Tag Archives: comprehensive general liability

Internal Vs. External Benchmarking Of Insurance Claim Data

Data-driven analysis is a critical decision-making tool for Construction Financial Managers and other industry leaders.

Decision-making is arguably the most important responsibility of company leadership.

Companies that make better decisions make fewer mistakes, and achieve a distinct competitive advantage in the marketplace.

The underlying purpose of benchmarking is to continually improve the quality of organizational decision-making.

Overview
As construction risk management consultants, we help contractors prevent accidents, mitigate claims, and reduce the total cost of risk through a continuous improvement process.

We believe companies must instill management accountability for continuous improvement by linking performance measurement to both prevention activities (leading indicators) and operational results (lagging indicators). As the adage goes:

“What gets measured is what gets done.”

In our consulting roles, we frequently help companies establish realistic performance measures by conducting various types of claim and loss analysis.

This type of data analysis is usually the starting point in a performance improvement process — and a common practice among insurance agencies, brokerages, carriers, and risk management consulting firms.

In addition, we are often asked to conduct a benchmarking analysis that compares one company's claim and loss data against peer companies or to the construction industry as a whole.

Benchmarking
The term “benchmarking” refers to the comparison of a company's performance results against those of similar peer companies. Benchmarking evolved out of the quality improvement movement in the late 1980s and early 1990s.

Its initial intent was to identify leading companies regardless of industry sector, and apply their best practices to improve one's own company. Over time, benchmarking has become synonymous with process improvement.

The traditional view of benchmarking required two separate disciplines focused on performance improvement: measures and methods. Identifying and capturing performance indicators (the measures) is only the first step; developing and implementing performance improvement (the methods) is the second and most important step for the benchmarking process to be truly effective.

The Health Club Analogy
There is limited value in benchmarking without applying new methods to address continuous performance improvement. Performance improvement requires more than the measurement of performance indicators; it requires the implementation of changes in management disciplines to attain improved operational results.

Using only performance indicators without implementing new methods to improve operations is akin to joining a health club and expecting the benefits without actually using the equipment or committing to an exercise program.

Merely jumping on the scale and gauging your weight relative to others doesn't help you achieve your own weight loss goals anymore than comparing your pulse and respiration rate to others helps you attain your aerobic or cardiovascular fitness goals. What matters most is that a person embarking on a weight loss or fitness program stays committed to the process and monitors his or her own progress.

Similarly, we believe the ongoing monitoring of claim and loss data specific to an individual company is even more important than the initial measurement of insurance claim and loss data relative to other companies.

Baselining As Benchmarking
The term “baselining” refers to the internal benchmarking process that occurs when a company compares its performance against its own results year after year. Ongoing, internal monitoring allows a contractor to determine if the company's claim and loss trends are improving or deteriorating, and to make the critical performance improvement decisions necessary to facilitate a change in results.

Referring back to the health club analogy, baselining does not compare an individual's weight and aerobic fitness to that of the other health club members. Instead, individual fitness goals and measures are established, monitored, and tracked to verify continuous personal improvement.

Similarly, a construction company can develop a baseline analysis of its loss cost performance by reviewing loss and claim data for a minimum of 3-5 years. Company results are compared from year to year, and ideally are broken down by operating entity, division, project, manager, or even crew levels.

Exhibit 1 provides a sample of a baseline analysis that compares one company's relative claim and loss performance within all of its operating divisions.

2001-2006 Total Claim Cost per Man-Hours Worked by Division

 

This analysis reviews the historical loss cost data for the entire company and breaks it down into meaningful data relative to each operating division. The total workers' comp, Comprehensive General Liability, and auto liability incurred claim costs (sum of paid and reserves) for each company division over a five-year period were compared to the total man-hours for each division, producing a cost per man-hour figure.

The results illustrate dramatic differences in total claim costs per man-hour for each division. This baseline analysis was the first step in raising awareness of the predominant loss leaders within the company. This increased awareness led to a detailed analysis that established plans of action and realistic cost targets by company division for the upcoming year.

External Benchmarking
We acknowledge that there are numerous benefits to measuring the frequency, type, and cost of insurance claims compared to peer groups and/or the entire construction industry. Such analyses provide the ability to:

  • Identify leading types and sources of claims
  • Establish strategic objectives to prevent the occurrence of common industry claims
  • Increase knowledge of industry best practices
  • Determine operational performance improvement priorities
  • Create awareness among managers and employees about the costs of claims and the impact on profitability
  • Post positive results on company websites and for use in other marketing materials

The Bureau of Labor Statistics provides safety-related data so that companies can externally benchmark injury and illness data against specific industry groups. (Check out the Web Resources section at the end of this article for more information.)

