Category: Commercial

Self-Insuring Workers’ Compensation Plans May Produce Premium Savings

Joining a workers’ compensation group self-insurance program may be a significant means for small and mid-sized employers to reduce operating costs. Such plans deliver savings by providing employers with considerable control over losses, medical care and rehabilitation, plus improving cash flow.

While some companies self-insure workers’ compensation programs individually, these are usually best suited for larger corporations with immense assets. For smaller and medium-sized businesses, a Group Self-Insurance (GSI) workers’ compensation plan is more suitable. A GSI is a non-profit association of employers formed for the specific purpose of providing workers’ compensation coverage. A GSI enables employers to assume a major portion of their risk and provides group purchasing power for excess insurance to cover individual losses or in the aggregate in excess of a specified amount.

Workers’ compensation is well suited for self-insurance plans because claims are typically of low severity but high frequency, which allows losses to be predicted with some accuracy. Further, payment for large claims can be spread over several years, which benefits a company’s cash flow. GSI programs enable companies to better manage safety programs and have more direct involvement in seeing that employees receive prompt medical care when injured, and employers are able to exercise closer monitoring of the return of the employee to work.

Requirements for joining or forming a GSI vary considerably from state to state. Some states do not allow GSIs and in other states, companies must meet certain solvency standards and provide financial and loss data to be considered. Also, if a company has operations in more than one state, GSIs must be setup in each state. A GSI in one state will not cover losses in another state.

Besides improved cash flow, the major benefits that come from joining or creating a GSI are enhanced loss experience through more effective loss prevention, loss control and managed care programs; reduced administrative costs, and interest income earned on premiums. GSIs in most states do not have to pay premium taxes and or be assessed for residual workers’ compensation market losses.

Members of a GSI pay a premium to the group based on their exposures, classification codes, payroll, experience modifications, and rates developed by a state’s workers’ compensation rate making bureau. At the end of the contract year, any surpluses from both the claims fund and the administrative expense fund can be returned as dividends to group members.

GSIs handle claims following guidelines of the state workers’ compensation laws. Often, third-party administrators handle loss prevention and control, case management, accounting, investment and actuarial services.

An agent can provide guidance to employers wanting to explore joining a GSI. An interested company should first seek management commitment as joining a GSI requires careful attention to the entire workers’ compensation program rather than shifting these responsibilities and duties to a private insurer. Also, an employer has to be willing to disclose detailed information regarding its finances, support systems and ongoing risks.

While GSIs offer important advantages, there are some disadvantages. Members of the group are usually jointly and severally liable for losses incurred by the entire membership. A bankruptcy or dissolution of a member does not release the remaining members from liability. If the GSI’s retention and excess insurance are exhausted by a catastrophic event, the group members must contribute their pro rata share of the total loss. And, if a GSI has a pattern of liberal underwriting for new members, it’s possible it will have financial deficiencies in the future.

If an employer understands the additional risks it assumes as well as the added reporting and administrative duties when it joins a GSI program, the end result could be a significant reduction in overall costs for workers’ compensation.

Workers’ Comp Claims for Mental Illness May Be Difficult to Diagnose, But Are Real in Today’s Workplace

When one thinks of workers’ compensation, images of workplace accidents and occupational diseases come to mind. Though the vast majority of workers’ compensation cases do involve claims for physical injuries and conditions, a small-but potentially growing-portion of workers’ compensation cases are based on mental or psychological claims, particularly related to stress experienced on the job.

Mental workers’ compensation cases fall into one of three categories: physical/mental, mental/physical, or mental/mental. A physical/mental claim involves a workplace physical injury that has progressed to a mental condition or disability; an example would be a back injury that lingers, and that results in the worker lapsing into clinical depression. A mental/physical claim involves a psychological condition arising out of the worker’s employment that has caused a physical illness; an example would be workplace-induced stress that causes ulcers. A mental/mental claim involves a psychological occurrence in the course of employment, which leads to a psychological injury or condition; an example would be an employee who witnesses a horrific workplace accident involving a co-worker, and who later develops a fear of operating the same equipment on which the co-worker was injured.

