Subrogation Part II

Two Subrogation Questions to Ask your Workers Comp Adjuster - there are two questions that you will need to ask the Workers Comp adjuster who is adjusting the file.

They are:

1. Have you sent a notice letter to the carrier of the negligent third party, and may I have a copy of that letter?
2. What is the status of the subrogation lien?

There is a much longer list of questions, but these are the two basic ones that a Workers Comp employer should be asking often if there is a possible lien on the file.

There are time limits for giving a third party insurance carrier notice. The Workers Comp adjuster may be absorbed into the Workers Compensation file and may have overlooked putting the third party carrier on notice. Any amounts recovered by your Workers Compensation carrier must be immediately entered into the file. Almost all Workers Comp adjusters do not have a background in Auto, Premises, General, or other type of liability coverages.

There are quite a few tricks and traps in Subrogation. Remember, when the Workers Comp Adjuster's lien is negotiated down, that is your money that is being lost. Not following the subrogation of your Workers Comp lien can ruin a great avenue to recover funds that will bring down your E-Mod.

Subrogation is one area where I recommend that you use an adjusting expert. Subrogation can be very complicated and confusing even to the adjuster that is on the file. We have had to assist the Workers Comp adjuster on quite a few claims in recovering the funds from a third party liability carrier. The largest one we have had so far is over $1 million.

Next Up - Another definition from www.cutcompcosts.com/definitions.html A list of free definitions that you can download.

Subrogation Part I

This is one of the most misunderstood areas in insurance, and especially Workers Compensation, that we see costing insureds millions of dollars a year.

Subrogation: Prevents the insured from collecting loss payments from his or her own insurer and from the responsible third party for the same loss. Once the insurer pays a loss caused by a third party, the insurer takes over, or is subrogated to the insured's common-law right of action against the negligent third party.

What does this mean to the employers? If there are any accidents where another party is responsible (critical - or even partially responsible) for an on-the-job-injury, your Workers' Comp carrier should be pursuing funds from the third party's insurance carrier. This is one area where we see so much of the employer's money go down the drain.

Next Up - Two Subrogation Questions to Ask your Workers Comp Adjuster

West Virginia's Follow Up Carrier Forum

Released from the West Virginia Department of Insurance

WEST VIRGINIA’S FOLLOW-UP CARRIER FORUM

In response to the overwhelming attendance from our Open Market Forum in September 2007 and the requests for updates of recent legislative items, the Offices of the Insurance Commissioner invite you to join your colleagues for a second Workers’ Compensation Open Market Forum.

This April 8th forum will provide you with the information needed to smoothly enter the West Virginia market and will allow you to ask specific questions your company may have regarding this new opportunity. Join the West Virginia Offices of the Insurance Commissioner and NCCI for a forum designed to provide workers' compensation carriers with additional information needed to begin writing business in WV. This is a valuable opportunity for senior management to learn first hand of what is being experienced in WV and provide answers to questions relative to this new market opportunity. Participants will learn about the legal updates that have occurred, NCCI's filings, and what they must do to take advantage of the quickly approaching July 1, 2008 opening date.

WHEN: Tuesday, April 8, 2008 9:00 am to 3:00 pm (Registration starts at 8:30)

WHERE: Town Center Marriott, Charleston, WV

Among the topics we will cover are:

• The New West Virginia Market
• Legal Issues and Update
• NCCI Loss Cost Development
• NCCI Underwriting Plans
• Residual Market

We are going to attend and will post about the Conference on 04/08/08. This meeting is critical if you plan to write or are considering writing Workers Comp coverage in West Virginia.

The Difference Between Workers Comp File Reviews, Premium Reviews, and Reserve Reviews

Yes, they are all different.

I have posted on this issue more than a few times. This is most of what we do for a business. I felt the need to re-post on the subject as we receive questions daily on file, premium, or reserve reviews. Employers, agents, and others are sometimes confused by the terms.

• File Reviews - also called Performance Reviews. File reviews are usually reviewing all aspects of the way that a Workers Comp Claims Adjuster handled a specific file or group of files. The performance on the set of files is scored against a group of weighted criteria. Any trends are noted. We do not and will not pick out a few things that an adjuster erred on in the handling of the Workers Compensation claims. We look for trends such as over-reserving of files, late three-point contact, etc. Most adjusters do very well in our audits.


• Reserve Review - we should call this the Total Incurred Review, but most people outside the Insurance Industry refer to the Total Incurred as the reserves. We review the Workers Comp loss runs to make sure that the reserves are in line with the accident and the claims status provided by the adjuster. This can be part of the File Review.


