By Mandy Locke
mlocke@newobserver.com

The state Industrial Commission will be taking a tough line next month against uninsured employers it has ordered to settle claims with injured workers: Pay up or go to jail.

More than a dozen employers have been ordered to come to a hearing May 22 and settle a claim that has dragged for years. If the business owners don’t – and can’t settle a portion of the claim – they’ll be ordered to jail. Law enforcement will be sent to arrest those who don’t show up for the hearing, officials say.

The efforts follow a News & Observer investigation this month which revealed that tens of thousands of employers required to protect their workers with insurance don’t. And when workers were hurt, the commission has done little to ensure the uninsured employer paid the workers’ medical bills and wages for missed work. Some workers ended up permanently disabled and reliant on Medicaid and welfare to survive.

“In response to the issues you raised, we now have some concrete plans,” said Pamela Young, chairwoman of the North Carolina Industrial Commission, the state agency charged with enforcing the workers’ comp laws.

In addition to the May 22 contempt hearing, the commission will schedule other special hearings to deal with lingering uninsured cases. Commission staff reached out to nearly 100 workers who reported they’ve been injured on the job and whose company didn’t have coverage. Most of those cases had fallen through the cracks because the worker didn’t have an attorney to press for collection.

About 125 uninsured employers who ignored the commission’s orders to pay the worker and penalties will be called back, too.

Young said the commission is spreading the word that it is serious about enforcing workers’ compensation laws, which require employers with three or more employees to carry insurance for workplace injuries. The law, which dates back to the 1930s, is supposed to ensure that industry takes care of its own accidents.

Leonard Jernigan, a workers’ compensation lawyer and national expert on employer fraud, said Young’s efforts are a step in the right direction.

“I’m delighted that they are in fact going after this,” Jernigan said. “It’s been greatly needed.”

A big gap

The Industrial Commission has long struggled with enforcement of workers’ compensation coverage. The commission, whose members are appointed by the governor, has the power to demand employers routinely show proof of coverage.

It has instead turned to the N.C. Rate Bureau, a private group that lobbies for insurance companies, to provide information on which carriers cover which employers.

Last month, the Rate Bureau accounted for about 140,000 companies covered through private insurers doing business in the state. Another 117 large companies have been certified with the Department of Insurance as having the ability to pay should their workers be injured.

That leaves a wide gap. The Department of Commerce estimates that as many as 170,000 companies operate in North Carolina that have four or more employees, one employee above the trigger for required coverage. Dun and Bradstreet, a firm that tracks businesses, counts about 174,000 companies with three or more employees headquartered in North Carolina; that number doesn’t account for those based elsewhere.

Young said she has now requested the Rate Bureau send the commission a report when companies cancel their policies or let them lapse.

But Young is still confounded by the prospect of trying to account for all the businesses without coverage.

“If you have a business out there that does not have any intention of having workers’ compensation, how do you capture that?” Young asked. “How do you find these people?”

In plain sight

Some of the businesses forgoing workers’ compensation duties are in plain sight, compliant with other agencies that deal with businesses.

G&J Transport, a trucking company in Beaufort County, is one of the companies whose owners face possible contempt charges next month.

Gregory and Joyce Nixon, the company’s owners, decided to drop their workers’ comp policy in October 2004 to cut costs. Twelve days later, a driver died in a crash. And, in 2007, while the company was still without coverage, another driver died on the job.

Through those years, the company was registered as a limited liability corporation with the N.C. Secretary of State. The Nixons paid taxes, and they registered a fleet of trailers with the Division of Motor Vehicles.

Gregory Nixon has declined to comment. He could not be reached Wednesday.

The commission fined the Nixons in 2009 for failing to carry workers’ compensation insurance. They owe $50 for each day without coverage, which amounts to $41,500.

A long process

Young says she has been working for more than two years to establish a contempt process at the commission. In December 2009, Young said, she began meeting with local judges, sheriff’s deputies and magistrates in Wake County to come up with the right forms and procedures when the commission forces an employer to jail.

Still, the program wasn’t in place. And until the N&O report, there was no immediate plan to start.

Tracy Curtner, the former assistant attorney general who was assigned to the Industrial Commission, said she had already created a contempt procedure in 2008 when she worked for the commission.

“The process was set and ready to go,” said Curtner, now in private practice.

As the insured losses from storms continue to rise, insurers may need spread their risk, have reissuance in place and readjust reinsurance for 2012.

The tornadoes, hail and strong winds that tore through the Mid-West last week have produced from $1 to $2 billion in insured losses, according to the latest report from EQECAT.

The majority of the more than 150 tornadoes in Tennessee, Kentucky, Indiana, Illinois and Alabama last week took the lives of at least 37 people, 20 of whom were in Kentucky. However the death toll may continue to rise over the coming days,

Insurance Information Institute President Bob Hartwig told INN, Its likely well see elevated thunderstorms in 2012 as we have the past four years in a row. The question is whether that elevation will include tornadic activity.

