Layoff Considerations and How to Prepare for Potential Claims

Layoffs are an unfortunate reality for many businesses. Whether a layoff is planned or unplanned, a business can suffer major reputational harm or even be taken to court following a large-scale termination.

In fact, it’s not unheard of for layoffs (and even just the threat of layoffs) to increase workers’ compensation claims, particularly in a tight job market. This is because individuals faced with a loss of income, temporary unemployment benefits and the likelihood of unaffordable health insurance may look to workers’ compensation as a way to sustain their income.

Although employers must never attempt to stop any individual from filing a workers’ compensation claim (legitimate or otherwise), there are steps you can take to help minimize your business’s liability for future claims.

Communicate With Your Insurance Carrier and Legal Professionals First and foremost, it’s crucial that you let your insurance carrier know about any downsizing plans. This is because your carrier can provide tips for dealing with any workers’ compensation claims that may follow the downsizing.

Working closely with a legal professional can also help you understand the relevant workers’ compensation laws in your jurisdiction.

If a claim does arise, you should immediately report any suspicions you have about the claim —along with all the reasons for your suspicions—to both your workers’ compensation carrier and legal professionals. The earlier you voice concerns, the more opportunities you’ll have to investigate the claim, gather medical evidence and discuss defense strategies.

Have Strong Reporting and Investigation Procedures in Place

Workers’ compensation claims are not often decided by a singular bit of information or evidence. Rather, employers must cover multiple angles in order to defend against questionable claims effectively.

For instance, employers could provide documentation of anecdotal evidence (e.g., no one saw the individual get hurt). Objective evidence (e.g., an independent medical exam’s X-ray or MRI) is also important for a strong defense. To help gather this kind of evidence and stay ahead of potential claims, accident reporting and investigation is crucial.

Regularly revisit your accident reporting policies, and require all employees to report accidents immediately, no matter how minor. Following a reported incident, you should investigate immediately. Consider separating witnesses from each other in order to get an accurate picture of what happened. Document these incidents and investigations thoroughly, and secure witness statements and signatures whenever possible.

Finally, as part of an employee’s exit interview, you should consider having the employee sign a form stating whether he or she has been involved in any unreported accidents or hazardous exposures while on the job. This can help you defend against unexpected claims that arise after a layoff.

Maintain Strong Recordkeeping Practices

When it comes to combating questionable future claims, accurate recordkeeping can make all the difference. Above all, employers need to know where employee records are kept and should secure photocopies of them as backups. Employers should also:

  • Assign a trustworthy employee to oversee employee records. This individual should be able to provide and explain these records in court.
  • Maintain a photographic or video record of your premises. This can help illustrate the conditions of your building and workspaces in the event of a claim.
  • Consider using and keeping records of termination interviews in order to help determine the risk of any future workers’ compensation claims. You may also want to consider performing termination physicals, as these can be useful in case an employee files a claim after being laid off. Specifically, these physicals can help establish an employee’s health and fitness at the time their employment ended.

Finally, employers should ensure employee records are not destroyed, since payroll, schedules and accident reports may become vital evidence.

Invest in Employee Assistance Programs

Terminations can put employees in an antagonistic frame of mind, which can lead them to bring questionable claims that they wouldn’t make otherwise. However, this risk may be reduced if an employer demonstrates that it cares about an employee’s well-being during an exit interview.

To accomplish this, many employers provide resume counseling, therapy and other services that demonstrate concern for a former employee’s welfare. These simple actions can ensure employees don’t take a layoff personally.

Watch for Risk Indicators

To better protect themselves, employers should be aware of certain indicators that they may be at risk of a future claim:

  • The employee is disgruntled after being fired or laid off.
  • The employee has been told his or her employment is about to end.
  • The employee is having financial difficulties.

It should also be noted that a lack of witnesses and medical evidence can indicate that a claim is questionable. Make note of these instances, as they can come in handy in the event of a claim.

Have a Strategy in Place

While employers must never attempt to prevent an employee from making a workers’ compensation claim, the above tips can assist in avoiding and defending against questionable claims. Employee reductions can pose a significant challenge for employers and are often devastating turns of events for employees. It is important for employers to have a layoff strategy broken down into goals and an action plan for the company.

For more workers’ compensations strategies and advice, contact Libertate Insurance Services today.

The NCCI Speaks to the Impact of COVID19 on Workers’ Compensation

Following suit with the research brief from WCIRB. Click here to access.

