I have posted on this subject previously.  As it is a very popular question that we receive, I will cover the subject again.  The steps to finding out are: 

1. Obtaining online access or Workers Compensation loss runs
2. Understanding which claims will affect your NCCI or State Rating Bureau Experience Mod (E-Mod/X-Mod) 
3. Understanding which claims will be examined when an insurance company provides a quote   
4. Understanding how your claims affect your insurance premiums
5. Examining and understanding what the three factors of a reserve are and which ones can be analyzed
6. Understanding the difference between a Workers Comp claim review, reserve review, and premium audit

I will cover these in groups of three over the next two posts.  Quite a few of these topics have been covered in prior posts. Feel free to use the Search box to find my prior posts on this topic.  The steps for self-insureds/large deductibles are different.  We will cover those in later posts. 

I was reading an article earlier this week in The Workers Comp Forum concerning an employer in South Carolina that disputed their Workers Comp insurance premiums. The insurance carrier, Companion Insurance, cancelled a second policy as the employer did not pay the insurance premium demanded on an audit billing for the first policy.

The employer sued Companion Insurance for breach of contract as they had paid all undisputed premium. The employer lost the case on a summary judgment but the Court of Appeals overturned the lower court. The reason the employer brought suit was that one of their employees was seriously injured in an accident and was denied benefits/coverage.

The employer disputed the premium audit increase and forwarded its payroll information to dispute the audit's accuracy. The court found such that a bona-fide dispute existed because the employer disputed the premium by refusing to pay, submitted its payroll data, and informed an insurance agent that it believed it had paid the amount owed on the first policy. The court stated it was "at a loss as to what more [the carrier] could reasonably expect of [the employer] when attempting to dispute the premium charge."

Check out my last post as this is all somewhat related. How is it all related? The employer prevailed as they disputed the audit timely. That is why I have posted very often to not let a premium audit statement or billing just sit in the inbox. The employer prevailed as they disputed the audit timely and forwarded the proper information to the carrier and agent. We will have to see how this all turns out as the case now goes back to the lower level court. The case is Triple H Debris Removal, Inc. v. Companion Property and Casualty Insurance Co., No. 08-1137 (8th Cir. 03/30/09)

Next Up - Question From A Blog Reader - How Can I Tell If The Workers Compensation Reserves On A File Are Correct?

If your company feels the insurance carrier has not billed you correctly - especially at the time of premium audit, then by all means do not wait to send in a premium dispute letter.  Your insurance policy should have an address for premium disputes.  Each state has its own set of premium dispute rules that may differ somewhat between each state.  

The three main concerns that we have seen with premium disputes are: 

• The employer does not dispute the billing timely.  All states allow the insurance carrier to cancel an existing Workers Comp policy if a prior policy billing has not been paid or disputed timely.  If you are going to seek the services of a Workers Compensation consultant, make sure you do it quickly after receiving a billing.  
• The employer ignores the due date of the premium audit billing. This goes along with the first bullet point.  In this economy insurance carriers are not very flexible if a company does not pay or contact them by the bill due date. 
• The employer uses the dispute letter as a way to stall the bill payment.  This may ruin the business relationship between your agent, the carrier and your company.  Be very careful what you include in the dispute letter.  It is very difficult to add more disputes to the original dispute letter.  

If your company is unable to pay the full amount of the undisputed part of the premium audit bill, contact the insurance carrier immediately upon receipt.  Some carriers will accept payments over a few months time.  The key here is contacting the Workers Comp carrier before the due date.   

Next Up - A Supreme Court Case That Covers Premium Disputes

This is one of the more confusing areas of Workers Compensation.  The terms are different on almost every insurance carrier's loss runs.   The term Total Incurred is the sum of the funds Spent added to the Reserves.   In other words:  Total Incurred = Spent + Reserves. The easiest way to locate the Total Incurred is to find the largest of the reserving amounts on each claim. The Total Incurred will always be the largest number. 

