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NEW England HVAC Insider Guest Column
Workers Compensation Essentials 2009
By Christopher F. Hawthorne CPCU, CRIS, CIC, LIA
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While the subject of insurance
typically is one of business
owner’s least favorite
subjects, the issue of Workers
Compensation and Employers
Liability coverage (WC) can
stand alone as an irritant. Like
a F550 coming at you, WC
gets your attention. I think the
reason for this is due to the
expense of the coverage combined
with a lack of knowledge
and the fact that it is a shotgun
wedding between business
owners, employees, insurance
carriers and state government.
For the business owner a general
feeling of helplessness and
victimization may result which
quickly turns to anger. This
typically happens just before I
walk through the door.
The following are the facts
that might help you better
understand WC coverage/
program and how to navigate
it to your advantage. First a bit
of history. We are not alone.
Workers Compensation programs
are in place throughout
most of the civilized world. The
reason for its coverage is to
protect society. In the United
States, prior to WC coverage
injured employees were tossed
aside! In theory the injured
employee could sue the employer
but most did not have the
resources to do so and if they
did the defenses an employer
could mount were many. As
with anything, if it goes too far
you can expect a reaction.
From the early 1900’s to
approximately 1950, individual
states in the US began enacting
WC laws to protect the
citizens. The first aspect of
WC to understand is that it is
a social good, which is based,
in state law, thus the shotgun
wedding. Please note, it was
not the insurance industry that
came up with WC but rather the
state legislatures.
The insurance mechanism
was the obvious choice for
funding the requirements
set forth in the law. Based
on the law of large numbers
if everyone pays in a “small”
amount then there will be
money in case there is a
large loss.
The government made a deal
with business owners in return
for accepting the WC arrangement.
If you carry WC coverage,
it will be the sole remedy
for the injured employee. The
injured employee can not sue
you for the injury other than
for the WC benefits. This had
a very stabilizing effect on
society.
Unfortunately in the original
format, there was no financial
consequence for those employers
who had employees
using the program often and
for those who did not. Insurance
is designed for the loss
that occurs as an exception
as opposed to the rule. Soon
enough the WC system began
to collapse under its own
weight. To cover the enormous
number of losses the rates went
sky high.
Enter reform! In Massachusetts,
the system was saved
by the arrival of the Experience
Modifier (MOD) and the All Risk
Adjustment Program (ARAP).
Before describing these two
factors, a review of how rates
are set is needed.
The amount you pay annually
for WC is based on the amount
you pay your employees and
what those employees do for
you. Currently a secretary’s
WC coverage will cost twelve
cents per hundred of payroll
while a carpenter’s will cost
seven dollars and fifty cents
per hundred.
Each year at the
beginning, the business owner
and agent estimate what the
payroll for each class will be
and the business is charged
a “Deposit Premium,” based
on the estimate. Your final
premium bill is based on your
final annual payroll total. I have
heard business owners lament
that when they have a good
year the insurance company
penalizes them. This highlights
a very basic lack of understanding
of how the system works.
As such one can understand
the business owners frustration.
With this basic lack of
understanding the Mod and the
ARAP were sure to put people
over the edge!
As I said the original program
did not differentiate between
the big and little users of the
system. While still not perfect
the Mod and the ARAP saved
the system and brought rates
down dramatically.
The Mod
was designed to differentiate
the level of use of the system
by each employer. The state
came up with a formula that
predicts what the expected
losses will be for each class of
labor at each level of payroll.
Your businesses WC losses
are then compared to the expected
losses of your industry
and if lower than the expected
amount, you get a discount and
you pay less than the state rate
per hundred. Alternatively if you
are higher than the expected
amount, you have to pay more
into the system. When losses
get big enough the Mod calculation
cannot handle it and
so the next level of calculating
your share is introduced and
it is called the ARAP. These
two factors have you pay into
the system for your prior use
of the system,
The following chart shows
the effect these two factors
have had on rates since
1991.
Story
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So while paying back into
the system hurts, overall you
can see the dramatic affects!
The Mod and the ARAP provided
the stimulation needed
to have employers embrace
risk management practices.
