General liability insurance protects a company’s assets and pays for obligations. For example, it covers medical costs incurred if someone gets hurt on your property or when there are property damages or injuries caused by you or your employees. Liability insurance also covers the cost of your legal defense and any settlement or award should you be successfully sued. Generally, these include compensatory damages, non-monetary losses suffered by the injured party, and punitive damages. General liability insurance can also protect you against any liability as a tenant if you cause damage to a property that you rent, such as by fire or other covered loss. Finally, it can also cover claims of false or misleading advertising, including libel, slander, and copyright infringement.
Getting liability insurance is a wise investment that doesn’t cost much – annual premiums could range from $425 and up on your line of business and coverage needs. That’s certainly a lot less than the thousands, if not millions, of dollars you may need to spend fighting your case in court. General liability insurance can be purchased on its own, but it can also be included as part of a Business Owner’s Policy (BOP) which bundles liability and property insurance into one policy. If you have a BOP, check it to see what your liability coverage limit is. You may find that it is quite low, in which case you may need additional coverage through a separate policy. There are specific liability products catered to contractors that you can add some tools and equipment coverage making it into a BOP that costs the same if not better than just getting liability coverage by itself. The coverage you need depends on the type of business you are in and the perceived risk associated with it.
How general liability insurance works is the same as many insurance plans, your general liability policy will outline the maximum amount the insurance company will pay against a liability claim. So, if your small business gets sued for $250,000 for medical costs associated with an injury caused by a worksite hazard, plus an additional $100,000 in legal fees, but your coverage maxes out at $300,000, then you are responsible for paying the difference of $50,000. If you are on the higher end of the risk scale and already have general liability insurance, you can also opt for umbrella insurance that increases your coverage limits. This will cover you in situations in which you’re worried that your existing coverage won’t cover all your costs should someone file and win a claim against you. The most commonly asked limit we have found is $1,000,000 per occurrence with a $2,000,000 aggregate.
If an incident occurs that may lead to a claim, you should notify your insurance company or agent immediately. Be prepared to explain what has happened in detail including the time, date, the names of any witnesses, and any other pertinent information.
Remember General Liability Insurance just like all other kinds of insurance are designed to help you in a time of need. Make sure you review your policies with your insurance agent on a regular basis. This can help you make sure you are up to date on coverages and that you have the limits that best suit your business. This is important because your business has probably changed a great deal from the first time you took a policy out when you open your doors.
What Type of Building Do I have for Insurance Purposes?
This is a question that will be asked of you by insurance agents and loss control professionals with insurance carriers. It is important that you understand why they are asking and how to determine what type of building you have for insurance purposes.
Let us first look at how to determine what ISO construction class you are in. All buildings must be classified into one of 6 construction classes which is broken down for you below. Classification is based on 2 factors.
The first is Building Elements. This is the materials used in construction of your structure. Examples are wood, steel, or masonry. The areas that are looked at be built with these materials are the structural frame, interior and exterior load bearing walls, interior and exterior non load bearing walls, floor construction, and roof construction.
The second factor is Fire-Resistance Rating. All the building material used in construction has a rating which means the time it stands up to a fire and how quick it spreads to other areas. Your building is going to be rated by the weakest aspect. For example: if you have a wood roof vs a metal roof you would be rated in a higher premium bracket due to the fire rating of the wood material used to build the roof. Wood burns quicker and does not contain fire like metal.
In summary to determine the ISO class we must know what type of roof, floor, walls, structural frame, and fire rating of building materials. Now let’s determine which class you may fall into.
ISO Class 1 is Called Frame. This is one of the most common classes used in construction. You will have wood walls, brick veneer (single layer for appearance only), stucco, and a wood roof that is not typically anchored. Primary examples of this class would by a residential home or offices that may have been converted from homes to commercial locations.
ISO Class 2 is Called Joisted Masonry. This class consist of concrete or cinder block load bearing walls. Could have structural brick along with a wood roof. The roof in this class is also typically not anchored. Examples of this are residential homes but also single story office building locations that do not have flat roofs. Main difference between this and Class 1 Frame is the increased amount of concrete, cinder, brick for load bearing and structural purposes whereas frame uses wood for these areas.
