How your workers’ compensation insurer manages your claims can have a big impact on your premiums. In a recent case, an employer whose premiums skyrocketed and dividends dropped for several years sued its insurer for overestimating the amounts needed to be held in reserve to pay claims—and won. This case underscores that keeping an eye on your insurer’s claims practices can help keep your workers’ comp costs down.
Employer Sees Premiums Jump
Lance Camper Manufacturing Corp., a leading maker of campers that fit on pickup trucks, purchased a series of one-year workers’ comp policies covering its 320 workers from Republic Indemnity Company of America. The agent who sold the policy told the Lancaster-based company that Republic had a history of good dividends but that they weren’t guaranteed.
Before joining Republic, Lance Camper had paid about $30,000 in workers’ comp premiums annually. But over three years with Republic, Lance Camper paid Republic more than $1.2 million in premiums, and the insurer paid out only minimal dividends. This occurred even though Lance Camper employees filed fewer claims, the severity of injuries decreased and the company’s experience modification rating, or x-mod, dropped consistently. The x-mod compares an insured’s claims history with others in the same business. Typically, a decline in an employer’s x-mod results in lower premiums.
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Lawsuit Charges Insurer Overestimated Reserves
Lance Camper ultimately became self-insured and sued Republic for breach of contract and bad faith. The company charged that Republic grossly overestimated claim reserves—the amount of money the insurer sets aside from premiums to cover the expected costs of a claim—by approximately 60%, compared to the industry standard of about 10%. According to Lance Camper, the insurer based reserves on a worst-case-scenario analysis rather than on the reasonable expectation of a claim’s value. Additionally, Republic reportedly charged a $2,500 administrative fee on all claims without disclosing the fee to Lance Camper beforehand.
Lance Camper also accused Republic of consistently increasing reserves just before dividend calculation dates, which reduced the dividends due to Lance Camper. For example, on one claim, Republic increased its reserve from about $33,000 to $104,000 a few days after the scheduled dividend calculation but before the actual calculation was made. This single reserve increase wiped out the entire $75,000 dividend Lance Camper was to receive. In other cases, reserves in claims already settled—so the actual claim amount was known—often lingered until after the dividend calculation date. And Republic allegedly mismanaged claims and refused to permit Lance Camper to inspect its claims files.
Jury Awards Millions To Insured
Republic denied the charges, claiming that its reserves were within the bounds of permissible decisions other insurers could have made. But a jury sided with Lance Camper and ordered Republic to pay more than $1.7 million in damages plus a whopping $4.6 million in punitive damages.
Court Upholds Verdict
A California Court of Appeal has upheld the verdict, finding substantial evidence that Republic set reserves beyond the range generally acceptable in the industry. The court ruled that Republic’s alleged pattern of claims mismanagement, overreserving and not paying proper dividends amounted to a breach of the terms of the workers’ comp policy and bad faith.
Watch Reserves
You’re entitled to a written report detailing the amount reserved on any of your claims, although most insurers don’t provide this information unless you ask. Here’s how to obtain and analyze the report:
- Put your request in writing. Ask for a breakdown of reserves on your claims as required by California Labor Code section 3761(c). The insurer should itemize the estimated vocational rehab costs, medical and legal costs and other anticipated expenses of each claim.
- Make your request soon after the policy year ends. Your insurer must report reserves to the Workers’ Compensation Insurance Ratings Bureau, usually 180 days after your policy year ends. The information is used to adjust your premiums for the following policy year. But once reported, reserves usually can’t be challenged for a year, so your premiums could go up before an error can be corrected. Be sure to examine your reserves data before it’s reported to the Ratings Bureau so you have time to complain if the reserves seem too high.
- Ask the insurer to justify reserves. If reserves seem excessive, request that they be lowered. Also, ask the insurer if there are ways to help reduce your claims costs.