6 Common Work Comp Mistakes Employers Make – An Academy of Insurance Webinar Presented by Randy Sieberg

I’ll be presenting an educational webinar on November 10, 2016, sponsored ijacademy-400x200by the Academy of Insurance, an Insurance Journal Company. The title of this webinar is “6 Common Work Comp Mistakes Employers Make.”  Please go here to sign up for this webinar!

We all know that employers make mistakes in managing their workers compensation programs on a daily basis. Some of those mistakes are made by making inaccurate assumptions about key premium producing areas of a work comp policy while others are simply made from a lack of knowledge. Some of those mistakes can be quite costly creating opportunities for the informed insurance agent to help out.

In this presentation we’ll explore common workers compensation errors made by employers within these six categories:

  • Payroll
  • Changes in Business Operations
  • Claims
  • Class Codes
  • Experience Rating
  • Audits

Our emphasis will be on:

  • How to identify key points that you may use to help with sales and earn a new clients business when it comes to inaccuracies found within these categories;
  • How employers create issues that cause problems within these categories;
  • How to identify hidden future problems that an employer may have to face;
  • And how to turn identified problems into sales opportunities for agents while improving an employers situation

It’s a tall order for only a hour webinar! I do tend to talk a lot! But I’ll do my best to provide real life examples from cases worked that will help shine a light on using an employers work comp problems to gain new clients. And provide some tips that may help save an employer premium dollars and other headaches in the future!

So be sure to go to “6 Common Work Comp Mistakes Employers Make” at the Insurance Journals Academy of Insurance website for more information on this webinar and be sure to sign up!

Thanks for reading and hope to “see” you on the webinar!

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A Workers Comp Problem With Garage Risks Code 8380, 8391 and Using Clerical Code 8810

Classification codes cause problems. It’s not their fault. They’re just numbers. But the kind of numbers that cause a lot of folks a lot of trouble! And one of those problems is when a garage business classifies counter help in the clerical classification. Let’s talk a bit about this.

First off there’s really nothing new about this common classification code problem. It’s been causing problems for a long time. But it’s something where we want shine a little light. It’s not uncommon for 0ur office to receive calls from garage business owners who are experiencing an insurance company class code payroll reassignment of clerical employees, code 8810, into the business governing code of 8380 or 8391 or one of the other auto repair codes. This often happens after a physical audit has been conducted. That’s where the auditor actually has a chance to look around the business and observe how normal business operations are conducted.

Here’s what commonly happens. When looking at a garage type risk you will typically find a pretty good example of separation of work space. Most auto repair operations will have a physical separation of space between the garage repair area or shop and the office or counter area where the customer comes in and discusses the problem with their vehicle and turns over their keys to the service writer. Mechanics are normally exposed to hazards found within the shop. Lifting, removing and installing vehicle parts, the use of tools, grinding, cutting, lifts and jacks used on vehicles can all be found within the typical auto service repair garage.

Counter help will typically handle checking in and checking out customers when they drop off or pick up their vehicles before or after repair. Most often, in smaller garage operations, counter help will be a combination of the garage owner and bookkeeper. This is the point where things will go wrong.

Common sense would indicate that a bookkeeper or office helper who stands behind the counter, welcomes the customer, shakes their hand, takes their keys and completes the sales transaction by taking cash from the customer would fall into the clerical or 8810 classification. Wrong! It continues to be a common practice that those employees who handle cash transactions with a customer in a garage risk operation will be classified into the governing class, 8380 or 8391. If on the original workers compensation policy their payroll or remuneration was included under 8810, they will most likely be moved into 8380 or 8391. This action will increase an employers premium because the 8810 class would carry a very low rate per 100 of somewhere around .30 while the garage repair class code would carry a much higher rate, perhaps somewhere around $5 per 100 or payroll.

The premium impact? The premium for an employee making $30,000 in the clerical code may be somewhere around $90. While the premium for the same employee in the garage code could be somewhere around $1,500. That’s a significant difference in what the employer may have to pay. Just for having a clerical employee complete a money transaction with a customer.

