Florida Approves New WC Rule: Carriers Must Verify Subcontractor Employees

The National Council on Compensation Insurance has laid down the law, requiring Florida workers’ compensation insurers to verify employees before arbitrarily charging premium for subcontractors’ exempt officers.

The question now is, will insurers abide or will they choose to ignore the concerns that some Florida insurance agents and consultants have raised over the last few years.

“This has more meat on the bones now and requires carriers to do something. It’s a fair solution for all, I believe,” said Frank Pennachio, a workers’ comp consultant who advises the Florida Association of Insurance Agents and other groups around the country.

Others in the industry said the changes to NCCI’s Basic Manual for Florida, released Monday, will raise the bar for carriers, requiring them to provide evidence that subcontractors have employees, before charging premium.

“It’s do-able. It just depends on how the verification gets done,” said Gary Guzzo, a consultant and lobbyist with Floridian Partners, which represents Liberty Mutual, FCCI Insurance Group and several other workers’ compensation carriers in the state.

Until now, some insurers have simply assumed that subcontractors doing more than a certain level of business – $50,000 in annual revenue, in some cases – had employees and their principals and officers had not exempted themselves.

When a carrier includes an exempt subcontractor officer or owner on a payroll, it can end up costing the general contractor perhaps $2,000 more per year in premium for a tile craftsman, for example, or $6,000 more per year for a carpenter, agents have calculated.

And when that happens, commercial insurance agents can feel the blowback from their contractor customers.

Carriers in recent years have said they have erred on the side of caution in order to help prevent payroll fraud by subcontractors – which has been a huge problem in the industry.

The Jan. 30 NCCI circular said the change had been approved by Florida regulators and will be effective for new and renewal voluntary policies starting March 1, 2023. Insurers may elect to follow the NCCI rules or apply to the Florida Office of Insurance Regulation for a deviation.

Florida’s workers’ compensation law allows construction firms with three or fewer employees to opt out of insurance requirements. But the law also mandates that a contractor is responsible for insurance on non-exempt employees of uninsured subcontractors. Subcontractors are not required to provide evidence of workers’ comp coverage if they have no employees and provide a certificate showing that the subcontractor’s officers have elected to be exempt from the coverage requirements.

With the NCCI rule change, carriers should not charge additional premium on the contractor’s policy unless they have filed notice with the Florida Division of Workers’ Compensation that a subcontractor has hired nonexempt employees and has failed to provide evidence of workers’ comp insurance.

The circular includes a table that carriers can use to calculate additional premium on subcontractors.

Pennachio gave credit for the change to FAIA officials who brought their concerns to Florida regulators and to the NCCI, which acts as the ratemaking and analysis body for Florida and 37 other states.

“This is pretty significant,” Pennachio said.

Some FAIA member agents raised the alarm last year after hearing from their insured contractors.

“We have received numerous phone calls from FAIA members regarding work comp premium audit problems arising from clients’ use of contractors with exempt officers,” Pennachio wrote on the FAIA website in August. “Some carriers are charging premium for exempt officers in a similar way as uninsured subcontractors.”

The concern now, though, is how carriers can verify subcontractors’ employees, and what the consequences may be if insurers don’t follow the new rules.

Guzzo said that the rule may require some tweaking or even statutory changes in coming years. But for now, carriers, agents, and insureds will need to work closely to obtain the verification. Agents will likely have to remind contractors to gather the requisite paperwork from their subs.

“The goal is to avert fraud but not make it too cumbersome for the insured,” Guzzo said.

If a policyholder or an agent feels that a carrier is not following the new rule, Florida regulations allow for a dispute resolution process through the Florida Workers’ Compensation Appeals Board, which is administered by the NCCI. If an employer disagrees with the board’s decision, the employer may seek further review by the OIR.

Three disputes were heard by the appeals board in 2022, said Cristine Pike, director of communications for the Boca Raton-based NCCI.

The issue has been simmering for years. In 2019, the NCCI put out a memo explaining that its basic manual already bars carriers from charging premium for exempt officers. Despite that, agents have said, some insurers have charged premium anyway.

The practice has made things difficult for some contractors, who, knowing the subcontractor’s exempt status, weren’t expecting carriers to charge the extra premium. And retroactively proving an independent contractor’s officer status can be easier said than done.

Carriers around the country have said for years that too many subcontractors have fraudulently claimed few or no workers in order to avoid workers’ compensation premiums. That cuts insurers out of revenue and deprives workers of injury protection and benefits.

The American Property Casualty Insurance Association said that making sure workers are covered is paramount.

“APCIA’s critical concern is that all workers on a construction site are covered by a valid workers’ compensation policy,” said Steven Bennett, vice president of workers’ compensation programs for the association. “We support reasonable state efforts that ensure coverage for all workers on the site.”