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WorkComp Watch
News and Commentary regarding Workers Compensation insurance cost & coverage


by Ed Priz,
President of Advanced Insurance Management



Wednesday, May 25, 2016

How Ghost Policies Haunt Other Employers

So when is a Workers Comp policy not a policy? When it's a "Ghost Policy". And these ghosts can do more than just scare a business owner late at night--they can pick your pocket. Or rather, enable your insurance company to do so.
Perhaps some background info is in order, for those unfamiliar with this paranormal version of a Workers Comp insurance policy. A "Ghost Policy" is when a small business, usually a sole proprietor, buys a Workers Comp policy to satisfy the demands of some customer, but then excludes himself from the policy. Now, if that sole proprietor is the only person actually doing work for his company, the policy actually covers no one, since it would only cover for injuries sustained by employees of the sole proprietor, not the sole proprietor himself.
But--the Ghost Policy enables an agent to issue an all-important Certificate of Insurance for the sole proprietor, satisfying the request of a customer for evidence of WC coverage. Oftentimes, the sole proprietor is unaware that he or she is doing anything improper---agents often suggest that this is just standard operating procedure and a mere formality. 
But a recent case of mine illustrates how these Ghost Policies can haunt a company that relied upon such a Certificate of Insurance.
My client was a very small business and relatively unsophisticated when it comes to insurance. He used the services of a couple of independent contractors, and knew enough to request Certificates of Insurance from them.
But when my client's Workers Comp insurer performed the annual audit, and saw those Certificates, the insurer did a little cross checking with their own records. See, the large and well known insurer who wrote the policy for my client also wrote the policy for one of those independent contractors. So this large and well known insurer learned something that had been hidden from my client--the policy written by that same large and well known insurer for the independent contractor had been a Ghost Policy. So said large and well known insurer charged my client for these independent contractors, saying that since the Ghost Policy didn't actually cover the I/C, they were entitled to charge premium.
Now, my client didn't know this had been a Ghost Policy--The Certificate of Insurance that had been provided to him indicated it wasn't a Ghost Policy. But the insurer knew otherwise, because they had the benefit of being able to look up the details of this I/C's policy from their own records.
Nice work if you can get it. You provide a misleading (dare I say fraudulent?) Certificate of Insurance, and then, much later, you spring the trap for my client, based on the information that was withheld.
Now, we've referred this matter to the Illinois Department of Insurance, where we expected it to be a pretty open and shut case that would be resolved quickly for my client. Turns out, not so. Everybody from the department to the NCCI-sponsored appeal board has, so far, been frantically trying to pass the buck. Everybody was eager to suggest my poor little Lithuanian-born small business owner would need to hire an attorney (at considerable expense) if he wanted to pursue this dispute. I didn't like that answer.
It looks like the department is reconsidering this matter now, after I helped my client arrange a few phone calls from his state legislators. But it's still far from settled.
But this case is an abject lesson in how Ghost Policies can leave unsuspecting business owners exposed to a Shock Audit (as I like to call them), because the insurers sometimes have information that has been withheld on the Certificate of Insurance.
This isn't the first time I've seen a large insurer play this game. And it does make me wonder just how widespread this practice may be. This is an issue I'm currently researching, and I would love to hear from anyone with information on this subject.
To protect yourself from being victimized by a Ghost Policy by one of your independent contractors, you must first realize a painful truth about the insurance industry: Certificates of Insurance have been designed by the insurance industry to be essentially unreliable. When push comes to shove, the fine print says that the insurer really doesn't stand behind the information provided by a Certificate, so more fool you if you believe them.
If desiring evidence of coverage from a very small business, like a sole proprietor, you need a copy of the policy itself. And maybe, just to be sure, insist on something in writing from the agent or broker that states that the policy in question doesn't exclude anyone. If you don't, you may be setting yourself up for a haunting. Not to mention a drive-by Shock Audit.


