An Insurance Premium Headache
Workers compensation insurance premiums present a huge expense and a confusing
weave of regulations
By Arthur J. Levine
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Levine |
This year, California employers will pay nearly $15 billion for workers compensation
insurance. Although premiums the price insurers charge for coverage have
dropped by half in just four years, they remain a major expense and an occasional
severe headache for many companies.
Yet few business attorneys have more than a passing acquaintance with how
their clients' workers compensation insurance costs are determined. Nor,
perhaps more importantly, do most attorneys know how to represent clients effectively
when premium disputes arise. This article highlights the system basics and
touches upon some of the finer points.
How insurers determine rates
Workers compensation insurers may charge any premium that does not tend to
impair or threaten their solvency or tend to create a monopoly. State Compensation
Insurance Fund v. Superior Court (Schaefer Ambulance) 24 Cal 4th 930, 103
Cal Rptr 2d 662 (2001). The old "Minimum Rate Law," under which
most insurers charged the identical premium and then paid dividends, was repealed
in 1995. Nevertheless, virtually all workers compensation insurers still use
the same base rates, which they apply to standardized employment classifications.
Insurance Department regulations known as the Uniform Statistical Reporting
Plan (or "USRP"), 10 California Code of Regulations 2318.6 et.
seq. require workers compensation insurers to report policy data (rates,
payroll, employment classifications, claims, etc.) to a private, licensed
trade organization to which they must belong. Insurance Code 11751.4. This
organization is the Workers Compensation Insurance Rating Bureau of California,
often called "the WCIRB" or simply "the Bureau." The
WCIRB serves as the Insurance Commissioner's statistical ratemaking
agency. Insurance Code 11750 et. seq. It aggregates and analyzes all
of the data received from insurers.
The WCIRB then projects the rates that insurers will need to charge per
$100 of payroll in one or more of 400+ "classifications" in
order to pay projected claims during the coming year. These claim-cost-only
rates are called "pure premium rates." Insurance Code 11730(f). The
WCIRB recommends them to the Insurance Commissioner, who "approves" or
modifies them in an advisory capacity as "adequate" following
a public hearing. Insurance Code 11750(b). The WCIRB has statutory
immunity in connection with most of its rate-making-related activities. Insurance
Code 11752.7(f), 11759.
It is at this point that market competition begins to factor into the pricing
system. Each insurer calculates its own margins for non-claim expenses (sales
expense, overhead, profit margin, etc.) and decides how much to load the advisory
pure premium rates. Since they are only advisory rates, insurers are also free
to deviate from them by filing actuarial support for their deviations. Rates
must be adequate to cover an insurer's losses and expenses, not tend
to create a monopoly in the market, and not be unfairly discriminatory. Insurance
Code 11732-3.
Insurers also develop rate modification plans applicable to individual policyholders,
with rate credits and debits for such characteristics as housekeeping, financial
strength, safety training, etc. These would be reflected in "scheduling
rating" pursuant to Insurance Code 11730(j). All of these rate
loadings, pure premium rate deviations and rating plans are filed with the
Insurance Commissioner and are open for public inspection. Insurance Code
11735.
Thus, the first reason why market competition is structurally, although not
legally, limited, is that every insurer begins its premium calculations with
the WCIRB-calculated uniform loss costs and the commissioner's advisory
pure premium rates. They then apply their somewhat modified rates to a uniform
regulatory employment classification system.
Experience modifications
The second factor limiting market rate competition is "experience rating." Insurance
Code 11730(c). When insurers report claims under the policies they issue,
the WCIRB compares each employer's claims history to that of its industry
competitors. This calculation produces a merit rating called an "experience
modification" for every employer large enough to have a minimally statistically
credible claims history.
The purpose of experience (aka "merit") rating is to provide an
economic incentive (or penalty) for safety. Indeed, employers with high experience
modifications are assessed to pay for special Cal/OSHA inspections and consultations.
Labor Code 62.7, 6314.1, 6354(a). An employer may not enter into an employee
leasing arrangement (Labor Code 3602(d)) to evade application of its experience
modification. Insurance Code 3600(d).
The WCIRB's calculation of experience modifications is governed by the
California Experience Rating Plan, or "CERP," 10 California
Code of Regulations 2353.1. Rather than making their own projections of
a policyholder's likely claims experience, as they do for most other
types of insurance, insurers must apply to their policy the WCIRB-promulgated
experience modification for the policyholder. Insurance Code 11734(a). Generally,
an employer receives its first experience rating at the beginning of its third
year in operation.