The reason that the Total Incurred figure is so important is that is the amount used by insurance carriers to report your insurance loss history to NCCI or your State Rating Bureau.  The amount Spent is not what is used to calculate your E-Mod. It is the Total Incurred  value.   

For instance, if you have a Workers Comp claim that has only $300 spent but there are $13,000 in reserves, then the claim is valued at $13,300 not $300.  We just received a call today from a company in California that had this very question.  The Workers Comp file was left open for three years and they paid premiums off the $13,300 not the $300.  A few claims such as this can wreck a Workers Comp program.

This is a very important point when you look over your company's Workers Comp loss runs.  It is a great idea to make sure the claims adjuster has provided you with an updated status on the Work Comp claim.  Workers Comp adjusters are very overloaded with claims, especially with the downsizing occurring due to the recession.   They may not have time to look at reducing reserves. That is the lowest priority in an adjuster's busy day.  The adjuster has about thirteen main tasks and reducing reserves is #13.  It is not the individual adjuster's fault.  It is the way Workers Comp claims systems have been operating for many years. 

If you feel that your files are over-reserved, it may be time to call in a claims professional or a Workers Comp consultant to keep your Workers Compensation premiums in check. We always recommend not calling an adjuster and saying that all your Workers Comp reserves are too high. Emailing an adjuster with specific questions is the best way to follow your claims.                       

  

A few California Workers Compensation Insurance carriers have filed lower rates than what is recommended by California's Workers' Compensation Insurance Rating Bureau (WCIRB). No matter what the decision California Insurance Commissioner Steve Poizner issues regarding a mid-year rate increase, several workers' comp carriers have ignored their recommended heavy increases. The new recommended number for the mid-year increases is 23.7% recommended by the Workers' Compensation Insurance Rating Bureau.

Two insurance carriers increased their rates by only 10%. Zenith increased their rates by only 4%. Poizner cut 11 points off the Bureau's after factoring out the State Fund's results which is responsible for much of the increase in its current recommendation. As I have said in prior posts, July 1 will be a very interesting time for the Workers Comp market in California. Poizner has performed well in doing what is right without political influence.

I have read quite a few articles that questioned the very small increase by Zenith. Zenith has always had disciplined underwriting. The articles also mentioned that Zenith had poor financial results. Zenith wrote 4.26% of the California market, which was down from the 4.38% market share in 2007. The hallmark for how insurance companies are performing is A.M. Best. Zenith's A rating was recently reaffirmed by A.M. Best. This means that Zenith knows what they are doing. An A Rated insurance carrier in this market is very solid.

I think the articles missed one important point. The publicity around cutting their rate increases well below the market is great marketing for Zenith. They will also place themselves as an attractive carrier to place business with by agents. Zenith has a very good group of underwriters, so this is not the proverbial toss at the dartboard.

Why is this so important? There are quite a few states with this same type of situation. South Carolina, for instance, had skyrocketing increases recommended for years and carriers undercut the recommended increases. West Virginia just moved from a monopolistic system to an open market. The State Fund may not be a monopolistic carrier, but it was close in the late 1990's. California is such a large amount of the Workers Comp market that any major changes there affects the national statistics on Workers Comp more than any other state.

I had posted on this subject back on October 16, 2008. That post is listed in the archived posts further down on the right side of this blog. I posted on the the most used Standard Exception Code (8810) earlier this week, I thought it would be good to cover the subject again.

We will use NCCI Standard Exception Codes - classifications that are common to many businesses and that are generally not allowed to be designated as the governing classification. The governing classification is the class code that produces the most payroll in a business. The Standard Exception Codes are:

8810 - Clerical
8742 - Salespersons or Collectors - Outside
8871 - Clerical Telecommuter Employees
7380 - Drivers, Chauffeurs, Messengers, and Their Helpers NOC—Commercial
8748 - Automobile Salespersons

Please note that each of these codes has many subheadings. The Classification Code 8810 has pages and pages of explanation on the code. Is there an overall guide to what jobs fit all of these codes? The NCCI has the Scopes Manual which is supposed to be used by all insurance personnel that rate or audit companies' Workers Comp payrolls and premiums.

