September 2008

For many businesses, Workers Compensation insurance is one of the largest expenses. A firm’s experience modification, which is a numeric factor that applies to the Workers Compensation premium, is a major influence on that cost. It is designed to reward firms that have below average loss activity and penalize those with above average activity. Firms with losses below average will have a mod of less than 1.0, while others with above average losses would have mods greater than 1.0. The insurance company multiplies this number by the calculated premium, producing either a reduced or increased premium. Firms with frequent, small losses fare worse under experience rating than those with infrequent, large losses. However, large losses and changes to the amounts reserved for them can still have a great impact.

In each state, a bureau independent of the insurance company calculates an eligible firm’s experience mod. The bureau uses a formula that considers the type of operation, the payroll over the previous three policy periods (not including the current one), the losses with values of less than $5,000 each, and the losses valued at more than $5,000. Through the application of mathematical factors, the formula determines the firm’s actual losses for the three-year period. The bureau divides this number by the expected losses for a firm in that classification with that amount of payroll. If actual losses exceed expected losses, the mod is greater than 1.0; the mod is less than 1.0 if the converse is true.

The formula values losses of less than $5,000 at full value. For example, a firm that had five losses totaling $10,400 would be charged that amount in the experience rating formula. However, a firm with one $10,400 loss would not be charged the full amount. The formula breaks this loss into two amounts — $5,000 plus some fraction of the amount in excess of that. The experience rating manual contains the factors that apply to the amount over $5,000, and they will vary by the firm’s expected losses. Factors are greater for firms with greater expected losses. Each state has a maximum amount for which any one loss can be valued, no matter what its actual size. For example, if a firm suffers a loss reserved at $900,000 and the state’s maximum single loss is $200,000, the formula will apply the factor only to $195,000 (the amount between $5,000 and $200,000).

A significant change in the amount reserved for a loss can have a dramatic effect on a firm’s experience mod. In the example above, if the reserve dropped from $900,000 to $100,000, the factor would now apply to $95,000 instead of $195,000. This would produce a major decrease in the formula’s calculation of actual losses, resulting in a big drop in the experience mod. Conversely, a loss reserve that jumped from $50,000 to $250,000 would produce a sizable increase in the calculated actual losses, as the factor is now applied to $195,000 rather than $45,000. This shows the importance of proper claims management. Lingering problems such as back injuries can result in large reserve increases if the injured worker does not receive effective medical treatment early on.

A good insurance agent will work with the firm to analyze the experience modification worksheet and verify its accuracy. The firm and its agent should inform the insurance company of any errors in reported losses or payroll. Also, the firm should question an unusually large decrease in a reserve and appeal to have its mod reduced. A properly calculated experience mod should neither over-reward nor under-penalize a firm for its loss experience.

Most construction contracts require one party to name the other party as an additional insured under the first party’s General Liability insurance policy. For example, a contract between a project owner and the general contractor will require the GC to cover the owner as additional insured. A contract between a GC and a subcontractor will have a similar requirement in favor of the GC. By making this requirement, the owner or GC is attempting to transfer the liability insurance responsibility from itself to the other party. However, what the GC is trying to achieve and what it actually gets might not be the same.

Many owners and subcontractors, when they require Additional Insured coverage, are seeking coverage that an obsolete insurance form used to provide. This form covered the person or organization listed on it for liability arising out of the policyholder’s work for the person or organization. The industry has revised this form several times over the years. The current version covers the named person or organization for liability arising at least partly out of the policyholder’s acts or omissions or those of subcontractors working for the policyholder. It covers liability for the policyholder’s ongoing operations for the additional insured. Coverage ends when all work on the project is completed or the part the policyholder was working on is put to its intended use.

The modern version has some significant differences from the old one. Courts interpreted the old version as covering the additional insured even when the accident was 100% its own fault. The new version requires the policyholder to be at least partly responsible. The old version covered liability arising out of the policyholder’s work, whenever it occurred. The new version covers liability arising out of the policyholder’s work only while it is in progress. It does not provide any coverage for liability arising out of the work once it is complete.

