An Innovative State Fund

The California Department of Insurance lowered its advisory pure premium rate again this year, and many insurance companies writing workers' compensation in the state have followed along.

Side note for the uninitiated - the DoI's rate is not mandatory nor obligatory; insurance companies in California are free to charge a base rate but most tend to follow the advisory rate to remain competitive in the market.

The pure premium rate is not what a company actually charges either. The pure premium rate accounts only for anticipated losses for the year, and the costs of administering and settling claims. It does not account for administrative expenses or other overhead costs.

The rate is not to be confused with the actual premium charged an employer. The rate is just one factor. An employer's experience (i.e. how many claims are made over time) and the amount of payroll and job classifications account for how much an employer is actually billed.

The Workers' Compensation Insurance Rating Bureau, which gathers all of the carrier data in California for analysis and advisement on rates (among other duties) says that frequency (i.e. the number of claims) keeps going down, severity (i.e. how much is paid on each claim) keeps going down, and safety keeps improving, all of which dictate less expensive insurance for employers.

For employers, this is all good news, so long as the insurance obligations to take care of their workers injured on the job are performed (I know, there are going to be comments that the insurers aren't keeping their promises - but that's not what this post is about, so don't tap that keyboard just yet...).

The State Compensation Insurance Fund has really wicked up the pace, however, by announcing a monumental 9.5% drop in its pure premium rate.

Compare that to the average rate drop filed in California, which is about 3% for the year (give or take a few basis points).

Perhaps even more important though is the State Fund has asked the DoI to approve a new tiered rating plan, increasing the tiers from four to seven.

The purpose, says the State Fund, is to smooth out pricing fluctuations from year to year for its policyholders.

This is huge.

The State Fund, though it has been losing market share (albeit, not unintentionally), is still by far the largest workers' compensation carrier in California (and one of the largest in the nation) because it's core market is by far the biggest market: small business.

Small business is no different than small households - many generally live, essentially, paycheck to paycheck, month to month, season to season. In other words, cash flow is the biggest challenge for small business.

What drives small business owners nuts is not being able to adequately plan for cash outflow. Surges in expenses, particularly expenses that tend to be perceived as fixed, like insurance, cause panic and anxiety. The year over year double digit workers' compensation insurance inflation in the early 2000s is what created the havoc that resulted in SB 899 in 2004; it wasn't the fact of inflation, it was that inflation was so radical (40+% year over year)!

And the State Fund plans to revise how it assigns employers to tiers by taking into account the wages that an employer pays in comparison to average wages paid by similar employers in the same industry. An employer with a higher ratio between the average annual wages associated with the policy and the average annual wage for the industry would be assigned to a better tier.

In addition to this new rate plan, the State Fund is also planning a one year transition because some employers will in fact see rate increases - the transition plan is designed to ease those employers into the new tier, which officials believe will be more fair to more employers and will flatten the payment obligations.

I think we're seeing a new State Fund, one that is much more customer focused and innovative. Does the State Fund have issues and problems? Sure, we can find fault in nearly any business, particularly insurance companies. But State Fund has been stepping up its game.

It's not easy to stand out in work comp insurance. State Fund is showing the others how to do so.

Good job folks.

High Flying Work Comp Claim

When a space ship falls out of the sky and there's a surviving test pilot, and one that incurs fatal injuries, how does the workers' compensation system cope?

Are test pilots treated differently than us regular folks? Are the medical bills of the survivor strictly scrutinized for appropriate charges? Are medical decisions rendered quickly, or will there be rounds of utilization review and independent review?

It's now been preliminarily determined by the National Transportation Safety Board that SpaceShipTwo's structural failure was induced by pilot error - the swinging boom that was used to slow the spacecraft for reentry into the atmosphere was unlocked and initiated prematurely, presumably accidentally, by the right seat pilot.

The NTSB believes that mission copilot Michael Alsbury, 39, who died in the crash and was sitting in the right seat of SpaceShipTwo, prematurely flipped a switch that unlocked the boom while the craft was still traveling in excess of Mach 1.3, or 1.3 times the speed of sound.

The experimental rocket plane broke up over the Mojave Desert moments after that action. Mission pilot Peter Siebold, 43, parachuted out of the aircraft and suffered serious injuries. Investigators have not yet been able to interview Siebold, who was discharged from Antelope Valley Hospital Monday according to news reports.

Test pilot ranks high in the occupational risk category for obvious reasons - surviving a plane crash is rare.

Siebold bailed out at 50,000 feet which is nearly twice as high as Mount Everest. At that altitude there is essentially no oxygen, and the ambient air temperature is about minus 70 degrees fahrenheit. The pilots did not wear pressure suits, because the cabin of SpaceShipTwo was pressurized.

This is 6641M, not SpaceShipTwo

That Siebold had enough wits about him to get out of the craft at over 600 miles per hour, maintain sufficient situational awareness to be able to deploy his parachute at a safe altitude and speed, and in fact be able to do so despite the extreme cold, is nothing short of miraculous.

Now the recovery starts. Undoubtedly there will be long term medical consequences and potential disability. Will his condition prevent Siebold from flying again professionally? And if it doesn't will there be a position for him at his employer, Scaled Composites (a division now of Northrop Grumman Corp.)?

I don't know how Northrup's workers' compensation program is set up - the company is a global corporation with operations in many different countries, let alone states. Someone out there likely knows how the company structures its work comp compliance. But there does at least appear to be some sort of wage differential program to make up for the capitation of benefits provided by work comp.

I don't have any answers. I don't really know what will happen with Siebold, or whether the family of his copilot, Alsbury, will receive any compensation above the statutory limits for death benefits (I would assume there was a supplemental life insurance policy...).

I suspect however that, from a claims perspective, the cases of Alsbury and Siebold will be handled quite efficiently and expertly - this is after all a high profile situation. But more importantly the culture of space exploration encompasses calculated risk and a close-knit relationship between all involved in a project like SpaceShipTwo.

My guess is that Siebold will be flying again, professionally, and probably for his employer - test pilots are of that rare psychological makeup that perseveres against the most challenging situations; it's more than training, it's genetic. And Siebold has a huge amount of knowledge about the plane and the project that his employer is going to want to preserve.

A work injury recovery system, whether called workers' compensation or otherwise, requires the cooperation and coordination of many different elements to deliver as successful an outcome as possible.

The primary element is the attitude of the employer and the attitude of the injured worker. When their interests are aligned surprising things can happen.

Siebold has already demonstrated his attitude - surviving the near space breakup of an aircraft is demonstrative of his mindset.

The culture of Scaled Composites, a company that operates at the fringes of space itself and overcomes huge risks every day is also demonstrative of a mindset I suspect that is in alignment with Siebold's.

Walking A Highline

The tension between social responsibility and financial gain that is the workers' compensation insurance industry is reflected in the latest California Workers' Compensation Insurance Rating Bureau's data report.

Lower frequency and continued premium growth is making the business in California more attractive to carriers seeking to profit from underwriting the system.

