Workers Compensation is a source of much confusion and anxiety for many of my clients, especially for those obtaining for the first time.

Here are three of the most common mistakes:

1. Shopping for WC when you have no employees 

Shopping for WC with no employees is a lot like shopping for car insurance when you don't have a car; there's no insurable interest. Simply stated, Workers Compensation is, as the name implies, for workers.  Generally speaking, the owner of a company is almost always excluded under their own WC policy. Why? WC was designed to protect business owners from being sued by employees who became sick or injured on the job. It's in the state's best interest to keep businesses, well, in business.  If an owner gets injured, they're not going to sue themselves. 

If you own a business with no employees and you have a client asking you to show proof of WC for a job you have essentially four options: 

1. Sign a Hold Harmless (if that's acceptable to your client) which basically says you have no employees and if you hurt yourself you're not going to sue them, 

2. Buy a WC "ghost policy" which, as the name implies, covers no one. The only real-world coverage this affords is usually a small Accidental Death and Dismemberment benefit (usually $5,000-$10,000) and, God forbid, you die or lose a finger or toe on the job, your beneficiary would receive a percentage of that benefit amount. Also, if you hire anyone while your "ghost policy" is in effect, it immediately voids your coverage. 

3. Tell the state you are "looking to hire" at minimum annual payroll and usually at the statutory or minimum levels of coverage. This provides the WC proof of coverage for your business along with actual real world coverage, as soon as you hire a W2 employee they will automatically be covered.

4. Lastly, you can do WC "owner covered" which is typically cost prohibitive as many carriers will take your entire gross annual revenue and "tax" that as payroll.  

2. Under projecting payroll to save money on WC

Any savvy business owner is going to be cognizant of all business operating costs and do everything within their power to curtail them. 

That said, WC premium is directly correlated to projected payroll and while it's good business to project at, or even just below, estimated projections...it can be downright fiscally catastrophic (not to mention unethical) to dramatically misrepresent your payroll figures. 

Most WC carriers audit on a quarterly or semi-annual basis (vs. annually for GL).   And at the heart of any WC audit lie the two big drivers of class and volume; what kind of work are your employees doing and how much of it are they doing (as reflected by total payroll)?

Easy example: 

A new roofing business in Texas projects $40,000 in payroll for the year. 

The stand-alone roofing rate in Texas (class code 5551) for new ventures is currently at $20.57 per $100 in payroll for 1M in WC. 

Simply put, for every $100 in payroll, the owner is setting aside $20.57 towards WC premium.  So, to determine average "raw premium" for $40,000 in payroll we simply divide by 100 and multiply times the rate associated with that work class ($40,000 divided by 100 = 400 x $20.57 = $8228 due carrier).

So, if, in the spirit of saving money, the company projects $40,000 in payroll when, in reality, they have $100,000 in payroll, they'd be looking at an additional $12,342 in "raw premium"  ($60,000 divided by 100 x $20.57 = $12,342) which is not how most companies want to close out their final fiscal quarter.

Now carriers are well aware that businesses, especially in the construction industry, expand and contract all the time.  Any projection is just that, a best guess, just be aware of the basic nuts-n-bolts of what drives the premium (so you can reserve and project accordingly) and provide good information to your agent and carrier and the whole WC process will get progressively easier and easier.

3. Ignoring Audits

As mentioned above, most WC carriers will audit on a quarterly of semi-annual basis.  

I encourage my clients to see the carrier as a partner, of sorts, whose job it is to accurately collect the appropriate amount of premium for the WC coffers based on the nature and volume of your work.  Their job is to make sure you and your business are protected should someone become seriously sick or injured on the job. These carriers pay out hundreds of millions of dollars annually on these injuries, especially in classes like roofing which has historically proven to be more dangerous than police and fire work.

It's not always easy and can even feel a little invasive at first, but establishing sound bookkeeping practices and being responsive to carrier requests can really help pave the way to a longlasting partnership based on trust, respect and a professional sense of symbiosis. 

Some businesses, either out of desperation, lack of sound fiscal management or even laziness will simply refuse to comply to audits, pay additional premiums or even return carrier calls and emails.  

Not only is this not good business but carriers do NOT forget.  If even a single carrier in either the voluntary or residual markets has an outstanding issue with a client, be that a function of an incomplete audit or overdue premium, no other carrier will bind new WC coverage until that issue has been satisfactorily resolved.

Providing good info, keeping payroll records up-to-date and maintaining open lines of communication will make this process easier and keep your people safe.

Do you have the right Work Comp insurance for your business? Is your payroll categorized properly to maximize coverage and savings of premium? Don’t overpay when you don’t have to, get a free quote today and have a licensed professional give everything a proper review.

No. 5 "Claims made" vs. a "Full occurrence"

In the pursuit of savings, many large companies will opt for a "claims made" policy vs. a "full occurrence" policy. While the short-term savings are immediate, the long term exposure often negates these savings and a single uncovered claim can sink even the largest of ventures. A "claims made" policy is designed to cover damages from claims arising within the policy term (usually 12 months). Some "claims made" policies have what's called a "sunset" provision which extends the coverage to to or even three years but the industry norm is one year. "Full occurrence" policies, on the other hand, have a look-back period (or the period within which a claim can be made) of, on average, ten years.