There’s another issue with these codes. If you read the scopes description of 8380 or 8391 you’ll see that they include counter help. Specifically, if a repair shop has a parts department that retails or wholesales parts to customers, you’ll see that those parts department employees will fall under 8380 or 8391. This situation has in the past caused agents and employers a bit of trouble. You see, most parts departments are segregated from the repair operations. As a matter of fact, if you’ve ever visited the repair department of a typical car dealership you’ll find that when the mechanics working in the shop and need a part they will go to the parts department’s counter to order and collect the parts they may need. And the temptation when assigning employees to classification codes would be to put the parts department employees under some type of retail store code. Parts departments are often found sequestered in a locked room with limited access. So in this situation we may have a clear separation of work spaces yet the basic manual and scopes indicates those parts department and counter help are to be classified in 8380 or 8391 with few exceptions. Those exceptions will be state specific directives along with the concept that the entire operation of the employer be classified into the predominant operation. No real change there. Think about it. If the predominant business operation is repair with some parts sales then repair is the classification used. Of course other state rules and normal classification procedures are to be followed.

The take away for this post is to be cautious when classifying workers of auto repair business operations. You should follow the code descriptions carefully. And if you find yourself facing a 8380, 8391 and 8810 class code problem, reach out to a workers compensation consultant for assistance!

Thanks for reading!

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Workers Compensation Issues for Small Business Owners

Have you ever thought about the small business owners in your community? Coffee shop owners; druggists; local grocery stores; auto repair and body shops; contractors of every kind; floor covering stores; appliance stores; local owned manufacturers; car dealerships; music stores; machine shops; doctors; janitors; local owned restaurants of every kind all play a vital role in your community. These businesses, and many more like them, employ a ton of local workers! Many local business owners face a daily challenge of providing their services to their communities while eeking out some kind of small profit to make it all worth their while. At this point I should cite some government study that gives you proof of the value these kinds of employers provide but I’m not going to do that because you already know their value. In this blog we’re going to take a look at the burden workers compensation issues play in the operation of a small business.

For some employers, workers compensation insurance is expensive. For some, it may not be that big of a deal. If you run a carpentry contacting business your rate per 100 of payroll, depending on the state where you operate, may be as high as $26. Yep! That means that you are paying $26 in premium for every $100 of payroll that you give your workers. If you run a coffee shop your rate per 100 or payroll may be $2 which means that you are paying $2 in premium for every $100 of payroll that you give your workers.

Now on the surface you might see that as unfair. But it’s at this point that you need to understand the concept of risk, exposure and cost. If there’s anything that an insurance company knows it’s risk and exposure. The carpentry contractor has a much greater chance of having workers injured on the job while the coffee shop workers have a much less chance of incurring on the job injuries. Workers compensation rates are generated by detailed statistical computations based on very specific loss data reported to individual state rating bureaus. You can learn more about how rates are developed by visiting our website.

So there’s a big difference between a coffee shop and a carpentry contractor when it comes to how much they pay in workers compensation premium. But what kind of burden does this cause and what are some of the problems they may share?

To understand the burden that workers compensation insurance may cause an employer you should know something about the reason workers comp insurance exists. Prior to the implementation of the workers compensation concept in our country in the early 1900’s the only recourse an injured employee would have against an employer would be through the court system. An injured worker had several issues to overcome in order to win compensation in court from their employer. They included having to overcome:

  • Contributory Negligence – Regardless how slight an incident, if the employer could prove the worker was responsible for their own injury the worker would not receive any compensation.
  • Assumption of Risk – In order to get a job workers were forced to sign work contracts where they accepted the hazards of the job and where they agreed not to sue their employer for injuries.
  • Fellow Servant Rule – If a workers injury was in any way caused by another worker the employer would not be held responsible.

