Nebraska Legislators Introduce Covid-19 Workers Comp Presumption

 Out in Nebraska, legislators have filed a bill to make COVID-19 infections presumed to be compensable for first responders and other designated types of workers. Now, so far, I've been unable to find specifics about which categories of workers are included in this bill--which has not yet been passed into law, btw. 

The other interesting aspect of this bill is that is specifies that no COVID-19 case can increase an employer's Workers Compensation insurance premiums, or experience rating, or modifier. So that should be an interesting thing to handle behind the scenes, if the bill passes as currently written.

Stay tuned for more details as I can find them out.

Another Shock Audit Illustrates What's Wrong With Workers Comp For Small Biz

 I know I sound like a broken record, going on about these Shock Audits for Workers Comp we see just about every day from some small employer somewhere in the U.S. But I keep writing about it because it is such a widespread problem and yet is on no one's radar screen.

So this particular small biz is from my home state of Illinois. He was in the construction biz, doing home remodels and he bought an Assigned Risk policy. The policy was sold to him as a Minimum Premium policy with premium of $1,500 and ran from 6-15-2019 through 6-15-2020. After the policy ended, the insurance company sent out an auditor. And after the auditor was done, that $1,500 policy had turned into a bill for $179,070.

Can you imagine any other business service a small biz might purchase that could legally get away with that?

The worst thing is that, for this particular Shock Audit, there doesn't appear to be a lot I can do to reduce the bill. Because everything appears to have been done according to the rules. It's just that the rules suck.

Let me be more specific. The rules are largely written by the insurance industry, for the interests of the insurance industry. And that's why a small business owner can be sold a policy for $1,500 and then, a year later, get a bill for $179,070.

That's because, in Illinois (and most other states) independent contractors paid on a 1099 basis get treated, for Workers Comp insurance purposes, just the same as regular W-2 workers. And this particular business used a fair amount of 1099 labor during the policy.

Only nobody explained that to this small business when the policy was sold. And nobody's required to explain it. And in the normal course of the insurance business no one does explain it.

This small biz is based in Chicago. The policy was sole by a small agency out in Frankfort, Illinois, way out in the south suburbs. And because it's an assigned risk policy, the agent makes very little money in commissions. But if you sell a lot of these tiny minimum premium policies I suppose you can make a bit of money.

But agents don't typically spend much time with such accounts--who could afford to? But that means these insurance agents are just order-takers. Order takers who commonly don't take the time to explain to these tiny accounts about the potential for these Shock Audits.

And because insurance agents aren't required to be anything more than order takers (unless they voluntarily start to offer advice, thus creating some additional professional duties) the small business owners who use their services don't really have any recourse against the agents who sold them these policies.

Yes, insurance agents aren't legally treated the same as other professionals like an accountant or attorney, even though many insurance agents aspire to similar professional status. So unless the agent can be shown to be acting as an insurance advisor, in addition to just selling insurance as an order taker, the small biz owner on the receiving end of one of these Shock Audits has no recourse against the agent who sold the policy.

And the insurance company? Heck, they're just charging the premium that's really due under the rules. Too bad the system allows these minimum premium policies to be sold without making sure somebody is really explaining how these Shock Audits can happen.

Insurance companies and agents aren't required to provide any simple and clear warnings about this at the time the policy is sold. But insurance companies sure do love to provide lots of explanations after the policy has ended and they are trying to collect one of these huge Shock Audit premiums.

See what I mean about the rules being largely designed for the interests of the insurance industry?

Now, fortunately, a lot of times I can find ways to reduce these audits, because the insurance system still manages to build in overcharges into these audits a lot of times, overcharges based on errors in classifications or payroll determination or experience modifiers. But I can't help all victims of Shock Audits, alas.

And so, pretty much every day, I get a phone call or email about another Shock Audit.

The Shock Audits Keep On Coming

 I know I've visited this subject before, but it bears repeating. Just today, I had two more small contractors reach out to me, each one a small employer crushed under a Workers Compensation insurance Shock Audits--where the premium developed after the policy has ended is far, far larger than the employer ever anticipated, based on the original policy premium.

One was an email from a Chicago small contractor, who bought a Workers Comp policy for $1,515.00, but who has now received an audit bill for $177,555.00 in additional premium for the policy.

The problem, as it often is, was that no one explained to this small business that payments to subcontractors would be picked up just the same as payments to regular direct employees of his company. This small biz had purchased an Assigned Risk policy, with Minimum Premium, and as is so common in such situations the insurance agent had not taken any time to explain the potential for this particular trap.

Agents who sell Assigned Risk policies to tiny employers often don't spend much time and effort explaining how the premium charges will ultimately be computed, after the policy has ended. And so these tiny employers are left thinking their Workers Comp insurance will cost only $1,500 or so in premium, only to be traumatized when they get the Shock Audit billing, after the policy has ended.