…done last week by the Workers’ Compensation Insurance Rating Bureau of California (“WCIRB”) on the impact of COVID19 on the California Workers’ Compensation system, the National Council of Compensation Insurance (“NCCI”) came out yesterday with the same for the 38 States that it tracks for rule and rate-making purposes. Note the numbers below do not include half the country’s volume of workers’ compensation premiums when it is considered States like California (25% on its own), New York and Ohio are not included in the below data.

Key findings of the NCCI on frequency rates:

  • % of ee’s that will contract COVID 19 on the job – <10% – 81%
    • it should be noted that the issue of “Presumption of Coverage” related to different types of occupations is the driver of the huge range in frequency – all States are presuming “First Responders” (1,176,110 workers), others to include Healthcare Workers and First Responders (9,666,420 workers) and still others such as Illinois that presumes any worker that is client facing has occupational exposure to the disease (86,351,950 total workers in the 38 States considered)
  • Infection rate is 5-50% regardless of class of worker above
  • Range of Impact of CoVid losses on overall expected losses by category of worker:
    • First Responders – PreCoVid expected losses of $1.1B with potential impact of $.1B – $1.9B… 10%-170% range
    • First Responders and Healthcare Workers – Pre CoVid losses of $3B  with potential impact of $1B – $16.2B…. 33% – 550% range
    • All Workers – PreCovid losses of $32.1B with potential impact of $2.78B – $81.5B… 8 – 254% range
    • Hospitalization rate after infection range is 1 – 31%
    • Critical care rate of 5 – 27%
    • Duration of care for mild symptoms of 2 weeks and 3 – 6 for moderate or critical cases
    • Cost per claim type:
      • Mild $1,000
      • Moderate-Severe $25,500
      • Severe $59,000
    • Impact by infection and compensability rates
      • 1% occupationally impacted, cost of loss goes up 8%
      • 5% = 42%
      • 10% = 85% – which at present is NCCI’s selection
    • Fatality rate for those infected with the virus is .5% across all classes of employees – Average impact $146,980 in death benefits (does not include medical)

My summation of what the NCCI and WCIRB are projecting is as followed:

  • The huge range in expected costs is going to be understood on a State by State basis with the issue of presumption of contraction based on occupational duties being the biggest driver
  • As each State has unique payouts for disability and death, the prediction of cost and risk load for pricing needs to be State by State
  • The healthcare segment is providing the most unpredictability – add a risk load, park the business elsewhere or stay out of the segment for now – too unpredictable
  • PEO’s can be a very important partner to insurance carriers by allowing them to understand performance data fastest due to their management of payroll
  • The smartest people I know do not know what to predict but this is a start – we probably will not have enough real data to narrow this range of expectations for months

Stay safe and we will get through this – but with our eyes open.

Potential Wage and Hour Claims Due to New Overtime Rule

Woman working at desk

This article was originally published on InsuranceJournal.com.

Time is running out for employers to familiarize themselves with new federal rules on overtime pay.

Starting January 1, the threshold for who is entitled to overtime pay — and who is not — changes. It’s the first change since 2004.

The new rule raises the income threshold that employees must reach to $684 per week, or $35,568 per year, to qualify as exempt from overtime. Employers are allowed to count up to 10% (or $3,556.80 per year) in bonuses or commissions towards the threshold.

Workers making less than the threshold are entitled to earn one and one-half times their regular rate of pay for all hours over 40 during a work week.

Failure to properly implement the new regulations could expose employers to wage-and-hour type claims under the Fair Labor Standards Act (FLSA).

For some employers, that could mean employment practices liability insurance claims.

That’s one reason Chris Williams is trying to raise awareness. Williams is employment practices liability product manager for Travelers. He is responsible for employment practices underwriting strategy, including policy language, target markets, overall profitability of the book, marketing, and serving as a general resource for underwriters on employment practices.

In a recent talk with Insurance Journal, Williams discussed the overtime rule change and what it means for employers, employees and insurance.

There’s so much else going on in the area of employment practices, the overtime pay issue hasn’t gotten much attention.

“That is a concern because the law’s already fairly complicated for employers to comply with,” Williams said. “Then, anytime you have a change in a complex law, you’re likely to see one, compliance challenges, and two, potential litigation coming out of that.”

Williams said the starting point is understanding the basics of the current rule compared to the new rule that starts in January.

