The Work Comp Executive publication recently headlined an article about a legal dispute between a well-known and respected Sacramento California employer and a workers’ compensation insurance company.
To me, the issues in this disagreement are a reminder of how careful employers need to be when selecting an insurance company and the type of insurance policy they purchase for their business.
Those involved in this disagreement are not as important as the issues, so I am intentionally not mentioning their names.
The dispute involves how insurance premiums would be determined from the workers’ compensation insurance policy the employer purchased.
Unlike most workers’ comp policies in the market place, the policy selected by the employer had a feature where the premiums could go up or down during the policy term. The variation of premiums depended upon the dollar value of claims, i.e. cost of claims, which come from employee’s work related injuries.
It is typical when a workers’ comp claim occurs for the insurance company claims staff, or claims professionals hired by the insurance company to handle claims, to estimate the cost of the claim. They would base their decision upon their professional judgement from the information received from the injured worker’s treating medical doctor. In California, it is customary for the treating doctor to be selected by the insurance company through a Medical Provider Network (MPN) the insurance company hires. It is not clear from the information we have if an MPN was used.
The employer’s position is that when they chose not to renew their policy with this insurance company, the insurance company dramatically increased the costs of their claims. This reevaluation resulted in a very large additional premium which the insurance company says the employer owes. The employer refuses to pay, because they feel this is an “arbitrary” billing that in their view there is no sound basis. So, they are both in a legal tug a war.
When the employer purchased this policy, I am sure the employer entered into this arrangement with the feeling they could manage the risks and threats that cause workplace injuries which would result in low claims. To them, and perhaps to other employers, it seemed like an opportunity to reduction the sizable expense created from the purchase of workers’ compensation insurance.
Concerns for Decision Makers:
Here are some concerns that I feel employers should be aware of before purchasing this type of “variable premium” insurance policy:
A program like this should cause an employer to become very familiar with the details of the upside and downside of the offering before making a commitment. Reliance upon the knowledge and experience of a qualified insurance advisor (insurance broker) is a must.
Determining the future costs of a claim is not an exact science. The cost of an open claim is an estimate and the estimate can go up or down depending upon the recovery stage of the injured employee and other factors. Most times the cost estimates are artificially high, because the insurance claims adjuster does not have updated doctor’s medical reports. If the claim is very new and there is little information, the adjuster will make a worse case estimate.
When policy premiums can vary from decisions made by an insurance company’s staff, to me this is a big red flag. So under these circumstances, it needs to be very clear what are the checks and balances to make sure the claims costs are realistic. So, what role can the employer and their insurance adviser play to provide appropriate claims management oversight? These and other questions need to be answered.
Let us not forget that workers’ comp is a tool to finance claims, like a credit line with a bank. This is the employer’s money that is being used and it should be managed carefully.
More Questions to Ask:
Since this type of insurance policy is not as common as those that provide a 12 month rate guarantee, here are some additional questions for the buyer to ask before making a decision:
- How many other employers does their insurance adviser insure who have purchased this type of policy? This helps demonstrate the knowledge of those proposing this program.
- What have other employer’s experienced with this type of policy? E. When premiums are adjusted, is it clear to the employer why and how this is occurring?
- How does the claims practices of this company compare to other insurance companies?
- Ask the insurance company to provide various written examples of how premiums can be adjusted given your past claims history, plus some worst case claims? This information may provide you with a view of their prospective.
- What happens when you choose to not renew our policy with this insurance company?
- What types of issues have other employers experienced with this insurance company?
To me, it is troubling to learn the insurance company involved in this disagreement is owned by one of the largest and most well know insurance conglomerates in the US.
So, decision makers be thorough, thoughtful and careful. Sometimes opportunities are too good to be true.
Reach out to me and here is how to do so:
Email: email@example.com; Phone 800-346-6216 x 8757 or direct 916-960-8758; mail: ISU Insurance Services, 2266 Lava Ridge Court, Roseville, CA 95661