In addition, Bureau of Labor Statistics data is used to calculate and compare OSHA Recordable Incident Rates and Lost Workday Incident Rates, both of which are common construction industry benchmarks. This data is useful when making high-level comparisons within construction industry segments relative to injury and illness rates.

We also use external benchmarking analyses to establish risk reduction, loss prevention, or cost containment goals. In “Risk Performance Metrics” by Calvin E. Beyer in the September/October 2007 issue of Building Profits, a sample benchmarking comparison shows a representative contractor's duration of lost workdays workers' comp cases in median number of days compared against the median duration for the industry. Results such as these can highlight the importance of an increased focus on injury management and return-to-work programs.

The benchmarking analysis in Exhibits 2A and 2B compares a contractor's workers' comp claim and loss performance to an established group of peer contractors in the same specialty trade. (These companies engaged in similar work, and performed in states with similar insurance laws and legal climates.)

WC Claims Per $1 Million WC Payroll by Company

The analysis was based on total incurred workers' comp costs and total number of workers' comp claims as compared to payroll for each entity. Overall, Company D had worse results than the other three companies.

This prompted an in-depth review of Company D's workers' comp losses by division and occupation. As shown in Exhibit 3, the company experienced significant claim frequency and severity issues within the first six months of employment.

WC Claim Count & Cost by Length of Service

These findings triggered the development and implementation of specific activities designed for Company D's new employees.

Below are some of the activities that were incorporated into the formal improvement plan:

  • hiring processes
  • new hire skills assessments
  • orientations
  • daily planning meetings
  • formal training

Other Sources Of Benchmarking Data
Professional associations and industry trade/peer groups also provide comparative data for benchmarking purposes.

The Construction Financial Management Association's Construction Industry Annual Financial Survey is an excellent source for understanding the key drivers of contractor profitability. We use the survey data to determine comparative profit margins for different types and classes of contractors when we calculate a revenue replacement analysis to show the additional sales volume needed to offset the cost of insurance claims. (This technique was highlighted in the “Risk Performance Metrics” article previously mentioned.)

Similarly, the Risk and Insurance Management Society (RIMS) conducts an annual benchmarking survey that reviews insurance rates, program coverages, and measures of total cost of risk.

An example of a peer group data source for benchmarking is the Construction Industry Institute (CII). The Construction Industry Institute is a voluntary “consortium of more than 100 leading owner, engineering-contractor, and supplier firms from both the public and private arenas” (www.construction-institute.org). It develops industry best practices and maintains a benchmarking and metrics database for its participating members.

Another peer group example involves members of captive insurance companies sharing and comparing claim and loss data for the group as a whole. There is a major advantage when a true peer group shares benchmarking data: Such data sharing often leads to peer pressure in the form of increased ownership and accountability for improvement by the companies shown to be the poorest performing members.

We continue to search for more new sources of industry best practices and comparator data. A possible emerging source for the construction industry is the National Business Group on Health. This organization has developed standardized metrics known as Employer Measures of Productivity, Absence and Quality™ (EMPAQ®).

EMPAQ® helps member companies gauge the effectiveness of their injury and absence management and return-to-work programs. The founder and principal of HDM Solutions, Maria Henderson, served as a project sponsor for EMPAQ® from 2003-2007, and co-presented with Calvin E. Beyer on “Return to Work as a Workforce Development Strategy” at CFMA's 2008 Annual Conference & Exhibition in Orlando, Florida.

Limitations Of External Benchmarking
We fear that the increasing popularity of external benchmarking analyses may indicate that it has become a “quick fix” solution or a management fad. When asked to conduct an external benchmarking analysis, we always ask the following questions:

  • What is your purpose in seeking these comparisons with other companies?
  • Who are you trying to convince and what are you trying to convince them to do?
  • What specific peer companies should be used for comparative purposes?
  • Are these companies (and their operations and exposures) truly similar enough for a fair comparison?

Beware Of Pitfalls
There are many hurdles to surmount in locating suitable companies for external benchmarking comparisons. Generally, when benchmarking comparisons can be made, more often than not the greatest value lies in the workers' comp line of insurance coverage.

Here are some key factors to consider when choosing contractors for external benchmarking comparisons:

  • Percent of self-performed work vs. subcontracted work
  • Payroll class codes and hazard groupings of selfperformed work
  • Differential geographic labor wage rates
  • Payroll rate variances between union and merit shop operations
  • Size of insurance deductibles
  • Claim reporting practices

For example, claim reporting practices must be similar in order to minimize distorting the frequency or average cost of a claim. If one or more comparison companies self-administers minor claims or does not report all claims to their carrier, using carrier loss reports for the comparison is an invalid method.

We also find that comparing the frequency of claims and total loss dollars divided by thousands or millions of dollars of payroll (exposure basis) is a helpful workers' comp benchmark between companies of similar operations in similar states.

