“National Council on Compensation Insurance, Inc., based in Boca Raton, FL, manages the nation’s largest database of workers compensation insurance information. NCCI analyzes industry trends, prepares workers compensation insurance rate recommendations, determines the cost of proposed legislation, and provides a variety of services and tools to maintain a healthy workers compensation system.”

What they do affects the workers compensation rates for all employers in your class as well as your specific experience modifier (determined by your company’s claims), and impact of any legislative changes on rates in your state.

Rates for your business

To determine the rates for your business NCCI uses class codes based on what your employees duties are.  More hazardous duties usually equal higher rates.  For example, steel workers have a much higher rate than salespeople.  Each business can have multiple class codes depending on the variety of duties their different employees perform.  A Manufacturer may have a different class code for clerical, sales, drivers, and 2 more for each of two products they make.  They look at the claims for all employees in that class in the entire state and compare to payroll in the class to determine a rate.  They use actuaries for this.

Your Experience Modifier

If your premium is over $5000 for the past few years or over $10,000 in a single year, you are subject to being “experience rated” by NCCI.  Every year you will receive a sheet from NCCI that has a bunch of numbers on it and looks similar to a spreadsheet.  There is a complicated formula involved but basically the more claims you have the higher your modifier is.  The modifier, often called “EMR” or “Mod”, is a multiplier applied to your premium.  So if your modifier is 1.25, you get surcharged 25% and if it’s .75 you get a 25% discount.  All insurance companies will apply your experience modifier to your rates.  If you are really into math here is a link that explains how they are calculated: “ABC’s of Experience Rating”, by NCCI.

Impact of Legislative Changes or Case Law

NCCI will also determine how any legislation that affects workers compensation will ultimately affect the rates.  These changes could result in immediate or future changes in the rates for your state.  Changes that are perceived to change rates (such as a new law extending disability time) will be calculated by an actuary based on detailed information of past claims and a rate increase or decrease will often be applied immediately or in the future.  Court cases that overturn this legislation or other court cases that are appealed above the workers comp court can also have an effect on the rates.  In Oklahoma, key legislation was passed that had an immediate rate reduction.  Over the next few months, many of these changes were challenged and defeated in appeals courts and therefore much of the rate decrease was reversed and rates were raised back up to almost where they were before.

You can see the effect NCCI has on your rates.  It is funded by the member insurance companies that are members and through fees they charge for their data.  Understanding this helps you better control your Total Cost of Risk.

• Preventative - Safety & Risk Management, Pre-Employee Screening, Safety Equipment, Culture Management, Wellness, New Hire Training, salary of safety personnel & expenses, Personal Protective Equipment, Safety Meetings.
• Direct- Insurance, Managed Care, OSHA Fines, Deductibles, Legal Expenses, Loss of Productivity post accident, Management time to administer Injury or attend hearings, Staff time to administer injury.
• Indirect - Reputation with insurance carrier(s), reputation with vendors, loss of morale, loss of reputation, employee gossip, etc.

Considering all of these expenses why would anyone not want to spend more money on Preventative costs? 

Question:  Why should a business owner use different LLC’s (or corporations) to help manage their risk and exposure?

Answer:  First of all, legally speaking, it’s important to understand that LLC’s (or S-Corps or C-Corps, whichever one you use) are actually their own, separate, “legal persons.”  This means that, just like you or me, the LLC (or corporation) can actually sue and/or be sued as a separate, legal entity (Note: the only difference between you being your own, legal person and the LLC being its own, legal person is that you, as a human being, in addition to being a separate, legal person, are also what’s called a “natural person” who is, medically speaking, an entity that is alive and breathing!).    

Second of all, as a business owner, it’s important to understand the incredible importance of having your various interests owned by various LLC’s (or corporations) because doing this, in and of itself, is actually a great way to perform the critical function of risk management.  How does it work?  Read below.

