November 24, 2008

Ohio: Severed Joint and Several?

There are a number of ways to purchase workers comp insurance: most companies secure stand-alone policies. Under experience rating, if the company has losses, their costs go up; if they have lower than average losses, they benefit from reduced premiums.

Some companies join with others to form a self-insurance group (SIG), where individual companies are no longer in charge of their own destiny. Group performance determines future costs. Needless to add, it's important to limit group membership to companies fully committed to good loss controls and to proper management of injured employees. The shared liability for losses is known in the insurance world as "joint and several liability." There is some risk involved: one company might be loss free, but the losses of other companies in the group could still drive up the cost of insurance for all.

Except in Ohio. Ohio has an unique set of rules for groups, which brings us to the saga of Corky & Lenny's, a deli operating for half a century in Cleveland. Until recently, Corky & Lenny's participated in a workers comp group. Unfortunately, they had a few claims. In most group situations, their losses would have been averaged against the performance of the group as a whole, thereby ameliorating the impact on the deli's comp premiums.

Instead, the group threw Corky and Lenny's out of the group, forcing them to secure individual coverage. Naturally, with their recent losses factored into their premium, Corky and Lenny's were suddently faced with a dramatic increase in costs. So they did what one of their customers would do after slipping on a stray piece of pastrami: they sued.

Re-establishing Joint & Several Liability
Common Pleas Judge Richard McMonagle found merit in the lawsuit and has issued a restraining order against the Ohio Bureau of Workers Comp (BWC). Here is the problem with the BWC approach to group insurance: the bureau assesses a group's risk at the beginning of a policy year and sets premiums based on the claims history. Members of the group are offered deep discounts. At the end of the year, group managers would toss out any members with substantial losses during the year. These unfortunate companies would take their losses with them. Instead of "joint and several" liability, the high loss companies, like Corky and Lenny's, were suddenly on their own, facing doubled premiums. Companies remaining in the group, freed from the losses of expelled members, experienced premium reductions of 20 percent or more.

As you can see, the Ohio rules really defeat the purpose of group insurance. Judge McMonagle has ruled that state law requires that the rating plan be retrospective, taking into account the actual performance of each and every group member. The BWC agrees, but they are hoping for some time to work out the details. In the interim, they have agreed to cap increases for companies tossed out of the group at 100 percent - which does not sound like a bargain, but some were facing increases substantially higher than that.

Judge McMonagle has moved this unfair situation in the right direction. He deserves a nice pastrami sandwich on rye bread with a little mustard. Under ethics rules, of course, he'll have to pay for it himself.

| 3 Comments

3 Comments

Jon:

It is the same as a group health policy tossing out the members that get sick. It violates the whole concept of insurance allowing a group to purge itself of the worst members. All the years that the deli had no losses and contributed to the lower rate are lost.

The State of Ohio should rate them coming out at the joint and severable rate they had as part of the group. Anything else benefits only the group at the detriment to the expelled member who may have been exemplary for years and contributed to every members lower rates.

Charles

I commend you on your posting. Unfortunately, having read the decision, your description of the judge's decision is slightly misleading. The statute authorizing the BWC to establish the group rating program specifically states that it must be "retrospective." Amazingly, the BWC argued that this word was a typo (yes, that is in the judge's decision), and that the legislature meant to say "prospective." In granting the aggrieved employers motion for a temporary restraining order, the judge simply enforced the law as written. It is clear that had the word "prospective" appeared in the statutory language, the judge would very likely have held differently. While the judge deserves credit for upholding the law as written, there was no judicial activism here in trying to correct any inequities in the current system.

This is something of a scam which was first brought to light a year or so ago. These pools are designed to throw out the participants that have loss experience, placing that experience on the BWC's book of accounts and immunizing the pool. The people who profit most are the pool operators who can deeply discount from BWC rates and still keep a big chunk for themselves.

Some one told me the other day: there are only two real players in workers com: the employee and the employer. Everyone else is in it for their cut.

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This page contains a single entry by Jon Coppelman published on November 24, 2008 10:36 AM.

Cavalcade of Risk, health care reform, bankrupt insurers, guns at work and more was the previous entry in this blog.

The human cost of bringing poultry to the table is the next entry in this blog.

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