Certificates of Insurance: Worth The Paper They're Printed On?

Interesting news item from California, about an insurance agent arrested for misappropriating Workers Comp insurance premiums and issuing bogus Certificates of Insurance.  And it reminded me of what a poor vehicle Certificates of Insurance really are for providing reliable information about insurance coverage.

A Certificate of Insurance is often issued by an insurance agent/broker on behalf of a client, to provide required evidence to some third party of insurance coverage being in place. But as this news story illustrates, an unscrupulous agent/broker can issue deceptive or fraudulent Certs that mislead the parties relying upon them. Even in less egregious cases, Certificates can mislead.

For one thing, the standard Certificate form says that the insurer will "endeavor" to inform certificate holders if the policy gets cancelled prior to the expiration date. "Endeavor" means, in this instance, "we'll sort of try to notify you, unless it's inconvenient for us, or if we just screw up, in which case you're S.O.L."  So if the policy runs until December 31st, but the policy gets cancelled August 5th for non-payment, the party relying on the Cert may or may not be informed that the insurance coverage has vanished.

And sometimes, the third party recipients of Certificates are demanding coverage details that are difficult or impossible to actually obtain in the real world. So some insurance agents/brokers will indicate on the Certificate that the policy complies with the unrealistic coverage requirement, even though the policies does not in fact so comply. And the fine print of the Certificate makes clear that if the Cert contradicts the actual policy, it is the policy that determines coverage, not the Cert.

For those interested in further reading on the subject, here's a White Paper prepared on Certificate of Insurance issues.

Oklahoma WC Changes Are OK, Says Court

The Oklahoma Supreme Court has ruled that recently-enacted changes to that state's Workers Compensation statutes are constitutional. The law, Senate Bill 1062, allows employers to opt out of the state administrative system, and create their own equivalent benefit plans for injured workers.

The OK law, modeled after a similar effort in Arkansas, eliminates the adversarial system for adjudicating Workers Compensation claims, and replaces it with an administrative system.

It will be interesting to watch this experiment unfold, to see if it truly improves outcomes for injured workers, as claimed, while also reducing costs for employers. Too often, it seems, one side of that equation suffers when the other improves.

Former Arizona WC State Fund Has A New Name

The former Arizona State Compensation Fund has operated as an independent entity for years, but the entity known as SCF Arizona will now be known as CopperPoint Mutual Insurance Company. The company will still have an A- rating from A.M. Best.

This is part of a continuing trend, for state Workers Comp funds to be morphed into mutual insurance companies, and would appear to be a good thing, as having Workers Comp reserves available for raiding by state politicians is just waaay too big a temptation.

New Study Suggests "Zero-Cost" WC Claims Paid by Health Plans

A study published in the December issue of The Journal of Occupational and Environmental Medicine concludes that so-called "Zero Cost" Workers Comp claims end up being paid under employer health insurance plans.

The report suggests that this reflects an inadequacy in Workers Compensation coverage, which doesn't ring true with me. If this study really holds up to analysis--that is, if genuine work-related injuries and illnesses are being fobbed off on health insurers, it would suggest to me that the problem would lie not in Workers Compensation coverage, exactly, but in the hurdles some insurers might be placing in the way of injured workers.

But some commentators have suggested that the authors of the study may be misunderstanding how Workers Compensation insurance works. It may be, these critics suggest, that claims that initially are put forward as being work related just don't pass muster when examined more carefully by claims adjusters. After all, it is not unheard of for a worker to try and pass off as work-related an injury that actually happened on the worker's own time. So it would be entirely appropriate for such claims to be handled instead by health insurance programs rather than Workers Compensation insurance.

After all, just because a claim is initially submitted as Workers Compensation, it doesn't mean that the facts of the situation will ultimately support such a claim. Even with the best of intentions, there can be misunderstandings about what is and is not genuinely work related, under the specific statutes of a given state. An injury in a parking lot, for example, before a worker has actually entered the workplace, could generate an initial claim under Workers Comp, only to be ultimately rejected by the WC insurer or a state's WC judges.

So it is not entirely clear to me that the methodology used here is as airtight as it might be. I'll try to get a copy of the actual report (rather than just relying on press reports) and offer a more detailed analysis at a later date.

Can An Insurance Company Commit Insurance Fraud?

Just about every day, Google News finds another story for me concerning Workers Compensation fraud (that's because I ask it to, of course, demented soul that I am.) And guess what? The guilty parties (or the accused parties, sometimes) are always workers who, according to the charges, falsified or exaggerated their injuries, or else they are employers who, according to the charges, avoided proper and legitimate Workers Compensation insurance premiums by various devious means.

