Why Do Work Comp Rates Vary From State to State?

Citizens of the United States enjoy a very high quality of life. According to a 2016 Business Insider Article, Americans enjoyed the 9th highest quality of life of any country in the world. Workers’ compensation coverage is a huge contributing factor to this quality of life. A strong workers’ compensation system provides the ‘exclusive remedy’ that helps prevent litigation between employers and employees when accidents happen on the job. When a strong Workers’ Compensation System is in place, employees are guaranteed some wage replacement while hurt and not able to work. Employees also receive payment for all medical expenses as a result of injuries that occur as a part of normal business operations. In turn, employers can rest easy knowing they will not be held liable for employee injuries, except in circumstances where the employer intended to cause the injury or was willfully negligent.

In the United States, Workers Comp Laws are left up to the state governments. In most states, employers are required to carry workers’ compensation insurance. There are a few exceptions to that rule, but for the most part all employers are required to carry some baseline coverage to protect their injured workers. There are many things a state government must do to administer a workers compensation system. The two main things states do that can effect price are; determine a process for assigning rates on industry class codes and provide employers with a provider of last resort (state fund or assigned risk provider).

Provider of Last Resort

Rates can be strongly impacted by the strength of the provider of last resort. This is frequently referred to as the state fund or the assigned risk provider. The assigned risk provider is offered to employers who cannot find a carrier to offer them coverage on the open market. The business may not be able to find coverage on the open market because of their past claims history or because they operate in a high risk industry. How well the state goes about setting up this relationship goes a long way towards determining the rates employers pay for coverage in that state.

There are three main ways states go about providing this service.

State provided fund
Public-Private Partnership
Partner with an outside agency

The Workers’ Compensation Fund of Utah (WCF) and The California State Compensation Insurance Fund (CSCIF) are two examples of states who provide their own fund. These two states area good comparisons to show how rates are affected by either a strong or weak state fund. In Utah, The WCF has a 57 percent market share while the next largest provider owns only a 3 percent share of the market (2). In comparison, The CSCIF controls just over 11 percent of the market compared to just under 10 percent for the next largest provider. As a result, Workmans Comp Utah has rates that are 107 percent cheaper compared to California. This is not the only contributing factor to the discrepancy in prices, but it goes to show how drastic an impact a strong state fund can have. Now in California’s defense, the Gross Domestic Product (GDP) in Utah is nearly 1.7 trillion dollars less than California (2). That is another huge factor driving up prices in California.

Another factor impacting rates on workers’ compensation insurance is how a state goes about determining rates on all the different industry classification codes. There are two ways states can go about providing this service. They can provide their own rating bureau or they can partner with an outside agency to do this in-depth work. Most states partner with the National Council on Compensation Insurance (NCCI) for determining rates on class codes. A few states have an organization that is part of the state government who determine rates.

Determining Rates on Class Codes

New York and Arkansas are two contrasting states that are a good example for how these different approaches can effect the rates on workers comp coverage. New York has its own bureau, The New York Compensation Insurance Rating Board (NYCIRB) while Arkansas outsources these duties to NCCI. As of 2014 Arkansas has rates on Workers Comp Coverage that are 90 percent cheaper than those rates in New York. Now again in defense of New York, it does have a GDP that is just under a trillion dollars more than Arkansas. That is a strong factor contributing to higher rates, but so is the fact that New York does not use NCCI to determine rates. Typically states who have their own bureau have higher rates across the board. In most cases, NCCI is better at doing this task than the states are themselves. The one exception to this is the state of Indiana. Indiana has their own state rating bureau, but enjoys some of the lowest rates on workers comp in the country.

In both of these examples the larger states have different ways of going about administering their workers compensation policies. These different ways contribute to escalating rates on workers’ compensation insurance. Now part of the reason for them doing things differently might be the vast size of the economies in these state’s. They may not be able to outsource this job for an economy in the trillions of dollars where as another state may be able to outsource more easily because their economy only amounts to 100 billion. Both of these examples do show how the strength of the state fund and how efficiently a state determines rates can drastically effect the amount employers pay for workers comp coverage.

These factors are two of many factors that can have a huge impact on rates employers pay for workers comp coverage. This is why it is immensely important to consult with an insurance industry professional when quoting a policy. It is also important to quote with agencies who have access to many different insurance carriers within your state. The more carriers your agent can get a quote from, the more likely your businesses is to get more comprehensive coverage and lower rates on premium.

