How building ordinance or law coverage impacts your property loss

Phil Coyne, Vice President, ECBM

Phil Coyne, Vice President, ECBM

You are insured and sustained a fire loss. The township has now told you to demolish the damaged and undamaged portions of your building, and when you re-build make sure the building is fully sprinklered. How will you pay for these additional costs?

“The additional costs to comply with an ordinance due to the loss can be substantial, such as the loss of value of an undamaged portion of the building, demolition costs and the additional costs to reconstruct a building to comply with the ordinance,” says Phil Coyne, vice president at ECBM.

Smart Business spoke with Coyne about how building ordinance or law coverage would fill this gap in your standard property insurance policy.

What is ordinance or law coverage?

Standard property ‘cause of loss’ forms have a coverage exclusion for loss or damages that occur as a direct result of enforcement of any law or ordinance regarding construction, use or repair of the property, which includes demolition. Three coverages are available to address this exclusion under the ordinance or law coverage of your property loss form:

  • Coverage A — Loss to the undamaged portion of the building. The limit should be included in the building limit.
  • Coverage B — Demolition coverage, the cost to demolish and clear the building. The amount of coverage should be determined.
  • Coverage C — Increased cost of construction, which covers the additional costs to comply with the ordinance or law. Limits should be determined.

In some cases, Coverage B and C are combined under one limit.

Why is ordinance coverage necessary?

Each state, county, township and municipality chooses to adopt and amend national codes, such as the National Fire Protection Association’s Fire Code, according to their needs and concerns. It can be an ever-changing landscape, and many times older buildings are grandfathered or exempt from these codes until a loss occurs.

The coverage should be on every insured’s wish list. It’s probably most critical for buildings that are older, or have older portions, and may have grandfathered codes or regulations for square footage and density. Many lenders have a requirement for this coverage in mortgage agreements.

What triggers the coverage?

There has to be a covered cause of loss that results in the application of a building ordinance. For instance, in 1990 a city ordinance said every new building in excess of three stories had to be sprinklered. Your building is four stories and built in 1985, so the ordinance doesn’t apply. However, the ordinance also might say if 50 percent of an older building is damaged, the entire building has to be demolished and rebuilt. If, after a large fire, you must demolish the building and put in a sprinkler system, this triggers your ordinance or law coverage.

Where might this coverage not apply?

The ordinance or law coverage will not apply if an insured was required to comply with an ordinance and chose not to. Let’s say, a township requires buildings with four or more apartment units to have hardwired smoke detectors and you decided not to install them. If you chose not to install them and then the building sustains a covered loss, the coverage won’t apply.

The three ordinance coverages all have to do with direct loss to the building or property. There’s no provision for the loss of business income. Standard business income policies exclude coverage for the increased period of restoration due to the enforcement of laws or ordinances. Therefore, you would need to endorse your policy to pick up coverage for this increased time.

Also, anything excluded from the policy would not be covered, such as flood loss. Every building ordinance and business income policy excludes any costs regarding pollution or mold and fungi.

What should you consider when buying this coverage?

Look at the current value on your building(s) and what coverage you get under your policy form because each insurance company adapts it differently. Have a thorough discussion with your broker regarding what coverage you think you need and what you can actually get. The insurance company may limit the amount of coverage, based on your premium and portfolio size.

Phil Coyne is a vice president at ECBM. Reach him at (610) 668-7100 or [email protected]

 

For more information about risk management, visit ECBM’s blog.

 

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How manufacturers manage workers’ compensation, disability costs

Mike Stankard, managing director, Industrial Materials Practice, Aon Risk Solutions

Mike Stankard, managing director, Industrial Materials Practice, Aon Risk Solutions

Joe Galusha, managing director, leader for casualty risk consulting, Aon Risk Solutions

Joe Galusha, managing director, leader for casualty risk consulting, Aon Risk Solutions

Middle market manufacturers often think workers’ compensation and disability are uncontrollable costs items. However, it’s more important than ever to change this way of thinking.

“Workers’ compensation is a significant variable cost element for manufacturers,” says Joe Galusha, managing director and leader for casualty risk consulting at Aon Risk Solutions. “It’s an area where controlling workplace injuries and their associated costs can actually become a competitive advantage.”

“We’re coaching our clients to take more responsibility over workers’ compensation and disability prevention, as well as claim management,” says Mike Stankard, managing director, Industrial Materials Practice, at Aon Risk Solutions. “If they do, there’s a significant opportunity to lower costs, and with that comes boosts in productivity, morale and many intangibles.”

Smart Business spoke with Galusha and Stankard about why workers’ compensation and disability management is crucial as well as cost containment and reduction strategies.

What’s the manufacturing landscape today?