One caveat to the Standard Exception Codes is that premium auditors are trained in and are very adept at analyzing the above Class Codes. We often see in our audits for employers where the auditor has changed the Class Codes from the Standard Exception Codes to other codes.

This is the most popular question that we receive about the NCCI Classification Code system. Classification Code 8810 is the Administrative/Clerical code that is used in all 50 states, including the monopolistic states. It is usually the least expensive code as employees that fall under the Class Code are considered very low risks for a Workers Compensation accident.

The 8810 Class code is what is referred to as a Standard Exception. I will cover Standard Exceptions in the next post. NCCI class code 8810 is an all encompassing code. There are very many job titles that would fall under this code. Class code 8810 is not just for administrative assistants.

We have performed quite a few workers comp audits for employers where a large number of workers were included under the 8810 code that more than likely could have been classified under another code. The insurance companies' Workers Comp Premium Auditors have become very adept at reclassifying employees out of the 8810 Class Code into other more expensive class codes.

I had read quite a few of the reports coming out of the NCCI Annual Symposium. NCCI stands for National Council on Compensation Insurance. The company is based in Boca Raton, FL. It is not a governmental entity. I also watched the videos that NCCI posted from their annual symposium. The reports are not usually exciting reading. The possible modification of the NCCI Classification Codes may send a shockwave through the Workers Compensation industry.

Even though some states may have their own rating bureaus, the systems are all very similar to the Class Code based rating system from NCCI.

One of the reports indicated that the NCCI may use "type of injury" coding in their ratemaking formulas. I am not sure how this will change the Workers Compensation landscape. There is a already a code for type of claim that is a very benign variable as it changes nothing on the ratings.

All insurers have a fields or group of fields they input when setting up a Workers Comp claim. I am only surmising that the NCCI will pick up that data as part of their Workers Compensation Experience Rating.

I am not 100% sure on how this will affect the E-Mods produced by NCCI. I am also not sure if the type of injury will feed directly into the formulas or will just be a tracking field to get an overall "outside the numbers" sense of how an employer is doing with their safety and claims program.

Next Up - NCCI Class Code 8810

Question from one of the blog readers - We use many subcontractors. Can our company be held responsible for Workers Compensation coverage if one of their employees is injured on the job?

The Ladder of Insurance is a term that I coined and copyrighted a few years ago. The Ladder is how a main contractor can be responsible for a Workers Comp injury from a subcontractor with no insurance. In fact, the injured employee may be a 5th or 6th level subcontractor that you may never know even existed until they are injured on the job and wish to file a Workers Compensation claim. We have seen the main contractor have to pay a death benefits claim. The complicating factor in all of this is that the Workers Comp insurance carrier may deny the claim in some cases as this employee was not even on their books.

There was a recent Supreme Court case ruling in South Carolina where the main contractor was held liable as they had a high level of control over one of the subcontractor's employees. The employee was considered to be a statutory employee of the main contractor. This was not a wholly terrible decision as the employee of the subcontractor was trying to bring suit under an unlimited liability policy. At least the Workers Comp policy provided for some limits to the lawsuit.

The courts have almost always started with the primary contractor and moved up the Ladder of Insurance by moving up the chain of contractor and subcontractor until a valid Workers Comp policy was in place. If the employee was a sub-sub-sub-sub-sub-sub contractor of the main contractor and no company except the main contractor has a Workers Comp policy in place, then the main contractor will be held responsible. There are hundreds upon hundreds of court decisions that use this logic.

How do main contractors protect themselves from such a situation? One solution is to always require certificates of insurance from all subcontractors. If this is not feasible, then it may be best to actually build the cost of the insurance into the subcontract and then provide the insurance coverage.