Underwriting and What It Means to You

I have taken many calls from business owners in search of Work Comp. I would like to say that I have always been able to help. One common exception is when a business can only purchase coverage through the assigned risk pool and the truth is there are many businesses who have no other option. Assigned risk is outside the volunteer insurance market. Underwriting these industries is risky for the carrier and that makes it extremely difficult for an agent to find a carrier willing to quote the business.

Insurance agents typically interact with a minimum of 20 workers comp clients per day.

What ultimately puts a business into the assigned risk pool is what is called, underwriting guidelines. What can sometimes be a hurdle is explaining to potential clients that I am not the underwriter. I ultimately do not have the say on if a carrier will take on a particular business (risk). What makes a business a “risk”, whether it be a high risk or a low risk, is determined by the underwriter with the insurance carrier. There are many factors that determine if an insurance carrier will take on the risk of you and your business.

Insurance Underwriters research and assess the risk each prospect presents. Get all of your questions about underwriting answered at myinsurancequestion.com

Underwriters also research and assess the risk each prospect presents. This helps to create the market for securities by accurately pricing risk and setting fair premium rates that adequately cover the true cost of insuring policyholders. If a specific applicant’s risk is deemed to be too high, underwriters frequently refuse to cover it.

The most common reason a business is declined coverage on the open market is due to the business not having enough payroll for the exposure. Most construction businesses are going to need between $20 and $30k in payroll to be offered coverage by a carrier on the open market. Many of my potential clients ask me to just quote with $25k in payroll so they can get the policy they need. However, the policy will most likely be cancelled in a year due to not enough payroll or premium too small for risk.

The next reason for a business to be declined is because of 1099 or sub exposure. I should say that the amount of sub exposure to w2 employees makes a difference. Most carriers want no more than 20% of sub or 1099 employees. Just because a business has chosen to issue 1099 rather than W2’s does not automatically mean the employee is an independent contractor and should not have rights to work comp coverage. Many business owners assume that they do not have to provide coverage for the subs however if the sub or 1099 is not providing a Certificate of Insurance to the contractor or business owner, than the payroll will be picked up at audit. because of this the policy owner will owe in to the carrier for that employee. Ultimately what carriers worry about most with the subs is if there was a lapse of coverage the contractor would be on the hook for any claims that were to happen.

If I had to pick one other reason for a business to be declined coverage it is because of travel exposure. By travel exposure I mean using a vehicle to do work related to the business. Carriers deem this a larger risk because when the employees are driving there is a higher rate of claims and the claims tend to be more severe. It seems these days’ contractors need to go where the work is. If there is multi-state exposure where employees are traveling out of state or live near the border of two states, that is something that many carriers are not interested in writing. For instance, if a contractor sends 5 or 6 employees more than 50 miles away to do a job and they all ride together that is 5 or 6 claims that would have to be paid if they were all riding together and were injured in a car accident. Many employers think that while their employees are driving to work they are not covered under an employer’s work comp policy. That is accurate if you drive the same route to work every day and generally go to the same place every day. However, if you as a business owner send your employees on jobs that in tails driving exposure. The driving exposure is anything that would not normally be a part of everyday work. If the employee is solely driving for the reason of doing a job then the insurance carrier would indeed need to pay for the claims that arise out of a car accident.

Insurance is the most common example of underwriting that most people encounter. In order for insurance to work well, risk has to be spread out among as many people as possible. Underwriting helps insurance companies manage the risk that too many policyholders will file claims at once by spreading out the risk among outside investors. Once an underwriter has been found for a given policy, the capital the underwriter puts up at the time of investment acts as a guarantee that the claim can be paid. This allows the company to issue more insurance to other customers. In exchange for taking on this risk, the underwriter is entitled to payments drawn from the policyholder’s premiums.

Long story short the 3 reasons for businesses being declined by an underwriter are not enough payroll, too much 1099 or sub exposure and too much travel exposure. These risks are just a few that could result in your business being placed in the Assigned Risk Pool.

Construction Industry

Why is Workers Compensation Insurance so difficult to purchase?

The construction industry in general is very difficult to locate multiple options when quoting workers compensation insurance. A large majority of workers compensation providers do not have an appetite for small construction or high hazard construction businesses. These insurance companies feel the construction industry suffers too frequent and severe claims. Therefore, a lot of construction businesses default to the appropriate state fund or assigned risk pool for workers compensation coverage. The state fund or assigned risk is the most expensive option with the least flexible payment plan. It is simply not the best option. The state fund, also known as the pool or assigned risk, often becomes the only option for small businesses with a high risk and a low amount of revenue. When businesses travel into other states to perform work, there are additional difficulties if they are insured through a state workers compensation fund. In most cases this creates a gap in coverage when the employees are working out of state. Several state workers compensation funds do not extend coverage outside of that state. It’s best for business owners to contact their agent or the insurance provider to verify if coverage extends to the job site that is outside of the state boundaries.