Oftentimes, when deciding between a claims made or a full occurrence, it's helpful to look at the nature of the work being performed. It is rare that damages from painting, drywall, debris removal or landscaping will manifest seven years after-the-fact but with commercial roofing, industrial plumbing and structural welding, the likelihood is much greater. As a company grows and the number of jobs increase, it often becomes not a matter of if someone will file a claim, but when.

The full occurrence policy affords protection and peace of mind, well after the work is completed and the next project begins.

No. 4 "Read the Exclusions"

While signing up for Commercial General Liability might feel a bit like purchasing a home or vehicle, without the home or vehicle...but it is important to read the fine print.

All general liability policies have exclusion and reading through all of them can be exhausting. The most important thing is to identify any exclusions that pertain to the work that you do. If you have questions, ask your agent or ask for the actual exclusionary language itself.

Most of these exclusions can be removed by way of a 'buy back' which excludes the exclusion, thereby covering said exposure. An easy example of this is the common exclusion of work performed at schools, hospitals and churches. If you're remodeling an elementary school, and they are requesting to be added as an Additional Insured, you'll want to make sure that work is not categorically excluded before you step foot on the job site.

Other common exclusions include "open roof" damages for roofers, "heating element" exclusions for plumbers, "foundation repair" for concrete workers, and "stand-alone roofing" for general contractors.

No. 3 "Get It Right the First Time"

Shopping for insurance, for most, is not the most exciting activity one can engage in so, it's no wonder that many simply pick up a policy that's quick and inexpensive. Unfortunately, this can be costly down the road when the coverage purchased does not meet the insurance requirements being demanded by your clients.

If you have a laundry list of attributes that your GL coverage needs to satisfy, provide that to your agent on day one.

Many carriers do not allow for flat cancellations after a policy has been issued and bound. They are assuming risk the moment that bind takes place; typically to the tune of $1,000,000 at a minimum. Likewise, the agent has given time and attention to the application process and typically has a non-refundable broker fee to cover those costs.

Common Mistakes:

1. A client requests a "claims made" policy when a "full occurrence" policy is required.

2. A client goes with the least expensive carrier which carries no formal rating when an 'A Rated or better' carrier is required.

3. A client purchases a policy without requesting any one of a number of required endorsements (e.g. Additional Insureds, Primary Wording, Per-Project Aggregate or Waiver of Subrogation etc.).

Remember, even the most seasoned of agents is not telepathic. Providing as much information as possible from the start will help to ensure you get what you need the first time!

No. 2 Know How Policies Influence Each Other

Just like with medications, not all policies play well with others. As your business grows, you can anticipate your risks (and the coverage designed to protect you from them) will grow in kind.

If you anticipate having multiple lines of coverage within the next fiscal year or two, communicate that to your agent so, that, when the time is right, you are eligible to do so.

Common mistake:

A client reaches out requesting the least expensive GL policy. Presented with a number of options, they go with a "claims made" policy through a non-rated carrier with no additional endorsements.

Two months pass and the same client comes back advising they are now required to carry a 3M Excess policy on top of their General Liability.

That presents an issue as you cannot "stack" an Excess policy on top of a GL policy of that nature. In fact, most Excess carriers will require that the underlying General Liability coverage be written on a "Full Occurrence" basis, through an A Rated carrier, with limits of 1/2/2 Million and Defense Outside the Limits, Per-Project Aggregate, Waiver of Subrogation, Primary Wording and blanket Additional Insureds endorsements all included.

If that client decides to fulfill the new Excess insurance requirements, they will have to cancel their existing GL and start over with a new underlying policy that will support the Excess coverage.

This is hardly limited to the General Liability as minimum thresholds for Commercial Automobile, Workers Compensation, Environmental/Pollution and even Errors and Omissions need to be honored as well.

The easiest way to avoid this is thorough communication with your agent. Tell 'em where you're at now and where you'd like to be in the next few years so they can help to chart the trajectory of your business and anticipate the protection that growth inevitably demands.

No. 1 Choosing Pricing Over Service

This may sound like a marketing line but the reality is that saving a few dollars at the beginning of the year loses any semblance of value when you cannot obtain a time-sensitive Certificate of Insurance to bid on a project or step foot on a site, cannot reach a live human being when someone becomes hurt or something gets damaged, have a question on your GL or WC audit, need a new line of coverage bound same day for a particularly lucrative contract or experience an inadvertent cancellation due to lack of premium payment or audit compliance.

Even understanding the basics of what is covered and what's not, what drives pricing, how do you 'project and protect' as your business grows can be frustratingly convoluted or, with the right advocate and agent, be surprisingly straight forward.

Investing in a seasoned agent with years of industry experience and a genuine desire to see his clients grow and succeed can be a decision that pays dividends for the life of your business.

WE understand THAT IT’s SO TEMPTING to go for the cheapest insurance available. But if your policy isn’t the right fit for your business needs, or you cut corners to save pennies - it could render your policy literally useless no matter what you paid for it.

Have questions about your Contractor general liability policy? Speak with a licensed insurance professional at contractors choice by inquiring below.