Under the FSLA, employees that satisfy three requirements — they are paid on a salary basis, they are paid more than $23,660 per year, and they perform certain functions considered executive, administrative, or professional duties — are currently not entitled to overtime wages.

“For example, if you’re an executive, you’re a manager in an organization, you’re managing folks, you have the ability to hire, to fire people, and you make more than $23,660 per year, you are not entitled to overtime,” he explained.

Exempt executive, administrative and professional employees include teachers and academic administrators in elementary and secondary schools, outside sales employees and employees in certain technology occupations, according to the Department of Labor. Certain casual, seasonal and farm workers are also exempt from the overtime requirement.

For the new year, while the definitions and exemptions for those doing executive, administrative, professional and other work remain, the key change for employers to be aware of is that the salary threshold is going up from $23,660 to $35,568 per year.

“As a result of that, you’re going to have folks that are now within that pay band that are going to be entitled to overtime that previously weren’t entitled to overtime,” Williams said.

“Employers are going to have to one, figure out who those individuals are. And two, they’re going to have to make sure they’re tracking their time, and if those folks are working more than 40 hours per week, they’re going to have to make sure that they’re compensated on a time-and-a-half basis for that time in excess of 40 hours per week.”

While $35,568 is the threshold and where the primary impact is felt, there is also an upper limit as well. The high threshold under what is called the highly-compensated employee rule is going from $100,000 to $107,432.

“In other words, if you make more than $107,000, you have some administrative or executive functions within the organization, and you’re doing non-manual work, you’re not going to be entitled to overtime,” he explained.

The upper limit rarely is an issue. “We don’t see very much claim activity arising out of those individuals. It’s much more on the lower spectrum,” Williams noted.

In addition to the federal rule, depending on the state they are in, employers may have state laws on overtime pay they must follow as well. California is one such state.

“Employers in those situations are obligated to comply with both the state and the federal law. For example, in California, most of our overtime wage claims that we see pertain to state law as opposed to claims under the Fair Labor Standards Act,” he said.

Williams sees a few potential trouble spots for employers.

“One of the things we see today is employers, and I don’t think a lot if it is malicious, I just think it’s a misunderstanding of what their obligations are, but they may not pay their employees overtime.

“They may not correctly classify individuals as exempt or not exempt, meaning they’re entitled to overtime. They may not track their time correctly.”

Another area is claims for not compensating workers for time they spend putting on their gear to prepare for work. “If you work in a meat processing plant or something like that, you have to put on protective gear, and then you weren’t compensated for that time,” he said.

There are things employers should do to prepare for the new overtime situation, according to Williams.

“Employers will want to go back and make sure that they’ve correctly identified who is now entitled to overtime and are they, in fact, tracking their time and making sure those individuals are compensated correctly.

“It’s probably a good idea, given this change in the law, to review all your employees and make sure that you classify them correctly and you’re tracking their time properly and that you’re compensating them appropriately.”

Williams also noted that some employers may decide to raise the salary of their workers above the threshold of $35,568 to avoid an overtime issue. However, in order to avoid paying overtime for those workers, the employer would need to make sure the worker also qualified for an exemption under professional, administrative or executive.

“In other words, if the employer raised the salary of a worker above $35,568 per year, and the worker did not qualify for one of the exemptions, the worker would still be entitled to overtime,” he said.

Williams recalled that happened in some cases after the Obama Administration in 2016 initiated an even high threshold of $47,000. Some employers increased the pay of some of the workers beyond that threshold. But then the Obama change was struck down in court in September 2017 when a judge ruled that the ceiling was set too high and might apply to some management workers who are supposed to be exempt from overtime pay protections. Business groups and 21 Republican-led states had sued to challenge the 2016 rule.

The Department of Labor estimates that 1.2 million additional workers will be entitled to overtime pay as a result of the increase to the standard salary level, while an additional 101,800 workers will be entitled to overtime pay as a result of the increase under the highly-compensated employee rule.

Williams urges agents to advise their clients to take advantage of resources available to them to be sure they are in compliance— whether that be a human resources department, payroll processor or general counsel. He also recommends the DOL’s website that has information about the final rule.

Williams added that a number of insurance carriers including Travelers also have resources available. “It’s sort of a matter, one, of employers educating themselves, and then, two, taking action on that information,” he said.

