Common Cents: A Primer

When insurance buyers look for cost reductions, they often focus on bidding or greater risk retention to achieve their goal. These cost-reduction efforts are usually made at renewal time, but astute insurance buyers can continue to achieve reductions of a different sort throughout the year.

Experience Rating Errors in workers' compensation can be difficult to detect, but can be among the most costly if not detected because their impact can last for as many as three years. You should verify the accuracy of payrolls and losses used in the rating calculation. If all appropriate payrolls are not included, the experience modification 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 (retrospective rating or large-deductible plans) are used. Regular monitoring of claim management is a necessity. As the saying goes, "The squeaky wheel gets the grease." 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' compensation classifications, finding your way through the tangled web of insurance company underwriting departments, state rating boards and state 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. Once a classification is changed in error, it will be yours for years to come if not corrected.

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. Discouraged policyholders may give up, but those who press on 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. Regrettably (for the insurer), 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 the specified 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 are too often thought to be intrusive by insurance buyers. Complying with such recommendations, however, can help reduce insurance costs, and more important, can help avoid or mitigate losses. Not long ago, a manufacturer resisted implementation of an in-rack sprinkler system because the downtime associated with installation of such a system would have had a negative effect on sales. Refusing to recognize the potential impact of a severe loss on sales was shortsighted and ultimately led to a nonrenewal by the insurance company.

-- Charles H. Cox

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