More On the NCCI Code Changes

I have posted often over the last few weeks about the possibility that the NCCI will change the way they calculate the Experience Modification Factor (E-Mod). The possibility of the change is now a reality. I just read over a 150 page actuarial report that the NCCI is going to use as a basis for the changes.

The main changes will include:

1. Loss development factors (LDF) will be derived using claim characteristics such as injured body part, the open and closed claim status at 1st report, and the injury type category.
2. The loss development triangles are being expanded from five reports out to 10 reports
3. Large claims will be capped at $500,000 and expected excess factors (derived from the new seven hazard group mapping by class code) will be used to calculate ultimate losses.
4. Serious and non-serious pure premium components will no longer exist. There will only be indemnity and medical components.
5. The computation of the industry group differentials was slightly modified.
6. The full credibility standards for indicated and national pure premiums were slightly modified

What does this mean for employers?

1. As always, I am impressed the NCCI is going to try to improve their processes. I hear too often in the insurance industry "We do it that way because we have always done it that way."
2. After looking over the report, your claims history will be more accurately affected in your E-Mod, which is a good development for employers. I do not see it as a way to find more money for insurance companies.
3. The introduction of quite a few new variables into the equation means the insurance carriers will be relied on more than ever to report accurate data. One mistake may be magnified under the new calculations and there are more areas for mistakes to be made in reporting the data and calculating your E-Mod.
4. An employer is going to have to understand and examine their loss runs very closely now more than ever in the past.

As always, if there are terms that you have questions on, please click the definitions tab on the right side of the page. We have a large number of definitions available.

What Could Be The Upcoming NCCI Class Code Changes? ***

I had read quite a few of the reports coming out of the NCCI Annual Symposium. NCCI stands for National Council on Compensation Insurance. The company is based in Boca Raton, FL. NCCI is not a governmental entity. I also watched the videos that were posted from the NCCI annual symposium. The reports are not exciting reading. A shockwave may be sent through the Workers Compensation industry because of the possible modification of the NCCI Classification Codes.

Rating Bureau systems are all very similar from state to state and also to the Class Code based rating system from NCCI.

One of the reports indicated that the NCCI may use "type of injury" coding in their ratemaking formulas. It is not clear how this will change the Workers Compensation landscape. There is already a code for a type of claim that is a very benign variable as it changes nothing on the ratings.

All insurers have a fields or group of fields they input when setting up a Workers Comp claim. I am only surmising that the NCCI will pick up that data as part of their Workers Compensation Experience Rating.

I am not 100% sure on how this will affect the E-Mods produced by NCCI. I am also not sure if the type of injury will feed directly into the formulas or will just be a tracking field to get an overall "outside the numbers" sense of how an employer is doing with their safety and claims program.

***Due to popular demand, this is a repost of this information***

Is The Obama Administration The Final Countdown For State Run Workers Compensation?

In the past few months, I have performed a large number of phone consultations on Workers Compensation claims and premiums. One of the most common questions that I receive is what would be the largest shakeup in the Workers Compensation world in the next five years.

As the title of this post indicates, the federalization of Workers Comp - and it is in process as I write this - would make Workers Comp not look anything like it does today. If we examine what was once state administered and then converted to a federal administration, one can see great changes. Workers Comp would be no different.

From my viewpoint, if health care becomes nationalized, then it will be a very small leap to have 24 hour coverage. This is especially true if employers are tagged with administering the national health part of the plan. How many times have we seen states say that 24 hour coverage could grow from the health insurance as a modified carve out program? I have never seen the states say we can expand Workers Comp coverage to include health. Once again, nationalized health converted to 24 hour coverage would obliterate the Workers Comp infrastructures of each state. I am not intending to say this would be a positive or negative occurrence.

How well would the program run? I do not want to pick on the TSA, so I will point out the digital TV transition that was federalized. I will register no opinion. It is a great example of a federalized program.

The whole transition may not take place for 20 years. I am still trying to fathom what the system would look like overall. The main concern would be if the federal government becomes a Workers Comp insurer that could charge less than the competition for the same coverage, what would happen to the current Workers Comp carriers?

I am not making a political statement.

Caution - What You Can Do To Harm Your Workers Comp Program ***

Most employers have concerns that decisions about what to pay and when to pay can actually harm their business. When Workers Compensation insurance policies are examined for employers, there is one area where large mistakes almost always occur in the policy process. The mistake is simply writing a check for a Workers Compensation bill - especially a Workers Comp audit bill - without questioning how the insurance carrier or premium auditor calculated the amount. Insurance policy billing statements must be treated the same as a bank statement. If not, then over payments for Workers Comp coverage are almost guaranteed.

One employer wrote a check for over $50,000 because the insurance carrier audited them and sent them a bill. There were miscalculations during the audit, later discovered by an independent consultant. The true bill ended up being less than $20,000. This is becoming more prevalent in recent times.

Always ask for backup documentation on how the Workers Comp policy or audit bill was calculated. Look it over carefully. There may be no errors. But, at least the assurance is there that the documentation that justifies the billing was reviewed and anything that could be done, was.

"Just Do Not Write A Check" should be one of the primary mottoes for insurance departments. At a time when every cent counts more than ever, feel 1,000% comfortable with writing the check. If not, trusting instincts and asking questions is Key. The answers to your questions may be very surprising and the results can be very lucrative and a huge boost to the bottom line.