You might think such small employers might have a basis for holding the insurance agent responsible for this SNAFU, but that is not such an easy proposition.

Unlike professionals like accountants or attorneys, insurance agents typically have a much lower professional responsibility, generally. As long as the agent obtains the insurance requested, or explains that it can't be obtained, and doesn't steal money from the insured, the agent's professional responsibilities are generally viewed as having been satisfied--unless, and it is a big unless, the agent has voluntarily started serving as an insurance advisor or otherwise voluntarily taken on greater duties towards a client. But absent that, insurance producers typically have a very low level of professional responsibility.

And when producing Assigned Risk Workers Comp policies for tiny clients, agents often just don't spend much time or effort advising clients about potential problems with the insurance.

So in this case, it doesn't appear the insurance company is necessarily wrong with this huge additional premium increase--although I'm still checking it to see if there are any potential avenues for reducing the bill--it's just that the insurance industry operates in such a way that these Shock Audit scenarios happen commonly.

I know, because I get the phone calls and emails when the bill arrives, every darn day. Sometimes I can help reduce the bill. Sometimes not. The devil is always in the details.

But it shouldn't be such an issue for small employers. Obtaining Workers Comp insurance should not constitute an existential threat to small business, and yet it does, surprisingly often.

Insurance companies tend to assume insurance agents explain all this stuff at the outset. They also assume most business people, even really small business managers, already understand these details.

Based on all these calls and emails, those assumptions too often don't hold up, with tragic results for small business.

My second Shock Audit contact today was from a Massachusetts small contractor. I'll cover that one in a separate post.

Staffing Companies and Workers Comp Classifications and Premiums

 Recently, I was approached by a staffing company looking for assistance in figuring out correct Workers Compensation classification codes for the workers they were placing at a variety of client companies all across the U.S. I can certainly understand why this staffing company is seeking such assistance, as figuring out correct Workers Compensation classifications can be vital for a staffing company's financial well being. Staffing companies have some unique exposures to serious problems with Workers Comp insurance costs, mainly due to issues involving determining correct Workers Comp insurance classifications.

The staffing industry in the U.S. is composed of two distinct kinds of labor placements and it is not uncommon for a single staffing company to blend and blur those two kinds of labor placements in a single business enterprise.

The first is the sort of temporary labor placement that has historically been common--supplying workers on a "temporary" basis to third party employers. Originally such labor placements were truly temporary, providing "temps" to replace workers on vacation or for similar short-term engagement. In more recent years such placements have commonly involved providing workers for longer periods of time, sometimes as a trial period before selecting workers to become permanent additions to an employer's workforce, but sometimes serving as a more long term source for outsourced labor, although the individual workers provided may typically change over time. One common example of this kind of labor placement is where a staffing company provides warehouse workers to a client company on an ongoing basis. The individuals making up that outsourced labor force may vary over time but the contractual relationship between the staffing company to the client company can be a long-standing one.

The second kind of labor placement in the staffing industry is what has come to be called a PEO arrangement--a Professional Employer Organization, in the parlance of the staffing industry. This is an arrangement where existing employees of a client company contractually become "co-employed", at least on paper, with an outside staffing company. This contractual arrangement provides a legal basis for the staffing company to be able to provide Workers Compensation insurance coverage to workers at a client company, as well as the basis for the staffing company to provide other services such as withholding and reporting taxes for those workers. But the provision of Workers Compensation insurance to client companies is often the most important service provided by a PEO type staffing company.

In a typical PEO arrangement, the PEO staffing company charges fees for their services that are based, in large part, on the cost of providing Workers Compensation insurance (along with costs of providing other services that may be part of the contract, and provisions for overhead and profit for the PEO.)

But this means the PEO staffing company must anticipate what their cost of Workers Compensation insurance actually is for workers at a client company. And since the fees charged to those client companies are a separate contractual arrangement from the insurance coverage purchased by the PEO, a potential exists for a dangerous mismatch to occur (dangerous from the point of the view of the PEO and also from the point of view of the insurance company.)

This same kind of dangerous mismatch can apply to the more traditional "temp' type of staffing company as well, because the fees charged to clients typically also include a significant component for the cost of Workers Compensation insurance.

If the staffing company operates on the assumption that workers being provided are doing clerical work, and thus should be classified in the inexpensive clerical class for Workers Compensation insurance, but the insurance company later concludes that those workers actually belong in a more expensive classification, the staffing company can be left in a position where it cannot retroactively adjust the fees it has charged the client, but the insurance company can (and often does) retroactively adjust the premium charged for those workers.

