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Controlling workers' comp costs.

Workers' compensation insurance is fast becoming one of the most significant business costs for property managers and the contractors who work for them. In some states, it is practically impossible to find an insurance carrier who will provide the coverage. This often forces businesses to participate in an expensive statewide insurance pool. In other states, premium costs are increasing at hyper-inflationary rates.

For example, from January 31, 1991, to October 1, 1992, the workers' compensation insurance rate for property managers in Nevada increased by 24.43 percent. During the same period, the rate for workers classified as maintenance personnel went up by 29.64 percent, and the rate for clerical workers by 36.73 percent.

In New Jersey, a state with some of the lowest workers' comp rates in the nation, overall workers' compensation costs will rise 14.3 percent as of January 1993 (a one-year increase). Nationally, the average combined rate increase for the past three years was 33.5 percent.

Some of the highest rate increases included those in New York (an increase of 72.5 percent over the past three years), and those in Pennsylvania (up 52.3 percent over the same period). (Newark Start Leader, December 1, 1992.)

Why costs are rising

The problem of high costs for workers' compensation is tied closely to out-of-control costs for health care. The latest report on health care from the Commerce Department stated that spending on health care accounted for more than 14 percent of the nation's total economic output in 1992.

The Commerce Department projects that without significant changes in the health system, medical spending will continue to rise 12 percent to 15 percent a year over the next five years.

Ed Boudreau, CPM|R~, president of Capital Consultants Management Corporation in Dallas, believes that while cost is a major hurdle, the most serious problem is that few insurance carriers are willing to underwrite the workers' comp policies at all.

Texas, and other states as well, actually provide a disincentive for insurance carriers to handle workers' comp. The state assesses a required contribution to cover the shortfall in the state's assigned risk pool, based on the market share of an insurance carrier's workers' comp business. This requirement has forced many insurance carriers out of the market; others have raised their rates considerably to cover the difference in their profit margins.

"Most people who operate intrastate," remarks Boudreau, "have had to make the choice between doing without insurance or going into the assigned risk pool at a very high rate."

The root of the problem is not the number of legitimate claims, but the high incidence of fraud. Television advertisements in Texas advise workers to call an attorney at no cost, get a free ride in a limousine, and undergo diagnosis by a doctor.

The fraud problem has become so severe partly because the system, in effect, holds employers re-responsible for virtually all employment-related injuries or diseases without regard to fault.

The original intent of this decision was to provide a way for employees to receive limited compensation for injuries without resorting to years of expensive litigation.

Unfortunately, however, unscrupulous lawyers and their clients often use workers' compensation as a cash cow to be milked dry, instead of as a safety net for legitimately injured workers.

Compounding the problem is the fact that insurance companies are not penalized for paying out on fraudulent claims. "Because the workers' comp statute sets limits on your liability," states Boudreau, "the insurance company decides how far it wants to carry litigation on a particular case. If I have no choice over what the insurance company is going to settle for, then I have no choice over what my next year's premium is going to be."

Problems are similar in other states. According to Paula Janoski, human resources director at Watt Industries, Inc., a real estate group in Santa Monica, the system in California makes it easy to get away with fraudulent claims. To file a claim of work-related stress, for example, you only have to prove that 10 percent of the stress you are under is caused by the work environment.

The result, she states, is that the company spends $3,000 to $4,000 investigating a stress claim, only to pay an additional $2,500 to $3,500 if the claim is validated. "You save money by not doing the investigation," she states. "And that's a sad scenario."

In almost every instance, reducing costs for workers' comp is at best, an arduous task. States Joe Borger, CPM, executive vice president of Borger Companies in Washington, D.C., "It's a nickel-and-dime process. It's a tenth of a point here, and cutting back some overtime there. But certainly the larger the property and greater the number of employees, the more significant those numbers become. It is worth it."

Augmenting safety

One of the best ways to contain or reduce the costs of workers' comp premiums is to encourage safe work environments. The lower the accident risk is in a particular profession, the lower the percentage of payroll an employer has to pay to insure a worker in that profession. Also, in theory, the safer the work environment, the lower premiums will be, because premiums are tied to workplace accident histories.

In practice, one accident may increase your insurance premium drastically. Says Boudreau, "Any year, you're rolling the dice. One employee could slip and tear up a knee, and you could be out $50,000 to $60,000 in loss." This means that your premiums will reflect the costs to the insurance company for medical bills as well as administrative costs, which could amount to as much as 50 percent of the insurance company's total cost for the injury. In general, as long as a loss reserve for an injury remains open, your experience rating is worse, and your premiums are increased for the three years that follow the injury.

Property managers advise continuous promotion of safety in seminars, training, and publicity at the workplace. "Everyone should be aware," explains Boudreau, "that they should not grab that heavy refrigerator or that heavy box."

Also make your employees aware of how much your workers' comp premium affects your bottom line; your ability to be competitive in the marketplace; and ultimately, your employees' salaries, benefits, and the security of their jobs.