Likewise, a suitable benchmark for auto liability performance compares the frequency of claims and total loss dollars per one hundred vehicles.

When benchmarking fleet-related claims, ensure that the number and size of fleet vehicles — as well as the type of driving (urban vs. rural) and the total number of miles driven annually — are similar among the contractors whose claims are being compared.

Benchmarking comparisons of Comprehensive General Liability insurance results are especially challenging due to delays in reporting third-party bodily injury and property damage claims, in addition to the expected long tail of loss development for these claims.

All of these factors are compounded by vastly different litigation trends and liability settlements in various states and regions of the country.

Common Limitations Of Data Sources
Whether or not you intend to develop a baseline of your company's claim data or to benchmark your company's performance against a peer company, there are several issues that must be successfully resolved regarding the data's quality and integrity.

Based on our experience, we classify the key challenges associated with exposure and claim/loss data into the categories shown in Exhibit 4: availability, accuracy, accessibility, standardization, reliability, comparability, and date-related problems.

Seven Data Challenges

Value Of Multiple Measures
Evaluating data from various sources and different angles is also valuable. Why? Because it's possible to gain a better understanding of the whole by dissecting the parts. This practice illustrates the principle of multiple measures.

This approach is substantiated by 2006 research, which concluded that the “simultaneous consideration” of frequency and severity provides a more comprehensive result than performing analysis based solely on one factor.1

This is similar to our approach when we conduct a “Claim to Exposure Analysis” and review historical frequency and severity vs. the relative bases of exposure for each line of casualty insurance coverage.

Returning to the health club analogy, when starting a formal exercise program, you often begin with such general baseline measurements as height and weight; this is usually followed by additional measurements, such as BMI, body fat content, and the girth of arms, legs, and chest (the baseline).

As we all know, weight alone is not always the best indicator of success in fitness efforts. In fact, since muscle weighs more than fat, an increase in total body weight may actually occur after beginning and maintaining a fitness program.

Although you might not experience a dramatic weight drop, you could see a reduction in waist size and BMI — positive changes that would not be evident unless multiple measures were being used and reviewed.

Benchmarking insurance claim and loss data performance is like comparing one person's height and weight against the ideal height and weight charts based on the entire population.

Wouldn't it be more effective to establish your baseline weight and other multiple measures initially so you can see the progress you are making?

This is similar to the baseline measurements that a company should take (as well as the multiple measures) that are necessary to meet your company's performance improvement goals for financial success, operational excellence, or risk reduction.

Web Resources:

  1. U.S. Department of Labor BLS Incidence Rate Calculator and Comparison Tool
  2. National Institute for Occupational Safety and Health Work-Related Injury Statistics Query System
  3. Risk and Insurance Management Society, Inc. Benchmark Survey
  4. Construction Industry Institute Benchmarking & Metrics
  5. National Council on Compensation Insurance, Inc. (NCCI Holdings, Inc.) Benchmarking Tools
  6. Employer Measures of Productivity, Absence and Quality EMPAQ
  7. CFMA's Construction Industry Annual Financial Survey with Benchmarking Builder CD

Authors
Cal Beyer collaborated with Greg Stefan in writing this article. Greg is Assistant Vice President, Construction Risk Control Solutions, at Arch Insurance Group. As a member of the Southeast Regional team in Atlanta, GA, Greg supports underwriting and claims in risk selection, claim mitigation, and risk improvement activities. He is also responsible for high-risk liability risk reduction initiatives including contractual risk transfer, construction defect prevention, and work zone liability management.

1 Baradan, Selim, and Usmen, Mumtaz A., “Comparative Injury and Fatality Risk Analysis of Building Trades,” Journal of Construction Engineering and Management, May 2006, pp. 533-539.

New Supreme Court Case on Long Tail Exposures: State of California v. Continental Insurance

Yesterday the California Supreme Court issued its long-awaited decision in State of California v. Continental Insurance, No. S170560. In its latest ruling, which will affect all long-tail insurance cases, including Environmental, Asbestos and latent injury, and Construction Defect cases, the Court rejected the “pro rata” time on the risk allocation scheme advocated by the insurers and held:

  1. For indemnity relating to “long tail” claims1, the “all sums” language in the Comprehensive General Liability (CGL) policies obligates a carrier to indemnify up to the policy limits, so long as some portion of the “property damage” that is the subject of the suit occurred during the policy period; and
  2. The insured is entitled to “stack” the limits of successive policies up to the policy limits for indemnity relative to that loss.

