Understanding Workers’ Comp Combinability

Consolidating separate legal entities’ loss experience to develop a common experience modification factor has the potential to cause confusion for the client and sometimes the agent. Clients may view such mixing of loss experience due simply to common majority ownership/interest as less than reasonable, especially if the commonly-owned entities substantially differ with regard to the relative hazard presented (i.e. the owners of a heavy equipment contracting company purchase a marina).

Combinability rules do not merely marry the experience of entities currently in operation and related via common majority ownership, these rules also assure that owners do not avoid historically poor loss experience simply by closing down one entity and reopening under another corporate name. Most agents would agree that such a stunt is unethical at best and may actually be considered fraud. Changing the operation’s name does not change the owner’s operational methods.

A Case for Combinability Rules

Owners theoretically run every operation (past and present) in essentially the same manner and with the same attitudes. An employer who is concerned with safety and strives to provide the best equipment and training will likely always act the same. Likewise, employers looking for the easiest and cheapest way out will likely continue down the same path in the future.

Combinability rules are, to some extent, based around two theories:

• Employers that appear to operate in the employee’s best interest should have all their entities (current and future) rewarded due to such attitude. Commonly-owned operations are likely managed in the same manner; the same care and concern is expected to be showed for all employees (regardless of the relative hazard of the operation).
• If an employer allows unsafe operations to continue unchecked in one entity, it is reasonable to postulate that such an attitude carries over to all commonly-owned entities or any new entity recently formed. Employers not operating (or not appearing to operate) in the best interest of their employees should be subject to and held responsible for their past (or current) experience.

Although past actions do not guarantee future actions, they stand as a very good indicator. To not reward or punish allows employers/owners to act with impunity, knowing that as long as no law is broken, all that is necessary to escape a poor loss history is the killing off of an old and birthing a new corporation.

Without the ability to combine loss histories, workers’ compensation carriers could potentially be victims of inadequate premiums. In like manner, average and above average risks would be victimized by higher premiums than necessary. The “average loss cost” balance would be tilted causing all employers to experience an increase in their rates rather than just the ones that “earned” the increase (due to poor loss histories). Further, rate predictability and possibly rate adequacy may be compromised without combinability rules.

Granted, there are exceptions to every rule such as is demonstrated by the employer that had a hiccup in its loss history not indicative of its past. Not every injury can be avoided, even with top-notch safety and training, bad “things” sometimes just happen. This is why there is underwriting discretion and the availability of rate credits and debits. A historically above-average employer with a bad year or two in their experience modification calculation can have the debit mod negated by a rate credit.

Conversely, an average or below average employer that has been fortunate can be debited to account for the increased hazard presented to the insured. Employers that do not practice or refuse to comply with recommended safety practices, as reported by the loss control department, can see their rates increased by a debit factor in anticipation of the increased potential for employee injury.

Upcoming Training

This Thursday (April 7), the Academy of Insurance is conducting a training session on combinability guidelines. This session focuses on:

• Combinability guidelines;
• What creates “Common Majority Interest;”
• The two types of employers; and
• Provides a detailed example.

Join us Thursday for this session.

Topics Workers' Compensation Training Development