In my last post, I covered the predicament some employers can be in when they want to switch insurance companies due to their premium audit sticker shock. The main consideration is the short rate penalty. The premium audit has just been completed so your company is very early into your next policy.

Your company is going to receive a very heavy financial penalty even though you may have no claims. That is due to the sometimes nasty Incurred But Not Reported (IBNR). The insurance carrier is basically saying there is a risk that even though claims were not reported during the short rate policy, your employees may have unreported injuries. It is a common term.

What is your plan of action if your company is in this "back against the wall" situation? You have seven choices. You can :

• Dispute the audit, if there is a good reason. You may have to call in an audit expert - yes, that was a shameless plug for J&L
• Take the new policy on the chin and wait until the end of the new policy period to switch. The caveat here is you are going to be hit with another audit.
• Calculate the short rate penalty to see how much it will cost your company to switch and pony up the funds. It is not a simple calculation. We do them occasionally. The short penalty tapers off later into the policy.
• Calculate the short rate penalty further into the policy to see if there is a better time to switch. However, you have to the extra premium while you wait and then pay the penalty. This may not make good financial sense. Attempting to game the system will always end up costing more unless you know what you are doing.
• Just consider Workers Comp as overhead and write the check. If you were going to do that, you would not be reading this blog or post.
• Ask for a policy extension. I have rarely seen this agreed to by the carrier.
• Call or email us - even more of a shameless plug

The short rate penalty is calculated with factors from a group of tables. The interesting note is all insurance carriers say that the short rate penalty explanations are in the policy. The Workers Comp policy usually will only refer to applicable tables and calculations which are not located in the policy.

The best way to avoid this whole situation is with proper policy pre-planning. This involves:

• Calculating your E-mod six months early, yes, it can be done.
• Performing a pre-audit on your current Workers Comp policy to avoid audit sticker shock, especially if you have increasing payroll figures.
• Making sure you have rock-solid job descriptions for all employees.
• As always, making sure you have a good safety program. The less accidents your company has to include in the E-mod system, the better.

One of the most horrendous penalties that your company can receive in Workers Compensation is the short rate penalty. I recently had discussions with two of our clients who were switching or wanted to switch to a new carrier for Workers Comp coverage mid-policy.

The short rate penalty was originally designed to keep employers from frequently changing carriers. If the changes were allowed, the E-Mod and basically the entire Workers Comp system would grind to a halt. The paperwork nightmare would be profound.

The disadvantage to the carrier is they could be left holding the bag on bad loss development without ever being able to recover the necessary premiums. The short rate penalty heavily discourages an insured from switching carriers until the policy renewal.

I really do not see this as unfair to employers. There is, however, one area where, in my opinion, short rate penalties should be waived without hesitation.

Workers comp premium audits are usually performed on an expiring policy within two months after policy expiration, if not earlier. If your company has already renewed with the same carrier, then you will be in month two or three of your new policy with this Workers Comp carrier.

As your expired and new policy states, the exact premium that you will pay for your policies are not final until audit is performed on your expiring policy. If you disagree with the way the premium auditor has determined your final premium and want out of your new policy, the short rate penalty will make you end up paying a very steep penalty.

Your company is now stuck with:

• A premium audit with which you vehemently disagree
• The renewal policy where the same issues will raise their ugly head at the next premium audit
• A severe short rate penalty if you want out of the new policy
• No time to find a new policy quickly
• A new carrier will be concerned that you may want to jump ship in the middle of their policy if they provide you with one.
• All parties (premium auditor, carrier, agent, etc.) are all unhappy with your company for wanting to switch mid-policy
• The earlier you cancel - the more pro-rata your company will pay.
• The carrier already has your $ if you paid it all upfront. As I said in this post, you lose leverage when the carrier has your $.

If your company wants to switch carriers early in a policy, your company will pay a hefty fee - up to 90% in certain states for extremely early policy cancellations.

How do you avoid this situation? Check back here tomorrow.

As I have discussed many types; and as you will see in the heading of this article, we, of course, perform audits for employers and governmental agencies. Our audits are basically a review of the last three years for policy overcharges. This is one of a group of our services.

I have received two phone calls this week that were disturbing to say the least. One employer from CA and another from WV both called to ask about a service that where the auditor would come in and basically set up the business book BEFORE the premium audit by the insurance carrier. This is highly illegal.