As with workers’ compensation claims that have only physical components, in order to be compensable, the claimed injury or condition must arise out of or occur during the course of employment. Some types of mental injuries are difficult to prove under this standard. For example, symptoms of physical ailments caused by stress (e.g., ulcers, heart attacks) may appear only after working in a stressful workplace for a long period of time. Furthermore, unlike claims based on a workplace accident, mental claims may not be linked to one particular incident, but rather to months or years of stressful working conditions.

Another example of the complexity of the cause-effect link in mental workers’ compensation claims is seen in claims based on post-traumatic stress disorder (PTSD). PTSD is a delayed psychological response to experiencing an extreme situation that overwhelms one’s usual ability to cope. Most commonly thought of in connection with soldiers and wartime, discussions of PTSD arose after the September 11 terrorist attacks. Though few would doubt the psychological impact of witnessing the devastation in New York or Washington first-hand, by definition, symptoms of PTSD do not appear for months or years after the event, making their connection to the workplace event difficult to assess.

Mental workers’ compensation claims represent a tiny percentage of all claims; estimates put claims with a mental component at about 1% of claims overall, although this figure varies by state. For a period of time in the 1980s and early 1990s, the incidence of claims with a mental component rose in some states, but stricter requirements imposed by state lawmakers, workers’ compensation boards, and courts stemmed this trend. In particular, mental/mental claims are least recognized.

Though workers’ compensation claims with a mental component represent only a small minority of claims today, the reality of the modern workplace should motivate all employers to be alert to their existence. White collar workers-who are most likely to claim an injury with a mental component-make up an ever-growing portion of the U.S. work force. Furthermore, today’s workplace puts great pressure on employees to be productive and cost-efficient. Many workers live with fear of job loss, as businesses continue to seek optimum competitiveness through “right-sizing.” All of these factors can breed stress.

All employers can take some basic steps to deal with increased stress levels in the workplace-

  • Be alert to signs of stress among employees, and solicit input from employees and managers on this issue. Be aware that certain events, such as layoffs, may trigger stress levels in employees beyond what is to be expected on a day-to-day basis.
  • Make employee assistance program (EAP) services available so that workers have ready access to help with dealing with stress.
  • In the event of a severe workplace trauma, arrange for on-site intervention and counseling services.

Though these steps will not make a business immune from the possibility of a workers’ compensation claim with a mental component, they will, at the least, help make stress recognition and prevention part of the workplace ethic.

Manage Your Workers’ Compensation claims

How can managing your workers’ compensation claims process protect every employee?

The first step is to file the claim right away. To this end, have claim forms available to all supervisors. Some companies keep forms near the first aid kit alongside the OSHA log. Management must acknowledge the problem to correct it, so keep good records.

Keep any information regarding preferred doctors networks or nearest emergency care facility with the first aid kit. Maps to these facilities help in crisis management.

Because of the privacy laws, keeping records of employee health concerns (hypertension, diabetes, allergies to medicines) at the ready is tricky at best. Without making the records readily accessible by anyone, they need to be available to supervisors in an emergency.

The insurance company has a depth of claims experience that no insured can have. If not treated properly, some injuries worsen over time. The company has a right to investigate and guide treatment and rehabilitation. A delay in reporting that causes the situation to worsen may create coverage problems. Dutifully report all claims immediately.

Allow the insurance company to investigate the claim. Usually, if the claim results in only medical bills and no lost time, the company will not spend time finding causation; but your company management needs to understand the progression of events that leads to any loss.

Uncover the cause. Were safety appliances, equipment, and personal protection in place and used properly? When the employee was drug tested after the claim, was that an issue?

Use any claim as an opportunity to discuss safety at your next scheduled safety meeting. Discuss the following topics as collateral to the claim:

Assure employees the injury is covered by workers’ compensation and the injured will be cared for properly. If the injured is at work, have them report on the level of care.Discuss the results of the investigation regarding the cause of the loss in neutral terms, but no personal information about the employee. This discussion is about future avoidance, not humiliation.Remind employees of the drug testing policy and explain the policy aims to protect everyone.