Post-recession manufacturing activity is increasing, partially due to repatriation. But with that comes payroll growth, and then typically growth in workforce costs, which for manufacturing can largely be workers’ compensation and disability. There’s also negative trends related to the profile of the typical American worker that will compound the current challenges, so manufacturers that don’t put more effort into managing injuries and related costs may be at a disadvantage.

What workforce demographic trends make this management so essential?

About one-third of adults and almost 17 percent of youth are obese, according to the Centers for Disease Control and Prevention. Obesity drives comorbidity and complexities in an individual’s health, creating a link to the cost of care and recovery from injury.

At the same time, workers 55 and older are expected to be nearly 20 percent of the workforce within a year. A number of physical impacts — decreased strength, more body fat, poorer visual and auditory acuity, and slower cognitive speed and function — come with aging and affect a workers’ ability to recover from injury. People over 60 also are much more likely to be obese.

These trends not only affect employment-related injury costs, but also productivity and business continuity costs when workers are absent for non-occupational injuries.

How can big data be used as a tool here?

There’s never been as much data available for a nominal cost — the challenge is leveraging it. You need the right data at the right time to compare it to the right things. When benchmarking against other companies or applying data sets to your environment, jurisdictions, evaluation base and the age of the benchmarking sources are important to ensuring your data is pure.

Although there are external sources, many times third-party administrators (TPA) or insurance carriers have already done a tremendous amount of data mining and predictive modeling. Businesses just need to know it’s there and to start using it to drill deeper into the cause of loss and the cost drivers of workers’ compensation.

What are some best practices for managing workers’ compensation and disability?

The secret is preventing injuries and creating a healthy workforce. But injuries will occur, so focus on responding quickly with the right amount of effort at the right time on the right claim. Predictive modeling can help identify the types of claims likely to become more costly.

Understand what’s driving your costs by doing a baseline assessment of cost drivers and utilizing benchmarking to drill down. Then, align the incentives of all internal and external parties — TPA, carrier, broker, and vendors involved in loss control and claims management — to focus on the cost-driving elements, using a dashboard to monitor performance. This creates a sustainable loss control and claims management effort.

Many organizations need to align all stakeholders — human resources, finance, legal, operations, etc. Also, combine the efforts of health and wellness with workers’ compensation and safety. A streamlined approach creates a healthier workforce, reducing injuries and their costs.

Joe Galusha is a managing director, leader for casualty risk consulting at Aon Risk Solutions. Reach him at (248) 936-5215 or [email protected]

Mike Stankard is a managing director, Industrial Materials Practice at Aon Risk Solutions. Reach him at (248) 936-5353 or [email protected]

 

Hear more expert advice about workers’ compensation and disability management in manufacturing by visiting our archived webinar.

 

Insights Risk Management is brought to you by Aon Risk Solutions

 

How tenants and landlords can have a clear understanding of lease intent

Phil Coyne, Vice President, ECBM

Phil Coyne, Vice President, ECBM

Many times landlords and tenants don’t realize that their commercial lease is unclear, contradictory or out of date until it comes time to resolve a claim, whether it’s a case of liability or property damage.

The payout is then delayed as the insurance companies review the entire lease to try and determine responsibility, liability and how the policy should respond.

“The real world is this — when the landlord and tenants go to renew an option, they just want to renew it. They don’t want to look at anything else because they don’t want to open up opportunities for negotiation that could be detrimental to either party,” says Phil Coyne, vice president at ECBM.

Smart Business spoke with Coyne about how knowing what’s in your lease and fixing problems now will save you a headache later.

What is one of the biggest risk exposures involved with a commercial lease? 

You can avoid significant risk by making sure the lease language doesn’t expand, broaden or increase the liability and exposure to the point where your insurance coverage either doesn’t apply or would be limited. Therefore, each party — tenant and landlord — needs to have an understanding of the intent of the lease and its language.

Also remember that it’s not only the insurance provisions that have an effect on the outcome of a claim, but also definitions, maintenance, landlord/tenant obligations, use of premise and indemnity provisions. The insurance section alone only outlines limits and coverage; it’s the other sections of the lease that outline responsibility and ownership.

If two insurance companies review the same lease, and there are questions, it delays the claim process. For example, who is responsible for or owns the improvements and betterments to the space? Is that the responsibility of the tenant or the landlord?

How can tenants and landlords best mitigate risk when drafting and negotiating commercial lease provisions?

By understanding the intent of the lease and its language, the tenant and landlord can mitigate a potential problem prior to a loss and have an understanding of how their policies will respond.

Therefore, both insurance brokers should have an opportunity to review the entire lease during negotiations. He or she can explain what each party is accepting and not accepting, and how your policy will respond in the event there is a claim.