Soon thereafter, the WCIRB inspects the employer's premises and operations
to confirm that the insurer is reporting the employer's payroll under
the correct classification(s). The USRP also governs both insurer reporting
and classification assignments. Both the CERP and the USRP are posted on the
WCIRB's website, www.wcirbonline.com.
Insurer data reports to the WCIRB under the USRP, called "unit statistical
reports" or "USRs," reflect data deemed accurate as of 18
months after insurance policy inception. Since premium is based, in part, upon
the employer's actual payroll during the policy term, final premium can't
be determined until the insurer conducts an "audit" or physical
examination of the employer's books a few months after policy expiration.
Insurers must then submit updated USRs, typically tracking developments in
claim value estimates, annually for nine more years, as necessary.
Premium disputes
With these basic processes, laws and procedures in mind, categories of common
premium disputes begin to emerge. Most premium disputes involve one (or more)
of the following five issues:
1. Did the insurer use the correct USRP employment or industry classification(s),
and therefore apply the correct pure premium and deviated rates? If not, did
the employer, agent or broker report the wrong classification(s)? Did the insurer
use the wrong ones? Did the WCIRB assign the wrong ones? WCIRB classification
assignment changes that increase premium are usually not retroactive. Insurance
Code 11753.2(b). By contrast, the USRP states that payroll reallocation
among existing classifications on a policy is retroactive to the policy's
inception. The USRP directly governs data reporting only, not premium. Nevertheless,
given this rule, courts are likely to find additional premium owed under these
circumstances unless the facts support contract law defenses.
2. Did the insurer report to the WCIRB, and use for premium calculation purposes,
the correct amount of payroll? Did the employer keep proper payroll
records? If not, what is the appropriate remedy? How did the insurer treat
overtime, bonuses, expense reimbursement, housing allowances, and benefits?
Did the employer improperly characterize employees as independent contractors,
or did the insurer treat contractors as employees where the policyholder didn't
obtain certificates of insurance from the "contractors?"
3. Was/were the WCIRB-issued experience modification(s) correct? Did
it/they reflect incorrect classifications and/or payroll? Did it/they fail
to recognize an ownership change, thus incorporating or failing to incorporate
certain data?
4. Did the insurer's improper claims handling (inadequate investigation,
passive acceptance of the employee's doctor's evaluation, failure
to pursue subrogation, etc.) result in the reporting of overstated claim value
estimates? Did the insurer fail to send to the WCIRB a USR update reflecting
a WCAB "take nothing" claim determination, or crediting an allocation
or subrogation recovery? If so, one or more experience modifications would
have been too high. The result would have been excessive premium and possible
Cal/OSHA assessments, as discussed above.
5. Did the insurer previously accept the employer's current arrangements
on prior-year audits, but has now changed its opinion of classifications, employment
status, recordkeeping sufficiency, etc. and therefore seeks substantial additional
premium?
Insurers often point to CERP and USRP language to justify their additional
premium demands, but these regulations only pertain to data reporting requirements.
Ordinary contract defenses such as estoppel, custom and practice, laches and
negligence of the insurer's agent and/or contract premium auditor may
protect the policyholder from an additional premium invoice, even if the CERP/USRP
requires the insurer to file a corrected USR with the WCIRB. Nevertheless,
as discussed below, it may be necessary to navigate CERP and/or USRP issues
in an administrative setting before raising defenses in court.
Administrative review
It is often difficult to determine whether an employer must or even should
file an administrative appeal with the WCIRB, or with the insurer, or concurrently
with both, and then demurrer to a premium collection action rather than simply
filing a complaint, cross-complaint, or answer in court. Since failing to file
a timely administrative complaint may ultimately prove fatal to a cause of
action or defense, counsel's initial false step may prove the first one
toward a malpractice action.
A party may appeal a WCIRB or insurer decision to the Insurance Commissioner. Insurance
Code 11737(f), Title 10, California Code of Regulations, §2509.40. The
commissioner designates some of his decisions as precedential: insurance.ca.
gov/0250-insurers/0500-legal-info/ 0600-decision-ruling/0100-precedential/index.cfm.