***Due to popular demand, this is a repost of this information***

A Few Concerns On Copyright

I have been contacted by quite a few insurance agents, consultants, websites, etc. about using this blog and the newsletter at will to beef up their website or open access to use the posts at will. As I have put in over 360 hours (9 weeks total) of solid work, I cannot agree to using my posts in any form at any time. Why I decided to bring this up is that there are websites that charge for access that are using quite a few of my posts. That will be stopped very soon.

As we have a few websites using the blog, we are running checks to make sure that no one plagiarizes the website or this blog. When we ran the check last year, we found five websites that just copied the blog or parts of the website (better known as plagiarism) at will.

I have no problem allowing someone to use a single post if we are given credit in the article. I cannot give out carte blanche access. I hope you and the other blog and newsletter readers understand my position. If you have any questions on this, please drop me an email at jmoore@cutcompcosts.com.

Now, let us get back to saving you Workers Compensation premiums.

The Five Secrets To Cutting Your Workers Compensation Costs

I have in a roundabout way covered a few of the secrets (that are not so secret) to cutting your company's Workers Comp costs. The five are:

• Timely reporting of the injury to the insurance carrier/TPA
• Medical network in place
• Return to work plans for an injured employee
• How the employee is treated by the employer
• Understanding Your Premium Audit

If you look over the last few posts, the first three have been covered. I will cover #5 - Understanding Your Premium Audit in the next post or two.

Communication With Your Company's Workers Comp Medical Providers

This is one of the very critical areas in your Workers Compensation program. Communication with the medical providers in your network is one of the most effective ways to control your Workers Comp costs.

The most important medical providers in your network are not the first-level physicians such as general practitioners. The second level which includes surgeons is the best area to save on Workers Compensation costs. The second level physicians will usually be in charge of the more serious claims and will make decisions on the disability of a more seriously injured worker. The treating second level physician will also help in controlling the medical costs.

How can your company control the second level physicians that your employees are referred to for treatment? A working relationship with your first level physicians so they realize who you wish your employees referred to in case there is a referral to a second level physician.

How can a surgeon or specialist know what the job tasks are for an employee? I will cover that in one of the next few posts.

Another Way For An Employer To Harm Their Workers Compensation Program

This would apply to all employers regardless of size, type of insurance program, or state. California has shown that MPN's (Medical Provider Networks) are a way to reduce premiums very quickly. Designing your own provider network is a task that will pay your company back with a large amount of savings.

Does your company have a medical network in place? If not, you are very likely spending out 400% more on your premiums. I performed a study ten and again two years ago on a set of public entity files that indicated that very fact. The 400% is a conservative figure. How do you set up a network of doctors and other medical providers for your company? The first step is to take some type of action.

• The first step is always the most difficult. Your medical bill processing company - which is sometimes your insurance carrier - has a list of doctors in their network. You can usually save about 15% on your medical bills just by using these medical providers. Find the ones in your area and direct your employees to use them.
• Find the doctors that are industrial-minded inside of the network. This is a double savings as your company gets the network discount from your carrier/TPA. Your company will also save as industrial-minded doctors and providers tend to return the injured employees to work earlier.
• If you do not like the providers that are in your carrier's/TPA's medical network, then explore your local area for industrial clinics. We have seen great results from Concentra Medical Centers. Certain state laws may prevent you from going outside of your medical network such as the MPN's in California. We have found that medical walk-in clinics are great for minor injuries.
• Once your network is in place, communicate with the medical providers. I will cover the communication to the medical providers in the next one or two posts. This relates into my last post on return to work.
• Monitor the network for changes in medical providers. Quite a few of the pharmaceutical networks have changed over the last few years. The network that you originally built may not be the same even after one year.
• Communicate the network to your employees. We have advised companies to place the medical provider list with the employees' paychecks once per year, or sending out a memo to all employees yearly on who is the required or recommend physicians and other medical providers in the network. The procedures for reporting workers comp claims that I covered in the last few posts is very important. That is where the employer has the initial control of their claims.

One of the other areas that I recommend to cut workers comp costs is how the employee is treated after the accident. The employees see the medical providers as impartial and so do the Workers Compensation Industrial Boards and Courts. Medical treatment is the make or break area for your program other than safety.

The Long Term Outlook for Workers Compensation

The National Council on Compensation Insurance (NCCI) had an optimistic outlook on the Workers Compensation market. However,the NCCI had recently adjusted its long-term outlook for workers' comp to cautionary. This may be the warning of a hard market.

These concerns, according to NCCI, include:

· Rising medical costs remain a significant challenge and continue to rise faster than wages. California is the best example of spiraling medical costs. The NCCI does not track CA statistics.

· Higher indemnity claim costs. Researchers found that indemnity claim costs also continue to outpace wage increases The number of claims have decreased. The higher indemnity and medical costs have offset the decrease in the number of claims.

· Lower investment yields. I am of the opinion that the insurance markets follow the stock market. The recent downturn in the economy should have hardened the market. The bailouts in the financial markets may have delayed the hard market.

· Potential political changes. I think the political changes such as a Federal Insurance office has caused great uncertainties in the market. Workers Comp benefits could be even be affected by the nationalized health insurance program. With all of these uncertainties, the market could harden very quickly.