ISO Class 3 is Called Non Combustible. Construction of this type of structure will contain a minimal amount of wood. Load bearing walls will be brick, stone, concrete tilt up, or metal. Frame is generally steel. The roof is a steel deck which is flat or has a slight slope. Roofs could also be metal. The roof is anchored to the structure with metal bolts. Examples of this class would be warehouses, storage facilities, and manufacturing plants.
ISO Class 4 is Called Masonry Non Combustible. This structure is a class above ISO Class 3 because it reinforces its load bearing walls. They are usually tilt up concrete, precast concrete masonry, or concrete blocks on steel. The roof systems are steel decks, poured structural concrete on steel decks, or metal. The roof is also anchored by metal bolts. Examples of this class would be schools, shopping centers, outdoor malls, and warehouses, etc.
ISO Class 5 is Called Modified or Semi Fire Resistive. This class has semi wind resistive walls made out of protected steel or precast concrete tilt up. The roofs are similar to class 3 and 4 in which they are a steel deck or poured structural concrete. The roof is anchored by metal bolts. The heavy construction nature of this structure makes leads us to examples such as high rise office buildings.
ISO Class 6 is Called Fire Resistive. This is the strongest class possible. Walls are concrete, very well protected steel. Floors are 4” cast in place concrete, precast concrete or protected steel. The structure is wind resistive. Roofs are poured structural concrete and anchored by metal bolts. Office buildings are another example of this class along with parking garages.
The key thing to remember in determining your building class is you are only as strong as your weakest element. This is a quick overview of the classes and if you are looking for more details or have questions than reach out to your agent or insurance carrier and they will be able to help you out.
Risk mitigation standards to keep in mind when using Subcontractors:
The topic of subcontracting comes up in several scenarios when it comes to small businesses, especially contracting and construction. This topic can bring up many questions from a legal, tax, and insurance standpoint. I’ll leave the legal and tax part to your Attorney and CPA. Here we will discuss, from an insurance standpoint, how to protect yourself and your business.
Subcontracting in the perspective of 1099’s vs W-2 employees is generally a very grey area with most contractors. It does not have to be. Here is why. Working with your independent insurance agent should allow you to determine if your employees truly are 1099 or traditional W2 employees. Many business owners think they have contractors, but to the letter of the law the workers are employees and require your business to cover them under a workers’ compensation policy. When it comes to General Contractors and those who have true subcontractors working for them, you still need to make sure you are protecting yourself.
Most business owners have chosen to utilize subcontractors for a combination of the following reasons: a specialized trade your business does not primarily do, the contractor is brought in for a specific job for a specific purpose, & this person or company you have “hired” is not an employee so you are not providing any typical employer benefits and it is your intent for them to cover their own business liabilities on their own in hopes of taking this off of your company. At least partially take this risk off of your company. When it comes to managing your risk, many business owners wonder, am I doing everything I can to mitigate these risks? There are many benefits of subcontracting work out, but if not done properly you are opening yourself and your business to a significant amount of liability. This liability could be costly, even detrimental to your business.
Here are a few basics requirements that you will want to make sure you verify with all of your subcontractors before they step onto your jobsite:
Confirm proof of Basic Insurance Coverages:
General Liability: (Common Limit Amount $1Million Per Occurrence/$2Million General Aggregate) This coverage varies from company to company, but the basic coverage is intended to protect from damages to 3rd parties as a result of the business operations for the company being insured. So if your subcontractors work operations cause physical damage or bodily injury to someone (excluding employees). This policy is a basic protection to cover those types of damages. For most artisan subcontractors we typically recommend a minimum limit of $1 Million per occurrence with a $2 Million General Aggregate limit.
