R&R Insurance Blog

On October 1, 2019 Wisconsin continued its trend entering a fourth consecutive year of reduced workers’ compensation insurance rates.  Rates in 2019 fell an average of 8.84% compared to 2018, which is the most dramatic reduction in over a decade.  This rate reduction will affect work comp policies with renewal dates between 10/01/19 to 09/30/20.

Workers’ compensation rates are state mandated in Wisconsin, meaning all insurance carriers must use the same rates resulting in premiums from one carrier to another are basically the same. 

While at first glance, this appears a “boon” to the bottom line for Wisconsin contractors as work comp premium makes up the lion’s share of insurance costs.

When it comes to the 4^th consecutive year of reduced work comp rates there’s “the Good, the Bad, and the Ugly…”

... the Good …

In general, a reduction of work comp rates result in reduced premium costs to contractors.  It’s estimated that Wisconsin businesses will save over $170 million in reduced work comp premiums.

In 2019, the Wisconsin construction industry will see the greatest reduction in work comp premium compared to other industries:

Overall 2019 Wisconsin work comp rate reduction:  -8.84%

Construction	-11.21%
Goods & Services	-8.66%
Manufacturing	-8.11%

Within the various Construction industry class codes, the 2019 WC rate reduction ranges from:

High	Low
-16.4% Roofing	-4.0% Sand & Gravel
-16.0% Carpentry	-7.2% Water & Gas Main
-15.5% Excavation

 

 

... the Bad …

To understand the downside of falling work comp rates, a snapshot of the last 4-years is needed.  Overall the new 10/1/19 rates are 24.1% lower than the rates that were in effect on 9/30/16. In the last four years there has been nearly a ¼ reduction in the potential work comp premium dollars available to the insurance market (Construction is over 30%).

The effect of four consecutive years of work comp rate reductions is a continued deterioration of insurance carrier profitability in writing this line of insurance, which will eventually lead to:

• Insurance carriers scaling back % of Dividend Offerings (an action that insurance carriers have historically been reluctant to take for fear of a loss of market share)
• Potential of reduced insurance carrier interest in writing WC coverage (especially standalone WC markets)
• Potential of rate increases in non-work comp coverage lines to support the overall account profitability
• Hardening of the insurance market, that already has been seen rate increases over the past few years in Business Auto and capacity limitations on Umbrella/Excess  

... and the Ugly …

Construction companies may be surprised to learn that significant WC rate reductions have an inflationary impact on the Experience Modification Rate (EMR).

It should be noted that this inflationary impact to the EMR will offset to some degree the premium reduction created by reduced WC rates.

Of the many variables that affect the EMR, the below example illustrates the inflationary pressure created by reducing WC rates:

• “Expected Losses” are the amount of losses that the State of Wisconsin expects to result from the state mandated work comp rate.
• As the state mandated work comp rates have reduced over the past 4 years (example: -33% in Sewer Construction), the “Expected Losses” that will result from the reduced WC rates also reduce.
• “Expected Losses” are compared to each construction company’s “Actual Losses” in the calculation of the EMR.
• The lowering of the “Expected Losses” through reduced WC rates when compared to the “Actual Losses” results in inflationary pressure to the EMR.

The only way to offset this inflationary pressure on the EMR is for contractors to reduce their “Actual Losses”.

Contractors familiar with competitively bidding on large projects know all-too-well the importance of having an Experience Modification Rate below 1.00. Most contractors have seen their EMR increase over the past several years, due in part to the last 4 years of WC rate reductions.

 

What can Contractors do?

Competitive pressure on insurance carriers

• Start the renewal process early (120 days prior to renewal)
• Evaluate insurance carriers:
  • WC Dividends Plans
  • Analysis of carriers coverage enhancements and/or restrictions
  • Evaluation of Carrier Support Functions (Loss Control / Safety Services & Claims Service)
  • Carrier dedication to the construction industry (Most national carriers have construction dedicated Underwriting / Loss Control / Claims functions)

Pre-Loss – Safety:

• Identify who is accountable at each job site for administering safety?
• Involve the insurance carrier and insurance broker to create an annual service plan addressing:
  • Training (employees / supervisors & foremen / safety director)
  • Jobsite inspections (Are we following our policies and documenting all inspections and corrective action?)

Post-Loss – Controlling Costs:

• Claims should be reported immediately
  • Statistics confirm a direct correlation between immediate reporting of a WC claim and minimizing the cost of that WC claim
• Keeping WC claims “Medical Only”
  • “Medical Only” claims (without Loss of Wages and or Disability) are discounted by 70% for the purpose of the impact on the EMF
• Partnering with an Occupational Medical Provider
  • By having a medical provider familiar with your business, there tend to be fewer hang ups in getting employees to return to work as fast as possible
• Regularly scheduled mid-term and year-end claim reviews with broker and insurance carrier

  

Applying for available work comp credit programs:

• Wisconsin Contractors Premium Credit program (up to a 10% Premium Reduction that has no impact on the EMR)
• Wisconsin Apprentice Credit Program (up to $ 2,500)

 

NOTE:  Some insurance brokers (including R&R Insurance) have dedicated Construction divisions to serve the needs of Wisconsin’s construction industry.