Friday, January 16, 2015

Florida Upholds WC As Exclusive Remedy

In a fairly important ruling, the Florida Supreme Court has upheld the "exclusive remedy" aspect of Workers Compensation in that state.  In Moreles v. Zenith Insurance Company, the court has now ruled that the exclusive remedy provisions of the law and the Employer Liability coverage form.
This is an important win for insurers and employers, not so much for the widow Morales. Florida is still wrangling with some other important court cases concerning Workers Comp, though, including the question of whether recent "reforms" shatter the grand bargain between employers and employees that rests at the heart of Workers Compensation that justifies the exclusive remedy doctrine.

Stay tuned, it seems there will be more to come on this subject. Although the Florida Supreme Court appears to have given a pretty clear notice here about how it views this dispute.

Wednesday, January 14, 2015

Workers Comp Issues in 2015

Interesting article here, about possible issues that could impact Workers Compensation in this new year. One of the items here that piques my interest is that of "opt-out", that is, states giving employers the legal right to go without traditional Workers Compensation coverage. Texas has had it for years, of course, and more recently Oklahoma enacted a version of it, a version that allows employers to forego regular Workers Compensation coverage if they put in place an alternative program that offers the same benefits.

Now, it seems to me that the devil will really be in the details there. If the alternative program really and truly offers benefits that are the same as "real" Workers Comp, where exactly are the opportunities for cost savings? And if these alternative programs don't really and truly offer the "same" benefits, how does that all shake out for employers?

I know of one case where a state allowed certain kinds of employers to opt out if they provided an "alternative" plan that provided essentially similar benefits. And I know of an employer who hired some broker who specialized in such alternative programs to come up with one for them, and everything seemed fine until some workers were seriously injured. Then everything hit the fan, the lawyers earned some significant fees, and ultimately an appeal court determined that the alternative program had not really offered benefits sufficient to meet the (vague) statutory requirements, so the employer ended up being saddled with really expensive claims plus large penalties for failing to meet the statutory requirements, along with very hefty legal bills.

I'm just saying, there aren't many genuine short cuts in the world of Workers Compensation, and things that look they are sometimes don't turn out that way, when push comes to shove.

Monday, January 12, 2015

A Report Card For Insurance Regulators

An interesting attempt to quantify and grade insurance regulatory efforts by the various states can be found here.  Not sure if I necessarily agree with their criteria in all cases, but this is an interesting approach. I may have more once I digest this report card more fully. In the meantime, take a look and form your own opinions.

Thursday, January 8, 2015

Shameless, Stan Lee-Type Plug

When I was a kid, Stan Lee was the master of self-promotion over at Marvel Comics, then kind of an underdog to DC. Any way, this being January, the time of year when all good premium auditors are planning their annual extravaganza of field audits, I thought I would steal a page from Stan's old playbook and indulge myself in an unabashed self-serving plug for my book, Workers Compensation: A Field Guide For Employers.

The Field Guide explains everything business owners and managers need to know about Workers Compensation insurance audits, classifications, experience mods, and various and sundry other topics, including how to guard against and/or correct the common errors made by premium auditors that raise premiums unnecessarily.

You can find out more here, and even order a copy, if you so desire. Trust me, it contains enough valuable information that you'll count it as the best bargain you've ever found on Amazon.

There. Stan himself couldn't have done it better. Excelsior!

Friday, December 19, 2014

Some Cautionary Thoughts on Employers' Workers Comp "Fraud"

Been seeing a number of blog posts and articles about when employers commit "fraud" in relation to Workers Compensation insurance. Now, don't get me wrong--there are indeed employers out there who are gaming the system to lower premiums. And by gaming, I mean deliberately misrepresenting the nature of their operations or the nature of the work done by certain workers.  I've seen my share of cases where that was done, so I'm not being naive about the problem.

But I've also seen more than a few instances where the actual facts of the case were more complicated than the tales of greed painted by insurers and prosecutors.

