Tips for Premium Savings
Experience modifications are a complicated topic, but need to understand enough to make sure that your insurance agent does his or her job to make sure you’re not getting cheated by the system.
Your Experience Modification is a safety factor that can have a significant bearing on the competitiveness of your Workers’ Compensation rates. It can result in either a debit or credit being applied to your policy.
Your Experience Modification is assigned to you by a rating body such as the National Council on Compensation Insurance (NCCI), your state Workers’ Compensation Commission, or by your self-insurance fund. The factor is mathematically derived from a comparison of your actual losses to your predicted losses. The comparison period does not count the preceding policy year but looks at the three years prior to the preceding year.
In order to qualify for an experience modification, you must have had a single year of premium that exceeded $9,000 or an average premium for two years in a row that exceeded $4500. Once you qualify you’ll receive an experience modification worksheet in the mail from the rating body about three months prior to your next renewal that will indicate your factor. It will include all of the information that factored into the computation. You should immediately forward a copy of the worksheet to your insurance agent.
The experience modification factor is an indication of whether you have had more claims or less claims than expected based on state averages for the classification codes you’ve been using. An experience modification of 1.00 is neutral and that’s what you start out with. A factor above 1.00 is called a debit modification and is an indication that your claims experience has been worse than average. A factor below 1.00 is called a credit modification and is an indication that your claims experience has been better than average.
When you have a debit modification over 1.00, you are hit with a surcharge penalty. For example, if your experience modification is 1.2, you get a 20% surcharge penalty that’s applied to your policy. On the other hand, if your experience modification is .90, you get a 10% credit discount that is applied to your policy. I’ve seen builders have experience modifications that range from .80 to over 1.75.
Common Mistakes and Oversights
Verifying your experience modification on an annual basis is a must because they’re wrong over 50% of the time. Most of the errors are in favor of the insurance carrier and result in your paying incorrect premiums that are too high. I recommend that you take an active role in the verification process and manage the performance of your insurance agent.
The most common mistake is that your payrolls can be understated on the worksheet. This can occur if your insurance carrier didn’t report them to the rating body after your final audit for each of the three policy years that are taken into account. It’s relatively easy to compare the class codes and payrolls that appear on your final audit bills to the class codes and payrolls that appear on your experience modification worksheet.
Another common mistake is that the claim payments will show up as overstated or won’t reflect recent reserve takedowns. Your insurance agent will need to order loss runs from your insurance carrier for each of the three policy years that are taken into account. You and your agent need to compare the incurred claims to make sure that they’re consistent between the loss runs and your experience modification worksheet. The term “incurred claims” here means that you are charged not only for the claims that have actually been paid, but also for the claim reserves that are set up in anticipation of future payouts. Any discrepancies in either the payrolls or claims should be reported to your insurance carrier so that they can get the accurate information to the rating body and correct your experience modification.
This leads to the issue of checking for reserve takedowns prior to the deadline for making a change. Six months prior to your policy renewal to contact your insurance agent to request hard copy loss runs to check for any open claims with reserves that should be reviewed. If there are, your insurance agent should contact the claims adjuster to find out if the claim was recently closed for a lower amount or if he or she is getting ready to reduce the reserve to a lower amount. If this is the case, the carrier must report the reserve takedown to the rating body four months prior to the policy renewal for it to be taken into account on your soon-to-be-issued experience modification factor. If you miss this deadline, you’re probably going to be out of luck unless the mistake causes an experience modification increase of over 5%, which is called an aggravated inequity. In that case, steps may be taken for resolution if your state allows this.
Use Insured Subs
Using insured subs is a no-brainer. If subs can provide a currently valid certificate of insurance evidencing Workers’ Comp, you won’t be charged on your own policy. I would say that about 90% of the subs used by our builder clients are insured. You don’t want your loss record or experience modification ruined by taking a hit on a claim for an uninsured sub. If you protect your loss record by only doing business with insured subs, this will translate into long-term savings with both a lower experience modification and more scheduled credits being applied to your policy.
Excluding Owners From Coverage
Owners of building companies often exclude themselves from coverage under their own Worker’ Comp policy, especially if they’re classified under a more expensive class code, such as when they perform labor. Being excluded will reduce premiums as the owner’s payroll will not be included in the premium computation. However, it can be risky as important benefits that are provided under Workers’ Comp will be lost.
I would not recommend doing this unless the owner replaces the lost benefits with a combination of health insurance that covers on-the-job injuries, disability insurance, and life insurance. As a note of caution, you need to be careful if you’re covered on your spouse’s group health plan because such plans probably won’t cover your on-the-job injuries.
Residential Carpentry Classification Rules (Code 5645)
Residential Carpentry is an expensive classification code for a builder. For example, in South Carolina, one carrier’s current rate for Residential Carpentry is $19.51 per $100 or payroll but their rate for interior trim is only $11.26 and their rate for wallboard is only $10.21. The technical rules published by the National Council on Compensation Insurance, which most insurance carriers follow, say that all carpentry including framing, siding, interior trim, roofing, wallboard, and hardwood floor installation must come under the residential carpentry class code when performed by a general contractor at a worksite. Furthermore, the governing classification rule is responsible for dumping inside cleaning and yard debris removal into the residential carpentry classification in most cases.
