When placing Workers Compensation what could possibly go wrong?

by Curtis M. Pearsall, CPCU, CPIA
Special Consultant to the Utica National E&O Program

It’s somewhat of a surprise that when looking at E&O claim statistics, E&O claims arising out of the placement of Workers Compensation each year account for approximately 10% of all claims. Moreover, many of those WC claims are well in excess of $100,000. What could go wrong? Let’s take a look.

Ensure you are providing coverage for all of the client’s states
When meeting with the account to secure the necessary information to provide a proposal or issue a policy, bring along the necessary WC application so specific risk questions can be asked and documented. Obviously, answers to these questions could determine the acceptability of the risk and what endorsements are provided.

One of the key questions involves the states in which the client is doing business. There are a number of issues here. If there is a chance the client will have an employee temporarily working in another state, while the policy may provide coverage, there is the chance that the benefits of that other state will be greater than the home state with the employer forced to pay the difference. If the client is looking to set up a permanent new location, absent the policy reflecting that additional state, there would be no coverage.

A highly recommended approach is to add the Other States endorsement to the policy to ensure injuries to employees in the other states will be fully covered. One exception to this involves the monopolistic states; private insurers are not allowed to provide coverage in those states. Explain and document this discussion with your clients.

Don’t just renew “as is”
If you have issued the policy with specific states listed and no “other states coverage,” it is highly recommended that you secure an update each year with your client as to what their work plans are for the next policy term. There have been many E&O claims where the client apparently did not understand the “rules” and opened up a permanent location in another state only to have an employee injured – and then discover there was no WC coverage in effect. As you will note by the following claim, when moving the account to another carrier, be certain the coverage is at least equal.

In this claim, the agency failed to properly replace WC coverage for a trucking firm that had “other states” coverage on a previous policy. The new policy only covered losses in the state in which the client was domiciled. The client had an employee injured in another state, only to find they had no coverage for losses occurring in that state. The case settled for $317, 000.

State requirements
In New York, it is mandatory to have New York listed if the insured has any New York exposure – even if it is incidental. In fact, sources confirm that New York has started to levy fines against employers if there is an exposure in New York but the state is not listed. Thus, keep up with and comply with the various state regulations!

Insuring contractors?
This class of business has its fair share of E&O claims arising from improper handling of the WC exposure. Oftentimes, the terms of the contract with a sub-contractor call for the general contractor to supply the Workers Compensation coverage. If you are insuring the GC, work with your client to understand this stipulation and take the necessary action. Don’t wait for an employee of the subcontractor to be injured to find out that no WC coverage was in place.

Be alert to communication from your carriers regarding coverage status
This is a claim where the agency procured Workers Compensation for a small contractor. After the policy had been in force for a month, the carrier cancelled the policy for underwriting reasons. Both the client and agent denied seeing a cancellation notice and thus no replacement policy was procured. It was not until a worker was injured several months after the cancellation that it was discovered the WC policy had been cancelled. The client was forced to pay the benefits and sued the agent. A review of the agency’s records revealed a fax the agent had received from the carrier one month prior to the cancellation date clearly indicating the policy was to be cancelled. Because the agency failed to act on the fax, the case was settled for $11,000.

U.S. Longshoreman and Harbor coverage
Do you have a client that is subject to the Longshore and Harbor Workers’ Compensation Act? This act, administered by the U.S. Department of Labor, provides medical benefits, compensation for lost wages and rehabilitation services to longshoremen, harbor workers and other maritime workers injured during the course of employment or who suffer from diseases caused or worsened by conditions of employment. Placing this coverage may not be easy and extra caution should be exercised. As you will note by the following example, the dollars at stake can be high.

The client requested U.S. Longshoreman and Harbor coverage be provided for their employees. The agency went through a broker to place the coverage. An employee of the client was injured and the carrier disclaimed, saying there was no policy in place. The employee lost wages and incurred medical bills and attorney fees. The client was faced with the cost of an attorney and had to pay fines for not having coverage in place. Although the carrier felt the broker was at fault – there was documentation on file supporting the position that the broker had agreed to procure the coverage – following a bench trial the Court found the agent equally liable with the broker. With the total damages claimed in excess of $700,000, the agent’s share was $315,000.

WC Trusts/alternative programs
If you are looking to use a trust to place one or more of your WC customers, it is important to fully understand these trusts, how they operate and, quite certainly, their financial condition. In New York, a number of these have declared insolvency in the past few years. Without a Guaranty Fund to provide protection, a high degree of due diligence should be exercised. This lack of a Guaranty Fund should also be clearly communicated in writing to your customers.

Placing WC is not that difficult – doing it right is the hard part
When placing this coverage, there is a definite need for attention to detail. Work with the application and document the responses from the prospect, and your job should be a lot easier.