Wage-and-Hour Claims

Those caught not in compliance could face wage-and-hour claims. Defense costs only for such claims may be covered under employment practices liability insurance (EPLI) but only for those purchasing a separate endorsement under their EPLI. It’s not part of the traditional EPLI. (Coverage of unpaid wages may be available to large firms with sizable self-retentions but this coverage is not typically available to small and medium firms.)

“A lot of carriers, including Travelers, will provide a sublimit that applies to defense expenses only for wage-and-hour claims. That generally includes issues like failure to pay overtime, misclassifying workers as exempt, potentially misclassifying workers as independent contractors when they’re in fact employees,” Williams explained.

There are certain state statutes, like in California, where employers are obligated to provide rest and meal periods. The separate coverage would include defense expenses for those types of claims as well.

Travelers offers a sublimit up to $250,000. “I think the market’s generally between $100,000 and $250,000, and there may be some outliers beyond that,” he said.

Since it’s been 15 years since the overtime rule was changed, this is in a way a new exposure, one agents may want to explore with clients.

“I think that’s a good idea. We sell this coverage to privately held companies and nonprofits, and we try to be proactive in selling it because it’s an exposure for employers that’s out there,” Williams said.

He noted that these claims are attractive to the plaintiffs’ bar because there is a fee shifting provision in the statute so that if the plaintiff prevails on the claim, they’re entitled to their attorneys’ fees. “You can have cases where the actual recovery amount may not be that significant in terms of the unpaid wages, but the attorney fee is potentially significantly more than that unpaid wage portion,” he said.

Other EPLI Issues

Overtime is hardly the only pressure on employment practices liability insurance (EPLI) these days when workplace issues are in the news on a regular basis.

EPLI provides protection against many kinds of employee lawsuits including claims alleging sexual harassment; discrimination based on age, race, gender or disability; wrongful termination, hiring or promotions; retaliation and wrongful infliction of emotional distress.

According to Williams, there are two areas in particular where EPLI is currently seeing increasing claims activity: sexual harassment and privacy.

“I’ll start off with the sexual harassment, and there’s been an uptick, particularly in severity, on those claims. There’s been an uptick in the frequency of those claims as well. It’s a challenging environment to litigate one of those cases in,” he said.

The second issue is biometric claims, driven by the Illinois biometric information privacy act.

“One of the requirements under that is that if you’re going to use biometric information of your customers or employees, you have to get a signed release from the employee or customer,” he said.

A number of employers have been using fingerprint technology to scan employees in and out and to clock when they’re coming and leaving work. In many cases, they did not get a signed release from the employee. “That’s resulted in class action claims brought against those employers alleging violation of this statute, sort of quasi-invasion-of-privacy claims,” he said.

Other claims areas that are relatively new include websites not in compliance with the Americans with Disabilities Act. “The website isn’t compliant if it doesn’t allow the disabled individual full use of that website because it hasn’t been programmed properly,” he said.

Travelers is among the insurers that will provide workplace violence expense reimbursement coverage that reimburses employers for certain expenses in the event of a workplace violence event. The expenses might include counseling, additional security, and services of a public relations firm to help a business through the crisis.

An employment practice claim is not a recommended experience.

“No one’s ever gone through an EPLI claim— which is a tremendously burdensome process in terms of the documents that have to be turned over, all the emails, the personnel files, the deposition the employer has to go through— no one’s gone through that process and ever said, ‘Boy, we’d like to do that again,’” Williams said.

Workers’ Compensation Claims for Leased or Temporary Workers

Many companies are increasingly turning to staffing agencies to meet their personnel needs for a variety of reasons, including increased workloads and high employee turnover rates. Companies that use staffing agencies can save money because they avoid selecting, hiring and training new full-time employees. In addition, using staffing agencies frequently offers companies peace of mind because they know that workers will show up and perform their duties consistently.

But what happens if one of the staffing agency workers is hurt on the job? Who is responsible for covering the injury? What if the injured worker wants to sue the staffing agency’s client company for negligence? Answering these questions requires a thorough understanding of the employment relationships between the staffing agency worker and the client company. And the way employees are classified affects how the staffing agency and the client company’s workers’ compensation and commercial general liability (CGL) policies apply to work-related injuries.

Workers’ Compensation Versus CGL

Generally, companies are required to cover an injured employee’s medical treatment and lost wages through a workers’ compensation policy. This is a system of no-fault insurance that affords employees some security while recovering from work-related injuries. In exchange for these benefits, employees waive their right to sue their employers for negligence and related damages. Workers’ compensation provisions apply only where an employer-employee relationship exists between a company and its workers.

