New Hampshire Contractors Face WC Jolt

Small contractors in New Hampshire are facing a serious increase in their Workers' Compensation insurance premiums, due to a new law that went into effect in September. This new statute requires that anyone working on a constuction site has to be covered by Workers' Compensation insurance (or approved self-insurance). Many small contractors have routinely exempted the principal members of their LLC from coverage, covering only subcontractors. This reduces premium charges by excluding remuneration costs for those principal members from the premium calculations.

But the new law requires that everyone working on the jobsite be covered--and insurance producers are scrambing to let their LLC construction clients know about the change. Somehow the bill flew under the radar screens of many small business groups, so small construction companies impacted by the change are just now voicing their objections, as the financial impact becomes clear.

The law clarifies a grey area that exists in many states, but it is certainly going to cause quite a few financial shocks to small companies in the Granite State as their Workers' Comp audits are done.

Louisiana Biz Coalition Seeks WC Reforms

A coalition of Louisiana businesses is pushing for broad reforms in that state's Workers' Compensation system, claiming that the current system "...is in a crisis situation." The group, Louisianans for Workers' Compensation Reform, cites studies by such groups as the National Council on Compensation Insurance (NCCI), the Workers Compensation Research Institute, and others, as evidence that injured workers in Louisiana stay on temporary disability longer than necessary.

The group points to reforms in other states such as California, Colorado, Delaware, Florida, Hawaii, Illinois, Kentucky, Maine, Missouri, Nebraska, New York, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Vermont and West Virginia that have reduced costs for employers.

I would only caution them, as someone who has been involved in the efforts to reform the Illinois system, to remember that not all reforms produce the promised results. Here in Illinois, the business community thought it had made a reasonable compromise by accepting an increase in certain benefit levels in return for the first-ever medical fee schedule.

So far, the promised cost savings have not materialized, and many in the Illinois business community feel it is because the implementation of the medical fee schedule has been done in such a way as to minimize any actual cost reductions. The process of actually establishing a working medical fee schedule in Illinois has been difficult, and is still not finished. And so while the increased benefits have already gone into effect, the promised cost savings from the medical fee schedule remain in the future. And may always stay that way, if some influential groups have their way.

NY Workers Comp Rates Cut

New York Insurance Superintendent Eric Dinallo has ordered a 20.5% cut in New York Workers' compensation rates, based on changes to the state's WC laws enacted earlier. New York Governor Elliot Spitzer made reform of Workers' Comp a priority in his new administration, and he worked with legislative leaders to make changes in benefits and other statutes that have led to this significant rate reduction.

Spitzer may have been the bane of some businesses during his time as New York's Attorney General (which included high profile legal attacks on insurance industry abuses) but this latest news has got to be very welcome indeed to the larger business community there.

New York Imposing New WC Requirement On Out-Of-State Employers

Under new regulations set to take effect on September 9, 2007, out-of-state employers who have workers in New York State will have to make sure they have valid New York coverage, either through a separate policy for New York or by making sure New York is added to their multi-state policy in section 3.a of the policy.

More details can be found at http://www.wcb.state.ny.us/content/main/Small_Business/outOfStateEmployers.jsp

New York doesn't hesitate to apply significant fines for companies that they feel don't comply with these provisions, so if your company has workers who occasionally work in the state of New York, you will want to make sure you are in compliance with the new regulations.

Class Action Filed Against California WC Fund

The State Compensation Insurance Fund, or SCIF, has been hit with a class action lawsuit against the fund and some of its top executives. SCIF is the California Workers' Compensation Fund, and it competes against private insurance companies to provide Workers Comp coverage to employers in California. SCIF is the largest provider of such coverage in California.

The lawsuit seeks $25 million in compensatory damages and $50 million in punitive damages, and alleges that there were improper payments made by SCIF to some safety groups operated by former board members of SCIF.

The lead plaintiff in the action is Acro Constructers, Inc. of Burbank, and the law firm handling the suit is Pearson, Simon, Soter, Warshaw & Penny, LLP. in Sherman Oaks. It is reported that potentially there could be 250,000 members of the class action among California employers.

