"Navigating California's Workers' Compensation System"
By David W. Pearce, Marsh Advantage America

As with California's electricity industry, the state has deregulated its workers' compensation system and this new competitive environment may prove problematic for emerging tech companies – unless they know how to navigate the system.

California approached deregulation of the workers' compensation system because its rates increased by double digits for several consecutive years. Other states had gone to "open rating" systems, in which insurers could establish their own rates, provided they retained adequate pricing for paying claims, expenses, and maintaining adequate surplus and reserves for developing and future claims.

In 1995, California adopted the open rating system as well and saw rates plunge. Unfortunately, as with the problems California faces with its nascent unregulated electric utility industry, the open rating system has a few glitches. The two largest private carriers, and several smaller carriers have been placed in liquidation or under state "supervision." Because of this, the state's insurance guaranty association (CIGA,) had depleted its surplus in April of this year and is projected to be in the red by more than a billion dollars within five years. Many of the remaining carriers also face insolvency.

Although rates dropped initially, rates are increasing on average by nearly 25 percent. Given this situation, how can an emerging growth company successfully navigate this system?

First, choose a broker and a carrier who understands the technology industry. I have seen insurance "malpractice" suits over the past two years in which employees were misclassified. Because of this error, employers either paid higher rates than necessary or did not pay enough premiums, and then owed thousands of dollars after a final audit.

Consider a trade association program that has secured a carrier to write coverage for association members at a lower cost. Membership in such an association can lower a company's risk profile to the insurer.

Second, buy only from "Admitted" companies rated "A" or better by A.M. Best Co. Although you may pay a little more for this – perhaps as much as 20 percent more – you will be protected from a carrier that is on the brink of insolvency. If you were to file claims with an insolvent carrier, and those claims went into litigation, the plaintiffs' attorneys would be able to negotiate significantly higher settlements for their clients. These higher settlements would count against your experience, causing you to pay more much for workers' comp insurance for several years.

Third, leverage your workers' compensation insurance against your commercial package policy. Some carriers are willing to write a competitively priced workers' comp policy if they also write the property/liability package.

Finally, invest in a real and manageable safety program. Even if your company only has 10 employees writing software all day, there is an exposure to soft tissue and repetitive motion injuries. Ergonomically correct chairs, keyboards, mice and workstations will keep your frequency and severity of claims down. Good claims experience still provides you with the best lever.

David W. Pearce manages business development for Marsh Advantage America. A service of Seabury & Smith Inc., March Advantage America manages and administers insurance programs for growing businesses, associations and affinity groups, educational institutions, nonprofits and individuals. Mr. Pearce can be reached at 714.245.7825 or david.w.pearce@seabury.com
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