Every employer buying workers compensation coverage knows it is an insurance policy for the costs associated with injured employees, but few employers ever read the actual policy. The primary reason most people do not read the insurance policy is because it is written in “insurance speak” or legalese. The following is an effort to translate a generic workers compensation insurance policy into everyday English so more people can understand it.

A workers compensation insurance policy is actually divided into two parts. The first half covers what most employers think of in workers compensation. The second part is the “Employers Liability Insurance.” Part two is designed to cover instances where workers compensation insurance does not apply and an employee brings a lawsuit against the employer. Part one’s coverage and workers compensation statutes are so broad that it is rare for an employee to be able to bring a claim under Part two. For the purposes of this article, we will only be addressing what is typically found in Part one of the policy coverage

Section A – What the Insurance Covers

Workers compensation insurance will pay for injuries caused by accidents, or for illness/disease caused by being exposed to an unfavorable environment. Accidents and illnesses also include death. This section limits the coverage to the policy period. The injuries or illness has to be caused by conditions associated with the employee’s employment. If the work comp claim brought by the employee is for work-related illness, the employee’s last day of exposure to the conditions causing the illness must occur within the policy period.

Section B – What the Insurance Company Pays

The insurance company agrees to pay for all benefits as defined by the workers’ compensation statutes of the state where the employer does business. The insurance company agrees to make timely payment of these benefits.

Section C – The Right to Defend Claims

The insurance company reserves the right to determine which claims it will pay willingly and which claims it will contest. In exchange for the insurance company making this decision, the insurance company agrees to pay the cost of defending the employer from any claim brought against the employer. This allows the insurer to investigate and settle claims as it deems appropriate. It also includes the insurer’s right to not to defend a claim if it is not covered by the policy.

Section D – Additional Things Paid By Insurance

The insurance company agrees to pay the cost associated with the claim in addition to benefits provided by the work comp laws. This includes such things as:

1. Attorney fees and expenses.
2. Surveillance and extraordinary investigative expenses.
3. Medical management expenses (triage, nurse case managers, etc).
4. Court cost.
5. Employer’s expenses incurred at the request of the insurer, excluding loss of earnings.
6. Appeal bonds.
7. Any other expenses incurred by the insurer.

Section E – When There Exists Other Insurance

If the employer has a self-insurance retention or large deductible, the insurer will not pay until the employer has met its financial responsibility under the policy. Also, (this rarely happens), if the employer has other workers compensation insurance that will pay for the employee’s injuries, the insurance company will not pay more than its share of the benefits.

Section F – What the Employer Must Pay

The insurance policy makes the employer responsible for payments when the employer:

1. Intentionally fails to comply with a safety law or regulation.
2. When the employer has serious and/or willful misconduct.
3. When the employer knowingly employs someone in violation of the law.
4. When the employee brings a claim against the employer for discharging, coercing or discriminating against the employee for bringing a work comp claim.

Also, if the insurance company is compelled to make a payment in one of these situations, the employer agrees to reimburse the insurance company for all cost associated with the situation.

Section G – The Right of Recovery

In exchange for the insurer paying the work comp claim, the employer and the employee agree the insurer will have the right to recover the cost of the claim from a third party who is at fault for the injury (think auto accident or equipment malfunction).(WCxKit)

Section H – Legal Stuff

This section includes several miscellaneous conditions including:

1. Most states consider notice to the employer of a work comp claim to be notice to the insurer.
2. An employer’s bankruptcy does not relieve the insurance company from paying the work comp claims.
3. The insurance company agrees it is primarily responsible for any benefits owed under the policy.
4. The legal jurisdiction is the state where the employer is located.
5. The insurance company agrees the policy conforms to the applicable law.
6. The insurance company agrees to pay any special taxes or assessments that arise due to the issuance of the insurance policy.
7. Anything in the policy that conflicts with the state law is modified to comply with the state law.

Not every workers’ compensation policy will follow this generic outline, but the above outline should assist you in understanding your workers’ compensation insurance policy.

Author Michael Stack, CEO Amaxx LLC. He is an expert in workers’ compensation cost containment systems and helps employers reduce their workers’ comp costs by 20% to 50%.  He works as a consultant to large and mid-market clients, is a co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and is founder & lead trainer of Amaxx Workers’ Comp Training Center .

Contact: mstack@reduceyourworkerscomp.com.

