Minority Owned Business and Workers Comp Audits

 I've been noticing a pattern in recent years, in the regular inflow of small business owners reaching out to me regarding what I call "Shock Audits" for Workers Compensation insurance.  And this pattern is consistent with something I've long suspected, based on my many year's experience with Workers Compensation insurance (I started working with Workers Comp insurance back in 1978, for those keeping score at home. But that's A.D. not B.C.)

The pattern is that minority-owned businesses are a disproportionately large portion of the employers who reach out for help. Now, my clients over the years have included all types of businesses, and all sizes, all over the U.S. So it's not that minority owner businesses have a monopoly on this problem. But, boy, they sure do seem to be over-represented among the folks who call or email us, looking for help.

I've long suspected that this might be the case, for a number of reasons. A lot of these minority businesses tend to be smaller enterprises. And an awful lot of smaller businesses end up in the Assigned Risk programs for Workers Comp insurance. And that, I think, increases the odds of a Shock Audit.

A Shock Audit, for those just joining us, is a situation where an employer buys a Workers Comp insurance policy for a relatively modest initial premium--say, $1,500.00. But then, after the policy has ended (sometimes a couple of years after the policy has ended) said employer gets a bill from the insurance company for $10,000.00. Or $20,000.00. Or maybe $100,000.00. 

And if the employer doesn't pay that Shock Audit, the insurer company typically files suit for that shockingly large audit bill.

Now, it could be argued that I shouldn't complain overmuch about this state of affairs. After all, I do a lot of work as an expert witness in such litigation, often (but not always) retained by the policyholder to dispute the amount sought by the insurance company. And it's not just litigation cases that butter my professional bread--I also do a lot of work helping policyholders dispute audits via the various administrative remedies available, in cases where litigation has not yet been initiated by the insurer.

I often like to say that, in a perfect world, I should have to do something else for a living, as there really shouldn't be so many instances where someone with my particular experience and skill set is needed.

But alas, we do not live in a perfect world.

But back to minority-owned businesses. Because so many of them are insured through Assigned Risk plans, I believe that these businesses tend to receive less insurance-related counsel and advice from those selling that insurance.  For a variety of understandable reasons.

Assigned Risk Workers Comp policies pay relatively low commissions. That means that insurance agents find it hard to justify spending inordinate amounts of time advising such clients. And keep in mind, unlike, say, an attorney or a CPA, insurance agents have a relatively low bar to clear in regards to meeting their professional responsibilities.

In general, an insurance agent only needs to obtain the insurance requested, or explain that he or she could not obtain it, and not steal the client's money, in order to meet the default setting of professional liability. Of course, if the insurance agent voluntarily begins to offer professional advice, a higher level of professional duty may be created, but that's essentially a voluntary election by an insurance producer. 

So for Assigned Risk business, as long as the insurance agent obtains the requested Workers Compensation insurance and doesn't steal money paid by the customer, the agent has likely satisfied any professional duty--as long as that agent doesn't start offering professional advice.

Please keep in mind that these are generalities. Each and every case depends heavily on the particular facts and details of that case, including potential state-specific statutes and regulations, as Workers Compensation insurance is a state-by-state matter, generally. 

But in general, an insurance agent isn't commonly an expert in premium auditing, anyway. The training and expertise of insurance premium auditors involves technical matters that licensed insurance agents are not required to possess. So the bottom line is that businesses that purchase Workers Comp insurance through an Assigned Risk program typically, in my experience, receive an even lower level of professional advice from the insurance producer than those who get coverage through the so-called "voluntary market".

And even in the voluntary market, the expertise of insurance agents in regards premium audits is commonly limited. There are, of course, some who develop and offer significant expertise in these matters, for their clients. But such insurance producers are not, in my experience, your average insurance agent. And that goes double, I suspect, for those who write large amounts of Assigned Risk business.

And insurance companies that write Assigned Risk business do not expend significant resources explaining to customers (particularly Assigned Risk customers) the potential for Shock Audits after a policy ends.