Executive Supervisor Classification Rules (Code 5606)
This is a favorable class code for an owner of a building company because the cost is much less than the residential carpentry classification. The rules published by NCCI are a bit strict on when the executive supervisor classification can be used and the auditors from the insurance carriers often try to force what I consider to be true executive supervisors into the more expensive residential carpentry classification. Under the technical classification rules, an executive supervisor spends his day arranging for delivery of materials, scheduling of subs, and briefly visiting each job site no more than once a day to inspect the work of the subs. This is a brief summary and oversimplification of the rule, but I think you get the point. If you tell the auditor that your executive supervisor spends a lot of time on the job site and that he personally supervises the work, he will be reclassified as residential carpentry and this will cost you a lot of money.
Division of Labor Rules
The Division of Labor rules allow you to split out the payroll of an individual employee who performs more than one type of labor into separate classification codes. This can save money if one class code is less expensive than the other. However, your records must show the exact amount of hours and payroll allocated to each classification code. The auditor won’t accept a mere estimate on a percentage breakout basis. Also, be aware that you’re not allowed to split payroll for an employee into non-labor classification codes such as clerical, outside sales, driver, or executive supervisor.
Properly Collecting Certificates of Insurance
You must properly collect certificates of insurance from your subs in order to get credit for them and to not be charged after your audit. If you collect a problematic certificate of insurance, your auditor can refuse to give you credit for it and charge for the use of an uninsured sub. Furthermore, you may find it impossible to get reimbursed by your sub after the fact. This can be very expensive.
Properly Deducting from Uninsured Subs
You must know how to properly deduct or withhold from your uninsured subs in order to recoup the cost of providing their Workers’ Comp insurance. There are several rules about labor vs materials that you need to be aware of to properly deduct. For example, you always want the invoice to break out labor vs materials so that you are charged only for the labor portion. However, if the invoice does not break out labor and materials, auditors have wide discretion in determining the labor charge. Most will assume that 50% or more of the total amount is attributable to labor. However, if heavy equipment is provided as part of the job, the auditor may assume that only 33% is attributable to labor. Your insurance agent should provide a withholding sheet that indicates the proper rate to deduct for each classification of uninsured sub. We’ll also devote a later video to the topic of how to properly deduct from uninsured subs.
Worksite Safety Program
Builders must have a no-nonsense attitude toward workplace safety. One of the best ways to show this to your employees and subs is through a formal, written safety program. One of the best resources that I’ve found is the risk management section of the Builders Mutual Insurance website. This resource has all the specialized information you need to easily customize your own program. It includes a safety program template, safety checklists, and important forms.
The attitude of the builder towards safety can have a profound impact on preventing claims. And remember, just several small claims can jack up your experience modification factor, resulting in other loss of credits or discounts from your carrier upon renewal. Even worse, you can find yourself in a position where no insurance carrier wants to voluntarily write your coverage and you can be forced into the state assigned risk pool. This in itself will result in rates that are at least 25% higher in most cases.
Managing Open Claims and Claims Adjusters
It’s important that you take an active role in managing your open claims with your claims adjuster. The typical claims adjuster juggles hundreds of claims, so you need an aggressive follow-up strategy when you have an injured worker who is out for an extended period of time, especially if a worker is “milking the system.” You should require that your claims adjuster keeps you informed about how the medical treatment is progressing and inquire about strategies and timelines in bringing the claim to the quickest and least expensive conclusion. The old adage about the squeaky wheel getting the grease is true when it comes to making sure that your claims get priority attention. Many state Workers’ Compensation commissions offer excellent one-day courses to employers on the claims process, and this knowledge will help you to better manage your claims adjuster.
Verify Experience Modification
As we’ve already discussed, verifying your experience modification is extremely important since over 50% have errors, most in favor of the insurance carrier. This verification is not something that most insurance agents are going to automatically do, so you need to take an active role in this process to manage your insurance agent on an annual basis. And remember, you must set a reminder for 6 months prior to your renewal date to review all open claims with the claims adjuster to see if any have been recently closed or if they are getting ready to have a reserve takedown. Any such takedowns must be reported to the rating body four months prior to your renewal date to be taken into account on your experience modification.
- Drug-free workplace credits may be available in exchange for the implementation of a formal drug-free workplace program. The insurance carriers usually don’t offer this credit for builders that are general contractors due to the near impossibility in enforcing these compliance requirements on the subs. In addition, you need to take into account the costs to implement and administer the program.
- Deductible programs may be available that result in small discounts on your overall premium in exchange your taking on certain out-of-pocket deductible amounts. However, very few builders opt for deductible programs because the discounts tend to be very small in exchange for the risk that must be assumed out of pocket. For example, in South Carolina, a $1,000 per claim deductible only results in a premium discount of 3%.
- Insurance carriers have the ability to give scheduled credits on a discretionary basis to policyholders who exhibit excellent loss records, have low experience modifications, and documented management controls such as safety programs. The insurance carrier underwriters are not always willing to give these discretionary credits and tend to reserve them for larger accounts or for when there is a lot of competition in the market place.
- Do business with an insurance agent who specializes in insuring builders. An insurance agent who has a large book of builder business should represent several carriers that will offer you options. No one insurance carrier can meet the needs of all builders. At different points in time, different carriers run hot and cold on their competitiveness. A good agent will keep you informed about what is going on in the marketplace for builder insurance and will offer a renewal quote with a different carrier if your carrier is no longer price competitive.