Some important areas for discussion are:

  • Who is responsible for what, such as common area, tenant space,  maintenance and repairs.
  • Who is responsible to insure these items?

The commonly discussed issues in the insurance section are limits, coverage, indemnity provisions and specific wording, but policies respond to the entire lease and its language in sections other than the insurance section.

How should a lease be updated when up for renewal?

Many times lease options are renewed without re-examining the entire lease’s language. There could be simple items such as a name change or an increase in the square footage, other times it can be a change in use and occupancy and therefore changes in various other sections need to be amended and addressed.

Although the landlord and tenant likely just want to sign a quick renewal, it is important that all parts of the lease are carefully reviewed and understood. This will ensure each side is in agreement on the terms prior to a loss instead of after a loss, as the latter could lead to delays or restrictions in coverage.

Phil Coyne is a vice president at ECBM. Reach him at (610) 668-7100 or [email protected]

 

BLOG: For more information about risk management,visit ECBM’s blog.

 

Insights Risk Management is brought to you by ECBM

 

How accountable care measures are transforming our health care system

Ron Calhoun, Managing Director, National Health Care Practice Leader, Aon Risk Solutions

Ron Calhoun, Managing Director, National Health Care Practice Leader, Aon Risk Solutions

As accountable care programs are implemented, health care providers are going through significant financial, clinical, operational and strategic transformation. This has profound effects not only on health care providers, but also on those touched by health care delivery.

Payment transformation, re-admission penalties and demographic shifts are creating a perfect storm where health care providers have to be very skilled, says Ron Calhoun, managing director, national health care practice leader, at Aon Risk Solutions.

“Providers are going to have to get it right,” he says. “They’ve got to be clinically integrated, and a majority of them are not.”

Smart Business spoke with Calhoun about the risks health care providers are facing in this new environment.

What are the impacts of payment transformation and re-admission initiatives?

Numerous payment reform programs are moving providers toward payment for value and outcomes, as opposed to volume or service. The Patient Protection and Affordable Care Act has increased emphasis on Medicare/Medicaid outcomes, which has in turn led to more commercial sector payment transformation. The fundamental question is how are health care providers going to clinically manage a population in a non-clinical environment with all of the quality measures by which they’re assessed?

In 2012, Medicare’s Hospital Re-admission Reduction Program started penalizing hospitals for re-admission of certain acute myocardial infarction (heart attack), heart failure and pneumonia patients. Reimbursement penalties are expected to be $280 million in year one, and to increase as penalties go up and the program expands.

With financial risks tied to reducing re-admissions, there is de-emphasis on acute care — short-term medical treatment — and emphasis on post-acute care. This puts more demand on non-physician clinicians like registered nurses. Hospitals also are managing discharged patients to reduce exposure by either pushing a patient into a post-acute setting earlier or managing that patient more aggressively. However, this has direct and vicarious liability implications.

How are demographic changes creating risk?

As Medicare and Medicaid grow, payment transformation models will proliferate, placing more emphasis on outcomes and value. Roughly 44.3 million Americans are on Medicaid, which will increase by 10 to 20 million, depending on how many state Medicaid programs expand. Michigan Gov. Rick Snyder included an expansion of about 320,000 residents in his budget proposal. Also, 60 percent of the 169 million with employer-sponsored health care are ages 40 to 65, so the Medicare population will double to 88.6 million by 2035.

The Centers for Medicare and Medicaid Services is bundling reimbursements with outcomes, which shifts liability to the provider. Health care providers need to adhere to established clinical protocols, narrow physician practice pattern variation, be highly communicative between specialties and with patient hand-offs, and have sophisticated clinical decision support capabilities within electronic medical record platforms. The tighter the clinical integration, the more confident the health care provider will be in participating in bundled or value-based reimbursement.

Why are family caregivers so important?

About 45 million Americans are unpaid, informal caregivers for those with dementia and/or the top 15 chronic conditions. In the next three to five years, care will systematically go into the home, increasing the demands on home health. Health care providers must connect to caregivers to drive outcomes, such as decreasing re-admissions or increasing medication compliance.

What’s the impact for consumers?

As health care providers move toward value-based or bundled reimbursement, health care networks may become narrower and include only the highly effective providers in a given geography. Consumers with higher deductible, more consumer-driven plans will demand that all providers demonstrate an ability to comply with quality measures. Group health plan providers are certainly going to demand quality, as well. Population management will only become more critical. Consumers and employers will want relevant medical data pushed beyond the hospital’s four walls and into their hands.

Ron Calhoun is a managing director, national health care practice leader, at Aon Risk Solutions. Reach him at (704) 343-4128 or [email protected]

 

Website: Aon’s health care reform microsite can help businesses navigate this complex issue. Visit www.aon.com/healthcarereform/ to learn more.