Workers’ Comp Roundup Blog: https://blog.reduceyourworkerscomp.com/

©2018 Amaxx LLC. All rights reserved under International Copyright Law.

Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.

An annual premium audit is a great opportunity to review your workers’ comp class codes and included payroll for accuracy.  Employers that understand the process and prepare early should, at the very least, have no surprises from the audit. Unfortunately, far too many organizations view the audit as a necessary evil, don’t take the time to understand it, and are later presented with a bill they did not expect and may not even be able to pay.

The best way to face a premium audit is head on. That means knowing what to expect and preparing ahead of time, along with avoiding the most common errors.

The Audit

Insurance carriers conduct premium audits to verify a company’s payroll for the period during which it provided coverage. It occurs after the policy expires to determine the accuracy of the payrolls for that year to see if the premium must be adjusted. If the payroll exceeds the estimated projected payroll, the carrier will send a bill seeking more money. On the other hand, if the payroll is lower than projected, the employer may get money back.

Insurers conduct audits to ensure the premium paid to them accurately reflects the company’s risk. That includes making sure the business and employees are properly classified. It’s imperative to have the proper documents and information ready for the audit.

Here are common errors employers make — and how to avoid them.

1. Failing to include deductions. Everything in the payroll is not necessarily subject to the workers’ compensation premium. The allowable exclusions vary among states, but several are universal to all jurisdictions, such as

• Overtime (premium portion, or the half part of time and half)
• Double time (premium portion, or the double part of double time)
• Severance pay

Severance pay for someone who has not worked at the organization incurs no risk and, therefore does not need to be included in the workers’ compensation premium calculation. Overtime and double time pay may be excluded — to a certain extent.

For example, if ‘Joe’ makes $10 per hour, but you give him overtime, or time-and-a-half for working weekends, the extra portion of his pay can be excluded. So, if Joe works 8 hours on Saturday at a rate of $15 per hour, the extra $5 per hour, or $40 (8 hours x $5 per hour) can be excluded. The same exclusion applies for double time.

Depending on the jurisdiction, additional deductions may apply.

• Officer excess
• Uniform allowances
• Tips/gratuities
• Employer-provided perks
• Bonuses

2. Neglecting to inform the auditor. You will be charged for your $100,000 in overtime, double time and severance if you do not report them to the auditor!

3. Omitting the necessary paperwork. Once you’ve informed the auditor of the deductions you’ve found, you need to back it up with the proper paperwork. For example, if a portion of your payroll went for severance pay, you will need the proper documentation. Other documents you may need to have at the ready include:

• Payroll records
• Payroll tax returns
• Certificates of insurance
• Invoices for contracts that show a breakdown of labor and materials

4. Forgetting to consider state differences. In addition to the overtime, double time and severance pay exclusions, jurisdictions often have additional deductions. However, they are not the same in every state. A multi-state employer that assumes exclusions in one state apply to another may be sorely mistaken. You can check your state’s Basic Manual, ask your insurance broker, or ask your premium auditor to direct you to the allowable deductions for a particular jurisdiction.

5. Improperly classifying employees. Your business operation determines what your ‘governing class’ will be; i.e., the classification code in which the bulk of your employees will fall. Employees such as clerical workers who incur little risk may fall into a different category, but only if they NEVER do other work. For example, if ‘Sally’ is an administrative assistant but once or twice a year she is involved with inventory control on the manufacturing floor, she cannot be classified in the clerical class.

6. Failing to ask questions. If you’re not sure which classification applies to your company or you don’t know what paperwork is required to back up your deductions, ask. Resources are typically available through state insurance bureaus, NCCI, or your broker or insurer.

Conclusion

Premium audits don’t need to be a gut-wrenching ordeal. Document and prepare for the premium audit on an ongoing basis, so you don’t have to spend hours or days getting ready. Asking the right questions, understanding deductions that apply, and gathering the proper documentation will make the process smooth and painless.

Author Michael Stack, CEO Amaxx LLC. He is an expert in workers’ compensation cost containment systems and helps employers reduce their workers’ comp costs by 20% to 50%.  He works as a consultant to large and mid-market clients, is a co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and is founder & lead trainer of Amaxx Workers’ Comp Training Center .

Contact: mstack@reduceyourworkerscomp.com.