If the insurance company investigation implies fraud, fake injury, review safety rules or regulations in a more generic form. Perhaps discuss slips, trips, and falls prevention as opposed to that specific incident.

Risk avoidance is your best measure against workers’ compensation injuries. Maintaining a safety culture with training, meetings, and management leadership keeps a workplace safer. Having proper paperwork and first aid readily available reduces the lost production effect of injuries.

The more prepared you are to handle an injury professionally, the more you protect your workforce. Manage ahead of the crisis with proper planning.

Professional Errors and Omissions: Protect Your Practice

Professional liability insurance funds losses caused by errors or omissions in the rendering of services. What does this mean?

Professionals are human and errors do occur. In medicine and science, the client benefits from the best course of action suggested by an experienced practitioner at the time the service is rendered. The best course of action, though, has some risk of failure. It is wise to cover this potential.

Some examples of typical professional liability claims:

An attorney misses a filing date for a lawsuit and the client loses the right to sue a surgeon removes too little, too much, or the wrong tissueA hair stylist misuses chemicals and burns the client. A computer consultant provides incompatible software, causing damage

Some examples of actual, but unusual claims:

Although machinery is tagged as under repair, a building inspector is held responsible for a new system because they merely reported the tag-out rather than investigating the nature of the repair required.A real estate agent sold a home that the listing agent reported as located in the wrong school district. The selling agent did not correct the error although they were never asked to verify the information.A stockbroker advises a client to sell some stock and balance their portfolio. The client refuses and loses money. The client sues for mismanagement.

Most professional services contracts offer advice, design, expertise, politics, negotiations, or any skill associated with a particular profession. Beyond laws and regulations, professions self-govern by way of setting minimum performance and ethical standards.

When these performance standards are not met, either by an error occurring or an omission of an important service duty, a potential claim results. Expert witness testimony is often a feature of litigation in these claims to determine the definition and scope of the malpractice.

Doctors, lawyers, and certified public accountants (CPAs) spring to mind when discussing malpractice insurance, professional liability, or errors and omissions insurance. How about architects, engineers, office designers, barbers, dog groomers, bankers, clergy, web site designers, software producers, or computer consultants?

Any profession that provides a service instead of a product has a professional liability exposure. Almost any product includes some element of design. So, what separates a product from a service?

A service is defined by the acts of the professional, not by the finished product or outcome. Concrete contractors are covered by completed operations insurance; construction managers who select and supervise the concrete contractor fall under professional liability.

If you provide a professional service, advise clients, act on behalf of a client, or provide an outcome or consequence rather than a specified product or completed operation, you need professional liability insurance.

Professional liability policies define the acts, errors, and omissions covered both in general and specifically. Restrictions or exclusions are enumerated as well. Standard forms exist for many professions; however, different forms are used and it pays to have knowledgeable advice.

Reputation creates value in any professional practice. One major difference between standard business and professional liability is the professional’s right not to settle. The downside to this decision, however, is the policy limit of liability decreases for that claim to the accepted claim offer, including costs and legal fees, a very risky strategy.

Claimants and their legal counsel prefer to negotiate with an emotionally distraught practitioner than a dollars and cents experienced adjuster who knows the potential court outcome.

With reputation and time away from the practice already at risk, remove the strain of total financial ruin from the equation and obtain professional liability insurance.

Umbrella Liability Coverage: What Limit Saves my Assets?

Insurance funds losses; it transfers risk from your company to the insurance company for a fee – premium. Deductibles are used to reduce the number of claims by having the business pay small amounts and only reporting larger issues.

The order in which claims are funded is: deductible, liability limits, and then company assets…and sometimes personal assets. Your company needs high liability limits to protect company assets.

Claims exceeding $1,000,000 in liability are infrequent, but not rare. Umbrella insurance covers above all other liability insurance in one million dollar layers. High liability limits become affordable this way.

Business nightmares like the $3,000,000 cup of coffee, the truck catching fire under a railroad bridge, or your vehicle colliding with a school bus unfortunately do occur. A million or two is just not sufficient coverage for most operations.