There are states such as California where you can access the Contractor's Licenses to see if they truly have Workers Comp coverage. A phone call to the insurance carrier is also a good idea if you receive a certificate of insurance. Checking with the subcontractor's insurance carrier is always a good idea.

This is a question that I received a week ago. It is one of the top twenty questions that we receive on Workers Comp.

I recommend at least monthly if the report is on paper. As I have said many times before in the blog, one of the keys to controlling Workers Comp Costs is to have online access. If your company has a TPA process your claims or you have regular commercial insurance, you should be able to see your Workers Compensation files online. Monitoring the increases, closings, and decreases in your Workers Comp claim reserves will keep your company from having to wait for the monthly loss runs.

Usually, by the time you receive the loss run, quite a few days can pass. The delays can be very costly in certain situations. Check with your Workers Comp carrier to see if they provide online access to your claim files. If they do not, you should register your concerns with that carrier.

I had said earlier in a blog that it is worth paying an extra 20% on your premiums to have online access. If you happen to have to pay extra for online Workers Comp file access, then it is imperative that you use the online system.

I recently received a question on our post  regarding the South Carolina employee being ruled an employee. I rarely copy from another website, but this is very important and I do not want to change the language of the IRS.  There are cases (such as the previous post on SC) where statutory employees may look like subcontractors, but are instead statutory employees.   I think it is best to assume that you will need a subcontractor agreement that spells out the fact the workers is a subcontractor.   The following is an exact definition and not just examples. 

Statutory Employees - IRS Definition

If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under Social Security and Medicare taxes, below.

• A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission
• A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company
• An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
• A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson's principal business activity.

One of the best examples of a statutory employee under Workers Comp is an employee that is hired to do the same work that the company employees regularly do may be considered a statutory employee. There was a famous Missouri Supreme Court decision that spells out a four-prong test to see if an employee is a statutory employee or not.  The case was Bass v. National Super Markets, Inc. The four prong test is centered on the activities of the possible statutory employee in question: 

1. Activities that are routinely done;
   
2. On a regular and frequent schedule
3. Contemplated in the agreement between the independent contractor and the statutory employer to be repeated over a relatively short span of time
4. The performance of which would require the statutory employer to hire permanent employees absent the agreement.     

I know that was not exciting reading.  However, it may keep a company from being sued under an unlimited liability policy versus under Workers Comp as the sole remedy.   

Next Up - Subcontractors and The Ladder of Insurance Revisited

This question has made a comeback in blogs and publications that I have read over the last few weeks.  It has to do with the classification of employees or non-employees for Workers Compensation while on the job.  I had posted previously on the IRS rules for a subcontractor.  Feel free to use the search box to find the post Most courts, Departments of Insurance, and State Rating Bureaus have all followed the IRS rules.  

The issue at hand is the amount of control you have over a person while on the job as to whether they are an employee, subcontractor, or statutory employee.  There is a bit of a grey area on how to classify the employees.   

Recently a South Carolina court ruled that a material hauler was actually a statutory employee and had to apply for Workers Compensation benefits and could not bring a lawsuit against the employer's liability policy.  This is known as the exclusive remedy doctrine for Workers Compensation claim.  Once an employee receives benefits under Workers Comp, they can no longer look to sue the employer under different laws. 

The U.S. District Court, District of South Carolina dismissed a truck driver's negligence and breach of implied warranty suit against a manufacturer. The driver was classified as a statutory employee and not a subcontractor.  Therefore, he could only seek relief under the Workers' Compensation Act.  Under South Carolina law, where a worker's activities satisfy any of three tests to make him a statutory employee of a contractor, his exclusive remedy for an on-the-job injury is workers' compensation.