Factors that cause difficulty for the construction industry to find workers compensation insurance quotes:

General Construction Services – not specializing in 1 or 2 specific trades. When a business does the same trade everyday the chances of a workers compensation claim is less likely. Construction businesses that perform multiple trades are more difficult to find multiple workers compensation solutions for.

Heights – historically workers compensation claims pay out considerably more when an employee falls from a height above 15 feet. Most workers compensation insurance carriers limit heights to 15 feet. Any heights slightly above 15 feet must show proper safety precautions taken. Business owners that require proper safety equipment to be attached and written procedures in-place for the underwriter to review generally are given more competitive options. It’s important for your insurance agent to give the proper information to the insurance company underwriter so they have a clear and comfortable picture. Most insurance agents do not take the time to gather the right information therefore the underwriter doesn’t feel comfortable and declines to offer coverage.

Unstable Industry – when the U.S. economy fell in mid-2000’s, the construction industry suffered the most. Workers Compensation insurance carriers who insure construction businesses suffered claims combined with reduced premiums paid by employers due to fewer employees. Insurance companies must be able to somewhat predict the amount of money they are collecting for each risk they insure. Businesses that produce a consistent payroll are easier to predict, businesses that process payroll randomly throughout the year are not, therefore less likely to have multiple insurance companies willing to quote.

Sub-contractors or 1099’s – construction businesses commonly use 1099 or sub-contract labor. Businesses do not specialize in some construction services that are connected to a job therefore must sub-contract to another business that does specialize in that service. The use of 1099 sub-contractors in this way is acceptable by most insurance providers as long as the business owner is collecting a workers compensation certificate of insurance from the sub-contractor. Businesses that choose to pay their labor by 1099 instead of w-4 are viewed negatively by workers compensation providers. Most workers compensation providers have a very limited appetite for businesses that use a significant amount of 1099 labor. If a sub-contractor fails to pay their workers compensation premiums and the General Contractor is not aware their policy cancelled, most likely the General Contractor’s workers compensation policy will be required to cover the claim. Therefore, Workers Compensation providers do NOT like a large sub-contractor or 1099 exposure even if certificates of insurance are collected.

20 terms you need to know when purchasing or renewing commercial insurance

For many business owners, purchasing insurance is a foreign concept. Like many industries there are terms only the insiders know and they frequently use when discussing the policies. Here is a list of 20 terms that will give you a leg up the next time you are purchasing or renewing your commercial insurance policy.

20 commercial insurance terms to be aware of the next time you look to buy small business insurance.

Insurer – a person or company that underwrites an insurance risk; the party in an insurance contract undertaking the risk to pay compensation.

Insured – a person or organization covered by an insurance policy.

Peril – the possibility that you will be hurt or killed or that something unpleasant or bad will happen. exposure to the risk of being injured, destroyed, or lost.

Premium – An amount to be paid for an insurance policy. It is an amount paid periodically to the insurer by the insured for covering their risk.

Deductible – A deductible is the amount you have to pay out-of-pocket before the insurance company will cover your remaining costs.

1st person liability – First person liability is for damage that is done to you or your business. A good example of this would be a commercial property insurance policy. This policy covers the damages to you and your property. It does not cover the damage to another persons’ property or if they are hurt on your property.

3^rd person liability – Third person liability is liability that you or your business has to other third parties. Third parties can include customers, vendors, other businesses or anyone who may be harm by the actions of you or your business.

Claims-made policy – A policy written on a claims-made basis means that if the insurance is in place when the claim is made, but not when the occurrence took place than the insurer responsible for the claim is the insurer when the claim is made. This is common for professionals like a lawyer or an engineer. In these professions a claim is frequently filed months if not years after the occurrence takes place. At that time the insured may have coverage with a different company and there may be some discrepancy between who is responsible for the claim.

Occurrence based Policy – A policy written on an occurrence basis means that the insurer responsible for the claim is the insurer who was in place when the occurrence took place. If an engineer works on a house and there is a problem with the house years later than the insurer responsible for the occurrence is the insurer that was in place when the occurrence took place.

