Northeast HVAC News Guest Column
By Christopher F. Hawthorne CPCU, CRIS, CIC, LIA
While the subject of insurance
typically is one of business owner’s least favorite subjects,
the issue of Workers Compensation and Employers Liability
coverage (WC) can stand alone as an irritant. Like a F550 coming
at you, WC gets your attention. I think the reason for this is
due to the expense of the coverage combined with a lack of
knowledge and the fact that it is a shotgun wedding between
business owners, employees, insurance carriers and state
For the business owner a general feeling of helplessness and
victimization may result which quickly turns to anger. This
typically happens just before I walk through the door. The
following are the facts that might help you better understand WC
coverage/ program and how to navigate it to your advantage.
First a bit of history. We are not alone. Workers Compensation
programs are in place throughout most of the civilized world.
The reason for its coverage is to protect society. In the United
States, prior to WC coverage injured employees were tossed
aside! In theory the injured employee could sue the employer but
most did not have the resources to do so and if they did the
defenses an employer could mount were many. As with anything, if
it goes too far you can expect a reaction. From the early 1900’s
to approximately 1950, individual states in the US began
enacting WC laws to protect the citizens. The first aspect of WC
to understand is that it is a social good, which is based, in
state law, thus the shotgun wedding. Please note, it was not the
insurance industry that came up with WC but rather the state
legislatures. The insurance mechanism was the obvious choice for
funding the requirements set forth in the law. Based on the law
of large numbers if everyone pays in a “small” amount then there
will be money in case there is a large loss.
The government made a deal with business owners in return for
accepting the WC arrangement. If you carry WC coverage, it will
be the sole remedy for the injured employee. The injured
employee can not sue you for the injury other than for the WC
benefits. This had a very stabilizing effect on society.
Unfortunately in the original format, there was no financial
consequence for those employers who had employees using the
program often and for those who did not. Insurance is designed
for the loss that occurs as an exception as opposed to the rule.
Soon enough the WC system began to collapse under its own
weight. To cover the enormous number of losses the rates went
sky high. Enter reform! In Massachusetts, the system was saved
by the arrival of the Experience Modifier (MOD) and the All Risk
Adjustment Program (ARAP). Before describing these two factors,
a review of how rates are set is needed. The amount you pay
annually for WC is based on the amount you pay your employees
and what those employees do for you. Currently a secretary’s WC
coverage will cost twelve cents per hundred of payroll while a
carpenter’s will cost seven dollars and fifty cents per hundred.
Each year at the beginning, the business owner and agent
estimate what the payroll for each class will be and the
business is charged a “Deposit Premium,” based on the estimate.
Your final premium bill is based on your final annual payroll
total. I have heard business owners lament that when they have a
good year the insurance company penalizes them. This highlights
a very basic lack of understanding of how the system works. As
such one can understand the business owners frustration. With
this basic lack of understanding the Mod and the ARAP were sure
to put people over the edge! As I said the original program did
not differentiate between the big and little users of the
system. While still not perfect the Mod and the ARAP saved the
system and brought rates down dramatically.
The Mod was designed to differentiate the level of use of the
system by each employer. The state came up with a formula that
predicts what the expected losses will be for each class of
labor at each level of payroll. Your businesses WC losses are
then compared to the expected losses of your industry and if
lower than the expected amount, you get a discount and you pay
less than the state rate per hundred. Alternatively if you are
higher than the expected amount, you have to pay more into the
system. When losses get big enough the Mod calculation cannot
handle it and so the next level of calculating your share is
introduced and it is called the ARAP. These two factors have you
pay into the system for your prior use of the system, The
following chart shows the effect these two factors have had on
rates since 1991.