Workers Compensation: This coverage is intended to cover medical expenses and a portion of lost wages for injuries incurred on the job for employees working for the business. This in particular is commonly overlooked since many subs are owner only companies, however if that owner only company despite not being required by law to carry workers comp gets injured on your jobsite you could see some liability for that. Making sure they provide a certificate of insurance to protect yourself. (Please note: current insurance certificates also point out if any officer the company are excluded from coverage; if you have a sub that does not have employees and they are excluding themselves then their coverage might not be sufficient to protect you)
Commercial Auto: (Common Limit amount ($1 Million) With some projects there are many vehicles used in the course of the operation. Whether going from one jobsite to another but also going to pick up supplies. Making sure your subs have Commercial auto liability coverage. At least making sure Hired/Non-Owned Auto endorsements are added to their General liability/BOP policy can be a minimum coverage to consider if they truly don’t have any vehicles.
Umbrella/Excess Liability Policy (amount needed will vary): Umbrella limits to increase the liability limits can be important especially depending on the size of the project and how many contractors your sub works for, a standard $1M/$2M General Liability Limit might not be sufficient. The reason for this is a $1 Million Occurrence limit on General Liability means the most one claim would pay is $1 million. If a sub has 2 claims of that amount, then they do not have any more coverage as their limits have all been used up on a $2 million General aggregate limit. For a small contractor having a $1 Million-$2 Million excess liability limit can be a good buffer to extend that, however for larger contractors this can easily go up to $5 Million or $10 Million and sometimes even higher.
If a subcontractor is doing major projects for you and several other general contractors but doesn’t have higher limits, one or two major claims could potentially wipe out their insurance limits leaving no coverage for the remainder of a policy period. If you have several projects that are total over the subs limits or if you have a multi-million-dollar project, the liability limit of some subs might not be to the level they should be at in the event of a catastrophic claim especially.
Waiver of Subrogation & Additional Insured: Additional Insured wording for the General liability and Commercial auto coverage and Waiver of subrogation on all three lines of insurance are two good ways to keep your company further protected as the General Contractor. An additional insured endorsement adds certain protections to the Additional insured for jobs the sub works on for you and the waiver of subrogation protects you from the subs insurance company from going after your company for damages. Keep in mind, these are sometimes put on a blanket or individual basis. The blankets in particular typically require a Written Contract between you and the subcontractor. Which leads me to….
Have a Written Contract: This day in age there is no good reason not to have a written contract of some sort for business conducted, especially in the construction field. Too many things can go wrong so it’s best to have a written contract. Especially on that has a Hold Harmless Agreement, insurance requirements with the above minimums and including the Waiver of Subrogation & Additional Insured requirements for applicable policies. There are many samples of contracts you can find online, as always, check with your attorney to make sure it has everything you need as well.
Screen Certificates of Insurance: In a time where insurance policies can be very costly, some sub-contractors do try to skirt the system. Fraudulent certificates of insurance whether they are for policies that never existed or for policies that have expired and the sub altered the dates these do unfortunately happen. The best way to keep from becoming a victim of this is to have certificates of insurance sent from the subcontractors Insurance Agent and make sure you are listed as a Certificate Holder. This way their agent will be able to let you know if a policy is cancelled before the expiration date.
These are just a few basics policies you will want to make sure you require from your subcontractors. Consulting with your Insurance Agent and your attorney can be best practices to make sure you doing everything you can to protect yourself. and your business.
Fraudulent Workers Compensation Claims – How to Defend Against Them
Over the course of 10 years writing workers compensation insurance, throughout the country a very common conversation I have with business owners is “that claim was fraudulent”. For the most part the explanation I am given seems correct, but the story is only one-sided. For that reason, how can I fully agree with the business owner. Fraudulent or not, workers compensation claims cause the overall cost of the coverage to increase almost immediately for the business owner.
One solution rarely thought about is requesting your company loss runs periodically throughout the year. Some business owners are so disconnected from their employees that claims are filed without the business owner knowing what really happened. I have personally insured a business that suffered a $180,000 fraudulent claim and the business owner didn’t realize the injury was serious. Certainly not serious enough to amount to $180,000 in medical costs, compensation and the attorney fees. From my perspective I have to ask: How do you not realize a fraudulent injury occurred, that has a large effect on your insurance cost, until the increase happens? As a business owner, by requesting your loss runs periodically you can monitor 2 very important things. 1. Which employee filed a claim? If the claim is fraudulent then you can catch it early enough to attempt to fight the claim being paid. 2. Has the insurance carrier properly closed the claim? When claims are “open” the insurance provider typically sets aside an amount in a reserve account. This amount is for just in-case the claim pays more. For example, if someone hurts their back, goes back to work and re-injures their back. This is what the reserve amount is for. The reserve amount counts against your claims history until it’s closed.