CGL policies protect companies when third parties (non-employees) are hurt because of the company’s negligence or misconduct. The issue of CGLs is particularly important for companies with staffing agency workers because it is not always clear whether an employment relationship exists between the company and the staffing agency workers. To fully appreciate the complexity of the issue, companies must be able to properly

Leased Versus Temporary Workers

The definitions for leased and temporary workers vary from state to state, so an adequate classification of staffing agency workers requires a solid understanding of state and local requirements.

For CGL purposes, a leased worker is an individual leased to a client company by a labor leasing firm under an agreement between the company and the labor leasing firm to perform duties related to the conduct of the company’s business. The leased worker category does not classify staffing agency workers as either leased workers or temporary workers.

Leased Versus Temporary Workers

The definitions for leased and temporary workers vary from state to state, so an adequate classification of staffing agency workers requires a solid understanding of state and local requirements.

For CGL purposes, a leased worker is an individual leased to a client company by a labor leasing firm under an agreement between the company and the labor leasing firm to perform duties related to the conduct of the company’s business. The leased worker category does not include temporary workers. Under this definition, leased workers are considered employees of the client company and are, therefore, excluded from the client company’s CGL.

CGL policies define a temporary worker as an individual furnished to a client company to substitute for a permanent employee who is on leave or to meet the company’s seasonal or short-term workload conditions. Temporary workers are considered employees of the staffing agency and are covered by the staffing agency’s workers’ compensation policy and could be covered by the client company’s CGL.

The Coverage Gap

An insurance coverage gap exists when a leased employee is injured while in the client company’s employ. Leased employees are considered to be employees of the client company for CGL purposes, but they may not necessarily qualify as employees under applicable workers’ compensation regulations.

This results in employing individuals who could sue the client company for negligence (because they are not limited by applicable workers’ compensation provisions). A company with no CGL coverage must pay any court-ordered damages (because CGL coverage does not apply to the company’s employees).

Solutions to the Coverage Gap

To bridge the gap created by leased workers, companies can look at shifting work-related injury liability to the staffing agency through an alternate employer endorsement or an extension of their CGL coverage to injury to leased workers.

  1. Alternate Employer Endorsement

Client companies can negotiate with staffing agencies to include an alternate employer endorsement on the staffing agency’s workers’ compensation and employer liability policies. This endorsement protects the client company, providing coverage to the client company in the case of a tort action and by giving the client company all the workers’ compensation coverage the staffing agency enjoys.

  1. Coverage for Injury to Leased Workers

This endorsement can be added to the client company’s CGL policy by changing the language that excludes leased workers and temporary coverage from CGL coverage. However, companies should recognize that insurance carriers will disfavor this solution as it effectively removes an exception they intentionally built into the CGL policy.

AM Best Assigns Credit Rating to Clear Spring Property and Casualty

Congrats to Clear Spring and the recent AM Best rating!

Press Release – AUGUST 14, 2019

AM Best Assigns Credit Ratings to Clear Spring P&C Co.; Downgrades Ratings of Lackawanna Casualty Co. and Other Subsidiaries


CONTACTS:
Jeffrey Stary
Financial Analyst
+1 908 439 2200, ext. 5689
jeffrey.stary@ambest.com

Robert Raber
Associate Director
+1 908 439 2200, ext. 5696
robert.raber@ambest.com

Christopher Sharkey
Manager, Public Relations
+1 908 439 2200, ext. 5159
christopher.sharkey@ambest.com

Jim Peavy
Director, Public Relations
+1 908 439 2200, ext. 5644
james.peavy@ambest.com


FOR IMMEDIATE RELEASE

OLDWICK – AUGUST 14, 2019
AM Best has assigned a Financial Strength Rating (FSR) of A- (Excellent) and a Long-Term Issuer Credit Rating (Long-Term ICR) of “a-” to Clear Spring Property and Casualty Company (Clear Spring). Concurrently, AM Best has removed from under review with negative implications and downgraded the FSR to A- (Excellent) from A (Excellent) and the Long-Term ICRs to “a-” from “a” of Lackawanna Casualty Company and its subsidiaries, Lackawanna American Insurance Company and Lackawanna National Insurance Company. The outlook assigned to these Credit Ratings (ratings) is stable. Clear Spring is domiciled in Dallas, TX, while the three Lackawanna companies are domiciled in Wilkes-Barre, PA. The companies are collectively referred to as Lackawanna Insurance Group (Lackawanna).

