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Safeguarding Receivables

This post is part of a series sponsored by Early Warning.

The insurance industry has become a prime target for criminals. Well aware of the money flowing between insurance companies and consumers, scammers continue to find ways to exploit vulnerabilities. Since the vast majority of transactions now take place via ACH, both for payables and receivables, the use of this channel requires insurance companies to take heightened precautions to effectively mitigate risk.

In today’s era of electronic payments, it is critical for insurance companies to protect their receivables processes by properly validating that funds are coming from the correct account that can be validated to the policyholder. Herein lies the primary challenge. Without the ability to determine exactly where received funds initiate, insurance companies are susceptible to fraud as well as the overhead associated with insufficient funds (NSF) and other administrative and authorized transaction returns.

This issue creates a significant burden for an insurance company’s receivables department. Not only does it need to verify accounts at the time of a policyholder’s ACH enrollment, it also needs to validate that funds coming in are “good funds” that can be used. This comes into play any time an organization is collecting either one-time or recurring payments; or, if an established customer changes his or her account, payments should be re-validated.

As insurance companies continue exploring new ways to safeguard their organizations and their customers from fraud, it is not sufficient to validate receivables in a one-off fashion. Rather, they need solutions that can consistently provide account status and ownership confirmation. Insurance companies should not allow instances of NSF or administrative tasks to take away from core business objectives or customer service or create fraud susceptibilities. Instead, they must capitalize on solutions that can seamlessly authenticate policyholders and accounts on the front end, before even giving high-risk payments a chance to occur.

Many insurance companies are looking to technology to ensure they are interacting with legitimate accounts and the correct policyholders. Early Warning understands that authenticating accounts and ensuring good funds is more than a common issue, but an everyday matter. Early Warning’s Real-Time Payment Chek® Service with Account Owner Authentication (AOA) is aiding insurance companies to quickly confirm account ownership and verify whether accounts are open and in good standing, leveraging the collaborative intelligence of the National Shared Database℠ Resource.

Real-time Payment Chek Service with AOA provides value to insurance companies by answering two key questions at the point of transaction to immediately match the account owner and signatory details.

As a result of using technology and taking a proactive stance, insurance companies can effectively mitigate risk and reduce ACH returns and unauthorized transactions. At the same time, they can provide their customers with a much better experience; ACH enrollment is faster and employees can dedicate more time to customers’ needs instead of managing back office returns and collections.

To learn more, click here to download the solution brief.

Watch for our next blog, October 5th, which will showcase how Real-time Payment Chek Service with AOA optimizes payables for insurance organizations by reducing claims payment fraud.

About David Barnhardt

David Barnhardt is Early Warning’s Vice President of Product Management where he oversees development and management of deposit and payment solutions. He joined Early Warning in 2014 bringing with him thirteen years of executive experience in bank fraud and risk management. During his career, he has done extensive work in mitigating deposit, debit, e-commerce, and internal fraud. He has also done significant work in link analysis and collusive ring investigation.

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Audit Problems Leading to Additional Premiums

Let’s dispense with the niceties and all attempts to eloquently ease into a discussion on the troubles surrounding workers’ compensation audits. Rather let’s jump right into the problem — assignment of “employee” status to non-employees. This is not the only problem, but this is where most additional premium headaches seem to originate.

Statutes in most jurisdictions are rather clear regarding who is and is not an employee, but auditors have taken it upon themselves, on many occasions, to assign an individual “employee” status in direct contradiction to statutory language; particularly when it comes to sole proprietors, partners, corporate officers, properly insured subcontractors and true independent contractors. Worse yet, different carriers’ audit departments treat the same exposure in different ways, which leaves agents to guess on the outcome. Guessing usually ends with the client being stuck with an additional premium bill and the loss of a client.

In one instance, an agent was sued by his insured to recover the amount of the additional premium audit (in the neighborhood of $75,000 to $80,000) resulting from independent and statutorily exempt subcontractors being assigned “employee” status. The insured claimed the agent never advised him which workers might and might not be considered employees and thus the agent erred in his professional responsibility and duty to the insured. Even if no lawsuit had been filed, the client will likely move his coverage at renewal (or sooner), even if the audit is right.

Challenging an auditor’s ruling seems to be a no-win proposition akin to tilting at windmills. Some underwriters have stated that they cannot overrule the auditor; and even the states seem to be or choose to be impotent in a classification dispute.

Before completely ripping auditors apart, let’s agree that good auditors can be a valuable resource when working on a difficult account. Some company auditors will even take the time to help agents classify the insured (which could possibly help win an account). I have had occasion to establish an up-front agreement with the auditor regarding a particular insured’s classification at audit. Auditors who go above and beyond need to be recognized to their managers and the manager’s manager. Bosses generally hear nothing at all or bad reports, a good report will stand out in their mind and the auditor will be an ally later.

To be fair, the auditor’s job is not always easy, and sometimes it is hard. Judging who is and is not an employee is not always clear. When there is a gray area, the auditor generally takes the conservative approach and assigns “employee” status. The bad part is the agent doesn’t generally find out until receiving the angry call from the insured holding the audit bill in his hand. How the auditor is approached once the audit is contested goes a long way towards amiably rectifying any problems.

Regardless, the agent needs to protect himself or herself from the sufficiency of gray area that may lead to an additional premium audit. Employee status in workers’ compensation is a function of law, not a function of the policy, and since agents are not generally lawyers, the best they can do is make an educated interpretation — but even that might be wrong.

Stuart Powell, CPCU, CIC, CLU, ARM, ChFC, AMIM, AAI, ARe, former vice president of Insurance Operations for the Independent Insurance Agents of North Carolina, crafted a letter for agents to send to their clients upon purchase or renewal of a workers’ compensation policy. This well-written letter explains to the client what workers’ compensation is, how it is priced, how employee status is determined and what will happen at audit.

The Letter

Insured Addressee Business Name Street Address City, State Zip

Re: Workers’ Compensation Policy

Dear Client:

You recently purchased (or renewed) a Workers’ Compensation and Employers’ Liability Insurance Policy. This policy is designed to support and comply with (this state’s )Workers’ Compensation Laws and to provide benefits as prescribed by statute to any injured employee whose injury or disease “arises out of and in the course and scope of” their employment.

Payroll generally determines the ultimate cost of coverage. Estimated payroll supplied by you at the beginning of the policy year determines the deposit premium. An audit of actual payrolls is completed by the carrier at the end of the policy period to determine the final premium. If actual payroll is less than your estimate, a premium refund may be sent. Likewise, actual payroll higher than estimated results in an additional premium bill.

Today’s business climate makes it difficult to determine who qualifies as an “employee;” the use of leased employees, subcontractors and independent contractors contributes to the confusion. Employment contracts, statute or common law usually establish employment (and employee) status. Calling a worker by a name other than employee (i.e. “subcontractor” or “independent contractor”) does not overcome the facts. Additionally, how compensation is reported to the IRS (use of a 1099 Form) is not sufficient to establish that the individual is not, in fact, an employee.