The commissioner's decision can then be appealed to the Superior Court
by seeking a writ of administrative mandamus under Code of Civil Procedure
1094.5 and Insurance Code 11754.5. The courts have made it clear,
however, that the commissioner has broad discretion in interpreting workers
compensation premium rules. Simi Corporation v. Garamendi 109 Cal
App 4th 1496, 1 Cal Rptr 3d 207 (2003).
Employment status issues
Employers pay workers compensation premium for their employees only, not for
independent contractors. Similarly, experience modifications reflect wages
paid to, and injuries sustained by, employees only. It would therefore make
sense that any premium dispute involving the alleged employment status of "workers" would
require administrative review. This is not the case, however.
If the dispute is whether individuals are employees, neither the WCIRB nor
the Insurance Department will determine whether the payroll an insurer reports
to the WCIRB and the WCIRB uses for experience rating, and which the insurer
also uses to charge premium, is correctly reported and used. The commissioner's
right to refuse making this determination is currently being litigated. Whether
insurers can use the disputed "payroll" to calculate premium should
not be an administrative issue, except perhaps on the theory that an insurer
violates its filed rating plans by doing so. The courts may nevertheless require
that administrative expertise be brought to bear on the issue under either
the administrative exhaustion or primary jurisdiction doctrines. Jonathan
Neil & Associates Inc., v. Freddie Jones 33 Cal 4th 917; 94 P.3d 1055;
16 Cal Rptr 3d 849 (2004).
Claim-valuation disputes
As the California Supreme Court noted in 2001, numerous Court of Appeals decisions
have sanctioned civil claims against workers compensation insurers alleging
that their misconduct resulted in unjustifiably higher premiums. State Compensation
Insurance Fund v. Superior Court (Schaefer Ambulance Service Inc.) 24 Cal
4th 930, 103 Cal Rptr 2d 662.
It's well-established, though, that there is no administrative remedy
concerning an insurer's substantive handling and valuation of workers
compensation claims. This is so even though claims-handling directly affects
the WCIRB-issued experience modification, which the insurer must use to compute
premium. Claims handling and valuation disputes that affect workers compensation
premium are a matter for the courts. Lance Camper Manufacturing Corp. v.
Republic Indemnity Co. 44 Cal App 4th 194, 51 Cal Rptr 2d 622 (1996), Tricor
California Inc. v. SCIF, 30 Cal App 4th 230, 35 Cal Rptr 2d 550 (1994).
Punitive damages are recoverable for bad faith claims-handling causing inflated
premium. A policyholder who suspects claims-mishandling or improper valuation
often experiences an initial challenge in gaining access to the insurer's
claim file. Labor Code 3762 sets forth employer rights in this area.
State Compensation Insurance Fund
Although many employers refer to the State Compensation Insurance Fund as
their "insurance company" or as simply "the state," it
is actually neither. SCIF is a Public Enterprise Fund created by Insurance
Code 11773, enacted pursuant to Section 21, Article XX of the California
Constitution. It functions, on the one hand, as what is sometimes called the "insurer
of last resort." This means that under most circumstances, SCIF cannot
refuse to insure any applicant. Insurance Code 11784.
On the other hand, SCIF is charged with being "fairly competitive with
other insurers" and "neither more nor less than self-supporting." Insurance
Code 11775. State coffers do not back-stop SCIF. Insurance Code 11771.
SCIF is even vulnerable to punitive damages for the adverse premium impact
of bad-faith claims handling, just like private insurers. Notrica
v. SCIF 70 Cal App. 4th 911, 83 Cal Rptr 2d 89 (1999). Aspects of SCIF's
pricing were discussed in P.W. Stephens v. SCIF 21 Cal App 4th 1833,
27 Cal Rptr 2d 107 (1994) and in Rail Services of America v. SCIF 110
Cal App 4th 323, 1 Cal Rptr 3d 700 (2003), but many other SCIF practices have
not been addressed by our courts.
Premium fraud
Some employers intentionally underreport the amount of their payroll, knowingly
report payroll under the wrong workers compensation classification, pay medical
bills "under the table" to avoid their inclusion in experience
rating, and/or engage in other types of workers compensation premium fraud.
