Changes in the Works for WC Experience Rating Plan; Rescinding a Policy for Unintentional Error in Application; and Reports from the Real World

There’s a big change coming in how workers’ compensation experience modifications are calculated. NCCI (National Council on Compensation Insurance) actuaries have recommended increasing the $5,000 primary/excess split point to $15,000. For example, at present a $50,000 claim would be result in a $5,000 primary loss and a $45,000 excess loss. Under the proposed change, $15,000 would be primary and $35,000 would be excess. An insured’s actual primary losses are given much more weight when an experience modification is calculated. The basic experience rating formula is: Adjusted Actual Losses divided by Expected Losses. I’ve emphasized “adjusted” because not all of an insured’s actual losses are used to calculate its experience modification. Primary losses are used in full, but excess losses are not. Only a portion of actual excess losses is used. The portion increases with premium size; for smallest insureds it can be less than 10 percent. The balance is derived from expected excess losses.

The change will be revenue neutral overall, that is it will neither increase nor decrease the premiums that insurers collect in total. But remember, that’s overall; individual insureds will see changes in their ratings. As a rule of thumb, insureds with no losses over $5,000 will see an improvement in their modifications while insureds with many losses over $5,000 will see their ratings deteriorate. NCCI hasn’t yet published the factors that will be used in the new plan, which is expected to be implemented in 2013.

New York uses its own experience rating plan, but it’s quite similar to the NCCI plan. The New York Compensation Insurance Rating Board intends to make a similar change in the New York plan. As soon as they do, I’ll work up illustrations of how the new plan will impact specific insureds and show you how you can recalculate an existing modification on the revised basis. Showing this to your insureds will prepare them for possible WC cost increases and may motivate them to pursue loss control methods that will make everyone a winner.

Primary losses (whether capped at $5,000 or $15,000) are indicators of claim frequency; excess losses track severity. The revision will increase the importance of frequency. It is much easier for insureds to cure frequency problems. Because experience modification reflects reductions in frequency more than reductions in severity, loss control can enable insureds to dramatically improve their experience modifications.

Dogs Again and Rescinding a Policy

In the May 30th issue of the Insurance Advocate, I wrote about the problem of insuring dogs under a homeowners policy. This week I came across a homeowners dog-bite claim1 in connection with an argument over rescinding coverage. I’m always happy to see that topics I write about have a real-life existence, but it’s the coverage rescission that’s important to us in this case.

In May, 2000 George Perkins purchased a homeowners policy for his new home. The policy application asked whether Perkins had “any animals or exotic pets” and, although he owned a dog, the question was answered “no.” Two years later the dog, a German Shepherd/Pit Bull mix, bit and severely injured a guest. Upon learning that Perkins had a dog when he took out the policy, the insurance company moved to rescind coverage as of inception. (Rescission differs from cancellation. If a policy is cancelled, claims that attach prior to the cancellation of the policy can still be covered. When a policy rescinded, it is as if the policy never existed; there is no coverage for any claims no matter when the occurred.)

Perkins testified that he neither read nor personally completed the application— presumably his agent or broker did that—he did, however sign the application. He stated that if he had been asked if he had any animal, he would have said that he had a dog. The appellate court ruled that: …his assertion that he did not read the application is irrelevant …, as the signer of a contract is conclusively bound by it regardless of whether he or she actually read it.”

In New York, the key issue is whether or not the misrepresentation is material. If it’s material, then the insurer can rescind the policy even if the misrepresentation was unintentional2. A representation is material if the insurer would not have declined to issue the policy or would have charged a higher premium or reduced coverage. However, the insurer can’t rely on post-loss underwriting standards. Its manuals and procedures in force prior to the issuance of the policy have to support its position.

A representation is based on past or present fact. If George did not own the dog when he completed the application, but purchased it six-months later, the insurance company would not be successful in its attempt to rescind coverage. Furthermore, the question must be unambiguous. The insured’s attorney tried that in this case, claiming that the words “or exotic pet” made the question ambiguous. The court found no ambiguity saying that “while a dog is not an exotic pet, it clearly is an animal.”

Reports from the Real World

Volunteers Steal from Little Leagues Again It’s good news/bad news. The good news is that Rockland County isn’t the only place where volunteer treasurers filch funds from local Little Leagues. (I wrote about the two thefts from Rockland County Little Leagues in the May 30th issue of the Insurance Advocate.) The bad news is that it looks like the problem is nationwide. In Pennsylvania, an accountant was sentenced to 11 1/2 to 23 months in prison for embezzling money to finance a lifestyle that included vacations, private schools and strip club visits. Prosecutors said he stole $57,000 from the Lower Gwynedd, PA Little League, as part of a larger scheme involving clients totaling $1.75 million. And in Honolulu, the Makakilo Kapolei Honokai Hale league made it into the news when a former treasurer pleaded guilty to forgery and theft. He stole registration fees and fundraising income totaling $11,500 between December 2007 and April 2008.3 We should be advising all volunteer organizations that we’re involved with that they’re not immune from this disease— we’ve already told all our clients, right?

Designated Location Endorsement Removed— Physician Heal Thyself?

I wrote about the designated location endorsement that limits coverage to the premises specified in the policy in the November 19, 2010 edition of the Insurance Advocate. In another real-word example, I was just able to get this limiting endorsement removed from one of our client’s policies. You may be able to also, give it a try. (Full disclosure: I was unsuccessful for another client—we’ll have another opportunity at renewal.)