Workers’ Comp Roundup Blog: https://blog.reduceyourworkerscomp.com/

©2018 Amaxx LLC. All rights reserved under International Copyright Law.

Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.

When used properly, transferring risk for workers compensation exposure and losses can be an excellent tool for cost control. One such tool is known as Waiver of Statutory Immunity.

A Waiver of Statutory Immunity is: the abandonment, relinquishment, rejection, renunciation, surrender, release, cancelation, or loss (by implied conduct) of any known statutory or contractual legal right.  There are dozens of legal phrases outlining the various types of waiver and additional definitions.

While most waivers of immunity are in the construction industry, any employer using Sub- Contractors, Professional Employee Contractors, Leased Employee Vendors, Volunteers, Individual Specialists, or Temporary Help Agencies can face similar exposures.  The purpose is these entities take over exposures from the entity using their services.

Governments generally have almost full Statutory Immunity for negligence by either constitutional or legislative act.  Yet, if the loss is egregious enough, has major impact, or is not properly asserted, this immunity can be lost.

Hold Harmless and indemnification contracts (with or without Statutory Waiver) not properly written and designed to meet normal public practices, can held null and void by the courts, and/or workers compensation judicial ruling.

For purposes of this discussion two descriptions will apply.  Indemnitee: is the person or organization wanting to transfer risk.  Indemnitor: is the person or organization assuming or taking the risk.

Example of Exposure:

Company A (the Indemnitee) hires company B (the Indemnitor) to perform some computer adjustments.  The work is done on A’s premises.  A and B entered into contract with a standard hold harmless and indemnification agreement.  B also furnishes insurance endorsements naming A as an also insured.

Company B’s employee is injured and alleges A to have been negligent and cause of the injury.   B’s employee is paid compensation benefits by B’s insurance carrier.

B’s employee then sues A for negligence.

A, relying on the hold harmless clause and endorsements for liability coverage turns the lawsuit over to B for defense and disposition.

A is astounded when B’s liability carrier uses employer immunity as defense since B’s workers’ compensation carrier paid benefits.  Because the hold harmless and indemnity clause did not have a Waiver of Statutory Immunity, A is left without defense or coverage under B’s liability policy.

A may be denied coverage under its insurance policies.  A’s carriers may assert that A made its own assumption of risk.

The situation can be progressively worse depending on the number and type of insurance carriers, and parties involved, but most of these cases are resolved without lengthy litigation.  Records show that Indemnitees generally lose the most in exposure and cost.

There are numerous situations where Statutory Immunity is lost.  A few are:

1. Violation of Public Practice.
2. Late Reporting.
3. Failure to properly assert.
4. Vague or Cross interpretation of contract wording.
5. Missing litigation time tables.
6. Judicial or Administrative Ruling
7. Indemnitor fails to Waive Immunity in proper written format.

Manuscript Policy

Standard insurance policies are seldom written to extend coverage for Waivers of Immunity, and State Insurance Departments may not have premium structures for the coverage.   Few carriers recognize waivers without specific endorsement, therefore, a manuscript policy may be necessary.

A Manuscript Policy is written to conform to tailored needs of the insured, or joint venture.  Policies can grant coverage for almost every legal operation.   Premiums may be negotiable, and shared among the various entities.  The policy generally defines every entity exposures and limits, and will define how the insured is to comply with the policy provisions. The policy is generally written for a single use and will expire or be cancelled when the use is completed.  An extending endorsement may be added to allow for injuries or claims incurred but not reported.

Most agents, brokers, and underwriters are not experienced enough to write a manuscript policy, therefore, a manuscript policy is usually prepared by the home office insurance carrier department. The same will apply to endorsements accepting Waivers of Immunity.

Manuscript policies are seldom offered to smaller organizations as premiums are generally expensive or have high retention limits.  Such retentions may be spread across all participants, therefore, it will be crucial that all participants are fiscally sound enough to absorb their share of retentions.

Summary:

Obtaining a Waiver of Immunity from another is a good way to transfer and protect against workers’ compensation claims and subrogation challenges by non-employees, or independent contractor relationships.  However, they must be prepared by properly experience lawyers, in conjunction with all entities and insurance carriers.

