Lights Still On At Illinois Insurance Department, But No One's Home For Small Biz Anymore

Some years ago, I wrote a piece that was headlined "Will The Last Person At The Illinois Department of Insurance Please Turn Out The Lights", that was focused on the diminishing institutional expertise and commitment at the Illinois Department of Insurance when it comes to employers who want to dispute their Workers Compensation insurance charges.

I have kind of a special perspective on that subject, because for more than thirty years I've been helping Illinois employers (and especially small business employers) dispute inflated Workers Compensation insurance charges. And over the course of all those years, and all those disputes, I developed something of a working relationship with the Illinois Department of Insurance. I found that the department would generally try to find a way to informally encourage insurance companies to do the right thing, when I brought to the department's attention situations where it was pretty evident that insurance companies had broken their own rules and as a result overcharged an employer for Workers Comp insurance.

It was an informal process, but that meant that employers could avail themselves of it, with a little assistance, without turning it into an expensive legal case. And while I do plenty of work as an expert witness in legal cases where there is a dispute over Workers Comp insurance premiums, those litigations tend to be, of necessity, fought by larger employers with the financial resources to fight large insurers in court.

For small business, it was the Department of Insurance or nothing.

And now, based on the clear input I'm getting from higher-ups at the Illinois Department of Insurance, it's going to be pretty much nothing, because nothing is essentially what the department is now willing to do when small employers dispute Workers Comp premiums.

Let me give you an example. Illinois has had a unique statute that went into effect January 1, 1984. I know this statute well because I consulted on the language of the statute when it was being written. That statute, section 462.b of the ILCS says that if an insurance company overcharges an employer because of an error in Workers Comp classification, payroll, or other rating factors, the insurer has to refund that overcharge.

Since the law went into effect January 1, 1984 it kind of was self-evident what the effective date was. This week I got an email from an Assistant Deputy Director of the IL DOI that the department could not communicate to an insurer what the effective date of that statute might be. This insurer had asked if the department could clarify if the statute meant that it said, that if an insurer had overcharged in the past it had to refund that overcharge, even if discovered years later.

In the past, the department made it clear that this was so. I have a copy of sworn testimony by department representatives that this was so.

But no longer.

The Illinois Department of Insurance, which in theory is responsible for enforcing insurance regulations and statutes, apparently feels it cannot really provide guidance to insurance companies regarding insurance regulations that protect employers from abusive practices by insurance companies.

About a month ago, I provided testimony before the Illinois House of Representatives about how non-existent Workers Compensation insurance rate regulation was in our state. And I shared a recent case of ours, where we were able to negotiate a refund of around $100,000 for a small business in Broadview, Illinois, because their past insurance companies had mistakenly used the wrong classification and rates to compute their premiums.

Part of the reason we could negotiate those refunds was that the insurers knew we could go to the Department of Insurance if they did not make a good faith review of the facts.

But the Department of Insurance in Illinois, like regulators in many states, have lost many of their experienced people--and in particular, the Illinois Department of Insurance has lost their personnel who were experienced with these kinds of Workers Compensation premium disputes.

And so small business in Illinois are now losing the benefits that the department provided, limited though they always were, to dispute Workers Comp insurance premiums.

There are some more formal appeal processes still remaining, of course. There is a Workers Comp Appeal Board run as a joint venture between the insurance department and the NCCI. But that board is limited as to the issues it can accept for review, and limited regarding how far back in time it will review premiums.

There is also a more formal hearing process at the Illinois Department, a process that is a legal hearing (and thus, no employer in his or her right mind should go there without having retained an attorney, in addition to retaining an expert like me) so these hearings are an expensive proposition from the get-go. I have had more than one small business client give up on a legitimate dispute because the cost of retaining legal counsel was more than they could justify. And so they reluctantly closed their doors, because an insurance company was seeking excessive and improper premiums and they couldn't afford to fight it at a legal hearing--and without Workers Comp insurance they couldn't legally stay in business.)

So the lights are on at the Illinois Department of Insurance. But if you're a small business who's being overcharged by your Workers Comp insurance company, there's nobody home there anymore.

A Tale of Two Cases

Perhaps you can also file this under "American Horror Story". Let me tell you about two cases of mine. The names have been changed because they are both still ongoing cases, but I can share enough detail to explain my point without violating any confidentiality.

In one case, the employer has been criminally charged because he put down the wrong classification code on the application and the insurance company didn't catch it for several years. By the time the insurance company got around to figuring out that they didn't think the policyholder's expertise in classifications was very good, the insured company had gone out of business and the insurer couldn't get the money they felt they were owed.