Workers’ compensation pays benefits to injured “employees;” any individual determined by statute or the court to be your employee is entitled to benefits. Because benefit payments are the responsibility of the insurance carrier, they are becoming very aggressive in making sure you pay the proper premium for the benefits they must provide. Insurance company auditors have traditionally allowed the use certificates of insurance to establish exemption from “employee” status. Recently, auditors have begun to disregard these certificates particularly in cases of workers’ compensation “ghost” policies (a workers’ compensation policy written for an unincorporated business with no employees and which does not extend coverage to the business’ owner(s)).

Additionally, workers that perform the same tasks employees perform or would perform may lead the auditor to define such individuals as employees, resulting in additional premium based on the individual’s compensation. These are workers you might label as “independent contractors” or “subcontractors.” Depending on the number of workers in question, the premium adjustment could be substantial.

An opinion from an attorney trained in employment law is required to answer any questions about the status of a particular worker or group of workers. We as your agent appreciate the opportunity to assist you in your workers’ compensation insurance program; however, we are not attorneys and are unable to provide a legal opinion as to whether a particular worker is or is not a statutory or common law employee.

Sincerely yours,

Your Agent


Keeping other agents and clients informed allows a better system to be built. Communicating with clients up front also avoids some heartburn in the end.

Workers’ Compensation Series

This is the last in a series of articles on workers’ compensation. The series is taken from the book, “The Insurance Professionals’ Practical Guide to Workers’ Compensation: From History through Audit.” The articles in this series are:

  • Workers’ Compensation History: The Great Tradeoff
  • Benefits Provided Under Workers’ Compensation Laws
  • Second Injury Funds: Are They Still Necessary or Just a Drain On the System?
  • Employees Exempt from Workers’ Compensation
  • Nonemployee ‘Employees:’ The Borrowed Servant Doctrine
  • Work Comp for PEOs and Their Client/ Employers
  • Combinability of Insureds
  • Audit Rules and Guidelines
  • Audit Problems Leading to Additional Premiums

About Christopher J. Boggs

Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS, is a veteran insurance educator. He is Executive Director, Big I Virtual University of the Independent Insurance Agents and Brokers of America. He can be reached at chris.boggs@iiaba.net. More from Christopher J. Boggs

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Audit Rules and Guidelines – Part II

Part I of this two-part audit rules and guidelines article presented the section of the work comp policy making the audit possible. It also presented what remuneration was included and what was excluded for premium audit purposes.

Part II details the governing classification and single enterprise rules (including exceptions) and ends with the ABCs of premium audits (which can be applied to any premium audit).

Governing Classification and the Single Enterprise Rule

Once final payrolls are calculated, a “Governing Classification” is assigned to the employer. The governing classification is generally based on the class code generating the largest payroll; rarely the highest rated code is used as the governing class (usually only used in construction-related operations if used at all). All employee payrolls, with certain exclusions and exceptions expounded upon in upcoming paragraphs, are assigned to the governing classification.

The governing classification is intended to represent the exposure created by the overall operational business, not the exposure of each individual employee. Applying the single enterprise rule, the governing classification is designed to anticipate all the normal activities conducted by a particular operation or business. For example, a steel fabrication plant may have employees that rivet, others that bend and shape the steel, others that paint the finished product and still others that add braces and brackets. Even though there are different exposures presented by each of these operations, all payroll is assigned to the same class code – the one that represents the overall exposure.

Further, there are some activities a business conducts that appear to be so unrelated to the primary operations as to require or allow separate classification be assigned. However, NCCI considers some of these activities to be an integral part of the business’ operations thus the payroll of the individuals engaged in these activities is included in the governing classification. Known as “General Inclusions” these included activities are:

  • Employees that work in a restaurant, cafeteria or commissary run by the business for use by the employees (this does not apply to such establishments at construction sites);
  • Employees manufacturing containers such as boxes, bags, can or cartons for the employer’s use in shipping its own products;
  • Staff working in hospitals or medical facilities operated by the employer for use by the employees;
  • Maintenance or repair shop employees; and
  • Printing or lithography employees engaged in printing for the employer’s own products.

Payroll for any employee engaged in the above activities is assigned to the governing classification.

Exceptions to the Governing Classification Rules

There are four exceptions to the governing classification and single enterprise rules. These are:

  • The “Standard Exception” classifications;
  • The “Interchange of Labor” rules;
  • The “General Exclusion” classes; and
  • Employers eligible for classification under the “Multiple Enterprise” rule.
‘Standard Exception’ Classifications

Some duties/activities are so common to most business and may be so far outside the operational activities of the entity that employees engaged in these positions are considered exceptions to the governing classification rules. Payroll for these “standard exception” classes of employees is subtracted from the governing classification and assigned to the applicable standard exception code and rated separately from the governing class. The standard exception classes include:

  • Clerical Employees- Class Code 8810;
  • Clerical Telecommuter – Class Code 8871;
  • Drafting Employees – Class Code 8810;
  • Salespersons – Class Code 8742; and
  • Drivers – Class Code 7380.

For a particular employee or group of employees to qualify for assignment into one of the standard exception classifications, he/she must be physically separated from the operative hazards of the business by means of walls, floors, partitions or counters. Such separation requirement does not negate the assignment of an employee to a standard exception class if he is only entering the area of operation to conduct duties consistent with his class code; such as a clerical employee entering the operations area to deliver paychecks.

Standard exception classifications are not necessarily limited to these five class codes; some states utilize state-specific class codes that are also eligible for assignment as a standard exception. For example, Texas allows certain employees to be assigned to “Executive Officers NOC” (class code 8809) and the payroll for these employees is pulled out of the governing classification and rated as a standard exception.

Employees falling into a standard exception classification may not always be eligible for “standard exception” separation. Attention must be given to the governing classification description; at times, the governing classification may state “…&…” or “…including….” If such wording appears, the payroll for the standard exception employee is included in the governing classification. The reason for such inclusion, the analogy of that particular operation requires the presence of the standard exception employees to accomplish the goals of such business. A few examples of this include (not an exhaustive list):

  • Farm: Nursery Employees & Drivers (Class Code 0005);
  • Chemical manufacturing NOC – all operations & Drivers (Class Code 4829);
  • Carpet, rug or upholstery cleaning & Drivers (Class Code 2585);
  • Physicians & Clerical (Class Code 8832);
  • Photographer – All employees & Clerical, Salespersons and Drivers (Class Code 4361); and
  • School: Professional Employees & Clerical (Class Code 8868).
Interchange of Labor

A second exception to the governing classification rule is the “interchange of labor” rule. The applicability of this rule varies by state; some states only allow its use in the construction, erection or stevedoring classes of business while other states permit the interchange of labor rule to apply to any type of business operation.