Carriers are projected to write $16.1 billion in premium in 2014, WCIRB Vice President and Actuary Tony Milano said during a webinar yesterday, and have already recorded $8.2 billion through the first six months of the year.

The projected total written premium for calendar year 2014 would be 8.7% more than the $14.8 billion reported for 2013 and would mark the fifth consecutive year that premium has increased.

Written premium in 2013 was 68.2% higher than the $8.8 billion reported in 2009, while the projected $16.1 billion for the current year would be 83% more than what carriers wrote in 2009.

Some of this premium growth is due to the improved labor market which would boost payroll based premium, but it's more a reflection of the insurance industry's willingness to charge more to make up for paltry investment returns as earlier bonds and other financial instruments come due, and get replaced by current low interest rate backed portfolios.

According to the WCIRB, through the first six months of the year, carriers on average charged $2.96 per $100 of payroll, 3.9% more than the $2.85 they charged last year. The average rates charged in the first two quarters of 2014 is 41% higher than the average $2.10 charged in 2009.

Ultimate losses and allocated loss-adjustment expenses are projected to be $12.7 billion for accident year 2013. In the first quarter insurer experience report, the WCIRB was projecting ultimate losses and ALAE for 2013 of $13.1 billion.

It's a balancing act... we're in this together.

This is leading the bureau to lower its projected losses and costs for accident years going back to 2009 by $500 million. The WCIRB reduced projected ultimate costs for accident years 2009 through 2011 by $100 million each, and reduced its projection for accident year 2012 to $12 billion from $12.2 billion.

Claims are cheaper too.

The projected ultimate total loss and ALAE per indemnity claim dropped to $86,845 in accident year 2013 from $87,232 in 2012. It is the first decrease in ultimate claim costs since 2005.

While the WCIRB, and nearly every other insurance company in nearly every state, decries combined ratios in excess of 100 - meaning that more money goes out the door in claims than is taken in through premium - that obfuscates the financial picture.

The combined ratio is a cash basis measurement, but most all other measures of the insurance business are accrual basis.

There's good reason for that: cash in today does not pay for claims today. Cash in today buys investments, the returns of which will partially be used to pay for claims tomorrow, the balance of which will represent profit (after some deduction for operational expenses).

So while the projected combined ratio for 2013 is 109%, down from 114% in the previous year and the lowest ratio since 2008, and is higher than the national average of 101% for 2013 (National Council on Compensation Insurance estimate), this is simply a reflection of better profitability.

Workers' compensation insurance is not designed to generate an underwriting profit, which would be reflected by a combined ratio of less than 100. It was designed as an investment platform that also generates social value.

For every claim that is measured, and for all of the numbers that are analyzed, by the insurance industry, at the end of the day there are employers paying for the system, and there are injured workers that are supposed to be the beneficiaries of the system

A healthy insurance market is necessary to support a good portion of the workers' compensation system because that is how most businesses secure their obligation to provide compensation.

But if my premium, as an employer, continues to go up, regardless of causation, then another reformation will be forthcoming. Employers give money to politicians...

And don't forget about the injured worker. We continue to see both anecdotal and evidentiary reports of failures to deliver both timely and adequate medical treatment and indemnity benefits. I can't say that this part of the equation has improved, other than the statutorily based increase in disability indemnity weekly benefits.

Florida's Chief Workers' Compensation Judge, David Langham, said in his blog the other day, "all workers' compensation cases, involves real people, important issues, critical points of law and construction."

It's good that the insurance industry is seeing a better overall picture than what was previously expected.

But without employers willing to pay for securing their obligations, and without injured workers getting their legally entitled benefits in a socially acceptable manner and time frame, the industry fails to meet its mission and whether or not it's healthy is no longer important.

It's a tricky balancing act. The insurance industry can't be smug - we're all in this together.

Up A Tree Without A Ladder

Business owners often complain about workers' compensation and this story from Oregon highlights exactly why.

A tree trimming and landscape maintenance business was started by Robert and Jannai Cornett in 1998 with a pickup truck, "a chainsaw and a rake, a little blood and a lot of sweat."

R&R Tree Service grew from there to a 30 employee company with trucks, equipment, and an office.

At some point in time the company switched from a private workers' compensation carrier to SAIF Corporation, Oregon's state fund.

The company had a program by which volunteers would come out and collect the wood from trees that R&R had cut down to give to the needy to use as firewood.

As in many things in life, trying to do good just results in trouble, and that's where the trouble started for R&R - SAIF didn't like this arrangement and smelled "underreporting" of payroll.

Up the proverbial tree...

It should be noted that the volunteer program had started long ago and R&R's prior carrier had no issues with it...

So SAIF started auditing the company's payroll with multiple audits of records from 2007 until 2011.

Robert Cornett had kept a daily log of employee hours based on verbal reports from each crew at the end of each work day. For each job, Robert would record the person or business being billed, the crew members assigned to the job, the number of hours worked per crew member and whether the work performed was "above ground" or with "boots on the ground."

He made this division because SAIF had assigned two risk classification codes to R&R for its non-office and sales staff. Workers doing tree and shrub pruning above ground level were assigned code 0106. Workers doing lawn maintenance performed from the ground level were assigned code 9102.

The above ground ("AG") and below ground ("BG") designations were then input into the payroll records on a weekly basis - but there was no other "verifiable" payroll records to support this input.

It should be noted that SAIF didn't have an issue with this system during four audits between 2002 and 2007. In fact, one auditor even said R&R had "an excellent system of tracking work and time."

But later SAIF assigned a particularly aggressive auditor to review the company's records for years 2007 and 2008, and he took issue with the payroll tracking methodology.

That auditor found R&R's records did not meet the requirements for verifiable records under OAR 836-042-0060.

Under OAR 836-042-0060(4), payroll records are "verifiable" if they establish the time worked and duties performed by each employee, and they are supported by original entries from other records, including but not limited to time cards, calendars, planners or daily logs prepared by the employee or the employee's direct supervisor or manager.

Based on the auditor's findings, SAIF assigned the entire payroll to the highest rated classification.

For the year audited, 2007-2008, this raised the company's premium by over $67,000.

The company objected, and of course this incited further auditing, ultimately resulting in a claim by SAIF of over $386,000 in additional premiums.

R&R went through all of the appellate procedures for contesting the additional assessments and lost all of them all the way to a state appellate court.

According to WorkCompCentral's news report on the story, R & R likely will close its doors and terminate all of its employees, putting another 30 people on the unemployment rolls.

And that's a shame.

Sure, those of us up in the ivory tower of workers' compensation insurance compliance will say, "that's the law," or "they should have hired an expert to help," or "where was their broker in all of this?"...

That's besides the point. Here we have a well intentioned, seemingly compliant business taking care of people, putting value into the economy for 15 years, and they're taken out by The System.

What's wrong with the picture is that what should be a cooperative relationship turned adversarial.

