How Contractors Can Get a Grip on Workers’ Comp Costs

Small contractors struggling with workers’ compensation coverage may feel like they’re using a one-pound hammer to knock in a nine-inch nail—swing all you want, you won’t get very far.

The nail is indeed large—prices for coverage continue to climb, spiraling upward along with health-care costs and court settlements. And the hammer is small—small contractors can rarely afford the large minimum premiums, exorbitant deductibles and expensive safety programs that large contractors resort to in solving their coverage issues.

But small contractors are not at the complete mercy of market conditions. There are steps they can take to improve their results in this risk-management area that increasingly eats a disproportionate share of their dollars. Workers’ comp costs today amount to 40 to 60 percent of their insurance costs. They cannot afford to ignore these options.

Insureds are consistently warned by agents and brokers to expect substantive increases at renewal and they are bombarded with articles in industry periodicals providing post mortems with each carrier exodus. Even when experts express optimism about greater competition in this area, reports appear warning of continued double-digit increases in health-care costs—another enormous burden for small contractors. As the economy heats up, rising employment rates may lead to yet another financial challenge: higher labor costs.

Premium increases have produced marginal profitability for insurance companies in the past few years. Some observers laud improvements in recent loss results. However, market conditions and past loss history mean that reserve increases will outstrip rate increases thereby causing construction classes of business to incur higher costs.

For the fourth year in a row, workers’ comp rates in the United States continue to increase at double-digit rates: a range of 8 to 12 percent is expected for 2004. While many states are considering workers’ comp reforms to curb these trends, others such as California have yet to see cost reductions from similar “cost-cutting” legislative actions. Small contractors throughout the nation have recognized that waiting on legislative solutions to this insurance challenge could be too little too late.

In response, some small contractors are assuming higher retentions or are relying on experience-rated programs. Either of these approaches add a degree of uncertainty to the cost of risk, and therefore to the cost of work. Some contractors are forgoing coverage altogether and sometimes find themselves shut down by state investigators enforcing rules on proper insurance protection. The uncertainty of cost, and in some cases the prospect of subcontracting for an uninsured or underinsured contractor, may very well have a negative impact on the surety markets’ evaluation of the risk and in turn, on pricing.

There are steps, however, that insurance buyers can take to help control the impact of rising costs on their bottom lines. First and foremost is to assume control of the firm’s insurance destiny by reviewing the effectiveness of the company’s health and safety program. The cost of an injured worker is much greater than just the cost for medical treatment and lost wages.

There are hidden costs, which are difficult to quantify but consist of project delays, loss of crew efficiencies, clean-up and repair costs, civil fines, legal assistance and increased administration. Clearly, managing safety to reduce the frequency and severity of losses is about more than improving the company’s experience modification factor, though it will do that as well. It will also improve the risk in the eyes of the underwriter. A small contractor with an excellent safety program and record stimulates competitive appetites among competing insurance companies, a very good thing in this market.

One of the largest cost factors for workers’ comp insurance is the cost of claims. Especially when contractors are retaining more risk to help reign in costs, it is paramount that insureds take an active role in claims management. By selecting carriers or third-party administrators with proven track records in managing claims, small contractors can help shape their insurance destinies. Becoming more involved in the process can, at a minimum, improve communication between the claim representative and the insured.

Claims adjusters everywhere are being stretched and insureds must demand exceptional service if they want to receive the attention they deserve. It is also important that insureds do everything possible to secure and preserve evidence from an accident site and carefully document the circumstances associated with a loss in order to improve the chance for subrogation against negligent third parties.

Finally, small contractors should consider alternative markets that are becoming increasingly available. As national carriers often turn away small accounts, and local markets tend to be unstable, coverage offered by industry associations become more popular, and more viable. Controlling the insurance market is impossible. But small contractors can still have a big impact on their ultimate costs of loss by more aggressively managing safety and becoming an active participant in the claims process.

Mark Reagan is the CEO of Willis Construction.

Topics Claims Workers' Compensation Contractors