Interchange of labor rules allow a single employee’s payroll to be split between or among several class codes that may be present within the operations. The advantage to the employer (premium payer) of such allowance is an ultimately lower premium. Without the interchange of labor rule, the employee’s entire payroll would be assigned to the governing (likely highest rate) classification. With the interchange of labor rule in effect, the employer is charged based on the employee’s actual exposure to injury.

For instance, an employee in the construction industry who does framing work (5645) and hardwood floor installation (5437) can see his payroll divided between these different operations and realize a reduction in premium provided the following specific provisions are met:

  • All classifications used for an employee are appropriate to the job performed;
  • Payroll records exist that allocate the employee’s wages between/among the different classes. This requires an actual, dollar amount payroll split, a percentage of payroll is not allowed;
  • The division of payroll is not available with any of the standard exception classifications (with the possible exception of the driver code); and
  • The operations/activities are not conducted on the same job site.

Continuing the above example using assigned risk rates of $25 for code 5645 and $14 for code 5437, an employee earning an annual payroll of $30,000 will cost the employer $7,500 if there is no interchange of labor. If, however, all the interchange of labor guidelines are met, and the employee’s payroll is split as follows: $20,000 for framing and $10,000 for hardwood floor installation; the employee will only cost $6,400 in workers’ compensation premium (ignoring expense constants, modification factors and debits or credits).

The interchange of labor rule is great for the employer due to the premium savings and is fair for the insurance carrier because exposures differ based on activity. When the employee is on scaffolding he is more like to suffer a severe injury than when installing flooring.

Employers and their agents must understand and take advantage of the interchange of labor rules allowed in each state. Large payrolls can greatly benefit from such splits thus agents should encourage detailed payroll records be kept and the audits should be checked closely.

General Exclusion Classifications

Some operational activities do not fit into the analogous assignment of the governing classification due to the unexpected existence of such an operation as part of a particular business. It is not reasonable to expect the hardware store code (8010) to pick up the exposure created by an onsite sawmill operation (2710) for example.

Such operations are known as “general exclusion” classes. General exclusion classes are listed separately on the workers’ compensation policy and a separate rate (based on the class code) is charged for the employees within these classes of operations.

General exclusion classes are the opposite of “standard exception” classes. General exclusion classes are completely unexpected and not considered part of the analogy of the governing classification of an operation requiring separation to allow the insurer to garner the, usually, higher premium for the increased exposure. Conversely, standard exceptions represent operations common to most business and are of such minimal hazard that the insured should not be punished by having the payroll for these classes included in the governing classification, but should rather enjoy a lower premium for the reduced exposure.

Operations and activities falling within the general exclusion classification are:

  • Employees working in aircraft operations;
  • Employees performing new construction or alterations;
  • Stevedoring employees;
  • Sawmill operation employees; and
  • Employees working in an employer-owned daycare.
Multiple Enterprise Rule

The single enterprise rule requires that all activities usual and customary to a particular operation be assigned to one “governing” class code (with the exceptions described above). However, a particular entity may conduct additional operations not usual or customary to such an enterprise; such disparate activities may allow the insured to qualify for the separation of payroll into multiple classifications under the “multiple enterprise rule.”

A secondary operation producing a basic premium equal to or higher than the governing class code (the “governing class code” is the code generating the highest payroll) premium automatically qualifies for separation under the multiple enterprise rule with the only requirement being segregation of payrolls.

If, however, the basic premium generated by the secondary operation is less than the governing class code basic premium, four tests must be satisfied before the insured can make use of the multiple enterprise rule. These are:

  1. The operation is not commonly found within the operation of the subject insured’s business;
  2. The operation could each exist as a separate entity;
  3. Financial records are kept separately for each operation; and
  4. The operations are physically separated by means of a partition, wall or placement in a separate building.

Such separation of payrolls may benefit the insured employer by a reduction in premium if the secondary enterprise carries a lower rate per $100 of payroll. Additionally, employers that qualify for separation of payrolls under the multiple enterprise rule may also be able to benefit from the application of the interchange of labor rule as presented above and based on the state.

ABCs of Premium Audits

There are specific guidelines that agents and the employer should apply to every audit. These are the “ABCs” of premium audits.

A: Always be there. A representative from the company familiar with the financial records and the operations should be present at every audit. The auditor will likely have questions and unless someone is available to answer these questions and explain the financial documents, the auditor will have to make some potentially costly assumptions and/or mistakes. This duty should not be delegated to any member of the staff not intimately familiar with the business and its finances.

B: Be prepared. The auditor needs all the necessary financial records to conduct the audit and will likely ask for a tour of the facility. Prepare a place for the auditor to work and help them complete their job as quickly as possible. Have ready or available:

  • Payroll records: Payroll journal and summary; 941s; state unemployment reports; an explanation and break out of overtime payments; and the general ledger.
  • Employee records: Include a detailed description of job duties; the number of employees; employee hire and fire dates; and class code splits if applicable.
  • Cash disbursements: Cost of and payments to subcontractors; cost of materials; and the cost of any casual labor hired.
  • Certificates of Insurance: Make sure to supply current certificates of insurance covering the entire period of the audit or the entire period of time the contractor has worked for the insured. If the sub’s policy renews in the middle of the audit period, a new certificate should be requested covering the remainder of the insured’s policy period.
  • OCIP projects: If the insured has been a part of any wrap-up, the auditor needs this information in order to remove the payroll from the calculation.

C: Copy of the auditor’s work papers. Don’t let the auditor leave without getting a copy of the audit work papers. This allows the insured and the agent to review the audit and confirm that there are no errors BEFORE the audit is processed and billed (fixing it “after-the-fact” is more difficult).

D: Don’t volunteer more information than asked. The auditor will ask questions, this is expected. Insureds should be advised to only answer the questions asked and not lead the auditor down a path that may be detrimental to the insured.

E: Exceptions to the single entity rule. The exceptions listed above should be capitalized on by the insured. Audits should, at the very minimum, contain at least one standard exception code. If the insured is eligible for any of the other payroll splits described above, those codes should also be included.

Knowing the rules and exceptions, giving the auditors everything they need to complete the audit quickly and following the above rules increases the chances of a correct and favorable audit.

