Whether you are starting a new business or already in an established business, you need to know the basics of workers’ compensation insurance. Nearly every business that has employees other than owners is required by state law to carry workers’ compensation. But you need to be careful in choosing a policy. The fact is that many insurance companies can get very tricky when it comes to writing policies – in their bag of tricks there are such ways as classifying the type of work your employee is doing incorrectly, miscalculating so-called modification factors, and creating a variety of other types of insurance policies. an error that, oddly enough, results in higher insurance costs for you than it should.
Beyond your own need to carrier your workers’ compensation insurance, there is another reason to take a few minutes to learn more about this type of insurance, namely fraud. Worker compensation fraud is the second largest category of white-collar fraud in the United States today, second only to income tax evasion. According to industry observers, fraud occurs in almost a quarter of all claims. This can be employee fraud (an employee who was in an accident claiming to have been hurt more seriously than was actually injured), employer fraud (harassing an employee who submits a claim or trying to deceive the insurance company about the number of employees the company has), or insurance company fraud (falsely denying a valid claim). ).
In many businesses, such as manufacturing and construction, workforce composition is a major expense item – and also a major source of friction and confusion. But most business owners know little or nothing about how it works or how to calculate rates. It’s too complex to go into detail here, but I’ll try to cover most of the basics in this short article.
Fundamentals of Worker Compensation
If you’re in the type of business where it’s mandated by state law to purchase workers’ compensation benefits, this is something to take seriously. In some states, notably Florida and California, businesses are closed and owners are criminally prosecuted for failing to carry this type of insurance. In most states, you need it if you have one or more employees – California being one of the few that requires it even for a one-person business.
In most states, you can purchase an insurance policy from a workers’ insurance company; however in five states (OH, ND, WV, WA, WY) you must obtain cover through a fund operated by that jurisdiction’s state. These state-operated funds are called “monopoly state funds”.
Note that thirteen states maintain state funds that compete with private insurance companies. So in those thirteen, you can buy your policy either from a private insurance company or from a state fund (CA, AZ, CO, MD, ID, MI, MN, MT, NY, OR, OK, PA, UT).
If for some reason your business turns out to be very risky, you’ll need to get insurance from what’s called an “assigned risk” fund, and it costs a lot more. Workers’ compensation is regulated primarily by the state (and Washington DC) so there are 51 separate sets of rules governing benefits, premiums, and coverage. However, a so-called “ratings bureau” called the National Insurance Compensation Council (NCCI) has developed manuals used by many states to regulate how insurers calculate your rate. The NCCI states rely almost entirely on this manual, while several other states have developed their own manuals. For example, Nevada adheres closely to the NCCI manual, while California has developed its own manual.
Worker compensation policies tend to seem complicated and improbable to the uninitiated. Also, you can’t completely depend on your insurance agent to spell out the technical terms, options, and terms – remember, it is in his or her interest to sell your policy as expensively as possible. So, if your premiums turn out to be sizable, it’s best to have your policy reviewed by a lawyer with work experience or a consultant who specializes in this area.
For example, do you need a guaranteed cost policy (a policy where the premium stays the same no matter how many claims you file) or a loss-sensitive plan? The last alternative will cut your costs but increase your exposure.
The basic formula that almost all insurance companies use to calculate your policy is to multiply the rate times one hundred dollars in wages. But what are these “tariffs”? Where does it come from? This is based on the classification of the type of work your company does. It’s always to your advantage to be in a relatively “safe” classification, such as clerical work, compared to a more injury-prone classification, such as construction. Experts warn that you should be on guard lest insurance agents misclassify your company – such a “mistake” can easily double your premium.
What’s more, insurance companies inevitably apply an “experience” factor to your premium. This is a deduction for the multiplier calculated based on your company’s claims history. The bigger or bigger your claim, the bigger the experience factor.
Assigned Risk Plan Explained
So what can you do if every private insurance company in your state rejects your insurance application? In this case, you must use the state-defined risk plan. It’s expensive insurance. However, I’ve been told, many agents sell assigned risk insurance without bothering to mention it, and the words “assigned risk” don’t appear on the policy. In general, rates and services are said to be better in NCCI states. However, even if your company is in NCCI status, you will probably get a lower rate if you switch to “voluntary” (that is, risk unassigned) coverage as soon as possible.