• Premium Review - this is where we actually confirm all the premium calculations and the structure of the calculations. We examine areas such as classification codes, E-mods, original Workers Comp policies, year-end audits, etc.

Quite a few of our clients are now requesting E-Mod reviews. This is where we assist in lowering the E-mod or getting a company out of the Assigned Risk Pool. There are many areas where a company's Workers Compensation premium payments may be reduced. We see so many companies just writing a Workers Comp premium check without questioning how the payment was calculated. Questioning the $ you pay out is the best place to start a Workers Comp premium reduction program.

A Further Analysis of the Wyoming Workers Compensation System

One of the areas that Wyoming will need to examine is how Workers Comp claims are handled - specifically if claims that should be accepted are instead denied. This is one of the lingering questions about the North Dakota Workers Compensation system. Is there a trend to over-deny claims as the adjusters in North Dakota and Wyoming know that the Workers Comp system is one-sided?

A high-quality full claims audit from an outside source would enable Wyoming to find out if they are being fair to their injured employees. The word "independent" is crucial. The audit would have to be superior to the one in North Dakota.

From the Casper Star Tribune:

• A recent assessment of workers comp's finances by Pacific Actuarial Consulting suggested that about $642 million is required to cover benefits and liabilities based on historic and current income and payouts. It also suggested a more conservative view may call for $848.7 million, which would cover a major catastrophic scenario.
• As of Jan. 31, workers comp's cash balance was $925,296,141, according to outgoing director Gary Child. So whether the surplus is in the neighborhood of $77 million or $283 million, advocates from both the employee and employer viewpoints say they want a more detailed analysis of the finances.

I do not ever, and will never accept, an analysis from anyone in an insurance position that uses the word or words "worst-case scenario". Therefore, the analysis by Pacific Actuarial Consulting that 848.7 is needed for a catastrophe is not valid. However, I have not reviewed their findings. The $642 million seems high, but is probably more in line with actual needs of the Wyoming Workers' Compensation System. Producing a LDF (Loss Development Factor) should be sufficient for the projected needs.

One of the great things about the Wyoming Workers Compensation system is that attorneys, legislators, administrators, and others are asking questions.

Next Up - The Difference Between Premium and Reserve Audits - they are very different.

Analysis of the Wyoming Workers Comp State Fund

While we are on the topic of State Funds, Wyoming has been in quite a few online Workers Compensation publications with their huge surplus. Basically, the two basic questions that are being asked are:

• What do they do with the surplus?
• How did Wyoming get to have such a surplus?

The Wyoming surplus issue is complicated. We will address the first bullet point today and cover the second one in the next blog post.

It is, and has been, our opinion that any surplus that involves a Workers Comp Fund surplus should be returned to the employers. The surplus clearly indicates that Wyoming has been overcharging their employers for years. Refunding the Workers Comp premiums pro-rata should be the way to go. If the surplus was very small then, the State Fund of Wyoming should retain it to pay claims. I understand the surplus to be $925,000,000. That is not a small surplus for Wyoming. One may equate the return of premiums as a business stimulus. We would have to look at the numbers to see the amount of the surplus that should be returned to the employers.

One article that I read indicated that the injured employees were the ones that were shortchanged. I would have to disagree with that totally as there has never been a study conducted anywhere at any time that indicated that underpaying employees caused a surplus in a State Fund's premium. If the employee benefits were to increase that would affect only the FUTURE premiums, not the current and past ones.

One area that seems to have arisen in North Dakota with no conclusions drawn there is that too many claims were denied, and that increased the surplus. I will write a blog on that in a following post about the process of a litigated Workers Comp claim in a monopolistic state such as Wyoming or North Dakota. Could the claims process in a monopolistic Workers Compensation state be unfair? Possibly.

Next Up - Analyzing the Amount of the Surplus that should be returned.

The Answers to the Final Five Questions

The Answers to the Final Five Questions on the Last Blog with One More Question added:

6. We could not file a dispute with the North Dakota government or WSI, as the dispute had to be filed BEFORE the end of the bidding. We would have filed a dispute for the small number of files that the provider examined in their review vs. cost, but the number of files reviewed were not published until AFTER the audit was completed.

7. A recent North Carolina public bid for a file review of 350 files had a range of $27,000 to $65,000. So with 475 files, that would be 475/350 * 65,000 = $88,214 maximum.

8. Yes, we are familiar with the audit provider. They are one of the larger companies that bid on quite a number of projects.

9. We know no one at the WSI or within the North Dakota state government.

10. Yes, we do realize that we were posted on some of the politically-based websites in North Dakota. We made no effort to contact anyone with the North Dakota press. We have heard from a few news outlets and have been interviewed on the blog postings.