Insurers and government agencies have become more aggressive in prosecuting
alleged premium fraud. In part, this may reflect the special surcharge upon
all workers compensation policies which provides funds (allocated through the
Insurance Commissioner) to district attorneys. Insurance Code 1877, et.
seq., 8 California Code of Regulations 15607. In any event, attorneys should
advise their clients of the severe penalties that exist for premium fraud.
These include fines of 10 times the premium difference and up to five years
in state prison. Insurance Code 756, 1871.4, 11755, 11756(a), 11760, 11880,
and Labor Code 3820.
Can an insurer be liable for bad-faith conduct in charging and collecting
premium? The California Supreme Court said "no" in 2004 in a case
involving automobile insurance premium, Jonathan Neil & Associates Inc.,
v. Jones, supra. Its reasoning seems equally applicable to workers compensation,
and Jonathan Neil was applied, albeit under arguably narrow circumstances, in
Tilbury Constructors Inc., v. State Compensation Insurance Fund, 137 Cal
App. 4th 466; 40 Cal Rptr 3d 392; 2006.
Nevertheless, an insured may sue for malicious prosecution if an insurer (or
its legal counsel) engages in bad faith collection tactics. Citi-Wide Preferred
Couriers Inc., v. Golden Eagle Insurance Corporation 114 Cal App. 4th 906;
8 Cal Rptr 3d 199; 2003, hearing denied. An interesting, open premium-related
question is exposure to punitive damages if an insurer cancels a policy in
bad faith, falsely claiming premium is due in order to fall within Insurance
Code 676.8's limited reasons for permissible cancellation.
Workers compensation insurance premiums are an ongoing, substantial expense
for most California employers. As these summary points suggest, the law in
this area presents a dynamic and complex weave of statutes, regulations, case
law, administrative procedures and rulings, jurisdictional murkiness, market
controls, market competition, insurer custom and practice, lofty public interest
and economic/political self-interest.
• Arthur J. Levine is a Fullerton attorney and litigation consultant/ expert
witness specializing in workers compensation insurance premium issues. He can
be contacted at art@drlevinelaw.com.
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- Since 1995, California workers compensation insurers have charged premium
under the "Minimum Rate Law."
- The USRP and CERP are the state agencies primarily responsible for establishing "pure
premium" workers compensation rates.
- Under California's "open-competition" system, an insurer
must apply a WCIRB-issued experience modification.
- Most of the laws governing insurer data reporting to the WCIRB are contained
in the California Insurance Code.
- If an employer disputes workers compensation premium over the issue of
whether workers are employees (for which premium may be charged) or independent
contractors (for which it may not), they can seek a determination from the
Insurance Commissioner.
- Employee leasing arrangements have become popular, in part, because employers
with high "experience modifications" can legally procure workers
compensation coverage through a leasing firm with a lower experience modification.
- Most employers can't know how much they will pay for workers compensation
insurance because the final premium won't be determined until after the
policy expires.
- As the "insurer of last resort," the State Compensation Insurance
Fund must insure most employers that seek coverage.
- Despite a series of legislative workers compensation reforms over the past
few years, statewide workers comp insurance rates remain close to their 2003
historic high.
- Insurers must file their rates and rating plans with the Insurance Commissioner,
and these are available for public inspection at the commissioner's offices.
- Workers compensation insurers may charge two otherwise similar employers
different rates based upon the employers' housekeeping practices, financial
strength, safety training and other individual risk characteristics.
- An employer who believes that its workers compensation premium is too
high because its insurer paid a fraudulent claim without adequate investigation
has no administrative remedy with the WCIRB or Insurance Department.
- The California Supreme Court has declared that punitive damages are recoverable
for insurer bad faith in charging and collecting workers compensation premium.
- The Insurance Commissioner's Web site posts precedential workers
compensation premium decisions.
- Unlike most other administrative agency determinations, Insurance Department
decisions concerning workers compensation premium are not subject to administrative
mandamus proceedings.
- "Experience rating" provides rate discounts to long-established
employers and surcharges to newly established employers, because statistics
show that established employers, on average, have better safety records.
- The California Labor Code describes an employer's right to
examine an insurer's workers compensation claim file.
- The Uniform Statistical Reporting Plan governs WCIRB reporting of data
to workers compensation insurers.
- Premium increases due to payroll reallocation among workers compensation
classifications already on the policy are not retroactive.
- Standard contract law defenses are available in premium collection
actions even when the insurer correctly applies data reporting regulations.
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