From what I could gather, the so-called premium auditing company's goal was to lower the premium BEFORE THE AUDIT. That is a good way to spend time in jail. I had written about this type of unscrupulous audit here and here. The company owner and the premium auditing consultant are now both doing hard time in a South Carolina prison.

Honesty is always the best policy when dealing with insurance company premium auditors. Your company should pay every cent in premiums you owe, but nary a cent more.

These types of bad-actor companies give the premium auditing and risk management consulting professions a bad name to say the least. Do not end up being accused of the "F" word in insurance. California has added some very strong laws dealing with this subject. I will cover that next time.

A massive Workers Compensation predictive model was recently generated by Liberty Mutual for their internal uses. A video about the database was very informative. I am sure Liberty invested a large amount of time and effort constructing the model. According to the manager in the video, there were terabytes and terabytes of data to combine.

I think a tip of the hat is in order for this undertaking, even though the model will likely never see the light of day outside any Liberty Mutual data servers. As I see it, the data is their private data.

The video points out the main reason for gathering the data. The outliers or very expensive claims will have certain characteristics such as obesity, remote location, etc. Liberty wants to cut the analysis period of a claim from two years (which is too late) to one month. Their policyholders should be pleased with this development. I wanted to cover a few pros and cons of the database.

The pros are:

• The database is massive. Trends can be analyzed very easily.
  
• The number of years covered could cover almost all tail claims due to the state-of-the art BoComp (r) computer system that was being used in the 1980's and forward.
  
• The data is homegrown, so the accuracy would be higher than agency data
• Certain outlier claims can be identified very early in the claim - hence more accurate reserves for the claim
• Liberty was always meticulous about correct and full data input
• I am assuming with the model just now being built that it was not thrown together or synthesized just so they can say they have a model.
  

The cons are:

• The data was from Liberty Mutual claims only. A mix of carriers would have been more accurate. Self-sourced data can lead to erroneous conclusions.
• Using old data to forecast new trends may be inaccurate. Actuaries argue the triangulation method is better than regression as it gives more weight to the most current conditions.
  
• The data would likely have to be analyzed on a state-by-state basis as what happens in Montana may not be used to forecast what would happen in West Virginia. There are too many state-specific variables. The NCCI can vouch for that assumption.
  
• With this large amount of data structures, some assumptions would have to be made overall. A model is only as good as the assumptions.
  
• Data security - would someone want to pirate the model?
  

The bottom line is that I want to be the last person to sound critical of the data modeling performed by Liberty Mutual. I oversaw a state agency data transfer that was on a smaller basis, but still very large. I called it the never-ending nightmare.

I was trained by Liberty Mutual many years ago in the gold standard for training new recruits. I also used to be a systems engineer years ago. That is why I assumed a little more than usual in this article.

I was just reading a newsflash on a horrible Workers Comp decision by the Massachusetts Supreme Court. If I am reading it properly, an employee was injured 23 years ago is now able to claim benefits with a new average weekly wage and not based on Mass. Workers Comp law.

I thought I would revisit the WALSH test of jurisdiction. It is what the Mass. Judges should have used in their decision. The test has been around for many years. I have seen a Workers Comp judge actually draw up the test on a multi-jurisdictional claim in Oklahoma a few years ago. The old article on WALSH is here.

• Worked
  
• Accident
• Lived
• Salaried
  
• Hired

The weight of each part of the jurisdiction is higher with Worked. Each term carries less weight. Hired has the least weight when considering jurisdiction. There was one industry that I consult on often which makes jurisdiction so difficult - trucking/transportation.

Let us look at how the confusion is lessened with WALSH -

• Worked - unless the trucker short-hauls, then there are many states where the drive would work almost every single day
  
• Accident - this one is a little more clear
  
• Lived - this would be straightforward
  
• Salaried - also straightforward
  
• Hired- not as clear as the driver may have been hired at a terminal or HQ.
• Choice - wherever the injured employee decides to file a claim using WALSH as a guide.
  

I would say the Worked part would be wherever the terminal he/she works out of is located. There seems to be another term that is very prevalent and that is Choice. I have seen states lately rule in favor of wherever the driver decides to file their claim.

