Understanding Workers Compensation Coverage: Key Factors

What is Workers Compensation?

Workers compensation, which is also popularly known as workers' comp or workman's comp, is a form of insurance coverage that provides compensation to the employee(s) in various forms like Medical care, Loss of Income (usually two-thirds of normal salary), Funeral Cost, and Job Retraining when an individual is injured during the course of employment. The policy also provides compensation for survivors of the employee(s) if an individual died during course of employment.

Workers compensation coverage also protects the employer in exchange for mandatory relinquishment of the employee's right to sue his or her employer for the tort of negligence.

Workers Compensation Laws

Each state has its own statutory laws towards workers compensation coverage. Some states require employers to carry coverage and some don’t, depending on different factors like the type of entity or the size of the entity (usually based on the number of employee(s) working for the entity). Most importantly, states which require employers to carry workers compensation coverage may impose fines if they failed to carry coverage.

Workers Compensation bureau rules are becoming stricter day to day and require careful attention in a few key areas to avoid rapid fines to the insurer and the insured.

Key Factors

As an insured or employer, it is very important to understand the following key factors on a workers compensation policy. This will also help in understanding significant values like policy premium and annual audits.

In addition, it is important to review your workers compensation policy for accuracy and understand the policy to avoid penalties or fines by the Bureau.

Experience Modification Factor

The experience modifier adjusts workers compensation insurance premiums for a particular insured or employer based on a comparison of past losses of that insured or employer to what is calculated to be average losses of other employers in that state in the same business, adjusted for size.

The modification factor represents either a credit or debit that is applied to the workers’ compensation premium. A mod factor greater than 1.0 is a debit mod, meaning that losses are worse than expected and a surcharge will be added to the premium. A mod factor less than 1.0 is a credit mod, meaning that losses are better than expected and resulting in a discounted premium.

Classification Codes

One of the primary components of pricing workers compensation insurance is classifying a risk with the proper and correct class code designated by National Council on Compensation Insurance. Fines result when policies reflect class codes that have not been authorized by the state for an insured class of business or occupation.

Ownership

Most of the state bureaus, especially New Jersey, require a single policy to be written by the insurer if multiple entities have more than 50% common ownership. These multiple entities should be documented by an ERM 14 form or a statement of ownership signed by the insured. Failure to do so may also result in a fine. Even multiple state operations recommend to have a single policy covering all locations and entities.

Audit

The Workers Compensation premium is based on anticipated payroll, and carriers want to understand if there is any change in the payroll which was estimated during policy inception. To learn payroll information, carriers conduct an audit on an annual basis. It is very important for the insured to cooperate with the carrier during the audit to avoid estimated audit or policy cancellation.

An estimated audit will make the insurer bill the insured for an additional premium of 150% to 200% of actual premium paid. Carriers will not hesitate to cancel the current policy due to non-cooperation of the audit. Carriers will like to see 941 Tax Forms or 1099 to understand annual payroll.

Federal Employer Identification Numbers (FEINs)

Fines can also be generated when FEINs are blank or incorrect. Comparing the FEIN on the workers compensation policy and Federal 941 for accuracy will also help in avoiding fines.

Monopolistic States

Monopolistic states are those where private or voluntary insurance carriers are prohibited to write workers compensation policies. These states include Ohio, Wyoming, North Dakota, and Washington. Business owners in these states should acquire workers compensation coverage through the State operated insurance fund or pool.

If a business owner operates in multiple states including a monopolistic state, then it is not possible to add the monopolistic state under the other state workers compensation policy.

Also, state pools do not include Employers Liability to cover employers in case of any legal action brought by an employee(s) in reference to a workers compensation claim. In that case, Stop Gap Liability can be added through an extended coverage schedule on the business owner's commercial General Liability policy.

To learn more about Workers Compensation, contact Upen at 866-554-6799 today.