New model for solving workers' compensation dilemma - win-win-win for business, employees, and insurance companies.

On July 1, 1992, one hundred-fifty small businesses in the Los Angeles garment district lost their workers' compensation insurance. To some, this meant closing their doors forever. The events that took place afterward, and outlined in this article, may have formed a model that can be used to solve the spiraling crisis with the California workers' compensation system.

The model ultimately benefits all who are involved. For employees, the work environment is improved -- it is clean, safe, more productive, and in compliance with state and federal law. For the small business owner, insurance premiums are much lower -- allowing them to stay in business. For the insurance company, the reduced number of claims translates to lower loss ratios, lower premiums, and fair profit.

The best part of this story is the human element. The people involved not only saved 2,800 jobs, they improved the work place, making it more comfortable and safe for employees. In the process, some business owners gained an irrepressible sense of pride in their accomplishment and a genuine concern for their employees.

Workers' Compensation -- The Problems

To understand why the model works, it is important to understand the problems related to workers' compensation. Most recently, much has been reported about fraud, and workers' compensation claim mills. The number of claims are increasing exponentially. For example, in 1980, there were approximately 1,200 stress claims. In 1990, this number skyrocketed to over 10,000.

For small businesses, the impact of this is felt at the profit line. Insurance premiums have gone up by as much as 300 percent. This growing trend is forcing many business to close or relocate elsewhere. One study stated that 669 businesses left the state within the last five years and cited workers' compensation insurance premiums as the primary reason for their relocation. For employees, this means lost jobs ad lost futures.

In addition to high premiums, business owners may not be aware that fines for non-compliance with regulations could close their doors. For example, one company, who was found without workers' comp insurance, was fined $1,000 per employee, and was required to pay 10 days paid vacation for each employee, while they filed for insurance. To date, they have not re-opened for business.

Why do insurance companies charge so much? Simply stated; claims costs are rising faster than premiums. State Fund, which is the largest workers' comp carrier, reported a loss ratio of 95% for the previous year. This means 95 cents of each dollar of premiums collected was spent paying claims.

To offset this loss, insurers have surcharged premiums for businesses based on risk. For the 150 garment manufacturers, this translated to paying $38 per $10 of payroll (the book rate is seven dollars and fifty cents per hundred). Many could not afford such a steep rate, which led insurance companies not to renew these groups.

How the garment manufacturers saved their businesses

Faced with cancellation, the garment manufacturers, through an associate of an insurance broker, sought help from Ms. Kathleen Calderon, Director of the Los Angeles Minority Business Development Office. Ms. Calderon was concerned that this group of local businesses, primarily minority hispanic, would be shut down. She looked for support in the political arena. Here she was able to involve Assemblyman Richard Polanco, Vice Chairman of the California Insurance Committee. He set up a meeting between Ms. Calderon and a representative of Zenith Insurance (one of the carriers who did not renew the insurance policy of the garment manufacturers). To her surprise, Zenith was very cooperative in willing to work out a solution to the problem. They asked her to recommend an independent consultant to meet with Zenith officials and the garment manufacturers, determine their needs, and make recommendations.

She recommended Ralph Ramirez, a former administrator of the California Division of Workers' Compensation as the independent consultant needed. Mr. Ramirez met with the garment manufacturers and came up with a set of guidelines that Zenith could agree to.

As you might guess, this process was somewhat painful. The guidelines included the formation of the Association of Garment Manufacturers. Monthly association meetings were established and became mandatory. At the meetings, experts were brought in to make presentations on safety regulations, accounting and payroll reporting procedures, proactive strategies to reduce the workplace safety hazards, and how to increase productivity and profits.

In addition to the association, Mr. Ramirez required the manufacturers to provide full disclosure of records including payroll, time cards, and payroll statements. Mr. Ramirez, along with a former safety engineer, also inspected the work sites on a regular basis. The bottom line became: comply or be cancelled. Mr. Ramirez continues to work with this industry, especially on a case-by-case basis to try to make the process less painful.

Still, for some, changing the old ways is a difficult process. For example, on one inspection, Mr. Ramirez was unable to locate the owner. When he asked the employees, they told him the owner was at the "other" factory down the street. This turned out to be a second site -- curiously missing from the insurance application and reported payroll. This type of under or non reporting is not uncommon in many California industries. The problem is the insurance companies are not paid for the actual risk involved. State and Federal revenues are also lost. Of course, the employee loses too -- no payments equals no benefits.

In this particular case, meeting with garment manufacturers, Mr. Ramirez went back to Zenith to try to work out a plan to provide insurance at a workable rate, and still allow for a payment of back premiums for those who need it.

To his surprise, Zenith took a bold step. They agreed to re-insure the group retroactively to July 1, 1992. In addition, they agreed to pay all claims discovered during the retroactive period. Zenith also worked with the group to develop a payment plan to collect all premiums required under affordable terms. In addition, they lowered the surcharged rate from $38 to $15 per hundred of payroll.

As it worked out, all have benefited. The manufacturers got to stay in business at a lower rate, secure new business because of proof-of-insurance, and to date, Zenith has collected all premiums, including back premiums. So far, the loss results have been favorable.

On the down side, many have opted to drop out of this program. The results have been businesses either closing down completely, paying higher rates with other carriers, relocating to other areas, or conducting business illegally.

For those who have stayed with the program, the benefits have paid off. Mr. Henry Franco is one of the remaining 30 garment manufacturers of the original 50 who has stayed with the program. He feels, without this model, he would have been forced to close his doors.

As a result, his productivity and profits have improved by over 20 percent. Moreover, much has been accomplished to his garment shop itself. His business is clean, bright, and comfortable. He installed new equipment to automate his production line and reduce the risk of Carpel-Tunnel Syndrome. The supply/materials area is fully palletized so no one lifts heavy loads. There are colorful signs and posters displaying safety tips. Emergency-disaster kits are now in place and in clear view. Finally, a company newsletter is published listing safety tips.

The Solution -- A New Model

The results are amazing -- over 2,800 jobs were saved by this program. The question is: Can this be done with other businesses and industries?

Ralph Ramirez and Kathleen Calderon believe it can. The basic principle is employee safety and a comfortable work environment. If the employee is dissatisfied with the company, and wages are low, the employee is motivated to use the system to get back at the company by filing a workers' comp claim. Over 70% of people filing permanent disability workers' compensation claims have made previous claims.

The model developed by this experience is simple. Business owners and insurance companies work together to improve the work place. The resulting lower insurance premiums provide the incentive to invest in compliance efforts by the businesses involved. In this case, an outside consultant was brought in to work between businesses and the insurance company. This works particularly well because the consultant is not viewed as the insurance company, but as an arbitrator/negotiator to help meet the needs of the businesses involved. The outcome has clearly become favorable to all parties concerned and certainly presents itself as solution to an seemingly incurable problem.

-- Val Poliuto, is a Systems Analyst/Marketing specialist for the Office of Continuing Education, at California State