Then I read this article. and something in it triggered a thought I have sometimes entertained: how come insurance companies are never prosecuted under the various Workers Compensation fraud statutes that states have enacted in recent years? As the mother of this injured young worker wrote:

Why isn’t there a place in the Virginia State Police Insurance Fraud Program to include and investigate this obvious type of abuse and misuse by law firms such as this one? This has been typical and repeated for the last 5 years!

“Insurance fraud is a crime that occurs when someone tries to make money from insurance transactions through deception” –This definition was copied from the State Police website.

Now, I don't know anything about this particular case. But this mother does raise a valid point, I think. How come insurance companies aren't held to the same standard as employers and workers? On a regular basis, in our consulting work, we find instances of insurance companies making errors that overcharge employers for Workers Compensation insurance. And we can usually get those corrected for our clients. But what about all the employers who don't hire someone like Advanced Insurance Management? The insurance regulatory system isn't proactive--it only requires insurers to reverse overcharges when someone knows enough to complain, and how to make that complaint in an effective manner. But in most states,  insurance department's aren't routinely double checking how insurance companies compute premium charges for employers--insurance companies are on the honor system, I guess.

I still believe that many, perhaps most, of the overcharges we find are indeed the result of honest mistakes. The insurance underwriters and auditors I have known over the years have been among the most ethical and honest business professionals I have ever met. And yet---and yet, one sometimes wonders, when one sees how certain insurance companies seem to have adopted aggressive audit tactics, or when one reads of lawsuits by one major insurer accusing another major insurer of deliberate and systemic deceptions regarding Workers Compensation insurance premiums, and one sees insurers time and time again "innocently" forgetting or misinterpreting insurance regulations meant to protect employers from excess premiums--sometimes one wonders.

Illinois Employer Fined Ten Grand For Lack of WC

Ah, the Illinois Workers Compensation Commission has penalized another Illinois employer for refusing to obtain Workers Compensation insurance. According to news reports, John Linek has pled guilty to a class four felony and been fined $10,000 for failing to obtain Workers Comp insurance for his business, SMS Logistics of Chicago.

It's one of the lesser-known responsibilities of the ILWCC, to investigate employers who appear to lack the required Workers Comp coverage. As the news article indicates, this employer was apparently given opportunities to obtain coverage and failed to do so, resulting in the eventual felony and fine. As a general rule, ILWCC tries to just get the non-conforming employer to obtain valid coverage. I don't know why this particular employer failed to obtain coverage, but as a general rule ILWCC is willing to give an employer the opportunity to correct the problem before seeking criminal sanctions.

It reminds me of a story I was told a few years ago, regarding the enforcement efforts of ILWCC. According to my sources, one investigator for ILWCC started checking the Workers Comp status of some popular bars around Springfield (our state capital) and discovered a number of them lacked the required coverage. But when enforcement proceedings were begun, some Illinois legislators tried to intervene on behalf of their favorite watering holes. Ultimately, I am told ILWCC stuck to their guns, and the legislators' favorite after-hours spots had to obtain Workers Comp coverage. Which is pleasantly surprising, given how my home state of Illinois sometimes works in regards to political influence.

Large Deductible Policies

For many larger employers, so-called Large Deductible policies have become a common option (or sometimes, not an option but the only choice offered outside of the Assigned Risk plan.) These programs can offer employers the opportunity to reduce Workers Comp costs, if losses are kept under control. Of course, if losses are not so under control, the opposite can occur.

But whether losses are low or high, we've been noticing some peculiar things going on when some insurers calculate the charges for Large Deductible programs. We can't provide details here, but the problems we're seeing seem to be wide-spread enough that we would encourage any employer insured under a Large Deductible policy to let us take a look, to see if your charges contain these overcharges.  So far, our examinations of a number of these programs, from various different insurers, have found a disturbing pattern that results in employers being overcharged. So we would encourage employers covered by Large Deductible policies to give us a call, at 800-288-9256, or email us at AIM@cutcomp.com, to discuss how we can check, at no cost, whether or not your company appears to have been overcharged.

Undocumented Workers Eligible for Iowa WC

The Iowa Supreme Court has unanimously ruled that undocumented workers in the state are eligible to receive Workers Compensation benefits. The high court has ruled that Pascuala Jiminez, a worker for a temp staffing agency known as Staff Management, was eligible for WC benefits in spite of her undocumented status.

This has been a contentious issue in recent years, with a few states deciding to deny such workers benefits under their Workers Comp statutes. Such exclusions, in this author's view, are misguided and mistaken, and can end up rewarding employers who use undocumented workers.

The benefit for employers who use undocumented workers comes in by means of the experience modification factor, which adjusts Workers Compensation insurance premiums based on the past loss history of an employer. If an injured undocumented worker cannot make a Workers Comp claim, the employer will be rewarded with lower insurance costs when compared with competitors who employ documented workers. Thus, the inadvertent consequence of policies that seek to discourage the employment of undocumented workers would be to encourage the hiring of undocumented workers.  Along with, of course, allowing employers to injure or maim workers without having to take care of them, violating the intention of our Workers Compensation laws, along with basic human decency.

