Calling B.S. On The Illinois Policy Article on Illinois Workers Comp

So an outfit called "Illinois Policy" just posted an article on Illinois Workers Comp that is rather pungent, I fear. This article, by one Michael Lucci, purports to call B.S. on one Steve Brown, spokesman for Illinois House Speaker Michael Madigan. Mr. Lucci then proceeds to sling his own bovine byproducts in an attempt to show how Mr. Brown is full of, errr, brown stuff.

But the "facts" that Mr. Lucci cites simply aren't facts at all. They are, to put it diplomatically, B.S.

Lucci has written that "The workers’ compensation insurance market is worth nearly $3 billion per year in Illinois. Meanwhile, persons and companies harmed by federal anti-trust violations, including price-fixing, can seek triple damages on the economic harm they experience."

These two independent facts are true. They just have nothing to do with each other, and when placed together foster the impression that the Workers Compensation insurance industry could be a tempting target for attorneys citing federal anti-trust statutes. This is a lie, because the McCarran-Ferguson Act exempts the business of insurance from federal anti-trust regulations and statutes, as long as the state regulates said insurance business. Illinois does still, at least on paper, regulate Workers Compensation insurance, so the Workers Compensation insurance business is not subject to the federal anti-trust statutes that apply to most other businesses.

Lucci also writes that since the Workers Comp insurance market has a record number of insurers and is competitive, "it is simply unbelievable that 332 rivals would collude to fix prices." Ummm, no.

Workers Compensation insurers share data on claims and premiums routinely, through the operation of the National Council on Compensation Insurance. NCCI is a sanctioned "rating bureau" whose job it is to gather such data from all insurers operating in Illinois and use that data to develop advisory rates and loss costs that are then shared with all the insurers. So collusion is cooked into the system.

And while it is true that all these insurance companies are competing for accounts, they tend to be competing only for a certain sub-set of Illinois business. If, for example, your business is in a construction related field, you will find that there are only a handful of insurers interested in even considering you. If your business is brand new, or very small, no insurance company at all may be interested in your business, which means you go into the Assigned Risk Plan--where premiums are automatically doubled and service is non-existent.

And it's not like the typical business can easily access all those hundreds of insurers. A typical insurance agent may have access to only a handful of insurance companies. But said insurance agents are not always forthcoming with these limitations. They are, after all, salesmen, and good salesmen (or women) tend to find ways to obscure or talk past the deficiencies in their proposals. For a small business, an agent with limited markets will sometimes place the account in the Assigned Risk Plan without ever explicitly explaining that this coverage source comes with much higher costs and much lower service.

So the actual reason so many insurance companies are in Illinois is that the pickings are good here, precisely because they can be picky. There are still a lot of businesses here, and they are required to have Workers Comp insurance. Insurance companies are free to cherry pick and compete on the accounts they really want, and only on those accounts. For everyone else, the Workers Comp market is far, far from truly competitive.

Remember, all the insurance companies use the same manuals of rules regarding how they compute premiums, they all use the same experience rating plans developed by NCCI, and they all share underwriting data by means of NCCI.

So, again, I believe the key points raised by Lucci in this article are, as I said pungent. As in, the opposite of true.

How Ghost Policies Haunt Other Employers

So when is a Workers Comp policy not a policy? When it's a "Ghost Policy". And these ghosts can do more than just scare a business owner late at night--they can pick your pocket. Or rather, enable your insurance company to do so.

Perhaps some background info is in order, for those unfamiliar with this paranormal version of a Workers Comp insurance policy. A "Ghost Policy" is when a small business, usually a sole proprietor, buys a Workers Comp policy to satisfy the demands of some customer, but then excludes himself from the policy. Now, if that sole proprietor is the only person actually doing work for his company, the policy actually covers no one, since it would only cover for injuries sustained by employees of the sole proprietor, not the sole proprietor himself.

But--the Ghost Policy enables an agent to issue an all-important Certificate of Insurance for the sole proprietor, satisfying the request of a customer for evidence of WC coverage. Oftentimes, the sole proprietor is unaware that he or she is doing anything improper---agents often suggest that this is just standard operating procedure and a mere formality. 

But a recent case of mine illustrates how these Ghost Policies can haunt a company that relied upon such a Certificate of Insurance.

My client was a very small business and relatively unsophisticated when it comes to insurance. He used the services of a couple of independent contractors, and knew enough to request Certificates of Insurance from them.

But when my client's Workers Comp insurer performed the annual audit, and saw those Certificates, the insurer did a little cross checking with their own records. See, the large and well known insurer who wrote the policy for my client also wrote the policy for one of those independent contractors. So this large and well known insurer learned something that had been hidden from my client--the policy written by that same large and well known insurer for the independent contractor had been a Ghost Policy. So said large and well known insurer charged my client for these independent contractors, saying that since the Ghost Policy didn't actually cover the I/C, they were entitled to charge premium.

