November 2010

Volunteers are the lifeblood of hundreds of organizations, from churches to political campaigns to youth sports leagues. These organizations could not accomplish their missions without them. Just like paid employees, however, volunteers can have accidents that injure themselves or others or that damage property. A woman making deliveries for Meals On Wheels can have a car accident. A Little League coach can be injured by a batted baseball. A man helping to build a house for Habitat For Humanity might discard what he thinks is an extinguished cigarette and start a fire that destroys half of the house next door. Because each of these individuals was volunteering for charitable organizations at the times of the accidents, the question arises as to whether the organizations are responsible and whether their insurance will protect them.

Some state Workers Compensation laws cover certain types of volunteers. For example, some states cover volunteer firefighters but not other types of volunteers. Insurance companies have available a policy change that voluntarily covers workers who are not automatically covered by a state Workers Compensation law, but the endorsement is unclear as to whether it covers injuries to volunteers. Its coverage might vary from state to state, so an organization’s leadership should determine how the law applies in its particular state. For organizations in states where coverage for volunteers is unavailable, some specialty insurance companies offer accident policies. Such a policy might pay for the medical expenses of the Little League baseball coach injured by the batted ball.

Commercial General Liability insurance typically covers both the organization and the individual volunteers for bodily injury, property damage, and personal and advertising injury they cause to others. The man who starts a fire while volunteering for Habitat For Humanity will have coverage for the damage done to the other house. The insurance applies only while the volunteers are performing duties related to the organization’s business. Also, the person must meet the policy’s definition of “volunteer worker” as a person who is not an employee, who donates her work, acts at the organization’s direction and within the scope of duties the organization determines, and who receives no compensation from anyone for her work for the organization. The policy provides a small amount of insurance (typically $5,000) for injuries volunteers suffer. A volunteer who sprains her ankle while working at a library’s fund-raising book sale will have coverage for her medical treatment.

An organization’s Auto policy will cover a volunteer if he is using a vehicle he does not own for organization business with the organization’s permission. The vehicle must be one that the policy covers. However, although the policy will cover the organization for accidents the volunteer has while using his own vehicle for organization business, it will not cover the volunteer himself. He would have to seek coverage under his Personal Auto and Umbrella policies, if he has them. For example, the woman making deliveries for Meals On Wheels using her car has coverage under her own insurance, not the organization’s. The organization’s policy would cover her if she were driving a car the organization provided. Also, the Business Auto policy does not provide automatic coverage for injuries to volunteers like the liability policy does. The insurance company can add this coverage, known as “Medical Payments,” to the policy for an additional premium.

Organizations interested in providing additional protection for their volunteers should work with a professional insurance agent (such as ours!) to identify the options and insurance companies willing to provide them. Volunteers are essential to organizations, so it is worthwhile to make certain that appropriate coverage for them is in place.

Just the mention of a Workers Compensation audit engenders fear into the heart of man. If you are scheduled for a Workers Compensation audit, there is no need to dread it or be fearful. A small amount of preparation and common sense can save you a lot of aggravation and money.

Devoting a few hours of your attention now can save you a lot of time in the future. You need to give your full attention to the auditor and remain with him/her throughout the entire process. The process can take a couple of hours to complete. So, make sure that the time and date of the scheduled audit is convenient for you. Call to reschedule the audit if it has been scheduled at an inopportune time.

Begin to collect and organize payroll records, overtime payroll records, classification divisions, and insurance certificates as soon as you learn of the audit. This should give you plenty of time to compose a summary of each, which will help you to better communicate important data during the audit process. Information that is well organized will also expedite the process. If you can reconcile your calculations to payroll records, such as W2s and payroll stubs, the auditor might be more comfortable trusting your data.

You will also want to make any needed adjustment to payrolls; for example, subtracting bonus pay from overtime pay. If applicable, you will need to apply the maximum and minimum payrolls to the calculations. This part might require a little research, since the minimum and maximum will vary based on state; career; and even among sole proprietors, partners, and executive officers.