Richard Snyder, CPM, of R.A. Snyder Properties, Inc., San Diego, notes, "We have seen the greatest amount of savings by delivering an employee base that is well-trained and well-informed about safety issues. Those two elements largely result in a lowering of our workers' comp claims. And the real source of savings is to lower your incidence of claims."

Snyder uses newsletters and meetings to enhance awareness and to provide training. He recommends a strict policy against drug or alcohol use on the job.

Capital Consultants offers a reward program for employees that seems to have reduced claims. The program involves a monthly drawing for a $200 cash bonus in each region of operations. The only employees eligible for the drawing are those who have not missed a day of work during that time period. States Boudreau, "I don't know whether it's a coincidence or not, but our workers' comp claim history so far this year |1992~ has been much improved over previous years."

The firm operates in three cities, so that means an expense of $600 per month to reduce absenteeism. "It is well spent if we achieve some rebate on our $300,000-per-year premium," says Boudreau.

Another way to increase safety is to conduct aggressive property inspections. Says Snyder, "We encourage the insurance company to send out an inspector to go through the property and point out any items that would pose a potential threat to either employees or residents." Some of the recommendations have included more lighting, use of non-stick strips on steps, and additional railings for walkways.

Robert A. Murray, CPM, president of RCP Management Company in Princeton, recommends targeting possible areas of vulnerability and taking preventive maintenance action. In his company, many of the employees are bookkeepers or managers who spend a great deal of time in front of computer screens. Murray recognized the potential for a disease called carpal tunnel syndrome, a circulatory problem that results when people sit for a long time in one position with their arms higher than their waists.

To avoid the risk of this often debilitating ailment, Murray bought special desks with a shelf for the computer keyboard underneath the desk table and ergonomic features that produce the right posture for working with a computer. The equipment outlay was approximately $900 per work station. "That's a big investment," states Murray, "but in the long term I believe it will have a beneficial effect on preventing this kind of injury."

Important areas to target in property management include proper lifting techniques and working safely with cleaning fluids or other chemical solutions. Janoski remarks, "Take the time to make sure the people you hire have an understanding of how to handle equipment safely, how to deal appropriately with the chemicals they will use, and how to lift things properly." Her company appoints a coordinator responsible for training in each division.

After instituting an appropriate safety program, the next step is to link your emphasis on safety and your lower-risk environment to some kind of benefit in the policy you obtain. This means working closely with your agent and making an aggressive effort to find a insurance carrier that will recognize the advantages of your safety program.

Capital Consultants found a plan that allows the company a rebate on some of the previous year's premiums if its claims do not exceed a certain level.

Following up on injuries and claims

When a work-related injury does occur, a manager's first priority should be to analyze the cause of the accident, educate employees on how it occurred, and take steps to prevent a recurrence.

You should also stay in touch with the employee, both out of concern for his or her well-being and to help the employee return to work as soon as possible.

Generally, experience ratings and premiums are adversely affected for three years following a claim. Thus, getting the loss reserve account closed as soon as possible is obviously to your advantage.

If you can get an injured employee back to work, states Janoski, "it can drastically reduce the costs of your workers' comp insurance. Rehabilitation or job retraining is very expensive, so if you can modify job duties for this individual, you definitely benefit."

While this strategy is not always possible, Janoski describes a situation in which it worked. When an injury prevented an employee from future climbing or stooping, the company was able to give him a job scheduling customer service requests from clients. He could have stayed out of work longer, but it was advantageous for him to return, as the salary offered (the same as for his previous job) was more than the workers' comp disability benefit. And the company was able to stop the drain on its workers' compensation and gain meaningful work from the employee.

Murray describes one instance in which an injured employee went back to work early on a "light duty" job. He questioned the doctor's diagnosis, which recommended that the employee stay out of work for a month, even though the accident was a fall that had damaged only leg ligaments.

After consulting with the doctor and asking if the employee could do administrative work that did not involve any activity other than sitting at a desk, he made arrangements to have the employee driven to work.

"I think it's a matter of educating the doctor and having the right job description," he states, "so that the doctor can state whether or not the individual is capable of doing specific tasks involved in the job." He recommends asking doctors explicitly whether or not employees can perform certain responsibilities after an injury.

Monitoring classifications and losses

Murray also suggests asking for quarterly loss reports to supplement the annual reports you receive from your insurance company. The reports should show the claimant, the accident date, the claim amount, the cause of the accident, and the nature of the injury. This allows you to identify problems faster and prevent them from recurring.

More frequent reports also allow you to find mistakes faster. These could be either clerical errors that could cost you money or rate classifications (regulated by each state) that do not correspond to the reality of the jobs people do.

Murray explains that he originally put all managers who did property inspections in the same classification as maintenance personnel until he discovered there was another rating class for people who did both administrative and maintenance tasks. The agent brought back a detailed explanation of each classification available and reviewed it with Murray to determine if any cost savings could be realized.

