Workers Compensation: New Independent Contractor Test May Impact Your Business

On April 30, 2018, the California Supreme Court issued a decision that clearly makes it harder now to label workers as “independent contractors” under Industrial Welfare Commission (IWC) wage orders. The result: Workers Compensation audits in California will be more scrutinized in the future against employers attempting to classify workers as independent contractors vs. employees.

The new ruling is clear: The label an employer chooses, or the label used in a contract, does not matter in classifying a worker. Instead, the type of work performed matters.

The Supreme Court placed the burden on an employer seeking to classify an individual as an independent contractor instead of an employee to satisfy a three-factor test. Workers have long been presumed to be employees unless the employer proves all three factors that the worker:

1) is not under the control of the employer;

2) performs work outside of the usual course of business; and

3) is in a customarily independent trade.

The ruling stemmed from a class action lawsuit by delivery drivers against a package and document delivery company. The drivers alleged that the document delivery company misclassified drivers as independent contractors, and therefore violated an IWC Wage Order and engaged in unfair business practices.

The Supreme Court evaluated the core issues related to the appropriate legal standards for determining if a worker is an employee or an independent contractor. The Supreme Court agreed with the drivers. The Court adopted a three-factor “ABC” test that the company must satisfy in order to establish that a worker is an independent contractor:

  1. The worker is free from the control and direction of the hiring entity in the performance of the work, both under the contract calling for the performance of work and in fact;
  2. The worker performs outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently-established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The Court held that the failure of the company to prove any one of these factors is grounds to establish that the worker is an employee.

As we know, all California employers are subject to IWC wage orders. This court decision will have substantial consequences on some employers, particularly those that involve transportation activities, like contractors that have trucking operations. Misclassification of employees as independent contractors can result in significant liability for employers; labor code penalties as high as $25,000 per violation, payroll tax, overtime, unemployment benefits, and of course workers compensation premiums.

We recommend consulting with your labor attorney and insurance professional to assure your workers are properly classified.

Coverages to Consider When Starting Your Architectural or Engineering Firm

Stephen Watson, MBA, CISR, Account Executive
Venturing out on your own and starting a new firm can feel overwhelming considering all that needs to be accomplished before accepting your first client. From writing a business plan to determining a budget, selecting an office location, building a website, buying software, and setting up systems, one may forget the critical task of purchasing insurance.

This step, like many other areas of starting your business, needs attention and guidance from a specialized insurance broker.  As a design professional, you absorb tremendous financial risk when you oversee the construction, rehabilitation, or design of a building.  Insurance is a risk transfer mechanism used to protect your business from financial loss. The purpose of this article is to provide an understanding of coverages to consider when starting a firm and to introduce additional coverages you may consider adding as your firm grows.

Professional Liability: Professional Liability insurance, sometimes referred to as errors and omissions insurance, covers your defense costs and/or settlement payments should your firm’s professional services or advice be found to be inadequate, contain errors, or fail to meet specifications.  It is essential to work with an insurance company and broker who specialize in your industry and can provide additional risk management services such as contract reviews, webinars, and education credits.

The cost of Professional Liability insurance varies depending upon your projected annual revenue, your areas of discipline, the anticipated project types, and policy limits. Typically, most contracts require a limit of $1 million or higher.

Business Owners Policy (BOP): A BOP includes multiple coverage sections including losses related to:

  • property damage
  • business income and extra expense (if business operations are suspended)
  • lawsuits and claims related to property damage, bodily injury, personal injury or advertising injury resulting from your firm’s actions or location

The premium is based upon your location, policy limits, estimated payrolls, and other factors specific to your operations. Typically, most contracts require at least a limit of $1 million per claim and a $2 million aggregate.

Other Coverages to Consider: As your firm grows and you add even one employee, there are additional coverages to consider, some of which are required by law.

  • Workers Compensation is required by law in most states to be carried by a business with employees. Workers compensation provides coverage for employee-related accidents and employer liability lawsuits brought against the company for a work-related injury.
  • Cyber Liability helps your firm survive data breaches and cyber attacks by paying for recovery and notification expenses. It is essential to run system backups multiple times a day or at least once a day, as a cyber policy will not be of much benefit in data restoration if the backup data is old.
  • Employment Practices Liability covers your firm for claims made by employees for alleged discrimination, harassment, wrongful termination, and other employment-related issues. Some insurance companies offer training or have a help line for you to call if there is an issue. This coverage becomes essential as your firm grows.
  • Commercial Auto covers company-owned vehicles from liability or physical damage when involved in an accident. Other coverages can be added to include employee-owned autos used for business, leased vehicles, rental cars, etc.
  • Umbrella Coverage protects your firm from major claims and lawsuits by providing additional limits over your general liability, auto liability, and employer’s liability insurance.