What Is the effect of a hard market in Workers Compensation? I will post on that next time.

The One Thing An Employer Can Do To Quickly Wreck Their Workers Compensation

There is one thing that an employer can do to wreck their Workers Comp program. It is a mistake that can be remedied very quickly.

The mistake is not reporting claims timely. With so many of the states requiring the adjuster to make a compensability decision within a short time frame, the employer must report the accident quickly. Most companies do report accidents from their main office very quickly. It is when they have branch offices and/or divisions/departments that problems occur with timely reporting.

This is one of the Five Keys To Saving On Workers Comp that I have written and spoken about for many years. Letting the workers compensation adjuster know of an accident quickly allows for a more thorough investigation. The injured employee will receive their proper benefits when they need them if the investigation begins quickly.

One of the effects that employers may not realize is the adjuster that is setting the reserves on their claims will very often base some of the reserves on the "reputation" of the employer. An employer that chronically reports claims late may be seen as more of a higher risk. The adjuster may set the reserves much higher which will cost the employer a much larger amount of premiums. The worst first impression to an adjuster is an employer that reports their claims late.

Late reporting can also affect an employer at renewal time. Quite often, an adjuster will let the underwriting department know when an employer has reported a claim late. These late reports are usually compiled and provided to the underwriter at the time of renewal. We have seen employers not being renewed by their insurance carriers for reporting late.

A Startling Workers Comp Statistic From The AMA

I was attending a lunch conference on Workers Compensation Return to Work earlier this week. The presenter provided this statistic from the American Medical Association. The stat was based on the longer an injured employee is out of work, the less likely they will ever return to work.

The percentage of workers that return to work after being out of work for:

• Less than 8 weeks - 50%
• After 26 weeks - 18%

There was also a study performed in the 1980's and the 1990's that said an employee that is out of work more than six months will return to work only 50% of the time. I had performed a statistical analysis of the same type on a group of public sector files. The most startling statistic was that only a very small percentage of employees out of work more than one year. I think the number was 7%.

Return to work is becoming more of a financial defense strategy for companies. Having a return to work program is very critical to reducing Workers Compensation costs. It is one of the easier methods to reduce Workers Comp payouts.

There are a few good methods to establishing and facilitating a Return to Work program. I will cover them in the next post along with the reasons for the low % of return to work after such a short time off work.

How Can I Tell If The Workers Compensation Reserves On A File Are Correct? (Part 3)

From the last three posts I am assuming that you have online access or a claims loss run and can find the Paid, Reserves, and Total Incurred figures in your loss runs. The ones that you want to target are the ones that have an Open or Reopen status. You will likely only want to examine the Lost Time files and not the Medical Benefits only file. You would want to examine any medical only claims that have more than $2,000 in outstanding reserves.

Now that you have a list of those claims, how do you tell which ones are over-reserved or should be closed? Well, I have been able to answer hundreds of questions in this blog. This is the first time that I have no sure answer. Contrary to the belief of some people, reserving Workers Comp files is an art that is very difficult. I could write a book just on how to analyze loss runs.

You can call the adjuster to see if they will reduce the Workers Compensation reserves, but on which files would that be appropriate? You can call your agent, but I have only know a very few agents that understand the process of reserving a Workers Comp file. That is no slight to agents as they are very necessary to the Workers Comp insurance process.

I want to avoid sounding like an infomercial for our services. I will not "toot our own horns." The best thing I can say to do is have a working relationship with your adjuster. That will help somewhat.

I have posted a large number of posts on loss runs, file reserving, and contacting your Workers Comp adjuster. Feel free to look through the posts on this page and on the archived pages. The Search Box may be a good shortcut.

Next Post - A Statistic That Floored Me From The American Medical Association

How Can I Tell If The Workers Compensation Reserves On A File Are Correct? (Part 2)

Understanding how your claims affect your insurance premiums.

The Workers Compensation insurance reserve system is a delayed system. The adjusters actually have an additional six months after a policy ends to adjust the reserves to their proper level . Reviewing your claim reserves with the insurance company at the end of a policy year is an exercise in futility. Approximately 90 days after your policy expires is the best time to review the loss runs and the reserve values. These Total Incurred values will show up in your company's Workers Comp insurance policy for the next year.

Examining and understanding what the three factors of a reserve are and which ones can be analyzed.

• The three factors are the Spent amounts; Amounts in Reserve, and Total Incurred. The Spent amounts can be examined to make sure that the correct amounts were paid. The Spent amounts have little to do with the reserve figures. The Spent amount analysis is best performed in a claim review, not a reserve review.
• The Reserved amounts are the most important part of a reserve review. They are the unspent figures that the adjuster estimates will be paid out over the life of the Workers Comp claim. The Reserve amounts are the negotiable parts of the loss runs. Over-reserving can cost an employer dearly as the E-Mods/X-Mods are calculated directly from these figures. Over-reserving will cause an employer to pay premiums for funds that will never be used to pay the claim.
• The Total Incurred amounts are the Spent amounts added to the Reserve amounts. The Total Incurred amounts will appear on the Experience Modification Worksheets that are published on your company by the NCCI or State Rating Bureau.

Understanding the difference between a Workers Comp claim review, reserve review, and premium audit.

• Claims Review - analyzing how well the claims department handled the claims. This is usually accomplished with a review sheet that scores the effectiveness of the claims adjusters.
  