11. This is another question that we just added - Did I review the report from the provider on WSI's website? What was my opinion of the report?

The report was well done from a structure standpoint. However, the numbers are not there to draw any conclusions. One area that was remarkable was that the provider's team could have performed an audit on 475 files from 1/28/08 through 2/1/08. That is five workdays or 37.5 hours. The norm is one file per hour on the average. Lost-time files may take longer than one hour to review, but medical-benefit-only files brings the average back to within an hour. That would be 12.67 files per hour. The review team would have needed to consist of 13 auditors at a minimum to accomplish this task that quickly.

A Return to The North Dakota Conundrum

Update - if our website looks a little in disarray, it is because our website provider's server crashed. When they ran the backup, it was a file from an old work-in-progress file. The blog, however, is still working well. We are fixing the website as I am typing this info.

I was going to blog about Wyoming's Workers Comp concerns, but I received such a huge response to my last blog on my assessment of the Workers Compensation file review that was performed by North Dakota's recent service provider. I will not name the provider due to the legalities of disclosing the company that performed audit. It is public record and can be found on the WSI website and in different articles.

Some of the questions that I received today were:

1. Why did I think there were not enough files examined in the audit?
2. What is the usual normal % of files examined?
3. How many areas does J&L look at in files audits?
4. What is the area in which most of the mistakes are found?
5. What can be done about the audit if it was less than adequate?
6. Why did we not file a dispute with the North Dakota WSI?
7. What is the normal charge for 350 files?
8. Are you familiar with ********, the audit service provider?
9. Did I write the last blog due to the underlying personnel changes that were made with the audit? Do I know any of the personnel involved?
10. Did I realize that the blog was posted on a very reputable North Dakota political website?

My answer (respectively) to the above questions are:

1. The purpose of an audit is to show a statistical trend in certain areas of a group of Workers Comp files. There has to be enough files to generate instances of trends. Workers Comp files can be very complicated, so there may be a number of trends that have to be examined.
2. The Workers Comp industry standard is 10% of the files. My standard is 1/7 of all files in a set. In the case of the North Dakota file audit, that would have been from 3,000 to 4,000+ files.
3. We look at 33 areas that are scored by using a weighting system that is predefined. We usually have all 33 to add up to a number, which we designate as 100%, or the perfect score. The weighting system would change from state to state. We do more of a "performance audit." With me being a former Workers Comp adjuster for many years, J&L is not in the business of questioning an adjuster's decision on a file (usually).
4. Most of the mistakes we find in Workers Compensation files are in two main areas, both with devastating effects on the file. They are the work performed by the adjuster upon receipt of the Workers Compensation First Report of Injury (three point contact) and reserving of the files. Even self-insureds can be heavily affected by the wrong reserves on the file.
5. This would be one that the citizens of North Dakota and the personnel at WSI would have to handle. As I said in the last blog, according to North Dakota rules, we could only object BEFORE the bid, not after. One interesting thing is that the number of files the provider was going to review was released AFTER the bid, not before the beginning of the audit. I have never seen that before in all my years of Workers Comp experience.

Next Up- I will answer 6 - 10 tomorrow. I do not like the blogs to be too lengthy each day, as reading info on Workers Comp can be tedious to say the least.

North Dakota Workers Compensation Conundrum

One of my prior posts addressed some of the problems with North Dakota's Workers Comp system. I think there now may be a problem larger than the ones they tried to fix with multiple audits of their WSI. The WSI paid over $160,000 for an overpriced and underperforming audit. I, which I rarely do, would stake my reputation on it.

We were given a Request for Proposal along with other organizations that do Workers Comp claims file audits. The number that was supposed to be considered was 30,000 claims over the last few years. The provider, and I use the term loosely, reviewed little more than 350 files. Using straight division, that would be 350/30,000 files. That totals an unconscionable 1.17% of the files. NO JUSTIFIABLE CONCLUSIONS CAN BE DRAWN ON THAT SMALL A % OF WORKERS COMP files. As a long-time student of statistics, and as the industry standard dictates, the provider could not have drawn one iota of any type of recommendations. The number of Workers Comp files that needed to be reviewed should have been 3,000 - 4,000.

The cost of the project was astounding. It was about 100% larger than most providers would have charged. The bidding for the project left it to the bidder to figure out what was a statistically significant number of files. Quite a few promising companies did not even bid due to the sheer volume. A number should have been published by ND to make sure that there was a level playing field, which there was not.

The time taken to do the project was longer than allowed, which once again pushed out the small companies, as the RFP said the project had to be completed in a very short time, without question .