Asbestos and tobacco companies produced legal products for years before lawsuits started as the result of long-term exposure, and these very successful companies were brought to the brink of extinction. These companies kept tens of millions in umbrella layers. How much is enough?

Commercial liability insurance covers injuries to other people and damage to their property caused by your company, your employees, or you. The cause of loss may be vehicle, products, premises, operations, liable, slander, poor advice, or even aviation related.

The amount of liability and types of insurance depends upon your company’s exposure to risks.

Most companies face fleet risks, premises-operations risks, and employee injury risks; some add professional liability risks, aviation risks, common carrier and garage liability risks.

Insurance companies recognize these typical risk scenarios and respond by offering business automobile, truckers, garage, general, aviation and professional liability policies.

Purchasing sufficient liability limits for disastrous claims is costly when purchased one liability risk at a time. In fact, most companies simply could not afford purchasing insurance this way.

Insurance companies offer umbrella coverage to serve this need.

The company proscribes underlying, or first dollar coverage limits, over which umbrellas pay claims settling for more, or in excess, of these policies.

Since these claims are infrequent, premiums are affordable; and each added million dollar layer decreases in cost.

In addition, most umbrella forms add liability coverage by insuring more risks than the underlying policies. A relatively modest – $1000 to $10,000 – deductible is required, but then the umbrella limits cover unscheduled liabilities.

So, with an umbrella policy, the order in which claims are paid is: deductible or underlying liability limits, umbrella limits, and then company assets.

How much is enough combined liability limit? How well can you predict the future of litigation? Products, operations, and vehicle claims in excess of $3,000,000 are not rare.

The cost effective answer depends on the amount of assets you’re protecting, the cost of the coverage, company profit from which to expense the premium, your risk tolerance, and the availability of umbrella coverage.

Three more factors are worth considering:

Products claims may take years to discover. Claim inflation requires high limits at the time the claim is paid.Large liability claims take time to settle. Claim inflation is rampant. Even though an event occurs today, you may be settling at the going rate three years from now. Million dollar claims were rare twenty years ago; not so much now.Courts have been chipping away at the corporate liability shield for smaller businesses. Personal assets may be at risk. Now consider how far that erosion of corporate protection might progress by the time you get your day in court.

Umbrella liability limits should be high enough that business assets are not at risk. Business survivability is at risk with a too low limit. Your current limits can be assessed and reviewed by your broker and/or attorney for adequacy.

Should I Use a Personal Automobile Policy for my Company Car?

Automobile insurance covers the owner of the car, the driver of the car, and/or an insured driving a temporary vehicle. If the company owns the vehicle, the company needs to provide liability coverage for its risk of operating the vehicle on the road.

As a driver, you need liability insurance even if you don’t own a car. Drivers are held responsible regardless of ownership. Entrepreneurs who own a company car and a personal car need both policies.

If you drive your car for business, the company still needs liability insurance to protect against the risk of operating a vehicle on a public road. Tangential issues include:

Pick-up trucks and vans are excluded from business use in many personal automobile policies. Claims will be denied under these conditions.Courts have been “piercing the corporate veil” recently. If the business and individual are judged to be too closely tied financially, corporate limited liability can be lost. Separating business from personal usage avoids IRS problems when allocating deductible expenses.  Keep liability clearly separated. A business issue can destroy your unrelated personal wealth.If employees are transported in your personal car, workers compensation coverage blurs into personal liability. Is driving to lunch business or personal? If another employee drives your car causing you an injury, you are exempt from your liability policy.

Too many scenarios can occur to confuse commercial coverage with personal coverage. If you work for a company as an outside sales representative and drive your own car, use a business use personal policy. If the company owns the car, your personal automobile coverage will provide liability insurance for you personally, but not the company. If you don’t own a vehicle, but drive a company car personally, purchase a non-owners personal policy.

