UnderWater Magazine

Some insurance agents, underwriters and auditors do not fully understand all of the complexity and irregularities of a diving contractor's workers compensation insurance needs. As a consequence, coverage and premiums are frequently incorrect.

It is important for diving contractors to understand if they are covered in general or for a particular job, and how their premiums should be developed. The diagram at right shows how a typical company's premium is supposed to be developed. The rates and some minor parameters may vary from state to state but the fundamental concepts here remain the same.

The classification and benefits package elected (this will be explained in more detail later) designate the class code. The class code designates the rate. And the rate times the payroll formulates the foundations for the premium development. As one might suspect there are rules that assign the correct payroll to the appropriate class code. Unfortunately they are not always understood or correctly followed.

Under the classification system, each business as a whole is assigned a basic classification that best describes the business of the employer. This classification includes all the various types of labor found in a business, except the standard exceptions. The standard exceptions are Clerical Office Employees, Drafting Employees, Drivers, Chauffeurs, Outside Salespersons, Collectors or Messengers ‚ outside. In most cases all the applicable payroll except the standard exceptions would be classified under the basic classification. An example of slight deviation from this is an Engineering firm who performs bridge inspection. The Basic Classification may be that of Engineering, however all of the payroll of the divers would be classified under DIVERS. Most diving contractors' basic classifications is one of the DIVING classifications which we will examine in more detail later in this article.

Construction or erection operations are exceptions to the basic classification rules. They are supposed to be rated by each distinct type of construction or erection at a job or location, and should be assigned to the classification which specifically describes such operations, provided separate payroll records are maintained for each operation. If separate payroll records are not maintained, the operation is supposed to be assigned to the highest rated classification which applies to the job or location where the operation is performed.

Take for example, a contractor doing a wharf refurbishment job on navigable waters of the United States that involved diving, concrete repair and the replacement of bulkheads and pilings. There could be four different classifications that apply. Also if vessels were used some of the payroll would be subject to Jones Act which will be discussed in more detail later. From our example premium development diagram, the applicable class codes and rates would be Jetty and Breakwater - USL&H (6005F - $72.57 per $100.00 of payroll); Pile Driving and Drivers (USL&H 6003F - $181.31 per $100.00 of payroll); Concrete Construction NOC (USL&H 5213F - $39.71); or Diving (USL&H 7394F - $47.71). If separate payroll records were not maintained, the entire operation could be assigned to the classification with the highest rate, which in this case would be Pile Driving and Drivers (USL&H 6003F - $181.31 per $100.00 of payroll). Obviously with rates like these (these are presently correct for Florida) it is important to pay attention to the classifications and maintain separate payroll records.

When using the DIVING classification, it is important to pay attention to the phraseology Basic Manual of Scopes Classifications. Under this classification the rules once again deviate from the norm. Under the DIVING classifications it states, "In the event that both diving and construction work are performed at the same job by the same employee, no division of payroll is permitted and the highest rated classification is used." This could be a very important detail. In our above example, if one of the divers had any payroll subject to the Pile Driving classification, all of the payroll could be and should be rated as Pile Driving.

Further to this, the DIVING-MARINE classification offers three benefit packages for masters and members of the crew. Which means there are three different class codes: 7394, 7395, and 7398. The term "benefits" is frequently misinterpreted to mean coverage and the idea or intention that they are for master and members of the crew only, more times than not, goes unnoticed.

Class code 7394 provides State Workers Compensation Act coverage and Program I which provides a $25,000 limit in the Employers Liability Insurance Section (Part Two) for Admiralty Law (Jones Act). 7394 is a Non-F Class Code which means it does not specify the inclusion of the Longshore and Harbor Workers' Compensation Act Coverage Endorsement, WC 00 01 06 or include premium for operations subject to USL&H.

If operations under Non-F Class Code involve some employees subject to USL&H, the rate is supposed to be increased by the United States Longshore and Harbor Workers' Compensation Coverage Percentage for the applicable state. The increase should apply only to payroll of the employees engaged in operations subject to the USL&H. For example, in Florida the percentage is 175%, so the base rate for the payroll subject to LHWCA is multiplied by 2.75. The rate for 7394 is $21.08 and for 7394F is $21.08 x 2.75 which is $57.97. The percentage will vary from state to state. For example in Michigan it is 63% and in Oregon it is 78%.

Class Code 7395 ‚ Program II ‚ USL Act Benefits is also a Non-F Class Code but under Voluntary Compensation for masters and members of the crew of any vessel, will offer a settlement of a claim (Jones Act) strictly in accord with the statutory state benefits of the United States Longshore and Harbor Workers Compensation Act, as if the claim was subject to such law, instead of the laws of negligence.