NCCI Sues AIG--For A Billiion Dollars

There's been an extraordinary development in the world of Workers' Compensation insurance in the past few days--the NCCI has sued American International Group (AIG) for a billion dollars. NCCI, the National Council on Compensation Insurance, is the insurance industry group that writes the classification and audit manuals used for Workers' Compensation insurance in most states. NCCI is essentially owned by insurance companies that write Workers' Compensation insurance, so it's an unprecedented event for this organization to file suit against a member insurer such as AIG--and for a billion dollars, no less.

The suit stems from something that had been uncovered by New York Attorney General Elliot Spitzer: AIG had for years been reporting a lot of Workers' Compensation premium as if it were other kids of liability insurance premium instead. This enabled AIG to avoid its fair share of Assigned Risk Workers' Compensation business, which tends to be unprofitable. And NCCI administers the national pool that makes the Assigned Risk system work in most states. Thus, AIG's deceptive practices made other insurers pick up more than their proper share of this Assigned Risk business. The suit by NCCI charges that the damages to other insurers was a billion dollars.

AIG, for its part, has responded that its settlement with Spitzer for $300 million dollars should have closed the book on this matter, but NCCI doesn't seem to agree.

A lot of insurance industry professionals have pooh-poohed Spitzer's investigations of their business, but this lawsuit would seem to suggest that there was even more to the story than even Spitzer documented.

Former Ohio WC Exec Sentenced for Fraud

Terrence Gasper, who until not so long ago was the chief financial officer of the Ohio Workers' Compensation fund (a monopoly state fund) has been sentenced to a bit over five years in prison for his role in an investment scandal. This is the well-reported scandal involving an investment fund in rare coins that had been promoted and managed by Tom Noe, who is currently serving a 18 year prison sentence for his part in the scheme.

The Ohio WC fund lost $13 million in the investment fraud, along with a fair chunk of its credibility.

California WC Premiums Decline

The latest report from the WCIRB (California's equivalent of the NCCI) indicates that statewide premiums for Workers' Compensation insurance have declined significantly in 2006. The report states that California WC premiums totalled $16.5 billion in 2006, down by $5 billion, or 23%, from 2005. The total is down $7 billion, or 30%, when compared to 2004 figures.

This is certainly good news for California employers, who had been subjected to horrific rate and premium increases in recent years. Of course, part of the reason current premium totals show such dramatic decreases is that prior years' totals were at record high levels. Still, California businesses are glad for the relief. California labor groups are far less happy with the reforms that are largely behind the decreases, of course, and there are some loud rumblings coming from that camp that the recent reforms may have gone too far in reducing benefits for injured workers.

Workers' Compensation in California clearly remains a political football match between employers' interests and workers' interests--as it is in every state.

West Virginia Changing WC Classifications

The state of West Virginia is continuing its transition from a monopoly state fund to a state that allows competitive private insurance. The latest step is to move in two steps to the NCCI classification system used in many other jurisdictions. At the moment, West Virginia still has only one Workers' Comp provider--BrickStreet Mutual Insurance is a mutual insurance company that was formed from the old state monopoly fund. But in the next few years other insurers will be allowed into the state to compete for Workers' Comp business from employers, and so it was necessary to shift over to the classification system used by insurers in other states.

The old classification system used by the state fund and BrickStreet had under 100 classification codes. Last July, BrickStreet moved to a new system with 470 classifications, and come July of 2007 will transition to the full 586 NCCI classifications codes.

This will no doubt be a source of some confusion and difficulty for WV employers, particularly in light of the fact that even though the NCCI classification system is widely used, errors in application of the system are still widespread. (Classification errors are among the most common causes of overcharges that I find in my consulting work.)

So although West Virginia is getting in step with most of the rest of the country in regards Workers' Comp classifications, employers would still be well advised to check those new classifications carefully.

The Case for Increased Regulation

I read a very interesting article in the New York Times the other day (it's now archived so you have to subscribe to see a copy of the article, entitled When Regulators Knock Twice. The article explained how an old adversary of mine, an insurance company named Fremont Casualty, was run into the ground by management using (according to the NYT at any rate) a sneaky little scheme involving reinsurance for their Workers' Compensation insurance operations.

