Monday, March 22, 2021

Today's Workers Comp Shock Audit Phone Calls

 As I have often written in the past, it's a rare day at my office that we don't get a phone call or email about a Workers Comp "Shock Audit" from some employer, somewhere in the U.S. Today I got two.

The first one, this morning, was from a small biz in New York. This gentleman operates an import/export type logistics business. He insured his business through the New York State Insurance Fund, and bought a policy for only a few hundred dollars, as he was the only worker at his company. Or so he thought.

He called me because he now has a "Shock Audit" from SIF for $50,000. He's not absolutely sure how SIF managed this bit of legerdemain but it appears to involve him being charged for when he hired independent trucking companies to move some goods and he didn't get Certificates of Insurance from them.

I think we can likely help him straighten this out, once we get all the documents and paperwork from him regarding this Shock Audit. Most of these trucking companies didn't even operate in New York State, so it does make one wonder how an insurer that only insures an employer's New York liabilities is charging premium for those trucking companies. My initial impression is that there is a very good chance we can help reduce this audit bill substantially.

The second call I got today, though, is even more extreme. The call was from a non-profit agency in Georgia, an agency that helps Hispanic businesses. The Shock Audit involves a small roofer who bought a policy for around $1,000 and now has an audit bill of $600,000.00.

Yeah, that's not a typo. The non-profit is going to serve as a translator tomorrow, as the small business owner isn't fluent in English. Interestingly, the non-profit person who called me said this is far from the only such case they've seen like this. It appears these Shock Audits have been clobbering an awful lot of small businesses.

As Harry Bosch put it, you have to follow the facts. So I can't yet say what the odds are of helping this second Shock Audit. But based on other, similar cases I've seen in recent years, I have some expectations of what might have happened. We'll find out tomorrow if my theories hold water or if the insurer found some new and innovative ways to turn a $1,000 policy into a $600,000 audit bill.

I only know this. If there are errors in these audits, we will find and reverse them. Because that's what we do.

Saturday, February 6, 2021

Forty-Three Years Working With Workers Comp Insurance--Some Observations

 I started in the wonderful world of Workers Compensation insurance--still often called "Workman's Compensation" back then--in 1978, working at the late, lamented insurer American Mutual. American Mutual had, according to the company lore, written the very first "Workman's Compensation" insurance policy in the U.S., back in 1911. The company specialized in what we now call "Workers Compensation" insurance, and so they provided a very thorough training program to their Industrial Account Representatives, as they called their in-house insurance producers. They shipped me out from our offices in Chicago to a classroom they ran out by the Home Office near Boston, for an intensive three week course covering the fundamentals of underwriting, pricing, and auditing this unique line of insurance. 

That course was taught by a remarkable guy named Don Barber, who had an engaging and energetic way of covering materials that, in other hands, might have been dry as dust. 

Here I am, forty-three years later, still working with Workers Compensation insurance every day, and still using many of the lessons Don Barber tried to teach us, all those years ago. And yet, a great many things have changed in the field. Not all of them for the better, I think, although a great many of those changes have produced genuine benefits for many. Occasionally, those changes even serve the interests of the employers who have to buy the insurance. But some of those changes have eroded important things that were once viewed as inviolable principles that were fundamental to Workers Comp insurance.

The biggest change I've observed over these forty-three years is the erosion of regulatory oversight and control over insurance companies, along with significant changes in underwriting practices.

Back in the day, Workers Comp insurance was pretty closely regulated. Every company had to use the same rates, the same classification rules, the same experience rating rules. Innovation was discouraged, as it was felt that it was more important to maintain uniformity and predictability for policyholders, and to preserve financial strength for insurers.

But starting in the 1980s things began to change. Insurance regulators moved to allow price competition in Workers Compensation insurance, something that had been virtually impossible before. In 1978, American Mutual and other insurers differentiated themselves largely by the services they could provide for loss control, as pricing was pretty uniform. Then American Mutual introduced a rather revolutionary kind of policy, a sliding scale dividend policy that offered smaller employers the possibility of premium returns if losses were favorable--a feature previously only available to larger employers who were eligible for Retrospective Rating plans.

Then regulators in various states began to allow actual competition on filed rates and greater use of schedule rating. In Illinois, an insurer named Casualty Insurance Company took early advantage of these changes, filed their own manuals and radically different rates, and very quickly grew from nothing to the largest Workers Comp insurer in the state.

It took a while for more traditional insurers to catch on. I remember American Mutual seeing its book of Illinois business rapidly decline as Casualty swooped in and took policyholder after policyholder away. The oldest writer of Workers Comp insurance didn't realize it right away, but their days were numbered.

Today, most states don't really have much real oversight over Workers Compensation insurance pricing. They review and approve manual rules produced by rating bureaus like NCCI and WCIRB but there it often is a bit of a Potempkin Village these days. In my home state of Illinois, the Department of Insurance has seen an exodus of those who had real experience and knowledge of Workers Comp insurance. An older generation of regulators has retired or been forced out through budget cuts and those remaining, even with the best of intentions, are overworked and under supported by higher ups.

So the trend has been for insurers to underwrite policies without so much regard to figuring out things like correct classifications for a particular employer. I've seen sworn testimony from insurance company personnel that the prevailing attitude is to issue policies without exercising any real judgement about classifications initially used on a policy, with the thought that any errors can simply be caught on the audit.

That kind of attitude sets up employers for frighteningly expensive "Shock Audits" where classifications (or allocation of payroll among classifications) is changed after a policy ends, leaving an employer with a massively higher premium bill for a policy that's already expired.

It also fostered the environment where an insurer could market a program like EquityComp, where the details governing the ultimate cost of the insurance policy were so complex as to be incomprehensible to employers and even many of the insurance agents selling the policies. This ended in tears for many employers, when very large bills for additional premium came in and the explanations for those costs may as well have been an explanation of quantum mechanics. In Esperanto.

It's also fostered the huge growth of complex Large Deductible policies as well, where the ultimate cost of the insurance is determined by complex and proprietary formulas that are often poorly understood by those buying the insurance. It's only when the bill for huge additional premiums arrive that some employers start to realize they didn't really understand the pricing of the policies they purchased, to their eventual regret.

And even in smaller policies through Assigned Risk plans in many states, the concept of underwriting only at the time of the audit is a common one, causing Shock Audits a'plenty for smaller employers who often have only a very rudimentary understanding of this line of insurance. And insurance regulators typically can offer only very limited assistance when those Shock Audits threaten the existence of a small employer, because of deregulation and diminished authority and staff at many insurance regulatory agencies.

So in forty-three years, Workers comp insurance has gone from being tightly regulated (arguably too regulated, perhaps) to something that is, in this writers view, almost unregulated, in a practical sense. Policy forms are still filed, rates are still reviewed, but too much emphasis has been placed on using competition alone to regulate the pricing of Workers Compensation insurance. While that approach can offer some benefits, it also encourages large and powerful insurance companies to take advantage of employers, especially small employers, in the pricing of insurance that is a required purchase for most businesses.

Insurance regulators have been gradually enfeebled and hobbled in many states, and while this might make life easier for insurance companies it has not, in my view, been in the interests of employers.

Thursday, January 21, 2021

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.

Monday, January 18, 2021

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.

Monday, December 7, 2020

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.

Saturday, November 14, 2020

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.

Monday, November 2, 2020

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.