Author Michael Stack, Principal, COMPClub, Amaxx LLC. He is an expert in workers compensation cost containment systems and helps employers reduce their work comp costs by 20% to 50%.  He works as a consultant to large and mid-market clients, is co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and is founder of COMPClub, an exclusive member training program on workers compensation cost containment best practices. Through these platforms he is in the trenches on a working together with clients to implement and define best practices, which allows him to continuously be at the forefront of innovation and thought leadership in workers’ compensation cost containment. Contact: mstack@reduceyourworkerscomp.com.

©2016 Amaxx LLC. All rights reserved under International Copyright Law.

Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.

Annual Premium Audits (aka payroll reviews) are required by insurance carriers. They can be challenging for the insured employer as they tend to be disruptive, annoying, time consuming, inconvenient, and reduce business operation productive time.  Incomplete or wrong information provided to the auditor can result in adverse premium adjustments.

Self-insured employers face audits and questions from the state insurance department auditors.

Both types of audits are done to ascertain that premiums are proper, and /or the employer can continue to properly fund their workers compensation claims.

Prepare

Proper preparation for the audit can make the entire process less cumbersome and properly document the data being given to the auditor.  Do not wait until notice of the impending audit arrives which could be as short as several weeks.   Being on short notice can cause disorganization of information, missing information, inadequate information, and create more questions from the auditor.

Most employers have gone through prior audits and are generally aware of what will transpire.  Go to the last audit report and study the information used, and look for errors that were made in working with the auditor.  If this is the first audit, write to the auditor and request a listing of documents and information that they will be seeking.

Review all job descriptions to ascertain that the job fits the proper NCCI Class code descriptions’.  Leaving descriptions that can be interpreted for two class codes will certainly allow the auditor to use a higher rated code value that favors the insurance carrier.

Review all payroll records.  Be sure the employee is on the proper corporate payroll. Employers using outside contract employees need to be certain that the contract employees are not mixed with corporate employees.  Document the contract and provide copies of other insurance provisions by way of hold harmless agreements and insurance certificates showing the employer as an also insured on the contractors’ insurance policy.

Be prepared to explain excess earnings due to unusual situations.   An unexpected sale that required extra over time is an example.

On the day before the audit place documents and physical evidence in chronological order.  Place the audit items in a private comfortable room.  Arrange for IT hook up so the auditor can review electronic data.

During the Audit

When the auditor arrives be friendly and professional.  Take the auditor on a housekeeping tour of the office, coffee, photo copying, rest rooms, lunch facilities if on premises.

Designate one or two senior management persons who are totally familiar with the corporate programs, audit procedures, and the materials gathered for the audit, to act as liaison between the company and the auditor.

Auditors may be trying at times with their questioning and interpretations.  Others may have attitude issues.   It is also natural to feel threatened by an audit.  This could lead to unpleasant situations.   Remember it is the auditor’s responsibility to ascertain that the premiums were properly established based on sound financial data.

Keep cool.  Do not lose your temper. Do not make snide remarks or comments. Do not become hostel.

Be cooperative.  Answer all questions accurately.  Do not embellish or furnish any information.  Keep answers short, direct, and on point.

It is best to leave auditors alone and in private.  However, a mid-morning or mid-afternoon break or stop by is suggested.  This gives opportunity to see how the audit is progressing and address any concerns or findings that may be adverse.  Keep the discussions only on the audit.

Auditors are obligated to professional conduct.  They are not allowed to divulge information to any unauthorized persons.  Their reports must be confidential. Normally only the insurance company and the insured are copied on their reports.  Auditors are not authorized to review copyrights, patents, business secrets, and confidential industry procedures.  An example is ingredients in a cookie recipe.

Inviting the auditor to lunch, dinner, or office parties is not recommended.  Supplying tickets to the theatre or sporting events should also be avoided.  These can be interpreted as bribes or tokens to seek special favor.

Wrap-up Meeting

Set a date, time, and private place to have a meeting before the auditor leaves the premises.   Invite only those who need to know.  It is suggested that a draft of the auditor’s report be available.  Go over all the findings.  Attempt to resolve or make any corrections where discrepancies or confusions occur. Be completely frank and honest as well as cordial.

Challenging the Audit Findings

Should the wrap up meeting fail in reaching agreements and the published report is not in keeping with all facts, prepare a written challenge at once and supply necessary documentation to sustain a defense position.  Also request that any adverse premium changes be held in abeyance until the challenge is resolved.  This may require legal assistance.

