Watch out for legacy workers comp claims

Companies engaging in mergers and acquisitions often neglect a crucial part of the due diligence process: a close examination of the target company’s workers compensation program, experts say.

Failure to thoroughly account for unresolved claims and injured employees on leave can become a costly problem after an acquisition, experts say.

Factors relevant to a workers comp program that should be considered prior to finalizing a deal include workers comp insurance policies, claims management, legacy claims, safety culture, experience modification ratings and accident and regulatory violation histories, they say.

“They seem like no-brainers but it has been overlooked in the past,” said Jeff Cavignac, president of San Diego-based Cavignac & Associates, a privately held brokerage that assists with mergers.

The risk of too many departments being aware of a potential merger or acquisition and the cascading effect of leaks to employees who may fear for their jobs or the company’s future often keeps information on lockdown, said Paul Braun, Dallas-based managing director of casualty claims for Aon PLC’s commercial risk business.

But “all the silos need to be involved,” he said. “That has really become the big issue: everybody communicating.”

Forgoing a deep dive into old workers compensation claims still on the books or poor safety culture on sites could be more costly in the end, experts warn.

Gauging a workplace’s safety management culture is “very important,” said Eric Hobbs, shareholder in the Milwaukee office for the employer defense firm Ogletree, Deakins, Nash, Smoak & Stewart P.C. “There’s a major disconnect psychologically for employees who are all of a sudden thrown into a culture” opposite of what they are accustomed to.

Some companies are more transparent than others or safety may not even be a priority in a pending transaction, he said.

“The biggest problem is when a safetyfocused company acquires a company where safety is not a priority,” he said.

Sometimes risk management staffers are not aware of or do not remember a particular issue, said Mark Hansen, former president of the American Society of Safety Professionals and Dallas-based director of risk management for Contek Solutions LLC, which provides consulting services for small and medium-size companies that cannot afford full-time risk managers.

“Let’s say they had a blowout and I show them the claim. Then they say, ‘Oh, that blowout,’” he said.

Examining U.S. Occupational Safety and Health Administration records and comp claims are just part of what needs to be done in a transaction, said Mr. Hobbs.

A company that acquires a firm with a poor experience modification rating — a safety score often used by insurers to establish premiums — could later face higher insurance costs or the inability to secure contracts, as EMRs are essentially recalculated in a deal, according to Mr. Cavignac.

“If you have a 100 (EMR) and you are buying a company with 200 (EMR), that will push your mod over 125, making it tougher to secure work contracts or even insurance in some cases,” he said, adding it could eventually be a “deal-breaker” for some potential mergers or acquisitions.

In addition to examining a company’s safety records, a site visit can help an acquiring firm better understand a target company’s health and safety practices and whether acquiring the personnel should be part of a deal, according to Mr. Hansen.

“Local management will tell you the truth” on safety and employees, said Mr. Hansen. “Corporate won’t. Not that they are lying. They just don’t know. The field people will tell you who the keepers are.”

Understanding current claims is another necessary part of merging with or acquiring a company — not just to know how workers have injured themselves, but where claims are in the closure or return to work process, experts say.

“There could be a lot of potential pitfalls in those situations,” said Seth Gillston, New York-based M&A and private equity practice leader for Chubb Ltd. “If you are an acquiring (company) and you are acquiring the legacy claims, you have to understand the data.”

“I like to talk to the broker of the company we are buying. I like to talk to the carrier,” said Mr. Hansen. “Sometimes risk management, for whatever reason, doesn’t know, and you could end up opening Pandora’s box.”

Almost every firm has workers comp claims that have not been resolved, whether due to severity and unforeseeable complications that delay recovery or claim closure, or other matters such as malingering or pending litigation, experts say. Those considering a merger or acquisition need to know how many and how long such “legacy” claims have been ongoing, they say.

“You obviously have takeover claims, claims run by different administrators, and you have to make sure you have an idea of what they are and who they are,” Mr. Braun said.

“Some companies don’t keep close track of employees on leave and many, many employers don’t understand that in most states just about every compensable workers compensation injury or illness qualifies as (a Family and Medical Leave Act) health condition,” Mr. Hobbs said.

In many cases, Mr. Hobbs recommends that an acquiring company request a list of employees on leave and compare it to a list of comp claims over the past three years.

“I am amazed how often we get into a deal and the seller has employees who have no leave status,” he said.