Top 10 States For Workers Comp

Yesterday I recapped the top 25 WC insurers, per a recent A.M. Best news item. Today, from that same source, is the listing of the top 10 states in terms of Workers Comp insurance premium volume.

The top 10 states with  the most workers’ comp direct premiums written in 2012:

1. California ($9.00B; 18.8 percent)
2. New York ($4.75B; 9.9 percent)
3. Illinois ($2.60B; 5.4 percent)
4. Pennsylvania ($2.53B; 5.3 percent)
5. Texas ($2.45B; 5.1 percent)
6. Florida ($2.01B; 4.2 percent)
7. New Jersey ($1.93B; 4.0 percent)
8. Wisconsin ($1.73B; 3.6 percent)
9. North Carolina ($1.24B; 2.6 percent)
10. Georgia ($1.13B; 2.4 percent)

It's interesting to note that this ranking doesn't neatly track with state populations. For example, my home state of Illinois is number 5 in terms of population in 2012, but is number three in terms of total Workers Comp premium. Texas is number 2 in terms of population, but 5 in terms of WC premium.

Top WC Insurers

A.M. Best has released the latest rankings of Workers Comp insurers,by premium totals and market share,  and the list is as follows:

The full list of the top 25 workers’ comp insurers, based on net premiums written and market share:

1. Liberty Mutual ($3.83B; 9.3 percent)
2. Travelers ($3.44B; 8.4 percent)
3. The Hartford ($2.99B; 7.3 percent)
4. AIG ($2.82B; 6.9 percent)
5. State Insurance Fund of New York ($1.94B; 4.7 percent)
6. Berkshire Hathaway ($1.04B; 2.5 percent)
7. Chubb Group ($961M; 2.3 percent)
8. Zurich Financial Services ($951M; 2.3 percent)
9. Texas Mutual Insurance ($927M; 2.3 percent)
10. State Compensation Insurance Fund of CA ($888M; 2.2 percent)
11. Fairfax Financial Group ($833M; 2.0 percent)
12. CNA ($824M; 2.0 percent)
13. W.R. Berkley Group ($805M; 2.0 percent)
14. Old Republic ($759M; 1.9 percent)
15. Accident Fund Group ($644M; 1.6 percent)
16. Employers Insurance Group ($570M; 1.4 percent)
17. ACE INA Group ($557M; 1.4 percent)
18. NJM Insurance Group ($441M; 1.1 percent)
19. Pinnacol Assurance ($431M; 1.1 percent)
20. SAIF Corp. ($416M; 1.0 percent)
21. Farmers Insurance Group ($397M; 1.0 percent)
22. Nationwide Group ($370M; 0.9 percent)
23. Great American P&C Insurance Group ($356M; 0.9 percent)
24. Auto-Owners Insurance Group ($345M; 0.8 percent)
25. Meadowbrook Insurance Group ($345M; 0.8 percent)

Estimated Audit Armageddon

At the A.I.M. offices today, it was a bit hectic as we (well, okay, my son and partner Scott, actually) worked against the clock to save a client from an estimated audit billing that threatened to put the company out of business. The insurer had issued an estimated audit billing for an additional premium of $190,000 (when the original premium on the policy had been under $20,000.)

The client had only gotten us involved in this dispute recently, as the insurance company had put the proverbial gun to his head: pay the additional premium or have the current policy cancelled as of Monday. Actually, it had been the client's insurance agent who reached out to us, when it became clear he could not get the insurer to back off the payment demand/cancellation threat. And without current Workers Comp coverage, this client would be out of business.

This case illustrates a couple of important points that warrant sharing with a wider audience. First off, the idea of an "estimated" audit may need some explanation, as it sounds like a classic oxymoron, kind of like "jumbo shrimp" or, as some veterans like to suggest, "military intelligence". I mean, by definition an audit is supposed to determine actual final premium for the policy, based on the audited payrolls. so how can it be an estimate?

Insurers issue estimated audit billings when they have concluded that they can't get the data they need to determine actual audited premium, or when they feel the data they have gotten is unreliable. In this client's case, the owner had made some inadvertent errors in allocating payroll amounts among various classifications, and then had gotten defensive when pressed by the auditor. So the auditor and the insurer moved all payroll into the most expensive classification listed on the policy--and in the process, produced a quantum leap in premium.

It took a fair bit of work to get the auditor to trust the actual payroll allocations we developed, but with proper documentation it was accomplished. But then, because the policy had been issued by the Assigned Risk facility in Michigan, it took further effort to get the folks at that AR facility to accept the revised audit payroll allocations.