The Choice scenario can almost be applied to any occupation where the employee does not have all of Walsh in the same state. Would an employee research the best benefits available and file a claim in that state hoping to hit the proverbial jackpot on benefits? Would an employee try to file a claim in a state that has a max of $400 or $800?

We have that very file in our office. I was asked to examine the file as a possible expert witness. The employee has a decent attorney in the $800 a week state. As you may know, truckers almost always max out the benefits as they are paid well.

Applying the Walsh Test:

• Worked - terminal - NC
• Accident - SC
  
• Lived - GA
  
• Salaried - FL
  
• Hired - TN
  
• Chose - NY???

This is going to be a long evening. Try the test on some of your multi-jurisdictional files. It may not be 100% accurate, but at least it is a starting point.

One of the best large conference that charges no money for you to attend is coming up in 2 months in Greensboro. I have often attended the conference. The website is here. Registration is here.

The general info about the conference is below. I also threw in the info on the Safety Talk Contest. The contest is an integral part of the safety conference. If you are a vendor, it is a great time to put your biz in front of hundreds of safety professionals in NC. Exhibitors pay a reasonable price for the number of contacts made during the conference. Exhibitors register here.

I am posting this as I am the Treasurer of the North Carolina Mid-State Safety Council. There are eight councils in North Carolina. There are credits given for attending the water/wastewater and safety educational portions of the conference. As the say, there is no such thing as a free lunch, but there is a free safety conference.

NORTH CAROLINA

STATEWIDE SAFETY CONFERENCE, INC.

It's time to register for the 82nd NC Statewide Safety Conference!
Exhibitors and Attendees...Get ready to roll...Sign up today!

Joseph Koury Convention Center

Greensboro, NC

May 15 - 17, 2012


Dennis Parnell, Executive Director
NC Safety Conference, Inc.

PO Box 1608

Roanoke Rapids, NC 27870

NORTH CAROLINA SAFETY TALK CONTEST

Each year a safety talk contest is presented at the North Carolina Statewide Safety Conference. Contestants deliver the safety and injury prevention message to thousands of employees throughout North Carolina.

Contestants compete for the honor of representing their regional council at the state level. Each Regional Safety Council conducts a Safety Talk Contest. The Council’s winning speaker represents the employer and council in the Statewide Safety Talk Contest. The Statewide Safety
Talk Contest is a major event at the annual North Carolina Statewide Safety Conference.

The NC Statewide Safety Conference and the Regional Safety Councils promote participation in this program.

I had written about this subject late last year. I receive a few questions every time the online press starts publishing articles warning employers concerning classifications. There is a big difference in these two very similar sounding terms.

It has never been OK to purposely classify an employee as an independent contractor. We have never given the advice to classify employees as independent contractors. This method of cost savings will only backfire. If you are unsure whether a person that performs work for you is an employee or and independent contractor, please refer to this blog post on independent contractors.

Many states have clamped down on employee misclassification (contractor vs. employee) not the classification codes on your Workers Comp policies or E-Mod sheets. If you think some of your employees have been misclassified with the wrong Class Code, you can check on the codes and make a decision whether to dispute them or not.

Employee misclassification does not mean classifying an employee under a classification (class) code such as 8810 Clerical. Those are the classification codes that are assigned by the carrier, NCCI, or State Rating Bureau. Disputing a classification code has never been illegal unless it is done to delay paying a Workers Compensation premium audit bill.

There are many more complications that can arise when an employer tries to reclassify the Classification Codes. Approximately 20% of the time, I have seen it actually cost the employer more premium. That discussion turns to the ELR or D-ratio that you will see on your rating sheets.

There are many articles in this blog on how to determine whether or not your employee or employees are under the wrong classification codes and the proper dispute process.

I usually receive this question approximately once per month by email. I thought I would address the differences between a payroll and premium audit.

Actually, there are no differences between the two terms. A premium auditor performs a premium audit that is also known as a payroll audit. One thing for employers to remember is the premium audits are much more complex than just examining just the payroll.

