by Peter Schlactus, CIC, AAI
No form of insurance causes so much fear, misunderstanding, even loathing -- as Workers Compensation (WC). And for good reason. No other form of insurance can lay claim to so large a slice of your revenues. Whether you already pay big premiums now or are just waiting for the "ax" to fall, most courier owners know that the stakes are high.
Consider this your primer on Workers Compensation system as applied specifically to the courier industry. We will cover the basics of how the system works with a focus on pricing and independent contractor issues. Finally, we will examine the best legitimate options available to courier companies. This background will leave you better prepared to make the tough decisions about how best to protect your company.
Workers Compensation (WC), which was designed over seventy years ago to make sure that workers injured on the job receive reimbursement for medical expenses and lost income. In return, businesses are shielded from what otherwise would be unlimited liability for this plus pain and suffering, punitive damages, etc. While we strive to limit the cost of WC, we should not forget the substantial benefits we as business owners receive from it.
Before tackling so hefty a subject within a brief article, a few words of caution are in order. First, Workers Compensation is a state-by-state affair. General principles may apply to the majority of jurisdictions, but each state's particular statutes and regulations ultimately govern. Indeed, your WC insurance policy says little other than to promise that your carrier will comply with the terms of your state's statutes.
Second, laws and regulations never anticipate every situation. When disputes or ambiguities arise, administrative hearings must resolve the differing interpretations. Results are inherently unpredictable and not always consistent. By staying well within the bounds of established practice, you can minimize - though never eliminate - the chance of finding yourself at the mercy of this quasi-judicial system.
The Bottom Line: states require almost all businesses to procure a Workers Compensation policy. In many cases having even one employee is enough to trigger the statues. The fact that your drivers may be Independent Contractors generally does not excuse you. If your business does not comply, you face not only fines, but also unlimited liability of the sort already mentioned. Moreover, the law prohibits you from using most of the best legal defenses against driver lawsuits, such as the driver's own negligence or assumption of risk. In short, if you are caught without WC the system will do its best to make your business life as miserable as possible -- even if you close up shop and try to start fresh.
Understanding the Cost: Three primary factors determine WC premiums -- your classification, your rate, and your experience modification factor ("mod"). For the most part these factors are set up by the states and your insurance company's discretion is strictly limited.
Classification: The correct classification for courier companies is "Parcel Delivery," which covers transportation of shipments weighing less than 100 pounds. If you are currently assigned to a less costly classification, be forewarned that a sharp auditor can reclassify you and charge for the increased premiums you "should have" been paying going back up to three years. If the NCCI agrees, you are facing a costly, uphill battle (we have represented policyholders in these types of disputes). One piece of good news is that you are allowed to separate out all of your clerical, sales, foot messenger, and executive payroll into cheaper classifications.
Rates: Each classification has an assigned rate, which varies from state to state. For drivers the rate tends to flutter between $6.00 and $10.00 per $100.00 of driver compensation (though it can be even higher). That is equivalent to a premium of between 6% and 10% of total driver compensation (i.e. annual 1099 figures). By comparison, office and sales rates can be less than 1% (or $1.00 per hundred).
Let's take a simple example of a courier company in a state with a $7.00 Driver rate and a $.60 Clerical rate. The courier pays drivers $150,000 and office staff $45,000 annually. WC premiums would be $10,500 for drivers (7.00x1500) and $270 for clerical (.60x450).
Experience Modifier: To reward businesses with superior loss records and incent the others to clean up their acts, a percentage modifier is applied to the basic premiums of all but the smallest businesses. A ".82" modifier (a.k.a. "mod") would mean that a business had few if any losses and pays only 82% of the basic premium. By contrast a "1.82" mod is evidence of high losses -- a company with this mod pays 182%, or almost twice the basic premium!
Mods are calculated by the good ole' NCCI and follow you wherever you go for coverage. The formulas used are complex, but the basic idea is to compare you with the "expected" losses of a business in your classification. There is some protection against one nasty loss sending your mod sky-high, but each and every loss does impact your mod. for a full three years -- and it is not easy to escape your mod and start over.
One last word about costs: it is illegal in almost all cases to pass on the cost of Workers Compensation to those who may receive its benefits (i.e. workers). This has been one significant cause of the decline in contractor commission rates compared with ten years ago. At that time the government and insurance industry were only just beginning to crack down on companies using IC's. As more and more companies have begun paying WC on drivers, something has had to give.
Independent Contractors: The seminar's next topic was how WC applies to IC's. At this point I must humbly remind the reader that I am only the messenger, not the author of these rules. As alluded to above, the large majority of states require you provide and pay for WC on IC's unless the contractor provides you with a WC certificate -- not a realistic option in most cases. Many frustrated delivery service owners have pointed out that self-employed persons are not required to purchase WC and I agree. That rule unfortunately has nothing to do with the rules that govern companies who contract with them, at least in the eyes of the government agencies overseeing WC and handling worker claims..
What this means is that most delivery companies that use IC's have a ticking time-bomb on their hands. If your contractors and their full compensation were not accurately reported to your WC carrier, you may not be paying as much as the above rules suggest you should be. Keep in mind that when your carrier discovers its mistake, either by audit or claim, it can charge you for three years worth of back premiums, all due at once. This may seem grossly unfair and harmful, but it is certainly legitimate according to the WC regulations.
