Experience rating errors in workers' compensation can be difficult to detect, but can be among the most costly if not detected since their impact can last for up to three years. Insurance buyers should verify the accuracy of payrolls and losses used in the rating calculation. If all appropriate payrolls are not included, the experience mod will likely be higher than it should be. When increasing loss reserves cause a worsening of the experience modification, such changes usually cannot be challenged. If, however, a pattern develops where loss reserves increase just prior to use in experience rating and then are subsequently reduced, such practices should be questioned.
Loss reserve/claim management is particularly important when loss-sensitive rating plans are used. Regular monitoring of claim management is a necessity. Too often, as caseloads increase, claim files get ignored. Regular claim reviews initiated by insureds keep the files active and help ensure that appropriate steps are being taken to challenge claims when appropriate, keep reserves as low as possible or close claims at the earliest opportunity.
Classification changes can have devastating effects on insurance costs, yet challenging such changes can be an involved process. In the case of workers' comp classification changes, finding your way through the tangled web of underwriting departments, state rating boards and insurance departments can be a daunting task taking months or even years. But if your business has been misclassified to your detriment, a correction may be essential.
Billing errors are more common than one would think. Installment billings are sometimes duplicated. Although this will likely be caught at some point, no one wants to pay more premium than necessary. Other billing errors involve the incorrect pro-ration of premium charges or credits for midterm changes or the use of incorrect rates for midterm changes. Policyholders must have a clear understanding of how the initial policy premiums were determined.
Subsequently issued endorsements should then be carefully checked to be sure that the same basis is used for any midterm changes.
Claim denials or reservations of rights are more prevalent than ever these days. It is not unusual for insurers to cite almost every exclusion in a policy as a basis to reserve rights or deny coverage, but the persistent may find the insurer's position not as strong as first thought.
In a recent situation, an insurer cited a policy exclusion as a basis to deny coverage, but the cited exclusion was not in the policy that had been purchased. The coverage counsel for the insurer never read the policy and instead presumed that the insured had a specific coverage form. In fact, however, an earlier version of that form had been used and coverage for the claim was not excluded. The insurer ultimately defended the claim.
Loss control recommendations, though often perceived as intrusive, can help reduce insurance costs and help avoid or mitigate losses. Not long ago, a firm resisted implementation of an in-rack sprinkler system because the downtime associated with its installation. Refusing to recognize the potential impact of a severe loss on sales was shortsighted and led to a nonrenewal by the insurance company.
a principal of the Orchard Park, N.Y., consulting firm of Aldrich & Cox, writes a regular column for Risk & Insurance®.
April 15, 2005
Copyright 2005© LRP Publications