At the end of the day, as time was running out (remember, the current policy was going to be cancelled effective Monday) we got everyone to agree that an additional premium of $4,000 was appropriate and acceptable, and had the client wire the money over.

Beyond illustrating the potential pitfalls of estimated audits, this case also makes clear a principle I have often stressed in the past: it's important to avoid alienating the auditor. If you make the auditor suspicious by a perceived lack of cooperation or misleading or inaccurate information, the auditor can and often will calculate an "estimated" audit premium based on a worst case scenario. So it's usually in the best interest of the policyholder to be as cooperative as possible, and to avoid creating an impression on the part of the auditor that something is being hidden or misrepresented. Keeping a good working relationship with the premium auditor can avoid an estimated audit armageddon. and that is something that every sane business owner wants to do.

Small Business and Workers Comp

In recent years a lot of states have enacted what they call workers compensation reform. They round up the usual suspects, have some hearings, and then figure out creative ways to reduce or limit the benefits that are paid to injured workers and healthcare providers. Now, it isn't a bad idea to try to prevent genuine fraud and profiteering in the matter of Workers Comp claims--far from it. It's vital, in fact, to prevent the crooks from crashing the system.

But something often gets overlooked in that process. What such reforms often forget is that, for most businesses, the cost of Workers Comp is really the cost of Workers Comp insurance. And while the cost of claims does ultimately drive the cost of insurance, there are other, purely insurance related factors, that can be the most damaging for small employers. And it is insurance reform that is usually the area that is left off the reform agenda.

A few years ago, when Illinois was having hearings on the subject of Workers Compensation reform, I offered this testimony. This input was, unsurprisingly, ignored.

At the time, I was a member of the Workers Compensation committee of the Illinois Chamber of Commerce. So I got to have a ring side seat for the Chamber's efforts to reform Workers Comp. and it was all focused on benefits paid to workers and medical costs. Try as I might, I was unsuccessful in getting much attention paid to the issue of insurance reform. I'm not that good a politician, I guess.

When we here at A.I.M. help keep a small business in business, as we periodically do, the crisis hasn't been brought about by benefits costs or medical fees--it's been because of abusive or careless actions by an insurance company.  Workers comp, in theory, is supposed to be well regulated. This is in recognition of the unique nature of this line of insurance. It's mandatory, for one thing, for all but the self employed.  And the protection of injured workers is viewed, rightly, as a high priority policy matter.

But in actual practice, regulatory oversight of Workers Compensation insurance has been slowly but surely eroded over time, so that insurers know they can often bend or break rules without much consequence. For a perhaps extreme example of this, one need only examine the lawsuits against AIG in recent years over how that major insurer apparently flouted rules in a systemic fashion.

Larger employers often have greater resources, in terms of legal and insurance advisors, to resist the excesses of Workers Comp insurers. Small employers, often insured through Assigned Risk programs, can be left with the equivalent of a "pay up or die" demand, when an audit for a huge and unexpected additional premium arrives. Sensible and reasonable insurance reform could provide some much needed protections for small employers, who are so important to our economy, yet who are always among the most vulnerable of our economic drivers.

Recommended Reading

For those interested in learning more about Workers Compensation insurance, here is a list of books that might be useful and/or interesting:

Workers Compensation: A Field Guide for Employers
Alright, I know it's perhaps immodest to put my own book at the top of the list, but I really do think that, for many readers, it may be the best combination of technical information and accessibility.

The Accidental Republic
I know I mentioned this book the other day, but it really does a superb job of explaining the history of how Workers Compensation got started in the U.S.

Workers Compensation Guide
This somewhat slim book does a good job of explaining the standard WC policy, although the list price is very high for what you get. The technical language may also be a bit dry for the lay reader.

Workers Compensation A Reference and Guide
Another somewhat pricey but useful book, also somewhat technical in its approach.

Workers Compensation Benefits, Costs and Safety under Alternative Insurance Arrangements
Another pricey and technical book, although I see there are inexpensive versions available either used or as an ebook. Some useful information here, though.

Fallen Giant
This book isn't focused on Workers Compensation insurance, but rather on one of the titans of the insurance industry (and one of the most controversial insurers in existence, and its equally controversial founder.) I found it very interesting reading, though.

That's it for the moment. Happy reading. Oh, and when you've had your fill of reading about insurance, I might also modestly recommend something completely different:

Cosa Nosferatu
My own strange little novel featuring Al Capone, Eliot Ness, and the Undead. Has nothing to do with Workers Compensation, for better or for worse.

Understanding How Workers Comp Insurance Premiums Are Calculated

Working day in and day out checking over Workers Comp insurance audits and policies, it's sometimes easy to forget that, for a lot of small or new employers, there can be a lot of mystery and misinformation surrounding the cost and coverage of a Workers Compensation insurance policy. Insurance agents don't always do as good a job as they might explaining the fine details of these matters, particularly in the case of small businesses that don't generate a lot of premium and commission.