 

Insights Risk Management is brought to you by Aon Risk Solutions

 

How to set up a safety committee and reduce workers’ compensation claims

Kevin Forbes, Sales Executive, ECBM

Kevin Forbes, Sales Executive, ECBM

An effective safety committee will lead to fewer workers’ compensation claims and reduce your company’s experience modification factor and premiums.

“With lower claims your company may be able to obtain quotes from insurance carriers with lower rates than you could in years past,” says Kevin Forbes, sales executive at ECBM. “Lower claims may also provide alternative sources for coverage, such as captive programs and retention programs for companies that can effectively control their workers’ compensation claims.”

Smart Business spoke with Forbes about setting up a safety committee and driving down your workers’ compensation costs.

What’s the goal when forming a safety committee?

Employers who form safety committees are attempting to reduce injuries and meet compliance requirements of federal and state regulations. However, the overall goal should be to enforce and expand current safety procedures and continue to promote the organization’s safety culture.

Safety committees also are an effective tool in analyzing and ensuring regulation compliance. Making sure your company guidelines meet Occupational Safety and Health Administration (OSHA) minimum standards in the facility, yard, on job sites and over-the-road is a key function of every safety committee. Training can be provided by outside, certified instructors, and then committee members are responsible for passing on their training and monitoring new procedures.

Does a safety committee give you an insurance discount?

Depending on what state you are domiciled in, credits may be available. Pennsylvania offers a 5 percent credit to any employer who qualifies. New York and Delaware also offer credits, but New Jersey does not. To qualify, the safety committee has to meet guidelines laid out in the state’s workers’ compensation manuals and become state certified.

What ingredients do you need to set up a successful safety committee? 

To get the best results, any safety committee must have complete support and involvement from top management. And once procedures are implemented, they need to be communicated to employees, strictly followed and monitored for effectiveness.

The committee must meet regularly — typically once per month and at the same time for maximum involvement. Meetings shouldn’t always be in a conference room; some of the most effective meetings take place at job sites or on the factory floor.

The committee should be formed with volunteer members — management and employees — who show an interest in making the workplace safer. Since these individuals identify safety issues, develop new procedures and communicate them to the rest of the workforce, they should be from positions that will be directly affected.

Bringing on your insurance broker or risk manager as a member can be valuable. These individuals have the ability to analyze exposures and identify where the company is experiencing the most loss.

How important is employee buy-in? 

Without it, the safety committee will never help create an effective safety culture. By getting employees who are leaders from each level in the organization involved, the views formed in the committee can be transmitted throughout the organization.

Typically, when employees see a company invested and committed to keeping them safe, getting their buy-in is pretty easy. Management should also encourage employee involvement and suggestions. Employees have a much better outlook on participating when they see their suggestions being taken seriously.

Are there any risks you should be aware of when establishing a safety committee?

Be sure to comply with the jurisdictional law that has been established regarding the creation of safety committees and follow the rules. Once the committee is established and the plan is in place, it’s imperative to continue to run the committee in line with the mission on which it was established, which will include accurate record keeping.

Kevin Forbes is a sales executive at ECBM. Reach him at (610) 668-7100, ext. 1322 or [email protected]

 

BLOG: For more information about risk management, visit www.ecbm.com/blog.

 

Insights Risk Management is brought to you by ECBM

How to understand flood insurance and avoid policy pitfalls

Linda Cook, Vice President, Personal Insurance Division, ECBM

All companies that own, rent or lease a building may need flood insurance, regardless of whether the business is near a body of water or it is a requirement of a lender.

“Even if your business has a low risk of flooding, it’s wise to obtain a quote on flood insurance. Twenty-five percent of all flood claims occur in areas that are considered low to moderate risk,” says Linda Cook, vice president, Personal Insurance Division at ECBM. “Flooding can result from sources such as broken water mains, runoff water, storms, melting snow and other natural causes.”

In the aftermath of Hurricane Sandy, many property owners were unsure of how their flood policies would respond.

Smart Business spoke with Cook about what you need to know about flood insurance, including what is covered and not, to take back control.

What’s the National Flood Insurance Program?

The NFIP was established to provide a means for property owners to financially protect themselves against flooding in participating communities. A participating community agrees to adopt and enforce ordinances that meet or exceed FEMA requirements to reduce the risk of flooding.

Why do you need flood insurance, especially if there’s federal assistance?

