Homeowners and Workers Comp

The California Department of Insurance has issued a press release, warning homeowners to make sure to verify the license and insurance status of any contractors they hire to do work on their house. An uninsured contractor or sub-contractor, if injured, can make a claim against the homeowner under California Workers Comp law.

This kind of exposure varies from state to state--some states have addressed this issue by statute, seeking to exempt homeowners who hire people to work on their home-- but many, such as California, have not.

This sort of thing happened to my own grandmother, many years ago. She hired a roofer who, it turns out, did not have insurance. The poor man fell off the roof to his death, and she was held liable under Illinois Workers Comp laws (which have since been amended to make this sort of thing less likely.

Of course, even in states that have tried to address the issue, the law may not be settled and clear-cut. And I would hasten to add that I am not an attorney. This article is not intended to offer any advice or opinion about the legal question of who is and is not eligible for Workers Compensation benefits. Those rules vary state by state, and evolve over time as well, as the law is changed or as court decisions are rendered.

So a word to the wise--check your state's laws on this point before hiring anyone to do work at your home, and then carefully verify their license and insurance status.

Sauce For The Goose?

I know I've written about this subject before, but recent events have freshened my frustration and sense of injustice. Every day, my Google News service brings me fresh stories about employers and workers being charged or convicted of Workers Compensation fraud. Now, I don't necessarily have a problem with that--those who defraud the Workers Comp system harm honest businesses and raise costs for everyone.

I do sometimes worry that the tendency of the insurance industry to always see criminal intent in the place of honest error by employers may result in some employers being falsely charged (and perhaps even being convicted). But today's rant isn't about that.

It is instead about this case I'm currently working on. We had a mediation last week, because the insurer (one of the big major insurance companies) has sued an employer for about Two million dollars of additional premiums for several years' Workers Compensation policies.

My major problem is that this big-time insurance company argued before the mediator (a retired judge) that a particular Illinois statute either does not cover Workers Compensation insurance, or else should be interpreted in such a way as to allow the insurer to be entitled to this two million dollars.

The problem is that I produced a memo from the Illinois Department of Insurance that had earlier gone out to all insurers in Illinois that explicitly explained that the statute did indeed cover Workers Compensation insurance, and that the interpretation advocated by the insurer is not correct.

Additionally, I have learned that people at the Illinois Department of Insurance had ongoing communications (including a video conference) with representatives of this very same major insurer, explaining in detail how this statute does apply to Workers Compensation insurance and how the self-serving interpretation advocated by the insurer is wrong.

So let me ask a question. If it is fraudulent for an employer to misrepresent the amount of payroll used to compute Workers Comp insurance, or to misrepresent the nature of the work done, in order to lower Workers Comp premiums, how exactly is it not fraud for an insurance company to seek two million dollars of Workers Comp premium in contradiction to the established statutes and regulations that govern Workers Compensation insurance?  Just askin', as they say.

A Warning Sign for Workers Comp Insurers...(and employers)

A new study by an analyst group concludes that a number of Workers Comp insurers are dangerously thin on their reserves, leaving them vulnerable to sudden shocks that, in the past, have undermined the financial stability of insurers.

This study suggests insurers have been keeping reserves too low, which means that if and when the insurers take action to address the deficient reserves, this will result upward pressure on rates on premiums for employers.

More ominously, it suggests that some insurers might be vulnerable to financial shocks. In the past, some well known and long established Workers Comp insurers have failed fairly unexpectedly, producing significant stresses for employers who rely on the insurance market to handle their Workers Comp coverage.

Workers Compensation is a notoriously difficult line of insurance to successfully underwrite in the long run, and more than one insurer thought they were smarter than the average bear, until reality and under-reserved claims unexpectedly proved them very wrong.

Oklahoma Entering New Territory Re: Workers Comp

Oklahoma has now enacted significant changes (and had those changes upheld in court) to their Workers Comp system, altering how claims are adjudicated and also giving employers the option to satisfy their Workers Comp obligations in an alternative manner. Although it has been compared to the Texas rules that allow employers to "go bare", that is, forego Workers Compensation coverage, Oklahoma's new rules are something different. Oklahoma now gives employers the option to establish alternative coverage for workers in place of the traditional Workers Compensation insurance policy.