The case arose out of the State of California’s claim for indemnity under its excess Comprehensive General Liability policies in connection with a federal court-ordered cleanup of the State’s Stringfellow Acid Pits waste site. The State designed the Stringfellow site, and operated it as an industrial waste disposal facility from 1956 to 1972, when groundwater contamination was discovered. In 1998, a federal court found the State liable for all past and future cleanup costs for the site. Each of the six insurers that were parties to the appeal issued excess Comprehensive General Liability policies to the State between 1964 and 1976.

The Stringfellow site, and the resulting insurance litigation, has given rise to several insurance rulings already, including Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645 — adopting the continuous injury trigger for defense, and State of California v. Allstate Ins. Co. (2009) 45 Cal.4th 1008 — holding that the relevant event to determine if there is an “occurrence” is the discharge into the environment from a contained area, and that where there is an indivisible injury, the insured is not obligated to prove the amount of any property damage resulting from any discrete cause.

There are several critical aspects of the Court’s decision.

First, there was no dispute that the environmental damage began shortly after the operation of Stringfellow began, and that it continued throughout the defendant insurers’ policy periods and beyond. According to the opinion, the site was uninsured prior to 1963, and after 1978. The issue, therefore, was whether the State of California could be allocated partial responsibility for the cleanup costs for the amount of property damage occurring in years where it was self insured. This fact pattern — where there is insurance for some but not all of the affected years — is common in “long tail” or “progressive loss” type cases. A carrier with only one year of coverage could potentially be responsible for all damages regardless of the length of time over which the property damage occurred.

However, the second critical aspect of the Court’s decision, and one that may temper its precedent value, is the specific policy language. The Excess Policies at issue utilized older Comprehensive General Liability policy language. The Court observes:

Under the heading “Insuring Agreement,” insurers agreed “[t]o pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of liability imposed by law … for damages … because of injury to or destruction of property, including loss of use thereof.” Limits on liability in the agreements were stated as a specified dollar amount of the “ultimate net loss [of] each occurrence.” “Occurrence” was defined as meaning “an accident or a continuous or repeated exposure to conditions which result in … damage to property during the policy period …” (at pg.4) (emphasis added)

In newer Commercial General Liability policies, the Insuring Agreement reads: “We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies … This insurance applies to “bodily injury” and “property damage” only if … the “bodily injury” or “property damage” occurs during the policy period …” (e.g., ISO form CG 00 01 10 01) (emphasis added)

The State of California Court noted that the “pro rata,” or time on the risk allocation approach advanced by the carriers assigns liability for those years of the continuous progression of property damage to all affected years, including those where the insureds chose not to purchase insurance. The Court determined the “all sums” language of the policies was inconsistent with this result, emphasizing that its holding follows directly from the policy language, rather than any general principle, and is therefore arguably inapplicable to policies using the revised language:

Under the CGL policies here, the plain “all sums” language of the agreement compels the insurers to pay “all sums which the insured shall become obligated to pay … for damages … because of injury to or destruction of property …” (Ante, at p. 4.) As the State observes, “[t]his grant of coverage does not limit the policies’ promise to pay ‘all sums’ of the policyholder’s liability solely to sums or damage ‘during the policy period.'”

The insurers contend that it would be “objectively unreasonable” to hold them liable for losses that occurred before or after their respective policy periods. But as the State correctly points out, the “during the policy period” language that the insurers rely on to limit coverage, does not appear in the “Insuring Agreement” section of the policy and therefore is neither “logically [n]or grammatically related to the ‘all sums’ language in the insuring agreement.” (emphasis added)

Under later ISO policy forms, the Insuring Agreement requires that property damage occur during the policy period. Accordingly, there are valid arguments — at least for carriers using later versions of the Commercial General Liability policy forms — to distinguish the “all sums” holding by this decision, and that explicit language requiring that property damage occur during the policy period is unambiguous and should be applied. It is therefore an open question whether the allocation approach advanced by the carriers would have been successful with the newer policy forms.

The third critical aspect of the decision is its rejection of FMC Corp. v, Plaisted & Cos. (1998) 61 Cal.App.4th 1132. The Court noted that in this case, like FMC, the policies had no specific prohibition on stacking of policy limits. The Court concludes:

We agree with the Court of Appeal, and find that the policies at issue here, which do not contain antistacking language, allow for its application. In so holding, we disapprove FMC Corp. v. Plaisted & Companies, 61 Cal.App.4th 1132

In conclusion, this decision from the California Supreme Court is significant, because it firmly extends the “all sums” language to indemnity. For policies with the applicable language, if any part of the property damage that is part of a “long tail” case, the carrier will be obligated to pay up to the policy limit, and then seek equitable contribution between other carriers on the risk.

1The kind of property damage associated with the Stringfellow site, often termed a “long-tail” injury, is characterized as a series of indivisible injuries attributable to continuing events without a single unambiguous “cause.” Long-tail injuries produce progressive damage that takes place slowly over years or even decades. (Pg 7-8)