Keystone State Blues

There have been a couple of nasty news stories recently that focus on problems on SWIF-the Pennsylvania State Workman's Insurance Fund.  SWIF is a state fund for Workers Compensation that competes with private insurers.  Just in the past sixty days, a supervisor at SWIF was charged with fraudulently lowering Workers Comp premiums for employers, in return for significant kickbacks.  The supervisor, James McDonnell, allegedly ran his scheme for more than a decade, from 1999 to 2011.  According to news reports, McDonnell was also accused of sexually harassing another SWIF worker.  According to these news stories, SWIF failed to take those charges seriously at the time.

The other news story is that SWIF overpaid in the millions for an outsourced claims software program.  So it would appear that the Pennsylvania agency has been performing in a manner consistent with a lot of folks' worst stereotypes of a bloated government  bureaucracy.

Employees vs. Independent Contractors

There's an important article in the April 2012 issue of Best's Review about the liabilities of insurance producers and other financial professionals under state laws governing the mis-classification of workers as independent contractors.  The article noted that a recent change in California law creates joint and several liability for anyone who advises an employer to improperly classify a worker as an independent contractor.

It's not only insurance producers who have cause for concern here--other advisers, notably accountants, may well have exposures here.  And of course, employers themselves have more cause than ever  to be very careful on this subject, in many states besides California.

Even if other states have not added the joint and several liability for advisers, the potential penalties for employers who misclassify employees as independent contractors are substantial and growing.

A lot of states have been enacting statutory penalties for employers who, in the state's eyes, try to make employees into independent contractors.  States have been busy detailing specific criteria for distinguishing between employees and true independent contractors, and creating penalties for employers who get it wrong.

And of course, this issue is often the cause of unexpected increases in Workers Compensation insurance premiums, as insurers pay increased attention to situations where the use of uninsured independent contractors or sub-contractors entitles the insurer to charge premium.

Again, it can be vital to check into the specific requirements of a particular states, as the rules can vary significantly from one state to another.  A number of states have created registrations where sole proprietors or partnerships can opt out of the Workers Compensation requirements, so that companies that use their services do not incur Workers Comp insurance liabilities.  But other states offer no such protections, and these differences can trip up unwary policyholders.

New Experience Mod Formula Coming

For many companies, their Experience Modification Factor is more than just an important element of their Workers Comp insurance premium charges.  For many in the construction trades, the Experience Mod is also a critical benchmark used by customers and potential customers.  A mod higher than 1.00 can prevent a company from even bidding on certain projects.

Starting next year, NCCI (National Council on Compensation Insurance) will be changing the formula they use to calculate experience modifiers.  Since most states use NCCI as their Workers Comp rating bureau, this means that most employers will be affected by this change.  Our initial analysis indicates that the changes will lower mods for some employers, and raise them for others.

The bottom line is that companies that control Workers Comp claims will probably benefit from the new NCCI formula, while companies that have more significant claims costs in their history will see mods increase dramatically.

What NCCI is doing to create these changes is to alter the threshold at which a claim is discounted in the rating formula.  The old formula discounts any single claim over $5,000, so that only the first $5,000 of any claim is fully counted in calculating the experience modifier.  But the new formula will increase that threshold in graduated steps, so that by 2015 the threshold will be $15,000.

You can find a more technical explanation of the upcoming changes in NCCI modifier calculations at:
https://www.ncci.com/nccimain/industryinformation/regulatoryactivities/pages/iteme-1402-rev-expratingplan-excesssplit.aspx?s=E

I got an interesting call the other day from an insurance agent, who was trying to figure out how to help a client cover occasional Workers Compensation insurance exposures in other states.  The client was based in Colorado, insured by Pinnacol Assurance.

Now, normally the way to handle occasional exposures in other states is to add them to the policy under Section 3C.  But the agent said that he had gotten some written advice from Pinnacol indicating they couldn't do this.

Then it dawned on me: Pinnacol isn't a regular insurance company.  It's the former Colorado State Fund, transmogrified into the form of an insurance company.  But because of that, Pinnacol isn't approved to write Workers Compensation insurance in states other than Colorado.

