Hearing on Illinois Workers' Comp

Yesterday, I attended a hearing chaired by Illinois Senate President John Cullerton at the State Capital building in Springfield. The subject of the hearing was Workers' Compensation, hence my interest and attendance.

Several employers gave testimony about how the cost of WC claims in Illinois is higher than in nearby states, and gave some anecdotes about some past claims situations that they felt had been unfair. Many of these employers were larger self-insured companies, so their focus was not on the cost of Workers' Comp insurance, but rather the cost of WC claims in Illinois.

Interestingly, it was the labor representatives who testified that focused on Workers' Compensation insurance issues.

I myself had submitted some written testimony to the panel that also focused on Workers' Comp insurance reforms, so I was keenly interested in the testimony provided by the AFL-CIO and some trial attorneys.

They pointed out, correctly, that for small and medium sized employers, the way they generally satisfy their Workers' Compensation obligations is to buy insurance. Thus, for most employers in the state, the cost of Workers' Comp is really the cost of Workers' Comp insurance.

The head of the Illinois Insurance Department testified that Illinois has a competitive Workers' Compensation insurance marketplace, but that really is only partially accurate, in my view. For some employers in Illinois, there is genuine price competition for Workers' Comp insurance. If an employer is the right size, and in the right line of work, and has a decent loss history, there are usually multiple insurance companies interested in competing for the account.

But for small or new businesses, or for those employers in many construction fields, there is little or no price competition for WC.

A lot of employers still end up in the Assigned Risk Plan in Illinois because they're small, or new, or have some bad losses in recent years. And our Assigned Risk Plan is a pretty bad deal for employers--premiums there can be double what premiums would be in the so-called "voluntary market". And the Assigned Risk Plan provides no real help for employers who need assistance in making their workplaces safer.

I offered to the panel some specific suggestions for Workers' Comp insurance reform (in the form of written testimony.) I'll detail those suggestions in a subsequent post.

SC Work Comp Commission in Audit Trouble

We've done a lot of work in South Carolina, helping employers recover Workers Comp overcharges resulting from insurers not reporting Second Injury Fund reimbursements, so we keep a weather eye on developments in the Palmetto State. And a news item from there has caught our eye. The Workers Compensation Commission has gotten in trouble when an audit found that the commission did not reporting in a timely basis fines the commission had collected. Reportedly, the commission was worried the SC legislature would learn of those fines and appropriate them for other uses. These fines came from employers who were found to be operating without valid Workers' Compensation coverage.

This actually is not an unheard of practice. In Illinois, our former Governor Blagojevich would raid the funds of the Department of Insurance and use the money for other purposes, even though the funds at the DOI came from fees on the insurance industry and not from taxpayers. Blago managed to starve the department, preventing it from being able to properly function, and in the process got money for other things.

But in South Carolina, the WC Commission tried to avoid a similar problem by collecting, but not depositing promptly, some $244,000 in fines. In the process, they managed to be in violation of state law.

Washington State Keeping State WC Monopoly Fund

Voters in Washington state decided to retain their state's monopoly fund for Workers' Compensation. This means that insurance companies will not be allowed to insure Washington employers for their Workers' Comp liabilities, and employers there will continue to have to use the state fund for that purpose.

Insurance companies had lobbied hard to change things--I guess the Workers Compensation insurance can't be completely unprofitable--but ultimately, the voters decided to keep the monopoly fund going. Only a couple of states and territories still operate monopoly funds for Workers Comp--the trend in recent years has been to shift away from monopoly funds and embrace a competitive private insurance system. But Washington won't be joining that trend, at least not for now.

Another Employer Going to Jail Over WC

An Arizona man has been sentenced to a year in county jail for defrauding the Arizona State Fund of $72,000 in Workers Comp premiums over several years.

Damian Andre had been president of Arizona Payroll Systems,Inc., a PEO type operation. Mr. Andre was convicted of misreporting classifications and payrolls to the fund. More info can be found here.

This is representative of a trend in recent years, one I have written about in the past--employers getting in legal trouble for taking aggressive and improper actions to reduce Workers Compensation insurance costs. Once upon a time, I think it was less likely that employers would face criminal prosecution for such wrongdoing. But those times, they are a'changing.

Just last year, I worked as an expert on a federal criminal case against a former head of an Illinois-based PEO (Professional Employer Organization.) That woman (a very bright, engaging, professional businesswoman) is now serving time in a federal correctional institution. So employers need to keep in mind that what they think of as just playing hardball with their insurance company can sometimes produce disastrous consequences.