Another solution is having the same supervisor, foreman or key employee being responsible for handling all claims. One of the best solutions I have ever heard was a nursing home. This nursing home required all injured employees to report to their claim to one supervisor. That supervisor was required to write the report, drive the employee to the doctor’s office and listen/report the information relayed to the doctor by the injured employee. By doing this the story has been told twice with the same details and reported by the medical professional within their file. Almost all of us have smart phones that allow the supervisor and employee to take pictures or video the interview if needed.
The easiest solution to avoiding fraudulent claims is creating a safe work environment. Safety within the workplace and enforcing those requirements are the easiest way to avoid claims. A great first step is to have the business owner, supervisors and key employees almost always present when the employees are working. As the business owner you need to show the employees you care and appreciate them. Reward employees for long periods of time where 0 claims occur. If at all possible, develop a return to work program. By creating a return to work position, with light duty the employee is motivated to return to work quicker and reduces the overall cost of the claim. Your workers compensation provider can assist with setting up a return to work program. Ask them for assistance and documentation for setting up a program, make sure you input into your employee handbook.
So you have decided to (or maybe you are still considering) taking a leap most of us only dream of. That leap is to start your own business. Perhaps you have worked for someone else in your trade for several years and want something of your own. You may be fresh out of school (or still in school) and want to get started early. Maybe you just have a unique opportunity to start your own business. If this is you than you are probably looking at what you need to start:
Start up capital
These are things all first time business owners are looking for. One thing many new businesses put off until last moment is insurance. You will spend thousands of dollars just to start up your dream of owning your own business; you don’t want one accident to take it all away from you. Below are several insurance policies that can protect you from claims that could easily ruin your dream of owning your own business. Here we will go over the basic areas that you want to look at for starting your own business, and when you want to start looking.
First, Why is this important? Claims with new businesses can be more devastating for a few reasons.
The controls that are in place to prevent/reduce the extent of claims/liabilities are less established. Many of these types of firms can be started in a home office.
New businesses are many times less defined in their operations, which can bring the operations in to areas the business owner may not be as familiar with. These areas they may not have as much experienced in. This can bring up more risks a
Some businesses do not have an established LLC or Corporation established. Regardless of the insurance policies you have, it’s important to work with your attorney and CPA to make sure you choose the business entity type that works best for you. This separates your business liabilities from impacting your personal assets. It is bad enough if the incident you could have protected closes your business, but it is a much worse situation if the same incident causes you to lose your house or your savings.
Here are a few policies we recommend you start out with pretty early on:
Commercial Auto – Commercial auto is a topic in itself and oftentimes one of the most overlooked policies by a new business owner since many people just use their personal auto’s and don’t see this as something they need. This might not be the first new policy you look to get, it should be the first insurance policy you likely already have that you will want to look at changing though. If your using your personal vehicle for business purposes, at the very least you want to make sure your agent and insurance carrier is aware of that and that you have business use on your policy, upgrading your personal auto policy to a commercial auto policy might be a couple bucks more, but in many cases the difference is a lot less than you may expect, plus, a less expensive policy that doesn’t cover what you need isn’t really that valuable anyway.
General liability – Starting a business, general liability is the first policy most companies look for. If you’re a retail store its sometime referred to as “slip and fall coverage” to cover liability from bodily injury on your premise. Keep in mind, some of these policies only do that and might not cover all/any off premise damages. These policies come in a variety of forms and coverages and the pricing typically reflects that, that’s not also to say you cant shop to make sure you’re getting the best value. This for some business types can be packaged into a Business Owners Policy that can cover property and other additional coverages your company needs like Data Breach, EPLI and Hired/Non owned auto liability.