Now, my client didn't know this had been a Ghost Policy--The Certificate of Insurance that had been provided to him indicated it wasn't a Ghost Policy. But the insurer knew otherwise, because they had the benefit of being able to look up the details of this I/C's policy from their own records.

Nice work if you can get it. You provide a misleading (dare I say fraudulent?) Certificate of Insurance, and then, much later, you spring the trap for my client, based on the information that was withheld.

Now, we've referred this matter to the Illinois Department of Insurance, where we expected it to be a pretty open and shut case that would be resolved quickly for my client. Turns out, not so. Everybody from the department to the NCCI-sponsored appeal board has, so far, been frantically trying to pass the buck. Everybody was eager to suggest my poor little Lithuanian-born small business owner would need to hire an attorney (at considerable expense) if he wanted to pursue this dispute. I didn't like that answer.

It looks like the department is reconsidering this matter now, after I helped my client arrange a few phone calls from his state legislators. But it's still far from settled.

But this case is an abject lesson in how Ghost Policies can leave unsuspecting business owners exposed to a Shock Audit (as I like to call them), because the insurers sometimes have information that has been withheld on the Certificate of Insurance.

This isn't the first time I've seen a large insurer play this game. And it does make me wonder just how widespread this practice may be. This is an issue I'm currently researching, and I would love to hear from anyone with information on this subject.

To protect yourself from being victimized by a Ghost Policy by one of your independent contractors, you must first realize a painful truth about the insurance industry: Certificates of Insurance have been designed by the insurance industry to be essentially unreliable. When push comes to shove, the fine print says that the insurer really doesn't stand behind the information provided by a Certificate, so more fool you if you believe them.

If desiring evidence of coverage from a very small business, like a sole proprietor, you need a copy of the policy itself. And maybe, just to be sure, insist on something in writing from the agent or broker that states that the policy in question doesn't exclude anyone. If you don't, you may be setting yourself up for a haunting. Not to mention a drive-by Shock Audit.

Payroll Misclassification

Recently, the insurance trade magazine Insurance Journal wrote about how widespread the problem of payroll misclassification is in Workers Compensation insurance. 

Of course, some of us have been pointing this out for decades. After all, Advanced Insurance Management has been helping employers fight this kind of misclassification since 1987.

In fact, our very first client, back in 1987, had suffered from misclassification of one of their subsidiaries, and AIM was able to successfully recover those overcharges, going back four years.

And in all the ensuing years, misclassification of payroll has remained one of the most common, and one of the most expensive kinds of Workers Compensation overcharges that we find and fix for employers.

For example, one of our most recent cases involved a Chicago area meat processing company that had been misclassified for years. Their insurance company had been misclassifying them as a company that cooks meat, when in fact they properly belonged in a less expensive classification for companies that merely slice meat.

Correcting this misclassification ended up with AIM recovering $80,000 in past premium overcharges for this client.

Payroll misclassification occurs because the insurance industry makes the rules regarding Workers Comp classifications just complicated enough that the industry itself makes errors routinely.

And although the insurance industry devotes considerable effort to spotting misclassifications that lower premiums (and thus cost insurance companies money) they don't devote anywhere near the same kind of effort to correct misclassifications that improperly increase premiums.

As I have often said, in a perfect world I should have to do something else to make my living, rather than correcting all the overcharges made by insurers. But for better or worse, we don't live in that perfect world.

Premium Inequality

So, everyone's probably heard of the "income inequality" issue that's been bubbling up in the media, unless you're already so rich you don't worry about such mundane things. But no matter where on the political or economic spectrum you may reside, there's a different kind of inequality that I've been thinking about lately. And naturally, it involves Workers Compensation insurance.

Let me share with you a recent email I received from a prospective client that may illuminate my thinking on this subject. This small business owner was insured through the New York State Insurance Fund, which functions as the insurer of last resort in New York. That's the equivalent of the Assigned Risk Plan, for those of you in NCCI states like my own Illinois. It means that this is the source of Workers Compensation insurance for those who cannot get coverage from the "voluntary market". Often, small or new business ventures end up covered through such insurers of last resort.

The reason for this business owner's desperate email was that the NYSIF had just hit him with a 60% surcharge on his renewal policy, and he couldn't believe this was correct. He was hoping we would be able to tell him it was based on some error by the insurer.

Sadly, it wasn't. The NYSIF has a rating feature called a differential, and it functions much like Schedule Rating does in other jurisdictions--it's a discretionary premium adjustment that can be applied, without any statutory requirement for justification, and not subject to calculation by any particular formula. NYSIF explained that this 60% surcharge was because this particular business had incurred a couple of claims in the past year, totaling a couple thousand dollars, and this insured had been late paying his bill in the past year.