Summary

Premium audits are a fact of life. They are conducted for the benefit of the insurance carrier. It is necessary to properly prepare for the audit.  Supply all necessary information and be cooperative with the auditor.  Maintain business professionalism in all dealings, challenges and appeals. Use legal counsel where necessary.

Author Michael Stack, Principal of Amaxx Risk Solutions, Inc. He is an expert in employer communication systems and helps employers reduce their workers comp costs by 20% to 50%. He resides in the Boston area and works as a Qualified Loss Management Program provider working with high experience modification factor companies in the Massachusetts State Risk Pool.  As the senior editor of Amaxx’s publishing division, Michael is on the cutting edge of innovation and thought leadership in workers compensation cost containment. http://reduceyourworkerscomp.com/about/.  Contact: mstack@reduceyourworkerscomp.com.

©2015 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law.

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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.

Experience Modification premiums are developed from, gross payroll, losses reported to the state for the past three years, job classification codes, and application of credits discounts, assessments and penalties derived by the state insurance department.

Gross Payroll Figures Must Reflect True Wages

Gross payroll figures must reflect only the true wages for the employees of the organization.  Sort out leased employees, contractors, vendors, and sub-contractor persons working.  It is necessary for the employer to transfer risk back to these suppliers.  Obtain Certificates of Insurance from these suppliers naming the employer as an also insured.  Use contractual hold-harmless and indemnification clauses in all contracts with the supplying organization.

Proper Employee Job Classification

Proper employee Job classification coding is the next step. The National Council on Compensation Insurance (NCCI) has developed the codes used by most states. The states not using NCCI codes have developed their own lists. Most job codes reflect the overall business.  Hence multiple codes could apply for the same type job. Each could have a different rate. Furnish the agent, broker, risk manager, or underwriter with complete job descriptions.  Detail all tasks and hours.   A few NCCI job class code examples are: 3632 machine shop repair employees, 8810 clerical persons, and 5022 masonry workers.

North Carolina currently has the class code rates and group rates for:

– Machine Shop coded 3632 has a basic rate of $2.69

– Clerical coded 8810 have a basic rate of $0.21

– Masonry coded 5022 has a basic rate of $5.79

Experience Modification Rate

In  addition to the basic premium states assign the experience modification rate.  This is developed by the state insurance department using the loss experience of the employer.   A rate of 1.00 is considered average for the industry. A poor loss experience will lead to a experience modification factor of greater than 1.0 and a positive loss experience will lead to a mod of less than 1.  Each employer will have a minimum mod which would reflect a zero loss history.

Discounts, Penalties, And Assessments

The final step is the application of discounts, penalties and assessments.  Credits are determined based on many potential factors. A few are: employer safety programs, substance abuse programs, low loss experience.  Penalties or assessments can be due to poor loss experience, poor operational conditions, OSHA fines and many other causes.

Final Calculation Formula

(Gross Payroll) x (Job Classification code rate) X (MOD Rate) + or – (adjustments) = Premium.

Assuming the net Gross payroll is $100,000.00 and the employer qualifies for a 5% safety discount, the numbers for the Machine Shop premium would be:

$1,000,000 x 2.69% (class code rate) x 1.15 (experience modification rate) – $1,547 (5% safety credit) = $29,388 as final premium.

Carrier earnings cause impacts on premiums.  Good earning years from carrier investments or income, may allow them to deviate from the state rates.  They may grant premium reductions based on a percentage of those earnings.  During lean earning years, or years with lost profit, carriers more than likely will charge full premium value.

Unit Statistical Reporting:

All data used in the experience modification calculation must be reported to the state insurance department six months prior to policy renewal.  If a policy expires August 1 2014 the losses must be valued and reported by February 1, 2014.  Since the modification calculation runs for three policy years that means policies that expired 8/1/13 and 8/1/12 must also have the current values reported.

Author Michael B. Stack, CPA, Principal, Amaxx Risk Solutions, Inc. is an expert in employer communication systems and part of the Amaxx team helping companies reduce their workers compensation costs by 20% to 50%. He is a writer, speaker, and website publisher.  www.reduceyourworkerscomp.com.  Contact: mstack@reduceyourworkerscomp.com.

©2014 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law.