To be fair, insurance companies do nowadays issue some explanatory information attached to the policies. But such explanations often get overlooked by policyholders, buried as it may be in an insurance policy that can be overflowing with fine print and technical terms. Insurers and insurance regulators have made genuine efforts to make policies more user-friendly, but in spite of this, a great many who purchase Workers Comp insurance are genuinely taken aback when they receive one of these Shock Audits. It has become clear to me, over many years, that the system for providing Workers Compensation insurance for smaller business enterprises often fails to adequately inform those businesses of the likely real ultimate cost of the insurance.

Larger, more established businesses often can get coverage through the voluntary market--indeed, they may be in a position to receive competing proposals for that coverage, from competing insurance agents and agencies. They are often in a much better position to find an insurance agent who is capable and motivated to provide reliable advice about commercial insurance. And in the voluntary market, agents and agencies can sometimes have leverage to persuade an insurer to be more lenient with a client, particularly a client with large premiums and commissions.

In the Assigned Risk plans, agents typically have no such leverage.

For all these reasons, plus an occasional language issue (where English is a second language for some minority businesses) I fear that the issue of Shock Audits overwhelming a small business will continue to be a problem that impacts minority-owned businesses even more than the average business enterprise. 

In a follow up post, I will try to offer a few suggestions for things that could be done to address the problem. Stay tuned.

Interesting News

 Just received interesting news. The National Council on Compensation Insurance (NCCI) has contacted us to obtain the details about a recent classification decision by the Illinois Department of Insurance for our client. This client did manufacturing work but maintained an in-house tool and die department. For many years, Illinois had an NCCI State Special rule that allowed such tool and die departments to be separately rated into a less expensive class.

But last year, a client came to us because their insurer started using a new interpretation of the (admittedly awkwardly written) state special rule, and using this novel interpretation, the insurer said this client was not eligible for the lower tool and die class.

We first went to the Illinois Workers Compensation Appeal Board over this, but that board ruled in favor of the insurer. We then appealed that decision, on behalf of our client, to the Illinois Department of Insurance.

This case illustrates, I think, the unique capabilities of my company in such disputes. I was originally involved in helping the client, but once a legal hearing was required, my son and partner, Scott Priz, took over, as he is an attorney admitted to the bar in Illinois. Of course, he's worked with me for over twenty years here at A.I.M. so he has extensive experience with the details of Workers Comp insurance classifications and rates.

The Illinois Department of Insurance ruled in favor of our client, as I've reported here earlier. But now NCCI has reached out, asking us to provide details of the ruling by Illinois DOI, so NCCI can revise their manuals.

This will help make sure other Illinois manufacturers don't have to deal with this "novel" rule interpretation. We had heard that some other insurers were doing so, but this should head them off at the pass.

Congratulations to Scott Priz for obtaining this important decision at the Illinois Department of Insurance. And kudos to the National Council on Compensation Insurance for acting promptly to reflect this DOI decision in their manual rules.

A Case We lost--and Then Won

 A little while ago, we lost a case at the Illinois Workers Compensation Appeal Board. But we just got word we have prevailed in an appeal of that decision by the board. Here's the skinny on all this:

The Workers Comp insurer for a client of ours had insisted on a new interpretation of a long-standing understanding regarding application of an Illinois state special classification rule for companies that have an in-house tool and die operation as part of their manufacturing company. The understanding had always been that the language of that state special classification rule was that such tool and die operations should be separately classified into the less expensive Code 3113. This had been routinely and regularly done by premium auditors for many years.

But this insurer insisted on a different interpretation—that the tool and die operations had to be conducted as a separate business and not as a support function of the overall business.

We took this dispute to the Illinois Workers Comp Appeal Board on behalf of this client. And lost.

But we then appealed that decision by the board, to a legal hearing at the Illinois Dept. of Insurance. And we have now been informed that we have prevailed there.

This was possible because my son and business partner, Scott Priz, is also an attorney (in addition to being a brilliant and experienced consultant on Workers Compensation insurance premium issues). And Scott handled this appeal for our client, since a legal hearing, unlike the Appeal Board, really requires an attorney to properly represent the interests of the client.