Most homeowner and business property policies do not cover flooding conditions or floods. A flood policy can be purchased through your insurance agent or directly through NFIP. All rates are set by FEMA and do not vary from one insurer to another. The premium for a flood policy averages about $700 annually, with maximum limits of $500,000 per nonresidential building and $500,000 for nonresidential contents. The maximum limit under a residential flood policy is $250,000 per building and $100,000 for contents. If higher limits are needed, they may be purchased under an excess flood insurance policy.

As for federal assistance, most forms of assistance are only available after the president declares an area a disaster, and less than 50 percent of all flood incidents are declared official disasters. In addition, most federal disaster assistance to businesses comes in the form of a loan.

How is property-flooding risk assessed?

There are several factors involved in assessing the degree of risk, but a prominent one is the flood zone of a property. This is an area that FEMA has defined according to varying levels of flood risk. An elevation certificate, acquired through a licensed surveyor or engineer, will be able to provide information on the flood zone, the base flood elevation of an area and how a building is elevated. For a favorable flood insurance rate, the building insured should be elevated above the base flood zone.

If you rent commercial space, does that mean you don’t have to do anything?

No. You will need to purchase flood insurance in your business name to provide coverage for your contents. The building owner should have a separate policy to cover the building and whatever contents he or she needs covered.

What else do you need to know when buying or using flood insurance?

A flood policy only provides coverage for direct physical loss by or from flood. Losses are paid on actual cash value (ACV), not replacement cost value. So if, for example, the cost in today’s market to replace your contents is $80,000 but the ACV may be determined to be $50,000, you may only receive the ACV amount, or $50,000.

One particular area where contents coverage is limited is in the area under the lowest elevated floor, which may be a basement, finished or unfinished, as well as an elevated area with lattice or walls. It is important to read your policy.

Some important items that a flood policy does not pay for are:

  • Loss of revenue or profits.
  • Loss of access to the insured property.
  • Loss of use of the insured property or location.
  • Loss from interruption of business or production.
  • Damage caused by mold, moisture or mildew over a period of time.

A list of excluded items is available from a licensed agent or consultant.

Linda Cook is a vice president, Personal Insurance Division at ECBM. Reach her at (610) 668-7100, ext. 1288 or [email protected]

Insights Risk Management is brought to you by ECBM

How to ensure your company is ready for the next Hurricane Sandy

Neil Harrison, AGRC, group managing director, Risk Control, Claims & Engineering, Aon Risk Solutions

Ron O’Neill, senior claims consultant, Aon Risk Solutions

Learning how to deal with disaster during a crisis is not a good idea. Hurricane Sandy’s aftermath reminds employers of the importance of insurance, disaster planning and claim preparation.

“Always at a time like this, organizations who were not affected need to take a step back and ask themselves, ‘What if?’” says Neil Harrison, AGRC, group managing director, Risk Control, Claims & Engineering, at Aon Risk Solutions.

Smart Business spoke with Harrison and Ron O’Neill, senior claim consultant at Aon Risk Solutions, about best practices business owners can use to ride out any disaster.

How did Hurricane Sandy affect the insurance industry?

With an event like Sandy, the insurance industry plays a role in business specific and general economic recovery. Brokers and insurance companies expect to be judged on their performance and response. With a significant amount of claims, there is a lot of resource pressure. Resource scale and leverage become key, and operational efficiency is a prerequisite for success.

It’s too early to comment on the longer-term impacts of insurance pricing or coverage availability. With these events, everybody has an opinion, but nobody knows at this early stage. Property damage, business interruption and contingent business interruption all create the overall cost. Also, just because a company is based in Detroit or somewhere out of Sandy’s way doesn’t mean businesses didn’t have customers, suppliers or vendors affected.

How should you handle an insurance policy?

The first step is ensuring you’ve got the right insurance coverage — the terms, the conditions in place, definitions of perils — and that you understand items such as limits and exclusions. Business owners should aim to have claims preparation coverage on the property cover. Then you can engage an expert for accounting work critical to quantifying and making the claim, and, generally, the process runs more smoothly.

Also ensure the values at risk — asset values and business interruption values — are understood and accurate. Too often, an organization has a claim and is underinsured or overinsured. A best practice is having an external expert work with you on assessing values during your policy renewal process. The business interruption is particularly important because it’s complicated to work out in post-loss panic mode. Since the recession, everybody has different values at risk, but organizations may have continued to index link their values or sums insured.

Beyond insurance, what can businesses do to respond well to disasters?

Organizations that have responded well are those with business continuity plans that are well defined, kept up to date, frequently tested and broad. The plans cover not just the direct issues of building damage but also employee safety and welfare issues, supplier issues, customer issues, etc.

Insurance is an outcome, in many ways, of business continuity. Take a broad look at the business, plan for every eventuality, make sure everyone knows what to do and have restoration firms on contract, as well as access to alternative power.

How should a business submit claims if it suffers damage?