The ratings reflect Lackawanna’s balance sheet strength, which AM Best categorizes as strongest, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.

The ratings assigned to Clear Spring reflect the company’s role as a member of the group. Factors supporting this relationship include common ultimate ownership and management. Explicit support is provided through Clear Spring’s participation in the inter-company pooling agreement.

The rating downgrades reflect a revision in AM Best’s assessment of the group’s operating performance to adequate from strong. This rating action is in response to less favorable comparisons with peer companies assessed as having strong operating performances over the most recent five-year period in metrics such as loss and loss adjustment expense ratio and operating ratio. This places the group more in line with companies in the composite assessed as having adequate operating performances. The assessment also takes into consideration the execution risk associated with the blending of the distinct lines of business and geographic delineation of the member companies, which may affect prospective operating performance.

Negative rating actions would occur with a decline in the group’s risk-adjusted capitalization, operating performance well outside expected ranges, or business profile modifications that fail to gain traction.

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’sRecent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media – Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.

AM Best is a global rating agency and information provider with a unique focus on the insurance industry.

Applied Underwriters Fined $3 Million Over EquityComp Program

 

The State regulators continue to clamp down on insurers that use side agreements (aka Program Agreements) for large deductible/loss sensitive programs that are not properly filed with the various Offices of Insurance Regulation. Florida, New York and California have been particularly active in this realm, with Illinois specifically writing a white paper on the overall large deductible topic and PEO that I spoke on a few years ago … https://peocompass.com/role-large-deductible-policies-peos-failures-small-workers-compensation-insurers/ .

Additionally, the National Association of Insurance Commissioners (“NAIC”) has been very active in the enforcement of side agreements… “One significant forms-related issue is that there are sometimes agreements outside of the insurance contract–that is, they are not specifically referenced within or attached to the insurance contract— established between the insurer, the employer and perhaps a TPA or another party. This is an issue because insurance laws typically require the filing of the policy forms and accompanying endorsements used to write workers’ compensation insurance.” This definition from their white paper “Workers’ Compensation Large Deductible Study”, first published in 2006. https://www.naic.org/prod_serv/WCD-OP-06.pdf

Bottom line is that there is a marked increase of enforcement on the state level of non-approved side agreements and I would anticipate more carriers being called out for their lack of proper filings and having approval to use the side agreements applicable to their large deductible/loss sensitive offering(s).

From our friends at workcompcentral.com …

The New York State Department of Financial Services has fined Applied Underwriters $3 million for offering workers’ compensation insurance bundled with side agreements that weren’t filed with or approved by the department.

In announcing the fine on Thursday, DFS said the bundled programs were sold under names including EquityComp and SolutionOne. The products, sold in New York from 2010 through 2016, included guaranteed-cost workers’ comp policies issued by Continental Indemnity Co., an Applied subsidiary, along with a “reinsurance participation agreement” that employers were required to enter into as part of the program, according to the department.

DFS said the RPAs involved complex cost calculations that were presented to employers in a misleading way. 

“Under the formula, policy fees could rise rapidly with the first few claims to levels substantially higher than what would have been paid under a typical linear retrospective model,” DFS said.

In fact, the non-linear model was unique enough that Applied received a patent for it in 2011, according to DFS.

Financial Services Superintendent Linda Lacewell said Applied Underwriters had been “illegally operating outside of the department’s oversight to sell a complex product to hundreds of New York small and medium-sized businesses.”

Applied Underwriters on Thursday said it was pleased to have reached a settlement with DFS after the matter had been under review for three years.

But Jeffrey Silver, general counsel for Applied Underwriters, denied any wrongdoing by the company.

“There was no wrongdoing on our part whatsoever, but there were filings that the department thought should have been made,” Silver said in a statement provided to WorkCompCentral. “The nature and structure of the program was disclosed to participants who were large employers, and the participants were advised by their insurance brokers and other professionals.”

In the statement, Silver described Applied’s loss-sensitive program as a captive insurance program, which he said is covered in New York by a separate captive insurer law. The program gave businesses an incentive to improve their safety, he said, and a “significant number” of EquityComp participants did expand their safety programs, leading to lower workers’ comp costs.

