Workers comp rates creeping up again

Rates have reached a nine-year low in California, but signs point to increases later this year.

Business owners have enjoyed a steady decline in workers’ compensation insurance rates that are now the lowest in nine years. But that may be about to change.

While insurers continue to cut premiums in a competitive bid for market share, costs are creeping up again, experts say. There are similarities with the California market in 2000 that led to an unprecedented rise in average rates and legislative reforms in 2004.

Don Way
CEO

When fantasy meets reality, filmmakers turn to insurance

The sudden death of Heath Ledger at age 28 has focused attention on a little-discussed corner of the insurance industry—coverage for the incapacity of an actor or other key member of a film crew in the middle of producing a movie.

“The whole industry is watching the outcome of this situation,” said Brian Kingman, director of strategic account management and business development for Aon/Albert G. Ruben Insurance Services, a leading entertainment insurance underwriter.

Ledger, who died January 22 in his New York City apartment, was in the midst of shooting a $30 million film, “The Imaginarium of Doctor Parnassus,” at the time of his death.

“What is at risk on a movie is the cost incurred or committed to the completion of principal photography,” Kingman said. Producers have very limited options if a featured actor cannot complete his or her role. “Firstly, the producers can opt to abandon. They would opt to abandon because they don’t see a creative or financial answer to the issue of, “How do we complete the movie?”

One option would be to recast the role and reshoot scenes already committed, or cut down the role and use a double to complete filming. Kingman said that occurred when actor Brandon Lee was killed in an accident on the set of “The Crow” in 1993. “My understanding is that the entire shoot was scheduled at approximately 40 days, and I believe that they completed almost 20 days of filming,” he said.

Producers typically “insure just about every feasible cost item in the budget—including insurance premiums—and the cost of the story and the scenario,” he said, so that, “they’re virtually whole if they want to opt to pull the plug and abandon the project.”

In the case of “Imaginarium,” Kingman estimated that approximately $15 million, half of the film’s production budget, was at risk.

Kingman said the film’s producers also had bought an “essential element” endorsement covering Ledger.

“When you buy an essential element endorsement, you’re buying the right to pull the plug in the event that an actor cannot complete his or her respective duties as scripted and as per specifications,” he said.

The cover is also applicable to sickness and injury, Kingman said.

“In the case of disability, there’s a waiting period, 30 days or 60 days or 90 days,” he said. “When there’s a fatality, obviously that waiting period does not apply.”

Personality tests in hiring employees

For the past 15 years personality tests have been thought to be valid predictors of job performance. Many employers use them when selecting workers or making promotion decisions.

But a group of industrial-organizational psychologists say companies might want to reconsider the use of personality measures in making important hiring decisions and key appointments.

Why? Because personality tests often show very small relationships with measures of job performance, says Frederick P. Morgeson, a Valade Research Scholar and Professor of Management at Michigan State University.

Morgeson and colleagues John R. Hollenbeck and Neal W Schmitt of Michigan State University, Michael A. Campion of Purdue University, Robert L. Dipboye of the University of Central Florida and Kevin Murphy of Pennsylvania State University, all former editors of research journals where research on personality testing is reported, say these kinds of tests, in fact, suffer from several important limitations.

Their views, published in a recent issue of Personnel Psychology, are likely to cause some controversy within the field. “That’s understandable,” says Morgeson, “because it challenges the common sense notion that personality is a strong predictor of job performance.”

One criticism of personality tests, especially the self-report kind, is the potential for faked answers, which according to Morgeson, is understandable because job candidates want to present themselves in the best way possible. Despite substantial research devoted to techniques that will mitigate the impact of faked answers, there have been no clear-cut methods developed to solve the problem, notes Campion. Rather, “we need to engage applicants in a more open process where we disclose what we are looking for and gain the trust of test takers rather than playing paper-and-pencils games with them,” Dipboye says.

However, it is not the fakers that concern Murphy. “The problem with personality tests is that as predictors of job performance, their validity is disappointingly low.” Hollenbeck agrees. Given the low validity of personality tests, it is unlikely that faking would distort the results,” he said. Schmitt is even more blunt. “Why are we looking at the personality as a valid predictor of job performance when the validities haven’t changed in the past 20 years and are still close to zero?”

Dipboye says research should be directed at improving self-report personality tests, rather than scraping them completely. One strategy would be to allow people to elaborate on their responses to personality items instead of one-word ambiguous responses. Also, he suggests developing personality tests that are clearly job-related and avoid ambiguous and embarrassing questions (“Have you ever stolen anything?”). “There’s a lot of good science being done that offer better ways to predict job performance, including work samples, cognitive ability tests and structured interviews,” said Morgeson. He said research by industrial-organizational psychologists could greatly benefit human resource managers. “Science is designed to uncover truth and help improve the odds of making better personnel decisions.”

