Workers’ comp insurance premiums have risen 50-60 percent in California; weak stock market, medical inflation and terrorism equal higher premiums

The cost of workers’ compensation insurance is rising significantly all over the country, adding another heavy burden onto businesses. The system covers 127 million workers but is regulated state by state, with no federal oversight.

According to the National Council on Compensation Insurance, a weak investment environment, medical inflation and the need to fund against potential terrorism events are what is causing this increase in workers’ comp premiums.

“PHCC members are reporting increases in their workers’ compensation premiums, as they are in their health and liability insurance premiums,” said Lake Coulson, Plumbing-Heating-Cooling Contractors — National Association’s vice president of government relations. “Our legislative department is following these issues on behalf of members. Also, PHCC’s Safety and Health Committee is exploring new ways to develop risk management practices to increase members’ insurability. The committee is developing a variety of programs to help members learn how to reduce their insurance costs.”

The governors of Florida, West Virginia and Washington have called special legislative sessions this year to find ways to contain costs, The New York Times reported. And a coalition of Texas employers and insurers has prepared several legislative proposals for that state to try and restrain rising medical costs.

But the worst hit is California, according to Steve Lehtonen, California PHCC’s executive manager.

“Yes, rates have been increasing steadily, and have probably tripled for most businesses since 2000,” he said. “This year alone, premiums have gone up 50-60 percent. Of course, there are exceptions, both higher and lower. The State Compensation Insurance Fund has been forced into writing more business because many carriers have left the market.”

California’s SCIF has come under attack by Governor Gray Davis’ administration, and the State Fund recently sued Insurance Commissioner John Garamendi and the California Department of Insurance to “clarify CDI’s authority” over the fund, Lehtonen said.

The bottom line is many contractors are paying higher premiums because they don’t have much choice, said Pete Chaney, the Mechanical Contractors Association of America’s director of safety and health. The problem is that those costs are typically passed on to the construction owner. “When our contractors bid a job, they have to figure a higher insurance premium, so they add that cost to the bid. Higher workers’ comp premiums add to the cost of construction.”

Proactive Measure

Worker’s comp premiums are calculated by the Experience Modification Rate, which insurance carriers use as a multiplier of their base premiums. Each state has its own formula for EMR, Chaney said. But in the simplest terms, EMR is the actual losses of an insured party that occur over a three-year period of time divided by the losses the insurance industry expects that company to have.

“There’s a real incentive there for contractors to control their workers’ comp claims,” he said. “A lower actual loss figure could lower their premiums.”

To help control costs, contractors today are paying more attention to the safety and health of their workers on the jobsite, he added.

In 2001, plumbing and HVAC contractors had 83,900 nonfatal injuries; 39,700 involved lost workdays. There were 79 fatalities in the same year. Many plumbing and mechanical contractors are now hiring full-time safety directors, conducting more safety and health training, and enforcing existing disciplinary action programs.

Some larger contractors that can afford to will often pay for medical costs out-of-pocket and not even file a workers’ comp claim, Chaney said. This gives them a lower actual loss figure. They also can choose the health provider they want to, usually a group they use frequently, and can negotiate better prices.

And then there’s fraud. A significant amount of workers’ compensation claims are fraudulent, Chaney said, approximately 30 percent.

“About 10 percent of those are flat-out lies; the injury never occurred, and employees are just making the claim so they can get the money,” he said. “The other 20 percent are those where the injury was legitimate, but the workers are lying about the recovery so they can get more time off with pay.”

To combat this, Chaney explained that many contractors are starting to hire private investigators to photograph and videotape workers’ fraudulent practices.

On the education front, PHCC’s Safety and Health Committee will be involved in an insurance seminar during the ISH North America show Oct. 1-3 in Las Vegas. Coulson said that workers’ compensation most likely will be one of the areas discussed at the seminar.

And in an effort to try and get premiums to come down, an informal coalition of construction trade associations is considering creative ways to work with the insurance companies to ensure their members have affordable workers’ compensation insurance, Chaney said.