Five Areas For Workers Comp Jurisdiction

As I posted last time, Mr. Walsh is going to help us out with Workers Comp jurisdiction. See my last post for the original question. I was taught this many years ago.

If an employee is injured that has a multi-jurisdiction problem, the WALSH test is a great one to evaluate the jurisdiction. WALSH stands for Worked, Accident, Lived, Salaried, and Hired. I have seen a Workers Comp judge actually use this test.

W - where does the injured employee work most of the time?
A - where did the accident occur?
L - where did the employee live?
S - where was the employee paid from - where was check cut?
H - where was the employee originally hired?

The W carries the most weight. The H carries the least.

Yes, I know the test is not foolproof and does not work in all jurisdictions. It is a great starting point.

If one applies this test to the original question - the premium auditor would have been correct - from a possible claims standpoint - to ask for premium for coverage in another state for the subcontractor. There are many complications to making the statement that the premium collection was correct. This is when a company may want to contact a premium consultant. I am not advertising our services.

Workers Comp Subcontractors Jurisdiction Question

I received this question from one of my peers in the Workers Comp world.

A client of ours uses subcontractors as a part of their construction contracts. The subcontractors have provided valid certificates on insurance for Workers Comp coverage for any of their employees. The subcontractors sometimes cross state lines into another state to take materials to a landfill and to pick up materials.

The premium auditor has billed the client for a large sum of $ as they have said that part of the job involves another state that is not on the certificates of insurance. Can the carrier charge the client premium for their subcontractors as they are operating out of state for part of their job? Who would have the responsibility if a claim was filed in the other state if there was an injury?

I will answer this in two parts - one today and one tomorrow. There are many variables to examine to see if the premium should be charged to the client or to the subcontractors. If there are no out of state provisions on the certificates of insurance then a premium auditor will charge the main contractor for Workers Compensation insurance in another state. I am not inferring that the auditor would be correct, but one could not fault them for adding in a risk premium.

However, there are many particulars such as in which state the certificates cover and what state are they crossing over into to dump and obtain materials. This is definitely one for a premium review for the employer.

I will address what would likely happen if there was an injury in the non-covered state. Trucking companies have to address this very often. We have to thank Mr. Walsh for the next post.

Six Signals = Workers Comp Major Changes

The Death of Workers Comp was our most popular blog post since I started it. I have heard from many readers that say "no way."

Below is a list of things to make one think further about the changing WC landscape.

1. The Feds will have all Workers Comp data from the CMS database soon. They can analyze it to their advantage.

2. Senator Byrd from WV - very powerful - has twice tried to add 24 hour coverage amendments to different bills.

3. The Federal Insurance Office (FIO) was quietly created in a finance package.

4. At a major rating bureau conference, the main presenter said "They may not get all they want now, but the Feds will keep expanding their powers into WC every year."

5. Twenty years ago, no one would have thought that we would have a nationalized health care system - but we do now.

6. It was a river to cross to have 24 hour healthcare coverage in the past, now it is a small stream to step over. The AFLAC model is the best example.

Workers Comp is not soon going away. If anyone believes it will not change quickly - six letters - CMS MSA.

Pinnacol - A Different View

One of my blog readers that is an agent in Colorado disagreed with what I had said about Pinnacol in one of my recent posts. The verbatim quote is in the next few paragraphs. I may or may not necessarily agree with everything, but it was well thought out and written.
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Pinnacol has no plans of expanding outside the state of Colorado, which allows them to keep a federal tax exemption. They will also stay as the insurer of last resort. This portion of the business would be exempt from state premium tax. The premium tax on the remaining business is insignificant, 1%. That would translate to less than $4 million for the state based on Pinnacol's current book.

Pinnacol already has more than 50% of the Colorado WC market (that number fluctuates depending on the metric). This includes many of the best accounts in the state along with the business they have to write. They do have the ability to place other states coverage through a cut-through deal, currently with Argonaut (soon to be with Zurich).