• Reserve Review - a financial analysis to make sure the monies forecasted for the life of the claim is as accurate as possible. Negotiating down the reserves will result in a large amount of savings in your Workers Comp premiums.
• Premium Audit - performed by the insurance company's premium auditor to make sure that all the correct classification codes and payroll figures were used during the policy period that just expired.

I have provided the background of what you need to know to do a reserve review. The rest of the Reserve Review will be covered in the next post.

The First Three Steps of a Workers Comp Loss Run Claim Reserve Analysis

This post is a continuation of the last post.   I will break down the list of six into two groups of three.     

Obtaining online access or Workers Compensation loss runs. 

This area has been covered very often by me in previous posts.  Please use the Search box in the right margin.  Searching for online access or loss runs will give you the best results.       

Understanding which claims will affect your NCCI or State Rating Bureau Experience Mod (E-Mod/X-Mod).  

Any very old claims (more than 5 years old) will not affect your E-Mod or X-Mod in most cases.  However, if you are in a hybrid insurance arrangement or a long-tail Retro policy, the old claims can still affect your insurance premiums.  

Your company's most recent claims will likely not affect your next E-Mod/X-Mod.  However, the very new claims will affect your Mod eventually, so they should be examined along with the rest of the claims on the loss run.      

Understanding which claims will be examined when an insurance company provides a quote  

This may be a little confusing as the insurance companies that do a good job of underwriting will examine the older claims that will not affect your E-Mod.  The underwriter will still look at the old claims to make sure that your company did not have a very bad claims year that may not appear in the E-Mod calculations. 

We recently consulted with a trucking company that was trying to negotiate a switch from a regular commercial policy to a large deductible program.  Their E-Mod looked great. The insurance carriers that were willing to write them did not provide a great deal as was anticipated due to their low E-Mod. The underwriting departments were concerned the company had two very serious claim years 7 & 8 years ago.  The bottom line is that for the E-Mod the newest claims should be examined.  If your company is going to shop their Workers Comp insurance in the market or going to try to switch to an alternative insurance plan, all claims on the loss runs are then highly important. 

      

That covers the three out of the list of six. We will cover 4, 5 & 6 in the next post.  There is a Definitions tab in the right margin that will take you to a list of definitions if you have questions on any of the terms. Please email us if you have any questions.            

How Can I Tell If The Workers Compensation Reserves On A File Are Correct?

 I have posted on this subject previously.  As it is a very popular question that we receive, I will cover the subject again.  The steps to finding out are: 

1. Obtaining online access or Workers Compensation loss runs
2. Understanding which claims will affect your NCCI or State Rating Bureau Experience Mod (E-Mod/X-Mod) 
3. Understanding which claims will be examined when an insurance company provides a quote   
4. Understanding how your claims affect your insurance premiums
5. Examining and understanding what the three factors of a reserve are and which ones can be analyzed
6. Understanding the difference between a Workers Comp claim review, reserve review, and premium audit

I will cover these in groups of three over the next two posts.  Quite a few of these topics have been covered in prior posts. Feel free to use the Search box to find my prior posts on this topic.  The steps for self-insureds/large deductibles are different.  We will cover those in later posts. 

A US Appeals Court Rules On A Premium Dispute

I was reading an article earlier this week in The Workers Comp Forum concerning an employer in South Carolina that disputed their Workers Comp insurance premiums. The insurance carrier, Companion Insurance, cancelled a second policy as the employer did not pay the insurance premium demanded on an audit billing for the first policy.

The employer sued Companion Insurance for breach of contract as they had paid all undisputed premium. The employer lost the case on a summary judgment but the Court of Appeals overturned the lower court. The reason the employer brought suit was that one of their employees was seriously injured in an accident and was denied benefits/coverage.

The employer disputed the premium audit increase and forwarded its payroll information to dispute the audit's accuracy. The court found such that a bona-fide dispute existed because the employer disputed the premium by refusing to pay, submitted its payroll data, and informed an insurance agent that it believed it had paid the amount owed on the first policy. The court stated it was "at a loss as to what more [the carrier] could reasonably expect of [the employer] when attempting to dispute the premium charge."

Check out my last post as this is all somewhat related. How is it all related? The employer prevailed as they disputed the audit timely. That is why I have posted very often to not let a premium audit statement or billing just sit in the inbox. The employer prevailed as they disputed the audit timely and forwarded the proper information to the carrier and agent. We will have to see how this all turns out as the case now goes back to the lower level court. The case is Triple H Debris Removal, Inc. v. Companion Property and Casualty Insurance Co., No. 08-1137 (8th Cir. 03/30/09)

Next Up - Question From A Blog Reader - How Can I Tell If The Workers Compensation Reserves On A File Are Correct?

How Would Our Company Dispute A Workers Compensation Premium Statement and Bill?

If your company feels the insurance carrier has not billed you correctly - especially at the time of premium audit, then by all means do not wait to send in a premium dispute letter.  Your insurance policy should have an address for premium disputes.  Each state has its own set of premium dispute rules that may differ somewhat between each state.  