Workers Compensation – For starters let me clear a couple things up first: Workers Compensation is not automatic; it’s not something automatically gets taken out of payroll without you getting a policy in place first. This policy covers employee injuries when hurt on the job for medical expenses and a portion of lost wages. For some high risk businesses like heavy manufacturing, construction and transportation this can be one of the most expensive and hardest policies to get competitive quote’s on and can be frustrating for businesses owners that just want to buy the policy. The key in the beginning is getting a policy in place, pay your bill on time, and keep continuous coverage. Once you have a prover record, especially for 3 years with coverage in place the market is a lot easier to get coverage for companies that have established. If you are a labor intense business the pricing can seem very high, the expense for covering a claim out of pocket, and fines from many states can be just as expensive if not more than your premium would be anyway. This normally isn’t needed until you hire an employee, but sometimes contracts can still require it which can open up more business opportunities for your company.
Professional Liability – For some companies your biggest risks aren’t necessarily a customer slipping and falling, or an employee injuring themselves. Many professional firms have what can be equally as damaging of risks to them. The obvious ones are your Physicians Medical Malpractice, your insurance agents and accounts have Errors and Omission’s insurance to cover mistakes or professional errors made. Little mistakes can make huge claims but there are some companies you don’t think of needing this like Printing companies, Website Developers, IT Companies, Bookkeeping and Marketing Firms. Website Copyright infringement, or a faulty code in a software program that causes a glitch or even worse a breach could be a huge expense and could mean huge liability on your company.
Every business owner is worried about protecting what they own. The property you own can be devastating if its lost, damaged or stolen. However, the liabilities you take on during the everyday course of your business operation can be even worse and costlier. Even if you don’t own any property. There are insurance policies to cover the obvious, but also many things you wouldn’t think of. If there is a chance of an injury, fire, something stolen, or decreasing in value for something other than every day wear and tear (heck maybe there’s a policy for that too) there is likely an insurance policy for it. Working with a Professional Insurance Agent that can give you options and help guide you on the coverages that would be most important to you.
Four things to remember when purchasing Inland Marine Coverage.
Inland Marine Coverage is frequently referred to as ‘Floaters’ or ‘Equipment’ Coverage. That is because it is designed to protect equipment that a business owns, leases or rents that is not a vehicle or a piece of property. It is also typically equipment that is going to be transported in some way shape or form. This can include a mower that a landscaping business is transporting to a clients premises or a product being delivered to a customer. Many business owners think this part of their business is covered by their basic general liability policy, but that is incorrect. If they partner with a good insurance agent they know what is and what is not covered by each of the policy they may or may not be purchasing for their business. If you find that inland marine coverage is right for your business, here are four things to keep in mind in relation to this policy.
Choose an agent who partners with many carriers and not just a select few.
Determine the proper classification code for your business.
Inventory all equipment that needs to be protected under the policy.
Establish a good working relationship with your Insurance Agent.
Choose an agent who partners with many carriers and not just a select few.
By choosing an agent who partners with many different carriers you are allowing yourself to let the insurance agent shop the policy for you. Some agents work with only one carrier or just a select few carriers. This means they are not able to make sure you are getting the absolute best coverage at the best price. You can always shop the coverage around to several agents, but wouldn’t your time be better spent running your business. Finding an agent you trust and who knows your industry well can allow you to let the insurance professionals do their job. It allows you to get back to doing what you do best, which is running your business.
Determine the proper classification code for your business.
Most industries have several classification codes within the industry. Insurance agents and insurance carriers are in the business of analyzing risk. It is in the best interest of their business to always assume more risk until proven otherwise. If you are in a less risky classification code within your industry the agent and carrier are only going to know this if you bring it to their attention. Otherwise they will probably assume your business takes on more risk. This will result in you paying more premium and may cause some claims to not be covered. Now, these mistakes typically do get fixed at the end of term audit, but even when they are fixed you still have been tying up cash into premium you did not owe that could have been used to reinvest in your business. In some cases if you are classified into a less risky class code you will owe more in premium after the audit. In the worst case scenarios your claim may not be covered because you are misclassified and the carrier would not have offered coverage in your higher risk class code.
Inventory all equipment that needs to be protected under the policy.