I was confused by your statement that, "Cherry picking the good accounts that are just in Colorado would not enable Pinnacol to stay in business very long." Pinnacol has been very successful in not only writing the very best the state has to offer, but also the risks that nobody else will touch.
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Even though the discussion on Pinnacol may not directly apply to your state, I have posted on it many times as along with West Virginia, Nevada, Oklahoma, and other states the Workers Comp market is quickly changing overall. These and other states along with the health care debate should be looked at as bellwethers for your Workers Compensation situation.

The Death of Workers Comp - Have We Seen The Beginning?

I have posted many times on the term that I coined - The Federalization of Workers Compensation. The recent House vote on healthcare could be the first step to 24 hour health coverage. Traditional Workers Comp insurance would not survive if the federal government decided to experiment with covering individuals under a modified health plan that would also pay monetary benefits.

Is that possible? It exists today and is known as AFLAC. The AFLAC model could be applied to health insurance and therefore alter the Workers Compensation markets greatly. I am looking at a 7 - 10 year time frame.

If anyone does not feel that the federal government could move into the Workers Comp space so quickly, one only has to be reminded of how fast CMS and the Medicare Set-asides have changed the Workers Comp landscape.

I do not necessarily think Workers Comp will be wiped out completely. However, I think that anyone that has Workers Compensation at the core of their career should remain very flexible over the next 10 years.

Pinnacol Wants To Become A Mutual Company

One of my devout blog readers has asked why would Pinnacol offer so much $ for its autonomy. I did leave that part out of my last few posts Pinnacol.

Pinnacol wishes to become a mutual company. They want to have a board of directors that is not beholding to the state of Colorado. In my opinion, the request for the change is due to their book value. Pinnacol's value is very likely much more than the $330 million that was offered to the state.

As I said in my last post, Pinnacol would have to pay taxes if they become a mutual company. I am not sure they have stressed that enough with the state government. I have not seen a high level of concern that the switch would cause employers in Colorado to pay more premium. This concern was shown when CompSource Oklahoma was considering the same issue. The bottom line is Pinnacol will become a mutual insurer. The question is when and how much will they pay Colorado.

A Mutual insurance company is an insurance company which has no shareholders but instead is owned entirely by its policyholders.

Colorado - Pinnacol Is Willing To Pay How Much For What?

Recently, I posted an article on Colorado's Workers Comp carrier Pinnacol offering a staggering figure ($200 million) for autonomy. I had thought that Colorado would take the $ as the Colorado Legislature's raiding of the company's surplus to the tune of $500 million was considered illegal. After all, Pinnacol would immediately have to start paying taxes if they were given their independence from the state.

Pinncaol may actually take a lead from West Virginia's Brickstreet and expand into other states very quickly. Cherry picking the good accounts that are just in Colorado would not enable Pinnacol to stay in business very long. One has to wonder why Oklahoma's CompSource did not attempt to make such an offer to the Oklahoma Legislature.

The story does not end here. Pinnacol has just offered the State of Colorado $330 million for autonomy. Pinnacol might have taken negotiation lessons from their adjusters. Why make an increased offer of 65% over the initial offer? This is a case of very poor negotiation.

I am wondering what caused the enormous increase. There was a recent valuation of Pinnacol which set the company worth at $370 million. The next offer by Pinncaol should follow an offer from the Legislature. As any Workers Compensation adjuster will tell you, do not make another offer without receiving a monetary response from the other party.

Statutory Employees vs. Subcontractors Part II

In November 2009, I posted an advisory note from the IRS on how to classify employees and subcontractors. In my last post, I included how the IRS recommends differentiating employees and statutory employees. I could not find any articles by the IRS that directly compared Statutory Employees and Subcontractors.

I would think that an employer would have to first determine whether or not a worker is a subcontractor or an employee. If the worker is considered an employee, then the employer would have to determine whether or not the employer is a statutory employee.

The level of control that an employer has over a worker's activities seems to be the main determinant on the subcontractor/employee classification decision.