I am aghast that ND took this lackluster (at best) Workers Comp file review and are drawing conclusions from it. The file review was at a minimum 2,650 files short of being able to draw any conclusions. The minimum standard for the industry is 10% of the files. No company could object, as according to ND rules, the prospective bidders must file a dispute BEFORE the bid, not after.

I do hope North Dakota realizes the mistake made and tries to rectify it. Without doing that, the citizens of ND were heavily shortchanged on this one.



Up Next - Wyoming's Concerns About Their Monopolistic System

Another Question From One of Our Blog Readers

What is the one thing that I can do to quickly reduce my Workers Comp premiums?

I wish there was a quick-fix for paying less Workers Compensation premiums. There is a one-year lag time between anything a company does today and those actions affecting the E-Mod. Taking actions today is a start, but it needs to be a long-term goal. An action plan has to be put in place ASAP and then followed for three years to really have an effect on the E-Mod.

As I have mentioned in prior blogs, the first thing to do is to quit writing Workers Comp premiums checks without understanding the premium bill. If it is a bill from the initial policy, then review every page of the policy and ask questions. If the premium bill is from a Workers Comp audit, then make sure it is accurate. If there are any questions about the Workers Comp policy or audit, there is a time limitation for disputing the premium bill. Most of our initial contacts from employers are due to "Something just does not seem right - a gut feeling."

The bottom line is to not just write a check and consider it an overhead or fixed cost. Workers Comp is a variable cost. One of our favorite sayings is "Stop writing checks and ask questions." If you do not feel comfortable, do not hesitate to bring in a premium, reserve, or claims expert. It will almost always prove to be money very well spent.

I blogged "Red Flags That You May be Overpaying for Workers Comp" a few weeks ago. Check that one out. If you ever have any questions, please feel free to email me at jmoore@cutcompcosts.com or call us.

Up Next - Back to North Dakota's Workers Comp Conundrum

The Assigned Risk Pool- Is it Too Costly

My Company is in the Assigned Risk Pool, are we paying that much extra, and if we are, how do we get out of it ASAP?

We currently have quite a few employer clients that have asked for us to help get them out of the Assigned Risk Pool. The Workers Comp Assigned Risk Pool is where the State chooses a carrier for an employer as there was no coverage for them in the voluntary market. The insurance company must cover the risk. The insurer charges a HUGE rate over the voluntary market. Who could blame them, as this is "take them as you find them" insurance coverage?

A certain state's advisory Workers Compensation insurance rate for the Administrative/Clerical positions (Classification Code 8810) is 60% higher in the Assigned Risk Pool than in the regular Workers Comp voluntary market. As you can see, you are paying a much higher rate when in the Pool.

What is the quickest way to get out of the Assigned Risk Pool? This is a much-debated point. The most obvious one is a Safety Program. Keeping losses from happening will do the most for your E-Mod and Workers Comp insurance rates. However, there is a one year lag between your current safety efforts and the E-Mod you have now. Safety programs do take time to show in your insurance premiums.

Reviewing your loss runs is very important. They need to be reviewed long before your Uni-Stat date and any corrections made. There are quite a few prior posts on reviewing your loss runs. If you at any time feel in over your head in reviewing and/or negotiating reserves with your Work Comp claims adjuster, please call in an expert. These reviews can make or break a Workers Comp program. Do not call the Workers Comp adjuster up and say something like - "My reserves are too high. I am paying too much in premium." Be specific to what claims are over-reserved in your opinion and why.

The other ones are filing a timely report of injury, referral to a good medical treatment network, having a great return to work program, and employee treatment. These will bring your E-Mod and Workers Comp premiums down quickly.


Up Next - A Question From One of Our Blog Readers

The Most Expensive Component of All Workers Comp Claims

This is one that surprises most people. When I ask this question at presentations, the answer is usually the medical cost of the claim, or pharmaceuticals, or even settlements.

The most expensive part of a Workers Compensation claim is....poor adjusting decisions. If the Work Comp claim adjuster makes a mistake on the file, the insured/employer ends up paying for the result of that mistake through a higher E-Mod, resulting in higher premiums.

One of the most common mistakes we see is in the area of file reserving. Check back on the blogs where I mention Worst Case Scenario. Your Workers Comp premiums are calculated from the reserves on a file, better known as the total incurred. AS I HAVE SAID NUMEROUS TIMES IN THIS BLOG, WHAT YOU HAVE PAID ON A CLAIM HAS LITTLE OR NOTHING to do with the Workers Comp premium paid. It is the total incurred that matters. Please see my prior posts on total incurred.