SALES TO PAY FOR ACCIDENTS CALCULATOR:  http://reduceyourworkerscomp.com/sales-to-pay-for-accidents-calculator/

MODIFIED DUTY CALCULATOR:   http://reduceyourworkerscomp.com/transitional-duty-cost-calculators/

WC GROUP:  http://www.linkedin.com/groups?homeNewMember=&gid=1922050/

SUBSCRIBE: Workers Comp Resource Center Newsletter

Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.

It is natural for employers to be overly concerned about serious injury losses.  They recognize that the large incurred values will have effect on the experience modification rates set by the state department of insurance.  At the same time little attention is paid to the multitude of smaller claims including medical only cases.

Need for Concern:

A claim worth $50,000.00 will garner everyone’s attention.  It generally has a better investigation.  Medical management will be a top priority. Much effort may go into rehabilitation and vocational programs.  Great attention is given to reserving. Benefit and medical payments are audited.  Employee compliance is strongly monitored.

At the same time 10 claims worth $5,000.00 each are given much less attention. The difference between just one claim and ten claims can be significant.  The following example will demonstrate this.  This assumption is based solely to demonstrate the impact how frequency and severity impacts experience modification calculations and its impact on premium.

Example:

The total three year cost of premium for the largest claim, Claim 6, is $32,445.  The total three year cost of premium for the 5 smaller claims, Claims 1-5, is $38,958.

Unit Statistical Filing:

Experience modification rates are determined from the incurred values of all claims in a policy period. These values are reported on Unit Statistical forms to the state insurance department.  They are due six months prior to policy renewal.

As an example a policy with renewal effective date of 4/1/2013 must have Unit Statistical reports filed by 10/1/12.

States use statistical data for three policy years to determine the experience modification.    This means our example for the 2013 policy also requires unit stat reports for the policies that expired on 4/1/11 and 4/1/10.

The insurance broker or risk manager, should begin a claim review 8/1/12.  This review must be based on loss runs for policy periods 2013, 2012, and 2011.

Conclusion:

The frequency of smaller claims can have as much influence, if not more, than large losses or a shock loss.  Experience modification rates are based on claim values reported during the past three policy years.  A claim review must deal with large or shock losses, but is should also focus on the underlying issues and management of the smaller, more frequent claims.  It is important for an employer to understand these points and their impact on workers compensation costs, particularly in a guaranteed cost program.

Author Michael B. Stack, CPA, Principal, Amaxx Risk Solutions, Inc. is an expert in employer communication systems and part of the Amaxx team helping companies reduce their workers compensation costs by 20% to 50%. He is a writer, speaker, and website publisher.  www.reduceyourworkerscomp.com.  Contact: mstack@reduceyourworkerscomp.com.

©2014 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law.

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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.

In any workers’ compensation claim, one of the most important issues that needs to be determined upon the onset of an investigation is the employee’s average weekly wage.  The average weekly wage serves as the basis for the determination of a number of workers’ compensation benefits entitled to an injured worker in most jurisdictions, which include Temporary Total Disability, Temporary Partial Disability, Permanent Partial Disability and Permanent Total Disability benefits.  If an average weekly wage is not accurately calculated from the onset, it can lead to a number of issues, which may delay or impede settlement, serve as a basis for underpayment of claims, or penalties should the claim become contentious.

Never Rely Upon the First Report of Injury

One of the first documents received by a claims handler at the inception of a claim is typically a First Report of Injury or similar document.  Often times, this is a pleading completed by either the employee or the employer and almost without exception contains inaccurate information about the employee’s average weekly wage.  In other instances, the average weekly wage is left blank, which causes further question about what the average weekly wage is, and can result in incorrect benefits being paid.

Obtaining accurate information to calculate the average weekly wage can often be received as follows:

o   Collect payroll records from the employer(s);

o   Use a recorded statement or deposition to receive information directly from the employee regarding the number of hours per week they are working, the number of weeks they have worked prior to the injury, their method of payment, information concerning vacation time and paid time off; and

o   Remember that construction workers or employees who work outside may be subject to different rules regarding the calculation of the average weekly wage.

Understand the Difference Between “Regular” or “Irregular” Employment

Every jurisdiction has different rules concerning the calculation of the average weekly wage and their definitions of “regular” and “irregular” employment.  If this is the case, an initial analysis must be made to determine the employee’s classification.

o   “Regular” employment typically occurs in instances where the injured worker has worked the same amount of time in the 26 (or 52) weeks prior to the work injury.  If employment is regular, the calculation to determine an average weekly wage is quite simple.

o   “Irregular” employees have a variance in earnings from week to week, as well as the hours that they work.  This typically arises in instances where an employee has worked varying hours depending upon their job duties, or has had periods of excessive absenteeism.