Not sure how well this new system will actually work for employers and employees, but you can read more about it here.

Would You Buy Your Company's Workers Comp Insurance From Overstock.com?

...because Overstock.com is now selling Workers Compensation insurance, along with other lines of commercial property/casualty insurance, as well as personal lines. And I see Wal-Mart has just started selling Auto insurance (personal lines, I presume).

I strongly suspect that Overstock.com will not be competing on large accounts anytime soon. But this is, after all, very early days for this venture, which is in partnership with Insuritas. But it certainly feels like just the start of something big, something that may revolutionize the hidebound insurance delivery system.

The question remains, of course, what may be lost with this revolution, and what will be gained? For smaller employers, this could be a useful innovation, as smaller employers have often gotten short shrift from the traditional insurance system. But will getting commercial insurance from the likes of Overstock.com be better? Perhaps the implied improvement in electronic paper trail might offer some benefit to policyholders, as the occasional failings and oversights of the traditional analog system are replaced with something more reliable. But we have also seen spectacular screw-ups in the digital age, with information breaches and the like at supposedly large and reliable companies.

We are boldly going into new territory here, and only time will tell about the relative merits and demerits of this new development. The only thing I am confident of, at this point, is that Overstock.com will soon have competition for the online sale of commercial insurance.

More On PEOs and Workers Comp

I've written in the past about PEOs and Workers Compensation, but there are a few more points I thought might be useful to post about. To recap, a PEO (Professional Employer Organization) is currently the most common term for a business service that used to be known as Employee Leasing. It has some similarities to other kinds of staffing companies, but also very important differences. A PEO becomes, via contractual agreement, a "co-employer" along with the client companies of the PEO.

So, for example, if ABC Widget Remanufacturers, Inc. signs up with Supergreat PEOxperts, LLC, Supergreat becomes, for legal purposes, the co-employer of the people who work at ABC. That's an important and fundamental difference between a PEO and say, a staffing company that might provide temp workers to ABC who weren't already employees of ABC.

As co-employer, Supergreat can now legally do things like purchase Workers Compensation insurance that covers the workforce at ABC. Supergreat can also do things like handle withholding, get health insurance, and handle various other back office functions for ABC. But my focus is on the Workers Compensation coverage.

As I have said before, a well run PEO can indeed offer significant benefits to client companies in the area of Workers Compensation insurance. That's because there are economies of scale that can enable a PEO to obtain Workers Compensation insurance for less than the smaller individual client companies could get. So even with the fees charged by Supergreat, ABC likely can pay less for Workers Comp through the PEO than the best deal ABC could find on its own.

The problems I have observed with PEOs and Workers Comp have to do with some of the complexities of the Workers Compensation insurance system.  And when things go bad in a PEO Workers Compensation arrangement, they can go very bad indeed, and leave client companies like ABC with significant problems.

One problem is that PEOs are, in most states, loosely regulated at best. In my home state of Illinois, for example, a PEO must be registered and licensed by the Illinois Department of Insurance. But there is no actual oversight exercised by the department, save to confirm that the PEO has in place valid Workers Compensation insurance.

The big potential problem in regards PEO-provided Workers Compensation is if the PEO encounters difficulties in obtaining coverage at a cost that is low enough to make the PEO business model work. Sure, coverage is always available through Assigned Risk programs, but these insurers-of-last-resort pose real problems for PEOs--the cost is almost much higher than voluntary market coverage, and Assigned Risk coverage must often be cobbled together with a number of separate policies for different states.

As I've written about before, I once served as an expert witness in a legal case that involved, tangentially, the collapse of TTC, which had been, until it's demise, the largest PEO in the country. But the loss of affordable Workers Compensation insurance (which the PEO concealed from clients and regulators for as long as possible) ultimately doomed the company--and left client companies responsible for WC claims that they had thought were covered by the PEO  to which they had paid substantial sums for WC coverage).

TTC was hardly the only PEO to encounter Workers Comp related difficulties. In another case in which I served as an expert, a PEO had obtained WC coverage through the Assigned Risk plan. Now, it really should be impossible for a PEO to obtain WC insurance through an Assigned Risk program and still offer any cost savings to clients. But this PEO misrepresented classification codes and payroll amounts to the insurer, so that, until it all blew up, the premiums paid by the PEO were much, much lower than the clients could have obtained on their own (because of that aforementioned part about misrepresenting proper classifications and payroll amounts.)