The three main concerns that we have seen with premium disputes are: 

• The employer does not dispute the billing timely.  All states allow the insurance carrier to cancel an existing Workers Comp policy if a prior policy billing has not been paid or disputed timely.  If you are going to seek the services of a Workers Compensation consultant, make sure you do it quickly after receiving a billing.  
• The employer ignores the due date of the premium audit billing. This goes along with the first bullet point.  In this economy insurance carriers are not very flexible if a company does not pay or contact them by the bill due date. 
• The employer uses the dispute letter as a way to stall the bill payment.  This may ruin the business relationship between your agent, the carrier and your company.  Be very careful what you include in the dispute letter.  It is very difficult to add more disputes to the original dispute letter.  

If your company is unable to pay the full amount of the undisputed part of the premium audit bill, contact the insurance carrier immediately upon receipt.  Some carriers will accept payments over a few months time.  The key here is contacting the Workers Comp carrier before the due date.   

Next Up - A Supreme Court Case That Covers Premium Disputes

Why Is The Total Incurred Amount So Important?

This is one of the more confusing areas of Workers Compensation.  The terms are different on almost every insurance carrier's loss runs.   The term Total Incurred is the sum of the funds Spent added to the Reserves.   In other words:  Total Incurred = Spent + Reserves. The easiest way to locate the Total Incurred is to find the largest of the reserving amounts on each claim. The Total Incurred will always be the largest number. 

The reason that the Total Incurred figure is so important is that is the amount used by insurance carriers to report your insurance loss history to NCCI or your State Rating Bureau.  The amount Spent is not what is used to calculate your E-Mod. It is the Total Incurred  value.   

For instance, if you have a Workers Comp claim that has only $300 spent but there are $13,000 in reserves, then the claim is valued at $13,300 not $300.  We just received a call today from a company in California that had this very question.  The Workers Comp file was left open for three years and they paid premiums off the $13,300 not the $300.  A few claims such as this can wreck a Workers Comp program.

This is a very important point when you look over your company's Workers Comp loss runs.  It is a great idea to make sure the claims adjuster has provided you with an updated status on the Work Comp claim.  Workers Comp adjusters are very overloaded with claims, especially with the downsizing occurring due to the recession.   They may not have time to look at reducing reserves. That is the lowest priority in an adjuster's busy day.  The adjuster has about thirteen main tasks and reducing reserves is #13.  It is not the individual adjuster's fault.  It is the way Workers Comp claims systems have been operating for many years. 

If you feel that your files are over-reserved, it may be time to call in a claims professional or a Workers Comp consultant to keep your Workers Compensation premiums in check. We always recommend not calling an adjuster and saying that all your Workers Comp reserves are too high. Emailing an adjuster with specific questions is the best way to follow your claims.                       

  

Zenith Insurance's Marketing Move In California Is Pure Genius

A few California Workers Compensation Insurance carriers have filed lower rates than what is recommended by California's Workers' Compensation Insurance Rating Bureau (WCIRB). No matter what the decision California Insurance Commissioner Steve Poizner issues regarding a mid-year rate increase, several workers' comp carriers have ignored their recommended heavy increases. The new recommended number for the mid-year increases is 23.7% recommended by the Workers' Compensation Insurance Rating Bureau.

Two insurance carriers increased their rates by only 10%. Zenith increased their rates by only 4%. Poizner cut 11 points off the Bureau's after factoring out the State Fund's results which is responsible for much of the increase in its current recommendation. As I have said in prior posts, July 1 will be a very interesting time for the Workers Comp market in California. Poizner has performed well in doing what is right without political influence.

I have read quite a few articles that questioned the very small increase by Zenith. Zenith has always had disciplined underwriting. The articles also mentioned that Zenith had poor financial results. Zenith wrote 4.26% of the California market, which was down from the 4.38% market share in 2007. The hallmark for how insurance companies are performing is A.M. Best. Zenith's A rating was recently reaffirmed by A.M. Best. This means that Zenith knows what they are doing. An A Rated insurance carrier in this market is very solid.

I think the articles missed one important point. The publicity around cutting their rate increases well below the market is great marketing for Zenith. They will also place themselves as an attractive carrier to place business with by agents. Zenith has a very good group of underwriters, so this is not the proverbial toss at the dartboard.

Why is this so important? There are quite a few states with this same type of situation. South Carolina, for instance, had skyrocketing increases recommended for years and carriers undercut the recommended increases. West Virginia just moved from a monopolistic system to an open market. The State Fund may not be a monopolistic carrier, but it was close in the late 1990's. California is such a large amount of the Workers Comp market that any major changes there affects the national statistics on Workers Comp more than any other state.

What are Workers Comp Standard Exception Codes?

I had posted on this subject back on October 16, 2008. That post is listed in the archived posts further down on the right side of this blog. I posted on the the most used Standard Exception Code (8810) earlier this week, I thought it would be good to cover the subject again.

We will use NCCI Standard Exception Codes - classifications that are common to many businesses and that are generally not allowed to be designated as the governing classification. The governing classification is the class code that produces the most payroll in a business. The Standard Exception Codes are:

8810 - Clerical
8742 - Salespersons or Collectors - Outside
8871 - Clerical Telecommuter Employees
7380 - Drivers, Chauffeurs, Messengers, and Their Helpers NOC—Commercial
8748 - Automobile Salespersons

Please note that each of these codes has many subheadings. The Classification Code 8810 has pages and pages of explanation on the code. Is there an overall guide to what jobs fit all of these codes? The NCCI has the Scopes Manual which is supposed to be used by all insurance personnel that rate or audit companies' Workers Comp payrolls and premiums.