As you can see, there is insurance available for just about any risk.  Having a knowledgeable insurance broker who also serves as a loss prevention advisor can be far more beneficial to your bottom line than merely looking for the cheapest premium.

California’s Proposed Single Payer Health Plan: Questions That Our Lawmakers Need to Answer

Patrick Casinelli, RHU, REBC, CHRS
Patrick Casinelli - resized Adopting a “single-payer” system means the State of California would run and regulate the healthcare of the state’s residents using taxpayer money. The cost estimate for this plan is between $330 and $400 billion per year. To put it in perspective, California’s entire annual state spending budget is $190 billion. This additional money has to come from somewhere.

The plan to fund the bill is to repurpose $200-$225 billion of existing Medicare (this would require a Federal waiver) and Medi-Cal funds. The other $105-$200 billion would come from new tax revenue.  Proposed new taxes are a 15% increase in payroll tax and/or 2.3% gross receipts tax on businesses plus additional 2.3% sales tax increase.

The single payer bill (dubbed the “Healthy California Act”) is proposed by State Senators Ricardo Lara (D-Bell Gardens) and Toni Atkins (D-San Diego). Governor Brown has not been keen to the idea of single payer, but Lieutenant Governor (and front runner to replace Gov. Brown) Gavin Newsom is very much in favor of a single-payer plan.

What Does the “Healthy California Act” Look Like?

Simply put, the State of California would cover all costs for its residents’ healthcare. Effectively, the government would step into the role that insurance companies play now, paying for all “medically necessary” care. Whether you’re insured through an employer, through Covered California or on public programs such as Medicare and Medi-Cal, if you’ve established California residency — regardless of legal immigration status — you would be enrolled in the one and only plan available.  As proposed in the “Healthy California Act”, employer-provided and outside commercial options would be illegal and not allowed.

The plan would have no premiums, no deductibles, no copays and zero out of pocket costs for any “medically necessary” care.  The benefits would include all inpatient and outpatient care, dental and vision care, mental health and substance abuse treatment, and prescription drugs. Patients would be able to see any healthcare provider of their choosing.

Reality Check: Questions That Must Be Answered

  • What will the future cost of this “free” healthcare be to California?
  • How long do you have to be an established resident to receive free care?
  • Who determines “medical necessity”?
  • Who approves care and treatment plans?
  • Will the best doctors want to practice in the State of California?
  • How will doctors and hospitals be paid?
  • Who will determine the allowed amount to be paid for care?
  • Will doctors and hospitals be rewarded for quality care?
  • Will the plan incentivize and promote wellness?
  • Would all public employees be required to be on the “Healthy California Act”?
  • Will there be any waivers for unions or large multi-state employers?
  •  Who will oversee the “Healthy California Act”?

Closing Thoughts

Quality of care and access to great doctors will greatly diminish in a single-payer system. I cannot see the best doctors in the United States wanting to work for the State of California, or hospitals investing in the best technology or quality care systems when the return on investment is unachievable.  Wait times for surgeries will likely increase to ten times what they are now, similar to other countries who have adopted this system.  Corners will be cut, quality will suffer, and the patient advocates will be the same people that implemented the single payer plan in the first place.

Single-payer is not the answer for California.

My next blog will discuss how we fix our current healthcare system. We do not need to “throw the baby out with the bath water.”  We can fix and eliminate what is wrong with our current system, while keeping and improving all that is great.

60 Seconds on Risk Management: Communication

Kelly Potter, PWCA, Account Executive
Watch our one-minute video on Communication:

https://www.youtube.com/watch?v=IKAw3FhwJ84

Bed Bugs!

Matt Slakoff, CIC, CRIS
We all hear the stories on the news about bed bug infestations.  The thought makes most people start itching and want to run to the shower!  If you want to see how pervasive and widespread the risk is, just Google “bed bugs” in the news section. There are infestations in hotels, apartments, city buildings, offices, Airbnb…the list goes on and on.