With the introduction of these
two programs it became quite
obvious that having a safer
work place was a win win win
proposition for the employer,
employee and the WC system.
Let’s look at the effects of different
Mods and ARAP for a
plumber at $100,000 of payroll
per year.
A plumbing contractor with
a clean record and low Mod
as opposed to a high Mod and
ARAP saves $2,648 for every
$100,000 of payroll($6,062-
$3,414=$2,648). When you
consider that a business
carries its losses in the Mod
and ARAP for 36 months,
the $2,648 becomes $7,944
and that adds up quickly!
$7,944 pays for a substantial
amount of risk management
tools not to mention the savings
associated with a stable
work force (Not to mention
the additional costs for hiring,
training and ramp up
expenses).
With this understanding of
the system, it is time to look
at how the following also play
a role in what you pay for your
WC each year.
Workers Compensation
Construction Credit
Program (WCCCP).
In an effort to be fair to unions
which traditionally pay higher
wages and thus higher WC
premiums (remember premium
is based on a rate per 100 of
payroll), Massachusetts instituted
the WCCCP, which allows
contractors to apply for a credit
annually if their average hourly
wage is more than $18 hours.
The higher the average wage
the higher the credit applied
to your WC premium. The
application is in all WC policies
that contain construction
classes. This is money waiting
to be had. Please call me if
you need instruction on how
to apply for the credit.
Risk Management
Practices (RMPs).
RMPs can make the biggest
difference in your long-term
premiums. Risk Management
is the art/job of reducing the
odds of a loss and reducing the
size of a loss once it occurs.
Here are RMPs for your
consideration:
Contracts Review for insurance
requirements with
your agent.
Risk Transfer Agreements
Utilized with your Sub
Contractors.
Risk Releases.
The 3 practices listed above
can make a huge difference in
that WC claims can be transferred
away from you or to
you contractually. Imagine one
of your employees is injured.
Because you have WC they
cannot sue you but they can
sue the GC. If you signed a
risk transfer agreement with
the GC (often in the middle of
the work contract) then the liability
suit against the GC from
your employee is transferred
back to you!
Walk Away Training
(Avoidance)
Make sure your employees
know it is OK to walk away from
a situation they feel is dangerous.
Often they feel they must
get the job done no matter what
the risks are or face the boss’s
wrath. Let them know what
your priorities are.
Certificate of
Insurance Review
Certificate of Insurance
Tracking Program
Make sure your Subs and
the GCs are all carrying WC.
Remember courts decide
when coverage is applied. Do
not put your self in the situation
where you are the only
one on the jobsite with WC in
force.
Uninsured contractors
have a sneaky way of finding
a way to your coverage thus
affecting your future premiums
(remember the Mod and
ARAP!).
COBRA / MASS
Continuation Letters
When your employees leave
make sure they have been
offered the proper health coverage
options. This will help
you avoid false claims because
they have nowhere else to
turn due to a post employment
injury.
Driver Record
Checks prior to hiring
Company Driver Policies
GPS Systems in Auto Fleet
Remember auto accidents
that give rise to an injured
employee count as WC claims
even if the accident was 100%
your driver’s fault. Avoid hiring
or employing bad drivers!
Fit to Work Exams
Utilize Fit to Work programs
to get a third party (doctor or
medical office) to sign off that
the potential employee or the
returning employee is capable
of physically doing the job.
Drug & Alcohol Free
Work Place Program
People drinking or using
drugs have a higher chance of
being injured or injuring those
around them. Don’t chance it.
This is an easy way to protect
your employees and your
reputation.
Safety Talks
(Paycheck stuffers /
Tool Box Talk Program)
Safety Manual
Risk Management
Checklists
New Employee
Orientations
Employee Exit Interviews
These RMPs communicate
your position on safety and
how tight you run your ship.
This can be a real deterrent for
someone who feels they can
fi le a phony WC claim.
Discounts
There are several discounts
to be aware of:
Premium Discount for premium
over $10,000. This
is offered on voluntary
policies. So if you are in
the MA WC Pool, you are
missing this discount.
Deviations.
If we are in
a hot(soft) market and
other factors line up, often
we can place you with a
WC carrier that offers a
rate Deviation. This is upfront
guaranteed savings
regardless of losses that
occur during the policy
year.