Classified an EF4, the most devastating tornado destroyed more than 200 homes and businesses in Harrisburg, Illinois.

Tornado activity in 2012 is already high with 272 tornadoes, according EQECAT, Preliminary tornado counts from the weekend outbreak ranks it as the most in terms of number of tornadoes in March to date from 1950 and tied highest with January 1999 as the most this early in the season.

If we have two quiet weeks well be back on a normal trajectory, Hartwig said, What we saw in the past week doesn’t come close to the damage incurred in 2011 in Alabama and Joplin, Missouri.

Last year, deadly twisters took the lives of at least 339 people as more than 160 tornados ripped a patch across seven states, The city of Tuscaloosa, Alabama was especially hard hit with the largest tornado classified an EF-5.

The difference this year is that the damage largely occurred in rural areas with lower property values compared to the city areas and businesses that were hit a year ago, Hartwig said.

Insurers can spread their risk, have reissuance in place and some have already re-adjusted their reinsurance for 2012. Many already have or will be looking to adjust prices upward to reflect the increased risk,” Hartwig said, “Home ownership and commercial property have increased their rates or are in the process of doing so,”

(c) 2012 Insurance Networking News. All rights Reserved

Data Resources

A summary of key material, commodity, skilled labor and transportation price changes from the previous quarter, and from the same period last year, are highlighted below. The component cost changes were largely derived from an analysis of current and historical data provided by a variety of independent trade resources including:

• The Bureau of Labor and Statistics (BLS)
• The American General Contractors (AGC)
• The National Association of Home Builders (NAHB)
• Reed Construction Data
• Random Lengths Composite Price Index
• The Engineer News Record (ENR)
• Marshall Swift Boeckh
• National Association of Realtors

Pricing Breakdown 

A summary of select material, commodity, skilled labor and transportation price changes as of December 31st, 2011:

Looking Back on 2011

Despite a record slowdown in the construction of single family homes, the overall cost of residential construction actually increased in 2011, resulting from a multitude of factors:

• Global competition for the commodities used in the production of materials and the construction process itself resulted in construction increases. Although the prices for these resources moderated in the final quarter, volatility and demand for the commodities and materials were consistently subject to year over year increases of 15% to 40% or greater.
• Contractor overhead costs increased as prior strategies for profit margin reduction and cost absorption were no longer sustainable. These additional costs were ultimately passed onto the customer. Increased overhead costs can be attributed to:
• Environmental and safety regulation compliance
• Increased Professional Insurance Liability coverage requirements
• Energy efficient upgrades and code compliance
• Increased employee benefits and worker’s compensation costs

Looking Forward to 2012

Factors and circumstances already impacting 2012 residential reconstruction costs include:

Continued Global Commodity Demand - Oil prices have increased significantly in the early part of 2012, largely because of heightened tensions over Iran’s nuclear weapon development, disrupted oil shipments, and lower refining capacity, which has also increased futures speculation. 1

• Unfortunately, this slowdown has already ended for some key materials. Crude oil and diesel prices have moved up significantly since the January price index data were collected. Producers of plastic pipe have notified customers of 8 percent increases, effective March 1. And copper futures have jumped from levels of a few weeks ago, making increases in pipe and wiring prices likely.” Ken Simonson, Chief Economist for the AGC. 2

Domestic Construction Activity – Increased new home construction and remodeling activity will have an upward price impact on the cost of building materials such as lumber, plywood, cement and gypsum (which was up 5.9% in January 2012).

Environmental and Safety Regulations – OSHA Fall Safety and the EPA Lead Removal Regulations will increase the job cost for new home construction, restoration and remodeling and will force contractors to pass the cost on to the homeowner.

New Construction

• Fourth Quarter 2011 Single and Multi-Family permits and construction starts have improved and indicate continued improvement in 2012. 3
• “This year should be a better one for housing than 2011,” writes Patrick Newport, U.S. economist at IHS Global Insight, in a release regarding the forecast. “Initially, the revival will take place in the multifamily segment.” 4
• The National Association of Business Economists (NABE) forecast 700,000 single and multi-family homes this year, up 15% from the same period last year. 850,000 starts are predicted for 2013. 5

Remodeling

• Remodeling sentiment rose to the highest level in five years, according to the National Association of Home Builders’ (NAHB) Remodeling Market Index (RMI) for the fourth quarter of 2011. 6
• “With several key components above 50, the latest RMI provides reason for guarded optimism going forward,” said NAHB Chief Economist David Crowe. 7
• After a slow start, home improvement spending is expected to trend up later this year, according to the Leading Indicator of Remodeling Activity (LIRA) released by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University. 8
• “As more consumers remain in their homes rather than move in this economy, remodelers benefited from a gradual increase in home improvement activity, taking us to a five-year high,” said NAHB Remodelers Chairman Bob Peterson.
• Sales of existing homes have been increasing in recent months, offering more opportunities for home improvement projects,” says Kermit Baker, Director of the Remodeling Futures Program at the Joint Center. “As lending institutions become less fearful of the real estate sector, financing will become more readily available to owners looking to undertake remodeling.”

