Recent Legal Decisions Prove That Your Experience Modification Rate Matters More Than Ever

Snell & Wilmer

Some contractors no doubt experienced sticker shock when their most recent workers’ compensation audit came back with a higher-than-expected Experience Modification Rate, or EMR[1], that raised their insurance premium despite maintaining a good safety record. In all probability, the new EMR stemmed from a change to the workers’ compensation rating formula used by most states. But, try explaining to a general contractor or project owner that the number lies and you only appear to be less safe on paper. And worse, your EMR might further increase as the new formula becomes fully phased in by next year.

The ramifications extend beyond higher workers’ compensation premiums. It also potentially means lost work opportunities, because an EMR that suddenly exceeds 1.0 will disqualify most contractors from securing work, or at least place them at a substantial competitive disadvantage. This reality has no doubt led to a recent uptick in legal actions where an EMR is at issue. In fact, the U.S. General Accounting Office (GAO) has addressed multiple EMR-related bid protests the last three months. The outcome of these decisions does not bode well for government contractors who are defending a questionable EMR, however.

Given the effect that upward-trending EMRs will have on the contracting industry, contractors should consider taking a critical look now at their company practices. But, here is the legal landscape that contractors should be aware of first:

The EMR Dilemma Explained

Your EMR is a reflection of your company’s loss history compared with that of similarly situated employers. It is primarily utilized to adjust your workers’ compensation premiums upward or downward to better reflect actual risk.[2] The benchmark EMR rating is 1.0, which theoretically reflects the average safety rating of a comparable employer in your industry. If a particular employer’s loss experience is more costly than the average, the employer’s EMR will exceed 1.0 and therefore result in a premium. For example, an EMR of 1.5 will raise a $100,000 annual premium to $150,000. The converse is true as well: if the employer’s loss experience is less costly than the industry average, the result is a discount.[3]

Most states—including Arizona, Nevada, Colorado, Utah and New Mexico—utilize the National Council on Compensation Insurance (NCCI) to calculate an employer’s EMR. A company’s insurer provides data about the company to NCCI every year. In turn, NCCI determines your EMR according to a mathematical formula that, in essence, divides your actual losses by expected losses.

Expected losses (the denominator in the equation) are impacted by the payroll size among various job classifications. Actual losses (the numerator in the equation) are impacted by workers’ compensation claims filed against the company and the corresponding reserves established by the insurer for future payment; however, these figures are adjusted for “primary” versus “excess” losses. Further mathematical detail is unnecessary here, but suffice it to say that the “primary” component of actual losses is weighted much more heavily than the “excess” component. Every employer, therefore, seeks to minimize primary losses.

Whether a loss is considered primary or excess is determined by the “split point.” From 1993 to 2012, NCCI’s split point was $5,000. For example, a $25,000 workers’ compensation claim was considered a $5,000 primary loss and $20,000 excess loss. However, NCCI doubled the split point to $10,000 last year, which will further increase to $13,500 this year and $15,000 in 2015 (plus two years of inflation adjustment).[4] The potential result is that, with no year-to-year change in your company’s loss history, a larger percentage of your loss will be considered “primary” based solely on the split point change. Thus, due to how the rating formula disproportionately weighs primary losses over excess losses, your EMR could increase dramatically. Some contractors no doubt began to feel the pinch last year.

The EMR As A Legal Issue

Early cases. The EMR made its first appearance as a legal topic in the early 1990s, when some employers successfully sued their carriers for allegedly mishandling workers’ compensation claims that resulted in higher EMRs. See e.g. Zurich Insur. Co. v. T.T.C., Inc., 1994 WL 66086 (N.D. Ill. 1994) (denying insurer’s motion to dismiss a lawsuit based on a 25% EMR increase); Security Officers Service v. State Compensation Insur. Fund, 21 Cal.Rptr.2d 653 (Cal. App. 1993) (reversing trial court’s dismissal of a lawsuit alleging the insurer’s “sloth in resolving claims” caused the plaintiff’s EMR to increase to “unwarranted levels.”). These lawsuits did not always pan out, however. See Big Yank Corp. v. Liberty Mut. Fire Ins. Co., 125 F.3d 308 (1997) (affirming the trial court’s dismissal of a lawsuit that alleged Liberty Mutual’s claim mismanagement caused the plaintiff’s EMR to rise as high as 5.07).