Workers’ Compensation Series

This is the tenth in a series of articles on workers’ compensation. The series is taken from the book, “The Insurance Professionals’ Practical Guide to Workers’ Compensation: From History through Audit.” The articles in this series are:

  • Workers’ Compensation History: The Great Tradeoff
  • Benefits Provided Under Workers’ Compensation Laws
  • Second Injury Funds: Are They Still Necessary or Just a Drain On the System?
  • Employees Exempt from Workers’ Compensation
  • Nonemployee ‘Employees:’ The Borrowed Servant Doctrine
  • Work Comp for PEOs and Their Client/ Employers
  • Combinability of Insureds
  • Audit Rules and Guidelines
  • Audit Problems Leading to Additional Premiums

About Christopher J. Boggs

Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS, is a veteran insurance educator. He is Executive Director, Big I Virtual University of the Independent Insurance Agents and Brokers of America. He can be reached at chris.boggs@iiaba.net. More from Christopher J. Boggs

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Audit Rules and Guidelines – Part I

Workers’ compensation coverage is initially priced on an estimated basis. The insured estimates payrolls (and sometimes class codes) at the beginning of the policy period for the upcoming year on which the insurance carrier charges a premium using the prescribed rates. After the close of the policy year, the insurance carrier desires to firm up the numbers to confirm collection of the actual premium earned for the actual exposure insured. This “firming-up” is known as the premium audit.

Premium audits are addressed by Part Five, paragraph G., of NCCI’s Workers’ Compensation and Employers’ Liability Insurance Policy. The form reads as follows:

G. Audit: You will let us examine and audit all your records that relate to this policy. These records include ledgers, journals, registers, vouchers, contracts, tax reports, payroll and disbursement records, and programs for storing and retrieving data. We may conduct the audits during regular business hours during the policy period and within three years after the policy period ends. Information developed by audit will be used to determine final premium. Insurance rate service organizations have the same rights we have under this provision.

Premium Basis

Premium, with rare exception, is based on payroll, also known as “remuneration.” Below are the common remuneration inclusions and exclusions:

Remuneration Included:
  • Wages/Salaries;
  • Commissions – If on draw, and draw is greater than commissions earned — use the entire amount of the draw;
  • Bonuses, unless awarded for individual invention or discovery;
  • Overtime – One-third of amount is subtracted from the total amount (one-half if it is double-time pay);
  • Pay for holidays, vacations, or periods of sickness;
  • Pay for time not worked (i.e., paid for an 8-hour day when only 7 hours worked);
  • Pay for travel time to or from work or specific job site;
  • Employer payments of amounts otherwise required by law (i.e., Statutory insurance, Social Security, etc.);
  • Contributions to a savings plan or vacation fund required by a union contract;
  • IRS Qualified Salary Reduction Plan (i.e. 401K) (refers to the employee’s contribution and any qualified agreement between the employer and the employee to pay into a retirement plan in lieu of direct wages);
  • Employee Savings Plans – Only the amount given by the employee, not the employer’s match, if any;
  • Contributions to an IRA made by the employee;
  • Payment on any basis other than time worked such as piecework, incentive plans or profit sharing plans;
  • Payment or allowance for tools;
  • Value of housing/lodging;
  • Value of meals; and
  • Substitutes for money (merchandise certificates, store credit, etc.).
Remuneration Excluded:
  • Tips and other gratuities;
  • Payments by employer to Group Insurance or Pension Plans (employer matching);
  • Special rewards for individual invention or discovery;
  • Severance pay;
  • Pay for those on active military duty;
  • Employee discounts;
  • Expense reimbursements;
  • Money for meals for overtime work;
  • Work uniform allowance;
  • Sick pay paid by a third party; and
  • Employer-provided perks (company autos, incentive vacations, memberships).

Special Payroll Considerations – Sole Proprietors, Partners, LLC Members and Executive Officers

Actual remuneration for each employee is used in the calculation of the final workers’ compensation premium with just a few common exceptions. Sole proprietors, partners, LLC members and executive officers are treated differently than regular employees.

Sole proprietors and partners in states that allow these persons to choose to be subject to the workers’ compensation law and thus covered by the policy are generally assigned a payroll regardless of his or her actual gross income. This amount is adjusted annually to account for inflation and other cost of living factors. Each state allowing these individuals to “opt in” assigns its own payroll limit (the amount not the same throughout the country).

Executive officers are generally subject to an upper and lower weekly payroll limit rather than a set annual payroll. If, for instance, the minimum weekly payroll assignable to an executive officer is $331 per week ($17,212 per year) with a maximum weekly payroll of $1,300 per week ($67,600 per year); an executive officer paid $300,000 per year will appear on the audit at $67,600 per year. Remember, not all officers are executive officers. Executive officers are generally limited to the president or CEO, the CFO and certain levels of vice presidents. The delineation is a function of the articles of incorporation and can vary from entity to entity.

Members and managers of an LLC are, once again, subject to state laws. Some states treat these individuals as sole proprietors/partners while others view them as executive officers. The subject law should be reviewed to confirm how these individuals are classified and thus how payrolls are assigned based on the descriptions above. Likewise, proper assignment of the founders/organizers of a professional association (PA) is subject to individual state statutes.

Three operational and actuarial reasons for such payroll limitations are:

  1. Getting paid more does not increase the likelihood that an injury will occur. A plumbing company executive officer actually engaged in plumbing work and earning $150,000 per year is no more likely to get hurt than the $15 per hour “plumber’s helper.” In fact, he is probably less likely to get hurt due to experience and personal interest. The amount of pay does not increase the chance of injury;
  2. Medical costs, theoretically, don’t fluctuate based on the individual’s income. A broken leg costs the same to set for the owner and the hourly employee;
  3. Indemnity payments are limited to a minimum and maximum in each state. Each state sets the minimum and maximum weekly indemnity benefits. If the maximum that an injured executive or employee can receive in any given year is $75,000 (just for example sake), it is not reasonable to expect the insured to pay a premium based on a gross income of $200,000. This operational rule is combined with the previous two to limit the amount of payroll assignable to these special classes of people.

Continued in Next Post

Part II of this series-within-a-series focuses on and explains the:

  • Governing Classification and Single Enterprise Rule; and
  • ABCs of Premium Audits.

Workers’ Compensation Series

This is the ninth in a series of articles on workers’ compensation. The series is taken from the book, “The Insurance Professionals’ Practical Guide to Workers’ Compensation: From History through Audit.” The articles in this series are:

  • Workers’ Compensation History: The Great Tradeoff
  • Benefits Provided Under Workers’ Compensation Laws
  • Second Injury Funds: Are They Still Necessary or Just a Drain On the System?
  • Employees Exempt from Workers’ Compensation
  • Nonemployee ‘Employees:’ The Borrowed Servant Doctrine
  • Work Comp for PEOs and Their Client/ Employers
  • Combinability of Insureds
  • Audit Rules and Guidelines
  • Audit Problems Leading to Additional Premiums

About Christopher J. Boggs

Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS, is a veteran insurance educator. He is Executive Director, Big I Virtual University of the Independent Insurance Agents and Brokers of America. He can be reached at chris.boggs@iiaba.net. More from Christopher J. Boggs

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Combinability of Insureds

Consolidating separate legal entities’ loss experience to develop a common experience modification factor has the potential to cause confusion for the client and sometimes the agent. Clients may view such mixing of loss experience due simply to common majority ownership/interest as less than reasonable, especially if the commonly-owned entities substantially differ with regard to the relative hazard presented (i.e. the owners of a heavy equipment contracting company purchase a marina).

