Lance and Nancy Smith may be smiling here, but they are not happy about having to spend $280,000 on premiums for workers' comp insurance this year.
Credit: Gary Benson Lance and Nancy Smith may be smiling here, but they are not happy about having to spend $280,000 on premiums for workers' comp insurance this year.
Steve Ramser thinks one key to keeping workers' comp rates down is employee retention.
Credit: Compoa Steve Ramser thinks one key to keeping workers' comp rates down is employee retention.

This year, State Roofing will spend just under $280,000 on premiums for workers' compensation insurance to cover its 140 employees — $200,000 of that for the 60 who install. The Monroe, Wash., company buys that coverage through a fund run by the state's Department of Labor and Industry, which Lance Smith, State's president, says is very difficult to work with.

“It's badly managed,” Smith says, “and won't do any investigation. Washington needs to open itself up to private insurers.”

But private insurers aren't racing to write policies. Despite collecting 40% more in premiums last year than in 1999, insurers still paid out $1.08 in workers' comp claims for every $1 they took in, says Bob Hartwig, chief economist for the New York-based Insurance Information Institute. He and others blame that on runaway medical and litigation expenses.

CNA Financial, the carrier endorsed by the National Roofing Contractors Association, reduced workers' comp policies to 17% of its total portfolio in 2003, from 22% in 2000, according to James Lewis, president of CNA's property and casualty division. And as private carriers have retreated to drier — that is, safer — ground, roofing contractors across the country find themselves wading in the same insurance pool as State Roofing.

Hazardous to Financial Health If insurers are inclined to view roofing as far more hazardous than other trades, and roofing company employees as persona non grata, it's all for a reason. The International Labor Organization notes that one-fifth of lethal accidents within the construction industry involve roof falls. And residential installers are considered a greater insurance risk than commercial workers. One theory holds that residential installers, who lug shingles up and down pitched roofs and ladders, are more susceptible to nagging injuries like back sprains or carpel tunnel syndrome that are hard to diagnose and may require extended rehabilitation.

Consequently, residential roofing contractors must pony up for whatever coverage they can find. J&B Construction in Milwaukee, for example, pays a private insurer through an outside payroll service $40 per $100 in payroll for coverage of its roof installers, compared to $23 for siders, $26 for lead carpenters, and $28 for sheet metal workers, according to Tom Dooley, operations manager.

The benchmark “manual rate” for roofers in Florida is $46.17 per $100, vs. $11.66 for sheet metal workers.

Those imbalances become more pronounced in markets where, as several roofers allege, competitors intentionally misclassify their employees' jobs or treat subcontractors like employees to keep premiums down.

Typically, roofing contractors adjust to volatile market conditions with new levels of flexibility and accountability. Steve Bark, who owns Total Roofing, Burbank, Calif., a company that does around $2.5 million annually in residential jobs, now pays his installers more than $20 per hour. That's because the premium rate for covering higher-paid workers (the benchmark set in May by California's State Compensation Fund was $43.50 per $100) is less than half the rate for workers earning less than $20 per hour ($94 per $100). Bark says he's considering giving five or six of his 52 employees a 1% stake in his company, because owners are exempted from workers' comp.

To help control insurance premiums, B&M Roofing in Boulder, Colo., sends any employee who's hurt on the job to a medical clinic of this roofer's choosing and has that employee tested for drug or alcohol abuse within 24 hours of an incident. B&M, which generates 20% of its $7.5 million in revenue from residential projects, also saves money by purchasing workers' comp insurance though a carrier affiliated with RoofConnect, a nonprofit service provider in Roseville, Calif., that B&M and 26 other companies founded in October 2002.

RoofConnect's rigorous membership requirements include a written safety program and “defined employee training.” Rich Rosendahl, B&M's chief financial officer, says the renewal rate for that coverage is $26 per $100 in payroll. “With our experience mod at 0.82 plus cost containment, the actual rate is $14 per $100.” (Experience modification measures a company's loss performance relative to the expected losses of other companies in the same business classification.)

Safety Program a Must Most contractors would agree that the few measures at their disposal to keep a lid on workers' comp costs revolve around hiring, training, and workplace safety procedures. “Contractors have to have a strong safety program that comes from the top,” insists Leslie Kazmierowski, NRCA's insurance coordinator.