What most people don’t realize, however, is how costly the problem can be.  Most public places are at risk for exposure. These infestations not only create property damage, they create bodily injury hazard to employees and any third-parties who visit those properties. The potential liability costs range from a couple hundred dollars to millions of dollars.

So, is there any commercial insurance for this type of exposure?  Like so many exposures, it depends.  Below is a description of how coverage may apply.

First Party Property – Coverage for Owned Property:

  • This risk is excluded under standard property insurance policies. Insurance companies typically consider pest control to be part of ongoing maintenance, and do not view infestation as an insurable peril.
  • Standalone coverage specifically for bed bugs is available to purchase. One item to note is that the coverage is limited to an infestation on a covered premises and it does not extend to employees’ property. Some brief coverage details include reimbursement for the cost of:
    • Bed bug elimination services
    • Treating bed bug-infested apartment/co-op/condo unit contents
    • Cleaning of clothes
    • Additional Living Expenses for a set period of time (24 hrs.)

Third Party Liability – Lawsuits

  • The risk of a tenant/visitor filing a lawsuit based on a bed bug infestation is real. Tenants, guests or visitors may make a claim for reimbursement or make allegations of bodily injury.  Most General Liability polices do not have certain specific exclusions (like the above covered premises exclusion) so coverage (defense and indemnity) should apply as long as negligence or liability is proven.

Workers Compensation

  • If an employee suffers bed bug bites at work, workers compensation will apply. In most cases, the bites are more of a minor annoyance and do not require significant medical attention. However, employees could develop stress-related conditions.

Additional Considerations

  • Disability Claims — As with workers compensation, the primary issue may not be the bites themselves. It could be resulting associated conditions such as stress that could form the basis of a disability claim. The fact that bed bugs are so difficult to get rid of could provide support for such claims, particularly if employees take the infestation home and additional damage occurs as a result.
  • Employment Practices Liability — An employee who is suspected to be the source of an infestation may feel that the suspicion is not based on any objective evidence, but is the product of bias against some protected status, e.g. race, national origin, etc. Similarly, workplace discussions and accusations could lead to harassment claims.
  • Publicity — As a business, you do not want to be in the headlines for this issue. There could be a media/public relations risk which would need to be managed.

Bed bugs, like all risks, require an awareness and education to determine what your exposure is.  The best course of action is prevention but knowing what protection you have available through your insurance program is also important. Good night, sleep tight…

General Contractor’s Potential Liability for Unpaid Subcontractor Wages – Assembly Bill 1701 (Labor Code 218.7)

Jase Hamilton, CPCU, AFSB
The State of California has passed a number of new laws in recent years but none has been so widely discussed by the construction industry as Assembly Bill 1701 (Labor Code 218.7). This new law extends liability to a general contractor on a private construction project for unpaid wages, fringe, and other benefits owed to a subcontractor’s employees. This is regardless of the tier of the subcontractor or if the subcontractor has already been paid or not.

Before discussing possible protections, there are a few key components of the law to mention:

  • The new law became effective January 1, 2018;
  • All claims against the general contractor must be made within one year of the earliest of the recording of the notice of completion, the recording of the notice of termination of work, or the actual completion date;
  • The general contractor can seek indemnity from the subcontractor to recover costs incurred as result of a claim;
  • If requested by the general contractor, the subcontractor is required to provide its payroll records to show compliance with its wage obligations on the project; and
  • Claims are limited to unpaid wages, fringes, and other benefits, and may not include claims for liquidated damages or penalties.

How to Protect Your Company

When new and potentially unfavorable laws are enacted, there is usually an immediate scramble to avoid the negative impacts it may bring. However, as a general contractor, claims cannot be fully avoided. Like many other exposures to loss, the best practice is to implement procedures that reduce the possibility of a claim.

Drafting a favorable contract is a good first line of defense. This includes but is not limited to:

  • Including language that shifts the liability created by the new law back to the subcontractor.  For example, the general contract should include language affirming that every subcontractor is accountable for full and timely payment of their workers and all sub-tier subcontractor’s workers;
  • Requiring subcontractors (all tiers) to provide time cards and wage statements monthly with their pay applications. If the subcontractor fails to provide this information, they do not get paid;
  • Including a comprehensive indemnity clause and/or obtaining personal guarantees from subcontractors at all tiers; and
  • Requiring the subcontractors to defend the upstream party in the event a claim is made under the new law. This requirement should be outlined in the indemnity clause and/or defense clause.

