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    13 Replies Latest reply on Sep 22, 2008 8:47 PM by safetysam

    Workers Comp, Insurance, and the Cost Benefits of Safety

    SafeTekUSA Newbie

      At a recent speaking engagement for business owners addressing how to implement effective safety programs, I had a question from a member of the audience-we'll call him Bob. Bob asked why he should invest in safety. He told me he has insurance if an employee gets injured, he has a safety manual, OSHA has never bothered him and the only employee injuries so far have been minor. Why should he do more if what he's doing now is working?


      "Well Bob," I said. "How much will it cost your business if an employee falls from a roof, and how much have those ‘minor injuries' cost you so far?" Needless to say, Bob, and everyone else in the audience that day were quite surprised as we revealed the actual costs of workplace injuries to their businesses. Unfortunately, the only thing most employers are aware of is that they have to spend money to have an effective safety program, and that's where the train stops. Successful companies, however, maintain very effective safety programs and pay the expenses involved even when business is slow and times are tough.


      Most employers maintain some semblance of a safety program at their company, either because they care about their employees or because they're required to by OSHA. OSHA violations can range anywhere from just a warning, to $70,000 per incident with recent proposed legislation asking to raise fines even further into the range of EPA violations. I would like to think that all employers care about their employees, but often profits come first. What does that mean? It means one thing is certain-all employers care about their company because of the profits derived from it. A for-profit business is created to make a profit 99.9 percent of the time. You carry insurance to protect yourself and your business, you plan ahead to avoid unforeseen costs and cut expenses where they are not needed to ensure you are as competitive as possible while maintaining a good profit margin.


      Unfortunately, however, the cost of effective safety measures are all too often deemed an "unnecessary" expense. When business is slow, what is the first expense to get to get cut? You already know the safety program. Normally the responsibility gets transferred to the HR manager, and training and other expenses are cut which could really lead to disaster, especially for the new employee you just hired. If you are not motivated to have an effective safety program by either OSHA, the threat of fines or care for your employees, one thing that will motivate you is the actual cost of a workplace injury to your business. So how much does it cost?


      Statistics and Costs


      Every year in the United States there are over 6,000 workplace fatalities. The greatest majority of these fatalities are men ages twenty-five to forty-four, of which there are approximately 30 million in the United States. That means, using this example, just over 1 in every 6,000 men aged twenty-five to forty-four dies at work each year.


      Even with these staggering numbers, this does not include deaths related to occupational illness. Another 50,000 workers die every year in the United States from occupational illnesses due to exposure to a workplace hazard. These occupational illnesses include asbestosis caused by exposure to asbestos, silicosis which can be acquired from concrete cutting operations (and any work involving exposure to crystalline silica dust if not using proper respiratory protection) black lung disease for miners, or brown lung disease for textile workers, etc. (Just an FYI, though not usually fatal, poison ivy is an OSHA reportable illness.)


      In addition to deaths, there are over 6 million U.S. workers that suffer non-fatal workplace injuries with an estimated cost to U.S. businesses of around $128 billion annually. A person's life or health is obviously priceless, but incidents and injuries carry a tangible cost to business, one quarter of each dollar of pre-tax corporate profits, to be exact.


      The actual cost of a workplace accident or illness to your organization depends on a few different things. Costs depend on how many employees you have, how many incidents you have, the type of work you do and the value of your materials, products or services. For companies that may be experiencing a tough time financially, any losses are serious. Even for a large employer, losing an employee on a job who is skilled in their trade, for even a few days, can have a much larger impact on profits than the actual direct costs might suggest. With smaller businesses this would be magnified because they often have very little buffer when it comes to accidental losses. A serious incident could not just make it difficult to get by, but put them out of business. In fact, according to a recent study, 60 percent of companies experiencing a serious disruption that lasted more than nine days went out of business.


      "But Wait, What about My Insurance? Isn't My Business Covered?"


      Insurance only covers what is detailed in the policy, and it usually only pays for serious injuries or damage. Workers' compensation does cover all employee injuries, but you will end up paying for the cost of that injury and more-we'll get into that later. Some of the costs that are not covered by insurance include lost time, sick pay, damage or loss of product and materials, lost time and failure to keep schedule, extra wages for overtime and temporary labor, investigation time and expenses, OSHA fines, loss of contracts, legal costs and loss of company reputation, to name a few.


      The uninsured costs differ between businesses, the type of work being done, insurance and type injury. No matter how you look at it, though, the uninsured costs are many times greater than the insured costs. If your business is a ship, costs are like an iceberg. Most of the costs are hidden beneath the surface and are not immediately visible, but you feel it when you run into them. Studies have shown that the insurance premium to uninsured cost ratios for the construction industry generally range from 1:9 to 1:41. That means that for every $1 paid in insurance premiums, the company has to pay an additional $9 to $41 themselves for losses arising from incidents. Another way to look at it-uninsurable expenses often run up to as much as 4 times more than the actual costs covered by insurance.


      Workers' Compensation Insurance
      It may surprise even the financially savvy how much you can save on your insurance by being safe. A poor claims record will affect the amount a company pays in insurance premiums. Depending on the number of incidents a company may have, insurance premiums can increase, and coverage may even be cancelled. Insurance companies set a base rate for a particular industry, and the number of incidents you have directly affects how much you pay as your base rate. This is called an experience modifier. Your workers' compensation insurance premium is determined by this easy formula:


      Payroll x Workers' Compensation Rate x Experience Modifier


      Workers' compensation rates reflect the average claim cost per $100 of payroll. Workers' compensation rates can take a huge chunk out of your profits if you are not safe. The average worker's compensation rate for construction is 7 to 8 percent of your payroll, but can be lower for executives, around 2 percent, or 25 percent for more high risk activities. According to the U.S. Census Bureau, construction claims comprise around 21 percent of the total claims for all industries. This is quite a large number considering that only 5.7 percent of the U.S. workforce is in the construction industry.


      An experience modifier of 1.0 means your company's workers' compensation claims experience is no better or worse than your industry. If you have a lower experience modifier, you pay less.


      For example, if your business had a 1.47 experience modifier because of increased incidents and injuries and paid $85,958 in premiums, but reorganized, got serious about safety, and got down to a .82 experience modifier, your business would only be paying $47,950. That is almost a $40,000 savings. That $40,000 with a 9 percent profit margin equates to approximately $445,000 in new business each year!


      There are other savings to be had. Many businesses find that by improving workplace safety and health standards, their investments are repaid by improved productivity and efficiency, less employee absence, good company reputation, less turnover and improved quality of work. Tackling the causes of incidents and injuries is not unnecessary overhead, but an investment in your business. An investment in an effective health and safety program is as valuable as any other for your company. The American Society of Safety Engineers found in a recent study that for every dollar spent on a quality safety and health program, businesses saved $8. That's a healthy return on investment.


      An investment into an effective safety and health program for your business is just that, an investment. Not only is it unethical to risk an employee's health or safety to save money and cut costs, but in reality, it does just the opposite. It creates unnecessary risks, costs and headaches. A safe company with limited incidents and injuries will not only have an increased profit margin, but will be more appealing to potential clients and good employees. Successful businesses plan for the future, for growth and for potential risks. Safety should play a key role in your strategy and is the reason long-term successful businesses invest so much into their safety and health programs, because as I am sure some of you know, gambling isn't a good long term, or short term investment. Play it safe with safety. You may skimp by for a while, but the house always wins.

      Written by Robert F. Tilley, Jr., CEO
      SafeTek USA