To sum it all up all three class codes provide state workers compensation coverage for the designated state(s) and have $25,000 limits for Jones Act claims. Under 7398 injured masters and members of a crew of vessels are offered state workers compensation act benefits as if the claim was subject to such law. Under 7398 injured masters and members of a crew of vessels are offered USL&H Act benefits as if the claim was subject to such law. This is not the same as USL&H Act Coverage.

7398 frequently is incorrectly assumed to be an F-Class Code providing USL&H Act coverage and not subject to the LHWCA coverage percentage increase. 7398 appears in the Scopes of Basic Manual Classifications as 7398 Program II ‚ USL Act Benefits. Perhaps this is the reason many insurance agents, company underwriters and auditors make this incorrect assumption. However, without the USL&H endorsement, which states that the rates will be increased by the USL&H Act Coverage Percentage, there is no USL&H coverage.

With only a $25,000 Jones Act limit or either benefit package, a diving contractor could be in real trouble if they have a Jones Act claim. Crew coverage or Maritime Employers Liability (MEL) policies are used to provide the Jones Act coverage. They are usually expensive but if the workers compensation policy is written so that such coverage and exposures are taken into consideration, the total cost is usually less. But more important, if the policy is written properly and the limits are sufficient, a crew coverage or MEL policy can protect an employer from Jones Act claims. Because exposures may not be well defined or for lack of knowledge as to how to break them apart, employers frequently pay for both Jones Act and WC at the same time. Occasionally this is not avoidable. But if conditions are right, Jones Act Coverage can be a saving grace.

If an exposure is that of the Jones Act and the employer has Jones Act coverage separate from the WC policy, then the WC carrier should not have the right to charge the employer for the exposure. If there is no Jones Act Coverage, courts have ruled that the workers compensation carrier has the right to charge for the exposure even though they were not providing this coverage.

Because the DIVING-MARINE classification is supposed to include some Jones Act coverage, if the DIVING MARINE classification appears on the policy at all, the WC carrier almost surely has the right to charge for Jones Act exposures, even if the proper endorsements are not on the policy. If need be, there are legitimate ways to keep the classification off of the policy.

Diving contractors working in more than one state are sometimes subject to different state workers compensation exposures. They may also be subject to Jones or USL&H Act exposures. Yet their policy may only be written for one state and may not have the proper endorsement for USL&H Act coverage for exposures coming from the other state. Further to this the policy may provide coverage in more than one state and USL&H coverage, however the contractor may not have used the correct states rates or did not include the USL&H surcharge. Jones Act coverage is usually only available with a $25,000 limit. In some states higher limits are available and in others no coverage at all is available.

Longshore and Harbor Workers Compensation and Jones Act coverage is provided by endorsement only. Just because the class code specifies coverage, does not mean the coverage is there. A WC carrier may pay a claim where the coverage was specified but not endorsed or they may refuse. Even though the policy may not have the proper endorsements, small claims are generally paid. Big claims are a different story, as people tend to pay more attention. Unfortunately, from an actuarial standpoint our system is based on these claims and the underwriting associated with them.

Another item of note is the experience mod. An experience mod is a factor used to surcharge or discount an employer's premium based on their individual claims experience. If you look at our premium development diagram you will see its application. An experience mod of 1.00 would not change the premium. A mod less than 1.00 would discount the premium. A mod greater than 1.00 would surcharge the premium. Mods as low as .70 and as high as 2.80 are common. If all else was equal, an employer with a 2.80 mod would pay approximately four times as much as an employer with a .70 mod.

It is not uncommon for an experience mod to be miscalculated because of clerical errors, uncompensable or subrogable claims or reserves simply being set too high. These errors can amount to a great deal of money.

Premiums for overtime pay is another area which is sometimes overlooked or misunderstood. In calculating premiums, the extra pay for overtime can be excluded if the insured's books and records are maintained to show overtime pay separately by employee and in the summary by classification. If the records show separately the extra pay earned for overtime, the entire extra pay shall be excluded. If the records show the total pay earned for overtime (regular pay plus overtime pay) in one combined amount, one-third of this total pay shall be excluded. If double time is paid for overtime and the total pay for such overtime is recorded separately, half of the total pay for double time shall be excluded.

There are still many other items of concern to diving contractors workers compensation insurance, that we have not addressed. The subject can be almost overwhelming, but it is one that deserves attention, because addressing the policy in a thorough manner can result in substantial savings and more complete coverage.

Entire contents ©1997 Doyle Publishing Company. Reproduction in whole or in part without express written permission is prohibited.

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