It is very important to keep an up to date inventory of all the equipment you want listed under your Inland Marine Coverage Policy. Taking pictures of the equipment is a good idea as well because if there is a claim you will get replacement level value for the equipment that is damaged or destroyed. If you have an expensive version of whatever piece of equipment you are covering the best way to prove that is with a picture. Keeping this information on file with your agent and especially your carrier is crucial when a claim does occur.
Establish a good working relationship with your Insurance Agent.
The better relationship you have with your agent the smoother the process will be when you go to renew your policy and when a claim inevitably does occur. If they know you, your business and what is important to you as a business owner they can better insure your business the way you want it to be protected. Some business owners are okay with excepting some of the risk. Other business owners want to be protect to the fullest limits of the policy. The agent can only attempt to cover your business the way you want them to if you let them know what you expect and how you run your business. This relationship can also come in handy when a claim does occur. If you were combative during the quoting process and then your business has a claim six weeks into your term it does not speak highly of the way you operate your business. On the contrary, if you take some extra time to explain all the intricacies of your business and the way in which you want to be insured during the quoting process it starts off the relationship on the right foot. Later when a claim does occur this process will move through much more smoothly and your agent will be much more likely to go to bat for you with the insurance carrier.
Hard market and soft market are terms you may have heard before and they generally are categorized this way due to premium trends on commercial insurance. We will discuss in more detail below but the main difference and what really dictates them are industry wide or catastrophic claims for insurance carriers across the board. In layman’s terms, a soft market has loosened underwriting restrictions and lower premium. A hard market is just the opposite. Currently the industry is in a Soft Market.
Lower insurance premiums
Reduced underwriting criteria, which means underwriting is easier
Increased capacity, which means insurance carriers write more policies and higher limits
Increased competition among insurance carriers.
A soft market can affect a carriers’ bottom line due to lower rates. A carrier relies on a combination of insurance premiums and investments to make money as a company. This is an area to watch when carriers get downgraded by AM Best because it’s generally due to bad investments and bad decisions on what business to write.
Higher insurance premiums;
More stringent underwriting criteria, which means underwriting is more difficult;
Reduced capacity, which means insurance carriers write less insurance policies;
And less competition among insurance carriers.
Are we moving towards a hard market?
Mother Nature and the effects of the economic downturn have been the main causes for change in the insurance industry over the last 18 months prompting some to think we are in or heading towards a hard market. In addition, there are two other areas that can affect business insurance premiums – payroll and revenue. As companies began experiencing a decrease in revenue, employees are let go. Both their payroll and revenue are now lower, which means a decrease in premium to the insurance carrier. This is another way in which the carrier is losing money due to the economic downturn.
What can we expect from insurance carriers during a hard market?
During a hard market, underwriting gets tougher and more stringent. Meaning they are not as likely to quote a business with low payroll or in a risky class code. With each year, underwriters are becoming more sophisticated. They are looking more closely at losses, safety records and financials. Those in the industry are seeing insurance carriers dig deeper into a company’s financials than in the past. Rates will vary from carrier to carrier and will depend on a business’s inherent risks, claims history and finances. This is why it is important to always being looking for the best price + carrier you can find on a regular basis. Whether that is every year or every couple years you should always make sure that they are earning your business.An independent agent who partners with several carriers can help make this task easier for you as a business owner.
What you can do in a hard market when you are seeing rates increase?
While you will most likely need to be prepared for some rate increases due to the insurance industry’s hard market, there are several things you can do to help minimize the impact until the cycle turns back to a soft market:
Because the market and underwriters are becoming more restrictive, it is imperative that as a company you are more involved with your safety programs.
Take a more active, strategic approach to managing your company’s risks and claim activity.
Start your insurance renewal process earlier. Some carriers want at least 30 days to quote your business. Starting 60 to 90 days before your term ends can really help this process.
Be even more cognizant of your company’s financials – most insurers are looking at whether bills are being paid on time and many carriers are using third party companies to conduct credit scores.