I'm sure SAIF has its own position on the matter, but all they said to WorkCompCentral was that they were "pleased with the ruling" and the Court of Appeals' determination that "SAIF followed the correct process and acted appropriately in determining the policyholder's premium."

SAIF's media relations department needs some lessons in how to conduct good public relations. Their response exacerbates the adversarial perception of business versus carrier and the industry doesn't need that.

Maybe SAIF was legally correct and that it's auditors and employees were doing their jobs.

But maybe at some point a senior executive could step in and see the PR mess this kind of case creates, figure out a compromise and then media relations could proclaim the carrier's great willingness to help small business comply.

Instead, like most large corporate bureaucracies, nobody really cares - and if a customer goes out of business, there will be plenty more in the pipeline to collect premium from.

How Dare They

Last week WorkCompCentral reported on a raid in Florida of a company, Fruit Dynamics, arresting over a hundred undocumented workers.

Investigators from the Florida Division of Insurance Fraud and the Collier County, Florida, Sheriff's Department arrested workers from Guatemala, Mexico, Honduras and El Salvador.

Florida Chief Financial Officer Jeff Atwater, who runs the division, called the arrests "workers' compensation fraud" even though only a few of the workers had filed injury claims. The arrests were made under Florida Statutes Chapter 440, the workers' compensation law, which makes it a third-degree felony to use false documents to obtain employment or file an injury claim.

Maj. Geoffrey Branch of the Division of Insurance Fraud told Fox News Channel 4 the week of the story that the owners are not suspected of any complicity in the fraud.

"At this time, we do not believe anybody affiliated with the ownership or management had any idea that any of these documents were fraudulent," Branch said, according to the Fox 4 report. "We believe that they thought they were on their face value valid, authentic documents."

In fact the reason for the raid in the first place was because the original complaint was against the employer for intentionally hiring undocumented workers in a pattern of behavior and practice to underreport payroll and intimidate workers out of benefits for work injuries.

An attorney that represented several injured workers at the plant over the years had made the complaint to the Division because there was a pattern of practice he noted - that the employer's hiring and management practices were intentionally done to minimize workers' compensation liabilities and abuse immigrant workers.

So 105 workers get arrested for immigration and documentation fraud under a workers' compensation statute, even though most did not file any injury claims, and the employer faces no retribution whatsoever from the law even though there is documented evidence that the company knew what it was doing and its insurance carrier went along with the plan in complicity.

Bowzer persecuted because his face is brown

According to an affidavit signed by Lt. Mark Fritz, a state insurance investigator, the case started with a complaint made by Wellington, Florida, attorney Michael Elstein last September.

Elstein warned "there are numerous unauthorized workers (from another country) who are employed at Fruit Dynamics." He said the company also operated as Incredible Fresh and Collier County Produce.

Fritz said Elstein told investigators that the employer knew the workers were unauthorized. He reported in the affidavit that Elstein represented clients who had filed workers' compensation claim. He identified Elstein as a "defense attorney," apparently not understanding workers' comp industry parlance.

"Defense Attorney Elstein reported that when an employee became injured, he/she was terminated most of the time and/or harassed," Fritz wrote in the affidavit. "The insurance carriers in turn would then attempt to suspend his/her benefits and claim he/she committed fraud by using a false Social Security number in connection with their workers' compensation claims."

Elstein told WorkCompCentral, "I got so tired of this particular employer. Over the past five or six years I'd represented at least 10 of their workers, and I decided I had to find a way put an end to this."

Elstein had the permission of his clients to make the initial report, but the investigators from the Division of Insurance Fraud didn't then, and haven't yet, pursued the employer even though there is overwhelming documentation filed along with the criminal affidavits that not only did the employer know what it was doing, but it's insurance company knew too.

In his affidavit, Fritz alleged that the company's workers' compensation carrier, Guarantee Insurance Co., showed Fruit Dynamics was underreporting its payroll and thereby reducing its premiums by nearly half.

Of 212 Fruit Dynamic workers checked by the Division of Insurance Fraud, investigators identified 171 workers who used a stolen Social Security number or another person's identity to seek and maintain employment at the company.

And yet, no charges against the company or its managers and owners?

This is the double standard that can not be tolerated. Say what you will about whether or not undocumented workers are deleterious or beneficial to the economy, the bottom line is that unscrupulous employers will take advantage of them if they think there is a financial advantage to do so.

That any state would seek to bar workers' compensation benefits to undocumented workers is just plain backwards thinking - fortunately some lawmakers in North Carolina, where just such an attempt was made this legislative session, are smart enough to know that, killing such language in House Bill 369 in committee.

WorkCompCentral columnist Peter Rousmaniere wrote last month that based on extrapolation of statistics, undocumented workers sustain one out of every 10 work injuries.

"This high volume is invisible to almost everyone except for adjusters, case managers, lawyers and others who work directly with injured workers and have learned their work and life patterns," Rousmaniere wrote.

Rousmaniere concludes, "James Baldwin, debating William Buckley at Cambridge University in 1965, described the legacy of slavery as the tragedy 'when one has absolute power over another person.' To the undocumented worker, her or his employer holds nearly absolute power over safety. A work injury could result in jail time and deportation. Neither the workers' compensation system or worksite safety are healthy when one tenth of injured workers are in a constant state of vulnerability."

This double standard must stop. It is lightly veiled discrimination based on race. The masters aren't prosecuted for their fraud and deceit, but the powerless workers are punished for their enslavement.

I thank people like Elstein who stand up for immigrants and their rights.

And the people of our government who are complicit in employer fraud should be taken to task: Atwater should be removed from office, state investigators and prosecutors who turn the blind eye should be fired.

How dare they abuse the confidence of The People.

In terms of racial equality, this country, unfortunately, has a very, very long way to go.

The Misclassification Trend

Misclassification of workers seems to be at the top of news headlines lately.

WorkCompCentral reported this morning that Lowe's Home Centers in California agreed to a $6.5 million settlement of a class action brought by contractors the company hires out to customers to install products it sells.

Another story this morning is about an Arizona contractor that settled a misclassification action with the U.S. Department of Labor, agreeing to pay workers back wages and overtime, and penalties totaling about $600,000.

When I performed a search of the WorkCompCentral database for the word "misclassified" I get nearly 300 news stories returned, and a surprising amount of those stories are quite recent - seemingly every business day in this past year.

While most of these stories involve contractors, quite a few involve other industries.

Law360, a LexisNexis publication, has been replete with misclassification stories of late as well, reporting several class action suits against atypical industries for such activity, such as the banking industry.

What's going on here?

Are all of the businesses really trying to cheat their workers out of employment-based benefits?

Or are the management practices of these employers so flawed that workers get driven into employment relationships?

Or have the plaintiff's lawyers (generically of course) found a new source of revenue?

Misclassification of workers has always been an issue in workers' compensation - most of the time I believe that misclassification happens unintentionally; business just wants to get the job done for the most competitive price possible and whether a worker is called an employee or an independent contractor seems to be an after thought.