We've put up a lot of information on these subjects on our website, cutcomp.com. In fact, we have a whole online guide to these subjects.  You can find out detailed information there about remuneration, classification codes, experience modifiers, premium audits, and related matters.

NCCI

In the past few weeks, there have been a number of relatively routine news stories about NCCI filing new rates and loss costs in various states. Florida just approved a 0.7% increase in average loss costs, based on NCCI recommendations. And Connecticut just approved a 3.2% increase in WC loss costs that had been filed by NCCI. In August, NCCI filed a 4.5% decrease in Illinois Advisory Rates for Workers Comp.

This all got me thinking that a lot of folks might not have a good understanding of what NCCI-the National Council on Compensation Insurance- is and how it operates. And so, this short primer on the organization that is so central to Workers Compensation insurance rates and premium in so many states.

NCCI was organized in 1922 and became operational in 1923, establishing rates for Workers Compensation in ten states. Workers Compensation laws in the U.S. had begun just a decade earlier (The Accidental Republic by John Fabian Witt gives a great history of this.) In the ensuing years, NCCI has significantly increased the number of states where its ratemaking services are used so that a majority of U.S. jurisdictions now use NCCI as the rating bureau for Workers Comp.

That means that, in those states, NCCI has loss and payroll data reported to it by member insurance companies so that NCCI can calculate future rates and rate components (like loss costs) and experience modification factors. NCCI also writes the various manuals of rules that govern premium computation in those states.

But to understand what NCCI is, one should also understand what it is not. It is not a government agency. It is a not-for-profit corporation created by the insurance industry (and technically owned by its member insurance companies.) Insurance company executives constitute a majority of the board of directors of NCCI. And most of NCCI's revenue comes from the fees that insurance companies pay to it. So it's a mistake to characterize NCCI as a regulatory agency, given this close relationship between NCCI and member insurance companies. Yet NCCI is independent of those insurance companies, at least, as independent as an organization can be with such close ties to the industry.

The rates and rating manuals developed by NCCI must be filed with and approved by the various state insurance regulators, but in many states such regulatory oversight is, in this writer/s opinion at least, not as vigorous and well-funded as it might be. And in my experience, NCCI's own internal enforcement of its rules and regulations over member insurers has not always been as thorough and vigilant as policyholders might wish. At the end of the day, NCCI places a high priority on keeping its customers happy. And NCCI's customers are insurance companies, not the policyholders/employers who buy insurance from NCCI member companies.

Another Criminal Conviction For Premium Avoidance

A California employer got a rather unpleasant Halloween trick--he was convicted of defrauding his Workers Comp insurer of $52,000 in premium. His sentence is 364 days in jail and thee years probation.

More and more often, employers who have improperly shaved their Workers Comp premium charges face the threat of criminal prosecution. This may come as a shock to some old school employers, who have occasionally taken a sort of "all's fair in love and Workers Comp" approach to their insurance costs.

Of course, I have yet to hear of an insurance company executive facing reciprocal criminal penalties, even though insurance companies do overcharge employers with some regularity. Mind you, it's not that I condone premium fraud by employers--just the opposite. But many in the insurance industry have got a very selective sense of moral outrage when it comes to Workers Comp insurance premiums.  Mistakes that lower premium are viewed with great suspicion of criminal intent, while mistakes that increase premiums are honest mistakes.

Most overcharges we find really do appear to be genuine mistakes--but they are mistakes that could be greatly reduced, if insurers only gave as much effort to catching mistakes that increase premiums as they do to catching mistakes that lower premiums. And some of our recent projects have identified at least some insurers who appear to be doing something more systemic and deliberate with certain kinds of mistakes. We can't talk about those things publicly yet, but sometime in the near future some of these things may be reported in the press, at least in the insurance trade press.

Maryland State Fund Morphs into Mutual Insurer

Maryland's Injured Workers Insurance Fund, or IWIF, has transformed itself into a mutual insurance company named Chesapeake Employers Insurance.  The idea is to protect the loss reserves that have been set aside to take of injured workers from the depredations of greedy politicians who might wish to divert those reserves for other uses.

Chesapeake will be limited to writing Workers Compensation coverage for Maryland employers only. This continues a trend of recent years, as former state funds in other states (like Colorado) have done the same kind of transformation into mutual insurers.

Maiming Workers for Fun and Profit in Texas

Texas Governor Rick Perry likes to come up to my home state of Illinois to try and recruit employers to move to Texas, bragging how his state is friendlier to business (meaning less expensive to operate in). Now an article in Salon details one of those business friendly practices that is particularly insidious.

