting.
• Approval is needed from the Office of Self-Insurance Plans (OSIP)¹⁵ for companies wanting to self-insure their workers’ compensation liabilities in California. There are requirements including:
• Regulatory financial requirements such as three calendar years in legally authorized business, certified and independently audited financial statements, and acceptable credit rating.
• Security deposit in the form of collateral to be arranged with the Self-Insurers Security Fund.
• Using a licensed TPA to adjust claims in California for the first three years of self-insurance, and then self-administration is permitted afterwards.
• Annual reporting requirements such as an actuarial study, annual report, and audited financial statements.
• The payroll amount utilized in calculating workers' compensation premium is subject to a premium audit after policy expiration to determine the policy’s final payroll and premium. The annual payroll would be influenced by wages, number of drivers, and the volume and length of trips or deliveries conducted in addition to the already covered corporate salaries. These additional variables could cause the final payroll, and therefore premium, to vary significantly from the initial payroll and premium estimates. Implementing a monthly payroll reporting option could be advantageous in this context, as it may help manage fluctuations in cash flow for TNCs and DNCs, by revising the payroll and premium adjustments more frequently during the term of policy.

There is much to address should the "what-if" scenario materialize. Stay ahead by consulting with your actuaries, who can help assess some of the potential impact on TNCs and DNCs and offer valuable insights for selecting the most suitable workers' compensation insurance program.

¹ The ABC test is used to determine whether an individual is an employee or independent contractor in California beginning January 1, 2020. An individual providing labor or services for compensation is considered an employee and not an independent contractor, unless the hiring entity demonstrates that all three conditions of the ABC test are satisfied:

   A.  The individual is free from the control and direction of the hiring organization in connection with the performance of the work, both under the contract for the performance of the work and in fact.
   B.  The individual performs work that is outside the usual course of the hiring entity’s business.
   C.  The individual is routinely doing work in an independently established trade, occupation, or business that is of the same type as the work being performed.

See Employment Status (ca.gov) at https://edd.ca.gov/en/payroll_taxes/employment-status/.

² The full text of California Proposition 22, App-Based Drivers as Contractors and Labor Policies Initiative (2020) on Ballotpedia is available at https://ballotpedia.org/California_Proposition_22,_App-Based_Drivers_as_Contractors_and_Labor_Policies_Initiative_(2020).

³ Ricardo Lara, California Insurance Commissioner (February 3, 2021). Notice: Implementation of Insurance Provisions of Proposition 22. Retrieved July 24, 2024, from https://www.insurance.ca.gov/0250-insurers/0300-insurers/0200-bulletins/bulletin-notices-commiss-opinion/upload/Notice-Implementation-of-Insurance-Provisions-of-Proposition-22.pdf.

⁴ https://www.courts.ca.gov/opinions/documents/S279622.pdf.

⁵ Admitted insurance companies are regulated by the state they operate in and follow state regulations. The state guarantees the admitted company’s claims through the state guaranty fund if the insurance company becomes insolvent.

⁶ Uber. Get peace of mind while you drive. Retrieved July 24, 2024, from https://www.uber.com/us/en/drive/insurance/injury-protection/?city=olympia&uclick_id=5f5e6c7b-0f90-489c-b4e3-088788f3eea5.

⁷ Uber. Explanation of Coverage. Retrieved July 24, 2024, from https://uber.app.box.com/s/smq2dbxp12d6bki6coe2qwn5k8mkbzt9?uclick_id=abcc7f04-478d-48d3-93ab-8a0200749f7b.

⁸ Lyft. California occupational accident insurance. Retrieved July 24, 2024, from https://help.lyft.com/hc/en-us/all/articles/1500000281482-California-occupational-accident-insurance.

⁹ DoorDash. Occupational Accident Policy FAQ – US DASHERS ONLY. Retrieved July 24, 2024, from https://help.doordash.com/dashers/s/article/Occupational-Accident-Policy-FAQ?language=en_US.

¹⁰ Grubhub. What is occupational accident Insurance? Retrieved July 24, 2024, from https://driver-support.grubhub.com/hc/en-us/articles/360058272311-What-is-occupational-accident-Insurance.

¹¹ Instacart. Delivering for California Shoppers: New Trainings & Protections. Retrieved July 24, 2024, from https://www.instacart.com/company/shopper-community/delivering-for-california-shoppers-new-trainings-protections/.

¹² California Department of Insurance (October 4, 2023). Workers Compensation. Retrieved July 24, 2024, from https://www.insurance.ca.gov/01-consumers/105-type/95-guides/09-comm/WorkersCompensation.cfm.

¹³ California Department of Industrial Relations (November 27, 2023). DWC Announces Temporary Total Disability Rates for 2024. Retrieved July 24, 2024, from https://www.dir.ca.gov/DIRNews/2023/2023-84.html.

¹⁴ WCIRB California (August 23, 2016). Understanding the Importance of Advisory Pure Premium Rates. Retrieved July 24, 2024, from https://www.wcirb.com/research-and-education/learning-articles/understanding-importance-advisory-pure-premium-rates.

¹⁵ California Department of Industrial Relations. Overview of Self-Insurance. Retrieved July 24, 2024, from https://www.dir.ca.gov/osip/apprequirements.htm.