There are many areas the Workers Comp premium auditors cover such as (Most of these terms are covered here):

• Classification Codes
• Standard Exceptions
• Subcontractors
• Certificates of Insurance
• Experience Modification Factor (EMod or XMod)
• Premium Discount
• Scheduled Debit/Credit
• Insured Locations
• Other Operations
• Policy Endorsements
• NCCI or State Rating Bureau Info
• Prior audits - if you have the same carrier as the last policy period
• Other info - website, brochures, etc.
• Drivers Expense Logs
• Job Duties / Descriptions
• Ownership Info

I wanted to supply my blog readers with this list as often we hear the word payroll audit.. As you can see from the list, there is much more being examined than just your payroll tax figures.

There is nothing negative concerning a review of the above info. The premium auditor has a right to see just about anything that your company has on file.

One surprising fact is that almost all employers think the premium auditors are actually employees of the insurance carrier. That is often not the case. The premium auditor may very likely be working for a premium audit company instead of a direct employee of the carrier. This fact really makes no difference in the audit. Most auditors will give you their business card upon arrival.

There is one caveat to providing all this information. I will cover that next time.

I received a WCIRB (Workers Comp rating organization for California) announcing that as of March 1, 2012 all coverage for Workers Compensation for the last five years was available. The captcha to get in the site was a little irritating, but likely a necessary evil so that a robo-logger could not pull all the data from the website.

I decided to give it a run with one of our client's information. I attempted to look up their info on 3/2/2012. The info said "not found". I tried again today and it worked fine. However, the client's data that should have been updated since November 2011 was not logged yet. That is still OK. You can find the CA policy info here

I then decided to try the same in our HQ state. North Carolina's verification worked fine and was up to date using one of our client's data. I then tried different states' coverage verification with mixed results.

The first time that I had heard that Workers Comp coverage verification info was available for any person that could access the web, I was somewhat concerned about releasing that info to the general public.

I have seen coverage verification work very well in one area. Some of our clients ask us to aid them in verifying that their subcontractors have valid insurance. The websites were great as we (or our clients) did not have to go through the heavily laborious process of calling every agent and/or carrier on every Workers Comp certificate of insurance. This avoids the Ladder of Insurance claims that occur often in the case of subcontractors.

The area I am not sure serves a great purpose is that if an employee wants to file a claim against their employer, they can go around their employer. I do realize there may be an isolated case of an employer not reporting they claim when filed, but I think that is a very rare case with all the penalties an employer faces for not reporting claims. I may be looking at it from the wrong viewpoint.

Overall, I think coverage verification websites are more than a necessary evil. Check out the Ladder of Insurance link above to see what can happen if you do not verify your subcontractor's certificates of insurance.

I had not heard of the National Insurance Crime Bureau (NICB) until last week. The organization functions as a repository for questionable claims. The organization seems to be somewhat similar to the Index Bureau.

This is from the NICB's website - The National Insurance Crime Bureau is a not-for-profit organization that receives support from approximately 1,000 property/casualty insurance companies. The NICB partners with insurers and law enforcement agencies to facilitate the identification, detection and prosecution of insurance criminals.

The NCIB centers on questionable claims, not all claims. Questionable claims (QCs) are those claims that NICB member insurance companies submit to NICB for closer review and investigation based on one or more indicators of possible fraud.

There are over 1,100 Property and Casualty insurance companies and self-insured organizations that comprise the NICB membership base.

A single incoming QC may contain as many as seven "red flags," or reasons for further investigation. Each file is categorized according to type, such as property, casualty, commercial, workers’ compensation, vehicle, and miscellaneous.

The areas of possible Workers Compensation fraud that increased the most from 2010 to 2011 on a percentage basis were:

• Duplicate Billing - 207%
  
• Inflated Billing - 113%
  
• Material Misrepresentation on Employment App - 67%
  

The first two are based on questionable activities by medical providers. I found this a little surprising with all of the preferred provider networks and medical bill analysis and review companies that operate in today's Workers Comp environment. Does this mean that medical providers have become more dishonest in the last two years?

The highest non-medical issue for referral to the NICB was the employee not accurately completing the employment application. Through the years, I have seen this occur often in claims. One of the main things left off of the employment application by the employee is the subject of prior injuries or ability to perform a certain job function.

The %'s above are from certain claims from a set group of insurance carriers or TPA's. I do not think there was a large enough base to make any type of statistical inferences. The report can be found here. It may be worth a quick read. You will need a PDF reader to open the document.