Before the audit, you should apprise yourself on the different employee job classifications and make sure that each employee is classified correctly. This is a key element to ensure that the audit flows smoothly. The auditor is most likely going to be asking you about the classification and job duties for multiple different employees. So, be prepared and armed with knowledge.

One last important preparation item concerns subcontractors. Payments issued to subcontractors can go against your Workers Compensation in the event that the subcontractor did not have a certificate of Workers Compensation. You can get a copy of the certificate, but make sure that it is current and shows coverage during the time the subcontractor worked for you.

Once the audit arrives, you will be glad that you took a little time collecting, organizing, and summarizing your information. You will also find that the auditor is not a nemesis, especially when you provide honest answers and organized paperwork.

At the conclusion of the audit, ask the auditor for the audit worksheet. Ask one of our brokers or agents to review the accuracy of the final audit. You have a legal right to ask for a corrected audit anytime you think there were any errors. If any overpayment was made during the past three preceding audits, you also have a legal right to recover it.

A large contractor that specializes in excavating, removing, and hauling contaminated soil runs into an insurance problem while bidding on a multi-million dollar three-year project. The contractor has Liability insurance that covers pollution-related incidents for up to $1 million each and up to $10 million per year. However, that is not enough for the project’s owner and general contractor. They plan to build a new school on the site after the soil is cleaned up, and they want the excavation contractor to carry at least $40 million limits in case students fall ill and their families sue. The excavation contractor’s insurance broker gets quotes from four companies for the extra $30 million and reports back that the premiums will be astronomical. The companies are assuming that any claims involving sickness in children will get sympathetic hearings from juries, leading to potentially large judgments and defense costs.

The excavation contractor has more than a decade’s experience in this type of work and has never had liability losses in any one year that exceeded $5 million. Its management is confident in its ability to do this project correctly, and it wants the lucrative contract. However, the high premiums for the excess $30 million coverage will take a major bite out of its profit margin. The solution might lie in something known as the “corridor self-insured retention.”

Corridor self-insured retention is an insurance program where the insured organization carries one layer of insurance (known as the primary layer) and an excess layer, but insures losses that fall between the two with its own funds. To illustrate, our excavation contractor buys the primary insurance that pays for up to $10 million per year in liability losses. It then self-insures (pays on its own) for losses that exceed $10 million per year but that are less than $20 million. Finally, it carries the excess $30 million coverage (the excess layer) that applies when losses exceed $20 million.

Here’s how it would work under three loss scenarios:

• The contractor has a typical year, incurring around $4 million in losses. Since the primary insurance will cover up to $10 million in losses in one year, it will pay all $4 million, less any applicable deductible or self-insured retention specified in the policy.
• The contractor has $17million in losses. This time, the primary insurance pays $10million (again, less self-insured retentions or deductibles). The contractor pays the remaining $7 million out of pocket.
• The contractor has $30 million in losses. The primary insurance pays $10 million, the contractor pays $10million out of pocket, and the excess insurance pays the remaining $10 million.

Under the last two scenarios, the contractor has to pay some very large sums out of its own funds. Why would an organization agree to such an arrangement? First, it might be the only way it can obtain Excess insurance. If the organization is in a highly hazardous line of work, insurance companies might not want to pick up coverage at the point where the $10 million primary insurance is used up (also known as the “attachment point”). Second, if Excess insurance is available, a corridor self-insured retention can make the premiums more affordable. Instead of kicking in when losses exceed $10,000,000, the Excess insurance begins to pay when they exceed $20 million. Because the chances of having to pay are reduced, the insurance company reduces the premium. Finally, it allows the contractor to meet the general contractor’s insurance requirements at a more reasonable cost and relieves it of having to pay for expected losses out of pocket.

A corridor self-insured retention program is complex and should be developed with care. Our professional insurance agents experienced in alternative risk transfer techniques can provide valuable assistance with such an arrangement. Large organizations with strong balance sheets can benefit from a program like this, but they must build it on a thorough analysis and understanding of the risks.