For instance, in the Lowe's action, workers in the class action thought they stood to get as much as $33 million in back wages, overtime and other employment related protections had the case gone to trial.

Lowe's disputes that it did anything wrong and says that it did not violate any classification laws or regulations, and to me the settlement of $6.5 million, compared with the plaintiff's estimated jury award, says that it had relatively good defenses.

The lead plaintiff in the Lowe's case was Ronald Shephard. He worked for a Lowe's store in Victorville installing garage doors between 1995 and 2009.

Shepard's complaint alleged that customers paid Lowe’s for the installation work, and the retailer later paid the contractors. Contractors were prohibited from performing any work for a Lowe’s customer that was not arranged and approved by Lowe’s. The store also set the amount of time contractors had to complete a job.

The contractors were also required to wear clothing bearing the Lowe’s logo and identify themselves as employees of Lowe’s, according to the allegations.

Lowe's says that it did not control any of the installers and argued that each installer operated as a separate business, and that the installer companies made all decisions relating to employment matters such that Lowe’s could not be deemed an employer under California law.

The Arizona case involved a drywall contracting firm, Paul Johnson Drywall Inc., which entered into a contract with Arizona Tract in April 2013 that resulted in some 445 employees being as reclassified members or owners.

The Department of Labor said its investigation also revealed that Paul Johnson Drywall, before entering into a contract with Arizona Tract, failed to pay employees who worked more than 40 hours in a week proper overtime at time-and-a-half, and failed to maintain complete and accurate records.

The story does not indicate how much the contractor's workers' compensation insurance companies are going to seek in retroactive premium, but based on the size of the worker population identified in the Department of Labor that amount is going to be quite significant.

Some of these stories appear to be plaintiff lawyer profit driven, others seem to reflect intentional egregious employer activity. There isn't a single state that seems worse than any other and while contractors in general seem to be the biggest offenders the range of industries is broadly represented in the news.

I can't say whether this is all part of an enforcement trend, a legal trend, a business trend, or whatever. And depending on your perspective this is either welcome or despised.

But there's no denying that classifying workers as either employee or contractor has significant implications to both business and workers.

PAYG Efficiency

Workers' compensation and innovation are not usually used in the same sentence.

But competition from outside the industry is forcing innovation, and the employer market - the people that actually pay for the insurance - is reaping the benefits.

Some time ago the big payroll service guys, ADP, PayChex, and others, started making partnership deals with insurance companies to provide workers' compensation coverage in conjunction with managing payroll.

The advantages are obvious if done successfully - since work comp is based on payroll, integrating the two should result in greater efficiency with tighter reporting, more accurate accounting and overall better service.

The insurance industry is notoriously slow, however, at adapting to change.

But change happens and in the case of the payroll/insurance hybrid, seems to be catching on quickly.

Carriers are now starting to offer payroll services to compete with the traditional payroll management companies. The fuse has been lit, and competition is heating up.

The big advantage to employers is that they get a pay-as-you-go (PAYG) service. Rather than getting one big insurance bill once a year (or maybe twice a year if the carrier permits bifurcating the bill), through carrier initiated PAYG payroll, the work comp premium is integrated into payroll, so the employer's cash flow is more smooth.

This also produces more smooth income for carriers.

The downside is that it may be more difficult for employers to monitor their premium because in most companies payroll is not static, and neither is workers' compensation - particularly if there's a claim or two.

The trend seems to be driven by demand from brokers and agents, who are losing business to the payroll services. Brokers and agents get their income from commissions, and if their customer buys insurance from another source the brokers and agents are more directly impacted.

Having an option to provide employers who like the idea of integrated payroll and work comp insurance provides brokers and agents a big competitive advantage in being able to retain their customers.

Banks are in on this too.

I recently was lunched by our banker, who represents Wells Fargo. Wells Fargo has an insurance division. I didn't know it also did payroll, but it does, and my banking representative is working hard to get me to switch, promising me savings for WorkCompCentral and better service.

We'll see about that - in the meantime it might make sense for me to look at PayChex' (our payroll service provider) work comp offering.

I think the PAYG model of payroll/work comp integration will continue to grow and bring new competitive advantages to employers.

[The Paychex and ADP images are registered trademarks and copyrighted to their respective owners.]

The Market Is Dynamic

At the upcoming Workers' Compensation Research Institute 2014 Annual Issues & Research Conference in Boston next week, National Council on Compensation Insurance's chief economist, Harry Shuford will present "How the Economy Drives Workers' Compensation."

I don't know what Harry is going to present. But I've heard Harry in past NCCI events and he always does a masterful job of explaining how economic issues affect workers' compensation underwriting.

Harry would probably criticize my explanation of the economy's relationship to workers' compensation, but here's my elementary school version.

When employment is high, and payrolls increase, workers' compensation premiums go up. That's because workers' compensation premiums are based in large part on how big the work force is, and the best indicator of the size of a work force risk is how much money the work force is being paid, which is then modified by what kind of jobs that work force is doing.

Smart guys with lots of computing power (in the old days it used to be really fast slide rules) figure out what kind of jobs are risky, and which are not so risky, and ascribe a modifier to the payroll number to determine the ultimate premium cost.

When investment yields are low and claim exposure is high, workers' compensation premiums go up, of course depending usually on whether the state insurance commissioner agrees that these circumstances were not of the carrier's making.

And visa versa - when fewer are employed and payrolls decrease, premiums go down, and when investment yields are good and claim exposure is controlled, premiums don't go up (but usually don't go down appreciably).

Generally the industry doesn't expect to make much money, if at all, on an underwriting versus expense basis - a measurement called the combined ratio.

A combined ratio of 100 means that for every dollar coming in the door, a dollar goes out the door. If the combined ratio is higher than 100 then there is more cash going out the door in claims and expenses than is coming in from customer's premiums. And if the number is less than 100 then there is more cash coming in and less going out.

Workers' compensation is a cash flow mechanism. Carriers bet that the cash flow spread, what is parlayed into investments, yields enough money to generate a profit over time. The old adage that a dollar today is worth ten cents more tomorrow is what drives work comp profit margins.

As an investment, workers' compensation is not a great business. There are a lot easier and less risky ways to make more money than the general profit margin in work comp. But it's not a bad line if one can stomach the ever changing statutory and regulatory framework one must work within, and the consequential changing assumptions regarding the risk of investing in the market.

There is still a good appetite for workers' compensation risk however, as market statistics demonstrate.

Today it was reported that Travelers Group surpassed Liberty Mutual Group as the nation’s top workers’ compensation insurer in 2013, reporting direct written premiums of $4.14 billion to Liberty’s $3.59 billion, according to figures released Tuesday by the National Association of Insurance Commissioners.

Liberty had been top dog for many years, but the company has in the past let it be known that its appetite for workers' compensation risk, particularly in the ever changing market of California, was waning. So its move to number two is not particularly surprising.

And also not surprising is that the industry’s top 25 companies had a 7% increase in direct premiums written from a year earlier with a combined $51.4 billion in 2013.