I know of a high profile case where the business owner got pressured to plead guilty by an ambitious prosecutor in order to save a pending sale of a separate company that was going to greatly benefit his family. His choice was to fight the fraud charges that his attorney strongly felt he could defeat but scuttle a huge financial windfall for his family, or fall on his sword, plead guilty, and let his family benefit from a huge payday from the sale of the other company. It had been made clear to him that the sale would not go through if the unrelated company got dragged in, and it was also made clear that if he fought the charges that unrelated company would, indeed, get dragged in. What limited technical knowledge I have of the case suggests to me that the "misrepresentation" charged was exaggerated and that the fraud charges might not have held up under closer examination.

But cutting a deal with the prosecutor meant that such closer examination never happened. But the sale of the unrelated company went through.

I once saw a case where two insurance brokers were convicted on criminal charges over premium fraud committed by the policyholder. My own careful review of the evidence convinced me these brokers had done no wrong, had only sent in applications for WC coverage that had been based on prior audits by other insurers.  But I suspect the prosecutor wanted these brokers to roll over on the policyholder, who was politically connected to a well known (now retired) Chicago politician. So the prosecutor got the jury to convict the brokers, even though the policyholder had already reached a plea deal before the trial began. So there was indeed fraud there, but no indications that the brokers had been in on it. Didn't matter.

I saw another case where an inexperienced businesswoman was convicted of Workers Comp premium fraud even though it seemed to me she pretty clearly was not the mastermind behind the scheme. But she had made the mistake of hiring a woman she met at church--a woman who had served time in the past for Workers Comp premium fraud. The businesswoman was sure this nice lady from church had learned her lesson and would never risk going back to jail again by repeating her offense. So she hired her as an office manager for her new PEO--and guess what?

Only the repeat offender cut her deal with the prosecutor first, while the naive businesswoman fought on, believing that an innocent person had nothing to fear from our legal system.  For that assumption, she went to jail and lost her business, her reputation, and her marriage.

Keep in mind, the system for calculating Workers Comp insurance premiums is complex and often counter-intuitive. The system is complex enough that insurers make plenty of mistakes in administering it. So it should not be surprising that policyholders sometimes make the mistake of applying common sense to issues such as proper classification codes.  The manuals that spell out the technical details of classifications (including instances where common sense doesn't really apply) and audited premiums are not available to policyholders (and even if policyholders knew how to purchase them it would be a difficult read). So it can be difficult, if not impossible, for many policyholders to understand many of the fine points of WC premium computations.

I'm not saying there aren't genuine crooks out there looking to rip off the system--God knows, there are plenty of them. Some employers know from experience lots of ways to shave premiums by being less than honest.

I'm just saying it's not always as cut-and-dry as some in the insurance business (or the prosecutor's office) might have you think. So the next time you see some newspaper article painting an employer as the biggest crook since Yellow Kid Weil, take it with at least a small grain of salt.




Thursday, December 18, 2014

Michigan Clarifies Independent Contractor Rules

The Michigan Supreme Court has clarified the criteria for when a worker is to be considered a true independent contractor rather than an employee. The Michigan Supremes ruled, in Auto-Owners Ins. Co. v. All Star Lawn Specialists Plus, Inc., that if just one of the three statutory criteria is met, the worker is an independent contractor.

The three statutory criteria are that the worker:

1.  maintain a separate business;
2. hold himself or herself out to and render service to the public;
3. be an employer subject to this act.

The Court of Appeals had earlier ruled that the worker had to meet all three criteria to be an independent contractor rather than an employee covered by Workers Comp of the entity using his or her services. The Supreme Court ruling overturned that, saying that meeting just one of the three standards is sufficient to make the worker an independent contractor.


In this particular case, the worker wanted to be an independent contractor, rather than an employee limited to the exclusive remedy of Workers Compensation benefits. But this sword should cut both ways--it also changes the standard for when an insurer can pick up payments to a 1099-type worker in Michigan for inclusion in the WC premiums of the party that purchases their services.


We shall see how carefully insurers observe this new standard.