There are also a number of other issues that come into play when calculating an accurate average weekly wage.  These issues include, but are not limited to, the following:

1. Bonuses: Courts have usually held that performance bonuses based upon attendance at work to be includable in the average weekly wage.
2. Part-time/Additional jobs: Due to tough economic times, it is becoming more common to find injured workers who work more than one job.  As a result, even though an employee did not sustain an injury while working for one employer, it does not necessarily exclude the wages he or she earns in the final average weekly wage calculation.  Courts will usually examine if the employee was (1) regularly employed by two or more employers; and (2) that employment was taking place “at the time of the injury.”  In order for someone to be “regularly employed” the courts have scrutinized whether there was a continuing engagement to serve an employer in their business at that time.
3. Winter lay-offs and construction seasons: Employment in construction, mining and seasonal work presents a whole host of problems for determining an accurate average weekly wage.  Most states have special rules when dealing with workers who have membership in specialized labor unions.  States have adapted their workers’ compensation laws that generally allow for these types of workers to have their average weekly wage computed under special terms and formulas.

Conclusions

Careful consideration must be taken during the initial investigation of the unique circumstances surrounding the injured worker’s employment in order to accurately calculate an average weekly wage.

Author Michael B. Stack, CPA, Principal, Amaxx Risk Solutions, Inc. is an expert in employer communication systems and part of the Amaxx team helping companies reduce their workers compensation costs by 20% to 50%. He is a writer, speaker, and website publisher.  www.reduceyourworkerscomp.com.  Contact: mstack@reduceyourworkerscomp.com.

©2014 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law.

WORK COMP CALCULATOR:   http://www.LowerWC.com/calculator.php

MODIFIED DUTY CALCULATOR:   http://www.LowerWC.com/transitional-duty-cost-calculator.php

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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.

Most Workers compensation insurance premiums are generally formulated in five basic methods.

The first method is state insurance commission experience modification programs. The second method is Retrospective Programming, (known as Retros); it is developed by a contractual agreement between an insurance carrier and the insured employer. A third method is the use high retentions. Fourth is Self-funding. In this program the employer pays all losses. The last method reviewed is group or pool funding programs.

Experience Modification Premium Method:

Experience Modification premiums are developed from, gross payroll, losses reported to the state for the past three years, job classification codes, and application of credits discounts, assessments and penalties derived by the state insurance department.

Gross payroll figures must reflect only the true wages for the employees of the organization. Sort out leased employees, contractors, vendors, and sub-contractor persons working. It is necessary for the employer to transfer risk back to these suppliers. Obtain Certificates of Insurance from these suppliers naming the employer as an also insured. Use contractual hold-harmless and indemnification clauses in all contracts with the supplying organization.

Proper employee Job classification coding is the next step. The National Council on Compensation Insurance (NCCI) has developed the codes used by most states. The states not using NCCI codes have developed their own lists. Most job codes reflect the overall business. Hence multiple codes could apply for the same type job. Each could have a different rate. Furnish the agent, broker, risk manager, or underwriter with complete job descriptions. Detail all tasks and hours. A few NCCI job class code examples are: 3632 machine shop repair employees, 8810 clerical persons, and 5022 masonry workers

North Carolina currently has the class code rates and group rates for:

Machine Shop coded 3632 has a basic rate of $2.69 and a group rate of $5.58

Clerical coded 8810 have a basic rate of $0.21 and a group fund rate of $0.44.

Masonry coded 5022 has a basic rate of $5.79 and a group fund rate of $12.02

In addition to the basic premium states assign the modifier code. This is developed by the state insurance department using job classification codes, loss experiences, potential discounts, credits, penalties or assessments. Currently North Carolina’s MOD rate is 11.65 as of April 1, 2014.

The final step is the application of discounts, penalties and assessments. Credits are determined based on many potential factors. A few are: employer safety programs, substance abuse programs, low loss experience. Penalties or assessments can be due to poor loss experience, poor operational conditions, OSHA fines and many other causes.