The numbers reflect the 2.1 million new jobs nationwide, a modest increase in payrolls “and rate increases being pushed through as well,” said Robert Hartwig, president of the Insurance Information Institute.

Hartwig also told WorkCompCentral that “some of the most unprofitable business is being shed into the state funds,” predicting that the trend may continue for a while.

The private carrier appetite for risk must not be too healthy in New York, as that state's fund, New York State Insurance Fund, was sixth on the list, even ahead of big economy California's State Compensation Insurance Fund, which moved down the scale to twelfth. 

Apparently there is a lot of unprofitable business in New York that the private carriers don't want to touch.

Here are the Top 10 in direct written premium in 2013 and their change since 2012:

• Travelers Group, $4.14 billion, up 8.9%.
• Liberty Mutual Group, $3.59 billion, down 14.2%.
• Hartford Fire & Casualty Group, $3.35 billion, up 1.7%.
• American International Group, $2.85 billion, down 3.5%.
• Zurich Insurance Group, $2.53 billion, down 8.6%.
• New York State Insurance Fund, $2.28 billion, up 17.4%.
• Berkshire Hathaway Group, $1.76 billion, up 39.9%.
• AmTrust NGH Group, $1.67 billion, up 82.0%.
• Old Republic Group, $1.20 billion, up 7.9%.
• WR Berkley Corp. Group, $1.16 billion, up 17.4%.

California’s State Compensation Insurance Fund was No. 12, with direct written premiums of $1.11 billion, a 23% increase.

Texas Mutual Insurance Co. held its No. 13 ranking with direct written premium of $1.03 billion, a 13.8% increase.

Shuford will probably tell us at the conference next week that some of the big premium drivers, the riskiest categories with the highest payroll, haven't quite recovered completely from the 2008 recession - such as the construction and trucking industries.

But then we have new growth in the health care sector with its related sub-industries and it's trillions of dollars in payroll as the roll out of the Affordable Care Act continues over the years. The health care sector is generally low risk and high payroll - an attractive combination if you're an underwriter.

In the meantime the investment returns remain below inflationary rates because of the Federal Reserve's monetary policy which has kept interest rates artificially low, and historically anemic.

Which is to say that the overall workers' compensation underwriting market is particularly dynamic right now.

In the past couple of years the economists that follow this market have generally opined that the current trend of low investment yields, increasing payrolls, and an ability to pass along some of the risk onto policy holders will continue for a couple more years.

So far it looks like their forecasts are accurate.

See you in Boston.

Crashers Gettin' Bombed

Claim frequency is our industry's vernacular for the number of claims.

Severity talks about how bad those claims are.

The two are usually used in the same paragraph describing the amount of bad versus the amount of not-so-bad claims.

The best world is where the number of not-so-bad claims is greater than the number of bad claims and where both are less, or at least the same, as history portends.

In other words, if you're an insurance wonk, you like to see fewer claims, and of those fewer claims you like to see fewer that are bad.

We measure "severity" in terms of dollars - how much does a claim cost? It's an easier measurement than trying to say how many arms were amputated, or how many eyes were blinded, etc.

It's also a more meaningful number to employers, who are tasked with the burden of paying for these claims.

Usually there is some rationale behind these numbers, typically tied to economic trends. When more people are working then we would expect frequency to go up because there's more people that could get hurt ... and they do.

And when particularly more risky industrial segments are performing at high levels, such as construction or trucking, then severity goes up because there are more people doing more risky jobs that generate more severe injuries than, say, a desk job.

So we are all left scratching our heads when the numbers don't make sense.

The California Workers' Compensation Insurance Rating Bureau is in that quandary now - the numbers don't make sense, at least not in any historical perspective.

Yesterday the WCIRB projected a 5% increase in claim frequency during the first nine months of 2013.

The trend has been frequency dropping 3% to 4% each year since the 1960s as employers implemented better safety practices and industrial shifts led to more people working in the less-hazardous service-based sectors as opposed to manufacturing.

California frequency increased 6.7% from 2009 to 2010, following the nation and consistent with the economy as it started to come back from the recession. California frequency decreased by 1.9% from 2010 to 2011, again following the national trend.

But since then frequency has been on the rise, but it is geographically situated and in economic terms isn't making a lot of sense, at least on a cursory level.

The WCIRB is finalizing a study that will attempt to identify the factors causing the frequency increase.

The early results show that 2012 claim filings are up by 7.8% in the greater Los Angeles area – including Los Angeles, Orange, Ventura and Santa Barbara counties – while frequency is down 2.2% in the San Francisco Bay Area and down an average of 4% for all other regions of the state. The recent influx of claims also appear to be high-dollar permanent disability claims.

Claim frequency and severity are partially responsible for rate increases that have totaled 33.8% since 2009, and the increase in payrolls means that charged premiums are increasing at a faster pace. Some employers may experience a little sticker shock when renewal and/or audit time comes around.

If you're in the insurance game, though, the numbers aren't all that bad.

The higher charged rates, together with a moderate growth in wages, is driving up written premiums and bringing some improvement to insurer combined ratios.

The WCIRB says that California written premium (gross of deductible credits) for calendar year 2012 is approximately

$12.5 billion, about 16% above the written premium reported for 2011 and 42% above the written premium reported for 2009. Written premium for the first nine months of 2013 is approximately $11.2 billion, which is approximately 19% above the written premium reported for the first nine months of 2012. The WCIRB projects that total written premium for 2013 will be approximately $14.7 billion, which is the highest premium total since 2006.

With insurers collecting more in premiums, the WCIRB is projecting a combined ratio of 122% for accident year 2012, down from 141% in 2011, 142% in 2010 and 140% in 2009. The calendar year combined loss and expense ratio for 2012 reported by insurers is 114%.

Typically, when the actual numbers are released they show the State Compensation Insurance Fund skewing the combined ratio results because of its volume and its place in the industry covering all of the high risk, low payroll, small businesses that can not get coverage elsewhere. Perhaps this is indicative of what is driving frequency in the greater Los Angeles area - perhaps the economy really is recovering more robustly than thought and there are more small businesses employing more workers at the higher risk categories.

Or perhaps there are more businesses actually reporting properly their payroll and their claims.

The cynical might say that the claim mills of Los Angeles are at it again pushing claims through the system for ill begotten profit.

What I know is that, right now, we don't know.

The number people at the WCIRB will likely find what is driving these numbers, but of course by that time the impact to those who pay will have already been incurred.

Which is a big part of why workers' compensation can be so frustrating to the people who pay for the insurance - by the time we as an industry figure out what is going on, the financial damage has already occurred.

We can use "frequency" and "severity" to describe how things work, but at the end of the day it's how much the cost of the insurance is that matters to employers because it's a cost that they don't have a lot of control over other than trying to prevent claims in the first place.

I suspect the California employer community is going to be grumbling quite a bit in the coming years if projected savings from the great "reform" of 2012 don't result in lower charged premium.