 

 

 

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Monday, October 13, 2014

Illinois Workers Comp Rates Down--Premiums, Not So Much

Here's an interesting article from Business Insurance about how Illinois construction companies have not seen a decrease in Workers Comp premiums, even though there have been highly touted reductions in insurance rates in recent years.

This illustrates something I have written about before--just because manual rates go down, it doesn't mean the actual premiums paid by employers do the same. For one thing, this reduction in manual rates has coincided with a change in the NCCI experience modification factor formula. So even as manual rates decline, many employers have seen sharp increases in experience mods that more than offset any rate decreases.

And of course, there are lots of mechanisms for insurers to offset manual rate reductions in other ways, mainly by adjusting the use of Schedule Credit or Debits.  So a decrease in manual rates doesn't translate to an automatic decrease in premiums in the so-called Voluntary Market. And even in the Assigned Risk Plan, the change in the experience mod formula would more than offset the manual rate decrease for many employers.

Something to keep in mind when politicians hype the effectiveness of recent "reforms" in the benefits paid to injured workers.

Friday, October 10, 2014

New Oregon Study Ranks State Workers Comp Cost

The Oregon Department of Consumer and Business Services has released its latest studyranking the relative costliness of Workers Compensation insurance in all the various states.  The 'winner' this year, for most costly state, is California. And in our own experience, not only is California an exceedingly expensive state to buy Workers Compensation insurance, t is also a state where the regulatory and oversight mechanisms seem particularly poor, in terms of the redress and protection provided to employers in disputes over premiums, audits, classifications, and modifiers.

California goes its own way when it comes to Workers Compensation insurance, using its own rating bureau with its own distinctive manual of rules--and the biggest source of WC insurance is the State Compensation Insurance Fund, a state owned and operated WC fund that competes with private insurance. The combination of all these factors, really high premium rates and really crappy regulatory oversight, combined with a particularly high-handed State Fund means that employers in the Golden State have a really, really tough time of it. If you think your Workers Compensation insurance costs are a burden, just thank the business gods that you're not in California--unless you are, which in that case means you're really, really taking it on the chin.

Thursday, October 9, 2014

New York Small Biz Learning Hard Lesson About Group WC Trusts

This is one of those stories that pops up repeatedly, in different states at different times, but never seems to ever go away for long, because various states seem unable to resist the lure of cheaper Workers Comp alternatives without making sure adequate regulatory oversight is in place to avoid disaster down the road.

It's happened here in Illinois in the past, in Kentucky, and in other states that have allowed group self-insurance trusts for Workers Compensation coverage. Without effective oversight, some of these plans inevitably dig themselves into a hole from there is no escape. They underprice coverage, getting business in the short term, but eventually those long-tail WC claims eat them alive.

Then the former members of these trust start getting bills for huge amounts, as they are held responsible for their proportionate share of the huge shortfall of the fund to which they were once a member. It isn't fair, it's a huge and crushing burden to many small businesses, and those who created the problem--lawmakers and those who ran the trusts--typically avoid the painful fallout.


 

 

 

 

 

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We've been helping employers since 1987, making Advanced Insurance Management one of the oldest and most experienced firms in the field of premium recovery.

 

 

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"Before we hired Advanced Insurance Management, we were facing almost $40,000 of workers compensation premiums for my company that supposedly had one employee.  I was facing the very real possibility of having to close my doors because of these bills. 
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Over the years, we figure we've produced around $25,000,000--twenty-five million dollars--in Workers Compensation insurance premium reductions and refunds for clients. In the cases we review, we find significant reductions or refunds in one-third to one-half of them. You can find the answers to more Frequently Asked Questions here.

We've helped employers of all types and all sizes – from very small contractors and machine shops to Fortune 500 corporations.And we're experienced with the Workers' Compensation rules and regulations of every state that allows private insurance for Workers' Comp. So no matter your company's size, or where you're located, AIM may help you to reduce the cost of Workers' Compensation insurance now and in the future.

 

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