This summer, Affordable Roofing, Aurora, Ill., is participating in a program NRCA is running with the Occupational Safety and Health Administration. First, OSHA tested Affordable's workers on their safety knowledge. The agency and the company will then put them through six months of “toolbox” meetings on safety. At that point, employees will be retested “to see if the training is working,” says Affordable's president, Bill Wade, whose company generates about two-fifths of its $2.5 million in annual sales from residential projects. Wade adds that his company had been conducting safety meetings every Friday anyway, using guidelines provided by the Missouri Roofing Contractors Association.

Dooley points out that while training can establish patterns of behavior that lead to safer workplaces, it's wasted if companies don't screen job applicants thoroughly. “When you have vacancies and a backlog of jobs, you have to resist the temptation to just grab anyone and put them to work.”

Steve Ramser, president of Louisville, Ky.–based Highland Roofing, thinks the key to keeping workers' comp rates down is employee retention. “A new guy is more likely to have an accident than an experienced roofer, and we keep our people by offering good pay and benefits.”

Ramser worries, however, that his workers' loyalty might sometimes deter them from reporting when they get hurt, which could result in more serious — and costly — injuries and loss-work time down the road. “So far, we've been lucky. But I'm still holding my breath.”

The Insurance Lottery Highland Roofing has had its share of dubious workers' comp claims. But Ramser says he's confident that the “good bunch of guys” who install for his company “work hard and don't want to be sitting home. They aren't looking to hit ‘the insurance lottery.'”

Many roofers, however, have a repertory of workers' comp horror stories that feature employees with minor, even fake, injuries, who would rather collect a disability check than return to work, even on light duty. To the annoyance of most employers, doctors still decide when an injured worker is fit, so “you need to make doctors aware that not all jobs in roofing companies are back breaking,” Ramser says.

In fact, a critical element that has helped Highland Roofing keep workers' comp costs under control has been getting employees back to work in some capacity as soon as possible.

State Roofing participates in a program called Retro that Master Builders Association of Washington, in Olympia, coordinates with that state's insurance fund. Retro has provided a blueprint for State's claims management. “Retro helped us to understand the system,” Smith says. “If you don't have someone in the doctor's or claims adjuster's ear, that claim will never end. And if you don't manage the claim, [the state] will essentially retire [the claimant].”

At State, that “someone” is Smith's wife, Nancy, the company's claims manager. She says that because the company pays its injured workers their full salaries for the first 30 days, it qualifies as one of Retro's “select” group of contractors. Salaries paid under those circumstances are not factored into State Roofing's loss ratio (meaning the difference between premiums and payouts, one measure insurers use to determine rates). And by adhering to the association's safety and claims management standards, State Roofing is also entitled to a rebate from the state fund that could equal 30% of its premium payments in 2004.

Associations To The Rescue Contractor associations have become useful resources for roofers grappling with this issue. These groups often reward members with a diligent workplace safety regimen. The Arizona Roofing Contractors Association, in Phoenix, works with the State Compensation Fund to develop policies governing workplace safety and inspection, employee training (in English and Spanish), and claims management. The result of that cooperation is the lowest workers' compensation insurance premium rate for roofers in the country: $12.09 per $100 — less than half of what the rate was a decade ago, according to ARCA's executive director Dan Cohen. The fund has been paying an annual dividend, plus a bonus dividend to insured companies that belong to the association. Eighty-one of the 162 ARCA members in this program had zero claims losses last year, and the group's loss ratio was 37% for 2003, and only 12% for the first quarter of 2004. “I have some members who, after the dividend and bonus, pay nothing for workers' comp,” Cohen says.

The 1,000 roofing contractors that are part of the 14,000-member Western Regional Master Builders Association, a safety promotion organization in Long Beach, Calif., are entitled to a 6% discount on their workers' comp insurance, which virtually all purchase through a state fund with the highest premiums in the country. Members also receive dividends when they meet Western's underwriting standards, which include maintaining a loss ratio of under 65% and an experience modification rating of under 1.10. Contractors whose loss ratio falls below 50% get a bonus dividend. (Last year, this group's ratio was in the 20s, says executive vice president Frank DelRe.)