Once upon a time, Fremont was a significant player in the Workers' Compensation insurance business. They were one of the major writers of California Workers' Compensation insurance back in the 1990's. I personally got the pleasure of dealing with Fremont when they purchased the largest single writer of Illinois Workers' Compensation insurance back in the 1990's. I found their audit people to be difficult to work with, but still managed to recover overcharges that had occurred.

But Fremont spectacularly flamed out of business a few years ago, shut down by insurance regulators. And according to the NYT article, the reason for the flame out was that executives of Fremont had decided to juice up their own bonuses and earnings by rigging a clever little reinsurance maneuver. They dramatically lowered the threshold where reinsurance would take over payment of Workers' Comp claims, and then dramatically changed their underwriting standards so that they would underwrite risky lines of business at discounts. This resulted in great increases in premiums, and the reinsurers were the ones responsible for paying most of the increased claims costs that resulted. It worked fine for a while, until the reinsurers figured out the game and balked.

Fremont itself was then left with the disastrous claims results of their new underwriting standards, and it didn't take long for those costs to destroy the company.

Most interestingly, those executives and managers have, according to the Times, repeated their clever scheme in a new arena--sub-prime lending. that's because although Fremont insurance went under, Fremont General (the parent company) remained open for business in other fields. But in March the F.D.I.C. issued a cease-and-desist order to Fremont which charged that Fremont had “engaged in unsafe or unsound banking practices and had committed violations of law and/or regulations.”

Deja vu all over again.

All of which leads me to ponder how the lack of regulation of both the insurance industry and the lending industry may have allowed companies like Fremont to pursue such ill-advised schemes, while leaving the greater society holding the bag. After all, California famously "deregulated" their Workers' Compensation insurance market back in the mid-1990's, setting the stage for Fremont and some other significant California Workers' comp insurers to pursue strategies that ultimately imploded their companies and created huge disruptions for California employers who still needed to get Workers' Compensation insurance coverage.

Our currently-unfolding debacle involving sub-prime lending appears to be another instance when lack of effective regulation has allowed exeuctives and managers to pursue business strategies that generated considerable benefit in the short term to those same executives and managers, while ultimately creating huge disruptions in vital financial markets.

The neocon view that regulation stifles innovation in financial markets would appear to be, at least in my view, fairly well discredited by the double disasters created by Fremont and their fellow travellers. Once upon a time, insurance regulators understood that rate adequacy and market stability were factors that needed to be kept in mind, lest essential markets be disrupted. But the trend in recent decades has been to diminish or even eliminate most regulation of commercial insurance and other financial industries. In the short term, there were benefits to both consumers and to the industries. But in the longer term deregulation has simply ended up making the case for the need for some level of effective regulation of insurance and financial markets. Just ask employers out in California who have been dealing with the fallout of the disasterous deregulation of Workers' Compensation insurance. Or just watch our current financial markets deteriorate as the full impact of the largely unregulated lending business devastates hedge funds, insurers, and other financial institutions. The long term costs of deregulation can be huge and hugely disruptive, while the only real "innovations" are in the form of "creative" underwriting, accounting, marketing, and, of course, executive compensation.

This may be a lesson we're all about to re-learn at great cost.

Bill Introduced to Eliminate SC Second Injury Fund

A subcommittee of the South Carolina Senate has approved a bill that would eliminate that state's Second Injury Fund by 2013. The Second Injury Fund has been a contentious issue in SC in recent years, with the insurance industry lobbying to eliminate the fund.

The Second Injury Fund assesses charges against insurance companies and self-insured employers to make reimbursements for injury costs to certain workers who have prior injuries--the idea being to encourage employers to hire such workers, in spite of fears that they might be prone to further claims costs due to to those prior injuries.

A recent study by Advanced Insurance Management found that many smaller employers in South Carolina were not receiving any premium savings from the operation of the Second Injury Fund, apparently due to failures on the part of many insurers to report reimbursements received by the fund. The study has led to calls for further review of the NCCI rate information that was used to justify recent rate hike recommendations.

As in many other states, employers in South Carolina remain extremely concerned over the costs of Workers' Compensation, and the issue of the Second Injury Fund has pitted large employers and insurers against small business organizations.