Performance and Payment Bonds

A second line of defense and more secure solution is for the general contractor to require its subcontractors to provide performance and payment bonds.  The performance bond protects the general contractor (obligee on a subcontract bond) from losses in the event that the subcontractor fails to perform the contract. The payment bond guarantees that the subcontractor will pay their workers, subcontractors, and materials suppliers and that the project will be a lien-free project. Requiring performance and payments bonds from your subcontractors transfers the risk of a subcontractor’s non-performance and non-payment to the surety company.

With the introduction of this new law, it is even more critical for general contractors to thoroughly prequalify their subcontractors and implement safeguards to protect them from undue claims. Adding contract language/provisions that transfer the burden back to the subcontractor and implementing additional risk mitigation requirements surrounding tracking payroll should now be a staple of all subcontracts on private construction projects.

If you have additional questions regarding this Bill or if we can be of direct assistance, please do not hesitate to contact us.

Click here to view the Bill

Note:  This document is provided for informational purposes only and does not purport to be a legal opinion. For legal assistance, please consult your attorney.

Insurance Industry Results Deteriorate in 2017! What This Means to You

Insurance companies make money in one of two ways, underwriting and investments.  The profitability of the industry generally determines the cost of insurance.  When the industry is making decent money and surplus is rising, pricing trends downward.  When the industry, however, is not hitting their numbers, surplus tends to decline and pricing tends to increase.  While rates have been either stable or decreasing for the past 5 years, that could change based on the industry’s recent results.

When losses and expenses are less than premiums, there is an underwriting profit.  When losses and expenses exceed premiums, there is a loss.  This is what happened in 2017 (and 2016).  The expected net underwriting loss for 2017, according to AM Best Company, will be $29.3 billion!  In 2016, there was an underwriting loss of $6.5 billion.  Investment income pushed the industry into the black, however, pre-tax operating income declined substantially from $41.1 billion in 2016 to $14.8 billion in 2017.  Needless to say, the pre-tax return on revenue fell sharply as well, from 7.8% in 2016 to 2.7% in 2017.  The industry strives for a 10% return or greater.

The main driver for the poor performance is the increase in catastrophic property losses and deteriorating results in the auto Line.  Floods, hurricanes, earthquakes and wildfires will collectively cost the industry about $100 billion.  The industry’s total surplus is about $725 billion.  Auto insurance is also losing money.  This is mainly driven (pun intended) by distracted driving and the increased cost to repair a camera- and sensor-laden vehicle.  It is not uncommon to see our auto underwriters seek rate increases of 15-25% or more on renewals.

Some insurance prognosticators predicted that these losses might turn the market and drive up premiums.  While those properties exposed to wind-driven losses, flood or wildfires might see fairly significant increases, the market as a whole is actually in pretty good shape (although auto rates will also go up).  Despite the poor operating results, the fact that the industry could absorb the substantial losses experienced in 2017 without materially increased pricing reflects positively on the insurance marketplace.

While it is important to have a basic understanding of insurance industry economics, it is more important to proactively manage your risk.  After all, the only way you can lower your insurance and risk management costs in the long run, is to reduce the frequency and severity of the claims that drive those costs.

Common Restaurant Hazards

Matt Evans, Account Executive
The restaurant industry accounts for about 10% of employment in California which is roughly 1.7 million employees. This number is projected to grow another 10% by 2027. That kind of growth attracts attention, including attention from OSHA. The Occupational Safety and Health Administration enforces safety standards and compliance in many industries including the restaurant industry.  Under OHSA, employers have the responsibility to provide a work environment that is free from recognized hazards that could cause serious physical harm or death to their employees. OSHA has the ability to inspect, fine, and even shutdown restaurants for non-compliance.

Strains and Sprains
Strains and sprains can be caused by lifting heavy objects or boxes by one person without assistance. Strains can also be caused during food prep where there are prolonged motions such as reaching, lifting, and chopping. These potential injuries can be prevented with proper lifting technique and lifting with a coworker. If possible, employers should also provide foot rests at work stations to allow the workers the ability to shift their weight from one foot to the other.

Slips, Trips and Falls
Slips, trips and falls can occur when there is poor housekeeping, especially in the kitchen, with wet slippery floors close quarters. Working around ice bins, where ice can easily fall on the floor, can cause hazardous conditions including puddles. It is important to wipe up spills immediately and wear proper non-slip footwear.