Reminder: One Home Can Actually Have Three Values

Market Value vs. New Construction Cost

The dynamics of supply and demand apply both to a home’s market value and its cost of construction. However, the impact is different for each, and it has become more common in many local real estate markets for the cost to construct a home to exceed the purchase or selling price of the lot AND home. The value disparity is still increasing due largely to the prolonged deterioration of property values and the slow, steady climb of actual construction costs.

• Economy and Housing Inventory – “There will be times when home values will fall well below the cost of construction and persist at that low level for a long time…In the U.S., parts of the Detroit Metro region have plenty of homes selling at bargain-basement prices, well below the replacement cost. Yet home prices are not moving up because a sizable number of residents have left the city. Only when population stabilizes or sees a rise, can home values be expected to trend back up to their natural equilibrium, in line with the cost of construction”. Lawrence Yun, Chief Economist for the National Association of Realtors 9
• Available Land Inventory – “In Houston and many interior parts of the country, the dynamics of the natural equilibrium price (The state in which market supply and demand balance each other and, as a result, prices become stable) are always heeded. If there is strong housing demand, the builders simply build more at that price. Supply increases in line with rising demand. If demand falls, builders stop building. That is not the case in San Francisco. If demand rises, builders do not build, because they cannot obtain housing permits. In some neighborhoods with unique, spectacular views from a hilltop, for example, there is simply no land available to build. In other nearby places, there is land but there are too many hoops to go through and loops to satisfy the planning office. Therefore, home price will be unrelated to the cost of construction in San Francisco”. Lawrence Yun, Chief Economist for the National Association of Realtors. Excerpts taken from the 2011 article titled “Natural Equilibrium Home Prices.” 10

Sources:

1 Post Tribune Article (Chicago Sun-Times) 2/6/12
2 AGC 2/16/12
3 Bloomberg Business article citing NABE February 2012 Economic Outlook 2/27/12
4 Builder Outline 1/6/12
5 Bloomberg Business article citing NABE February 2012 Economic Outlook 2/27/12
6 Professional Remodeler article citing NAHB Remodeling Index Report for 4th Qtr 2011 2/10/12
7 NAHB 1/27/12
8 Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University 1/19/12
9 Article by Lawrence Yun in National Association of Realtors Economists Outlook Blog 7/7/11
10 Article by Lawrence Yun in National Association of Realtors Economists Outlook Blog 7/7/11

• Why has my insurance coverage increased when the value of my home has decreased?
• Why is my coverage so high when homes in my area are being built for less?

While most homeowners track the market value of their homes, they rarely know what it would cost to rebuild with the same materials, craftsmanship and improvements added over the life of the home.

Even while the real estate market remains in a slump, and the cost of building materials continues to rise. Although the prices of some components, such as labor, concrete, sheetrock and lumber, have not increased over the last year, several materials have seen price increases:

• Asphalt roof shingles: +15%
• Diesel fuel and gasoline: +39% (almost $1 more than last summer)
• Steel: +11.5%
• Copper for plumbing: +15%
• Carpet: +5.5%
• Fabricated metals for heating and air conditioning ducts: +4%.

According to the US Department of Labor, the net increase for all residential building components is 6.7% from September 2010 to September 2011, and 8.1% for residential maintenance and repair. Some factors that impact new construction costs are favorable. Financing is very attractive, sales taxes and permit fees are not increasing, and labor rates have been fairly stable. In addition, when constructing new homes builders can select less costly components to keep the price down. Conversely, material prices are slightly higher and diesel prices drive up the cost of operating equipment.

Rebuilding a home after a loss usually involves a restoration contractor due to processes that are significantly different. Matching undamaged finishes, water and mold mitigation, and demolition are not skills required for new homes. Restoration contractors often need special equipment that new home builders would not. Finally, in damage repair the option to choose the least expensive components does not exist; the contractor must use the materials that existed before the loss.

“When demand is down, contractors shave profit margins and economize to remain competitive…. In the insurance industry, restoration contractors, working under time-is-of-the essence conditions, tend to hold profit and overhead rates at industry-standard levels.”

This advice is especially important for young adults who are covered under their parents’ insurance. College students are more apt to loan their cars to their friends who may not have a vehicle on campus. It’s important to note that auto insurance is on the vehicle and follows the car, not the person. If someone else is driving the car and gets into a crash or causes damage to the vehicle, your insurance is responsible for covering the cost of damages to the car. As a result, you insurance premium may go up.

Insurance companies underwrite the driving habits of the insured, not the driving habits of those you lend your car to and look unfavorably on incidents that happen while your car was in the possession of someone else. This behavior could not just affect your insurance rates, but also your insurability with that carrier.

While sharing in most other cases is a gracious gesture, in the case of loaning your car to a friend, it’s best to refrain and save you both the hassle and hard feelings in the event of a crash.