What your Experience Modification Rate costs you

Do you know what the real costs of workplace injuries are and what your Experience Modification Rate is costing you?

To stay competitive, all construction firms from the smallest to the largest must understand two key realities regarding Workers’ Compensation claims: (a) the real cost impact of a Workers’ Compensation claim to the employer, and (b) The Experience Modification Rate (EMR).

The direct costs associated with Workers’ Compensation claims are relatively easy to understand, since they are routinely billed to and paid by the employer.

Typical direct costs include Workers’ Compensation insurance premiums, medical treatment and prescription costs not covered by Workers’ Compensation coverage, cost of legal services related to a claim, payment of lost wages for the injured employee, and OSHA (the Occupational Safety and Health Administration) fines charged to the employer, if applicable.

The indirect costs absorbed by the employer are often much more difficult to quantify. Indirect costs related to a claim are estimated to range from 3 to 10 times the total direct costs. Indirect costs include:

• Lost time and productivity – Once an accident occurs, work stops. Not just for the injured worker, but also for co-workers who render first aid, stand around watching emergency response workers, or spend time discussing the event. Depending on the severity of the incident, most projects will be shut down for the rest of the work day following an accident. When serious accidents occur, OSHA may shut down the job, or portions of it, until investigations can take place. This lost time and productivity costs the employer money.
• Reduction of morale – Serious accidents, especially those where a hazardous condition was allowed to exist can have a distinct negative impact on a worker’s morale. Poor morale leads to poor productivity.
• Continued payment of employee benefits – While the injured worker is unable to perform their normal duties, the employer is still responsible for all costs related to his or her standard benefits.
• Costs for investigation & OSHA reporting – Supervisors must complete accident investigations and file all OSHA mandated reports.
• Handling Workers’ Compensation claims – Depending on the severity of the injury, Workers’ Compensation claims can last for months, and sometimes years. These ongoing claims require continued attention and effort by the employer.
• Cost of hiring and training a replacement – Should a key employee be unable to work for an extended period, the employer may be forced to find and train a replacement. The lack of a skilled foreman can lower the productivity of an entire crew.
• Damaged work – Repair and/or replacement of completed work is often necessary following a serious accident. The related costs, including repair work performed by other subcontractors, is the responsibility of the employer.
• Re-scheduling work and overtime costs – An accident can delay a key deadline or activity within the construction schedule, and overtime or re-scheduling costs may be necessary to get the project back on schedule.

These direct and indirect costs can add up quickly and can significantly impact an employer’s bottom line profitability both in the short and long term.

Experience Modification Rate

The long term impact may be much more damaging however, as the severity and frequency or Workers’ Compensation claims are prime factors in calculating a firm’s Experience Modification Rate (EMR). A complicated rating system considers an industry’s inherent risks, claims history, and region of the country on an ongoing basis. Your firm’s claims history is then compared to that group, and your EMR is calculated accordingly.

A favorable Experience Modification Rate, will save the employer money on the cost of Workers’ Compensation Insurance, while a poor EMR not only costs the employer more money for the same business insurance coverage, but it can also prohibit the employer from bidding on some types of projects.

All firms start with an EMR of 1. When the firm’s Workers’ Compensation premiums are calculated, they are multiplied by that EMR to yield the actual premium that has to be paid by the employer. An EMR of less than 1 will lower the premium, and conversely an EMR that’s greater than 1 will cost the employer more for the same coverage.

The more damaging aspect of an EMR that’s greater than 1 is that almost all state and federal projects mandate an EMR of 1 or less to be able to bid the project.

As a general barometer for the construction industry an Experience Modification Rate of 0.5 to 0.7 is considered above average; an EMR of 0.7-1 is considered acceptable, and an EMR greater than 1 is considered below average.

Firms must pay in excess of $3,000 for Workers’ Compensation premiums for at least five consecutive years. The various ratings bureaus that calculate an EMR look at a five-year window, excluding the earliest or the most recent history of filed claims.

The resulting three-year window of claims is used to determine the EMR, and typically that rating will not be adjusted until the beginning of the next consecutive year.

At that time the oldest claims will drop off, and a new three-year period will be analyzed. This timing is important to understand since once a firm is given its EMR, it will take another year to change it.

What is even more critical to understand is the fact that a serious incident/claim will be factored into your firm’s EMR for at least five more years, before it’s dropped from the three-year window and no longer making an impact.

Even a simple accident, such as a puncture wound, can result in combined direct and indirect costs in excess of $40,000 dollars. In that example, an employer that makes a 3 percent profit on total revenue, would need to increase sales by almost $1.4 million to recoup the cost of that single incident.

The EMR rating system is determined on a state-by-state basis. While many states use a common source −The National Council on Compensation Insurance or NCCI − other states do not.

As with all complex insurance matters, get advice from your insurance agent, who should be able to provide a complete explanation of exactly how and when your EMR is determined. A second opinion is always a good idea, if you feel your agent is not fully informed, or forthcoming.