Story continues below ↓
your ad here
So while paying back
into the system hurts, overall you can see the dramatic affects! The
Mod and the ARAP provided the stimulation needed to have employers
embrace risk management practices. With the introduction of these
two programs it became quite obvious that having a safer work place
was a win win win proposition for the employer, employee and the WC
system. Let’s look at the effects of different Mods and ARAP for a
plumber at $100,000 of payroll per year. A plumbing contractor with
a clean record and low Mod as opposed to a high Mod and ARAP saves
$2,648 for every $100,000 of payroll($6,062- $3,414=$2,648). When
you consider that a business carries its losses in the Mod and ARAP
for 36 months, the $2,648 becomes $7,944 and that adds up quickly!
$7,944 pays for a substantial amount of risk management tools not to
mention the savings associated with a stable work force (Not to
mention the additional costs for hiring, training and ramp up
With this understanding of the system, it is time to look at how the
following also play a role in what you pay for your WC each year.
Workers Compensation Construction Credit Program (WCCCP). In an
effort to be fair to unions which traditionally pay higher wages and
thus higher WC premiums (remember premium is based on a rate per 100
of payroll), Massachusetts instituted the WCCCP, which allows
contractors to apply for a credit annually if their average hourly
wage is more than $18 hours. The higher the average wage the higher
the credit applied to your WC premium. The application is in all WC
policies that contain construction classes. This is money waiting to
be had. Please call me if you need instruction on how to apply for
the credit. Risk Management Practices (RMPs). RMPs can make the
biggest difference in your long-term premiums. Risk Management is
the art/job of reducing the odds of a loss and reducing the size of
a loss once it occurs. Here are RMPs for your consideration:
Contracts Review for insurance requirements with your agent.
Risk Transfer Agreements Utilized with your Sub Contractors. Risk
Releases. The 3 practices listed above can make a huge difference in
that WC claims can be transferred away from you or to you
contractually. Imagine one of your employees is injured. Because you
have WC they cannot sue you but they can sue the GC. If you signed a
risk transfer agreement with the GC (often in the middle of the work
contract) then the liability suit against the GC from your employee
is transferred back to you! Walk Away Training (Avoidance) Make sure
your employees know it is OK to walk away from a situation they feel
is dangerous. Often they feel they must get the job done no matter
what the risks are or face the boss’s wrath. Let them know what your
priorities are. Certificate of Insurance Review Certificate of
Insurance Tracking Program Make sure your Subs and the GCs are all
carrying WC. Remember courts decide when coverage is applied. Do not
put your self in the situation where you are the only one on the
jobsite with WC in force.
Uninsured contractors have a sneaky way of finding a way to your
coverage thus affecting your future premiums (remember the Mod and
ARAP!). COBRA / MASS Continuation Letters When your employees leave
make sure they have been offered the proper health coverage options.
This will help you avoid false claims because they have nowhere else
to turn due to a post employment injury. Driver Record Checks prior
to hiring Company Driver Policies GPS Systems in Auto Fleet Remember
auto accidents that give rise to an injured employee count as WC
claims even if the accident was 100% your driver’s fault. Avoid
hiring or employing bad drivers! Fit to Work Exams Utilize Fit to
Work programs to get a third party (doctor or medical office) to
sign off that the potential employee or the returning employee is
capable of physically doing the job.
Drug & Alcohol Free Work Place Program People drinking or using
drugs have a higher chance of being injured or injuring those around
them. Don’t chance it. This is an easy way to protect your employees
and your reputation. Safety Talks (Paycheck stuffers / Tool Box Talk
Program) Safety Manual Risk Management Checklists New Employee
Orientations Employee Exit Interviews These RMPs communicate your
position on safety and how tight you run your ship. This can be a
real deterrent for someone who feels they can fi le a phony WC
claim. Discounts There are several discounts to be aware of: Premium
Discount for premium over $10,000. This is offered on voluntary
policies. So if you are in the MA WC Pool, you are missing this
If we are in a hot(soft) market and other factors line up, often we
can place you with a WC carrier that offers a rate Deviation. This
is upfront guaranteed savings regardless of losses that occur during
the policy year. Dividend Programs. This is when a carrier offers to
give you premium back after the policy term has expired if you have
a clean year. If ALL else is equal then these can be attractive.