Combinability rules do not merely marry the experience of entities that are currently in operation and related via common majority ownership, they also assure that owners do not avoid their historically poor loss records simply by closing down one entity and reopening and operating under another corporate name. Most agents would agree that such a stunt is unethical at best and may actually be considered fraud. Changing the name of the operation does not change the operational methods of the owner(s).

Understanding combinability rules necessitate a basic understanding of the theory and practice behind the calculation of experience modification factors. Following is a brief synopsis of experience modification calculations.

Calculating Experience Modification Factors

Workers’ compensation loss costs are calculated and charged based on the average expected losses for that particular business classification. All insureds in the same hazard class (based on the assigned code) are charged the same basic loss cost (individual carriers apply conversion factors to these loss costs to develop individual rates). However, not all insureds within a particular hazard class operate in the same manner, nor does each experience the same losses. To adjust for these differences in operation and loss histories, a method had to be created allowing for premium/rate differentiation between the above average, average and below average insureds within any particular hazard class code.

Experience modification factors (experience mods) allow such “customizing” and individualization of the workers’ compensation premium. Basing the standard premium on the insured’s unique loss history allows the class’ average rates to remain relatively constant and the subject insured to be rewarded or punished based on its own experience (rather than be subject solely to the experience of the group).

“Stop loss” limits used as part of the experience mod calculation makes loss frequency weightier than loss severity. One large claim will not damage an experience mod factor as drastically as three small claims in a single experience period (the “experience period” is usually the three years ending 12 months prior to the policy effective date — a 6/1/15 mod would apply the experience for the three years ending 6/1/14).

Calculating experience modification factors is far more complicated than presented in three short paragraphs. Mod calculations are a function of expected losses, actual losses, payrolls, class averages, loss limits (medical only vs. medical plus indemnity) and formulary factors applied by NCCI (or the applicable rating bureau) to all such collected data.

Knowing and understanding that experience modification factor calculations allow for the reward or punishment of individual employers allows one to more clearly view the need for loss experience combinability. Employers should not be freed of their premium responsibility simply due to legal structure. And rarely are majority-owned entities not interrelated such that employees work for multiple entities even though they appear to be operating for just one employer in the course and scope of their daily duties (combinability avoids some of the problems created by the borrowed servant doctrine).

A Case for Combinability Rules

Owners theoretically run each and every operation (past and present) in essentially the same manner and with the same attitudes. An employer that is concerned with safety and strives to provide the best equipment and training will likely always act the same with each entity. Likewise, employers looking for the easiest and cheapest way out will likely continue down the same path in the future. Combinability rules are, to some extent, based around the theories:

  • Employers that operate in the supposed best interest of their employees should have all their entities (current and future) rewarded due to such attitude. Commonly-owned operations will likely be managed in the same manner and the same care and concern is expected to be showed for all employees (regardless of the hazard of the operation).
  • If an employer allows unsafe operations in one entity, it is reasonable to postulate that such attitude will carry over to the new entity and all commonly-owned entities (current and future). Employers not operating (or not appearing to operate) in the best interest of their employees should be subject to their past (or current) experience.

Past actions are not a guarantee of future actions, but they stand as a very good indicator. To not reward or punish allows employers/owners to act with impunity, knowing that as long as no law is broken, all that is necessary to escape a poor loss history is the killing off of an old and birthing a new corporation.

Without the ability to combine loss histories, workers’ compensation carriers would potentially be victims of inadequate premiums. In like manner, average and above average risks would be victimized by higher premiums than necessary. The “average loss cost” balance would be tilted and all employers would likely see an increase in their rates rather than just the ones that “earned” the increase. Rate predictability and possibly rate adequacy may be compromised without combinability rules.

Granted, there are exceptions to every rule such as is demonstrated by the employer that had a hiccup in its loss history not indicative of its past. Not every injury can be avoided, even with top-notch safety and training, bad “things” sometimes just happen. This is why there is underwriting discretion and the availability of rate credits and debits. A historically above-average employer with a bad year or two in their experience modification calculation can have the debit mod negated by a rate credit.

Conversely, an average or below average employer that has been fortunate can be debited to account for the increased hazard presented to the insured. Employers that do not practice or refuse to comply with recommended safety practices, as reported by the loss control department, can see their rates increased by a debit factor in anticipation of the increased potential for employee injury.

Combinability Guidelines

Common majority interest is the basic rule of combinability. When the same person, group of persons or a corporation owns a majority interest in another entity, the owned entity’s loss experience is combined with the owning entity to develop a common (combined) experience modification factor.

The combinability concept seems simple enough, however achieving “common majority interest” can be accomplished in one of several relational constructs:

  • The corporation (a “legal person”) owns a majority interest in other entities. When Corp “A” owns a “majority interest” (this term will be defined in upcoming paragraphs) in Corp “B,” the loss experience of both corporations is pooled to produce a single, combined experience modification factor;
  • The business’ owner(s) (“natural person(s)”) individually or collectively maintain majority interest in more than one entity. If John holds majority interest in Corp “A” and he individually gains majority interest in Corp “B,” the two entities are combined for experience rating. However, if John has majority interest in only one of the two entities, they are not combinable (i.e. John maintains 75 percent interest in Corp “A” but only 25 percent in Corp “B”). To continue, assume that John and Joe combine to own majority interest in Corp “A” and Corp “B;” common majority ownership exists and the experience is combinable;
  • The corporation combines with some or all of its owners to hold a majority interest in another entity. Corp “A” (again, a “legal person”) maintains 30 percent interest in Corp “B;” John and Joe (100 percent owners of Corp “A”) hold 25 percent of Corp “B.” The combined ownership of the legal person and the natural persons result in common majority ownership (55 percent) of Corp “B” making the two entities combinable ; or
  • The business owns a majority interest in another entity which, itself, owns or owned a majority interest in a third entity currently operating or which operated in the last five years.

This is not an exhaustive list of relationships that can lead to combinability of loss experience; it is but a representation of the most common. These guidelines are subject to NCCI and/or individual state rating bureau interpretations. Agents, brokers and carriers should use these descriptions only for informational purposes as final determination rests in these other advisory bodies.

Natural and Legal Persons

Notice the repeated use of the natural and legal person(s) concept in the above paragraphs. Common majority interest can be created when a single “person” or a group of “persons” combine to hold a majority interest in multiple entities. It matters little whether the owners of other entities are natural persons, legal persons or a combination. Nor does it matter how they combine to create common majority interest between or among two or more entities.