For example, let’s say you’re a business owner who owns a plumbing company with 50 plumbers, 50 trucks and you own a 5 acre tract of land which contains your warehouse building and your administrative offices.  You own all the land, the offices, the trucks and the warehouse building.  Accordingly, you’d likely want to separate out your ownership of these various assets in the following manner:

 A)     You’d want to change the ownership of the trucks from your personal name (or from the one, single LLC or corporation that currently owns everything associated with your entire business) to a different, separate LLC - let’s call it “Truck, LLC.”  By putting your equipment into Truck, LLC, you’ve separated it from the other assets you own (i.e., the 5 acre tract of land, your warehouse and your administrative offices) so that, if an accident was ever caused by one of your 50 trucks, the other assets won’t be exposed or made vulnerable to any claims arising from such truck accident;

B)     You’d then do the same thing with your warehouse (i.e., Warehouse, LLC), your administrative offices (i.e., Administrative Office, LLC) and perhaps even certain pieces of plumbing related equipment (i.e., Related Equipment, LLC) which have their own unique, high liability risk factors such as: high voltage generators, tractors, backhoes, lift equipment, etc…).

This way, if any of these different categories of assets ever cause an accident (or are ever involved in an accident), all the other assets in the other LLCs will be neatly protected within their own separate, legal entity.  Is this method completely fail safe?  No.  But it’s a great way to begin doing some risk management for your company.  

Chris Griswold is an attorney in Oklahoma City. He specializes in Commercial Real Estate Law, Business Transactions, and Estate Planning. You can find him on the web at  www.chrisgriswoldpc.com

Many business owners protect themselves by purchasing high limits of insurance and setting up multiple companies to keep their assets protected.  You need to spend equal time making sure you have your personal coverages set up properly.  (For Example:)

My employee is driving a delivery truck and causes a multi-car accident in which there are several serious injuries.  A large award is given and I have enough coverage with my auto and umbrella liability to pay the claim.  As a backup to keep them away from my personal assets, I have the protection of my corporation or LLC. 

What if I have this same accident on my way home in my personal vehicle and I don't enough insurance limits to cover this claim?  Once they get a judgement, they can go after my personal assets.  If that is not enough they can come after my ownership in my company or it's assets.  The price to increase my personal auto limits is very reasonable and would seem cheap now.

I recommend you look at your personal liability limits under your homeowners insurance, personal auto, and any other recreational vehicles or boats you have, and increase them enough that you can buy a personal umbrella to extend all of those limits to between $1,000,000 and $10,000,000 depending on your needs.  Personal Umbrella's cost start at a couple of hundred dollars a year and go up from there.

Thanks to Chris Griswold, Attorney, for his help on this article.

I have been asked several times what Umbrella Limit a company should carry? While there is no definitive answer to this question, companies should begin their analysis by using the net worth of their company as a guideline.  For example, the more you have, the more you should carry. Companies with substantial property values that have appreciated over time should look to  more than just their financial statements to determine asset values. They should also look at the current market value of their properties. 

We all hear of large losses that put companies out of business, where there could not have been enough coverage purchased to cover the loss. I have personally seen accidents that exceeded $2,000.000 but I have not seen anything over $5,000,000.   This is why I am a proponent of dividing your companies into separate entities if it makes sense to do so. Whether or not you do this, keep in mind that the higher limits you obtain, the less each incremental layer will add to your premium. For example, let’s say the first $1,000,000 of the umbrella  costs $2,000.  The next $1,000,000 might cost $1,000 and the 3rd $1,000,000 might cost $500 for a total premium of $3,500 for a $3,000,000 umbrella.

Whatever you do, take the time to properly protect your company.  You spent a lot of time building your business, so spend the time to make sure you get to keep it.

• Leases (property)
• Automobile or Equipment Leases
• Construction or Service Contracts – This includes subcontract agreements with any subcontractors or service providers or contracts where you may be the owner of the property for work being performed.  An example of this might be you hiring a General Contractor to do a roofing project for you and he hires a subcontractor to do the work.  You should review this contract as well.
• Distributor Contracts – whether you are the one selling the product or the buyer

What are we looking for?  An attorney should be looking at the entire contract including how you will be paid and when or how you can get out of the contract.  Your Risk Consultant or insurance broker should be looking at:

• Indemnity Clauses or Hold Harmless agreements – are they fair? Are they insurable?
• Does your insurance cover as many of the exposures that you are assuming as possible – (many are uninsurable)
• Does the contract use modern Insurance Language -  Many are still patterned after policies first introduced in 1973.  Those were modernized in 1986 and much of the wording could be out of date if not modernized
• What can be taken out or changed that benefits you – If we can suggest changes in language that reduces your exposures, many times that can be negotiated before you sign the contract(s)
• What endorsements need to be added to your insurance to meet the requirements and how much will it cost you?