We are also informed, from our agent contacts, that this new interpretation of the state special rules is being applied by other insurance companies in Illinois. And while this decision by the Illinois Department of Insurance solves this problem for our particular client, it will not address the wider issue of other insurers doing this to other small businesses.

If you know of a company being impacted by this, perhaps we should talk. We’ll be doing our best to identify other policyholders harmed by this, but that will take some time and likely can’t find everyone. Still, we’ll be doing our best.

A Win at the Illinois Workers Comp Appeal Board

 I got word late yesterday that my efforts on behalf of a small Illinois roofing company, before the Illinois Workers Compensation Appeal Board, were successful. The board assigned Code 5606, the Executive Supervisor's class, to a worker of his that had been classified as a roofer.

The insurer had been rather stubborn about this, it seemed to me, and I did not believe their justifications for this classification change held up to scrutiny. The board agreed, I guess.

The representatives sent by this particular insurer definitely gave off something of a negative vibe about my involvement in this dispute--in fact, they tried to get me knocked out of the box on a technicality. This was unsuccessful, much to my personal satisfaction. But more importantly, the board agreed with our arguments and assigned the less expensive classification to my client.

A certain level of personal antagonism has historically sometimes crept into my efforts on behalf of policyholders over the years, with some insurance company personnel really disliking the very existence of someone like me, and my company. Fortunately, this is far from universal. A lot of insurance company folks are pretty cooperative when we ask them to correct premium overcharges for our clients. Heck, I even get hired occasionally by insurance companies to serve as an expert witness in legal disputes.

But I don't expect to get hired anytime soon by the particular insurance company that was on the losing end of this latest Appeal Board ruling, judging by the frosty attitudes of the folks at that hearing. And that's fine, that just comes with the territory, I guess.

In my younger days (I've been doing this kind of work a long, long time) I could sometimes get a little frosty myself, I think, when I encountered resistance from insurance company audit managers over correcting some technical errors for my clients. I like to think that I've mellowed a bit since then. 

But I still believe passionately in my work, don't get me wrong. 

That's why a relatively small case like this one still means a lot to me. I mean, I make my living finding and fixing insurance company errors in underwriting and auditing, but it's never been just about the money. Far from it. 

I've been incredibly fortunate to find a line of work that satisfies my need to make a difference in some way and also lets me pay my bills as a truly independent small business. In a world that is increasingly dominated by large firms buying up smaller ones, I get great satisfaction from doing things my own way, as captain of my own (admittedly tiny) ship. And somehow, I've managed to do that since 1987.

Even if occasionally I step on some toes within the insurance industry. 

Thanksgiving thoughts

 

A Sobering Phone Call Yesterday.

 I got this phone call yesterday, from a small contractor in Virginia, and it was genuinely sobering. I think it puts into perspective the problem I have tried to bring attention to, about how, for small construction businesses across America, Workers Compensation insurance audits can be much bigger source of stress than they should be.

This gentleman gave me a little background information. He said he is a combat veteran and also a former FBI agent. And after taking medical retirement, he decided to start a small construction business. And it has suited him, he said.

But the other thing he said was that his upcoming Workers Compensation insurance audit was keeping him up at night. 

"There's so much that wasn't explained to me," he told me. And that is a common complaint I hear.

He was sold a Minimum Premium Assigned Risk policy for a low premium. And it's only now he's learning about all the various aspects of these premium audits that may potentially turn this minor expense into a business-ending financial land mine.

I spent some time explaining all the stuff that should have been explained when he first bought that policy. I thanked him for his service, too, by the way.

And I thought about how wrong it felt that a guy who had seen combat in service to his country, and then further served us all in the FBI, now told me that he was stressing over this insurance thing more than he had ever stressed over his past perilous service.

That's not right.

Anyhow, I'm going to help him make sure his audit is done properly and that he has together all the paperwork and documentation he'll need to at least avoid the common kinds of overcharges that can occur with these audits. And I'll also help him dispute any overcharges that do get through the audit process, in spite of our efforts.