Endorsement – an endorsement is a document attached to an insurance policy that amends the policy in some way. An endorsement may add, remove or alter the scope of coverage under the policy.

Negligence – Negligence in relation to insurance means a person or business did not demonstrate appropriate amounts of care or responsibility for a particular situation. The failure to take appropriate precautions can cause you to be considered liable for the damage. This can also be referred to as the failure to use a degree of care considered reasonable under a given set of circumstances. Liability policies are designed to cover claims of negligence.

Named Insured – Any person, business or organization who is specifically named as an insured on an insurance policy. This is different from entities who although unnamed may fall within the policy definition of an insured.

Ordinance or Law Coverage – Coverage for loss caused by the enforcement of an ordinance or law regulating construction and repair of a damaged property. Older structures that are damaged may need to be upgraded in regards to electrical, plumbing, venting, etc. A typical commercial property insurance policy does not pay for these additional cost. This policy is an endorsement on top of your commercial insurance policy and will cover the additional costs needed to bring the new building up to date.

Hammer Clause – A ‘Hammer Clause‘ is a provision within an insurance policy that gives the insurer the right to settle for an undisclosed amount and if the insured does not agree to the settlement than they take on some or all of the risk. In some cases, the insured takes on all of the risk, but in many cases it is 70/30 or 50/50.

The Assigned Risk Provider (Also known as the pool or the state fund) – The assigned risk provider applies to workers’ compensation coverage. It is the provider of last resort within each state for businesses who cannot obtain coverage on the open market. The business may not be able to obtain coverage for a number of reasons. Typically, it is because of the small size of the company or because of their loss history. The Assigned Risk Provider offers coverage at a higher rate and typically once you are in the pool you must stay in the pool for 2-3 years.

Business Owners’ Package (BOP) – A business owner’s policy, commonly referred to as a BOP, combines several lines of coverage built into one policy. They are often better suited for small business owners because they offer targeted coverage options designed for specific types of businesses within certain industries. They are usually less expensive then purchasing coverage separately because the business is purchasing multiple policies for liability, property, commercial auto, etc.

Artisan Contractor – This term refers to businesses in several different industries. It includes many occupations that involve skilled work with tools at the customer’s premises. Carpenters, plumbers, electricians, roofers and tree surgeons are some professions that would be included in this group of businesses. Also included are diverse other skilled service providers, such as interior decorators, piano tuners and exterminators.

Loss History – Loss history is a documented history of damages or losses connected with a given asset. It is a way for the insurance carrier to determine the amount of claims your business has against an insurance policy. They use it to determine how much premium to charge or if they are willing to take on the risk altogether.

Inland Marine Insurance – Inland Marine Insurance is property insurance for property that is likely to be in transit over land. Many inland marine coverage forms provide coverage without regard to the location of the covered property; these are sometimes called “floater” policies. As a group, inland marine coverage forms are generally broader than property coverage forms.

Umbrella Coverage – The umbrella policy serves three purposes: it provides excess limits when the limits of underlying liability policies are exhausted by the payment of claims; it drops down and picks up where the underlying policy leaves off when the aggregate limit of the underlying policy in question is exhausted by the payment of claims; and it provides protection against some claims not covered by the underlying policies, subject to the assumption by the named insured of a self-insured retention (SIR).

What is the Assigned Risk Provider?

The assigned risk provider is also frequently referred to as The State Fund or The Pool

Workers’ Compensation Insurance Coverage is required by law in nearly every state in the country. The basic purpose of the Workers’ Compensation Insurance is to provide wage replacement benefits and medical treatment for employees who have been injured on the job. Workers Comp prevents the employer from bearing the costs of injuries that occur during normal business operations.

Each state has their own method for how they go about determining rates on workers’ compensation class codes. Most states partner with the National Council on Compensation Insurance (NCCI) to determine rates for different class codes. Some states; like Indiana for example, have their own rating system administered by a government organization. Most use the basic guidelines of the NCCI system.

Every state also has a different way for how they go about setting up a provider of last resort for the employer’s of the state. This provider of last resort is also referred to as the assigned risk provider, the state fund or sometimes as the pool. This provider is designated as the provider of last resort for businesses who cannot find coverage through the open market. It is typically more expensive from this provider for a number of reasons.