Legal persons are generally created by the actions and desires of natural persons. Some legal persons are owned by one or only a few natural persons (a small business) while some are “owned” by many shareholders (traded on the stock exchanges). Natural and legal persons are defined as follows:

  • Natural person: A flesh and blood human being. In workers’ compensation the employer is a natural person(s) in sole proprietorships and partnerships. Managers and members of an LLC are viewed as natural persons in a majority of states making these persons the employers.
  • Legal person (a.k.a. juridical person): A legal fiction, a “person” created by statute and born with the filing of articles of incorporation. These legal persons are given the right to own property, sue and be sued. Corporations are legal persons and several states consider LLCs a legal person.

‘Majority Interest’

Majority interest is created when the same person or group of person(s) combine to “own” more than 50 percent of an entity. But majority interest can be created in many ways. NCCI lists the following:

  • An entity or persons (as detailed above) owns the majority of the voting stock of another entity; or
  • Both entities share a majority of the same owners (if there is no voting stock). Generally these are natural persons that own multiple entities.
  • If neither of the above applies, majority interest is created if a majority of the board is common between two or among several entities;
  • Participation of each general partner in the profits of the partnership (limited partners are excluded); or
  • When ownership interest is held by an entity as a fiduciary (excludes a debtor in possession, a trustee under an irrevocable trust or a franchisor).

Combinability Conclusion

Based on and applying the above common majority interest rules, the possibility exists for more than one combination of common related entities. Deciding which combination of entities applies is based on the following two rules (presented in order of importance):

  1. Which combination involves the most entities?
  2. If the above does not apply, the combination is based on the group that produces the largest estimated standard premium.

Regardless of how a group is created and combined, no entity’s experience will be used more than once.

Finally, although separate entities may be combinable for experience modification calculation, this does not preclude each from having separate workers’ compensation policies. Separate legal entities are entitled (and really required) to be written on separate workers’ compensation policies; combinability rules exist merely to assure that loss histories are not escaped by the creation of multiple legal entities or the closing of one and opening of a new one.

Workers’ Compensation Series

This is the eighth in a series of articles on workers’ compensation. The series is taken from the book, “The Insurance Professionals’ Practical Guide to Workers’ Compensation: From History through Audit.” The articles in this series are:

  • Workers’ Compensation History: The Great Tradeoff
  • Benefits Provided Under Workers’ Compensation Laws
  • Second Injury Funds: Are They Still Necessary or Just a Drain On the System?
  • Employees Exempt from Workers’ Compensation
  • Nonemployee ‘Employees:’ The Borrowed Servant Doctrine
  • Work Comp for PEOs and Their Client/ Employers
  • Combinability of Insureds
  • Audit Rules and Guidelines
  • Audit Problems Leading to Additional Premiums

About Christopher J. Boggs

Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS, is a veteran insurance educator. He is Executive Director, Big I Virtual University of the Independent Insurance Agents and Brokers of America. He can be reached at chris.boggs@iiaba.net. More from Christopher J. Boggs

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Work Comp for PEOs and Their Client/ Employers

Professional employer organizations (PEOs) began their rise after the adoption of the Tax Equity and Fiscal Responsibility Act of 1982 cleared a path for the creation and expansion of such entities. Between 700 and 900 professional employer organizations operate in all 50 states. According to the National Association of Professional Employer Organizations (NAPEO), between two and three million employees work under a PEO arrangement and PEOs as an industry earned $92 billion in gross revenues in 2012 (gross revenues are the total payrolls plus the fees charged by the PEO).

PEO contracts are co-employment arrangements whereby the professional employer organization and the client with which it contracts both retain some right of control over the individual worker or workers collectively. Such relationship is wholly different than a leased employee or the use of a borrowed. Leased employees and borrowed servants are under the absolute control of the special employer. Co-employment vests responsibility and control with both parties to the contract.

NAPEO (http://www.napeo.org) explains these responsibilities in their Web site as follows:

The PEO relationship involves a contractual allocation and sharing of employer responsibilities between the PEO and the client. This shared employment relationship is called co-employment.

As co-employers with their client companies, PEOs contractually assume substantial employer rights, responsibilities, and risk through the establishment and maintenance of an employer relationship with the workers assigned to its clients. More specifically, a PEO establishes a contractual relationship with its clients whereby the PEO:

  • Co-employs workers at client locations, and thereby assumes responsibility as an employer for specified purposes of the workers assigned to the client locations.
  • Reserves a right of direction and control of the employees.
  • Shares or allocates with the client employer responsibilities in a manner consistent with maintaining the client’s responsibility for its product or service.
  • Pays wages and employment taxes of the employee out of its own accounts.
  • Reports, collects and deposits employment taxes with state and federal authorities.
  • Establishes and maintains an employment relationship with its employees that is intended to be long term and not temporary.
  • Retains a right to hire, reassign and fire the employees.

When evaluating the employer role of either the PEO or the client, the facts and circumstances of each employer obligation should be examined separately, because neither party alone is responsible for performing all of the obligations of employment. Each party will be solely responsible for certain obligations of employment, while both parties will share responsibility for other obligations. When the facts and circumstances of a PEO arrangement are examined appropriately, both the PEO and the client will be found to be an employer for some purposes, but neither party will be found to be “the” employer for all purposes.

NCCI and PEO Arrangements

NCCI has continually monitored the workers’ compensation issues and problems created when employers choose to join a PEO. A 2005 report printed in NCCI’s Workers’ Compensation Issues Report delineates and briefly discusses many of the continuing issues. A few of the problems/issues discussed in the NCCI article include:

  • Experience Modification Calculations: Most states require the PEO to individually monitor and report the claims experience of each individual client. The purpose is to thwart the efforts of employers with bad experience to escape their problems by joining a PEO for a couple of years then coming back out and starting over. Since individual experience must be monitored and reported, the employer’s experience mod will be correct based on its experience; it will not get a 1.0 when it leaves the PEO unless that is what it has earned;
  • The ability of executive officers to exclude themselves (if allowed by law); and/or the ability of sole proprietors or partners to include themselves (if allowed by law). The ability to include or exclude members of an LLC (based on the applicable state law);
  • Problems that might arise if the employer/client hires an uninsured subcontractor. Is the PEO’s workers’ compensation carrier required to pay as the statutory employer?
  • Problems that arise out of PEOs being insured in state assigned risk pools; and
  • Are the proper endorsements in place? For example, NCCI states in this article that the Alternate Employer Endorsement is not intended for use in co-employment situations. However, without using this endorsement there is a problem when trying to effectuate and confirm the proper dovetailing of coverage between the employer/client and the PEO (detailed below).

The report from NCCI specifically lists and highlights more problems than those listed above.

Insuring PEOs

Four endorsements are available for use in co-employment situations (an additional form may be necessary depending on the jurisdiction). Two are client-specific and two are designed to be attached to the PEO’s policy. Contractual agreement between the PEO and the employer regarding which entity is responsible for providing workers’ compensation benefits govern which endorsements are used.

Employer/Client is responsible for providing workers’ compensation.