Arranging business income coverage

Every five minutes in the United States, a business-related structure catches fire, according to U.S. Fire Administration and National Fire Protection Association (NFPA) statistics. These 115,000 to 130,000 fires result in annual direct property damage between $2.3 billion and $2.4 billion.

Depending on the study, the relation of the business income loss to the direct property loss can range from $0.65 of indirect loss per $1.00 of direct property damage for a manufacturing operation (per 2005 NFPA study, The Total Cost of Fire in the United States), to $2.00 of indirect loss for every $1.00 of direct property damage (per A First Pass at Computing the Cost of Fire Safety in a Modern Society, William Meade, 1991). Further, a 1989 study conducted by several highly protected risk (HPR) insurers found that two percent of fires to commercial structures resulted in business income losses four times greater than the direct property loss.

Some businesses never reopen after a major fire or other catastrophic loss.

Business closures following a catastrophic loss rarely result from the lack of adequate property insurance protecting against the financial consequences of the direct property loss. Most closures arise from the crippling loss of income (and profit) not properly protected by insurance. Without a source of income, no business can viably operate very long. The realistic recognition of and necessity to protect this overriding need for, at minimum, adequate income to pay ongoing expenses is why complete understanding of business income exposures and insurance is so important.

The Business Income Worksheet

In the simplest terms, the business income (BI) worksheet is nothing more than the time element equivalent of a property schedule. The BI worksheet lists the location(s) to be insured, but rather than listing the real and personal property values at each location, the BI worksheet develops the profit (or loss), the continuing operating expenses, and often any extra expenses necessary to keep the business running.

Understanding Business Income Coinsurance

Traditional coinsurance, as used in direct property losses, is a function of the value of the property being insured. Coinsurance for business income, however, is not only a function of the expected annual profit (or loss) plus continuing normal operating expenses (the definition of “business income”), but it is also a function of time—typically a 12-month period of time to be specific.

The estimated time to restore the business is used to determine both the limit of insurance and the maximum coinsurance percentage to use.

How long will it take to rebuild?

Choosing the time period necessary to rebuild after a major loss is a guessing game at best, but it is the necessary second step in developing the amount of insurance that needs to be purchased.

Time for the Adjustment Process

As disheartening as it may be, the adjustment process can potentially devour 60 to 90 days (and sometimes more) after the loss occurs before many (or any) of the other steps in the rebuilding process can move forward.

Industries and operations that are heavily regulated need to factor in the possibility of delays resulting from investigations.

Local governments also play a role when a building is damaged, as most communities have building codes and ordinances that dictate the construction or reconstruction of a building.

Replacement Machinery and Equipment

A new manufacturing facility with no production machinery is as useless as a severely damaged and unusable building. Thus, owners and production managers must take a realistic look at the amount of time it will take to order and receive critical production machinery.

Local Laws and Ordinances

State and federal-level government involvement in a loss can negatively affect the rebuilding process. However, the involvement of local governments and commissions (e.g., villages, towns, cities, counties) can be far more detrimental to the rebuilding process than state or federal authorities. Not only can local jurisdictions’ loss investigations slow the recovery process, it is the local government(s) and various councils that enforce the building code requirements. Thus, the potential for such involvement requires specific consideration when choosing limits and making the business income coinsurance decision.

These governmental entities enact building codes regulating everything from the maximum number of stories, to the construction materials required, to the fire protection requirements, as well as the regulation of construction in special flood hazard areas or adjacent floodways of property in such an area. One town in North Carolina even regulates the colors commercial structures are allowed to be painted (as they are very conservative regarding architectural individuality).

Governmental jurisdictions don’t only enact and enforce their own requirements; in addition to the local building codes, they also enact, by reference, and enforce federal requirements, including the National Electric Code, the Americans with Disabilities Act (ADA) codes, and the National Fire Protection Association (NFPA) 101—Life Safety Code.

One important concept regarding the business income policy in relation to these laws and ordinances that must be fully understood is that of “period of restoration.” The unendorsed business income policy only pays for the loss of business income that occurs during the period of restoration necessary to repair or rebuild the building to the condition it was in just prior to the loss, with no payment for any additional time needed to make upgrades required by any code.

Specific exclusions in both the direct property damage coverage form and the business income coverage form apply to any increase in loss resulting from the application of any law or ordinance that increases the cost to repair the building or increases the “period of restoration.”

There is, however, a seemingly simple method for filling this gap in coverage within both the property policy and the business income coverage: the ordinance or law endorsements.

Conclusion

Business income coverage is not nearly as daunting and ominous as many insurance practitioners imagine or make it out to be, once the basics are understood. However, without proper application of this coverage, many businesses will cease to exist following a catastrophic loss.