To sum it up, while at first glance the continued workers’ compensation rate reduction that took effect on 10/01/19 may create the appearance of saving “A Fist Full of Dollars” on reduced WC premiums, in reality an objective evaluation would indicated that there is “The Good, the Bad & the Ugly..”.

 

Caution is often the reaction I get when discussing Cyber Insurance to construction executives in Wisconsin. From their perspective it would be a nice policy to have should the North Koreans focus their slave hacking force on a plumber in Sheboygan. The resulting ransom of 200 bitcoin for their $200 laptop seems a laughable prospect to a field that generally isn’t tech reliant. The truth, however, is that contractors are a growing target for hackers, but fear isn’t the only reason for a contractor to have Cyber Insurance.

So is greed.

Newly mandated contracts are forcing the conversation of Cyber Insurance between owners and contractors. On October 31, 2018 the American Institute of Architects (AIA) requires the use of their new 2017-revised agreement documents and to toss the old 2007 versions. Among the most standard forms are basic contract agreement between owners and contractors: A101, A102, and A103. All three of those forms have a new section dedicated to Cyber Insurance.

The relevant language begins in the from at section A.2.5.1. This segment encourages the owner to purchase Cyber Security Insurance for any loss or data breach should such an event happen on the job. This represents an opportunity for a contractor to sell the fact that they have 3^rd party Cyber Insurance and can cover such a breach. Alternatively this could be a threat should the contractor have no Cyber Insurance and potentially lose out on a bid to a competitor who has said coverage.

Why was Cyber Insurance language inserted in this part of the contract? The AIA believes there is a growing threat of electronic data loss to owners after several real world examples surfaced where negligent contractors were at fault.

In 2013 an HVAC contractor in Pennsylvania was working at a Target retail store. An employee of the HVAC contractor opened a virus laced email. This email stole the identification and password of the contractor and was able to infiltrate Target’s vendor portal. From there the criminals were able to gain access to Target’s internal network. The result was the 5^th largest cyber-attack in history and 70 million compromised credit cards.

Beyond encouraging owners to attain Cyber Insurance, Forms A101-3 present easy opportunities for owners to require Cyber Insurance from contractors. Further along in the contracts (section A.3.3.2.6) the owner is given a segment to fill in additional coverages a contractors is required to possess on the job. In the real world we are starting to see contracts requiring a Cyber policy– often with high limits too.

More than just a threat, Cyber Insurance represents an opportunity for contractors. Having a policy ahead of a big job not only protects your company in case of a breach, but also gives the sales or marketing department extra ammunition to make the winning offer. 

Not all Cyber policies are the same. There is a major difference between a first and third party coverage. Contact an agent to work out the best Cyber policy for your business.

Pollution liability policies are only for contractors involved in environmental or pollution cleanup … or so goes the common perception in the construction industry.

The truth is a trade contractor without a pollution policy actually has a serious coverage gap when it comes to mold, bacteria, asbestos, silica, and lead.

Insurance carriers, always adverse to risk, write General liability policies with exclusions specifically for the aforementioned substances. It would instead be the Contractor’s Pollution Liability policy picking up the tab for bodily injury and property damage claims involving these often overlooked pollution conditions. 

Just about every contractor has some exposure to these elements:

• Plumbers have exposures to category 3 water (the water in drain pipes), mold, and bacteria. When the plumber’s work goes wrong, water damage caused by leaking pipes can lead to mold growth. A claim from a bystander alleging his quality of life was impaired due to the bacteria-abundant “category 3 water” would be excluded from a general liability policy.
• HVAC Contractors need worry about mold, bacteria, and legionella. Condensation in HVAC systems generally is the culprit in mold/legionella issues. Should your company have installed an HVAC system with too much humidity resulting in mold, claims arising out of the bodily injury (or even claims from the mere worry of bodily injury) would be excluded from a general liability policy.
• Roofing Contractors have exposure to mold, lead, and asbestos. Working on older buildings increases the chance of lead and asbestos exposure. Even a simple defect in the installation or repair of a roof could cause a large pollution related loss – i.e. a leaky roof resulting in mold growth. Costs associated with locating and removing mold can be extensive as the structure needs to be thoroughly inspected.
• Electricians are not exempt either from pollution liability and have similar exposure to mold, lead, and asbestos. Imagine a contractor running wire above a ceiling and stepping on a sprinkler pipe hidden by insulation. Should water damage result in mold growth, a general liability policy would not be your go-to. Like a roofer, work on older buildings increases the chances of lead and asbestos exposure.

Some Insurance carriers offer limited scope pollution endorsements. These endorsements do not compare in scope of coverage to a properly designed contractors pollution liability policy. After a loss, it’s too late to find out if a limited scope pollution endorsement provides enough coverage.

Should you have any further questions on potential coverage gaps in your current policy, talk to your Commercial Insurance Agent or shoot me an email.