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Published: January, 2010; Vol 6, Num 8

 

Workers' Compensation Insurance:

Clamp Down on Costs

In the construction industry, “down and dirty” means getting the job done quickly and cheaply. For contractors, keeping workers’ compensation claims to a minimum is essential to profitability.

The best way to do this?

“Provide a safe working environment which ensures that the project can be completed without cutting corners to meet deadlines,” says LIUNA General Secretary Treasurer and LHSFNA Labor Co-Chairman Armand E. Sabitoni. “A worksite set up with safety in mind will keep a lid on workers’ compensation costs.”

Larger companies have safety professionals or risk management specialists whose job it is to limit the hazardous exposures of workers and contain workers’ compensation costs. In smaller companies, this task falls on the owners.

The key to maintaining low rates is sustained efforts to improve safety and prevent injuries. The LHSFNA's Occupational Safety and Health Division can help signatory employers assess and improve their safety programs. In addition, some states require insurers to offer discounts to companies that have safety and/or drug-free workplace programs in place. Check with your carrier and your state’s workers’ compensation bureau to see what discounts are eligible for you.

“Workers’ compensation claims are part of the cost of doing business, but they don’t have to ruin business,” says Sabitoni. “When safety is kept at the forefront of worksite planning, workers’ compensation premiums will never undermine your profit.”

[Janet Lubman Rathner]

How to Control Your Costs

Many contractors are unfamiliar with the way workers' compensation premiums are calculated and, thus, fail to effectively manage their risk. This is costly. With construction industry profits typically running in the two to four percent range, effective management of workers' compensation can be the difference between a profitable company and a non-profitable one.

Workers' compensation is a no-fault insurance system in which workers give up their right to sue for injuries while employers are required to carry insurance that pays for the medical treatment and lost time of injured employees.

Rather than setting the same premium for all companies, state workers' compensation laws are written so that employers with better safety records get lower rates. This is achieved through a two-part pricing mechanism.

The first component, the "manual rate," is based on average medical costs and benefits paid (plus, costs added for administrative overhead and insurance company profits) in previous years for each of about 450 work classifications. This rate is expressed in dollars per $100 of payroll (except in Washington where it is expressed as dollars per payroll hours).

The second component, the experience modification rating or EMR, is based on compensation actually paid as a result of claims against a particular employer's insurance policy. An employer's EMR is multiplied against the manual rate to determine the actual premium due for that company.

Consider two employers bidding for the same $5.7 million project. Assume the work classifications of the project establish a manual rate of $85,000 annually. If one company has an EMR of 0.4, it will pay $34,000 for this insurance. If the other has an EMR of 2.5, it will pay $202,500.

That difference in premiums – $168,500 (2.9 percent of gross) – could equal or exceed the anticipated profit from the entire project. Clearly, the contractor with the lower EMR has a significant advantage in bidding work. Nowadays, to minimize delays and other hassles associated with high rates of on-the-job injury, many owners only accept bids from contractors with EMRs below 1.0.

How to Lower the EMR

EMRs are calculated by rating bureaus based on contractor claims-paid data provided by insurance companies. Because the frequency of accidents may better reflect safety performance than severity, frequency counts much more heavily against an employer than severity.

Thus, the most fundamental component of any company's effort to lower its EMR must be improved safety performance. However, because of the way the calculations are done, improvements must be sustained over time.

The rates for each employer are recalculated each year, but they are based on the rolling average of the three years before the last. The last year is ignored because too many adjustments are in progress.

Because of the time lag, a firm has to wait two years for the impact of a year's improved safety performance to take effect. Because of the three-year averaging, it has to wait four years for the full effect of improved safety performance.

Therefore, a lower EMR is primarily the result of a sustained safety program. The LHSFNA Occupational Safety and Health Division can conduct on-site safety audits and help contractors develop or improve company-wide safety programs that will likely lower their EMRs. Actions that can be taken today are noted in the sidebar.

Other Ways to Save

In some states, the establishment of a company safety program will, itself, earn a workers’ compensation discount. In others, a drug-free workplace program earns a discount.

Effective return-to-work programs can also produce savings on workers’ compensation since they reduce lost workdays and, thus, the size of some claims. Also, the employment of a Patient Advocate to focus on the treatment plans of injured employees can avoid unnecessary medical expense, accelerate treatment and aid quicker recoveries. Similarly, the use of a mediator can reduce problems and legal costs if disputes arise. Also, both the Patient Advocate and the mediator can minimize the possibility that an employee’s frustration with the injury will turn into animosity toward an employer.

It is also a good idea to shop around for insurance carriers which, in some states, are quite competitive. Shop for service as well as price.

Manage Risk

Complaints about the workers’ compensation system are legion, but there are no easy ways around it (except in Texas where it is not required). Every contractor should understand how to avoid its traps and take advantage of its opportunities. In the competitive markets of construction, this attention to detail can make a big difference in each company’s bottom line.

[Steve Clark]