So they got their friendly neighborhood prosecutor to file criminal charges. And now, as part of the negotiations to try and avoid a criminal trial, the insurer has suggested "restitution"--that is, pay them their money and they will arrange to have the criminal prosecution dropped.

My second case involves a major property/casualty insurance company that has just billed a policyholder for audited premium in excess of $700,000--from a policy that had an original premium of only around $1,500.00.  Yes, this employer bought a policy that he thought was going to cost $1,500--but the insurance company has retroactively sent a bill for more than $700,000.00 for that same policy.

And the galling thing is that this $700,000 bill is based on the insurance company ignoring the well-established rules that govern premiums in the particular state involved.

When this problem was brought to the attention to state insurance regulators, and NCCI, they all agreed it seemed to be wrong--and then collectively washed their hands and said there was nothing they could do. The policyholder should go to court, they helpfully suggested.

So, when the insurance industry feels an employer has based premium on a faulty or incorrect understanding of their arcane rules, and then can't pay what the insurance company feels is the proper premium, they get criminal charges filed.

But when an insurance company comes up with an outrageously inflated premium bill that is based on a clear and flagrant disregard for the rules that apply in a particular state, though, the insurance regulatory system shrugs and suggests the policyholder consult an attorney.

Does anyone else feel like something is wrong here?

Hysterical Over Reaction from Insurance Industry About Filing Rates

So, the American Insurance Association has just thrown a public hissy fit over new proposed legislation here in Illinois, legislation that would require insurance companies to file with state regulators their rates for Workers Compensation insurance before said insurance companies could use those rates on policies. Theoretically, insurance regulators could then object to rates they found objectionable.

“It's the harshest and most opposed regulatory type of structure that I have ever seen because we are going to have to seek permission from the government to charge a final price on the workers compensation insurance that we provide to our customers,” Steve Schneider, Chicago-based vice president for state affairs for the Midwest region for the American Insurance Association, said in published reports.

Holy Cow? Really? Mind you, the new laws would not really prevent insurers from using whatever rates they want, because the Illinois Department of Insurance is pretty understaffed, thanks to the deliberate behind-scenes lobbying by the insurance industry years ago.

And actually regulating Workers Compensation insurance rates was the norm, the standard practice, for many decades. To quote one of my older insurance textbooks (from 1986):

"the regulatory review process verifies that insurance rates are adequate, not excessive, and not unfairly discriminatory."

Until the late 1970's and early 1980's, all insurance companies had to use the same exact damned rate schedule, which had to be approved in advance by insurance regulators who, you know, actually regulated insurance. To make sure that rates were adequate, not excessive, and not unfairly discriminatory. What a quaint idea!

Even once so-called "competitive rating" began, insurance companies had to still submit their rating plans for approval. So this ridiculously over-the-top response by the insurance industry to these new Illinois regulations strike this observer as, well, ridiculous. This new legislation would merely return, on paper, the conceptual framework that governed Workers Compensation from its earliest days

Relax, boys, you'll still be able to get away with charging whatever you think the market will bear. This new legislation provides merely the smallest fig leaf on the current unregulated status of Workers Compensation. It doesn't really do anything meaningful, more's the pity. But even a tiny fig leaf is enough for the insurance industry to react like someone's proposing to erect a monument to Joe Stalin in Hartford, Connecticut and send their underwriters to re-education camps.

More Thoughts On Proposed Not-For Profit Workers Comp Insurer in Illinois

Now, one of the things that opponents of this new bill have been tossing around is that Illinois is a very competitive state for Workers Compensation insurance. And it is. On paper. In practice, not always so much.

Oh yeah, insurance companies have pretty much a free hand in pricing Workers Comp insurance in Illinois, and there are hundreds of insurers licensed to write Workers Comp insurance in the Land of Lincoln. Over three hundred different insurers, I understand.

Here's the gag, as my son likes to say: these insurers don't all compete for the same accounts, and many Illinois businesses can't, as a practical matter, get access to all these hundreds of insurers.

For the most part, a business has to go through a licensed insurance agent or broker. And any given agency might have contracts with only a handful of different insurance companies who write Workers Comp. But said agents all too often give the impression they can (and do) blanket the market in their search for coverage for a particular insured employer. Such impressions are often exaggerations, at best.

And if an employer is small, or new, or located somewhere away from major metropolitan areas, it can be difficult to get more than one or two insurers interested in proposing coverage in the "voluntary market". Of course, that still leaves the Assigned Risk Plan, a source of insurance that would be familiar in management style to Soviet-era bureaucrats. With pricing to match.

Insurance companies tend to compete for the sub-set of accounts that are deemed particularly attractive because of size, type of business, loss history, and sometimes, how well connected a particular agency may be with an insurer's underwriters.