And frankly workers could not afford the expense to seek payment through the court for injuries suffered on the job. You bet the system was rigged in favor of the employer.  An injured worker would basically have no rights. The consequences for an injured worker and their family could be catastrophic. Think about that…your father works for some giant industrial company; he suffers a serious life threatening injury; is out of work for a year; receives no compensation from his employer…what happens to your family?

In 1908, Congress passed the Employers Liability Act (FELA) of 1908 which helped to establish comparative negligence and addressed how injured railroad workers could receive compensation. This action helped changed how restrictive doctrines affected injured workers and began to place more responsibility on employers to provide safer work places. In 1911, Wisconsin passed the first workers compensation law in this country which placed a value on work related injuries, paid medical expenses and replaced lost wages of the worker. The trade off for the employer and worker is that the worker would give up their right to sue the employer for the security of receiving a guaranteed benefit through the workers compensation law and the employer would give up the uncertain outcome of facing an injured worker in court for the certainty found in the workers compensation law. After Wisconsin, other states slowly started coming on board by passing similar workers compensation statutes for their individual states.

So individual state workers compensation statutes provide protection to both the employer and worker. They also provide direction as to who must comply with their statutes. Most states require any employer who employ workers to comply. Sure, there are a few states who may have numerical exceptions that must be met before compliance is required but for the most part if an employer has a worker they must come under the statute.

Falling under state statutes and being required to comply is one thing but the ability of an employer to pay the benefits required to an injured worker is another! This is where workers compensation insurance comes into play. A standard workers compensation insurance policy will stand in the shoes of an employer. The insurance company takes over the employers responsibility for paying the injured worker the required state benefits including medical expenses and lost wages for a premium the employer pays to the insurance company.

An often overlooked point is that when an employer is not required to come under the act they often may elect to freely do so. Typically, an election to come under the work comp statute is accomplished by the employer securing a workers compensation policy. When this is done an injured employee will look to the insurance company to take care of any work related injury sustained.

But what happens if the small employer does not secure coverage? Keep this in mind. Just because some employers may not fall under a state workers compensation statute doesn’t mean that an injured employee will not have recourse against the employer. It often means that the employer will be subject to exposure to litigation on the part of the injured employee. It doesn’t mean that an employer is still not responsible for their injured worker.

Here’s a list of some workers compensation related burdens small employers face:

  • The Cost of Coverage – As mentioned above, the premium paid for workers compensation policies are based on an associated rate/100 of remuneration (payroll) that an employer pays their workers. Different types of business operations will pay different premiums. A carpentry contractor with $50,000 in payroll may pay a premium of $11,000 while a coffee shop with $50,000 in payroll may pay a premium of $1,100. Both will affect their respective employers as a business expense. Workers compensation insurance is not cheap! More on that later.
  • Required Compliance – For many employers it’s not an option. They must secure coverage for their workers. And for some small employers even if they are not required to have coverage it is often in their best interest to do so.
  • Trouble Securing Coverage – “New in business” is a hard concept for many insurance carriers to grasp. For a small business owner who has just opened up shop they will often find it difficult to secure a workers comp policy from the standard markets. Their only recourse to secure coverage may be to turn to the assigned risk plan for the state in which they operate. And while the assigned risk plan or “pool” may be the only choice for some, it’s not the place you want to stay.
  • Trouble Maintaining Coverage in Place – Standard market insurance carriers often change their rules. Sometimes these rules will affect how they treat small employers. We’ve seen a trend over the past several years where workers comp insurance carriers have tightened up their rules by establishing minimum employee payroll levels for acceptance into their coverage programs. This often means that an employer, who in the past had been eligible for coverage by a certain standard market insurance company, now finds themselves non-renewed by their insurance company and having to search around for a new insurance company to place their workers comp coverage at renewal. This can be a real problem!
  • Deteriorating Experience Mod or EMR – Small business owners who qualify for experience rating often face huge swings in their EMR when they incur losses or claims. Thresholds for being experience rated are based on premium size and in many states a premium around $3500 will force an employer into the experience rating plan. We’ve posted many examples of how a single claim can drive an employers EMR through the roof. With a small employer you’re looking at smaller payrolls and the resulting effect claims will have on their EMR will be much larger than an employer who has larger payroll.

