Big Hammer, Small Nail: Small Contractors and Workers’ Comp

Some contractors are forgoing coverage altogether and sometimes find themselves shut down by state investigators enforcing rules on proper insurance protection.

Small contractors struggling with workers’ compensation coverage may feel like a guy with a one-pound hammer trying 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 healthcare 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 simply at the 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, reports appear warning of continued double-digit increases in healthcare, 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 to incur higher costs. For the fourth year in a row, U.S. workers’ comp rates 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 industry 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 come in the form of 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 more than improving the company’s experience modification factor. 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 rein in costs, it is paramount that insureds take an active role in claims management. By selecting carriers or TPAs 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. 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.

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. Offerings by groups such as the Associated General Contractors of America (AGC) and the National Utility Contractors Association (NUCA) are growing to the point that they can offer attractive economies of scale.

Controlling the market is impossible. But small contractors can still have a big impact on their ultimate costs of loss by aggressively managing safety and becoming an active participant in the claims process.

Mark E. Reagan serves as chairman and CEO of Willis Construction. He joined Willis from AIG, where he was most recently president of the bond division.