Texas is the only state in the U.S. that allows employers the option of "going bare" for Workers Compensation--that is, not buying insurance (or meeting obligations via other approved routes like self-insurance). It leaves the employer, technically at least, vulnerable to lawsuits from injured workers. But the Lone Star State employers who want to save money don't appear to have to worry too much about lawsuits from the crippled and maimed undocumented workers they leave without medical coverage.

They just say that their workers are "independent contractors" and thus responsible for making their own decision about whether or not to purchase WC insurance. And when those workers fall and break their backs, or lose a finger or hand, well, that's just pure capitalism in action, Texas style.

According to the article, the Texas legislature tried to correct these abuses--and got bushwacked, as they might say down there, and so the bill died on the vine.

Take a look at the full article here.http://www.salon.com/2013/06/14/how_do_they_sleep_at_night%E2%80%9D/

Illinois Court Rules Gay Harassment Suit Barred by WC Exclusive Remedy and Human Rights Act

An Illinois appellate court has ruled that a gay man's suit against his employer for harassment over his sexual orientation is barred by the exclusive remedy provisions of the Workers Compensation Act and the provisions of the Human Rights Act.

Frederick Schroeder had filed suit against RGIS, Inc. alleging that a supervisor used derogatory terms about the man's sexual orientation in front of other workers. The suit also alleged that the company had him working extreme hours that left him emotionally and physically exhausted.

The court ruled that the worker could not sue for negligence because the Workers Comp Act and the Human Rights Act covered the situation.

New Fraud Fighting Tool in Florida

Florida has enacted a new statutory tool for reducing Workers Comp fraud. The new law, signed by the governor on June 7, creates a database system for tracking checks cashed at check cashing stores. The law requires reporting of data on all checks over $1,000.00.

These check cashing stores, it turns out, are believed to often be used in premium avoidance schemes by unscrupulous employers. More info can be found here.

Premium reduction or avoidance schemes by some employers put honest companies at a competitive disadvantage, and endanger workers who can be deprived of the protections and benefits that states have enacted via their Workers Compensation statutes.

A Very Rewarding New Case

We just finished a case that I wanted to share, as it illustrates a number of aspects of our unique business. A while ago, we had a contractor just show up at our door unannounced. He had gotten a large bill for additional premium due to an audit, he had found us on the internet, and rather than call he decided to just stop by.

His policy had been for minimum premium when it had been issued, around $1,000.00.  But the audit had now billed him for an additional $40,000.00  He made it clear to us that he could not pay this bill, and that unless we could somehow help he would be closing down his small business.

Fortunately, my son (and business partner) discovered that the audit premium was based upon a misunderstanding by the auditor about an independent contractor that had been used by our client.  This delivery person had not been working for our client, but rather was working for the materials supply company that our client purchased materials from. But that materials company had insisted our client use this delivery person, and pay him separately.  So when the auditor reviewed the books, he thought this delivery person had been someone who should be charged to our client's policy.

We were able to get documentation sufficient to clarify the true relationship, and that the materials dealer had its own policy--enough to get the insurer to reverse the $40,000 charge.

We didn't make a lot of money off this case, just a modest hourly fee, but the satisfaction derived from keeping a small business alive--that was immense.

I May Be Psychic

I had no sooner made a post here about New York raiding the reserves of its Workers Compensation fund, and adding, as an afterthought that it was fortunate that Illinois does not have such a fund for politicians to raid, than I read that Illinois lawmakers are proposing exactly that, a competitive state fund for Workers Compensation.

H.B. 2919 has cleared the Illinois State House Committee on State Government Administration late Wednesday, it was reported.  But I swear I hadn't seen the report when I made my earlier post.

While such a competitive fund could potentially offer employers a better alternative than the current Assigned Risk Plan administered by NCCI, there are sooooo many potential pitfalls with the idea that it is difficult to see a bright future for this proposal.

For one thing, the bill would have the Illinois Department of Insurance administer the fund.  But the DOI has been suffering in recent years from a massive drain of experienced people--as the state encouraged long-term workers to retire.

And of course there is the bad example set in so many other states of politicians raiding the reserves of state WC funds to cover other budget shortfalls.

Stay tuned for more exciting action in Springfield as the interested parties line up.

New York Robbing Peter to Pay Paul

Governor Andrew Cuomo of New York has submitted a state budget that siphons off around two billion dollars from the New York Workers Comp fund (New York State Insurance Fund) into the general funds of the state.  As a general rule, this is a very bad idea that has not worked out so well in other states that have tried it.

Appropriating the money set aside to pay the Workers Compensation claims that the fund is obligated to pay is just bad policy, but it's an inherent weakness of state administered Workers Compensation plans.  The nature of the long tail of Workers Compensation claims means that money has to be put aside for those future costs, but a pile of money is always an irresistible temptation to politicians.  So Cuomo can now boast that he has filled his budget gap without raising taxes--and all he had to do was rob money set aside for injured workers.  That money will still be eventually needed, of course, and so additional rate increases on employers covered by the fund would seem likely.  Thus, the governor's actions amount to a stealth tax on employers. 