When the employer/client is contractually responsible for providing benefits, two endorsements dovetail to provide the necessary or required workers’ compensation benefits:

  • Labor Contractor Endorsement (WC 00 03 20 A). This endorsement is attached to the client’s (the leasing employer’s) policy. Attachment of this endorsement extends benefits to the leased employees from the employer’s policy and essentially provides additional insured status to the scheduled PEO. The use of this endorsement is coupled with the …
  • Labor Contractor Exclusion Endorsement (WC 00 03 21). Attached to the PEO’s workers’ compensation policy, this exclusionary endorsement excludes coverage for employees leased to the client(s) scheduled in the form. This endorsement is used when the client leases employees on an “other-than-short term” basis and such client is charged with providing the workers’ compensation benefits.
PEO is responsible for providing workers’ compensation protection.

As above, at least two endorsements, one attached to the employer’s/client’s policy and the second to the PEO’s, work in tandem to assure that coverages mesh as per the contractual agreement that the PEO will extend workers’ compensation benefits to the workers.

  • Employee Leasing Client Exclusion Endorsement (WC 00 03 22). Attach this endorsement to the employer’s/client’s workers’ compensation policy to exclude the extension of workers’ compensation benefits to employees leased on a long-term basis from the labor contractor (PEO) scheduled in the policy. Only used when the PEO is responsible for providing coverage. The employer/client must confirm that the PEO attaches the …
  • Professional Employer Organization (PEO) Extension Endorsement (WC 00 03 20 B). Workers’ compensation and employers’ liability benefits extend exclusively from the PEO when this endorsement is attached to the PEO’s policy. This extension only applies to employees leased to the client(s) listed on the schedule.
  • Alternate Employer Endorsement (WC 00 03 01 A). Although NCCI states that this endorsement is not properly used in co-employment situations and even the form itself does not contemplate its use in these relationships; if the insured is located in a state that has not approved the PEO Extension Endorsement discussed above, this may be the only way to extend coverage from the PEO’s form to protect the employer/client. This endorsement is attached to the PEO’s policy naming the employer/client as the alternate employer. The use of this form in co-employment contracts is not recommended and should be avoided if possible.

Workers’ Compensation Policies for Employers in PEOs

As evidenced by the previous discussion, it is absolutely essential that the employer/client have in place a workers’ compensation policy even when the PEO is contractually providing coverage. Since both entities are legally employers and in fact are the “employers of record,” such contractual arrangement does not preclude the necessity of coverage.

Exposure to a workers’ compensation claim still exists if an uninsured subcontractor is hired, if there are employees hired outside of the leasing contract (temporary workers, etc.) and other potential gaps in protection as studied and monitored by NCCI. And while it may seem like a weak argument, without a workers’ compensation policy in force, the employer/client has nothing to which these endorsements can attach attesting that coverage is extended from another party.

Lastly, if the PEO loses its coverage or suddenly goes out of business, the employer is in violation of the law until coverage can be placed. Certainly many employers have received notice that the PEO with which they were contracted is no longer in business.

Employers should carry the workers’ compensation policy even if it must be set up using “If Any” payrolls. The cost is very low for the protection it provides. A central theme of risk management is “don’t risk a lot for a little.” The small premium may avoid big problems.

Workers’ Compensation Series

This is the seventh in a series of articles on workers’ compensation. The series is taken from the book, “The Insurance Professionals’ Practical Guide to Workers’ Compensation: From History through Audit.” The articles in this series are:

  • Workers’ Compensation History: The Great Tradeoff
  • Benefits Provided Under Workers’ Compensation Laws
  • Second Injury Funds: Are They Still Necessary or Just a Drain On the System?
  • Employees Exempt from Workers’ Compensation
  • Nonemployee ‘Employees:’ The Borrowed Servant Doctrine
  • Work Comp for PEOs and Their Client/ Employers
  • Combinability of Insureds
  • Audit Rules and Guidelines
  • Audit Problems Leading to Additional Premiums

About Christopher J. Boggs

Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS, is a veteran insurance educator. He is Executive Director, Big I Virtual University of the Independent Insurance Agents and Brokers of America. He can be reached at chris.boggs@iiaba.net. More from Christopher J. Boggs

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Nonemployee ‘Employees:’ The Borrowed Servant Doctrine – Part II

Part I of this “nonemployee, employee” mini-series introduced the three types of “employers” and began the discussion regarding what constitutes or creates control. Part II completes the conversation on establishing “control,” briefly describes common types of borrowed servants and introduces the possible workers’ compensation solutions.

Let’s begin by completing the discussion of control and the borrowed servant.

Other Borrowed Servant Tests

States and the federal government apply specific tests to determine if a particular worker qualifies as a “borrowed servant” and the employer as a “special employer.” The majority of these tests revolve around the question of control. The insurance industry, thanks to Lex Larson and his “Larson’s Workers’ Compensation,” marries the right of control detailed above with the various other tests to conceive and produce a three-part test to determine a worker’s status as a borrowed servant and the employer’s status as that of a special employer. These tests are:

  1. Has the employee made a contract of hire, express or implied, with the special employer? In essence, has the direct employer volunteered or directed the employee to work for the special employer and has the employee agreed to such assignment;
  2. Is the work being done essentially that of the special employer (as discussed under the right of control); and
  3. Does the special employer have the right to control the details of the work?

If all of three questions are answered in the affirmative (“yes”), then the employer is almost certainly a special employer and the employee a borrowed servant. There are other tests not contemplated by Larson that may need to be or will be considered by the court to absolutely prove special employer and borrowed servant status, including:

  • Does the presumed special employer have the right to discharge the worker? If so, that evidences a borrowed servant;
  • Who has the obligation to pay the employee? If the employee is paid by the borrowing employer, this is more proof of “special employer” status;
  • What is the course of dealings between the direct employer and the presumed special employer? Is there a contractual relationship or requirement? Employer-employee status can potentially be created by contract; and
  • Is the lent employee a specialist? And does the presumed special employer have the skill or knowledge to supervise the manner in which the work is being performed? This is a “negative test.” If the borrowing employer does not have the ability or skill necessary, the lent worker will likely not be considered a borrowed servant since one cannot control what one does not understand and cannot do; thus the individual is not a putative employee but a specialist.

Combining and analyzing the right of control, Larson’s three-prong test and the four other distinguishing test factors will produce as nearly as possible a definitive answer to the question of “special employer” and a resulting “borrowed servant.” Special employers owe the same duties to their borrowed servants as they do to any direct employee. An employer-employee relationship is created that must be managed from both a human resources and a risk management angle.