Whichever entity owns the vehicle – titled name – requires liability insurance. Commercial automobile coverage is designed for automobiles, trucks, vans, pick-up trucks, assorted delivery vehicles, even dump trucks. Rating, that is premium generation, considers multiple drivers of mixed experience and more miles driven.

Personal automobile policies do not anticipate non-family operators on a regular basis. Usually, the application asks who will be driving the vehicle regularly. It is not favorable to list several employees.

The cargo transportation industry has its own truckers form. Garages and repair shops carry garage keepers coverage. The insurance industry creates forms and policies that fit the unique needs of different business models.

Design-Build Insurance Issues

Managing design-build risk for any entity is something that requires careful consideration. There are many differences between design-bid-build projects and design-build projects. One of the most prominent differences is insurance coverage. In both types of projects, all parties share goals and have individual concerns. Since contractual relationships in these two types of projects vary, so do the methods of balancing risks.

Understanding Liability Concerns
If a problem arises when the owner has separate contracts with the designer and constructor, it is easier to distinguish whether the problem is a design flaw or a construction mistake. However, the law has a statute of limitations for design errors and building functionality. Both types of issues can result in messy and complicated lawsuits as time passes. For example, if a building experiences air quality problems two years after its construction, the cause of the problem could be shared by two or more parties involved in its design, construction and maintenance. When these issues turn into insurance claims, the parties involved often realize that their coverage is inadequate. Since insurance for these projects has changed in the past decade, the need for evaluation is crucial. Discuss the new changes, insurance requirements and helpful suggestions with an agent.

How To Solve Insurance Deficiencies
For those who are relying on general liability coverage, it is essential to have modifications made to the policy. For example, companies that perform design-build work should add the design-build rider or the means and methods rider. Adding a rider closes the deficiency gap for liability coverage in a general policy. Another beneficial addition for design builders is contractor’s pollution liability with a fungus inclusion. This affords protection from mold that results from damages. Another option instead of the combination of CPL and CGL riders is a contractor’s protective professional and indemnity policy, which is commonly called a CPPI. This type of product includes pollution and professional liability. Since the individual options are complicated, it is best to discuss them with an agent. To get a clearer picture of what should be done to enjoy the strongest protection, consider the following liability tips:

– Make sure the policy includes errors and omissions, which is layered as excess over the E&O coverage for architects.

– Study the rules for the extended reporting period.

– Ensure the policy period meets the project’s requirements.

– Carefully examine the terms, conditions and exclusions of the policy.

– Make sure the claim notification procedures are understood.

– Instead of asking for only a certificate of insurance from contractors and sub-contractors, ask to see the policy itself.

Importance Of Bonding
Many people in design building misunderstand bonding. Surety bonds are made between the surety and contractor to benefit the owner. They are classified as a credit instrument. While they are meant to benefit owners, brokers usually sell them. Owners should always ask for a total performance bond in any design-build project. If they are not requested, many types of unintended consequences can produce a messy situation. It is important to ensure that the design builder purchases surety products that include the contract’s entire cost. To learn all of the insurance issues for an individual project or company, discuss them with an agent.

5-Step Construction Quality Assurance

Planning Construction projects such as roads, industrial structures, stadiums, bridges, homes and various commercial buildings bring the need for a quality assurance process. Since even a tiny defect or flaw in any of these construction projects can have dangerous effects, it is imperative to develop a plan before construction begins. It is also necessary to monitor the quality assurance plan’s effectiveness throughout the span of the project. The cost of implementing a good quality assurance program is small in comparison with the possible large amount of money required to deal with the effects of lapses, defects and flaws. To better understand what a quality assurance plan in construction should include, consider the following steps.