In my years in insurance companies and TPA's, the only employees that understood what goes into paying premiums at the most basic level was the Workers Comp claim department. However, no adjuster has an exact idea of what effect a file reserve or total incurred has on an employer.

The other area that we see most of the errors and higher cost is in how expedient the employer was in reporting an accident (lag time) and how quickly the adjuster made the appropriate contacts. Within 48 hours AFTER AN ACCIDENT HAPPENS, the Workers Comp claim has already established its final cost factors. Yes, in 48 hours the claim's direction cannot be changed. There is a prior post of mine on that subject.

Next Up - My Company is in the Assigned Risk Pool, are we paying that much extra, and if we are, how do we get out of it ASAP?

Monopolistic Workers Comp States Examined

As of today, there still six states that have monopolistic state funds - They are North Dakota, Ohio, Washington, West Virginia, and Wyoming. West Virginia is still in a monopolistic condition as only one carrier, Brickstreet(c) can write Workers Comp business there. That will change on 07/01/08. Please see one of my prior posts on the investigations into the state funds going on in ND and OH.

In these six states, the state governments mandate that employers purchase workers compensation insurance from the state fund. These states don't even allow insurance companies to sell workers' compensation to employers headquartered within their borders.

There is a caveat to state funds that most employers do not realize until they receive a surprise claim. Even if your business isn't domiciled in one of these states, you could still be affected by their laws. If one of your employees is injured in any of these states and decides to file a workers compensation claim, that state's laws would apply. That is why "employer's liability" coverage is very important. If you have an employee that is injured in WA and you do not have coverage there or employer's liability, you will pay for the expenses directly out-of-pocket and may face steep fines from the Insurance Commissioner of that state.

This coverage would pay for related expenses and damages in case you are ever sued for the employment-related injury or illness. Most insurers may offer this extended coverage in these states, but only if you specifically request that they add it to your policy. There are a few Workers Compensation carriers such as The Hartford (c) that add it to all Work Comp policies.

I always recommend in all my presentations that employers make sure they have an "all-states" endorsement to their policies. It does not cost that much and can save an employer's Workers Comp program from taking a big hit.

Next Up - The Most Expensive Component of all Workers Comp claims, and it is not the medical component. In fact, it never shows up in a file in any place. No really, check it out.

What Is The Main Problem For State Run Workers Comp Programs

While there are many problems that have surfaced with State-run Workers Comp programs, there is one area that is quite lacking in the usual State Fund.

Workers Comp used to be a very simplistic process where benefits were paid, forms were filed, and everything was copasetic. My, how those times have changed. Workers Comp soon became a contentious process where attorneys, rehabilitation professionals, and other parties were added into the mix on a large percentage of the claims. The number of litigated or settled files skyrocketed.

The State Funds were not running their programs like a business. They were keeping their Workers Comp analyses very simplistic while companies such as Liberty Mutual(c), and Travelers (c) used very complex analyses to match the complex world that Workers Comp was becoming very rapidly. In other words, the State Funds were running their programs as a program not like a business with a profit motive.

Experience Mods, Classification Codes, Loss Costs, etc. were becoming a very exact science on what insurance carriers charged their insureds. State Funds ran up huge deficits where if the Fund was a carrier in a Rated state, the Insurance Commissioner would have put the carrier into receivership. West Virginia, for example, was running up a huge deficit very rapidly, but now the market is changing to a free-market system.

Not all monopolistic states are in that much trouble. However, I think that over the coming years, you will see a switch to private insurance from the monopolistic states that are in place.

Next Up - Monopolistic States Examined

Our website is at www.cutcompcosts.com

What Is The Problem

There are many challenges that are faced by state-run Workers Compensation programs. The ones that are most prevalent as of now are:

• Solvency
• Fraud
• Mismanagement
• Have To Take All Applicants
• Lack of Accountability
• Not Using Good Business Models
• No Competitive Forces
• No Profit Motive
• Customer Service Issues
• Deficient Claims Handling Service

There are states that have converted or are now in the process of converting their Workers Comp to a privatized system. Nevada has been successful and West Virginia is in the process with Governor Manchin taking the lead to push the system from the State Fund of Brickstreet(c) to an open market as of 07/o1/08. The West Virginia Insurance Commissioner Janet Cline has taken a tiger by the tail and has tamed it for the most part.

California's State Fund (SCIF) was a quasi-state run system as they held an extremely high percentage of the Workers Comp insurance market for many years. Their new Insurance Commissioner Pozner is in the process of cleaning up SCIF.

Up Next - What is the main reason for the problems that State-run Workers Comp programs are experiencing?