He was genuinely grateful to hear all that. I hope it helps him sleep a little better. And I hope we can help him keep the audit bill from being his worst nightmare.

We shall see.

An Egregious New York Overcharge by a Billionaire's Insurance Company

 I've got a new case out in New York that really exemplifies what's wrong with the Workers Comp insurance system, especially in regards small businesses. This is still a pending dispute, so I'll have to change the names to protect the innocent and guilty alike.

This small business does a combination of landscape work and what he calls "hardscape" work--the hardscape work is stuff like putting in paving blocks and retaining walls. His policy was written with Code 0042, the code for landscape work. But when the audit was done, the insurer changed the code to the Masonry code. So the rate went from a $6.00 rate to a $24.00 rate. And in order to do this, this well known insurer (owned by the conglomerate of a certain Wizard-like investor out in Omaha) contacted the New York Compensation Insurance Board and told NYCIRB that they wanted permission to make this class change because the insured did only masonry work and didn't do any landscape work. So NYCIRB said, well okay, we'll approve this unless someone squawks. And no one squawked to NYCIRB, at least not until I was hired, because the policyholder didn't know that NYCIRB existed.

But the policyholder had squawked about this audit--he had disputed the audit with the big time insurance company. But that did no good, and the insurance company turned the matter over to a collection attorney who did the usual job of applying pressure on the policyholder.

But here's the thing--the insurance company lied (sorry, misrepresented) to NYCIRB about the nature of this policyholder's work. The insurer said this policyholder did no landscape work, only masonry work. Then the insurance company lied (oops, misrepresented) to the policyholder, telling him that it was NYCIRB that had caused this classification increase and that the insurance company had no choice but to go along with it--even though the truth was that it was the insurance company that had initiated the class change and had only gotten NYCIRB to okay the change by misrepresenting the nature of the insured's work.

It gets worse. 

The collection attorney kind of expressed some mild annoyance, saying that the dispute had already been presented and rejected. Of course, said 'dispute' was handled by the insurance company itself, the same outfit that had made the original egregious error in classification in the first place. And the fact that the insurer took a second look at this and insisted that they were right just tells me this was no innocent error--it was a deliberate overcharge, it would seem. Let me explain, in another paragraph or two.

The collection attorney also wrote that since the audit had been done by an outside "independent" audit firm, it gave an additional level of legitimacy to this audit. 

But of course, "independent" audit firms are merely vendors to insurance companies, hired by and paid by the insurance company. There is little genuinely independent about that arrangement.

But here's what really frosts my pumpkin—the original classification code, as written by NYCIRB, explicitly states that it is designed for companies that perform landscape work and install paving blocks and retaining walls, which is exactly the work done by this policyholder.

Now, we're currently working with NYCIRB itself to correct this problem. And I have high hopes they will do the right thing. But until this is finished, I won't breathe easy.

I often say that, in a perfect world, I should have to do something else for a living. I really shouldn't be able to have, as my profession, the unique vocation of catching and fixing errors by the insurance industry in figuring Workers Comp insurance premiums. These errors shouldn't be so common, so costly.

But guess what. I've made my living doing exactly that since 1983.

Look, anyone can make an error in judgement, I get that. But in this case, the NYCIRB manual makes it clear that Code 0042 is intended to be used for companies that do landscape work but also do paving blocks and retainer walls. You know, exactly what this policyholder does.

Yet the insurance company told NYCIRB that this policyholder did no landscape work at all, in spite of having been given documentation by the policyholder that showed they did exactly that. (You know, in that original "dispute" handled by the insurance company itself.

Look, if a policyholder did something like this, he might well be accused of insurance fraud. God knows, in places like California, I've seen policyholders criminally prosecuted for much less obvious classification issues.

But sauce for the goose is not sauce for the insurance industry gander, in this regard. Hell, the California statute about Workers Comp premium fraud applies only to policyholders, not insurance companies, not at all. You may draw your own conclusions from that.