There’s no doubt that workers compensation insurance and the associated premium that small employers pay can be a burden. That’s an easy one. But the behind the scenes issues that small business owners face in securing and maintaining their workers compensation coverage can be just a troublesome.

Hope this helps you out and thanks for reading!

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The Expert Witness Role in Workers Compensation – Do you need an attorney?

We provide expert witness services, within our areas of expertise, and it’s a big part of what our firm does. Unfortunately, our expert witness services often come at the end of a bitter, unresolved disagreement between an employer and their workers compensation insurance company that’s finally ended up in court. You never know, we may be representing the employer or the insurance company!

Litigation is an expensive resolution to many workers comp disputes and in this post I want to talk a bit about where litigation fits in the overall dispute process. And to try and answer the question “Do I need to get an attorney?”

It’s a question we are asked quite often. Usually after the workers comp system has stifled, at every turn, an employers attempt to have a problem resolved. These problems may consist of everything from a claim problem or disagreement with classification codes, retrospective rating problems or a problem stemming from an employers experience modification rate or EMR. Regardless the original source of the disagreement, frustration and a sense of helplessness, experienced by an employer, will usually end up with a phone call to their attorney. A call for help. A call for direction.

Believe it or not, there’s not that many attorney’s out there that have the experience to work through a workers compensation administrative issue. Sure, there are plenty of litigation experts out there when it comes to suing for a claims related problem experienced by an employee. But just try to find an attorney with experience in workers compensation classification codes or audit or retrospective rating or just about any other premium producing portion of the workers comp conundrum. We’re lucky. We continue to have the pleasure of working with some of the best!

Why has our industry (insurance) let these folks down? I’d hate to answer this question with something as trite as it’s all about the money. But I’m often hard pressed to explain it any other way.

Problems between a policyholder (employer) and their workers compensation insurance company almost always come about from some misunderstanding. Audits, claims, classification codes, re-classification of employees into higher rated codes, all have the potential to blow up into a major dispute. Small disputes continue to be settled between the warring parties in some low level discussions on a regular basis. For example when an employer has been assigned to a clearly wrong class code you’ll almost never have a problem getting it corrected. These types of problems can often be corrected at the insurance company underwriting level. But don’t fool yourself! Just add a few zeros behind the problematic premium and all of a sudden the decision to make a correction is no longer in the hands of the underwriter. Don’t be surprised if the matter has been moved up the management tree at the insurance company. And if the numbers are large enough you’ll certainly find the insurance company legal team in the mix.

At this point you should be asking about the existence of dispute resolution processes. I should be hearing questions like, “Isn’t there a process in place to resolve these workers compensation disputes?” In fact every State will have their own process as to how these disputes are to be heard and decided. Most dispute resolution process rules will require or at least include some of these:

  • An attempt to settle the dispute directly with the insurance carrier;
  • Identification and payment of all outstanding premium not effected by the dispute;
  • When direct negotiation with the insurance company does not work then move the dispute to the next level;
  • Next resolution level will probably be with some State sponsored committee or review board;
  • When the dispute committee of review board fails then move the dispute to the next level;
  • Next resolution level may be with some State authority such as the Director of Insurance or other as directed by the individual state process;

At this point you should understand that there are two viable ways of resolving problems. They are:

  • Negotiating some type of settlement with the insurance company and
  • Following some organized state approved resolution process.

You should know a few things:

  • Insurance companies often will not negotiate with you. This depends on the specific issue at hand. Ask yourself, “what’s in it for them?” For example, as mentioned above, if the problem is a clear mistake the insurance company made in, let’s say, classification then they may make an adjustment in your favor. If there’s a disagreement in the interpretation of some rule or if you are in disagreement regarding a gray area of classification you will find the insurance company will not be in the mood of negotiating away any premium they believe they are owed!
  • Organized dispute resolution processes are only as good at the authority the deciding committee or board has been given by statute. In other words, if the reviewing board or committee does not have binding authority provided by the state to make decisions that must be followed, then the parties involved in the dispute (the policyholder and insurance company) may just chose to ignore the outcome. How’s that possible?? We’ve seen it happen where an insurance company and rating authority ignored a directive given to them by a state workers compensation review board. Sure doesn’t seem right but it happens.