What is the exclusive remedy for risk management and small business professionals? In the world of insurance, the term ‘exclusive remedy‘ refers to the workers’ compensation system. These systems are administered by the sate governments of each individual state, not the federal government. In most states, this grand bargain began around 100 years ago. It was an agreement between employment and labor during a time when many employers severely abused the rights of workers. As a result of these abuses, many workers were beginning to unionize. In an attempt to keep both sides happy, most states created a workers compensation system to deal with both medical benefits to employees and protection from most lawsuits for employers.
These workers’ compensation systems are administered by each individual state and not the federal government. Because of this, each state provides the system a tad bit different. Wisconsin was the first state to administer a workers’ compensation system in the year 1911. Mississippi was the last state to come around to the exclusive remedy in 1948.
The term ‘exclusive remedy‘ came about because the benefits that are provided under the workers compensation system are supposed to be the sole remedy available to employees injured on the job. The benefits to employees are, they have the confidence to go to work knowing that if they are injured on the job they will have their medical costs covered and some lost wages. Employers benefit from the system by having most lawsuits taken away for injuries that occur as a normal part of business operations. Businesses are not covered for injuries that are caused by the intentional actions of the business and its management. This includes decision-making or neglect by the business to operate the way in which they do business in safe conditions.
As time has passed and work environments have changed so has the opinion of many in the business community about the need for an exclusive remedy in todays’ business climate. A few states have removed workers compensation as a requirement for some types of businesses. A few other states have proposed the idea, but are still in a wait and see approach. At this time Texas and Oklahoma re the only states to implement what is referred to as an Opt-out program. This is a program where if the business qualifies they can elect not to carry coverage and provide an alternative to what most states give through the workers comp exchanges. Both have in place certain minimum standards that are similar to those standards required under most workers compensation systems. Opponents of these system frequently critique that there are very strict reporting policies put on the responsibility of the employee. In the system set forth by Oklahoma employees must report the injury to management within 24 hours or they may not be eligible for coverage. Most states are sitting in a wait and see approach and depending on the success or failure of these states will determine the future of the workers’ compensation system.
This past week, the California Department of Insurance announced its approval for a 9.5 % reduction for rates on workers’ compensation premium for the state fund. This is good news for business owners within the state of California. It could also have ramifications throughout the California Workers Compensation Market across the country. Three things in-particular could impact the workers compensation market. Those three things are: Carriers on the open market will have to change their rates in the state to remain competitive against the state fund. Business owners who have less than favorable loss runs will be even more encouraged to control the frequency and severity of claims in order to take advantage of even lower premium on workers comp premium. Other states will be waiting to see if the rate reduction encourages businesses to continue to have a focus on safety and the rate of claims continues to lower. If this occurs than you can expect other states to follow-suit.
Carriers on the open market will have to change their rates
The main reason for having a state fund within the workers’ compensation system is to prevent carriers from charging outrageous rates on premium. When instances like this occur (Claims Costs throughout the state have gone down) the state fund lowers the rates to reward businesses for their actions. This will cause carriers on the open market to lower their rates in an attempt to remain competitive. It is in the carriers best interest for claims to be low. The less claims in an area means less claims the carriers have to pay for. If claims are low they in theory should be able to charge less in premium and still be able to turn a profit. In another state where claims are extremely high they will be forced to raise premium rates in order to deal with claims they are having to pay for. The amount the carriers lower their rates may not be directly proportional to the 9.5% reduction by the state fund, but rates should lower significantly on the open market.
Business owners will be encouraged to get their loss runs under control
The reason for the drop in rates is because of a drop in loss runs throughout the entire state. If people within the state fund see the benefit of lower rates on premium they will have even more motivation to fix whatever it is about their business that causes them to have to buy work comp coverage from the state fund. In many cases the reason for this is because of a lot of claims that caused their experience modification rating to be too high to find adequate coverage on the open market. Premium rates on the open market are significantly lower than rates in the fund.
Other states will pay attention to see if the rate reduction encourages businesses behavior.
This action is rewarding businesses for a reduction in claims in the state. If this action makes the loss claim continue to fall, than other states will more than likely follow suit. If the loss runs again rise, many states may interpret that as the lowering of rates did not positively effect behavior. That being the case they probably will not lower the rates in their state if similar circumstances exist.