In Travelers Insur. Co. v. Paolino Material & Supply, Inc., an insurer sued its contractor insured who refused to pay the difference in premiums attributed to the EMR. 903 F. Supp. 865 (E.D. Penn. 1995). Counterclaiming for damages, the contractor claimed to have “relied on the … [initial] figure in formulating bids on various contracts” and pointed out that “contracts were awarded and work was performed under the assumption that their workers’ compensation insurance costs would be [the initial figure].” The trial court rejected this defense because the contractor was “well aware from previous experience that the [EMR] was a key element in determining the premium price.”

The EMR as a contract requirement. By the late 1990s, the EMR found its way into government contracts. For example, the State of California passed S.B. 981 in 1999 and added the following provision to its government code:

(b)(1) Prospective bidders, including contractors and subcontractors, [must] meet minimum occupational safety and health qualifications established to bid on the project. The evaluation of prospective bidders shall be based on consideration of the following factors:

(A) Serious and willful violations of … the Labor Code, by a contractor or subcontractor during the past five-year period.

(B) The contractor’s or subcontractor’s workers’ compensation experience modification factor.

(C) A contractor’s or subcontractor’s injury prevention program[.]

Cal. Gov’t Code § 4420 (emphasis added).

The EMR has become a requirement in various federal contracts as well. Although the FAR does not mention the EMR specifically, FAR 9.104-1(e) states that “[t]o be determined responsible, a prospective contractor must … [h]ave the necessary organization, experience, accounting and operational controls, and technical skills … including … safety programs applicable to materials to be produced or services to be performed by the prospective contractor and subcontractors.” Accordingly, the Department of Defense (for example) has provided the following guidance to its contracting officers:[5]

Contract Solicitations and Requirements Documents should require offerors to provide demonstration of their safety and health program capabilities and experience. The following are examples of documents that could be used …:

  • Experience Modification Rate (EMR) … for the past five years ….

Solicitations must also identify how the information will be evaluated. Below are suggested methodologies to consider[:]

  • In general, a prime contractor with a [EMR] rate of:
    • .7 is considered superior;
    • While one with a rate of .7 to 1.0 is considered acceptable;
    • A company with a rate of greater than 1.0 should be considered sub-standard.

The private sector has been no less impacted than the public sector. Many hirers—general contractors and project owners alike—have established the EMR as a safety indicator of contracting risk. Thus, especially on large projects, having a competitive EMR has become an important part of the bidding process.

Recent EMR legal decisions. While the EMR as a contract requirement has become more common, so has litigation over its significance.

Contracts are often threatened because contractors simply neglect to provide EMR information. In Griffy’s Landscape Maintenance v. United States, 46 Fed.Cl. 257 (2000), the Court of Federal Claims overlooked this deficiency and held that a contracting officer has a duty to inquire about missing EMR information before disqualifying a prospective bidder.

The GAO has been less charitable, however. In Brickwood Contractors, B-290305, 2002 CPD ¶ 129 (2002), the GAO denied a contractor’s protest based on its failure to comply with the solicitation requirement to “[s]ubmit [an] Experience Modifier Rate (EMR) for each of the past three years.” On the record before it, the GAO could “not question the agency’s overall rating of Brickwood’s proposal as ‘unacceptable’ based on the missing information.”

The GAO denied a similar protest just three months ago in Robert F. Hyland & Sons, LLC, B-408940, 2013 CPD ¶ 296 (2013). According to the contractor, its EMR was contained in a separate envelope provided by its surety company. However, the contracting officer did not discover the envelope and, upon reviewing the particular exhibit where EMR information should have been included, did not find any cross-reference directing him to look elsewhere. The GAO again upheld the agency’s decision to reject the proposal entirely.

Clearly, a federal contractor should consider protesting in the Court of Federal Claims, in lieu of GAO, if it were to find itself in this position.

Some contractors appear to have been confused about how the government would treat their EMR. In Dependable Disposal and Recycling, B-400929, 2009 CPD ¶ 69 (2009), for example, a contractor protested the Navy’s evaluation of its proposal as “unacceptable” under the RFP’s safety evaluation factor. The dispute turned on how to interpret the RFP’s requirement to submit safety records for the “last three (3) years.” The contractor happened to submit its EMR for the years 2008-2000, which encompassed safety data for the years 2006-1996.[6] In its evaluation, the Navy chose to consider the contractor’s EMR for 2007, 2006, and 2005, noting a “high” rate of 1.18 for 2005. The contractor argued that, because a given year’s EMR contains data for prior years, the Navy should have only considered the contractor’s 2008 EMR of .84. The GAO denied the protest because, in light of other deficiencies in the proposal, the contractor could not demonstrate it was prejudiced by the Navy’s interpretation. But even on the merits, the GAO held that the contractor’s argument “constitutes a challenge to a patent ambiguity in the solicitation that the protester was obligated to challenge prior to submitting its proposal.” The contractor probably should have submitted a question early on instead of guessing how to interpret the solicitation requirements.