Contractors who need or want coverage for additional insureds arising out of their completed operations must request a separate coverage form from the insurance company. Willingness to provide this coverage varies from one insurance company to another.

Another option is to cover all additional insureds automatically. Many insurance companies offer this, but the form ordinarily applies only when a written contract requires the policyholder to add the additional insured. Also, it usually does not provide completed operations coverage for the additional insureds, and it might provide only the amount of coverage the contract requires even if the policy actually provides more. The contractor must request to add completed operations coverage separately for each additional insured.

It is important to note that none of these forms promise to provide the additional insured with advance notice if the company decides to cancel the policy. Owners and GCs often require advance notice in the contract. If this is the case, the contractor should discuss it with his insurance agent and ask to have this provision added to the policy separately. Insurance companies’ willingness to do this varies.

An owner or GC that requires its contractor to add it as an additional insured might expect or demand coverage for all operations, both ongoing and completed. They may also require advance notice of cancellation. It is crucial for contractors to be aware of what their policies do and do not provide. The contractor should discuss any coverage deficiencies with his agent as soon as he discovers them. If the insurance company is unwilling to remedy them, he may have to negotiate with the other party. The worst possible outcome is for the other party to be surprised by lack of coverage when an accident happens.

Contact our office today. We can help you to negotiate the Additional Insured maze.

When organizational behavior specialists talk about “corporate culture,” they are often referring to the set of unwritten rules that influences the attitudes and actions of the members of an organization and that guide their behavior. An organization develops its culture as a long-term coping mechanism for problems that are inherent in its operations.

However, when daily problems appear, organizations make immediate alterations within their culture to respond to these situations. These alterations, known as “climate changes,” signal a change in the level of interest and importance placed on a particular aspect of operations by the organization’s leadership. Unlike culture, which is embedded in the corporate psyche, climate changes only last for a short duration.

One very good example of changing climate is the level of emphasis placed on safety at different times during an organization’s life span. Shortly after an incidence of injury, management puts extra emphasis on safety. This generally lasts until the incident that triggered the response is forgotten, and then the climate gradually shifts back to a more lackadaisical attitude toward safety.

When an organization allows safety to be subject to climate changes instead of making it part of the culture, serious injuries and even fatalities can result. Management’s goal should be to create an environment where injuries are not acceptable and where all members of the organization work to prevent them. Changing the focus from a temporary emphasis on safety procedures to one of continuous improvement will help an organization sustain longer periods without injury.

The first step toward achieving this objective is for senior management to accept ownership of the procedures and processes that will lead to the desired safety outcome of becoming injury free. Leaders are not only responsible for developing safety procedures, but also for ensuring that they work as expected. Keep in mind that development is not done in a vacuum. Senior management must have input from the supervisors and staff who perform the operations in order for them to be effective.

Ownership also includes maintaining the commitment to safety from mid-level managers and supervisors, and paying attention to how well new hazards are being documented and brought to senior management’s attention. Leaders who accept responsibility for safety performance also monitor the factors that influence cultural acceptance, such employees’ level of trust in management, the effectiveness of communication between management and employees, and management’s credibility.

The second step toward achieving the desired safety outcome is to obtain employee buy-in. Start by listening to the way employees describe performance issues and problems. If their statements express the beliefs that achieving an injury-free culture is outside their control or it is someone else’s responsibility, then there are serious barriers that can prevent incorporating the goal into the culture.

Overcoming these obstacles starts when employees are brought into the development process. Once employees have ownership of the new procedures, they no longer feel that creating an injury-free workplace is beyond their control. Making them part of this process also puts responsibility for its success in their hands.

To maintain employee commitment, however, there has to be continual motivation, such as incentives, that keeps employees enthusiastic about the need for ongoing improvement.