Borrowed Servants

There are only a few work/employment situations that may lead to or lend themselves to special employer and borrowed servant situations. While this is not an all-inclusive list, the following are the most common:

  • Temporary staffing operations. The employee works for a temporary staffing company that “leases” the worker to other entities to fulfill short-term or maybe even long-term employment needs. This is not to be confused with an employee leasing operation such as a PEO; that is a wholly different arrangement with different risk management concerns and solutions (detailed in an upcoming article). The contract between the staffing firm and the employer may require the staffing firm to provide the workers’ compensation coverage even though the leasing employer is, by all tests, the special employer.
  • Property managers required by the property owner to extend workers’ compensation protection to the employees actively managing the property.
  • Employee hired by the direct employer to work exclusively on or at the special employer’s location or job site. White v. Bethlehem Steel (U.S. Court of Appeals decision in 2000) addressed this issue. The employer (C.J. Langenfelder & Son Inc.) leased his equipment and employees to Bethlehem Steel. One of the employees had worked for Langenfelder for 26 years but had worked nearly exclusively at Bethlehem for his entire tenure. The employee was injured on the job; he collected the benefits due him from Langenfelder, but then sued Bethlehem Steel. The court found that since Bethlehem met all the requirements, it was the special employer and White was a borrowed servant. The employee-employer relationship blocked White’s ability to sue Bethlehem since workers’ compensation is the sole remedy in the employer-employee relationship. Examples of such a relationship could be an accounting firm having an employee who works exclusively for one client and, in fact, has a desk at the client’s office and daily reports there without going to the employer’s location; or a computer/software company that keeps an employee on-site on a full-time basis for a large client; etc.
  • Contractual relationships between a general contractor and subcontractor. Indemnification and hold harmless requirements may result in the general contractor becoming a special employer, especially in third-party-over suits. The subcontractor or sub-subcontractor (and on down) could be held financially responsible for suits against a third party made by an injured employee, even if that employee received all the benefits due and did not sue the employer. Contractual relationships potentially create a special employer exposure.

The Workers’ Compensation Solution?

Primary employers may not be relieved of their duty to provide workers’ compensation benefits to employees who are considered borrowed servants of a special employer. In fact, a contractual relationship may exist between the direct employer and the special employer specifically stating that coverage is to be maintained by the direct employer. The point thus far has been to spotlight the need for agents to discover these relationships (be they overt or hidden in a contract) and offer a potential solution to the client and even the client’s customer (maybe winning a new account due to being so detail-oriented).

The Alternate Employer Endorsement (WC 00 03 01A) is designed to extend coverage when employees are considered the “borrowed servants” of a special employer. It is attached to the direct employer’s policy, naming the special employer thus extending protection from the employer’s policy to the putative employer.

Only the first three of the four “borrowed servant” examples listed above are eligible for the Alternate Employer Endorsement per the endorsement instructions. The fourth is not specifically allowed, but neither is this relationship excluded from use. Regardless, the allowed uses are only theoretical in nature and underwriting approval is not guaranteed; sometimes such approval may not even be likely.

  • Temporary staffing firms. Underwriters willing to provide coverage, from the outset, for a temporary staffing firm will likely understand the need for this coverage and agree to provide this endorsement to all clients under the contract. If, however, the underwriter is unwilling to name the special employer (the lessee) as an alternate employer, the special employer may need to attach the Multiple Coordinated Policy Endorsement (WC 00 03 23) to the workers’ compensation policy. This endorsement extends benefits to the leased employees rather than having to depend on the staffing firm for coverage. Agents writing coverage for the special employer need to be aware of the exposure and the availability of this endorsement;
  • Property management firms. Again, underwriters may recognize and understand the need for this extension and agree to provide the endorsement when requested by the property owner;
  • Employees working almost exclusively on the property of another. Underwriters may not be willing to extend such coverage as they may not see the need. If there is a contract, agents may be able to convince the underwriter to meet the contractual requirement; and
  • Contractual risk transfer. It is unlikely an underwriter will ever allow the use of this endorsement in a contractual situation; doing so would be akin to naming the upper tier contractor as an additional insured (but is not as broad in that it only provides a means to finance the suit not protect against it). But the unwillingness of the underwriter to give this endorsement, especially if the CGL underwriter has altered the definition of an “insured contract,” may create a big out-of-pocket expense for the lower tier contractor. Even though not technically intended for this use, underwriters should be willing to extend this protection to protect its insured (the only loser is the personal injury attorney).

If the underwriter is unwilling to extend protection to the special employer, the special employer should be notified that its workers’ compensation policy may be called upon to provide the required benefits due the use of borrowed servants. Likewise, agents whose clients may be considered the special employer need to advise them of the possibility that such protection may be required and that an accompanying additional premium may result from the additional employees.

Protection Provided by the Borrowed Servant Doctrine Not Necessarily Related to Insurance

Being considered a borrowed servant may extend unexpected protection to the worker and his direct employer apart from any workers’ compensation issue. Such protection arises out of the sole remedy protection living in workers’ compensation statutes.

Many, if not most, borrowed servant suits researched while constructing this article had little or nothing to do with workers’ compensation coverage, per se, but rather dealt with the injured party’s rights to sue the person who caused the injury and that person’s (the tortfeasor’s) direct employer.

Essentially, if the person causing the injury is “doctrinally” judged to be a borrowed servant, thus he is considered an employee of the special employer. As a “fellow employee” of the injured person he cannot be held personally liable for the injury caused to the special employer’s direct employee (provided the borrowed servant did not act egregiously or intentionally) because workers’ compensation is the sole source of recovery for injury arising out of and in the course of employment, however and by whomever caused.

Likewise, the direct employer of the borrowed servant cannot be held vicariously liable for the actions of its direct employee since that employee is under the control of another entity. The theory of respondeat superior (Latin for “let the master answer”) applies to the special employer not the direct employer due to the finding of fact regarding who has control of the employee. Since the special “master” has already responded by paying workers’ compensation benefits, the direct “master” has no need and cannot be compelled to contribute.

Academy of Insurance Workers’ Comp Month

April 2015 is Workers’ Compensation Month for the Academy of Insurance. During the month the Academy hosts an in-depth, four-part webinar series focused on workers’ compensation. The topics are:

  • The Course and Scope Rule and its Gray Areas (April 2)
  • Employees, Independent Contractors, General Contractors and Contractual Risk Transfer in Work Comp (April 9)
  • When to Add Additional States – Extraterritorial Jurisdiction Problems (April 16)
  • The Surprising Importance of Employers’ Liability Protection (April 23)

Register now to assure a spot. Invite everyone in your office to attend (everyone in your office is welcome, only one registration required).

Workers’ Compensation Series

This is the sixth in a series of articles on workers’ compensation. The series is taken from the book, “The Insurance Professionals’ Practical Guide to Workers’ Compensation: From History through Audit.” The articles in this series are:

About Christopher J. Boggs

Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS, is a veteran insurance educator. He is Executive Director, Big I Virtual University of the Independent Insurance Agents and Brokers of America. He can be reached at chris.boggs@iiaba.net. More from Christopher J. Boggs

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