However this is the last consideration as dividend programs vary
greatly and the envisioned savings can vaporize quickly depending on
the actual program. In addition to RMPs there are several other
issues a business owner should consider when it comes to managing
their WC program. Is there an Alternate Employer? Does your employee
work for another employer? If so be careful in that injuries on the
other job can bleed through to your WC experience! Sub Contractors
and Sole Proprietor Issue Please do not kid yourself that because
you pay someone on a 1099 basis that you can always avoid paying WC.
If there is an Employee – Employer relationship then WC benefits can
and will be paid.
Follow the rules under chapter 149 of MA law as to who is an
employee. Remember that if the “sub-contractor” has no insurance,
your WC may collect WC premium based on what you paid them and this
will include materials! Be smart, hire subs with valid WC or include
what you pay the uninsured sub in your WC payroll calculations and
ask the sub to provide billing segregating payroll from materials.
Are you working outside of Massachusetts? If you are, make sure you
are reporting your payroll by state. Otherwise you may fi nd you
have some nasty news from the Department f Labor from the states you
are working in. Finally, one of the most common phrases I hear about
WC relates to how each carrier handles claims. “ The $@#$%# comp
carrier paid $XYZ, can you believe it!” or “the Comp carrier allowed
the benefi ts to be paid!” These statements uncover another basic
misunderstanding about the system. The WC claims process is a
process where the injured have rights.
If the injured disagree with how a carrier is handling a claim they
can go before a judge. The judge is who decides what happens not the
carrier. It is for this reason claims handling by both the carrier
and the employer is so important. If an injured person feels they
are being treated fairly, they will probably go along with the
process. Once irked however they will push the system to its limits.
That gets expensive for everyone. Understanding this concept shed
light on why a business’ hiring practices are so important. Imagine
the havoc a scam artist can play once they get into the system! They
get in through your employment. Once they have the employment they
have the keys to the system and we are all forced along for the
ride. This illustrates why risk management in hiring is critical.
Please do not give into the temptation to not report a claim/ pay
out of pocket or try to sneak it through Group Health. Both actions
can have nasty a backlash. Paying out of Pocket. While tempting this
is a bad idea. Part 4 of your WC policy says you should not assume
the cost of care unless you are prepared to pay for the claim
yourself. Imagine a splinter in an eye. You give the employee a
check to pay the Emergency Room. The following week the employee
says they are disabled due to the eye injury. Who owns this claim?
You do not want to risk this. Sneaking WC injuries through Group
Health. This is unwise.
We have seen employees go through surgery and be in the middle of
physical therapy when it comes out that the injury was work related.
The health system will pull up short on you and the Group Health
carrier will want their money back. The rate BCBS, Harvard, Tufts,
NHP or Fallow pay at may differ from the WC carrier. Who owes the
difference? Again, do not get into a situation where you could fi nd
out. In addition, the state may fi ne you for not reporting claims
on a timely basis. In short there are many things a business owner
can do to protect minimize their WC loss / premium exposure. The
most important is to understand the basics of how the system works
or else it will feel like a very rough ride.
Knowing how your program is priced, what credits are available to
you and what solid RMPs can do to help keep your premiums in check
can help to provide a less bruising experience. While employers must
carry and pay for the coverage it need not be train wreck that it
often is. I hope you find this helpful.?
Chris Hawthorne has specialized in working with Plumbing and HVAC
contractors since 1995. He is a licensed insurance broker and
advisor representing Thomas Gregory Associates Insurance Agency, Inc
located in Wakefield, MA and can be reached at 781- 914-1038. If you
have questions or have issues you would like addressed in future
articles or wish to find prior articles, please contact Chris at
781-914-1038 or firstname.lastname@example.org.