Knives and Cuts
Workers are often exposed to cuts while using sharp knives, cleavers and slicing equipment. To reduce the potential for accidents, employees should cut away from the body, keeping the thumb out of the cutting line and store knives in knife holders, not in sinks or on countertops.

For more information, please reference the following document:
https://www.osha.gov/dte/grant_materials/fy11/sh-22303-11/Restaurant_Safety_English.pdf

Indemnification Agreements and SB 496 – What to do if your clients still insist on an unfair indemnity agreement

Jeff Cavignac, CPCU, RPLU, ARM
Senate Bill 496 was signed into law in April of 2017 and became law on January 1, 2018.  The Bill amends Section 2782.8 of the Civil Code as it pertains to a design professional’s obligation to defend an upstream party.  Most importantly, this new law limits the cost to defend an upstream party to the design professional’s proportionate percentage of fault.  To quote from the Bill, a design professional will only be on the hook for the legal fees of another if “the claims against the indemnitee arise out of, pertain to, or relate to the negligence, recklessness, or willful misconduct of the design professional. In no event shall the cost to defend charged to the design professional exceed the design professional’s proportionate percentage of fault.”

This is great news for design professionals, and while the Bill clearly states that, “This section shall not be waived or modified by contractual agreement, act, or omission of the parties”, it is still unclear how the law might be interpreted by the courts.  In addition, many upstream parties are either ignorant of the law or have consciously chosen not to amend their indemnity provisions.

The verbiage below can be sent to those upstream parties along with a copy of the Bill.  The hope is that they will amend their agreement to comply with the new law, but regardless, we feel you are in a better position having called the law to their attention than simply signing the contract.  Here is the verbiage:

I have reviewed the indemnification agreement that was part of the contract you have asked us to sign.  As written, the agreement appears to be in conflict with the recently-passed Senate Bill 496 which was effective on January 1, 2018. 

In a nutshell, this Bill amends the Civil Code (2782.8) as it pertains to a design professional’s obligation to defend an upstream party.  Most importantly, this new law limits the cost to defend an upstream party to the design professional’s proportionate percentage of fault. 

We would like to rewrite the indemnity agreement to comply with the law and are suggesting the following:

Notwithstanding any clause or provision in this Agreement or any other applicable Agreement to the contrary, Consultant agrees to indemnify and hold harmless (but not defend) the Client, its officers, directors and employees from and against damages and costs that Client is legally obligated to pay, to the extent caused by the negligent act, error or omission of the Consultant or anyone for whom the Consultant is legally responsible, subject to any limitations of liability contained in this Agreement. Consultant shall have liability for reasonable and necessary defense costs incurred by persons indemnified to the extent caused by Consultant’s negligence herein and recoverable under applicable law on account of negligence.

I look forward to discussing this with you.

If you have additional questions or if we can be of direct assistance, please let us know.

Click here to view the Bill

Note:  This document is provided for informational purposes only and does not purport to be a legal opinion. For legal assistance, please consult your attorney.

It’s Wildfire Season. What Can You Do to Protect Your Home?

Carolyn Konecki, Private Client Manager
Last winter’s record rainfall meant an end to the drought, but it also led to an abundant growth of wild grasses and plants. Those plants have dried out over the summer, creating a large supply of fuel sources for a fire. Many fire experts are predicting Southern California will experience several large wildfires this year, the kind that the Pacific Northwest and Northern California have already experienced.

It is important for you to remember that the fire agencies do not have the resources to protect every home when hundreds of homes are threatened. It is imperative that you make your home as fire resistant as possible, especially from flying embers. A hot ember can travel up to one mile and slowly smolder in your attic, roof, under the eaves or in a wood pile, until it starts a fire.

Here are some tips to protect your home from a wildfire and flying embers:

  1. Clear at least 100 feet of defensible space around your home – removing overhanging tree branches, clearing gutters and roofs and thinning out plants.
  2. Replace combustible roofs and fences with non-combustible materials.
  3. Replace your roof vents with ember-resistant vents.
  4. If you have a clay tile roof, make sure the end tiles are capped with mortar or bird stops.
  5. Enclose or “box” your eaves.
  6. Replace your single-pane windows with double pane windows, or add fire-resistant shutters.

Watch my 1-minute video (https://www.youtube.com/watch?v=18p3yyHxgtw) to learn more. For more tips or to get a copy of the complete Managing the Risk of Wildfire, call me at 619-744-0545 or click HERE.