  1. Define Requirements
    This should always be the first step. To accomplish this task, determine what the needs of the customer are. Listen carefully to the customer, and rephrase ideas to ensure their needs are fully understood. The structural designs of the project should be determined by the customer’s specific needs. In the design phase, it is also important to decide on types of material to use. Define the standards for the structure’s construction to determine what components must be included in the quality assurance process. It is also important to consider surrounding factors. For example, the soil and construction site must undergo several tests to check climatic conditions. All parties involved must be certain to comply with any environmental protection laws. By considering these laws during this first phase, it is easier to incorporate them into the decision of materials and design planning. Keep in mind that the site should not pose a pollution threat to bodies of water nearby. Sound pollution must also be minimal, and it should not cause inconvenience to people who live nearby.
  2. Material Requirements
    After the initial project requirements have been defined, it is necessary to list all of the materials and supplies that will be used. Be sure to include their respective specifications. Note any brand requests, and add reminders for materials that must be certified. All of these details are necessary to ensure that the chosen materials match the quality and design needs for the project.
  3. Planning
    Once the material planning is finished, start developing a plan for the task’s completion. This plan should clearly outline the workflow. Invite several tenders to obtain the building material and supplies. During this process, document each step for future reference.
  4. Material Testing
    It is imperative to test the materials before using them. During this process, third parties or internal laboratories test the composition of the chosen materials. Whether private or internal labs are used, a uniform set of work quality standards from various institutes dictate decisions. Issues such as steel’s tensile strength or the compression strength of bricks are tested. Based on the results of tests or trials, the chosen materials will be approved or disapproved.
  5. During Construction
    In this final step, quality assurance is measured throughout the construction process. Supervisors must ensure that all standards outlined in the previous steps are upheld. Several different quality assurance measures should be taken to reduce the likelihood of any breaches. Supervisors must also check workmanship quality and conformance. With the help of external and internal audits, quality checks are stronger. If quality control supervisors find any components to be below the set standards, they must determine the cause. After this, they must develop a rework plan to fix the issue.

Since the cost of rework is very high, quality assurance should never be neglected. In addition to this, the liability issues connected with poor design quality can be detrimental to a company’s budget and reputation.

Reduce Premiums? Reduce Risk with Loss Control Strategies

Business owners know an injury to an employee or severe property damage destroys productivity; so all losses should be avoided or reduced.

So why do insurance loss control representatives’ visits and the ensuing safety recommendations bother business owners so frequently? Is it the nuisance that any disruptive visitor might be? Is it the money to implement loss control strategies?

Insurance companies understand that the frequency of claims, that is the number of claims, predicts risk levels much more accurately than does the severity of claims.

Insurance company recommendations tend to reduce the frequency of claims. In the long run, reduced frequency leads to better experience and greater discounts. Selfishly, you should implement loss control recommendations that lead to lower costs.

For small business, as defined by one that cannot afford an in-house full time safety officer, the insurance company loss control representative acts in that capacity to review the overall loss control picture. Use this service to your advantage.

The insurance company wants to reduce risk as much as you do. Of course, the company is less concerned about the budget to do so when you’re fulfilling their recommendations.

So, what can you do about costly compliance measures? Ask the loss control representative for help. These professionals are in the field all the time and see many solutions to the same problems. They will have some cost effective ideas.

What other proactive measures can a business owner implement? First, a loss control survey, sometimes called a risk management survey, outlines every process, job, piece of equipment, or operation with regards to safety.

Once your safety concerns are identified, you can manage the risks in two ways: loss control measures or strategies. A loss control measure reduces the frequency of claims. A strategy eliminates or reduces risk.

Loss measures include installing equipment safety devices, controlling environmental conditions, and supplying proper protective gear. Right now would be a good time to solicit feedback from the insurance loss control representative. They have valuable experience in this area.

Manufacturers and contractors are familiar with equipment safety devices, such as guards on saw blades or operator cages. Ergonomics has become a popular form of loss control that ties into safety devices. Differing control knobs, placement of controls and sight lines improve operator efficiency and eliminate unsafe habits.

Environmental controls, for example ventilation and lighting, reduce worker fatigue, unhealthy air quality, and poor visibility. Injuries decrease in frequency as a result.

Proper protective gear may seem a bit old school, but safety is the test of time. Goggles, gloves, hard hats, protective clothing, and even proper work clothing can help to reduce claims.

Installing guards and providing equipment protection is half the battle. Safety must be taught to the employees at all levels for an effective loss reduction program. New and old measures should be embraced by management and implemented correctly.

