What Constitutes a Shock Loss?

In the workers’ compensation arena, shock losses often present a contentious, agonizing dilemma for an insurance company, the insurance agent and ultimately, the policyholder.  The problem rests not with whether or not the loss is paid but the consequences afterward.  Let me explain.

What is a shock loss?


The strict definition of a “shock loss” is one which is so severe that it exerts a material effect on the underwriting results of the insurance company.   In practice, what’s important is not just that the loss is severe, it’s also because the loss falls so far out of the norm that no one could anticipate it happening and take steps to prevent it.  When a true shock loss does occur, the policyholder does not pay a penalty for its occurrence in the form of higher premiums later.   A fierce debate can ensue over whether or not a particular loss qualifies as a shock loss.

Consider three examples.  In the first case, a dental hygienist accidentally trips while treating a patient and falls and fractures her hip.   In another case, while a pest control worker is spraying for bugs in a home, a small child runs out and kicks him in the shin and breaks the skin. The worker is a diabetic and a hemophiliac.  The wound is severe enough that an infection spreads quickly and ultimately results in a leg amputation.  In the last case, a nursery worker operating a wood chipper removes a foot guard to facilitate faster chipping.  He slips and his foot is caught in the chipper resulting in its loss.

All three cases are severe and tragic and all three claims are paid.  Only the first two are true shock losses.   In these cases, the circumstances surrounding them are highly unusual and almost impossible to anticipate.  The last case, however, is not a shock loss and the policyholder will see an increase in premium to pay for it.  The worker took a chance and paid a heavy price for his mistake.  His employer should have anticipated the possibility for such a loss. 

The premiums a business pays for its workers’ compensation coverage are calculated based on the likelihood of a wide of range of scenarios and the steps they take to mitigate them.   There are times when a severe loss occurs that no one could predict.    The fact is, the standard for a true shock loss is not an easy one to meet, nor should it be.

*Patriot Underwriters, Inc. conducts insurance business in all of its licensed states as PUI INSURANCE AGENCY

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Patriot Underwriters, Inc. (PUI) is a national program administrator. We develop innovative solutions that help our clients contain costs and minimize risk through customized insurance products and services.

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