The one area that insurance carrier premium auditors tend to consider less over time is the certificate of insurance. We have often seen where the premium auditors will include a subcontractors pay as a company's payroll, even if there is a valid certificate of insurance. I do not agree and have debated this point with many auditors. Is it not against state insurance laws to require a company or individual be insured twice?

I do agree with insurance premium auditors concerning ghost polices. I will comment on ghost policies next time.

Statutory Employees vs. Subcontractors Part I

I have received a large number of emails since the last time that I posted on Statutory Employees. I first posted on statutory employees after a South Carolina Supreme Court decision separated the employment status of statutory employees and subcontractors. There seems to be some confusion between the two classifications of workers.

I had searched for the best definitions possible to help analyze the differences. The IRS website had a great overall definition of statutory employees -

Some workers are deemed to be employees by statute. For an exempt organization, the most common employees in this category are its officers. In addition, while not as prevalent in an exempt organization, the following workers are also statutory employees:

1. A full-time traveling or city salesperson who solicits orders from wholesalers, restaurants, or similar establishments on behalf of a principal. The merchandise sold must be for resale (e.g., food sold to a restaurant) or for supplies used in the buyer's business;

2. A full-time life insurance agent whose principal business activity is selling life insurance and/or annuity contracts for one life insurance company;

3. An agent-driver or commission-driver engaged in distributing meat, vegetables, bakery goods, beverages (other than milk), or laundry or dry cleaning services;

4. A home worker performing work on material or goods furnished by the employer.

These are great examples of a statutory employee. The worker in the SC Supreme Court case did not necessarily fit any of those definitions exactly.

The IRS goes on to say "Statutory employees are not liable for self-employment tax because their employers must treat them as employees for social security tax purposes." That means the employer must withhold FICA taxes.

I kept researching Statutory Employees and found that they exist as a combination between an employee and a subcontractor. What should a company do for covering a statutory employee under Workers Compensation or make them obtain their own Workers Compensation insurance?

From the previous South Carolina decision, I am thinking that under the above circumstances that Workers Comp coverage should be supplied by the employer. The fourth one is asking the employer to cover home workers. That is still a hotly debated topic yet today.

Five Fixes For Workers Comp In Oklahoma

My last post covered Oklahoma's CompSource. I am under the impression that CompSource will be sold in the future. What could Oklahoma do to help small businesses when there is no insurer of last resort?

1. Raise the minimum number of employees before an employer has to provide Workers Compensation coverage. Tennessee used to not require coverage unless there were more than five employees. North Carolina and other states only require Workers Compensation insurance if an employer has three or more employees.

2. The insurance risk pool will become the last insurer of resort when CompSource no longer exists. Oklahoma could soften the rates that the risk pool will charge to avoid the sticker shock that employers will incur when CompSource is sold. The rates in some state risk pools that I have examined can be up to 500% more than the regular market.

3. The Department of Insurance could not allow the company that buys CompSource to cherry pick the best clients. An agreement could be made that the employers insured by CompSource would have to be covered for three years.

4. The Legislature could leave CompSource in place and remove its tax-free status. This would remove any advantages in pricing its Workers Compensation insurance.

5. If CompSource is not sold but converted to a private carrier, the amount of reserves should be heavily monitored for weakness. The Oklahoma Workers Comp insurance market would become chaotic if a carrier this large became insolvent.

Any results that have come from Nevada, West Virginia, and other states that have completely opened their insurance markets have all been very positive.

Oklahoma's CompSource Will Not Be Privatized (Yet)

Oklahoma's House of Representatives did not make a final vote on privatizing that state's largest Workers Comp carrier. I have been a big proponent of privatizing Workers Compensation after seeing successes in Nevada and West Virginia.

West Virginia helped found Brickstreet that ran as a monopolistic carrier for a few years before the market was opened up completely. West Virginia modeled their program after Nevada's switch to an open market. Brickstreet still insures all of the governmental employees for Workers Comp. The West Virgina's governmental contract will be opened up for bidding to the market in 2012. A recent article by George Hohmann of the Daily mail pointed out that Bricksreet had a profit drop of well over 60% from the previous year.