Insurance loss control departments are a good source for safety lesson plans, posters, or even direct employee meetings to teach and discuss safety issues.

Loss control strategies eliminate or reduce risks. Prevention, avoidance, transfer, and separation are examples of viable strategies.

Prevention strategies anticipate future problems. A business may carefully screen driver applicants with background checks, records, and road testing to preclude poor operators from damaging valuable vehicles or injuring third parties.

Avoidance eliminates existing or potential risks. The business screens drivers unsuccessfully; and therefore decides to eliminate its fleet and use common carriers. The business has avoided all risks associated with operating vehicles, but not those associated with shipping products.

Separation segregates risk. The business decides to build a second manufacturing site rather than place both lines in the same building. The risk of both lines being destroyed at the same time is greatly prevented because the exposures are separated.

This strategy may allow one site to shut down for difficult maintenance while the second site continues filling orders. Better maintenance is a safety measure granted by the separation strategy.

Transfer strategies include: contractual transfers, subcontracting work, and buying insurance. Transferring is usually a legal risk reducing strategy.

Purchasing insurance is a strategy to fund claims. The business may not technically be reducing losses, but it is keeping those losses – premiums – at a tolerable level. This strategy brings us back to listening to the insurance company recommendations.

If you proactively manage the input rather than withhold feedback to the safety representative, in the long run, you will focus on the important issues, eliminate the intolerable risks, and attain affordable insurance premiums.

Workers’ Compensation Experience Rating

How does safety pay dividends to the business owner? Time and resources spent on developing a culture of safety repays the business in the long run. Safety cultures rely on reducing the number of workers compensation claims, in return, the odds of a disastrous claim are reduced.

Business owners with workers’ compensation experience modifications above 1.25 need to review their safety policies with professionals. It is possible one year or even one claim causes this situation; but it should not be ignored. Discover and repair the root cause.

A 1.01 to 1.25 modification indicates worse than average experience. State rates can be less than adequate for a short period of time. The actuarial or mathematical calculations just incorrectly reflect the average expected claims. Slightly elevated modifications may be caused by these issues; however, review your losses by department in these cases and see if a problem area exists.

For slightly elevated modifications, review the safety program and types of losses. Seek out a professional risk manager for help if needed. Look for patterns in the losses, and consider changes in safety equipment or procedures to reduce problem issues.

Proactively nurturing a safety culture will pay long-term dividends. Experience modifications will decrease with positive results. How?

Each state calculates workers’ compensation experience modifications independently. Many states do utilize the services of the National Council on Compensation Insurance (NCCI) to gather data and promulgate base rates and experience modifications; but each state regulates its own workers’ compensation system.

Workers’ compensation experience rating predicts future behavior by analyzing past performance. It is a consequence of loss control performance, neither a reward for no losses nor a punishment for too many claims.

The generic formula for experience modifications follows some rules:

Just as payrolls are the basis for the standard premium, they form the basis for expected claims. Payroll is multiplied by an average claim factor to produce total expected claims.A discount factor is then applied to predict the potential severity of the claims.The product of this equation is expected losses.Actual medical only (MO) claims combine and report as a number of claims/total amount. Some states designate the MO claims as primary (maximum average) and excess, and then apply a discount rate to one or both of these amounts.Most states set a limit on the value of any one claim, and then discount large claims on a sliding scale.This historical claim experience is divided by expected losses. That quotient is the experience modification.

The insurance industry spends millions of dollars to find ways to predict the future. Loss analysts discovered one important fact: the best predictor of future claims is the frequency with which companies suffer losses in the past.

Frequency reflects the number of claims per employee, usually expressed as claims per payroll unit ($100), claims per year, or claims per time unit. Frequency, however, more importantly, reflects the safety culture of the business.

If the frequency of claims is predictable, how about the severity of an individual loss? No, severity, the magnitude of the loss, is not predictable. With greater frequency, however, comes greater odds that a severe claim will occur.

Experience modifications indicate the status of the safety culture within a business. Good management listens to risk management and loss control experts who ultimately reduce workers’ compensation costs.