I want to start this article by making sure readers understand that I am not an insurance consultant, lawyer or any other type of expert on the insurance industry. My comments and information are based on 30 years of consulting and interaction with contractors. You must contact your local program agent and advisors if you have questions about workers' compensation issues, as each and every state has different requirements. This article is not meant to provide advice but rather to provide insight and urge you to obtain a better understanding of the situation in your area. Always consult your local professionals if you have questions about your company's obligations.

For roofers, workers' compensation rates are particularly high and a really touchy subject. In some areas, it is difficult for roofers to obtain coverage, and, since rates are so high, many contractors try to cheat the system. In today's litigious work environment, such avoidance is extremely foolish.

Understanding the Insurance Bet

Workers' compensation is a form of insurance. Insurance is a statistics-oriented proposition. When buying insurance, understand that the higher the premium, the higher the likelihood you may need to use it. If you have a poor driving record, insurance premiums are high because you are more likely to have an accident. If you are buying health insurance and are a smoker, you pay more because insurance companies run the numbers and they bet their money on the odds of you having a claim. Life insurance companies know that smokers don't live as long as nonsmokers, so they charge smokers more to cover this risk. So, as painful as the workers' compensation premiums might be for contractors, they are based on realistic statistics.

Many of your employees simply do not understand what workers' compensation is and how it impacts the company and their own wages. Some mistakenly think it is a government program and if they do not have a claim, they are not taking advantage of money that has been paid in. Make sure your employees understand that workers' compensation is claim based.

A good way to do this is to explain what the Experienced Modifier Rate (EMR) is and how it works. First, compare EMR to a person's driving record. Your employees understand the more tickets and accidents they have, the higher their insurance rate is. Next, show them some simple math and break down the cost per hour. Let's look at a hypothetical example; you can make up your own example according to your own situation. Always convert your workers' compensation costs to hourly wages, as employees can relate to this concept more easily.

Suppose workers make $20 an hour and your workers' compensation rate is 50 percent, which means that for every $20 an hour paid to the employee, you pay $10 an hour in workers' compensation fees. This $10 an hour is based on an EMR rating of 1 (or average). If accidents drive up your rate to 1.5, then the $10 an hour will increase to $15, or a $5 an hour increase. If the company is safe, and the rate is 0.5, then the rate drops 50 percent, to $5 an hour, resulting in a savings of $5 an hour. Employees are not dumb. Explain to them that as you pay more money to the insurance company, less money is available for wages. Also, carry out these numbers per year at 40 hours a week. Five dollars an hour is $200 a week on a 40-hour week. This equates to $10,400 a year, and, if you have 10 employees, this would run $104,000 per year.

Befriending the Auditor

Workers' compensation rates are audited by an industry person who checks your books and makes sure you do what you say you do, etc. For a small contractor, the auditor may simply send a form to be filled out. For a larger, multi-branch contractor, the process may take several days.

Remember that the auditor is an employee of the insurance company doing a job. Auditors are human beings, not computers. Make their job more difficult, and they may make things tougher on you. Try to be nice and cooperative. It may not help, but it won't hurt. Forcing the auditor to cancel and reset appointments is not going to help the process.

Heading Off Claims

Obviously, the safer your company is, the lower the premiums will be, but it is more complicated than that. Workers' compensation is a game where a good offense can be a bad defense. Understand and have safety systems in place. But don't stop there - know the rules for reporting claims and have them clearly laid out. Sloppy procedures can create a situation where previous injuries or injuries sustained at home end up being part of your costs. Know the rules and build into the system methods for avoiding false claims.

Know the classifications and rating options. State programs and classifications vary, but you should know your options. Years ago, one of our large concrete pumping customers convinced the workers' comp carrier to classify time when pumps were driving from job to job as trucking time. All of the time was documented, and his contention was that when the pump was driving, it was really a truck, not a piece of construction equipment. One carrier agreed to this and saved him $200,000 a year. Some states do not require workers' comp on the premium portion of overtime. In other words, if a worker is normally paid $10 an hour but he makes $15 while working overtime, the $5 an hour premium pay is not subject to workers' comp. If this is the case, remember it is your responsibility - not your carrier's responsibility - to document this information.

Subcontractor Rules

Rules for subcontractors and coverage also vary by program. Getting cute with subs and workers' compensation can be a disaster waiting to happen. You can be audited and suddenly have to pay huge premiums you were not prepared to pay. Worse yet, you may have a sub injured and suddenly claim to be an employee and sue you for coverage you don't have. Know the rules, document your procedures and make sure you are covered.

In summary, I wish I had a magic wand to make workers' compensation rates drop. I don't. Just like other forms of insurance, the costs are ever increasing, and, as difficult and discouraging as it might be, you must be prepared to manage these costs. Again, I am not an expert in this area. Call a local expert and learn the rules. Each and every state is different.