One caveat to the Standard Exception Codes is that premium auditors are trained in and are very adept at analyzing the above Class Codes. We often see in our audits for employers where the auditor has changed the Class Codes from the Standard Exception Codes to other codes.

What Is The NCCI Class Code 8810?

This is the most popular question that we receive about the NCCI Classification Code system. Classification Code 8810 is the Administrative/Clerical code that is used in all 50 states, including the monopolistic states. It is usually the least expensive code as employees that fall under the Class Code are considered very low risks for a Workers Compensation accident.

The 8810 Class code is what is referred to as a Standard Exception. I will cover Standard Exceptions in the next post. NCCI class code 8810 is an all encompassing code. There are very many job titles that would fall under this code. Class code 8810 is not just for administrative assistants.

We have performed quite a few workers comp audits for employers where a large number of workers were included under the 8810 code that more than likely could have been classified under another code. The insurance companies' Workers Comp Premium Auditors have become very adept at reclassifying employees out of the 8810 Class Code into other more expensive class codes.

What Could Be The Upcoming NCCI Class Code Changes?

I had read quite a few of the reports coming out of the NCCI Annual Symposium. NCCI stands for National Council on Compensation Insurance. The company is based in Boca Raton, FL. It is not a governmental entity. I also watched the videos that NCCI posted from their annual symposium. The reports are not usually exciting reading. The possible modification of the NCCI Classification Codes may send a shockwave through the Workers Compensation industry.

Even though some states may have their own rating bureaus, the systems are all very similar to the Class Code based rating system from NCCI.

One of the reports indicated that the NCCI may use "type of injury" coding in their ratemaking formulas. I am not sure how this will change the Workers Compensation landscape. There is a already a code for type of claim that is a very benign variable as it changes nothing on the ratings.

All insurers have a fields or group of fields they input when setting up a Workers Comp claim. I am only surmising that the NCCI will pick up that data as part of their Workers Compensation Experience Rating.

I am not 100% sure on how this will affect the E-Mods produced by NCCI. I am also not sure if the type of injury will feed directly into the formulas or will just be a tracking field to get an overall "outside the numbers" sense of how an employer is doing with their safety and claims program.

Next Up - NCCI Class Code 8810

Subcontractors - What Is The Ladder Of Insurance?

Question from one of the blog readers - We use many subcontractors. Can our company be held responsible for Workers Compensation coverage if one of their employees is injured on the job?

The Ladder of Insurance is a term that I coined and copyrighted a few years ago. The Ladder is how a main contractor can be responsible for a Workers Comp injury from a subcontractor with no insurance. In fact, the injured employee may be a 5th or 6th level subcontractor that you may never know even existed until they are injured on the job and wish to file a Workers Compensation claim. We have seen the main contractor have to pay a death benefits claim. The complicating factor in all of this is that the Workers Comp insurance carrier may deny the claim in some cases as this employee was not even on their books.

There was a recent Supreme Court case ruling in South Carolina where the main contractor was held liable as they had a high level of control over one of the subcontractor's employees. The employee was considered to be a statutory employee of the main contractor. This was not a wholly terrible decision as the employee of the subcontractor was trying to bring suit under an unlimited liability policy. At least the Workers Comp policy provided for some limits to the lawsuit.

The courts have almost always started with the primary contractor and moved up the Ladder of Insurance by moving up the chain of contractor and subcontractor until a valid Workers Comp policy was in place. If the employee was a sub-sub-sub-sub-sub-sub contractor of the main contractor and no company except the main contractor has a Workers Comp policy in place, then the main contractor will be held responsible. There are hundreds upon hundreds of court decisions that use this logic.

How do main contractors protect themselves from such a situation? One solution is to always require certificates of insurance from all subcontractors. If this is not feasible, then it may be best to actually build the cost of the insurance into the subcontract and then provide the insurance coverage.

There are states such as California where you can access the Contractor's Licenses to see if they truly have Workers Comp coverage. A phone call to the insurance carrier is also a good idea if you receive a certificate of insurance. Checking with the subcontractor's insurance carrier is always a good idea.

How Often Should I Receive a Workers Comp Loss Run?

This is a question that I received a week ago. It is one of the top twenty questions that we receive on Workers Comp.

I recommend at least monthly if the report is on paper. As I have said many times before in the blog, one of the keys to controlling Workers Comp Costs is to have online access. If your company has a TPA process your claims or you have regular commercial insurance, you should be able to see your Workers Compensation files online. Monitoring the increases, closings, and decreases in your Workers Comp claim reserves will keep your company from having to wait for the monthly loss runs.

Usually, by the time you receive the loss run, quite a few days can pass. The delays can be very costly in certain situations. Check with your Workers Comp carrier to see if they provide online access to your claim files. If they do not, you should register your concerns with that carrier.

I had said earlier in a blog that it is worth paying an extra 20% on your premiums to have online access. If you happen to have to pay extra for online Workers Comp file access, then it is imperative that you use the online system.

Who Is Considered A Statutory Employee Under Workers Compensation?

I recently received a question on our post  regarding the South Carolina employee being ruled an employee. I rarely copy from another website, but this is very important and I do not want to change the language of the IRS.  There are cases (such as the previous post on SC) where statutory employees may look like subcontractors, but are instead statutory employees.   I think it is best to assume that you will need a subcontractor agreement that spells out the fact the workers is a subcontractor.   The following is an exact definition and not just examples. 