It's not a problem limited to Pinnacol.  Not all insurance companies are licensed to write Workers Compensation in all states.  And there are also the group self-insurance trusts that operate in many states.  Many employers have difficulty differentiating between such programs and an insurance policy (they are often marketed in ways that may obscure the important technical differences.)

In the case of the Colorado company that prompted the phone call, it appears their options are to purchase a non-Colorado policy for their incidental out of state exposures, or to replace the Pinnacol policy with a policy from a multi-state insurer who would be able to add other states to a single policy.

Employers need to keep an eye on their incidental out of state exposures, as it can lead to uninsured claims if one isn't careful.

I worked on another recent case where a Louisiana employer had coverage through a group self insurance trust that covered only Louisiana.  When they took a new job in Texas, they ended up with an uninsured claim because they lacked Texas coverage.

Keeping an eye on what states are covered by your policy is an important detail that sometimes gets overlooked, especially by smaller employers.  Since Workers Compensation liability is mainly a state-by-state matter, having coverage in one state does not help if you have workers who are eligible to make a claim under the laws of a different state.

Illinois WC Reforms Signed by Governor

2011 is the one hundredth anniversary of the first U.S. Workers Comp statutes being enacted (first in Wisconsin, then elsewhere in fairly quick succession over the following years.)  So it seems timely that, this year, significant Workers Comp reforms were enacted into law here in Illinois.  While these changes were not all that some business groups wanted, they should have some noticeable impact on rates and premiums.
The biggest impact will likely be from the 30% reduction in the medical fee schedule.

The new law also introduces AMA guidelines for the first time in Illinois, for use in determining the degree of impairment of injured workers. It also allows for the use of PPOs in Workers Comp, although workers can still opt out of such networks and obtain care from a doctor of their own choosing.

The new law also tightens up limitations on benefits when alcohol or drugs are involved--shifting the burden of proof to the worker, applying a blood alcohol limit of .08 and a zero tolerance for illicit drugs.  But the language of the law is that such intoxication must be the "sole cause" of the injury in order for WC benefits to be ruled out.

The reforms also reduce the amount of time paid for carpal tunnel injuries, and strengthens the use of Utilization Reviews.

One thing the new law does not do, to the frustration of some in the business community, is require that workers prove that an injury or illness was caused by work.  In my own view, that might well have been a bit too much, as it would have likely caused some legitimately injured workers to be denied benefits if they could not conclusively prove the injury occurred at work.

All in all, these reforms represent a significant improvement for Illinois employers, while not throwing the baby out with the bathwater.  Now if only someone would consider some of the Workers Comp insurance reforms that I advocated for--but everyone in Springfield was focused on fighting over benefit levels, so the insurance industry got to avoid having some of their practices reined in.

California Woes for A WC Insurer and A Staffing Agency

There have been a couple of developments in the California Workers Comp marketplace that are leaving some employers scrambling. First, regulators have placed Majestic Insurance into conservatorship. Majestic wrote most of its business in California, but also wrote policies in New York, Arizona, New Jersey, Nevada, and some other states.

At the same time, it is reported that a large California temporary staffing agency is prepared to shut down in the wake of disputed multimillion dollar fine by California regulators. Mainstay was created and operated by an Indian tribe in California. Mainstay has been embroiled for years with California regulators over Workers Comp and Unemployment Compensation issues.

A WTF Moment in Illinois Workers Comp

Illinois state representative John Bradley has introduced a bill in the Illinois House to repeal the Illinois Workers Compensation Act. Bradley, a Democrat from Marion, Illinois, reportedly has characterized this as a response to the efforts by the business community to change the causation standard in Illinois Workers Compensation so that the workplace must be the primary cause of a covered injury or illness.

That's right--a Democrat in Illinois has introduced a bill to abolish the Workers Compensation Act. Now, it seems pretty clear that such a proposal will go nowhere, that is intended merely as some kind of protest, but even so...WTF, as they say on the internets.