When a significant incident hits, the company has some responsibility to mitigate the damage and cost. Much of it is common sense, but that’s easier to apply when it’s written down with clear responsibilities. Make sure that you:

• Report the loss to a broker or insurer immediately and there are clear lines of communication.

• Take immediate action to minimize loss.

• Keep documents, invoices or receipts, which become part of the insurance claim.

• Take photographs of the damage.

• Engage an external expert, if needed. When a business is in trouble mode, it’s all about recovery. Outside expertise allows you to talk to customers, suppliers and staff, while the expert handles the tactical, and somewhat more mundane, issues.

It’s important to have continuity planning, follow insurance best practices, consider a claim preparation clause and ensure common sense is applied after a loss. Disaster response, claim response and claim preparation are specialist technical disciplines, and businesses find investments in these areas have a positive return.

Neil Harrison, AGRC, is group managing director, Risk Control, Claims & Engineering, at Aon Risk Solutions. Reach him at [email protected]

Ron O’Neill is a senior claim consultant at Aon Risk Solutions. Reach him at (248) 936-5243 or [email protected]

For information from the Aon Situation Room, Post-Tropical Sandy, including videos on claim steps and business interruption, visit http://insight.aon.com/?elqPURLPage=3422 For an archived webinar on Post-Tropical Sandy, visit http://www.visualwebcaster.com/event.asp?id=90768.

Insights Risk Management is brought to you by Aon Risk Solutions

How to weigh risks of continuing to provide health care coverage — or not

Matthew R. Huttlin, vice president, Employee Benefits Division, ECBM

With the election settled and a number of lawsuits decided, it’s clear the implementation of the Patient Protection Affordable Care Act (PPACA) is moving forward.

There could be numerous timing glitches with implementation through delayed issuance of regulations and enactment of the exchanges, but Matthew R. Huttlin, vice president, Employee Benefits Division at ECBM, says it is important that every organization continue with its planning.

“This law will continue to be modified and adjusted over the next few years and employers are going to need sound, detailed guidance to negotiate their way through the PPACA legislation,” he says.

Smart Business spoke with Huttlin about the decision of whether to continue your health care program or relinquish coverage to the exchanges.

What risks are employers facing from the PPACA and health care exchanges?

For employers with more than 50 full-time equivalent employees — considered ‘large’ employers under the law — a number of areas need to be reviewed in anticipation of the 2014 effective date of the government health exchanges. However, none is more important than the financial impact. Employers that do not provide adequate coverage or offer coverage that is considered unaffordable may face penalties. However, the calculation to determine whether any penalties will apply in 2014 is fairly straightforward.

Once you’ve assessed potential penalties, what’s the next step? 

The more difficult question is whether an employer should continue its health care program or relinquish coverage to the government exchanges. The two primary areas of concern are financial and human resources. From a financial standpoint, a risk manager can run a detailed analysis to determine the cost impact of each option. The results depend heavily on the current cost of coverage, both for the employer and the employees, and the salary distribution of the full-time employees. The human resource impact is difficult to quantify, having to gauge the impact of each option on retention and recruitment.

Do employers that continue to offer health plans need to revisit their decision?

Employers that decide to maintain their programs should test these programs annually. Rates vary from year to year and from group to group based on the impact of the group’s claim losses in the determination of their rates. The impact of a group’s actual experience on their projected costs increases as the size of the group increases for insured programs. The projected rates for self-funded plans are typically based solely on the group’s claim losses. Whether self-funded or not, the greater a group’s claim losses impact their rates, the more important it is to control costs through utilization management, wellness, plan design, etc.

On the other side of the equation, PPACA penalties are expected, at a minimum, to be indexed for inflation. Also, the cost to obtain coverage from the exchanges — particularly for employees with salaries that exceed 400 percent of the federal poverty limit — is anticipated to increase, possibly at a rate greater than inflation.

How should employers that decide to eliminate their health insurance handle it?

This is a major undertaking for the HR personnel. Detailed communications with the employees explaining the organization’s decision and guidance will be required. This decision also will have a critical impact on administration. Businesses that choose this path should reach out to risk managers and consultants for assistance.

What is the risk of upcoming ‘Cadillac’ tax?

Looking further out, there is another ‘test’ looming under PPACA for 2018, commonly called the ‘Cadillac’ tax. Under this provision, if the combined cost for health care benefits exceeds the dollar threshold limits of $10,200 for single person plans and $27,500 for other plans, the PPACA will tax these rich benefits at a rate of 40 percent on the cost above this amount. According to a 2011 survey by Mercer, approximately 60 percent of employers with more than 500 employees believe their plans would trigger the tax unless they take action to avoid it. Employers will need to keep a close watch on costs as they progress toward this test.