Statutory Employees - IRS Definition

If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under Social Security and Medicare taxes, below.

• A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission
• A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company
• An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
• A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson's principal business activity.

One of the best examples of a statutory employee under Workers Comp is an employee that is hired to do the same work that the company employees regularly do may be considered a statutory employee. There was a famous Missouri Supreme Court decision that spells out a four-prong test to see if an employee is a statutory employee or not.  The case was Bass v. National Super Markets, Inc. The four prong test is centered on the activities of the possible statutory employee in question: 

1. Activities that are routinely done;
   
2. On a regular and frequent schedule
3. Contemplated in the agreement between the independent contractor and the statutory employer to be repeated over a relatively short span of time
4. The performance of which would require the statutory employer to hire permanent employees absent the agreement.     

I know that was not exciting reading.  However, it may keep a company from being sued under an unlimited liability policy versus under Workers Comp as the sole remedy.   

Next Up - Subcontractors and The Ladder of Insurance Revisited

Employee vs Subcontractor/Owner Operator vs Statutory Employee

This question has made a comeback in blogs and publications that I have read over the last few weeks.  It has to do with the classification of employees or non-employees for Workers Compensation while on the job.  I had posted previously on the IRS rules for a subcontractor.  Feel free to use the search box to find the post Most courts, Departments of Insurance, and State Rating Bureaus have all followed the IRS rules.  

The issue at hand is the amount of control you have over a person while on the job as to whether they are an employee, subcontractor, or statutory employee.  There is a bit of a grey area on how to classify the employees.   

Recently a South Carolina court ruled that a material hauler was actually a statutory employee and had to apply for Workers Compensation benefits and could not bring a lawsuit against the employer's liability policy.  This is known as the exclusive remedy doctrine for Workers Compensation claim.  Once an employee receives benefits under Workers Comp, they can no longer look to sue the employer under different laws. 

The U.S. District Court, District of South Carolina dismissed a truck driver's negligence and breach of implied warranty suit against a manufacturer. The driver was classified as a statutory employee and not a subcontractor.  Therefore, he could only seek relief under the Workers' Compensation Act.  Under South Carolina law, where a worker's activities satisfy any of three tests to make him a statutory employee of a contractor, his exclusive remedy for an on-the-job injury is workers' compensation.

A driver for a hauling company was injured while disengaging landing gear on a truck at a manufacturer's facility. According to the driver, he was struck in the face and the eye by a piece of the landing gear handle while attempting to disengage it. The hauling company was hired to provide transportation services on an as-needed basis.

The manufacturer moved to dismiss the driver's negligence and breach of implied warranty suit, alleging the driver was its statutory employee, and thus could only sue under the Workers' Compensation Act. The District Court agreed, finding the driver met the test for being the manufacturer's statutory employee.

The court explained that a subcontractor will be a statutory employee if his activity is considered part of the owner's activity. This occurs if the activity meets one of three criteria: 

1. Is an important part of the owner's business or trade; 
   
2. Is a necessary, essential and integral part of the owner's business; or 
   
3. It has previously been performed by the owner's employees.
   

The court found that because the manufacturer's employees had previously performed the loading and hauling, the driver performed the same duties as the manufacturer's employees. Further, the trailers that were towed were routinely loaded and unloaded by the manufacturer's own employees. Thus, he was considered a statutory employee and workers' compensation was the exclusive remedy for his injuries. 

I would say that the South Carolina Court had a very liberal definition of the rules for statutory employees.

Next Up - How Denying a Workers Comp claim can cost an employer big money.          

Californa's Very Complex Workers Comp Situation

I had posted a few week ago regarding the 24%+  rate increase that was recommended by California's WCIRB (Workers Compensation Insurance Rating Bureau).  There has been a large amount of discussion in the press about the upcoming increase.  

I noticed in a few articles where even a small decrease was recommended and there were extremely diverse estimations of what increase was needed.  The danger of underestimating the rate increase is that a snowball effect will occur when the rates are underestimated over a long period of time.  California could be creating an off-the-books crisis.  If two workers compensation rate increases fall short of say 20% for two years, then there will a need for a 40%+ increase sooner or later.   

The danger of overestimating the basic rate increase is overburdening employers with an unneeded increase further stymieing a recovery from a very rough economy.   The insurance market would likely head back to the 1990's and early 2000's with the State Fund (SCIF) having almost all of the insurance market   A competitive workers compensation insurance market is always better than a virtual insurance monopoly by the State Fund.

The WCIRB and the Insurance Commissioner must perform a very tough balancing act to keep the market healthy.  My advice is to take the brunt of the 24% increase and very carefully monitor the market for the next round of rate recommendations.  

Why do I keep bringing up California in this blog?  The events happening in California will be coming to a rating bureau near you.  California's Workers Compensation system can be a test case for the rest of the country.  West Virginia is also a test case for a workers comp system coming out of a State Fund to an open market.  

Do you see the similarity?  California and West Virginia are both systems that have just gone from monopolistic states to an open market.  How they survive may be the future for other states.  The best way to know the future of the workers comp market in your state(s) is to observe what is happening in similar states.
                 

