Rancho Mesa's Alyssa Burley and Account Executive Matt Gorham discuss how HVAC and plumbing businesses can stay protected with proper payroll classifications.

Show Notes: ⁠⁠⁠Subscribe to Rancho Mesa's Newsletter⁠⁠⁠

Director/Host: ⁠⁠⁠⁠Alyssa Burley⁠⁠

Guest: ⁠⁠⁠Matt Gorham⁠⁠

Producer/Editor: Megan Lockhart

Music: "Home" by JHS Pedals, “News Room News” by Spence

© Copyright 2024. Rancho Mesa Insurance Services, Inc. All rights reserved.

Transcript:

Alyssa Burley: Welcome back, everyone. My guest is Matt Gorham, Account Executive with Rancho Mesa. He specializes in risk management for HVAC and Plumbing contractors. And today, we’re going to talk about protecting HVAC and plumbing businesses with proper payroll classifications.

Matt, welcome to the show.

Matt Gorham: Great to be here, thanks for having me Alyssa.

AB: Of course, we’re always happy to have you back. Now, business owners understand that they need to classify their employee’s work properly.

So, why is it important that contractors properly classify the work they are performing with regards to their company’s overall risk management program?

MG: Yeah, that’s a great question. And it’s important to recognize first that class codes help carriers and regulators to differentiate businesses and evaluate their associated risks. We talk about transferring risk with insurance, and it's important to remember that we’re also pooling risk as well. With the classification system, carriers can better analyze risks to identify industries that they want to be involved in, what types of losses to reasonably anticipate, and from that, how do you appropriately price a policy or modify coverages. And problems can arise for businesses when their coverage fails to match their operations.

So to answer your question, using the correct class codes can help avoid problematic coverage exclusions, surprise audit bills or overpaying insurance premiums, and can help to align you with the best carrier partners within your industry.

AB: All right, well that’s a good point. So, will you give us an example of when the classification that was reported to the carrier by the insured didn’t match the work that was actually being performed and caused a claim to maybe be denied?

MG: Yeah, and it's kind of a nightmare scenario for a lot of contractors and business owners in general. But we were talking with an HVAC contractor recently; and this is before we started talking I want to make sure we're clear on that point, that had flooded an apartment while moving a water line, and they were held liable for over $350,000 in property damage costs. And the carrier denied the claim because of a coverage limitation endorsement, which specifically limited coverage only to the classification codes listed on their policy, and moving a water line wasn't contemplated within their operations. Now, obviously, that's like a worst case scenario that the coverage limitation is found out because a loss has taken place. But it's also possible for a carrier to cancel or to decide to non-renew coverage for a business if they learn that the business's operations are heavier or they're significantly different than what was previously represented to them.

AB: All right, so, do you have an example of where this may affect workers’ compensation claims?

MG: Yeah. And it's a little bit different on the work comp. side. It's still relevant because, again, you could have a situation where a carrier isn't really contemplating the work that's being done. And so we talked a little bit about the class fit. So, within HVAC contractors, they could either be considered within the plumbing class codes: the 5183, 5187, or the sheet metal class codes: 5538, 5542. And there's really a subtle difference that separates whether they should be classified within plumbing or within sheet metal. But there's a substantial difference in the corresponding premium for workers’ comp. I was recently working with a plumbing contractor that had a lot of their payroll classified under excavation work. And that wasn't with an appetite for a lot of work comp. carriers, and so it ended up actually excluding them or limiting them from a lot of markets that would have been really good fits for them even though that payroll really shouldn't have been in the excavation class code.

The technician getting paid $32 per hour whose payroll is classified as 5187 could expect to pay premiums from a $4 to $5 base rate per $100. While the technician getting paid the same $32 per hour, but categorized as 5538 could expect to pay premiums from a $10 to $12 base rate per $100. While the lower rate may at first be appealing, if payrolls improperly classify it throughout the policy term, an audit could lead to a substantial additional premium. So, it is best that you classify your work correctly from the start so that your premium properly reflects the risk of the work being done.

Plumbers often encounter a similar classification challenge. It depends on some key details in their operations, and will directly influence which carriers are willing to partner with them and how aggressively they price their coverage.

AB: All right, so there's really two areas that we need to look at. One is: are they going to be covered because they properly identified what work that they're doing? And then the other is paying for their work comp. insurance and not overpaying or underpaying. So, if there are listeners out there who think they may not be classifying their employee’s hours properly; what do you recommend they do to mitigate the risks?

MG: One of the most important things that you can do is to meet with your broker. You know, here at Rancho Mesa, we've got a comprehensive submission and renewal process. So we scheduled pre-renewal meetings 90 to 120 days before the renewal date to understand any changes in the business. And we use industry-specific supplemental applications to gather more thorough and relevant information. We all know how frustrating some of those generic questionnaires can be. But we also encourage open and honest communication with carrier partners that fosters trust and transparency. The better underwriters understand the risk, the better we can identify the right markets and they know what they're taking on. But we also offer policy reviews and audits to identify potential coverage issues. 

AB: All right, well Matt, if listeners have questions about their classifications and coverage, what's the best way to get in touch with you?

MG: I can be reached at (619) 486-6554 or mgorham@ranchomesa.com.

AB: All right, well Matt, thanks for joining me in StudioOne™.

MG: Yeah, thanks for having me, always a pleasure.