But for many other businesses, the same deregulated rules that allow insurers to compete for desirable accounts on price allows insurers to sock it to employers who aren't on this year's list of desirable accounts.

And it also opens the door for some agents and insurers to low ball initial proposed Workers Comp pricing, only to hit the employer with a Shock Audit from Hell after the policy ends. When that happens, deregulation ain't so much fun.

Illinois Legislature Okays Non-Profit Workers Comp Insurer

The Illinois legislature has approved a law that creates a not for profit Workers Compensation insurer, to compete with for-profit insurance companies. The bill now goes before Republican Governor Bruce Rauner, and whether or not that governor will sign said bill is something beyond this writer's ability to predict.

If anyone were to ask me (and one of the lobbyists for this bill did, just the other day) I would say it's an idea that could significantly benefit a number of Illinois employers, if done right. Right now, too many employers are in the ultra-expensive Assigned Risk Plan just because they're small, or new, or located away from metropolitan areas. If this not-for-profit insurer were to helps such employers escape the Assigned Risk Plan's excessive rates, it could be a huge help to small business.

But governance will also be key to the potential success of such a venture. Underwriting standards would have to be reasonable, fair, and and yet not give away the store. Audit standards would also have to be similarly fair, to spare employers the terrors of Shock Audits, as I've written about so many times before. Of course, doing a better job with underwriting would go a long way towards reducing Shock Audits, as employers would be advised of the actual cost of coverage at the outset rather than after the policy has expired.

The other potential pitfall of such an entity, if it isn't strangled in the crib by Rauner, would be to make sure it isn't used as some kind of emergency piggy bank by ambitious or unscrupulous politicians. Part of the reason the Illinois Department of Insurance had its budget and staff gutted was that then Governor Blajojevich raided the funds generated by that agency (funds that didn't come from taxpayers but from fees and taxes paid by insurers) to pay for other pet projects.

Letting politicians have access or control to an entity that is banking considerable dollar amounts of reserves for future claims has often been a recipe for disaster. Similarly, some government sponsored Workers Comp funds have sometimes fallen prey to political favoritism and cronyism in underwriting practices. Again, for this proposed entity to really accomplish what sponsors hope it can accomplish, the crooks and cronies will need to be kept at bay. No easy task in a state like Illinois.

But I think it's worth a try. Illinois employers, especially small business employers, desperately need some relief from the excesses of existing insurance companies. Now let's see what Governor Rauner thinks. He may not like this, because it isn't part of the standard GOP playbook of cut benefits for workers and reduce payments to medical providers. But we shall see.

They Said It Couldn't Be Done...

Well, at least the insurance agent for a client of ours in Connecticut said their experience mod could not be reduced. Fortunately, the client had us work on it anyway, and we just got a 12 point reduction in experience modification factor approved by NCCI, along with a 13 point reduction in the mod for the following year.

See, there are some obscure rules that can impact these modifiers, rules that even experienced insurance agents aren't always knowledgeable about. Bottom line is that our client is now getting refunds totaling $40,000 for both years, thanks to our doing something that they said couldn't be done.

Black Lung Disease: Back, and Deadlier than Ever

So here's a damned frustrating and horrifying story, from National Geographic, concerning how Black Lung Disease has had a resurgence among miners. Reading some of the details in this story, about how non-unionized mines pressure miners into playing fast and loose with safety regulations, just gets me pissed off as hell.

And of course, there are larger lessons to be gleaned from this, for those willing to listen and think, about how economic incentive and self-interest, left unchecked, can lead to disease, agony, and death for the people who do the actual hard work in this world.

I tend to be deeply suspicious of those who advocate for reduced regulation and oversight in regards occupational safety, as I've been around long enough to know that those who typically advocate for such looser standards are not those who are actually at risk from said occupational dangers. The guys who denigrate workplace safety and independent oversight are typically at risk only from paper cuts and obesity. But human nature being what it is, those same guys will sometimes happily persuade themselves that it's okay to find short cuts around safety rules and regulations. Who needs all that damn red tape when there's money to be made.

Look, I love business. I love our free market, free wheeling version of capitalism--it's enabled me to create my own little consulting business from scratch and make my living successfully taking on huge insurance companies for fun and profit. But I also have worked with industrial concerns long enough (most of my adult life) to know that some business owners need a little independent oversight to keep from mangling and maiming workers as part of doing business.

Most business people, in my experience, want to do things the right way, they want to keep their people safe and productive. But in a competitive world, pressure from those who cut corners and operate in a less than safe manner can exert harmful influence over even those with good intentions.

In the long run, I think it's in everyone's interest to maintain effective and independent workplace safety regulations and incentives. And when you don't, you get this kind of horror.