That's all it took for this insurer of last resort to unilaterally impose a 60% penalty on this employer's Workers Compensation insurance, a business expense that, need I remind you, is essentially mandated for most employers. And since this employer is already in the "insurer of last resort" it's not like he can just take his business elsewhere. I mean, it's theoretically possible he could get a voluntary market insurer to underwrite his coverage, but that seems unlikely because if insurers were really interested in his small account he likely wouldn't be covered by the "insurer of last resort".

Now, it is theoretically possible to appeal these "differential" charges to the insurance regulators in New York--but when I called them, they didn't even realize they had authority over this, so it does not seem too likely this can be successfully appealed. I'm still checking, though.

But this story just illustrates the common plight of small employers: the rates and premiums they pay for Workers Compensation insurance tend to be much, much higher than the rates for larger employers.

Small employers disproportionately tend to be covered by the various "insurers of last resort" and those insurers almost always have much higher rates and premiums.  For example, the manual rate here in Illinois for a machine shop is $6.07 per hundred dollars of payroll in the voluntary market, but $9.14 in the insurer of last resort.  And on top of that rate differential, the "last resort" employers lose the premium discount factor, are not eligible for schedule credit factors, and if their experience mod is over 1.00 they get his with an additional surcharge. So it's not uncommon for "last resort" companies to pay rates that are double what they would be in the voluntary market.

Now, of course, there are legitimate reasons for these higher costs, in the aggregate, because these last resort insurance programs often lose money, as claims exceed premiums. But that's because the "last resort" programs insure not just the small or new employers but also larger employers who can't get coverage through the voluntary market--and these larger employers often are shut out of the voluntary market because of bad claims histories.

But that is small comfort to a small employer with a spotless claim record who nonetheless is stuck in a last resort plan.

Even aside from those kinds of issues, small employers often take it on the chin because rating formulas don't give them as much credit as you would expect.

I was reviewing experience modification factors recently for another small employer, and noted that they had no claims at all for the ten years I was reviewing. Yet the lowest their experience modifier ever went in those years was a .94. So the greatest discount this employer could get from experience rating, after ten years of no losses, was a six percent discount. And that's because the experience rating formula is designed that way, to reduce big swings in mods for smaller employers.

Over the course of my almost-forty year career in Workers Compensation insurance, I've seen this trend grow. When I started, this wasn't the case--once, rates were set and uniform for all employers in the same line of work, adjusted only by experience rating based on their particular loss history. Insurers had to compete on service, as prices for each employer were essentially uniform from one insurer to another. Then competitive rating was gradually introduced, where insurers could increasingly compete on price by filing different rate schedules and using schedule rating adjustments. And this certainly did produce benefits for some employers--if you had significant premiums and decent losses, you could indeed often negotiate with your insurer over price.

But smaller employers haven't benefit from this change--in fact, they've been placed at a competitive disadvantage, because now their Workers Compensation insurance costs, on a unit cost basis, are much, much greater than their larger competitors. So competitive rating in Workers Compensation insurance serves to inadvertently handicap smaller businesses and reward larger ones.

As with many things, unintended consequences can have some of the most powerful impacts. And of course, there are now voices in some corners clamoring to allow larger employers to "opt out" of the traditional Workers Compensation system and create their own programs for addressing workplace injury and illness. I'm not a great fan of such ideas, as I fear they will harm workers who are already at a disadvantage, but another reason for my disdain of these proposals is that they increase the premium inequality between small businesses and their larger competitors.

Small business already has a difficult enough time surviving and thriving in our modern world, even though we celebrate small business in countless political speeches and chamber of commerce press releases. But the truth is, particularly in the field of Workers Compensation insurance, small employers get saddled with costs that are disproportionately high.

Guess It Wasn't Such A Good Idea To Buy Workers Comp "Insurance" From An Indian Named Chmliewski

Sometimes, you read about Workers Comp-related news items and just have to scratch your head and wonder at the Rube Goldberg style things that are sold as alternatives to Workers Compensation insurance.

Case in point, as Rod Serling used to say: this news item about an insurance executive named Gregory Chmielewski, who sold Workers Compensation "coverage" to California employers--"coverage" that was created by mean of an Indian tribe and a PEO arrangement.

See, the Indian tribe angle enabled the evasion of state insurance regulations, and the PEO set up enabled them to emulate a Workers Compensation vehicle that is widely used (if sometimes abused).

And surprise, surprise, the company ended up bankrupt, leaving some injured workers without coverage and the man behind the curtain going to jail for misappropriating funds.

I understand that employers are sometimes really hard-pressed to afford real, traditional Workers Comp insurance. God knows, we get calls every week from desperate employers who are being premiumed out of existence by insurance companies (fortunately, a lot of the time we can help these employers reduce those premium charges.)