Because neither agents nor insurance carriers usually make much money on workers' comp policies, you have more leverage if your agent handles your other insurance needs as well. Try to work with an agent who recognizes the value of your portfolio and will examine workers' comp costs as a courtesy to you as a client.

Janoski recommends checking quarterly statements to make sure workers are in the right classifications, all payroll information is correct, and no outlays that are not subject to workers' comp are included (in some states, this means health care allocations).

Borger cautions that payrolls should reflect regular pay rates, not unusual circumstances. For example, if an employee put in a great deal of overtime one year, the insurance company may assess your rate based on that payroll amount. If this was a one-time occurrence, however, you need to provide evidence that the premium should actually be based on a lower amount.

Barbara Holland, CPM, president of H&L Realty and Management Company, Las Vegas, states that watching rate classifications carefully is key to cutting costs. In many states, property managers are put in the same class as maintenance personnel, usually an expensive category. In others, you have more categories from which to choose.

The cost for workers' comp in Nevada for clerical workers, for example, is currently $0.57 per $100 of payroll. The rate for maintenance personnel is closer to $10 per $100 of payroll. Obviously, a mistake could cost a great deal of money.

In order to get the appropriate classifications, states Holland, you need to tell your insurance carrier specifically what your employees do. "If you have a couple working on-site in an apartment community," she says, "the carrier may want to charge you the highest figure, as if both are doing maintenance. But if one of them is strictly administrative, you should have two different rates."

Borger cautions against assuming that insurance companies have the right classifications for employees. "If the representative of your carrier resists changing a classification, back up your argument with accurate job descriptions and work schedules," he advises.

Find out what other kinds of employees are in the classification group your insurance carrier assigns. "Many times," states Holland, "you'll find out your employees are not in the right group. Maybe they put them in with welders or something." If the employee does not have a license to do work that is assessed at a high rate (e.g., licensed electrical or HVAC work), try not to allow the employee to be in the same classification as the workers who have that license.

Also find out the experience rating for each classification. You might be able to determine why a particular class is assessed a higher rate and then change job duties to get a different classification. If the rate is higher because employees have to leave the office to make bank deposits, for example, find out if assigning only one person in the office to that duty will lower your rates for the other employees.

Holland also recommends paying separately for separate functions. If an employee spends 80 percent of his or her time doing administrative tasks and only 20 percent cleaning or shampooing unit carpets, keep strict records of the time spent performing each function and pay for each separately. Make your insurance carrier aware of the division of the tasks, and support it with your payroll records.

Borger remarks that most insurance carriers will resist more than one classification per employee, but detailed, accurate recordkeeping can make this possible. "You have to maintain a pretty detailed set of supporting documents, and then you have to sell it to them," he says.

While you may have to struggle to get classifications you want, the effort often pays. Janoski describes her appeal of a rating classification decision made following an audit by her company's insurance carrier that reclassified property managers. The carrier claimed that a large number of the firm's employees should be put under a single expensive classification that included both on-site and off-site property managers. But Janoski says most of her firm's managers are white-collar professionals who don't perform on-site maintenance work.

The reclassification would have triggered a large increase in the company's insurance costs. Janoski realized that most of the employees currently in that class were operations personnel who usually did on-site repair work. "I had a fit," she says, "because the cost was going to be astronomical for our property management division, which was fairly small at that time."

Because her insurance carrier would not reconsider the expensive reclassification, Janoski sought recourse with the state ratings bureau. The appeal to the bureau took from 1989 to 1991, but the results were worth it.

The bureau finally decided on subcategories for the previously catch-all "building operations" class. This meant that a different category would apply to off-site managers who exercised discretion through on-site personnel, and another would apply to managers who oversaw all operations, including maintenance.

The classification change was retroactive, so the company did not have to pay the differential for the increase it had refused to pay two years earlier.

Janoski also recommends checking the amount of workers' comp you pay for owners, officers, and directors of the company. Each state sets a maximum payroll amount that is subject to workers' comp for company officers. Note your officers on your workers' comp payroll list so that you do not pay any additional premiums on an amount over the maximum.


Workers' compensation, like health insurance, is snowballing into one of the biggest problems business people have faced in recent times. A good safety program and a low claims history are essential, not just to keep your premiums under control, but sometimes in order to obtain coverage at all.

To help control your premiums, you should follow up on every injury to prevent a recurrence and to get your loss reserve account closed as quickly as possible. In addition, check your loss statements carefully for errors and to be sure that classifications fit the jobs assigned to them.

Finally, fight the system if you feel your classification ratings are unfair. You might win a big payoff in lower rates that help keep your business in the black.

Dorothy Walton is a freelance writer based in Chicago. She was previously a developmental book editor for the Institute of Real Estate Management. She has also designed and taught courses in English as a Foreign Language in Madrid.
COPYRIGHT 1993 National Association of Realtors
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Title Annotation:workers' compensation
Author:Walton, Dorothy
Publication:Journal of Property Management
Date:Mar 1, 1993
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