I remember a case where the staffing company classified workers as clerical, because they were doing things like collating printed documents together and stapling those pages together. But at the end of the year, when the insurance company did the premium audit for the Workers Compensation insurance policy purchased by the staffing company, the insurer's auditor learned that those workers were doing that collating work not in an office environment but in a warehouse area at the client company. The insurance company decided this meant those workers properly did not qualify for the inexpensive clerical class but instead in a significantly more expensive class for warehouse workers.

This left the staffing company in a difficult position. Since insurance companies often only really determine classifications after the insurance policy has ended, when an audit is done, the staffing company had priced their fees to this client based on using the clerical rate for Workers Comp insurance. By the time the insurance company performed the premium audit, a year had passed with the staffing company charging fees that turned to be inadequate to cover the cost of Workers Comp insurance. Overnight, this turned a profitable account into a very unprofitable account.

A staffing company can often have hundreds of different client companies, each one carrying the potential for such a classification error.  Under the rules that govern Workers Compensation insurance, workers provided by a staffing company are supposed to be classified based upon treating those workers as if they were direct employees of the client company. So a staffing company needs to try and determine the correct classification for all those client companies. And often those client companies may be scattered across different states--and the classification definitions can sometimes vary significantly between states. What is a correct class in one state for a type of business might not be the correct class in another.

Complicating things even further, some staffing companies in recent years have engaged in a controversial practice of providing "staffing on staffing" coverage, where one staffing company enters into a PEO style contractual arrangement with another staffing company, and it is this second staffing company that actually places workers with client companies. This practice increases the chances of a classification mismatch occurring, as the staffing company obtaining the Workers Comp insurance does not have a direct relationship with the client company and thus can lack a proper understanding of the nature of the client's business operations.

Insurance companies, in my experience, do not wish to insure staffing companies engaging in this kind of "staffing on staffing" business but it can be difficult for the insurer to determine if this practice is happening, at least, not at the time the policy is being "underwritten" and produced. Such issues are typically only uncovered at the time an audit is conducted, after a policy has expired.

I put "underwriting" in quotes because I have learned that some insurance companies perform little or no actual underwriting for staffing companies (and even other kinds of companies, particularly in the assigned risk plans) in the sense of expending any effort whatsoever to determine correct classifications at the time the policy is issued. 

Another complicating factor is that many staffing companies find that "voluntary market" Workers Comp insurance is only available through a Large Deductible policy. That introduces additional levels of complexity to determining the ultimate cost of Workers Comp insurance, with complicated side agreements and the significant potential for unexpected additional costs based on the ultimate cost of claims under the policy. Under such policies, getting classification correct is still important, but it is coupled with the very significant possibility of very large additional premium charges becoming due years after a policy has ended. Many staffing companies, in my experience, purchase such policies without fully understanding the potential for significant additional premium charges down the road, simply because they are the only alternative available to Assigned Risk policies (which can have their own drawbacks for a staffing company.)

Such Large Deductible polices can appear to be attractive at the outset, only to later generate very significant additional premium charges years after the policy has ended, additional premiums that have been calculated according to arcane and complicated formulas that were poorly understood at the time the insurance was calculated. Often, those additional premium charges are based, at least in part, on changes in classifications done at the time of the audit.

In short, determining correct Workers Comp insurance classifications at the outset is vital for staffing companies, but it is also challenging to do because of the complexity of the rules that govern Workers Comp insurance.

A Triple-Whammy Shock Audit For California Contractor

 So I just finished looking over a Workers Comp Shock Audit for a small California contractor. For those who came in late, a Shock Audit is where the audited premium for a Workers Comp insurance policy is unexpectedly much higher than the original policy premium.

Turns out, it looks like this is one of those frustrating times when it doesn't look likely I can help reduce this Shock Audit. But it is nonetheless an illustrative case study of how employers, particularly small employers, can get clobbered by one of these Shock Audits.

In fact, this case illustrates three different ways in which employers, particularly California contractors, can get blindsided about the cost of Workers Compensation insurance. 

A triple-whammy of premium traps, you might say.

First off, this employer was puzzled because the policy had been one of those "pay as you go" setups, where premium gets calculated monthly based on actual payrolls. These programs are often touted as providing a solution for the problem of unexpectedly high audit bills--you know, Shock Audits--so this employer was puzzled as to how he could be getting a Shock Audit. So that's the first element of our triple whammy case study--the "pay as you go" fallacy that it solves the problem of Shock Audits.

The second part of the triple whammy comes in because this Shock Audit is an 'estimated audit". I know, I know, a classic oxymoron like jumbo shrimp, but the COVID-19 pandemic has made these "estimated audits" more common, as field auditors were unable to get out into the field to conduct real audits. So forms were sent out to employers, many of which were themselves shut down or disrupted by the pandemic, and many smaller employers were unsure of how to complete the forms, or were just too disrupted by the pandemic and the associated business crisis to respond.