Here is the double back flip that nobody seems to be talking about:  What about adding all the savings that the health insurance community talks about with the facts that I just told you about workers compensation and looking at the savings at both sides.  If you are under fully insured health and workers compensation plans this could be a huge savings. If you are self insured or insured in a captive the savings could be even more and would start immediately. 

Since Construction, Oil and Gas, Service, and Manufacturing pay much higher workers compensation rates than office workers, they stand to benefit the most from implementing a wellness plan.  If I were a CFO at one of these companies I would jump on this immediately.  Besides the cost savings, fit people perform better, are happier and are less likely to leave.

• Data Backup and Recovery – This includes software and not just data.
• Written plan with procedures,  and contacts.  Copies of relevant data for each key employee  should be kept at their houses.
• Facilities & Power - If you are shut down, for many types of disasters, so is your power.  Who will provide power, computers, office space, warehouse space, and internet or phone connectivity if these are out.  A disaster can include a major cut in your internet service without any type of natural disaster being the cause.  We partner with firms that provide these services to our clients.
• Testing – If you plan has not been tested, it will probably fail or not obtain it’s desired result.  Everyone we know that has tested their plan has found huge problems they had to fix after the test. When you test, you should simulate a complete loss and restore just like you would have to do in a disaster.
• Funding – Now that you have the plan to take care of all of this, who will pay for it?  It’s important that your Risk Advisor structures your insurance to properly fund your plan.

Chris Moxley, CIC, CRIS

According to the study for claims under $3000 the indirect cost are 4.5 times the amount of the claim, 1.6 times for claims from $3,000 to $5000, 1.2 for claims between $5000 and $10,000 and 1.1 for claims above $10,000.  Even though this is fairly easy to spreadsheet these numbers,there is a worksheet on OSHA.com that does the work for you.  It goes a step further to show you what sales are needed to cover your claims.  When we have done these in the past for clients, they are very surprised when you show them the number, but the amount of sales to cover the claim is where it really hits home. 

What makes up these soft costs or indirect costs?  Loss of use, loss of productivity, lost customers, damage to brand, lost contracts, investigation expenses, administration, bad morale among employees, time to attend hearings, etc.  The list goes on and on.  I would challenge those of you who have changed your culture to a more safe workplace to look at  your financial statements and give the credit for the improvements to the reduction of these direct and indirect costs.   For those who may struggle to get upper management to look at something besides sales, use the worksheet to show them the importance of safety and loss prevention. 

Chris L. Moxley, CIC, CRIS

Professional Insurors Agency, LLC

Many Businesses look at their Insurance Premiums as their cost of risks from year to year and do not take into account what their real costs associated with their property exposures are.  You hear a lot of discussions about Workers Comp and Liability when talking about Total Cost of Risk but very little is said about your property exposures. 

The Total Cost of Risk (TCOR) is defined as the overall costs associated with running corporate risk management program.  These include such items as:

• Insurance Premiums
• Deductibles
• Uninsured Losses or Losses exceeding Insurance Limits
• Risk Control or Safety Expenses
• Management's time in dealing with issues (claims, contractors, moving tenants)
• Reputation with Insurance Companies (future premium increases)
• Loss of Reputation in Community
• Fines (City, State, Federal)
• City or State Mandates (ordinances) that force upgrades after a loss

When looking at these issues, most would have to agree that avoiding the loss is by far the best way to lower your TCOR and a key component of risk management.  Even though many say that there is not much they can do to lower their risk cost or, “it is just luck” that could not be further from the truth. 

Here are some items that can lower your TCOR for your property exposures:

• Inspections of Property to identify problems to prevent losses
• Fire safety equipment such as extinguishers, alarms, & sprinklers
• Properly Value Properties before loss
• Contractor Hiring & Risk Management Transfer
• Proactive improvements to property such as electric, roofs, plumbing, etc.
• Disaster Recovery Plan
• Tenant Screening where applicable

We will explore these in future articles.

Chris Moxley, CIC, CRIS, Professional Insurors  www.pi-ins.com