The alternative rock band from the late 1970s to early 1990s, The B-52s, produced a great song (well, I think all their songs are great) called "Party Out of Bounds" in which Fred Schneider repeats, "who's to blame?" when the party gets out of bounds, when they get poorly planned:

"Who's to blame when situations degenerate? Disgusting things you'd never anticipate?"

My guess: "Bombed, crashers gettin' bombed; crashers gettin' bombed, bombed, bombed, bombed..."

Jobs, Wages and Premium

I'm confused (but that's nothing shocking).

The Insurance Service Office and the Property Casualty Insurers Association of America say in a report released last week that expanding payrolls contributed new premiums written to the workers' compensation line, helping combined ratios improve to 97.9% for the first half, down from 101.9% a year ago.

But the Wall Street Journal's Ben Casselman says that the improved unemployment figures are masking a troublesome trend - workers' aren't moving up the ladder to better paying jobs but rather are holding on to whatever they have.

In "normal" economic times, employment churn (resignations, firings, replacements) create a much more robust employment condition. In 2007, according to the WSJ article, about 3 million workers churned each month. This past July, that number was just 2.3 million, barely any better than what was occurring during the depths of the last recession.

"Nobody's leaving for a better job," Jason Faberman, an economist at the Federal Reserve Bank of Chicago, is quoted as saying. "These guys aren't moving on to better jobs, which means their positions aren't opening up for the unemployed."

But this news isn't just bad for the unemployed, churn is critical to wage growth.

As explained by Toshihiko Mukoyama, a University of Virginia economist, unemployment for those under age 25 is still elevated at 15.6%, so many of those lucky enough to have jobs are playing it safe by staying put and not risking the move to higher wages.

Robert Hartwig, president of the Insurance Information Institute, noted that the increase in net written premiums, up 4.5% during the period, from a 3.7% gain recorded in the first half of 2012 and a 4.7% increase in the second quarter, was the 13th consecutive quarter of growth.

Hartwig said that, combined with modest increases in the hourly earnings of employees, payrolls expanded at an average annual pace of $216.5 billion during the first half of the year, relative to the first half of 2012.

“Indeed, workers’ compensation, hit hard during the recession by a soft market and a precipitous drop in payrolls, has within the snap of just a few years transformed itself from the fastest contracting major property-casualty line to the fastest growing, with direct premium growth in 2013 up by approximately 10%,” Hartwig said.

How this all plays out in the long run will be interesting. The interrelationship between the economy, jobs and premium health in workers' compensation makes the workers' compensation insurance market a complex study in contrast.

I have heard in several seminars over the past 12 months that while the market is hardening, it is less a reflection of market competition and more about wage recovery.

So premium growth may just be illusional at this juncture. If wages really do stagnate and there are no more jobs available to those who want to improve their employment positions, then we may see premature softening in premiums relative to the overall economy.

RAND & WCIRB Finally Address Small Employers

Last week the Rand Corporation released a study prepared for the Commission on Health and Safety and Workers’ Compensation on the effect of experience rating modifications.

The conclusion of Rand was that lowering the premium threshold for California employers to be eligible for experience rating modifications would improve worker safety and reduce employer costs.

This has been a topic of discussion for the past couple of years at the Workers' Compensation Insurance Rating Bureau (WCIRB).

As of July 1, 2012, the qualifying threshold for employers to receive an experience modification factor is a total of $25,225 in premium over the previous three years, calculated at the pure premium rate level as opposed to the premium actually paid to the carrier. So while an employer might have paid $28,000 in premiums over the previous three policy years, if its pure premium rates based on employee classification codes total less than $25,225, the employer would not be eligible for experience rating.

The Rating Bureau sets the rating threshold for California employers in its Experience Rating Plan, and the Insurance Commissioner has to approve any changes to the plan.

To measure the impact that experience rating has on employers, researchers compared businesses that recently became experience rated to those that were near the threshold, but didn't qualify for experience rating. The differences between the two groups should come as no surprise to anyone that believes in the power of market economics on human behavior.

This comparison of “virtually identical” employers showed an 8.4% decrease in claim reports after a business became experience rated for the first time.

While there was a decrease in claim activity for employers recently experience rated, the average cost per claim did not change. The researchers say it was unlikely that these employers were suppressing claims.

If employers were not reporting claims, Frank Neuhauser, a researcher with the University of California, Berkley, and one of the authors of the study, said the average cost per claim should increase, in part because smaller claims are easier to conceal. Additionally, smaller claims have a bigger impact in calculating experience modifications, or X-Mods, and the premiums that employers ultimately pay.

Another point of contention in the equation is the "split point" used to determine any discounts.

In calculating an X-Mod, carriers use the full cost of the claim up to the split point threshold, which is $7,000 in California, and discount the cost of the claim above that amount. The premiums charged to a small employer that is experience rated would increase by about the same amount if that business had a single $4,000 claim or a single $1 million claim.

Carriers can apply debits and credits to increase or decrease the premiums they charge, and larger carriers will often have two subsidiaries, one offering lower rates for employers with better claims histories, and the other charging higher rates for more risky employers.

But carriers aren't applying the discounts to small employers, largely because they don't consider the experience of a small employer to be credible in predicting future experience - their loss experiences are too diverse to be predictive of future behavior.

The next step researchers are going to look at, according to the story, is to examine the effect of adjusting the split point for determining primary and excess losses to see if lowering the split point reduces the variability in premiums charged to small employers.

This has been a point of discussion within the WCIRB of late, and the National Council on Compensation Insurance (NCCI), rate maker for most states, has already put into place plans to increase the split point and then tie it to inflation.

Which brings me to my basic point - in California we had a monumental change to the workers' compensation laws dealing with claims, and primarily litigated claims. These changes were pushed by Big Business and to a lesser extent Big Labor.

There was no consideration for Small Business. There was no consideration for dealing with the underwriting component of workers' compensation - the part that most directly affects Small Business.

And yet Small Business when aggregated is by far the biggest employer in the state and is disproportionately affected by the costs of workers' compensation both directly and indirectly.

I see that as a fundamental flaw in the entire negotiation and implementation of SB 863 - especially in light of the fact that in rating an employer for premium purposes the system makes a big distinction concerning the size of the business.

Listen, we all know that Small Business has no say in the California Chamber of Commerce, one of the big proponents of SB 863. We all know that Small Business really has no clout, no organization, no unification whatsoever in the political process of Sacramento. The Small Business owner is too busy trying to make payroll, manage inventory, people, customers all by him or her self.

At least it appears that the WCIRB is listening, and has some idea that Small Business really is important to the economy.

Working the experience modification formula and rating thresholds is a good first step towards making the economic burden of paying workers' compensation premiums, and engendering a more safety conscious Small Business population.

On another note, it was interesting to see, the day after my vacation started, that the Los Angeles Times ran a story about Deloitte's imbalanced ability to leverage contacts, political contributions and persuasion to garner California state information technology contracts and the huge cost overruns, as well as failed implementation, of these systems - notably the Division of Workers' Compensation's Electronic Adjudication Management System.

