What is it?
Worker’s Compensation (WC) coverage is a no-fault coverage that provides coverage for injuries that result during an employee’s employment. No-fault means it does not require one party to prove the blame was caused by another party. It is state specific. Individual state law mandates most definitions, coverage territories, terms, and conditions in WC policies. Due to the specific state nature of WC, it is very important if a company hires an employee in a new state, to add that state to the policy.
State Differences
Worker’s Compensation is mandatory in every state, except New Jersey and Texas. Why? Because well… everything is bigger there. I guess not Work Compensation though? Both states technically have elective laws with high restrictions to opt out.
In four states, you must go to a state-run fund (kind of like FEMA’s flood insurance program). The four WC monopolistic states are North Dakota, Ohio, Washington, and Wyoming. Note it is important to still have employer’s liability coverage, often referred to as Stop Gap insurance, in these states. Stop Gap attaches to a companies’ commercial package or business owner’s package policy.
Employer’s Liability provides coverage for an employer’s liability where recovery is permitted by law for bodily injury arising out of and in the course of an injured employee’s employment that is not covered under worker’s compensation law. It is a kind of umbrella insurance that sits above the state run Worker’s Comp insurance program. Say an employee is hurt, goes and gets fixed up through worker’s comp, but that isn’t enough, they want more, they are still hurt, and there isn’t any coverage left in the Work Comp, so naturally they go after the employer. Enter Employer’s liability insurance. It looks like this on your policy:
What is Looks like in a Policy
Bodily Injury by Accident $1,000,000 each accident
Bodily Injury by Disease $1,000,000 policy limit
Bodily Injury by disease $1,000,000 each employee
What are the Benefits of the Worker’s Compensation System?
Employers gain predictability for the cost of workplace injuries. Imagine back in the industrial revolution where many adults (and children) were working in dangerous factories. Upper management had no idea what the cost would be for injured employees each year. Now they can just see how much they paid for work comp anually.
The WC system encourages loss prevention and promotes safety. If a company has tons of WC insurance claims one year, you better bet the estimated premiums will go up.
Prompt benefits. Employees don’t have to wait to get treated, the idea is to get them fixed up ASAP and back to work. Speaking of benefits, Worker’s Compensation generally offers four types of benefits
1. Medical Benefits
2. Compensation for Lost wages
3. Rehabilitation
4. Death/Survivor benefits
By law the Government mandates Employer's must provide the following to employees:
1. Safe work place
2. Safe tools
3. Safe competent fellow employees
4. Safety rules established and enforced
5. Warn of danger
All employers owe these to all employees
Employee vs. independent contractor
This question comes up often. A general rule of thumb is an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what or how it will be done.An employee is hired at a wage or commission where the employer directs and controls what and how work will be done. Another question to ask is “who provides the tools”? Independent contractors bring their own tools to the job.
It is important if your hiring independent contractors that you get certificates of insurance from them including worker’s compensation coverage to prove they have their own. During a worker’s Compensation audit, auditors may include independent contractors that look like employees. Insureds should have saved their contractor’s Certificates of insurance to show proof they have their own worker’s compensation insurance and should be excluded from the audit. From the insured’s prospective, contractors are not employees, so why should they pay for their WC insurance? Insureds must have proper documentation to back it up.
Work Comp Audits
Worker’s Compensation policies are auditable. When the policy is put in place it is based off estimated payroll information. At the end of the policy term the insurance company goes back and reviews the policy term with actual pay roll data to account for any hires/fires throughout the year. The goal is to charge the appropriate premium for the appropriate risk/exposure.
It would be unfair if when the policy was put in place it was rated with $200,000 worth of office employees, but really throughout the year you hired $2,000,000 worth of sales people and only paid for the office employees. Vice versa, if the company had massive layoffs, the worker’s compensation premiums would go down (although you have bigger problems if you had massive layoffs, can anyone say EPL claims?). The audit also double-checks that employees were categorized correctly. Often the insurance companies sub-contract out the audits. Audits can be done in person, over the phone, electronically, or if the insured doesn’t respond, the insurance company can just assume estimated changes (which isn’t ideal).
As you can imagine, work comp is a moving target. With larger accounts that have 100s of employees I often recommend at least a quarterly Work Comp check.
How is WC Rated/Underwritten?
The payroll or WC underwriting information exchanged between the insured, insurance agent, and insurance company often consist of the following data points:
• FEIN #:
• State
• State Unemployment Number
• Date of Hire
• Number of Employees by state
• Work Address or if Employee works from home – home address
• Job Title or Work Comp Class code
• Annual payroll by state
As an insured, you don’t need to know class codes, but essentially every job title is broken into work comp class codes for insurance companies to rate the riskiness and the according premium charged. Office employee is 8810, Salespersons is 8742 etc. One item to note is that many states have maximum payrolls for directors or executives like CFOs, CEOs, COOs, etc. So if a CEO makes $1,000,000 per year salary, but the state has a maximum annual payroll of $160,000 the employer’s WC policy will be rated on $160,000 thus saving the insured’s insurance premium dollars.
WC audits can be a pain, but most insurance company policies include wording that the insurer must comply. To make it less of a pain, usually someone in the HR department can run a payroll report. Have a Worker's Compensation question or would like a draft of my" Worker’s Compensation Summary”, e-mail below!