CompSource is not a monopolistic carrier. It is more similar to where Brickstreet is now in evolving to a private carrier. I have friends and family in Oklahoma that actually depend on the market coverage provided by CompSource for their small business Workers Compensation needs. Brickstreet quadrupled the rates for the very small businesses in West Virginia as they instituted a floor of $750 per company.

I have posted opinions that agreed and disagreed with privatizing CompSource. There are other solutions to Oklahoma's problem that I will post next time.

Workers Comp Reserve Reviews And Subrogation - Three Concerns

Subrogation refers to an insurance company seeking reimbursement from the person or entity legally responsible for an accident after the insurer has paid out money on behalf of its insured. In Workers Compensation, we often see three different areas of subrogation that should be of concern to employers.

First, we sometimes find in our file reviews for employers that there was likely a third party that was or at least was partially responsible for the Workers Comp accident. As the file adjusting for Workers Comp claims has become more specialized, insurance carriers and TPA's have sometimes not trained their claims adjusting staffs in the steps to pursuing subrogation. We do often see that the adjusters have pursued subrogation properly if there was an auto accident involved with the claim.

The second area of concern is that when subrogation funds have been received by an insurance carrier or TPA, there is sometimes no procedure on how to handle these funds inside of the Workers Compensation file. This is an area that may not exist in most claims manuals.

The third area of concern is when subrogation funds have been received and credited to the file. We do see in premium audits for employers that the adjustment of the total incurred was never reported back to the NCCI or State Rating Bureau. This can have a great effect on an employer's E-Mod/X-Mod if the subrogation recovery was significant. As up to 45 months of data go into the E-Mod, a subrogation recovery must be credited on the day of receipt to the file and the correction reported to the NCCI or State Rating Bureau immediately.

I am not saying that this situation exists in all the files that we see. However, it is of a large enough concern that all employers should monitor if the recovered funds did make it to their E-Mod or X-Mod.

Further note - The X-Mod is the same as the E-Mod. The Experience Modification Factor is called the X-Mod in California.

Our 15th Year In Business

We have just celebrated our 15th year in business. I started the Workers Comp consulting business in early 1995 - mainly helping spinning mills in North Carolina straighten out their Workers Compensation claims. The spinning mills in North Carolina are mainly gone now. We have since then been awarded with various awards, most of them for the blog that you are now reading. I will try to come up with original articles on Workers Compensation at least three times per week. If you want to join our mailing list, there is a sign up button on the right side of the screen.

8810 and 8742 Classification Code Correction

I had posted previously in this post concerning the All Employees designation under certain class codes. I knew the rule, but I was in a hurry to get the post out and made a misquote. I am glad that many Workers Compensation premium auditors including our auditors, insurance company premium auditors, and auditors for auditing companies all emailed me very quickly to correct my incorrect post.

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In the last paragraph you seem to be saying that an “all employees” notation precludes the use of the standard exception codes. That is not how I read rule 1-D-4 in the users guide. They seem to say that a class including “all employees” still uses the standard exception codes unless one or more standard exception codes is specifically precluded, such as 7720 – Juvenile Detention Center- all employees & salespersons, drivers – this wording would still allow the separate classification of employees under 8810.

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Regarding your recent post on the difference between 8742 & 8810 which states:

"I have noticed very recently some of the class codes now include an “all employees” notation. The “all employees” designation on a class code means there are not Standard Exception Codes that will be accepted for a certain type of employer. "

This is inaccurate. The all employees etc. designation has no bearing on the standard exception codes. The standard exception can be separately rated unless it is specifically mentioned in the phraseology and or phraseology note. With regards to the inclusion of standard exceptions phraseology in some recent code changes, I wrote some of them and had input into the others that were changed.

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This is one of those posts that I rushed to produce. Thanks to all for correcting my mistyping. What I had meant to say is in bold above. Thanks to Carlos, Spencer, and others for making me toe the line.