Likewise, in OER Services, LLC, B-405273, 2011 CPD ¶ 210 (2011), the Navy issued an RFP for construction rental equipment and specified that “safety” would be judged (among other things) by the contractor’s EMR. Offerors were cautioned that “[i]f the EMR for the last three (3) years cannot be provided, submit an explanation for the reasons why and provide a safety program narrative.” In its initial proposal, the contractor noted that “OER Services follows the same Safety procedures as outlined & identified by the following Equipment Rental Firms” and stated “[o]ur current [EMR] is 1.0 as our firm has been in business … without a single accident.” The Navy twice responded by requesting more specific information, but the contractor responded in a limited fashion each time. Ultimately, the contractor’s proposal was deemed unacceptable under the safety factor.

The contractor protested that “it was not given a clear direction on exactly what information [the agency] was looking for.” However, the GAO held that “[i]t is an offeror’s responsibility to submit an adequately written proposal that establishes its capability” and noted that “[a]gencies are not required to ‘spoon feed’ offerors during discussions.” Finding the Navy’s evaluation reasonable, GAO denied the protest.

Just this January, the GAO in Cherokee Chainlink & Construction Inc., B-408979, 2014 CPD ¶ 20 (2014), denied a protest stemming from a Navy contract to install and repair fencing at various military installations. Offerors were instructed to provide their EMRs (among other information) for the previous three years, but the contractor could not do so because its premiums were too low to generate an EMR. The Navy deemed this a minor weakness, but since the contractor also failed to provide its DART rates (“Days Away from Work, Restricted Duty, or Job Transfer”), the contractor’s overall proposal was scored unacceptable. The GAO denied the resulting protest: “While Cherokee argued … that the Navy should have otherwise known that the protester’s DART rates were zero based upon its statement in its proposal that its premiums were too low to generate an EMR the Navy … could not presume Cherokee’s DART rates … based upon this statement concerning the firm’s EMR.” Accordingly, the GAO agreed that “Cherokee’s proposal was deficient under the safety factor because [it] failed to provide information required by the RFP.”

Lessons Learned

As recent history suggests, most contractors’ wounds in this area appear to be self-inflicted. Attention to detail, thoroughness, and responsiveness to the solicitation criteria are necessary for securing any contract—commercial or governmental, not just those involving EMRs. The pitfalls identified above are easily avoided through vigilance.

For those that comply with bidding requirements but are saddled with an EMR they deem misleadingly high, there is hope in the fact that many public and private customers either: (1) measure safety by other metrics beyond just the EMR; or (2) permit bidders to explain why their EMR is unreasonably high. A client who rejects a prospective contractor based solely on a 1.0 or higher EMR is only hurting itself by artificially narrowing the talent pool. Plus, as the above cases indicate, the contractors who are shut out of contract opportunities often find themselves in that position for reasons beyond just their EMR.

Of course, the surest way to remain competitive is to reduce the EMR itself. A well-executed safety plan remains the best way to accomplish that goal. However, it is worth mentioning that most insurance brokers can provide their contractor clients with valuable advice on how to strategically reduce their EMR in other ways. For example, a contractor should consider having its broker review its carrier’s treatment of existing claims (along with the corresponding loss reserves established), the accuracy of the data provided to the rating organization, its job classification codes, and the payroll assignments to those classification codes. In some circumstances, a contractor might limit its EMR by shifting certain types of injured workers to administrative tasks on a temporary basis instead of keeping them off work completely—assuming it complies with applicable employment laws, which a knowledgeable attorney can advise upon.

The bottom line is that contractors hovering around the 1.0 mark need not roll over and passively accept a steadily-increasing EMR. If a contractor’s broker has helpful tools in its toolkit, now is the time to use them. If a contractor loses (or stands ready to lose) an important contract, however, then the contractor should consider seeking knowledgeable legal counsel. Although there are no reported legal decisions (as of yet) addressing whether a government agency can validly reject a proposal where the EMR exceeded 1.0 solely due to NCCI’s split rate change, a contractor might have to make that nuanced argument in court or before an administrative agency in the near future.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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