Matthew R. Huttlin is vice president, Employee Benefits Division at ECBM. Reach him at (610) 668-7100, ext. 1312 or [email protected]

Insights Risk Management is brought to you by ECBM


How to administer your workers’ compensation claims to reduce your costs

Brian Chance, Vice President, Claim Services, ECBM

Workers’ compensation claims and insurance are not things an employer can leave to chance. The company’s managers need to actively work to manage the direct costs of workers’ compensation insurance, as well as indirect costs from lost productivity.

Brian Chance, vice president, Claim Services, at ECBM, says workers’ compensation insurance cost is based on a fairly strict pricing model that is heavily regulated by states. An employer’s actual claim expenses play a large role in the calculations that are done in order to price their insurance.

“An employer’s workers’ compensation claim experience has a direct impact on the cost of workers’ compensation insurance,” he says. “Larger employers may be self-insured to some extent and pay every dollar of their claims, and therefore, time and energy should be spent to reduce claim costs. Each dollar saved could be their own or will reduce the impact the claim will have on their insurance pricing.”

Smart Business spoke with Chance about the best techniques for managing workers’ compensation.

Are there certain industries where managing workers’ compensation is more critical than others?

All employers are subject to the same insurance pricing model, and therefore, all employers benefit from managing their claims. However, in certain industries — especially construction — a company’s claim experience may be reviewed in order to qualify it for contracts. Companies with worse than average claim experience may find themselves precluded from bidding on certain projects. Consequently, employers that ignore their workers’ compensation claims will spend money they would otherwise be saving, and some may find they are precluded from working.

If a company doesn’t effectively manage its workers’ compensation claims, what can be problematic?

The direct impact of not managing workers’ compensation claims is an increase in insurance costs or the out-of-pocket expenses paid by larger employers. However, there are many indirect costs employers suffer when an employee is injured. Studies have shown that for every dollar paid for a claim, the employer suffers $5 in indirect costs. Some of these costs are lost productivity due to the missing employee, the cost of errors or rework caused by inexperienced replacement employees, and poor employee morale.

Another misstep is that many employers assume that their role in the claims process ends after they report a claim. Employers that take a proactive role in managing their claims and the actions taken by their insurance carriers see lower costs as a result. Employers should have an ongoing dialogue with their injured employees and their insurance carrier in order to ensure that all steps are being taken to facilitate a return to work and reduced costs.

What are some best practices to use when managing claims?

The first thing you, as an employer, can do is report employee injuries as quickly as possible after an injury. Injuries reported more than three days after they occur cost more for each day the report is delayed. When you ignore an employee’s injury, the employee might find his or her way to an attorney and feel as though you are trying to avoid responsibility for the injury.

You also should return injured employees to work as quickly as possible by utilizing a transitional duty return-to-work program. Employees working in a modified duty capacity tend to heal faster, return to full duty quicker and are less inclined to use their claim as a way to punish their employer.

Additionally, you should identify local medical providers to treat your injured employees. Medical provider partners are most important to the ultimate cost of the claim because they determine the need for treatment and the extent of the disability. Medical providers who specialize in occupational injuries and understand your transitional duty program are critical to your ability to manage your claim costs.

Are certain areas within workers’ compensation becoming more critical to monitor?

Yes. As all employers know, the cost of medical insurance goes up every year due to inflation. That same inflation impacts workers’ compensation treatment costs, as well. Therefore, it is critical for employers to partner with providers that offer high-quality care at a discount. Employers with transitional duty return-to-work programs enjoy lower medical treatment costs on their claims because employees who are working tend to seek less medical treatment.

In addition, the U.S. government has spent a great deal of time and money in order to protect the interests of the Medicare system. Claims involving Medicare beneficiaries must be handled properly; otherwise, the employer and its insurance carrier could be subjected to extraordinary fines and penalties.

Once you put management techniques in place, how should you measure their effectiveness and then adjust accordingly?

Once you, as an employer, begin to manage your claims, you should see a reduction in the number of lost workdays you record on your Occupational Safety and Health Administration log. You will also observe a reduction in the payments being made on your claims and have fewer employees out of work.

Brian Chance is a vice president, Claim Services, at ECBM. Reach him at (610) 668-7100 or [email protected]

Insights Risk Management is brought to you by ECBM Insurance Brokers and Consultants

How to ensure your company is ready for the next Hurricane Sandy

Neil Harrison, AGRC, Group managing director, Risk Control, Claims & Engineering, Aon Risk Solutions

Roland Laury, CFPS, Senior risk consultant, Aon Risk Solutions

Learning how to deal with disaster during a crisis is probably not the right way to go. In the aftermath of Hurricane Sandy, employers are reminded of the importance of insurance, disaster planning and claim preparation.