You may follow all the rules outlined in a dispute process. You may even secure a favorable outcome by some state dispute board or review committee only to find yourself faced with litigation.

So, do you need an attorney? Maybe.

Here’s a few points to consider:

  • Have you consulted with a workers compensation consultant regarding your problem?
  • Have you exhausted your options of direct negotiation with the insurance company?
  • Have you exhausted your options through your states dispute resolution process?
  • Does your problem still exist and are you on firm ground for moving forward?

Experience says that if you’re problem involves a large premium dispute the insurance company will not just give up! Here’s where I reinforce the part where if there’s enough money involved in the dispute, you’re probably not going to avoid litigation.

The idea behind this concept is a bit disturbing. It has to do with the David and Goliath factor. That’s where the insurance company is a money making machine with legal resources and deep pockets. They can afford to pursue filing suit and taking things to court when they like. You know, Goliath.

A small employer will not have the means to fight against the full force of Goliath. And that’s where they must rely on the individual states to provide consumer protection. And, unfortunately, there are often holes in those remedies, as we pointed out above.

The bottom line is that, under certain circumstances, workers compensation disputes will end up in court. It’s just a fact.

Hope this post helps you out! And thanks for reading!

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Why Workers Compensation Insurance Companies are Afraid of Independent and Subcontractors –

A perennial thorn in the side of workers compensation insurance carriers is the notion of an employer who uses subcontractors in their business. This paranoia stems from an insurance carriers often misdirected desire to know all risks associated with a new insured. Blurred lines between employees and independent or subcontractors always seem to cause workers comp insurance carriers to gasp for breath. In this post we’ll try and answer the question: “Why are insurance companies afraid of independent and subcontractors?”

We all know the world is full of unknowns. Most of us, being the control freaks we are, find that notion a bit difficult to deal. We’ve been taught that unknowns are dangerous, unpredictable and unwary. Having control and knowing at every step just where we are, where we’re going and what we’re doing is the right thing. That the unknown equates to the unpredictable. Well, insurance companies are no different.

Insurance companies fear the unknown. At every turn, you’ll find they’ve invested great amounts of capital and human resources to the single practice of prediction. Prediction of future accidents to come, the sources and reasons that accidents occur and the requirements and practices required to avoid having those future accidents come true. In other words, insurance companies invest huge amounts of money in predicting the future, identifying risk, identifying the cause of occurrences and developing an understanding of what steps need to be put in place to mitigate that risk.

To understand this obsession a little better you need only to look at the use of predictive modeling that most insurance companies use today in front line underwriting. Not a new concept by any means, however it seems that within the last decade predictive modeling has taken over the insurance industry. Developed as an underwriting tool, predictive modeling provides an in-depth analysis of an insurance carriers risk tolerance points. These statistical tools allow an insurance company to identify areas of success (where they make money) and areas of failure (where they lose money.)

You might say that predictive modeling has become the crystal ball of the insurance industry!

So, when an insurance company looks into their workers compensation crystal ball all they see, when it comes to independent contractors and subcontractors, is trouble with a capital T!

Direct employees provide a certain level of predictability and comfort for the insurance company. From an insurance company stand point they believe the insured or employer has much better control over the activities of a direct employee. So the first thing to keep in mind is that a workers compensation insurance company wants to see all work processes of a business they insure being conducted by direct employees.