The New York DFS launched its investigation of Applied Underwriters in December 2015. The company voluntarily stopped offering the side-agreement program in New York after the probe started. Under a DFS consent order, Applied won’t offer any equivalent side agreements and will file any future products with the department for approval. In addition, Applied won’t enforce any arbitration provisions in contracts with New York employers.

The fine comes as a sale of Applied Underwriters, which is owned by Berkshire Hathaway, is pending. The agreement with DFS removes a possible obstacle to approval of the sale by the state of New York, Applied said through a spokesman.

The New York Post reported last month that the Applied Underwriters buyer was Bahamas-based United Insurance Co., which planned to acquire Berkshire’s 81% stake in the company, along with shares of the company owned by two executives. The Post cited a filing with the California Department of Insurance as the source of its information.

The Applied Underwriters spokesman said on Thursday that the Post’s report was inaccurate and incomplete, but he declined to provide information on the buyer.

A quarterly filing provided by CDI stated that Berkshire Hathaway entered into a stock purchase agreement this year with United Insurance Co. to sell its 81% interest in AU Holding Co., the parent company of Applied Underwriters, and that United had also agreed to acquire Sidney Ferenc’s 7.5% interest in AUH. The stock purchase agreements were assigned to Steven Menzies, who owns 11.5% of the company, according to the filing.

Berkshire Hathaway confirmed in February that it was selling Applied Underwriters, saying at the time that part of the reason for the sale is that AU competes with other workers’ comp insurance companies that Berkshire Hathaway fully owns. A spokesman wouldn’t comment at the time on whether controversy over Applied’s EquityComp program contributed to the decision.

Regulators in New Jersey have also been investigating Applied Underwriters, the New York Business Journal reported. Regulators allege that the company “marketed and sold an unapproved workers’ compensation program with impermissible retrospective rating,” according to a New Jersey Department of Banking and Insurance filing.

Applied Underwriters declined to comment Thursday on whether states other than New York were investigating its EquityComp program, or to say in which states the company still offers the program.

The Applied Underwriters website continues to list EquityComp as one of its programs, “designed for companies with premiums in excess of $250,000 that seek flexible risk financing.”

AM Best to Add “Innovation Scores” to Carrier Rating Models

In a very intriguing announcement, the “gold standard” of insurance company credit rating organizations, AM Best, has decided that how a carrier does or does not invest in areas of technological innovation will impact their long term financial viability and thus potentially their rating.

“AM Best defines innovation as a multistage process whereby an organization transforms ideas into new or significantly improved products, processes, services or business models that have a measurable positive impact over time and enable the organization to remain relevant and successful. These products, processes, services or business models can be created organically or adopted from external sources.” www.ambest.com

While I think this is a fantastic move, other agent peers not so much. My favorite quote of the article is:

“The Council of Insurance Agents and Brokers took a more dubious view of the innovation scoring proposal, in a blog post titled “AM Best Aims to Quantify the Unquantifiable: Innovation.”

What companies spend on innovation as a percentage of surplus/premiums is a pretty black and white measurement and I would think the ability to make innovation actionable and meaningful can also be quantified. Why would agents not want the carriers to be more advanced?

I have a quote of my own to reference on that front…

“If you want something new, you have to stop doing something old.”

 -Peter F. Drucker

The insurance industry is arguably the most behind on innovation than any other financial sector – let’s hope this change helps to jump-start a movement of investment in the improvement of the client and agent experience through technological innovation!

  • By Elaine Goodman and from our friends at workcompcentral.com

Rating agency AM Best has proposed a new scoring system for assessing carriers’ innovation efforts, an idea that is sparking mixed reactions from the insurance industry.

Mike Fitzgerald

Mike Fitzgerald
(Celent photo)

AM Best announced its draft proposal, “Scoring and Assessing Innovation,” in March. A public comment period ran through mid-May. The agency continues to meet with different groups to discuss the proposal, including a presentation this week at the Farm Bureau Insurance Managers Conference in Jackson Hole, Wyoming.

AM Best said it has been capturing innovation indirectly through the “various building blocks” of its rating process. But now, a more direct focus on innovation may be needed.

“Innovation always has been important for the success of an insurance company, but with the increased pace of change in society, climate and technology, it is becoming increasingly critical to the long-term success of all insurers,” AM Best said in announcing the initiative.

Under the proposal, all companies rated by AM Best would be scored and their innovation assessment would be published. In addition, AM Best would “explicitly consider” whether a company’s innovation efforts are impacting its financial strength.