Self-Insurance Funds Trade groups provide some roofing contractors with an alternative to state funds by letting them buy coverage through their self-insurance funds. For the past four years, Highland Roofing, which generates one-quarter of its $8 million in annual revenue from residential projects, has purchased workers' comp coverage for 75 employees through a self-insurance fund that Kentucky Associated General Contractors has managed since 1979. The premiums that Highland pays the association's fund — $17.75 per $100 in payroll — are among the lowest in the nation.

KAGC keeps those rates down by restricting its admissions to contractors with stellar workplace safety histories — Highland's experience modification rating is 0.68, remarkably low by roofers' standards — and by containing administrative costs and managing claims aggressively.

In March 2003, the Kentucky group returned to its members $8.6 million in dividends, or 29% of the premiums they paid for the year 1998 (the group delays its payouts for five years). Between 1994 and 2004, KAGC will have returned $46 million in premiums. “Some members have gotten back as much as 50%,” says director and vice president of underwriting Karl Ladegast.

Thirty-six states allow self-insurance groups, but few have opened their doors to these funds wider than Minnesota, where 22 self-insured groups offer workers' comp coverage at premiums that are anywhere from 15% to 40% below the prevailing market rate, according to Jim LeRoy, senior vice president at Meadowbrook Insurance, in Southfield, Mich. Meadowbrook manages claims filed through the Minnesota Builders and Contractors Association, a self-insurance fund with 60 members, and one of six groups in Minnesota established specifically for construction trades.

On May 5, MBCA returned to its members $1.1 million of the $4 million in premiums they paid in 2003. Ken Bressler, the group's chairman and owner of Minneapolis-based replacement contractor Builders and Remodelers, says this payout reflects members' safety records and the group's relentless claims management, which also focuses on getting employees back to work as quickly as possible. But MBCA maintains rigorous admissions criteria, and Bressler admits candidly that the group, whose founding members included two roofing companies, has been cautious about letting roofing contractors join because of the relative risk.

Competitive Challenge Groups like MBCA need to mitigate risk as best they can to cushion the impact that soaring medical and litigation costs continue to have on workers' comp rates. Medical costs are rising at 8% to 12% per year, according to Hartwig. And research conducted by NCCI Holdings, which maintains the nation's largest databank of workers' comp insurance information and calculates experience modification for different states, shows claims filed falling steadily since 1997 while medical costs per lost-time claim are rising sharply, 18% in 2003 alone. Several states have scrambled to enact reforms — sometimes in response to lobbying by contractor trade groups — aimed at curbing medical costs and attorney fees (see “Turning Tide?” below).

Rising insurance rates have had an escalating effect on what roofers are charging to remain profitable. They also place some roofers at a disadvantage competing against what Dooley at J&B Construction calls “hook and ladder guys” — roofers with one or two employees who, because they're self-employed or sole proprietorships, aren't legally required to buy workers' comp insurance. “If you have more than a pickup truck and a magnetic sign down here, your overhead is too high,” says Leo Wadley, who owns Leo Wadley Roofing in Fort Worth, Texas, which gets 80% of its business from residential insurance remediation jobs.

Texas is the only state in the country where workers' comp isn't mandatory. And Wadley claims it would be nearly impossible for his company to make money competing against all of the storm chasers in his market if he were saddled with workers' comp costs. Still, he's not blind to the value of such protection. He advocates making workers' comp and liability insurance mandatory in Texas, which he believes would increase the number of roofers willing to do residential work. “Roofing contractors trying to provide proper coverage are at a severe disadvantage with the significant number who provide improper coverage, or none,” says Mike Wheaton, assistant vice president for the William Rigg Company, in Fort Worth, the endorsed insurance agent for the Texas Roofers Association.

Evasion Srategies But it's not just Texas. Roofing contractors in various parts of the country allege that some competitors are skirting higher workers' comp premiums by engaging in fraudulent activities. These include intentionally misclassifying their installers as drivers, office workers, or other lower-risk jobs; or playing fast and loose in the way subs, who are in most states required to carry their own workers' comp coverage, are hired and used.

