Experience Rating in a Pandemic – New Proposal would Exclude COVID-19 Claims from Rate Calculation
To date, the State of Michigan has over 66,000 confirmed cases of COVID-19, with roughly 6,000 deaths. While the curve appears to be flattening, the number of individuals who contract COVID-19 will undoubtedly continue to increase until effective treatments or a vaccination can be developed. As a result of this unprecedented pandemic, certain industries are likely to see an increase in the number of workers’ compensation claims filed in the state and around the country.
Employers of “first response employees” will be hit hardest by an increase in workers’ compensation claims filed as a result of COVID-19. This is even more likely in Michigan in light of the Emergency Rules promulgated by the Director of the Michigan Department of Labor and Economic Opportunity which provide “first response employees” who are diagnosed with COVID-19 a rebuttal presumption of personal injury. We wrote about those Rules back on April 2, 2020, along with the recent bills proposed by the Michigan legislators seeking to convert those Rules into law on May 12, 2020.
Many employers may be concerned that an increase in the number of workers’ compensation claims will affect the amount they pay in workers’ compensation insurance premiums. The insurance companies calculate an employer’s premium by using an “experience rating” system. An experience rating is the amount of incurred loss on claims that an employer has experienced compared to the amount of incurred loss that would be expected for such an employer with the same payroll in the same class codes. Incurred loss is comprised of the amount paid on the claim, plus the amount in “reserves.” The experience rating, or modifier, is generally calculated using the insured’s loss history during the three years prior to the most recent expired policy period. An employer with greater actual losses than expected will have a higher experience modifier. This will result in higher premiums.
The rationale behind the experience rating system is that an employer which has higher losses than “expected” is inherently riskier. The hope is that an employer will seek to avoid a high experience rating by developing a safer work environment in order to avoid claims altogether. Of course, there is not much an employer can do in the face of a major disaster such as an earthquake, act of terrorism, or a worldwide pandemic. An increase in experience rating based on such outliers does not serve the underlying goal to promote a safer work environment.
The National Council on Compensation Insurance (“NCCI”) is a national organization that, among other things, provides objective insurance rate and loss cost recommendations. Currently, thirty-three states follow the NCCI guidelines in order to set workers’ compensation premium ratings. NCCI is proposing that all claims attributed to the COVID-19 pandemic be excluded from experience rating calculations. NCCI intends to file a rule change for the exclusion of such claims. In support of its decision, NCCI cites the fact that pandemics, such as COVID-19, are catastrophic, but rare. The presence or absence of a pandemic in a recent historical period is not believed to be a reliably good predicator of future loss. In this respect pandemics are not dissimilar to other catastrophic perils in the workers compensation line, such as terrorism and earthquakes.
Michigan is not an NCCI state. Instead, the Compensation Advisory Organization of Michigan (“CAOM”) is tasked with setting workers’ compensation rates for the Michigan Workers’ Compensation Placement Facility (“the Facility”). The Facility is also the source of workers’ compensation and employers’ liability coverage for Michigan employers who are unable to secure coverage through the voluntary market. CAOM also serves as an advisory organization with regard to the voluntary workers’ compensation insurance market. While insurance carriers are free to assess how to address the COVID-19 pandemic, it is likely they will follow a similar path as CAOM.
CAOM’s current position seems to be in accord with that of NCCI -- that all COVID-19 related claims should be excluded when computing the experience rating modification factor for risks insured through the Facility. This proposal is pending due diligence review and approval from the Department of Insurance and Financial Services (“DIFS”). In the event the position is adopted by CAOM and the voluntary market, claims related to COVID-19 will be completely exempted from the computation of experience modifications and ratings for Michigan employers.
While the intent of CAOM’s proposal may be to avoid punishing employers for unexpected, unpredictable, and unpreventable losses, the proposal may have the unintended consequence of failing to reward employers that have taken steps to prevent the spread of the disease in the workplace.
Again, experience rating is calculated in large part by comparing an employer’s expected losses with the actual losses experienced. In the current pandemic, it is probable that most similarly situated employers will be affected in a similar manner. Thus, if an entire industry – such as employers of EMS workers and first responders – experiences an increase in claims due to COVID-19, then the experience rating would not necessarily change dramatically, if at all.
As noted above, the proposal is currently pending DIFS approval. We plan to continue to track the progress of the proposal and will provide an update if and when it is approved. If you have any questions about how COVID-19 is affecting the workers’ compensation arena, please contact a member of the Foster Swift workers’ compensation group. As always, we are here to help:
Brian Goodenough (Practice Group Leader)...517.371.8147...firstname.lastname@example.org
Tyler Olney focuses his practice in General Litigation and Workers’ Compensation Defense. He has experience in cases involving first and third party no fault defense, insurance defense, commercial and real estate litigation.View All Posts by Author ›