Dividend Programs. This
is when a carrier offers to
give you premium back
after the policy term has
expired if you have a clean
year. If ALL else is equal
then these can be attractive.
However this is the
last consideration as dividend
programs vary greatly
and the envisioned savings
can vaporize quickly
depending on the actual
program.
In addition to RMPs there are
several other issues a business
owner should consider when it
comes to managing their WC
program.
Is there an
Alternate Employer?
Does your employee work for
another employer? If so be careful
in that injuries on the other job
can bleed through to your WC
experience!
Sub Contractors and
Sole Proprietor Issue
Please do not kid yourself that
because you pay someone on a
1099 basis that you can always
avoid paying WC. If there is an
Employee – Employer relationship
then WC benefits can and
will be paid.
Follow the rules
under chapter 149 of MA law as to
who is an employee. Remember
that if the “sub-contractor” has no
insurance, your WC may collect
WC premium based on what you
paid them and this will include
materials! Be smart, hire subs
with valid WC or include what you
pay the uninsured sub in your WC
payroll calculations and ask the
sub to provide billing segregating
payroll from materials.
Are you working
outside of Massachusetts?
If you are, make sure you are
reporting your payroll by state.
Otherwise you may fi nd you have
some nasty news from the Department
f Labor from the states
you are working in.
Finally, one of the most common
phrases I hear about WC
relates to how each carrier
handles claims. “ The $@#$%#
comp carrier paid $XYZ, can you
believe it!” or “the Comp carrier
allowed the benefi ts to be paid!”
These statements uncover another
basic misunderstanding
about the system. The WC claims
process is a process where the
injured have rights.
If the injured
disagree with how a carrier is
handling a claim they can go
before a judge. The judge is
who decides what happens not
the carrier.
It is for this reason claims
handling by both the carrier and
the employer is so important.
If an injured person feels they
are being treated fairly, they
will probably go along with the
process. Once irked however
they will push the system to its
limits. That gets expensive for
everyone. Understanding this
concept shed light on why a
business’ hiring practices are so
important. Imagine the havoc a
scam artist can play once they
get into the system! They get in
through your employment. Once
they have the employment they
have the keys to the system and
we are all forced along for the ride.
This illustrates why risk management
in hiring is critical.
Please do not give into the
temptation to not report a claim/
pay out of pocket or try to sneak
it through Group Health. Both
actions can have nasty a backlash.
Paying out of Pocket.
While tempting this is a bad
idea. Part 4 of your WC policy
says you should not assume
the cost of care unless you are
prepared to pay for the claim
yourself. Imagine a splinter in
an eye. You give the employee
a check to pay the Emergency
Room. The following week the
employee says they are disabled
due to the eye injury. Who owns
this claim? You do not want to
risk this.
Sneaking WC injuries
through Group Health.
This is unwise.
We have seen
employees go through surgery
and be in the middle of physical
therapy when it comes out that
the injury was work related. The
health system will pull up short on
you and the Group Health carrier
will want their money back. The
rate BCBS, Harvard, Tufts, NHP
or Fallow pay at may differ from
the WC carrier. Who owes the
difference? Again, do not get
into a situation where you could
fi nd out.
In addition, the state may fi ne
you for not reporting claims on a
timely basis.
In short there are many things a
business owner can do to protect
minimize their WC loss / premium
exposure. The most important
is to understand the basics of
how the system works or else
it will feel like a very rough ride.
Knowing how your program is
priced, what credits are available
to you and what solid RMPs can
do to help keep your premiums
in check can help to provide a
less bruising experience. While
employers must carry and pay
for the coverage it need not be
train wreck that it often is.
I hope you find this helpful.?
Chris Hawthorne has specialized
in working with Plumbing and
HVAC contractors since 1995.
He is a licensed insurance broker
and advisor representing Thomas
Gregory Associates Insurance
Agency, Inc located in Wakefield,
MA and can be reached at 781-
914-1038. If you have questions
or have issues you would like addressed
in future articles or wish to
find prior articles, please contact
Chris at 781-914-1038 or chawthorne@thomasgregory.com
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