“Always at a time like this, organizations who were not affected need to take a step back and ask themselves, ‘What if?’” says Neil Harrison, group managing director, Risk Control, Claims & Engineering, at Aon Risk Solutions. “We are spending a lot of time talking to organizations and helping them to say, ‘OK, what if it was us? Would we have been ready? Were we prepared?’”

Smart Business spoke with Harrison and Roland Laury, CFPS, senior risk consultant at Aon Risk Solutions, about some best practices business owners can use to help them ride out any disaster.

How did Hurricane Sandy affect the overall insurance industry?

An event like Sandy gives the insurance industry an opportunity to demonstrate why it exists. Too often, businesses look at insurance purely as a cost, but the industry is playing a role in business specific and general economic recovery. From the perspective of brokers and insurance companies, they expect to be judged in terms of their performance and how they respond to clients. There is a lot of resource pressure, as the number of claims is significant, so already busy staff is suddenly taking on increased workloads. Resource scale and leverage become key, and operational efficiency is a prerequisite for success.

It’s too early for anyone to comment on the longer-term impacts of insurance pricing or coverage availability for individual businesses or industry segments. When these events happen, almost everybody has an opinion of the cost, and those opinions vary widely. The reality is nobody knows at this early stage. Property damage, business interruption and contingent business interruption all come together to create the overall cost. In addition, just because an organization is based in St. Louis or somewhere not in Sandy’s way doesn’t mean businesses didn’t have customers, suppliers or vendors who were affected. This may indirectly affect them in terms of business interruption or contingent business interruption.

What should business owners know about their insurance policy for an event like Sandy?

There are some key things that organizations should look at. The first step is making sure you’ve got the right insurance coverage — the terms, the conditions in place, definitions of perils — for this kind of event and that you understand it. Business owners need to understand limits and exclusions. They should aim to have claims preparation coverage on the property cover, meaning there’s the opportunity to engage an expert for some of the accounting work critical to quantifying and making the claim. With this coverage in place, and with a relevant expert engaged, generally speaking, a claim is better prepared and the process runs more smoothly.

Linked to that is the need to make sure that the values at risk — asset values and business interruption values — are well understood and accurate. Too often, an organization has a claim and then is found to be underinsured or overinsured. A best practice is having an external expert work with you on assessing those values during your policy renewal process. The business interruption is particularly important because it’s far more complicated to work out in post-loss panic mode. If you think about the economy since 2008, everybody has different values at risk now than they did then. Organizations may have just continued to index link their values or sums insured.

Looking beyond insurance, what can businesses do to respond well to disasters?

The organizations that have responded well are those with business continuity plans which are well defined, kept up to date, frequently tested and broad. The plans cover not just the direct issues of building damage but also employee safety and welfare issues, supplier issues, customer issues, etc. There’s no alternative to investing the time, and probably some money, in a far-reaching business continuity plan because it gives the balance sheet the best protection possible.

Insurance is an outcome in many ways of business continuity. Take a broad look at the business, plan for every eventuality, make sure everyone knows what to do when an incident happens, have restoration firms on contract so you’re first in queue when an incident happens, and have access to generators or additional alternative power.

How can a business best submit claims if it does suffer damage?

When a significant incident hits, the company has some responsibility to mitigate the damage and the cost of the loss. Much of it is common sense, but common sense is easier to apply when it’s written down and people know what they are responsible for. Make sure that:

  • Everyone knows to report the loss to a broker or insurer immediately and there are clear lines of communication.
  • Immediate action is taken to minimize loss.
  • You keep the documents, invoices or receipts for any vendors brought in for restoration or to provide alternative power, etc. Later, this will become a part of the insurance claim.
  • You take photographs of the damage. It’s surprising how many people get everything repaired and then try to make the insurance claim without proof.
  • You engage an external expert, if needed. Sometimes when a business is in trouble mode, it’s all about recovery. Outside expertise allows the business leader to talk to customers and suppliers and deal with staff, while the expert handles the more tactical, and somewhat more mundane, issues.

It’s important for businesses to have continuity planning, follow best practices for insurance, consider a claim preparation clause and ensure common sense is applied when a loss occurs. Recognize that disaster response, claim response and claim preparation are specialist technical disciplines, and many organizations find that their investments in those areas have a positive return.

Neil Harrison is the group managing director, Risk Control, Claims & Engineering, at Aon Risk Solutions. Reach him at (312) 381-5660 or [email protected]

Roland Laury, CFPS, is a senior risk consultant with Aon Risk Solutions. Reach him at (314) 719-5120 or [email protected]

Insights Risk Management is brought to you by Aon Risk Solutions