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Northeast HVAC News Guest Column

Workers Compensation Essentials.
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 government.

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.

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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 expenses).

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 discount. Deviations.

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



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