InsuranceStates - Directory of insurance companies organized by type of insurance.

West Virginia Workers Compensation After The Monopoly

I just returned from a business trip to West Virginia.  The Workers Compensation system was in turmoil for a few years.  West Virginia has just experienced the switch from Brickstreet and the monopolistic system to an open market system.  How many employers placed their coverage with another Workers Comp carrier after the start of the open market is unknown.  I am sure the number of policyholders that switched will be reported by the newspapers or television stations.    

Over 80% of our West Virginia clients have switched or are in the process of switching to another carrier.  This number may not be that accurate overall.  Most of our clients were not satisfied with their Worker Comp program.  That is why they contacted us.  The  80% figure may be much lower in the overall market. 

Our recommendation to policyholders that are in a state with a volatile Workers Comp situation is to read all policies;  audits;  and claims loss runs as they receive them. Workers Comp policies are not that long.   You may be surprised at what you find.   

Due to the way that policies had to be rated by NCCI, some of our clients had multiple mini-policies that covered as little as two months.  It may be a good idea to put your premium charges on a spreadsheet to lessen the confusion.  We have found some of the policies difficult to follow and analyze.  That is/was no ones fault.  When you have to simulate E-Mods with no reliable data, the task is difficult.  The NCCI did an admirable job promulgating E-Mods by using other states' rates as part of the data. 

What is a PEO - Will They Save My Company On Workers Comp Premiums?

The definition of a PEO is:  A Professional Employer Organization (PEO) is defined as an organization that provides an integrated and cost effective approach to the management and administration of the human resources and employer risk of its clients, by contractually assuming substantial employer responsibilities and risk, through the establishment and maintenance of a co-employer relationship with the clients employees.

 A PEO establishes a contractual relationship with its clients whereby the PEO:

• Pays wages and employment taxes of the employee out of its own accounts
• Reports, collects, and deposits employment taxes with state and federal authorities
• Establishes and maintains an co-employment relationship with its employees which is intended to be long term and not temporary
• Assumes responsibility as an employer for specified purposes of the workers assigned to the client locations
• Shares the responsibility of co-employees wages and safety with the client. 

Businesses today need help managing increasingly complex employee related matters such as personnel management, health benefits, workers' compensation claims, payroll, payroll tax compliance, and unemployment insurance claims. Businesses contract with a PEO to assume these responsibilities, which then allows the client to concentrate on the revenue-producing side of its operations.

A PEO provides integrated services which more cost effectively manage critical human resource responsibilities and employer risks for clients. PEOs deliver these services by establishing and maintaining an employer relationship with the workers assigned to its client and by contractually assuming substantial employer rights, responsibilities, and risk.

That was a little marketing-ish.  There are many advantages as an employer to using a PEO.  Do we recommend a PEO for every employer?  We do not as each employer has to be analyzed individually to see if the company is a good fit for a PEO.   Most employers are - some are not a good fit. 

There has been a substantial amount of negative press about PEOs.  However, most of it involved the principals of the PEOs, not the companies themselves.         

I Have Heard From A Few Premium Auditors

My last post discussed two employers being audited for a total of 23 years by their Workers Comp carrier.   I am not faulting any certain auditor, but more of the insurance environment that is in place now.  I have seen two or three auditors that should not be doing premium audits.   I have also seen a few workers compensation adjusters that should not have been handling claims.  For the most part, auditors and adjusters are very hard working people. 

My main point is that there are audit rules that must be followed to the letter by employers.  The NCCI and each state have come up with very specific workers comp audit rules.  Insurance companies should have to follow the same work comp audit rules.  Going back 15 years and try to perform audits and collect in California is just not legal.   California has a very short look-back period on audits.  

I will post tomorrow on Professional Employment Organization (PEO's).  With the economy in a downturn, the prevalence of PEO's are increasing dramatically as they have in bad economies in the past.              

Two Employers Are Having 23 Years of Workers Comp Premium Audits

These are sad but true cases of where two Workers Comp Insurance carriers are trying to audit their clients a total of 23 years in the past.  One of the employers has already been audited twice per year for eight years, but that is not good enough for the insurance carrier. The other employer is having audit requests going back 15 years.   This is becoming more prevalent as workers comp insurance carriers are trying to increase their intake of premiums without having to incur any more risk.      

Did these two employers do anything wrong?  No, as they allowed the premium auditors to go over their books each year.  Do the insurance carriers have the right to re-audit or re-re-audit employers?  The answer to both questions is an emphatic - no.  The insurance carrier premium auditors get their one shot to audit premiums.  After that, there is a little grey area, but insurance companies are not allowed to keep auditing the employers.  

What can an employer do if there are multiple audits with requests for even more audits for the same year?  If the insurance carrier threatens cancellation if they are not allowed another audit, the scenario can become very complicated. 

I recommend: 

• Knowing or exploring your state's Workers Comp audit rules
• Writing a letter to the premium auditor advising them that they have already audited your company's Workers Comp payroll and class codes
• Contacting a premium expert
• Complaining to your state's insurance commissioner only as a last resort and/or if there is a pending cancellation 

One of the caveats of this advice is the employer must have  100% cooperated with the premium auditor during the premium audit.  I have posted previously on cooperating with the premium auditor.  You may want to use the search box at the top right part of the web page or just scroll down until you find the information on what information a premium auditor can examine.