The insurance industry has been, for many years, somewhat leery of the PEO industry, having been burned by shady operators who played games with classifications, payrolls, and experience modifiers, to obtain WC insurance at improperly-low rates. But then along came the advent of Large Deductible Workers Compensation insurance, and some insurers decided this could be a way to turn PEOs into profitable accounts and minimize the chances for improper premium avoidance.

With Large Deductible policies, the policyholder agrees to be responsible for all WC claims up some large amount (say, the first $100,000 of each claim--or the first $500,000, or even the first $1,000,000). Technically, the policyholder is responsible for funding upfront a pot of money to pay those claims, and then to replenish the pot as it gets used up. And the actual insurance premium charges under such policies gets heavily discounted, so that most of what the policyholder has to pay is really reimbursement for claims and associated handling fees and charges.

The problem with such a Large Deductible set up is that it's difficult to estimate what the actual exposure may be for claims under the deductible limit. Plus, insurers often make the details of these plans so complicated that it's very difficult for the policyholder to understand what the ultimate costs of the insurance really will be. A recipe, often, for policyholders running up tabs with insurers that they have difficulty understanding, or paying.

Now, the important aspect of Large Deductible insurance is that the insurance company is ultimately legally liable to pay claims under the policy, regardless of whether or not the policyholder reimburses for claims under the deductible. But this can introduce additional stresses on some insurers--and thus increase the odds of an insurer failing under those financial stresses.

The clients of a PEO usually don't have information about whether or not the PEO is insured via a Large Deductible policy or whether or not there are behind the scenes problems between the PEO and its insurer that could cause WC coverage to disappear on short notice. Clients of PEOs often assume that the insurance regulatory system is making sure there aren't abuses that will create unexpected and nasty surprises. But such assumptions, in many states, are probably not well warranted. Insurance regulators in many states have had a murky understanding, at best, of what is going on in the marketplace with PEOs and Large Deductible policies, and many state insurance regulators have had their staffs and budgets reduced significantly in recent years.  So oversight, never robust in many jurisdictions, is now further reduced. Caveat emptor, indeed.

If I were a business contemplating getting Workers Compensation insurance through a PEO, I think I would want to insist on getting a copy of the PEO's current WC policy, and then having an insurance professional take a look at said policy. I would want to know if the policy were a Large Deductible policy, or Assigned Risk policy, and who the insurer was. I would want to check into the financial size and stability of the insurer, and if it is a Large Deductible policy I would want to check carefully into the financial strength and stability of the PEO.  If it turned out to be an Assigned Risk policy, I would look to see if the correct classification code for my business was on that policy. If not, I would want to see evidence that the correct classification code for my kind of work was added to the policy once I signed up.  Because if it is not, the PEO might be misrepresenting classifications to its insurer, which is a big red flag that all is not well behind the scenes in regards Workers Comp coverage.

The insurance industry has taken significant steps, in recent years, to address some of the problems inherent in the PEO model. And as I said at the outset, a well run PEO can truly offer significant cost savings to clients. The trick is, I believe, to truly qualify which PEOs are indeed well run, at least in regards their Workers Compensation insurance. The current system does not always catch problems until something serious has gone wrong, and that can leave the clients of those problem PEOs holding an expensive bag.

Nebraska Supreme Court: PTSD Covered Under WC

The Nebraska Supreme Court has ruled that the state's Workers Compensation statutory coverage includes both PTSD and work-caused drug and alcohol dependency. The court upheld a prior ruling by the Nebraska Workers Compensation Court, which had been appealed by an employer and its Workers Comp insurer.

Mathew Kim, a clothing store manager, was shot twelve times to try and prevent him from testifying against an armed robber. Kim still testified against the robber, his accomplice, and the robber's brother who shot Kim and made phone threats to dissuade him from testifying.

Although Workers Compensation had covered his initial wounds and the resulting time off from work, Kim was also diagnosed with PTSD after the attack and developed severe drug and alcohol dependency, causing him to be off work for nineteen months and to also have to shoulder the medical costs for treatment.

Full story here.