Workers Compensation insurance covers organizations for their legal responsibility to pay medical and lost wages for employees with work-related injuries or illnesses.
Premiums are calculated based on payroll per class code, which is a description of the type of workers with associated rates. The policies are “auditable” at the end of the year, since the payroll estimates have to be reconciled for proper charges.
Workers compensation insurance policies are broken down into two parts: Part One and Part Two
Part One: Medical and Lost wages – Varies by state and federal statute
Employee injuries are the sole exclusive responsibility of the employer if injury or illness arises from and while in the course of employment, as required by state and/or federal statute – hence the need for workers compensation insurance. Medical bills are covered 100% under work comp law and lost wages coverage varies by state, but is usually 2/3 of weekly wages subject to various maximums (in Alabama, the max is $700/week).
Part Two: Employers Liability
Part Two provides coverage for the employer when sued by the employee (or by third parties effected by the injured employee) for work-related injuries or illnesses that don’t fall within the statutory “exclusive remedy” requirements.
Longshore and Harbor Workers Compensation Act (USL&H)
Employees working on or around water are subject to federal work comp laws, commonly known as USL&H. This mainly applies to those engaged in maritime businesses, but can even apply on a temporary basis for certain jobs. The benefits are different (usually more generous) than state statutes and the premiums for this coverage are much higher, on average.
We always recommend preparation of Light Duty job descriptions for your employees. If they are injured on the job, you can stay in touch with the insurance adjustor and the healthcare providers to get the worker back on the job quickly.
It has been proven that getting back to work quickly will significantly reduce the size of your claims, which saves you money. If you evaluate various scenarios, it is almost always your favor (and in your employee’s best interest) to get the worker back quickly and find jobs that don’t interfere with the recovery.
Rates are largely driven by your Experience Modifier – understanding how this works can be imperative if you suffer from any losses. NCCI is a third party bureau who publishes class codes and loss cost rates. They are also the creators and promulgators of experience mod rates for most insurance companies.
Some carriers, particularly self-funded or state funds, promulgate their own rates and do not report to NCCI. Either way, NCCI is the core “godfather” of the industry. Any other experience mod rate published will almost always follow the exact same formula as NCCI.
Your experience modifier is calculated using a complicated formula to measure what level of risk you are, as an employer. It is then factored into your insurance rates with the carrier. You start at 1.00 and then go up or down depending on your actual loss experience over time. If your mod rate increases to a 1.20, then you will see a 20% debit in the calculation of your insurance premiums.
Important Note: Claims that are tagged as “Medical Only”, meaning no lost wages are paid, are only calculated at 30% of the total loss amount. This is a very strong case showing why Light Duty programs are so effective at controlling your work comp costs.
The most effective method to control your work comp costs is to avoid claims! If you are in a high hazard industry, in particular, then a robust employee safety program will be pertinent (not to mention, required by OSHA).
This should not be a booklet you download online and then stick on a shelf until your next OSHA audit either!
Again, empirically proven over and over, employee safety training and practices will absolutely reduce injury frequency and severity. Do not assume your workers already know how to be safe.
Also, employees may not think about good safety practices unless you train them and enforce good habits. Incentive programs are excellent tactics for enticing employees to practice good safety.
Workers Compensation: Notable Coverage Gaps
Failure to Buy Insurance
Depending on your state and how many employees, you may be required to buy insurance.
Even if you are not required, beware that work comp laws still apply to you – this is a common misconception. For this reason, it is recommended that anyone with employees buy insurance. The costs are not going to be substantial if your payroll is low.
Unfortunately, this is a very common mistake. Sometimes it’s intentional and sometimes not. Most of the time, insured’s are afraid to be overly forthcoming out of fear they may be charged a lot of money for their risk.
If you misrepresent your risks to the underwriter, the policy can be cancelled, or at worst, claims can even be denied. It is recommended that you always disclose your risks and be very open with the underwriters.
Failure to buy the proper coverage for jobs “on or near water” creates very large uninsured exposures.
Failure to Endorse
If you sign a contract requiring Waive of Subrogation or any other similar clauses, you will need to endorse your insurance policy to account for this contractual exposure. Otherwise, the costs are all yours!