Note that if you are in a “monopoly” state – that is, a state where there are no private insurers and you must use monopoly state funds – you may still be put on an established risk plan. You should discuss this with your agent.
Some Tips Regarding Worker’s Compensation Insurance
– Your agent, working with his corporate underwriter, decides what classification code to use in developing your premium rate, as well as various other risk factors. Reportedly, mistakes and oversights abound in this type of policy (usually to the insurance company’s benefit), so review your policy carefully, preferably with the help of a professional with experience in this field.
– Make sure to carefully read your policy’s Information Page in detail – it contains the most important details that you need to check.
– You have to be very careful when your company hires independent contractors. If the independent contractor does not bring workers’ compensation and is injured, you will be responsible for all costs associated with the claim.
– Always make sure you indicate as the insured name all legal entities that are in any way related to your business. For example, if you own the building you are in, you must be named in your policy as the legal owner of the property, as well as the owner of the business.
– You should also be aware of federal workers’ compensation exposure. In addition to state requirements, several federal laws also impose liability on employers. You can add coverage for actions such as the following to your workers’ compensation policy by passing an endorsement (that is, by adding a supplement): Federal Coal Mine Health and Safety Act (benefits for miners with black lung disease; Workers’ Compensation Act) Longshore and Ports (benefits for employees injured in maritime work), and the Seasonal Agricultural and Migrant Workers Protection Act (housing and safety benefits for seasonal and migrant agricultural workers).
The NCCI Manual is not used to calculate rates in: Delaware, California, Indiana, Massachusetts, Michigan, Minnesota, New York, New Jersey, North Carolina, Pennsylvania, Wisconsin, and Texas. (All other states use it.)
If you or a professional you employ feels that your premium rate is not what it should be, based on the rules and specifications in the NCCI Manual (or other state rating manual), your first step is to contact your agent, say an expert, and request a change; if this doesn’t work, you should contact the NCCI or the appropriate state rating agency directly and point out the error in your policy as written.
Is your company required to pay workers’ compensation benefits to illegal aliens? According to experts, the answer depends on whether an illegal alien qualifies under your state’s laws as an “employee” working “to service” others under a “rental contract.” So far, Ohio and New York courts have upheld the right of foreigners to receive benefits; Wyoming, Virginia, and Florida haven’t.
Note that only Texas, among 50 states, does not require employers to carry WC insurance.
About Worker Compensation Fraud
Workers compensation is a no-fault system for providing monetary benefits to injured or sick workers while at the same time protecting employers from lawsuits. But the system is wide open to fraud on a number of fronts. Employers, trying to reduce premiums, may understate their total number of employees or describe the type of work they do; workers may claim benefits they are not entitled to, for example, by exaggerating the seriousness of an injury; even insurance companies themselves may deliberately miscalculate premiums and unfortunately this is not uncommon.
Surprisingly, it’s employer fraud that is the main type of worker comp scam. According to a recent study reported by the State’s National Labor Compensation Law Commission, more than 13% of employers studied operate without legally required workers’ compensation insurance. Additionally, others were found to cheat the system by intentionally misclassifying or reporting their paychecks or by misrepresenting employees as independent contractors.
Certainly the most well-known type of worker compensation fraud – the type most frequently covered by the media – involves workers claiming a disability that does not exist. Most insurance companies in recent years have established an internal Special Investigation Unit (SIU) to deal with this type of fraud. Claims adjusters report suspicious cases to their company’s SIU, which then uses surveillance, background checks, videotape, medical record checks, and other tools to document fraud, then submits the case to the Attorney General for prosecution. Criminal penalties for workers who try to game the system can be severe.
As an example of how the SIU investigative system works, CompSource Oklahoma recently investigated a female plaintiff who received total permanent disability benefits for back injuries resulting from an accidental slip and fall. The company’s SIU team found that while receiving this allowance, she was registered on the Internet as an outdoor recreation club clerk. Surveillance was carried out and it was found that he was involved in mountaineering, carrying heavy objects and other activities which would suggest that he was not disabled. Criminal charges were filed and conviction obtained, resulting in a lengthy prison sentence.
The moral of the story is simply this: Don’t scam the employee company. Insurance companies now employ a dedicated team of investigators who will vigorously pursue suspicious claims and, if fraud can be proven, will press charges without hesitation.