But really---Workers Compensation coverage from an Indian tribe, using a PEO (you know, Professional Employer Organization, aka employee leasing.) From an Indian named Chmliewski?

Before my Dad changed our family name, it was Przyborowski, so I guess I could say I'm a member of the same tribe as a guy named Chmliewski--and let me tell you, our tribe ain't from west of the Pecos. But truth to tell, I don't want to belong to any tribe that would let a flim-flam man like this remain in good standing. Guess I'll have to raise the issue at our next Pow-Wowski.

Criminal Liability for Employers From Their Workers Comp Insurance

I've recently been asked to serve as an expert in a case where an employer has been criminally charged over how they reported information regarding Workers Compensation insurance classifications. Essentially, this business owner has been charged with multiple counts of insurance fraud over how he reported information used to classify his employees.

Now, I obviously cannot comment about any specifics of this case. But it does remind me that this sort of thing is not uncommon--indeed, it is a growing phenomenon, judging from the news stories I read, and my own experience as an expert witness. And I think it's something that business owners don't think much about--at least, not until someone accuses them of criminal activity over how their Workers Comp insurance premiums have been calculated. Then it likely becomes the only thing they can think about.

Insurance companies have been active in recent years in funding specialized units within local prosecutors' offices, units to focus just on cases of alleged Workers Compensation fraud. Now, it might be argued that there are some ethical questions associated with accepting funding from the insurance industry to create prosecute employers whom the insurance industry thinks have cheated. But the answer to that, I think, is that prosecuting financial fraud is in the public interest regardless of where the funding comes from. The trick lies in not allowing the insurance companies undue influence over such prosecutions, and that is something that I suspect is easier said than done.

After all, the very act of charging a business owner with Workers Comp premium fraud creates terrible financial and professional burdens. The cost of effective legal defense is not cheap, even if it eventually produces an acquittal.  And there are all the terrible non-financial costs associated with such criminal charges.

Just in my own limited experience, I have seen a marriage broken up when one spouse was criminally charged, I have seen insurance brokers lose their livelihood and their licenses, and I have seen a family business threatened with extinction, because prosecutors charged them with Workers Compensation premium fraud.

And of course, there is that little matter of being sent to prison if one cannot win acquittal.

Now clearly, a significant number of the people who are criminally charged for Workers Comp fraud may well be guilty as charged--I wouldn't want to think that our criminal justice system is utterly broken---but my own experience as an expert witness and consultant also has shown me that the power of prosecutors is considerable, and that even some people who end up pleading guilty have done so because they concluded the costs of fighting the charges were just too high, in spite of the fact that they truly felt they were innocent.

The rules about how Workers Comp insurance premiums are supposed to be calculated are complicated---complicated enough that the insurance industry itself often makes significant errors in applying those rules. After all, I make my living correcting those errors by the insurance industry, and if they didn't make a lot of errors I would have to find some other means of paying the mortgage.

Those complicated rules mean that prosecutors can, I suspect, sometimes be persuaded by insurance company personnel to see fraud on the part of an employer where there really may only be imperfect understanding of those rules by employers.

Also, there is this. I think I would have greater respect for the application of criminal charges over Workers Comp insurance premiums if it weren't just employers and workers being charged. I am unaware of any insurance company personnel being prosecuted for committing fraud over Workers Comp premiums, even though I have seen situations that strongly suggested deliberate wrongdoing.

Mind you, the overwhelming majority of the errors we find by insurance companies look to be genuine errors, not something more deliberate and sinister. But that being said, there have been some insurers who have engaged in systemic practices that sure seem like they might have violated some laws.

Remember a decade or so ago, when then New York Attorney General Eliot Spitzer caught AIG systematically rigging the New York Workers Comp insurance system? Those AIG practices eventually led to a billion dollar lawsuit between the rest of the insurance industry and AIG. But I do not believe any AIG executives were criminally prosecuted.

There have been other instances I have been aware of where insurance companies have made Workers Comp insurance premiums higher than they should have been, by systematically ignoring certain rules and regulations, and when caught, there were financial costs, but no criminal charges.

Insurance regulation is handled, on a state by state basis, by specialized regulators. But the oversight and regulation of Workers Compensation insurance premiums has been degraded substantially over the course of the past thirty years, and the staffing and budgets of many state insurance regulators have been cut drastically. So regulatory oversight of Workers Compensation insurance premiums has been turned into a paper tiger, in many instances. And insurance companies know it.

Those insurance companies would characterize this development differently--they would say that deregulation of Workers Compensation insurance has produced a more competitive market that benefits employers. And there is some genuine truth to that argument. But those benefits are unevenly available to employers, and diminished regulatory oversight creates the opportunity for some insurers to exploit their advantage unfairly.

And now, one of those advantages increasingly appears to be the veiled threat that if an employer ticks off an insurer too much, the insurer might whisper in the ear of a prosecutor.