I Am Going To Agree With Insurance Companies On This Matter

Rarely do I completely agree with casualty insurance carriers on a broad subject. This is one time that I have to make an exception. I do agree that insurance carriers do not pose a systemic risk to the US financial systems.

Systemic Risk - Two Definitions

1. In finance, the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system.

2. Financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries". It refers to the risks imposed by interlinkages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market.

Systemic Risk is also sometimes erroneously referred to as "systematic risk" It is not possible to avoid systemic risk through diversification.

Why did I decide to go into definitions on systemic risk? The Federalization of Insurance - specifically Workers Compensation from a different angle is now in Congress. The Federal Government wants to rein in insurance companies by regulating them with the same laws as banks.

A letter signed by various large insurers' executives was delivered to Sen. Christopher Dodd, D-Conn., the banking committee chairman, as a precursor to bipartisan financial services reform legislation that could be introduced in the Senate this week.

I will not go into the letter except the passage “Property and casualty insurers have been an oasis of relative stability, weathering the crisis well without presenting any risk to the broader financial system." One of the main concerns of the recently formed Property & Casualty Leaders Coalition was having to pay some sort of tax that was centered on the bank failures. Also in the letter was “The property and casualty industry should not be charged any assessments to cover shortfalls that arise from a resolution of a non-insurance financial company.”

The gravity of the situation can be shown by who signed the letter. The letter was signed by Evan Greenberg, chairman and CEO of the ACE Group; Thomas Wilson, chairman, CEO and president of Allstate Corp., John Degnen, vice chairman and chief operating officer of Chubb Corp.; Thomas Motamed, president and CEO of CNA Corp.; Edmund Kelly, chairman, president and CEO of Liberty Mutual Group; Stephen Rasmussen, CEO of Nationwide Mutual Insurance Co.; Edward Rust, chairman, president and CEO of State Farm Mutual Automobile Insurance Co.; Jay Fishman, chairman and CEO of the Travelers Cos. Inc.; Stuart Parker, president and CEO of USAA Property and Casualty Insurance Group; William Berkley, chairman and CEO of W.R. Berkley Corp.; and Paul Hopkins, CEO-Americas of Zurich Financial Services Group.

California's Workers Comp System Is Shorting Employers

We have been very fortunate to have a large amount of our premium and reserve review services in California. I feel the employers in the state are not necessarily being treated fairly. The reason is the look-back period has been shortened severely in California. This is unfortunate as CA policies seem to have the highest error rate.

In California, the employer may only have their Workers Comp policies and audits reviewed for one year in the past. Most states allow a three year look-back period. I have had to explain this conundrum to more than a few aggravated California employers. Basically, when a mistake is found, that mistake may possibly be in triplicate in other states. A small error turns out to more significant when tripled.

Is it still worth the effort to review Workers Comp policies and premium audits in CA? Yes, as once the error is found, it usually becomes a permanent fix for the future. Our largest single error was found in a California Workers Compensation audit.

ASAP Must Be Built Into A Workers Comp Claims Processing Manual

We often have to examine a carrier or TPA's claims adjusting manuals while performing our file performance audits for employers. One area that can help to control claims costs is the initial three point contact (Employer, Employee, and Physician).

All the claims manuals properly address the information needed from the three point contact. We sometimes see the manuals requiring that the three point contact be completed within 48 or 72 business hours. This to me is a large mistake as the claim is set in stone approximately two days after the accident. The carrier that trained me quite a few years in the past would not accept the three point contact not being completed with 24 hours after receiving the first report of injury.

In my opinion, most of the CRITICAL work by the claims adjuster needs to be completed within 24 hours after receiving the first report of injury. The medical treatment can be controlled and the employee can be directed by the employer's choice of physician if the claim is attended to ASAP. Contacting the employee within 24 hours lets the employee know their claim is being attended to in an expedient manner.

The employer's responsibility in the process is to report claims as soon as possible and to direct the employee to the proper medical care. The time clock is ticking once the employee reports an on-the-job injury.