A proposed scoring system would rate companies on their innovation “inputs” — factors such as whether the company has an innovation strategy, and management’s attitudes toward innovation. AM Best would also assess measurable results, or “outputs,” a company is seeing from innovation.

Although some failure is expected when a company is trying new things, AM Best said the lack of productive results may indicate that innovation has become a financial drain on a company.

AM Best noted that not all innovation involves fancy technology such as blockchain or the “Internet of Things.” Innovation can come from outside sources and doesn’t have to be developed within the company, AM Best said.

Mike Fitzgerald, a senior analyst with information technology consulting firm Celent, called the AM Best proposal a positive step that will help ensure that the insurance industry moves forward.

“It’s a fantastic idea,” Fitzgerald said. “I think they’re right on target.”

One of the first results of the innovation assessment will be that insurance executives are more involved in innovation initiatives at their companies, he predicted.

“Senior leaders at all insurance companies are going to have to be a lot more engaged and conversant than they have been in the past,” Fitzgerald said.

One part of the AM Best proposal that could use more fleshing out, Fitzgerald said, is the definition of innovation.

In its proposal, AM Best defined innovation as “a multistage process whereby an organization transforms ideas into new or significantly improved products, processes, services or business models that have a measurable positive impact over time, and enable the organization to remain relevant and successful.”

Although Fitzgerald said innovation is likely to involve technology, he said there could be some cases where it doesn’t.

The Council of Insurance Agents and Brokers took a more dubious view of the innovation scoring proposal, in a blog post titled “AM Best Aims to Quantify the Unquantifiable: Innovation.”

“Market incentives already exist to push companies to innovate — will establishing an innovation rating system encourage companies to invest in new technologies for the right reasons?” CIAB said.

In addition, CIAB said, the scoring could push companies toward investing in risky companies to show their interest in innovation.

“Investing in immature or unnecessary startups presents an opportunity cost that in turn may harm a company’s overall rating if those investments do not result in any created value,” CIAB said.

Paul Carroll, editor-in-chief of the Insurance Thought Leadership website, called the AM Best announcement great news for the insurance industry.

“With this new focus on innovation, AM Best has done the insurance industry a big favor by not only sounding a warning but also offering the industry focus, structure and direction to avoid the danger of inaction,” Carroll wrote in a blog post.

The assessment will force insurance companies to move beyond merely “checking the boxes” when it comes to innovation, Carroll said. He cited as an example companies that go on innovation tours and then claim to be on top of the latest technology.

Shortly after the AM Best announcement, the strategic consulting arm of Insurance Thought Leadership, ITL Advisory, announced it was offering insurance companies a new innovation assessment service. ITL Advisory said its assessment can help insurers determine whether their innovation programs align with best practices and are likely to produce a return on investment, as well as whether the company is prepared for the AM Best review.

“The release of (the AM Best) draft criteria and procedures will create some urgency among insurers to understand the innovation process, and start or accelerate efforts to implement innovation programs,” Wayne Allen, chief executive officer of Insurance Thought Leadership, said in a statement.

The 72’nd Annual Workers’ Compensation Educational Conference – Orlando

Another year and another convergence of the who’s who in the field of workers’ compensation at the Marriott World Center in Orlando this week.  Known as the largest insurance conference in the country, the Workers’ Compensation Institute brings together “centers of influence” in law, medicine, claims adjusting, underwriting, brokerage, risk-bearing, managed care, regulation, legislation, staffing and of course coemployment.

Dating back over a decade, the Workers’ Compensation Institute and specifically Jim McConnaughhay and Steve Rissman have granted the PEO community a one day educational track.  Shortly thereafter, FAPEO and NAPEO threw their influence and sponsorship behind it.  Special thanks to the WCI, FAPEO and NAPEO for making this a success and bringing positive exposure to the PEO industry.

I am proud to participate on a panel Tuesday morning at 9:00 am with Andy Olwert (Next Level), Deb Hetzer (PEMCO), Phil Herron (Continuum HR) and Robert Barrett (Rissman, Barrett, Hurt, Donahue, McLain & Manganese’s, PA) titled “Accountability in the PEO Industry – Posting Wins for PEO’s and Their Claims Teams”.  More information on this data-driven session can be found on the WCI 360 site here:

http://www.wci360.com/conference/professional-employer-organization-breakout

Hope to see you Thursday morning and look forward to catching up with lots of old friends!