Understand the basic coverage and exposures to negotiate a construction risk financing plan.
Most states require contractors to complete workers’ compensation audit. Some exceptions, such as Texas, do not require this, and other states have exemptions that allow smaller contractors to opt-out of the system based on their number of employed workers. Many contractors purchase workers’ compensation insurance since they would lose the exclusive remedy protection if they do not have this coverage in place. Contracts entered into by the contractor with an owner or contractor also will require workers’ compensation before the work begins.
The Coverage
In most states, private insurance companies provide workers’ compensation, but a few states exclusively provide this coverage, such as Wyoming, North Dakota, Ohio, and Washington. For instance, a contractor who lives in Texas but has to add North Dakota is going to be required to get coverage directly from North Dakota. The standard workers’ compensation policy provides two types of coverage: statutory workers’ compensation benefits payable under the covered states’ laws and employers liability insurance for claims by employees or dependents that fall outside the protection of the workers’ compensation law.
Contractors should be aware of the covered state's provision. Incidental exposures in states not listed under the policy must be addressed through the other state’s provision. In most cases, underwriters will provide coverage for all states except monopolistic states, but the employer’s liability coverage is going to be allowed in these monopolistic states. This will provide coverage for incidental exposures, like transportation or actual project work.
Liability for Subcontractors
In most states, the statute specifies that an upper-tier contractor is going to be responsible for workers’ compensation benefits to an uninsured subcontractor’s injured employee.
If you are doing not insure subcontractors and supply appropriate insurance certificates to certify coverage, this will end in long audits and extra premiums. A basic workers’ compensation manual specifies that if a contractor cannot show evidence of insured subcontractors, the auditor can automatically add the subcontractors’ payrolls to the contractor’s audit.
Exclusions
The standard workers’ compensation policy excludes coverage for any federal acts, such as Longshore and Harbor Workers Act (USL&H), Defense Base Act, Outer Continental Shelf Lands Act and Federal Employers Liability Act (FELA). Unless coverage has been added to the contractor’s workers’ compensation policy by an endorsement, these acts won't be covered.
Construction Risk Financing Plans
Workers’ compensation insurance may be obtained under the following risk financing plans:
Workers’ compensation insurance could also be obtained under the subsequent risk financing plans: 1) a guaranteed cost policy, which contains no deductible liability to the contractor, 2) an outsized deductible policy, which requires the contractor to pay a portion of the claim through a deductible reimbursement, 3) a retrospective program, which requires the contractor to be responsible for losses within its loss limit and 4) a dividend plan (flat or sliding scale), which provides a return premium to the contractor supported the incurred losses.
From these four plans, the underwriting community provides many derivatives, including scheduled credits and debits. Some contractors fund their workers’ compensation exposure through self-insurance, captives or a combination of the two to manage the overall cost of the program. When negotiating your workers’ compensation program, do not overlook certain coverage endorsements, including:
- Executive officers, partners, and sole proprietors coverage
- Maritime Employers Liability Coverage (Jones Act)
- Employers liability limit to coordinate with the umbrella/excess liability program
- ULS&H as appropriate
- Stopgap endorsement
- Voluntary compensation endorsement
- Alternate employer endorsement
- Blanket Waiver of subrogation endorsement as required by the contract
- Defense Base Act coverage
- Foreign Voluntary Workers’ Compensation
Workers’ Comp Protocols
1. Experience rating modifier–Many contractors and owners use this as one of their pre-qualifications before obtaining work. The National Council on Compensation Insurance (NCCI) announces the modifier, but in some cases, specific states, such as Pennsylvania, announced this. The data included within the modifier are going to be the foremost recent four years, with the foremost recent year eliminated. The formula compares actual to expected losses.
Contractors can take several actions to manage modifier. Conduct periodic claims meetings to review reserves, make certain payrolls are assigned to the right workers’ compensation classification and therefore the correct states, and assure that losses and payrolls insured under an OCIP/CCIP are filed correctly with the bureau.
2. Audit time issues–Each year, the insurance company will conduct an on-site audit. Presenting the information appropriately and documenting all subcontractors’ certificates of insurance will be important. In some cases, an auditor may not agree with how specific payroll has been assigned to a working class. Have all classifications and descriptions available for any required discussions. Also, be aware of issues related to driver payrolls, appropriate payroll limitations, and overtime surcharges.
3. Classifications–Review classifications periodically for accuracy, and work out any disputes (with appropriate documentation) with the insurance company in advance.
4. Claims management–Preparing claims handling documents that promote best practices for adjusting, supervising and managing workers’ comp claims plays a large role in overall risk management protocols. This can include everything from establishing return-to-work procedures to selecting defense counsel. Having an efficient working relationship between the insurance firm adjuster (or third-party administrator) and therefore the contractor can pay dividends for years to return.