A driver for a hauling company was injured while disengaging landing gear on a truck at a manufacturer's facility. According to the driver, he was struck in the face and the eye by a piece of the landing gear handle while attempting to disengage it. The hauling company was hired to provide transportation services on an as-needed basis.

The manufacturer moved to dismiss the driver's negligence and breach of implied warranty suit, alleging the driver was its statutory employee, and thus could only sue under the Workers' Compensation Act. The District Court agreed, finding the driver met the test for being the manufacturer's statutory employee.

The court explained that a subcontractor will be a statutory employee if his activity is considered part of the owner's activity. This occurs if the activity meets one of three criteria: 

1. Is an important part of the owner's business or trade; 
   
2. Is a necessary, essential and integral part of the owner's business; or 
   
3. It has previously been performed by the owner's employees.
   

The court found that because the manufacturer's employees had previously performed the loading and hauling, the driver performed the same duties as the manufacturer's employees. Further, the trailers that were towed were routinely loaded and unloaded by the manufacturer's own employees. Thus, he was considered a statutory employee and workers' compensation was the exclusive remedy for his injuries. 

I would say that the South Carolina Court had a very liberal definition of the rules for statutory employees.

Next Up - How Denying a Workers Comp claim can cost an employer big money.          

I had posted a few week ago regarding the 24%+ rate increase that was recommended by California's WCIRB (Workers Compensation Insurance Rating Bureau). There has been a large amount of discussion in the press about the upcoming increase.

I noticed in a few articles where even a small decrease was recommended and there were extremely diverse estimations of what increase was needed. The danger of underestimating the rate increase is that a snowball effect will occur when the rates are underestimated over a long period of time. California could be creating an off-the-books crisis. If two workers compensation rate increases fall short of say 20% for two years, then there will a need for a 40%+ increase sooner or later.

The danger of overestimating the basic rate increase is overburdening employers with an unneeded increase further stymieing a recovery from a very rough economy. The insurance market would likely head back to the 1990's and early 2000's with the State Fund (SCIF) having almost all of the insurance market A competitive workers compensation insurance market is always better than a virtual insurance monopoly by the State Fund.

The WCIRB and the Insurance Commissioner must perform a very tough balancing act to keep the market healthy. My advice is to take the brunt of the 24% increase and very carefully monitor the market for the next round of rate recommendations.

Why do I keep bringing up California in this blog? The events happening in California will be coming to a rating bureau near you. California's Workers Compensation system can be a test case for the rest of the country. West Virginia is also a test case for a workers comp system coming out of a State Fund to an open market.

Do you see the similarity? California and West Virginia are both systems that have just gone from monopolistic states to an open market. How they survive may be the future for other states. The best way to know the future of the workers comp market in your state(s) is to observe what is happening in similar states.

InsuranceStates - Directory of insurance companies organized by type of insurance.

I just returned from a business trip to West Virginia.  The Workers Compensation system was in turmoil for a few years.  West Virginia has just experienced the switch from Brickstreet and the monopolistic system to an open market system.  How many employers placed their coverage with another Workers Comp carrier after the start of the open market is unknown.  I am sure the number of policyholders that switched will be reported by the newspapers or television stations.    

Over 80% of our West Virginia clients have switched or are in the process of switching to another carrier.  This number may not be that accurate overall.  Most of our clients were not satisfied with their Worker Comp program.  That is why they contacted us.  The  80% figure may be much lower in the overall market. 

Our recommendation to policyholders that are in a state with a volatile Workers Comp situation is to read all policies;  audits;  and claims loss runs as they receive them. Workers Comp policies are not that long.   You may be surprised at what you find.   

Due to the way that policies had to be rated by NCCI, some of our clients had multiple mini-policies that covered as little as two months.  It may be a good idea to put your premium charges on a spreadsheet to lessen the confusion.  We have found some of the policies difficult to follow and analyze.  That is/was no ones fault.  When you have to simulate E-Mods with no reliable data, the task is difficult.  The NCCI did an admirable job promulgating E-Mods by using other states' rates as part of the data. 