Thank God my home state of Illinois doesn't operate a state Workers Compensation fund.  One shudders to think about how Illinois politicians would abuse such a kitty.  Hopefully, they don't read this blog--I would hate to give them the idea.

Of course, a well run state fund could offer some genuine advantages to employers.  But as this New York story illustrates, it can be difficult for politicians to let a state fund operate prudently.

Former AIG Chief Suing U.S.

Never let it be said that Maurice R. 'Hank" Greenberg lacks chutzpah.  Greenberg is the guy who cobbled together AIG out of various pieces of second-tier insurance companies, creating an insurance juggernaut that Wall Street loved for its dependable profits (but which was less beloved by many policyholders, I believe.) Greenberg was forced out from the company he created after Eliot Spitzer proved in court that AIG had been operating in an improper and illegal manner.

Greenberg lived to see Spitzer disgraced and booted from the governor's mansion, after someone got the FBI to uncharacteristically investigate and wiretap a brothel.  But Greenberg had still been forcibly removed from his empire, just shortly before the Financial Products division of AIG hit the fan and threatened to bring down the world economy (at least, that's what the HBO movie said.)

Our federal government felt it had no choice other than to bail out AIG to the tune of $182 billion, as the insurer imploded in the wake of the 2008 financial crisis.  You may remember those days, when AIG quickly became the most hated insurer in the observable universe.

Well, Mr. Greenberg has now filed suit against the United States government, alleging that the bailout was unfair to him and other investors, and unconstitutional to boot.

I don't like to pre-judge any lawsuit--it has been my experience that initial impressions of such things can sometimes be inaccurate.  And while Mr. Greenberg may have been (at least according to some) an unscrupulous and tyrannical CEO, it doesn't automatically mean he is full of it in this instance.

Still, it sure feels unseemly.

Large Deductible Workers Comp Not Always A Panacea

I just saw an online blog/press release kind of thing that suggested that large deductible Workers Comp insurance provides "Most Control For Managing Workers Comp".  You can take a look at it here. Myself, I'm not so sure.  Maybe that's because I've been retained as a consultant/expert witness by so many disgruntled employers who have found Large Deductible Workers Comp policies to be something more akin to a money pit than a management tool.

Large Deductible policies make the employer responsible for paying most claims out of pocket, (plus handling charges to the insurer) but leave all power and responsibility for handling and reserving and settling those claims with the insurance company.  That means that the insurance company is now paying claims with someone else's money.  So employers can be subject to some rude surprises when claims costs escalate beyond projections, and they are asked to kick in more money.  And more money.  And yet more money.  So in many cases, employers can't really close the books on the costs of Workers Comp for any given year until three or four or five (sometimes more!) years later.  And estimating what your cost of Workers Comp will be for an upcoming year becomes more of a crapshoot than ever.

Worse, Large Deductible policies are often mind-numbingly complex.  Many of them utilize separate side agreements to spell out the details of what employers will actually owe the insurer, and those side agreements can make the standardized policy language look simple by comparison.  I've been working with Workers Compensation insurance for more than thirty years, and some of the side agreements used by some carriers make my head hurt when I try to read them.

Let me put it this way: one of my hobbies is reading about science and cosmology.  Explaining black hole physics is an easier matter than explaining some of these side agreements.

In some of the legal disputes I've assisted on, the insurers invariably say that the policyholder was a "sophisticated" insurance purchaser.  That always makes me smile to myself, because the complexity of some of these side agreements is far beyond what any normal business person who isn't an insurance professional would likely understand.  But let me assure you, the insurance company underwriters and lawyers who have drafted those side agreements have thought long and hard about the implications of all that dense prose.  Their understanding of what these complicated unilateral contracts contain is normally far in excess of that of even an experienced insurance buyer.

Some side agreements completely negate the effect of experience modification factors in determining final premium.  Others abandon the well established classification system for different workplace exposures that has been used since the earliest days of Workers Compensation insurance.  And these fundamental changes are often poorly understand, if at all, when many employers purchase these policies.

Now, to be fair, not all Large Deductible policies end up badly for the employer.  They can indeed offer genuine cost reductions for certain employers.  But Large Deductible policies also do away with, to a very great extent, the standardization of Workers Comp insurance policies that many employers have come to rely upon.  The details of the side agreements used can vary greatly, and so some Large Deductible policies may be well understood by an employer at the outset, while others can be as confusing as when I try to explain to my wife why you can't really ever see something cross the event horizon of a black hole.  (She's a smart lady, but doesn't share my enthusiasm for general relativity.)