“There's a lot of unlicensed and unpermitted activity going on,” states Brian Stover, the former president of Invincible Associates in Largo, Fla. He asserts that local roofers are using “illegal dodges” like paying installers as drivers or having homeowners pull permits and purchase building materials to disguise who's doing the actual work. Invincible uses subs exclusively on roofing jobs and insists they have workers' comp coverage. “Checking their certificates isn't difficult, but you have to want to do it,” Stover says.

It's not the maneuvers so much as the fact that companies get away with them that galls roofing contractors. “It's a crock,” says Al Jarrett, owner of Jarrett Roofing in Wyoming, Mich, about competitors who identify their installers as something else to circumvent higher workers' comp premiums. High rates have created “an incredible amount of employer fraud” in California, where there are 5,800 active roofing contractor licenses on file with the state but only 3,200 workers' comp policies, says Bill Callahan, executive director of Oakland-based Associated Roofing Contractors of Bay Area Counties. Callahan adds that one-third of the contractors with insurance report that their annual payroll is less than $25,000 a month. “Come on!” he states, incredulously. —John Caulfield is a freelance writer based in New Jersey. He has been reporting on the home improvement industry for more than two decades.

Turning Tide? Roofing contractors pleading for relief from rising workers' compensation insurance rates may finally be getting their wish. Legislative reforms and, in some cases, behind-the-scenes lobbying by construction trade groups are driving down insurance costs in at least three of the country's largest states.

Last year, California's legislature passed medical reform laws that reduced benefits for injured workers. Those laws, “for the first time in several years, allowed us to decrease rates slightly as accounts renew in 2004,” says Dianne C. Oki, president of the California State Insurance Fund, which ended 2003 with $15.8 billion in assets and $13.2 billion in liabilities. After the insolvencies of a number of private carriers in that state, this fund is the only option for workers' comp coverage for many roofing contractors.

California governor Arnold Schwarzenegger ushered in another wave of reform when, on April 19, he signed SB 899, a sweeping package of workers' compensation measures aimed at reducing employers' costs.

Among other things, SB 899 expands the role of medical networks to give employers more control over their injured workers' treatment and limits the provision of medical treatment to $10,000 while a claim is investigated. It also limits temporary disability benefits for a single injury to 104 “compensable” weeks, and to 240 weeks for employees with more serious injuries, like severe burns or amputations. The law requires doctors to address causation when preparing reports on permanent disability and creates a medical legal evaluation process for employees on all issues.

The bill does not mandate that insurers pass on savings to employers. But the legislation could benefit construction and remodeling companies in particular, who account for one-third of the 255,000 workers insured through the state fund, according to Frank DelRe, executive vice president of the Western Regional Builders Association in Long Beach. The next battle that Bill Callahan, executive director of Associated Roofing Contractors of Bay Area Counties, in Oakland, would like to see fought is one that “regulates the insurance industry.”

Last year, Florida's legislature passed bills that led to the first decrease in the state's manual rate for workers' compensation since 1995. That spelled a 15% rate reduction for contractors to cover their roof installers. Florida's reforms also closed loopholes exempting certain employees from coverage. “There had been 175,000 exemption holders in the state, which kept $1 billion in premiums out of the system,” says Steve Munnell, executive director for the Florida Roofing, Sheet Metal & Air Conditioning Association, in Winter Haven. “There were roofing companies that didn't have licenses but had exemptions,” he says. Munnell adds that the legislature placed restrictions on attorneys' fees, laid out specific fee schedules for judges, and restructured the Joint Underwriting Authority (the state's insurance pool) to make its premiums more accessible to companies.

The activist Arizona Roofing Contractors Association may spend as much time protecting the state compensation fund and the employees it insures from outside influences as it does championing reforms. Dan Cohen, the trade group's executive director, says ARCA last year helped defeat efforts by NCCI Holdings, a national rate-setting organization, from classifying estimators and yard workers as roofers, which would have significantly increased what companies pay to cover those employees. His group's lobbying efforts also paid off when the legislature blocked the state from raiding the fund of $50 million. “The state doesn't own that fund,” says Cohen, emphatically. “It belongs to the policyholders.”