Keep in mind that even if you have survived one or more audits unscathed, this is no guarantee that the next auditor won't take a more thorough look or adopt a more hard-line approach.
Assessing the Risks: Due to the widespread lack of knowledge and misinformation on Workers Compensation, many of you reading this article are probably exposed to one or more significant risks. You may not have a WC policy when you really should. You may not be properly classified and rated. You may suffer under a harsh experience mod. You may not be paying properly for your IC's. Or you may be paying more than seems fair.
A last factor concerns your carrier and how well they respond to claims in order to control costs and fight fraud. If you are insured by your state pool or assigned to a carrier because no one will voluntarily cover you, then you have little hope of receiving top-quality service. This can lead to higher losses, a worse mod, and more costly premiums down the road.
Solutions: If paying proper Workers Compensation premiums seems like an impossible burden, crippling or losing your business due to mishandled WC is even worse. If you wait for the proverbial ax to fall, you will have few options and little bargaining power. The time to address your problems is now - without the threat of a cancellation, lawsuit, and/or fines over your head.
1. IC Discounts: Some brokers have persuaded certain insurance carriers to give delivery companies a fairer deal. Since contractors are usually required by their contract to obtain their own Workers Compensation (whether or not they actually do), they tend to make significantly fewer claims.
Hidden within the WC rule books is fine print that allows carriers to discount their charges for such contractors. This is above and beyond the "standard" rate discounts and premium discounts that many carriers will offer to applicants with good loss records. The extra savings would apply only to independent contractors, not to any employee drivers you may have, even though they share the same classification.
The IC discount can be over 50%. If we return to our example from above, we have a $7.00 rate and $150,000 in driver compensation producing $10,500 in premiums. With a good IC discount premiums could drop to as little as $3,500. This is equivalent to reducing the rate to $2.33 per hundred, or only 2.3% of compensation! Many would consider this an acceptable price to pay for unlimited protection against claims from injured drivers.
Finally, this solution eliminates the risk of a nightmare audit. There is no need to fear large and uncertain additional charges because you will have fully reported all workers to your WC carrier up front. Each owner must weigh the costs and benefits.
2. Substitute Coverage: The problem with even a discounted Workers Compensation policy as described above is that any claims that do occur will impact your experience mod and lead to higher rates for three years thereafter. Also, your contractors will generally still believe themselves to be without protection against injury and disability. Many delivery service companies care about their drivers' welfare and would jump at the opportunity to make affordable protection available to them.
Occupational Accident Insurance (OccAcc) offers a way for drivers to receive benefits after an injury without affecting your Workers Compensation insurance. Unlike WC, drivers may legally pay the cost of the coverage- usually through weekly pay deductions.
OccAcc benefits package several benefits together for workers injured on the job. These usually include several hundred thousand dollars of medical expense reimbursement, additional payments in the event of death or dismemberment, and disability income benefits if a driver cannot return to work after a specified waiting period. The duration of different benefits, and other factors will vary from plan to plan.
Rates are generally much lower than stand-alone health, disability, or life insurance. The use of small deductibles discourages claims for minor injuries. Often managed care practices are utilized. Finally, the carrier need not involve itself with the myriad regulations of the WC system.
Occupational Accident insurance is not, itself, a substitute for Workers Compensation. It is possible, however, to find a WC Carrier willing to waive charges for contractors so long as it knows those contractors are covered by Occupational Accident benefits.
It is important that you get this commitment in writing so that in the event of a claim the carrier does not suffer from a sudden case of amnesia. Also, be sure the carrier is prepared to defend you against any contractor WC claims that do occur despite the OccAcc plan. Get this in writing as well.
A note of caution: there are companies aggressively promoting solutions that may seem similar to that described above, but provide substantially less security for you the delivery service. One common element in these is the so-called "Contingent Workers Compensation" policy, which is supposed to protect you and your WC Carrier from a contractor seeking WC benefits.
"Contingent Comp." as it is often referred to is not Workers Compensation and is not recognized as a legal substitute. It is merely liability insurance. Consequently it does not guarantee that your carrier will not have to pay claims, nor prevent your carrier from auditing your contractors. According to a number of involved industry underwriters, it is also largely untested in real-life claim situations.
If you are inclined to pursue the "Substitute Coverage" option, make sure your plan includes the following:
1. adequate Occupational Accident benefits
2. statutory Workers Compensation policy
3. written commitment by your WC carrier not to audit for contractors
4. coordinated WC and OccAcc benefits, ideally from the same carrier
Wrap-Up: There are solutions to the challenges of Workers Compensation. Although they are not without cost, most delivery services will find them affordable. Most importantly, the best solutions put you in full compliance with the law, correctly classify and rate your company, and protect you from the punitive WC audits that plague so many in your industry.
With a basic understanding of the Workers Compensation system you can adequately identify your risks, evaluate your options, and choose the solution that best fits your business.
Peter Schlactus, a Certified Insurance Counselor and Accredited Advisor in Insurance, is Co-President of KBS International Corp., which provides specialized insurance programs, benefits, and risk management services to courier companies and executives nationwide. Mr. Schlactus is available to answer inquiries at 1-888-KBS-4321 or via e-mail at peter@courierinsurance.com.
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