The definition of a PEO is:  A Professional Employer Organization (PEO) is defined as an organization that provides an integrated and cost effective approach to the management and administration of the human resources and employer risk of its clients, by contractually assuming substantial employer responsibilities and risk, through the establishment and maintenance of a co-employer relationship with the clients employees.

 A PEO establishes a contractual relationship with its clients whereby the PEO:

• Pays wages and employment taxes of the employee out of its own accounts
• Reports, collects, and deposits employment taxes with state and federal authorities
• Establishes and maintains an co-employment relationship with its employees which is intended to be long term and not temporary
• Assumes responsibility as an employer for specified purposes of the workers assigned to the client locations
• Shares the responsibility of co-employees wages and safety with the client. 

Businesses today need help managing increasingly complex employee related matters such as personnel management, health benefits, workers' compensation claims, payroll, payroll tax compliance, and unemployment insurance claims. Businesses contract with a PEO to assume these responsibilities, which then allows the client to concentrate on the revenue-producing side of its operations.

A PEO provides integrated services which more cost effectively manage critical human resource responsibilities and employer risks for clients. PEOs deliver these services by establishing and maintaining an employer relationship with the workers assigned to its client and by contractually assuming substantial employer rights, responsibilities, and risk.

That was a little marketing-ish.  There are many advantages as an employer to using a PEO.  Do we recommend a PEO for every employer?  We do not as each employer has to be analyzed individually to see if the company is a good fit for a PEO.   Most employers are - some are not a good fit. 

There has been a substantial amount of negative press about PEOs.  However, most of it involved the principals of the PEOs, not the companies themselves.         

My last post discussed two employers being audited for a total of 23 years by their Workers Comp carrier.   I am not faulting any certain auditor, but more of the insurance environment that is in place now.  I have seen two or three auditors that should not be doing premium audits.   I have also seen a few workers compensation adjusters that should not have been handling claims.  For the most part, auditors and adjusters are very hard working people. 

My main point is that there are audit rules that must be followed to the letter by employers.  The NCCI and each state have come up with very specific workers comp audit rules.  Insurance companies should have to follow the same work comp audit rules.  Going back 15 years and try to perform audits and collect in California is just not legal.   California has a very short look-back period on audits.  

I will post tomorrow on Professional Employment Organization (PEO's).  With the economy in a downturn, the prevalence of PEO's are increasing dramatically as they have in bad economies in the past.              

These are sad but true cases of where two Workers Comp Insurance carriers are trying to audit their clients a total of 23 years in the past.  One of the employers has already been audited twice per year for eight years, but that is not good enough for the insurance carrier. The other employer is having audit requests going back 15 years.   This is becoming more prevalent as workers comp insurance carriers are trying to increase their intake of premiums without having to incur any more risk.      

Did these two employers do anything wrong?  No, as they allowed the premium auditors to go over their books each year.  Do the insurance carriers have the right to re-audit or re-re-audit employers?  The answer to both questions is an emphatic - no.  The insurance carrier premium auditors get their one shot to audit premiums.  After that, there is a little grey area, but insurance companies are not allowed to keep auditing the employers.  

What can an employer do if there are multiple audits with requests for even more audits for the same year?  If the insurance carrier threatens cancellation if they are not allowed another audit, the scenario can become very complicated. 

I recommend: 

• Knowing or exploring your state's Workers Comp audit rules
• Writing a letter to the premium auditor advising them that they have already audited your company's Workers Comp payroll and class codes
• Contacting a premium expert
• Complaining to your state's insurance commissioner only as a last resort and/or if there is a pending cancellation 

One of the caveats of this advice is the employer must have  100% cooperated with the premium auditor during the premium audit.  I have posted previously on cooperating with the premium auditor.  You may want to use the search box at the top right part of the web page or just scroll down until you find the information on what information a premium auditor can examine.