This news item puts me in mind of another case of mine, one that has just recently been concluded. In this case, I had been hired by the insurance company rather than by an employer. The policyholder in this case had initiated legal action against the insurer, claiming that the insurance company had overcharged them by about $1.5 million. I believe this suit was the result of a review by an outside consulting company, which had reported to the employer that various improper claims handling techniques had caused the employer to be overcharged by that $1.5 million dollar amount over five years.

The problem was that, when the insurance company hired us to review other aspects of these Workers Comp premium charges, it was found that the employer had been systematically misreporting the kinds of work being done by many employees. So at the end of the day, the employer had not been overcharged, they had been significantly undercharged due to their misreporting.

The bottom line is that the case was settled, with the employer not receiving the $1.5 million dollar refund they had sought, but instead by agreeing to pay an additional $2.5 million dollars to the insurance company. Not exactly the outcome the employer had anticipated when they filed suit.

But while this employer is likely not happy over the outcome of this case, I would point to the example of this Arizona employer and suggest that he count his blessings.

Washington State Ending Game of Monopoly?

The state of Washington is considering ending its monopoly fund for Workers Compensation. Specifically, Initiative 1082 will be voted on by Washington citizens in November, and if passed would allow private insurance for Workers Compensation for the first time since 1911.

Employers there argue that the monopoly state fund there is inefficient and expensive. I don't know enough about the Washington state fund to comment on the wisdom of either side in this debate, but I can offer some perspective. A number of other states have made this change in recent years (West Virginia and Nevada) and the change appears to have worked fairly well so far. In general allowing competition via private insurers can help some employers obtain some price relief for WC. The problem is that for many smaller employers, the competitive benefits never really materialize, because there isn't any effective competition for a lot of smaller employers.

In theory, a state operated monopoly fund ought to be able to achieve some price advantages, as such a system doesn't have to operate at a profit. But state run monopoly funds can easily degenerate into politically-distorted bureaucratic boondoggles--Ohio comes to mind in this regard.

Employers in Washington should go into this with their wide open: the private insurance system comes with its own problems. Insurance companies can be bureaucratic and high-handed in some of their decisions, so scrapping the state bureaucracy doesn't guarantee an end to such problems.

Competition can help address such problems, but insurers don't always compete for smaller employers. And if a major insurer goes belly up (think Casualty Insurance in California and Illinois) it can cause real disruptions. So the private insurance system is no panacea.

It will be interesting to see which way the voters of Washington call this shot. And heck, if they choose to allow private insurance, it will at least open up one more state in which my company can offer consulting services.

Workers Comp Premium Plunge Not Good News For Employers

In 2009, Workers Compensation insurance premiums plunged. The top 25 WC carriers saw premiums decrease collectively by 13.2%. The entire WC insurance premium volume declined by 12.4%. For some carriers, the decline was more pronounced: AIG saw premiums drop by 22.2%.

This wasn't the result of rate decreases--it was caused by precipitous drops in payroll, as the economic crisis roiled its way through the country. As carriers performed audits for 2009 policies, again and again they saw that large Return Premiums were due policyholders, due to significant declines in payroll.

Now, not only is this bad news for employers in that it reflects slashed payrolls, it also portends an era of tightened underwriting standards by employers. As carriers deal with lower premium volume, they are tightening up their criteria for writing business. The net effect of this will be a significant increase in Assigned Risk policies (and in most states, the Assigned Risk programs carry much,much higher premium charges, and much poorer customer service.)

Oh, and for the folks out in California, their rating bureau, the WCIRB, has announced it wants a rate increase of around 30%. That may never come to pass, due to political pressure, but some significant rate increase seems likely.

So all in all, we would appear to be heading into a period of significantly higher Workers Comp insurance premiums, at least for those employers still in business (more on that in my next post.)

A Glowing Review For The New Book

Okay, can I share something of which I am inordinately proud? My latest book, Workers Compensation: A Field Guide for Employers, just received a glowing review in the "Workers Compensation Law Section Newsletter" published by the Pennsylvania Bar Association.

The reviewer, David B. Torrey, is a Workers' Compensation Judge in the PA Department of Labor & Industry, and here are a few excerpts from his kind and generous review:

"His chapters on classification and experience rating, meanwhile, may be the most lucid explanation currently available."

The judge also wrote: "I know that I have read and annotated the book repeatedly, and am always picking up nuances that I can relate to the cases that I have heard (and hear) litigated before me."

Judge Torrey concludes his review thusly: "So buy a copy of Mr. Priz' book and take in a critical explanation and account of fronting--and a myriad of other insurance customs, practices, and procedures. Like a new Beaujolais, breathe it in, drink it in, get lost in it, and don't ever let some risk manager catch you unaware on the topic of insurance coverage."

My goodness, I don't believe I've ever heard anyone wax rhapsodic about a Workers' Compensation book, but I am delighted (and humbled) that Judge Torrey has found my work so useful.