Large Deductible policies certainly have a place in the insurance universe.  They can make sense for some larger employers.  But not always.  And the complexity and non-standardization inherent in these programs just about guarantees that my work as a consultant and expert witness, in cases involving premium disputes for these policies, is not likely to end any time soon.

Now, if you have a few minutes, would you like to hear about how the paradox of a person falling into a black hole may point to the reality of multiple universes?  See, this is because an outside observer will see the unfortunate person falling into the black hole get vaporized, while the person himself will not experience any such vaporization at the event horizon (although later on things get rather unpleasant)...wait.  Why are you gnawing your own arm off to escape?  Would you rather talk about insurance?

The Incredible Shrinking Department of Insurance

Just had an interesting, if depressing, conversation with someone I know at the Illinois Department of Insurance.  It looks like the long-term plan of the insurance industry to effectively dismantle insurance regulation in Illinois is continuing apace.  The department is supposed to have 352 people there when it is fully staffed.  They are now down to 200, and experienced people there are getting out as quickly as possible.

Now, keep in mind that taxpayer dollars aren't involved in the IDOI--the funding all comes from fees and taxes levied on the insurance industry.  So starving the department of personnel doesn't save taxpayers any money.  It just makes sure there won't be any genuinely effective insurance oversight and regulation in the state.

This de facto deregulation was set in motion years ago, when the then-President of the Illinois Senate asked representatives of the insurance industry if they understood the long-term implications of starving the IDOI.  It was made clear by those insurance industry people, so I am told, that they were indeed fine with that.

When employers and their representatives get all upset over the cost of Workers Compensation in Illinois, they tend to focus rather obsessively on the benefits paid to workers.  And while that is certainly a significant driver of WC costs, it isn't the whole story.  What has usually been overlooked in Springfield, when they consider 'reforms' of the Workers Comp system,  is the role of insurance companies.  For most employers,  it is the cost of Workers Compensation insurance that they have to wrestle with.  And without effective and experienced insurance regulators, it is a foregone conclusion (in my mind, at least) that insurance companies will interpret things to their own benefit when computing insurance premiums and writing rules.  And when there are finally no experienced
people in the department of insurance to help employers dispute these abuses,  employers will truly be at the mercy of the insurance industry.  It is not a pleasant future to contemplate, but it is almost upon us.

New NCCI Experience Mod Formula Now in Effect

Now that 2013 has arrived, it's not just the changes in tax rates employers have to keep an eye on- the formula used by the National Council on Compensation Insurance (NCCI) to compute experience modification factors for employers has changed, and that means that employers have more reason than ever to keep a sharp eye on how their experience mods are calculated.

NCCI computes the experience modifiers (also known as X-Mods, mods, and EMRs) used on Workers Compensation insurance policies in a majority of states in the U.S. and these modifiers directly impact the insurance premiums paid by employers.

For example, an experience modifier of 1.25 means an employer is paying a 25% surcharge for Workers Compensation insurance. A modifier of .75 translates to a 25% credit. 

Experience modifiers are calculated using losses and payroll information from past Workers Compensation insurance policies, but NCCI (and other independent rating bureaus) apply a complicated formula to this data. One important aspect of this formula is that it discounts the impact of large individual claims, so that, for example, five claims of $20,000 each would have a greater impact on a modifier than a single claim of $100,000.

But under the new formula, NCCI has changed how much of a single claims gets fully counted in the experience rating formula. The net effect will be that employers with low claims histories will get modifiers lower than would have been the case under the current formula. But employers with some expensive claims in their history will see modifiers higher than would have been the case under the current rating plan.

Under the old formula, only the first $5,000 of each claim was fully counted in computing the modifier.  Everything over this "split point" was discounted.  But the new rating plan by NCCI increases the split point.  In 2013, the split point increases to $10,000.  In 2014, it goes to $13,500.  In 2015, the split point becomes $15,000, and then is subject to annual adjustment for inflation.

The other change in the new formula is to adjust the maximum modifier that can be calculated for an employer.  This maximum will vary by employer, as it is calculated based on past payrolls and classifications codes.  The maximum doesn't affect most employers, but the new formula will act to generally raise that cap on experience modifiers for those employers who qualify.

This will be an issue not just for those employers who see higher modifiers--and thus higher premium charges for Workers Comp insurance. It will be an even greater issue for those in the construction business, as a modifier of 1.00 is required to bid on many projects. With a modifier higher than 1.00, many contractors will find themselves locked out of even bidding on important projects. So employers who were just under that threshold of 1.00 may well find that their new modifier exceeds 1.00, even though no change in the safety of their operations has occurred.

Here's a link to a PowerPoint that goes into more detail about the new experience rating plan from NCCI.

This change in experience rating by NCCI may well create significant problems for many contractors, and likely will make careful review of experience modification factor calculations more important than ever.