It's no secret that I'm no fan of EAMS. I'm not a computer expert, but I do know how shared systems should work. EAMS in my opinion is far from where a professionally built multi-million dollar network should be in terms of user access, ease of use, customization, reliability, etc.

The Times story touches on why EAMS doesn't do what I think it should do: money influencing politics. I'm glad to see that a large daily publication at least is bringing this to the public's attention, albeit a bit tardily.

Another Lesson in Tax Law vs. Work Comp

Staffing companies are among the most "creative" when it comes to trimming their workers' compensation costs. Their margins are so thin that every penny saved in work comp premium is a penny of profit.

So it comes as no surprise that a recent California appellate case penalized a staffing agency for underreporting wages because an "unreasonable" amount was classified as "per diem" expense reimbursement.

ReadyLink Healthcare Inc. sued the Department of Insurance (DOI) and the Workers' Compensation Insurance Rating Bureau (WCIRB) after an administrative law judge ordered that it pay State Compensation Insurance Fund (SCIF) an additional $555,327.53 in premium.

ReadyLink was insured by SCIF from 2000 until 2007. State Fund conducted a final audit of ReadyLink in 2007 for its September 2005 through September 2006 policy period. A senior auditor noted that ReadyLink was paying its nurses $6.75 an hour, plus a much higher "per diem" amount. 

The auditor had experience with other nurse staffing agencies insured by State Fund and knew of none where traveling nurses received more than half their reimbursement as per diem payments.

The auditor asked ReadyLink to provide documentation showing that the per diem payments represented the actual living expenses of the traveling nurses. ReadyLink did not respond, and State Fund billed the company the additional premium.

An administrative law judge ruled that ReadyLink had failed to prove that its per diem payments were reasonable, noting that the company was paying far below the market rate in hourly wages and had not produced any documentation that its per diem payments were related to actual living expenses of the traveling nurses.

ReadyLink sought review by the Los Angeles County Superior Court, which denied the petition. The company then appealed to the 2nd District Court of Appeal.

ReadyLink argued that its per diem payments comply with federal tax law and that State Fund had imposed onerous documentation requirements that federal law does not require.

The 2nd DCA didn't care, distinguishing between the federal tax system and the WCIRB's Uniform Statistical Rating Plan (USRP):

"The IRS collects tax revenue from employers and employees to fund a variety of federal programs, whereas the purpose of the USRP is to accurately recognize the amount of an employee’s real wages to ensure that the SCIF has sufficient reserves to pay a worker his or her wages if injured on the job."

Lessons:

1. Don't mess with wage reporting. If you're an employer, pay market wages. If there is a per diem involved make sure that the payments can be supported as reasonably related to actual expenses.
2. Don't ignore audits. When the auditor requests supporting documentation at least make a good faith, reasonable attempt to comply. If you can't - big time red flag goes up!
3. Workers' compensation has NOTHING TO DO with tax law. This has been restated so many times since the beginning of work comp that it is unbelievable that any employer would attempt to raise this argument. Usually the attempt to relating tax law to work comp is in relation to employee classification - independent contractor vs. employee. Been there, done that so many times it still puzzles me that any attorney representing an employer would even attempt that argument; likely a professional that is not versed in the special character of work comp law.

ReadyLink also sued in federal court, which is pending. I'm sure there will be a similar outcome.

To read the decision, click here.

Iowa Tax Case Should Bring Employer Jail Time

How do you deal with workers' compensation scofflaws? By busting them on tax issues.

But just seeking money in a civil tax action won't do the trick - jail time is necessary. That takes commitment of law enforcement. The question is whether law enforcement deems the evasion of workers' compensation obligations sufficiently criminal to seek justice.

In Iowa, James L. Watts, owner of Watts Trucking Service and numerous trash and waste-hauling companies that operate in the Midwest, owes more than $30 million in payroll taxes and has failed to pay more than 14 judgments since 2008 related to injured workers’ claims, according to court records and news reports.

Watts, 69, has ignored tax obligations and opened and closed numerous corporations over the past few decades as tax and workers' compensation issues emerged, court records and officials said. He has formed and run at least 23 different companies, many of which accrued the sizable employment and unemployment tax debt, according to federal prosecutors. Collection efforts have largely failed, officials told WorkCompCentral.

Watts is being sued by the Internal Revenue Service in Federal court. The complaint accuses Watts of "pyramiding" employment taxes by opening new companies to avoid tax obligations associated with existing companies and trying to "stymie" IRS collection efforts.

Until the IRS case Iowa officials had no idea of how egregious Watt's actions have been.

And Iowa has no method to provide for injured workers of uninsured employers, unlike most states, so the victims of Watt's maneuvering have no recourse.

According to state officials, Watt's is just one example of an extensive problem in the state - employers skirting the workers' compensation requirement and, frankly, it seems to me the problem is the product of disinterest by Iowa prosecutors.

Dave O'Brien, a Cedar Rapids attorney who represented an injured worker in a case against one of Watts' companies in 2010, told WorkCompCentral that, "It's criminal under Iowa law (to not cover employment-related injuries), but there's really no history of the state enforcing that."

Now that the IRS is seeking Watt's money, O'Brien says his client will probably never be able to get his injuries addressed.

Chris Godfrey, head of the Iowa Workers' Compensation Division, said there is no state fund in Iowa to pick up the costs for injured workers when uninsured employers do not.

O'Brien's client, 45-year-old Jeffrey Carter, was forced to wait two years and be qualified for state-subsidized health insurance before he could get his needed back surgery, providing a stark example of the cost shifting that occurs when employers fail their legal obligations.

The IRS case did give workers' compensation officials a better idea of how many companies Watts was operating in recent years and how extensive his unpaid financial obligations are, said Andrew Mertens, spokesman for the Iowa Association of Justice.

Attorneys for injured workers in Iowa are hoping for criminal charges to be prosecuted against Watts to set an example.

According to Jeff Thompson, an Iowa deputy attorney general, the state is considering both civil and criminal remedies for dealing with Watts' workers' compensation violations.

The civil federal tax case, meanwhile, seeks an injunction, judgments on the tax debts and foreclosure of a few residential properties Watts owns.

We have seen in other venues that civil penalties are typically not very effective against white collar criminals because they amass so much wealth and become so adept at hiding it that damages just become a cost of doing business. In fact this was Watts' strategy - incurring obligations then starting a new company to avoid payment. Watts obviously understands how to avoid civil penalties.

So the way to deal with egregious scofflaws is jail time - protracted jail time.

Perhaps now that the IRS has demonstrated just how flagrant Watts was in flouting the law, Iowa law enforcement has the information needed to permit the Department of Corrections to provide him with room and board.

"(Watts' companies) don't really seem to have a system for taking care of their workers after an injury," Mertens told WorkCompCentral. "But they're not alone. It's a pretty wide problem and there are examples all across Iowa and the country of corporate lawbreakers who aren't paying for workers' compensation insurance. The workers are paying the price."

