Workers’ Comp Insurance Deserves Extra Caution in Construction Market

Move from Residential to Commercial Construction Increasing Risk Severity

Following legislative reforms, the slowing economy and soft market conditions, workers’ compensation insurance carriers are eager to build their business in California. But agents and brokers need to take care when writing coverage, especially in the construction market.

In the past few years the workers’ compensation market has undergone some significant changes, said Casey Roberts, commercial sales and marketing director for NorthWest Insurance Agency. Following reforms implemented by in California Legislature in 1993, 2002 and 2003, the number of carriers offering workers’ comp coverage increased.

M. Tommy Ruke Jr., president of Insurance Business Consultants Inc., said that laws addressing workers’ compensation have made the legal environment more attractive, because more companies can make money in the segment. Prior to the reforms, carriers were looking for any excuse to refuse coverage and were not writing workers’ comp.

Now, “post-reform carriers have come back, as they now have determined that they can write workers’ compensation for a profit in California … as long as the current atmosphere — or something close to it — remains,” Roberts said.

Pricing has changed, however. “Over the course of the last four years, premiums have decreased at least 50 percent over prior years,” Roberts said. “With more competition, pricing has come down and employers and the general economy are the beneficiaries of decreases.”

With competition up and pricing down, and as an inevitable response to the slowing economy, “Carriers are doing what they can to maintain their current books of business as well as to write new business,” Roberts added. In the construction insurance market, that issue is magnified by the number of companies that are going out of business and venturing into different types of construction.

As more residential contractors pursue commercial ventures [See story on page N22 of this issue] to stay in business, workers’ compensation problems can arise. There is the potential of falling from greater heights. And if contractors have inexperienced people working for them, there is a higher risk for loss and injury, Ruke Jr. said. “Clearly in residential construction there is less exposure than in commercial construction,” he said.

Some contractors may be tempted to use a “short-cut” approach to building, meaning they may use less trained or under-qualified employees, and less reliable, cheaper equipment, Ruke added. If that happens, “rates are going to go up. Usually it takes a two- to four-year cycle to figure this out,” he said

With workers’ comp in construction, the issue is not necessarily the frequency of the incidents, it’s the severity, Ruke Jr. and Roberts explained. Moreover, whereas historically injured parties provide modified duty to reduce workers’ comp costs, with the state of the market making less work available, it is getting difficult to get injured people back into the workplace, they said.

Thus, it is important for agents and brokers to ensure they are aware of their clients’ activities, Ruke Jr. and Roberts advised.

“Make sure their client is reporting accurately, even if that means making visits,” concluded Marjorie Segale, vice president of Insurance Skills Center and principle author of the curriculum for a Certified Insurance Specialist in Construction designation. “We must be more up front about what we’re doing for our customers and when they have to pay for their coverage,” she said.

Topics California Workers' Compensation Construction