Here are a few reasons for this:

  • It’s easier to properly identify direct employees;
  • Supporting payroll records are available from the employer;
  • Payroll tax documents can be used to verify reported payroll for audit purposes;
  • Employees are under the direct control of the employer;
  • Lost wage documentation is readily available if a claim should occur;
  • Direct employees have gone through training;
  • Direct employees follow the employer’s safety procedures;
  • Direct employees are usually assigned to a specific work location;
  • Direct employee work processes are easier to identify;

The use of independent contractors and subcontractors by insured business owners creates a certain level of unpredictability and uncertainty for a workers comp insurance company. Remember it’s unpredictability that gets under the skin of a workers comp insurance company. Actually that could apply to any insurance company!

Here’s a few reasons why:

  • It’s more difficult to properly identify independent and sub-contractors;
  • Verification of remuneration paid to independent and sub-contractors is more difficult to obtain;
  • Insurance carriers maintain a belief that independent and sub-contractors operate outside the control of an employer;
  • Safety training for the independent contractor’s employees is unknown;

Another, possibly more realistic, issue regarding this employee vs. non-employee situation is the fact that an insurance company wants to make sure they receive all premium dollars that they deserve for identified exposures. Here’s how to look at it, when the insurance company has to pay a claim, they are due a premium. Don’t understand?

Ok, let’s go a little deeper.

It’s easy to understand that when an employee sustains a work related injury the employer is responsible, under state workers compensation statutes, to provide benefits to the injured employee. Benefits include paying for medical costs incurred; lost time or lost wages of the employee because they were off from work while healing from the injury and related rehabilitation expenses.

It becomes more difficult to understand when the line between employee and non-employee becomes blurred. That’s what happens when subcontractors are used. From a definition stand point, and the manner in which a worker’s compensation policy responds to an injured employee, you need to know that an uninsured subcontractor will be treated no different than a direct employee when it comes to tendering a workers compensation claim for payment.

What was that? That’s right, as a general rule, you should always consider that an uninsured subcontractor will be treated by a hiring contractors workers compensation insurance company just like a direct employee especially when it comes to their obligation to respond to paying a claim. With this concept in mind you should begin to see one of the big problems that an insurance company faces when one of their insured employer uses subcontractors.

But don’t get carried away! You also have to keep in mind that the use of subcontractors is a normally accepted practice found within the construction industry. Subs and independent contractors play a big part in making things work in the world of construction. And believe it or not, most insurance carriers are quite aware of this normal practice and under certain circumstances can be very accepting. But remember, while they might be aware of it doesn’t mean they like it!

Ok, so let’s dig a little deeper.

When you have a large construction company that has many direct employees on staff who may be spread out over many states it will not be unusual to find that they use subs on a regular basis. You’ll also find that these types of companies will be very well organized in their management of subcontractors. Look deeper and you’ll find detailed contracts between the hiring contractor and sub. You’ll find scope of work details for specific projects and performance expectations along with safety requirements and insurance requirements. You’ll find indemnity and hold harmless agreements within these contracts. Basically, you’ll find that well defined lines exist between the hiring contractor and the sub contractor. This is what an insurance company wants to see!

A big problem exists when the hiring contractor has no direct employees but only uses subcontractors. Within the insurance industry the term “General Contractor” is normally used to describe this specific situation. It will be difficult and perhaps almost impossible to find an insurance carrier that will knowingly provide workers compensation coverage for the employer with no employees and who exclusively uses sub contractors in their business.

So why are insurance companies afraid of independent contractors and subcontractors?

  • They feel the employer or hiring contractor has no direct control;
  • It’s more difficult for the insurance company to identify work being performed by subs;
  • They may be performing unidentified, unacceptable underwriting exposures for the insurance company;
  • It’s more difficult for the insurance company to develop a consistent premium base;
  • The unpredictability of having an uninsured subcontractor exists;
  • Some employers call their workers subcontractors when in fact they are employees;
  • They may not be able to identify subcontractors exist until after the end of the policy and an audit has been completed;

Back to where we started. Insurance carriers love predictability and certainty. Uncontrolled use of independent contractors and subcontractors create an environment of unpredictability and uncertainty. And this plays a big part in the reason that insurance companies don’t like excessive use of independent contractors and subcontractors.

Hope this helps you out!

And thanks for reading!

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