Businesses that end up having to purchase coverage from the assigned risk provider, may not be able to find insurance coverage for a number of reasons. Lots of times it is because the business operates in a classification code that carries more risk than most carriers are willing to take. Sometimes it is because that business has had too many claims within a short period time. It also is frequently because the business just does not generate enough income for the amount of risk in their industry. States usually have a requirement that the business has to try to obtain coverage from a certain number of providers on the open market before they can apply to the assigned risk provider. Usually that number is two or three providers.

There are three main ways states go about providing employers with an assigned risk provider. Some states provide their own fund, some use NCCI and some have a partner carrier who guarantees coverage for employers who cannot find coverage on the open market. Typically states who have a strong assigned risk provider who competes with the open market enjoy the best rates on workers’ compensation insurance. There are different ways to provide this strong provider, but typically the stronger this provider is the lower the rates employers pay.

Utah is an example of a state who has its own fund. This fund is called the Workers’ Compensation Fund. This fund dominates 57 percent of the market and is the main reason Workers Compensation Utah enjoys some of the lowest rates in the country for workers comp coverage. Colorado has a partnership with a company called Pinnacol. Pinnacol was begun around the time workers’ compensation became a requirement in the state. It was designed in partnership with the state government so there would always be someone guaranteeing coverage and competing to keep the rates reasonable for the employer’s of Colorado. Both of these states enjoy some of the lowest rates on Workers’ Compensation Insurance because of their strong Assigned Risk Providers. New York is an example of the other end of the spectrum. New York has its own state fund administered as a non profit agency. New York also has very difficult regulatory compliance regulations for workers comp. These regulations force many carriers to simply not offer coverage in the state. All of these factors combine to cause New York to have some of the highest workers compensation rates in the entire country.

So administering the state fund is left up to each individual state. Again there are three main ways the states go about doing this. Some handle it themselves, others partner with an outside carrier and some contract this service out to NCCI. All three ways can be effective ways to keep costs down for the employers of that state. The strength of these pools goes a long way towards determining what employers across the state pay for workers compensation coverage.

Workers’ Compensation provider of last resort. 3 ways states provide this service.

Workers’ Compensation Insurance is required coverage for businesses in nearly every state. It covers workers’ for some lost wages and medical costs due to injuries occurring on the job. It provides employers with the piece of mind that they will not be sued for injuries that occur as part of normal business operations. How to administer a system of workers’ compensation is left up to the individual states. Each state has their own way of going about administering this system. One major part of this system is how a state providers employers with a provider of last resort. This is also referred to as the state fund or the assigned risk provider.

Some employers who have had several incidents may be labeled as too much of a risk to insure. other employers are in a very risky industry like off-shore oil-drilling or coal mining. In these situations, insurance companies may deem the business too much of a risk to offer an insurance policy. When this is the case the state steps in and providers a provider of last resort. There are three main ways states go about administering a provider of last resort.

A State Fund
A Public-Private Partnership
Partner with NCCI

A State fund

One way states go about administering a provider of last resort is to have a government provided state fund. Utah and California are examples of two states who have state funded providers. These two states show how a strong or weak assigned risk provider can affect the rates employers pay for coverage. For example, The Workers’ Compensation Fund of Utah (WCF) has a 57 percent market share for work comp policies in the state. The next largest provider owns only a 3 percent share of the market (1). In comparison, The California State Compensation Insurance Fund (CSCIF) controls just over 11 percent of the market, compared to just under 10 percent for the next largest provider. As a result, Utah has workers comp rates that are 107 percent cheaper compared to California. This is not the only contributing factor to the discrepancy in prices, but it goes to show how drastic an effect a strong state fund can have. Now in California’s defense, the Gross Domestic Product (GDP) in Utah is nearly 1.7 trillion dollars less than California (2). That is another huge factor driving up prices in California.

A Public Private partnership.

Some states create a quasi-governmental partnership with a private insurance company to be the provider of last resort. This relationship allows the state and the insurance company partner to spread the risk between the two and still provide coverage to the employers of the state.

Colorado is an example of a strong public private partnership. The state fund provider for Colorado is the company Pinnacol. Pinnacol serves 56,000 businesses covering more than 900,000 workers in Colorado. Colorado employer’s enjoy rates on workers’ compensation insurance that are 19 percent less than the national average(3).

NCCI

Some states partner with an outside organization to administer the state fund. The National Council on Compensation Insurance (NCCI) is the organization most frequently used. NCCI is the nation’s most experienced provider of workers compensation information, tools, and services. In most cases they can administer the assigned risk more efficiently and cheaper than a state government can themselves. States who outsource this job to NCCI typically enjoy lower rates across the board.