Martens is only partially correct. Law abiding companies, and the rest of society, bear these costs too.

I submit that Iowa's failure to seek criminal redress against Watts is a failure of the state to protect its citizens. Now that the IRS has laid out the case for them, the Iowa Department of Justice and Office of the Attorney General have no choice but to move forward with a prosecution of Watts.

MN Misclassification Case Sends Reminder

Misclassification of employees is a national problem that affects benefit programs and state systems other than workers' compensation, including unemployment systems, disability systems and tax/revenue systems.

Employers that engage in misclassification schemes are unfortunately rewarded to do so because the savings are tremendous and provide a huge competitive advantage, and generally have no other consequence because enforcement is so difficult ... until either the worker becomes dissatisfied and seeks redress, or a work injury occurs.

In Minnesota an appellate court bored down through the facts to find that a worker who was encouraged to form her own limited liability company (LLC) in order to retain work was in fact still an employee entitled to the benefits and protections of employment status.

Rowan v. Dream It, No. A11-1135, Heather Rowan was a painter for Dream It, a licensed general contractor, for more than four years.

According to the court opinion, Rowan alleged that in November 2010 her supervisor, Jim Herman, had told her if she formed her own company and came back to work for Dream It as an independent contractor, her pay would be calculated by the square footage of the areas she painted rather than by the hours she spent working, which would make up for the wages she was losing due to her reduced hours.

Rowan formed her own LLC continued to come in to work each day and perform the same work she had done as an Dream It employee for the next four weeks.

On Dec. 9, 2010, Rowan refused a job offered by Dream It because she thought the square footage and payment amount were improperly calculated. Dream It did not offer her any other work after this, and Rowan applied for unemployment benefits.

The original unemployment hearing officer found Rowan to be an employee. On reconsideration the decision was reversed.

On appeal the court sided with the original finding of an employment relationship.

The court noted that the "idea to have Rowan quit her employment and form an LLC originated with, and was suggested by, Dream It," but "at no time was she advised of the negative consequences she would suffer in giving up her position with the company."

By quitting and forming her company, the opinion states, Rowan "simultaneously lost her status as an employee, any certainty in obtaining work," as well as the protections of the Fair Labor Standards Act, workers' compensation, and unemployment insurance.

The appellate opinion concluded that a reasonable worker in Rowan's position would have acted as she did, and so she was entitled to receive unemployment benefits.

The court was obviously mindful of the growing problem with employee misclassification, citing in its opinion a May 2011 report by the legislative Advisory Task Force on Employee Misclassification.

Indeed, an August 2011 newsletter from the Minnesota Department of Labor and Industry reported a 441% increase in the number of penalties issued to employers for workers’ compensation mandatory coverage enforcement actions in the last fiscal year. The number of penalties jumped from 210 in 2007 to 1,137 in 2011, yielding payments of $1,684,982.

While I don't know whether this increase is due to heightened enforcement action or due to an increase in misclassification activity, it is an alarming number regardless.

On the line in misclassification cases are lost state revenues for services and programs related to employment activity and in these times of governmental austerity increased enforcement to enhance general fund revenues is a sure bet, regardless of which state a business is in.

Those interviewed for the WorkCompCentral story, regardless of whether they represented labor or business, applauded the court's decision for upholding the rule of law, citing the increased costs and burdens placed on society by employers not playing fair.

There will always be those who believe "it won't happen to me". Reminders by the courts, such as the Rowan case, are unfortunately necessary to a balanced competitive marketplace.

Payroll Zero? Not a Chance When Subs Are Unlicensed!

Yesterday we examined a case in Florida demonstrating an employer's folly in failing to report an alleged industrial claim timely.

Today's news (and blog post) concerns an employer's folly in failing to adequately estimate payroll obligation when applying for workers' compensation insurance.

Georgia is one of those states without an insurer of last resort and relies upon an "assigned risk pool" to cover those employers that carriers otherwise don't want to write. To be eligible to write the good business in Georgia a carrier must submit itself to the pool. Coverage obligations are randomly assigned.

James Smith, a contractor, enlisted the help of his general agent, Norris Strickland, which submitted an application on Smith's behalf to the Georgia Workers' Compensation Assigned Risk Insurance Plan because they couldn't find insurance on the open market.

After Smith's application was processed, his policy was randomly assigned to Amtrust North America. Based on Smith's representation that his estimated employee payroll was zero, Amtrust issued a one-year policy starting in January 2007 with an initial premium of $765. The carrier renewed the policy the following year.

Since workers' compensation premiums are based on the actual amount paid to workers, Amtrust could not determine the actual policy premium due to it until after the conclusion of the 2007 policy term. Amtrust conducted an audit of Smith's payroll records and calculated that an additional premium payment of $42,653 was owed, based on wages Smith had paid to uninsured contractors in 2007.

Amtrust then cancelled the renewed policy and demanded payment of $44,457 in premium owed for the period between January and May 2008.

When Smith refused to pay the additional premiums demanded by Amtrust, the company sued for their recovery.

Smith filed a motion for summary judgment, asserting that he was not obligated to pay because he did not sign a written contract with Amtrust, he did not authorize anyone to do so on his behalf and he did not otherwise assent to the terms of Amtrust's insurance policy.

In response, Amtrust moved for partial summary judgment, arguing that Smith was liable to pay additional premiums because Norris Strickland acted as Smith's agent when it submitted an insurance application on his behalf, the parties were bound to the terms of the policy once Smith's application was approved and Smith assented to terms of the policy by accepting coverage without objection.

State Court Judge Raymond S. Gordon Jr. denied Amtrust's partial summary judgment motion and granted Smith's motion for summary judgment, deciding that Smith was not liable for the additional premiums.

Amtrust appealed, reiterating the arguments it had made at trial. The Georgia Court of Appeals ruled in the carrier's favor on Monday.

The opinion by Judge M. Yvette Miller concluded that Norris Strickland was Smith's agent, not Amtrust's.

The court also said that Smith's express consent was not required for him to be bound by the terms of the assigned risk policy provided by Amtrust because state law obligated Amtrust to participate in the risk pool and determined the amount Amtrust could charge as premium for issuing policies to pool applicants.

Since the premium amount demanded by Amtrust in 2008 was admitted based on an estimate rather than a completed audit, a triable issue remained as to the amount owed by Smith.

Lessons for employers in assigned risk states:

1. Accurately estimate payroll;
2. Don't hire unlicensed contractors as subcontractors.

I sort of feel sorry for Smith. This decision likely put him out of business, at least doing business in the manner that got him in trouble with Amtrust.

But at the same time, this case sends an important message: don't gamble on insurance applications by falsifying or understating facts necessary for underwriting.

Smith's attorney told WorkCompCentral news that she felt that the insurance industry in the state was usurious. The reality is that her client attempted an illegal competitive advantage and got caught.

The case is Amtrust North America v. Smith, No. A11A1645.