An estimated audit isn't really an audit at all--it's the insurance company's educated guess (and often a bit of a worst-case-scenario guess as well) about what the final premium should be. But rest assured, if an estimated audit isn't paid on a timely basis, an insurer will send it out for collection efforts, just like was the case with this small contractor.

But the final blow of our triple-whammy came thanks to a unique California trap for contractors: Dual Wage Classifications.

California has a unique bunch of Workers Compensation insurance classification codes that apply for construction work in that state. These classifications are bound pairs, so, for example, this client had two carpentry classes shown on the policy, a cheaper class with rates just over $8.00 (for workers paid $32 per hour or more) and a much more expensive class, with rates over $22 per hour, for workers paid less than $32 per hour.

Both classes were on the original policy, this "pay as you go" policy, but all the policy's estimated payroll was the cheaper class, with the more expensive class shown with "If Any" for the remuneration.

So month by month, under the pay as you go system, this employer reported actual payrolls and they got applied under the cheaper class.

The audit, however, put all of the "estimated audit" payroll into the much more expensive class and rate. Hence, a Shock Audit. It wasn't that payroll was different from what had been reported month by month, it was that all that payroll got switched, on the estimated audit, to a vastly more expensive class.

This happens because the rules for these Dual Wage Classifications are detailed and a bit onerous and often not well explained when the policy begins. But auditors are trained and motivated to enforce these rules on the audit;

I've written in more detail about the problems with the Dual Wage Classifications before. It can be a nasty problem because many small contractors don't learn about the rule requirements until it's too late to do anything about it.

I've explained the situation to this particular small contractor, and if he can produce the required time records then I can definitely help reduce this Shock Audit. But if he didn't keep sufficiently detailed time records, as I fear he may not have, there may be no recourse here.

This one is a very frustrating example of a Shock Audit that exemplified multiple problems with Workers Compensation insurance. Fingers crossed, perhaps I will be able to help these folks, if they kept detailed time records.

When Insurance Companies Are Less Than Honest About Overcharges

 I've had an interesting day today, dealing with an insurance company that overcharged one of our clients in Illinois for Workers Compensation insurance by using the wrong classification (and thus the wrong manual rate) for year after year after year.

My client reached out to the audit manager at this insurance company, based on information provided by us, and instead of getting apologies for their mistake got vituperation and lies.

The audit manager told my client that companies like ours "extort" money from insurance companies. You know, because we insist they actually follow the goddamn terms of the policy, which requires insurers to use the correct class and rate even if different than what was originally used. Some extortion.

Then, the insurance company manager said they had reached out to the Illinois Department of Insurance for guidance. That's because Illinois has a unique statute on the books, one I consulted on when it was drafter way back in 1983. That statute requires insurers to refund any overcharges of Workers Comp premiums due to errors in classification (and other technical errors). In all my past dealings with the Illinois Department of Insurance over the enforcement of this statute, the department has consistently held that the statute means what it says and that insurers must refund any overcharges that have occurred since the statute went into effect in 1984.

But this insurance company audit manager told our client that the Department told them that they only had to go back three years in refunding overcharges, and even dropped the name of a particular guy at the Illinois Department of Insurance.

Now, if this client didn't have Advanced Insurance Management as a resource, they might well have accepted this at face value. Too bad it was all falsehoods. As we explained to our client.

You see, I've worked with that particular guy they named, the guy at the Illinois Department of Insurance, as part of my work getting refunds for clients. I've worked with that particular guy for decades and he has always taken the position that the statute means exactly what it says. And I confirmed that the Illinois Department of Insurance has not revised their position on that.

Oh, one last thing: that particular guy at the Illinois Department of Insurance, the guy the insurance company said was the basis for their intransigence about those refunds for older policies?

That guy retired back in 2015. So I don't think he gave them any guidance on the department's position about the statute and its requirements. Instead, the insurance company manager probably still had his name on a Rolodex and tossed it out to bolster his bald faced lie.

What really gripes me is that insurance companies go apoplectic if they think a policyholder has misrepresented material facts that impact coverage or premium. Sometimes they find a friendly prosecutor to bring criminal charges against a policyholder they think was dishonest with them.

Yet if this particular policyholder didn't have someone knowledgeable to catch these lies, the insurance company would likely have gotten away with it.

But somehow, in their collective mind, we're the bad guys, for insisting they retroactively fix an obvious mistake that they should have never made in the first place. Grrr.

Answering A Question From A Premium Auditor

 I just got an interesting communication from an insurance company premium auditor, regarding a challenging audit she was tasked with performing.

And this brought to mind something that I thought I should share more widely: I'm always happy to discuss technical issues with insurance premium auditors, underwriters, and agents, on a pro bono basis. 

I get such communications on a semi-regular basis, but I wanted to put this offer out into the world on a more formal basis.

So keep those cards and letters coming in, folks.