The final calculation formula is:

(Job Classification code rate) X (MOD Rate) X (Gross Payroll) + or – (adjustments) = Premium.

Assuming the net Gross payroll is $100,000.00 and the employer qualifies for a 10% discount, the numbers for the Machine Shop premium would be:

$2.69 times 11.65 =31.00 times 100,000.00 =$ 3100.00 – $310.00 = $2,700.00 as final premium.

Carrier earnings cause impacts on premiums. Good earning years from carrier investments or income, may allow them to deviate from the state MOD. They may grant premium reductions based on a percentage of those earnings. During lean earning years, or years with lost profit, carriers more than likely will charge full premium value.

Retrospective Premium Method:

Retrospective Rating (AKA Retros) premiums are derived by contractual agreement between the insurance carrier and the employer. Simply stated the employer deposits a sum of money with the insurance carrier. The carrier uses the funds to pay the employer losses and expenses. As the deposits are used the carrier makes adjustments. Final adjustments begin 3 months after the policy expires and continue periodically until the losses are fully paid or funded.

This program is only available with an insurance carrier. It may limit the employer’s ability to change carriers. Employers, with financial stability, who have a loss history, who maintain valid and consistent claim data, have large workers compensation premiums, and have better than average loss experience are the best type of employer to consider this program.

Retention Premium Method:

An employer may reduce premium cost by accepting a retention program. This acts like a deductible. In this program the employer processes the loss up to a certain dollar value, time frame or severity. Great care must be taken not to miss the reporting time frames and dollar values as coverage issues could develop. Severe injury cases, fatalities and contested cases should always be turned over to the carrier at once. The carrier will request payment of the retention if and when it to pay the loss.

Self-Insured Program:

Self -Insured programs require permission from the state, and sufficient financial capacity to pay losses. Qualified loss technicians need to administer the cases. Employers must comply with workers compensation reporting. It is recommended that a surplus insurance policy be obtained for losses exceeding any amount the employer decides as a cap for exposure. Severe injury, fatalities, and contested cases should be re-insured.

Pool and Group Premium Methods:

Pool and Group funding is derived from premium assessments to each member. Many variations are in use to assess these dollars. Some follow usual premium developments discussed earlier. Others ask for pre-funding and make adjustments as the funds are used. There may be assessments for bad loss experience. Conversely good experiences are rewarded with discounts. When applying to a group or pool it is imperative that the employer is fully cognizant of all the pool’s requirements, operations and how it impacts the individual member.

Claim Administrators:

Self-insured employers and groups or pools, generally employ Third Party Administrators. (TPA) The TPA is made up of professional claim persons and operates the same as an insurance carrier claim department. All rules, regulations and law requirements apply.

The TPA is often required to get the self-insured employer, and the group or pool to approve settlements of losses. This may even be required for an individual pool or group member. TPAs also perform regular loss reports. It may be to an individual member, the ranking board of the group or pool. Such reports cover loss values, nature of losses, expected outcomes, steps being taken to disposition that is prompt, equitable and in compliance with the law. There can be full claim reviews as well.

Some pitfalls for pool or group insurance may be poor of cooperation among members, financial stabilities of members, poor loss experience of one or more of the members, and slow responses to uniform desires by some members. The entire group or pool membership can be assessed for overall problems developed during operations.

Assessments generally arise from huge losses, loses to the groups assets, director error and omission, as well as failure of the group or pool to perform some legal requirement.

Exempt Employees and Employers:

Explore employers or employees exemptions from the workers compensation law.

A few exemptions are:

Officers and Directors

Sole proprietors

Household Domestic Employees

Casual Employees

Real Estate Persons

Volunteer Persons

Employees covered under Federal Laws

Family members in the same household caring for others in the family

Franchise owners

Claim Audits:

Claim audits can be used to impact premiums. Two months prior to renewal, obtain a full loss run from the insurance carrier. Study the run to be sure the claims are correctly reported and classified paid and reserved. Look for files that should be closed. When concerns are noted ask the insurance claim department to provide a full review and explanation. Resolve all differences and have the loss run corrected before it goes to the underwriters for renewal.

Using professional claim auditors not only allows for loss evaluations, it can assess the claim unit personnel experience, efficiency of operation, and adherence to best practices.

Summation:

In summary, the following suggestions could help reduce workers compensation premiums.

1. Clarify gross payroll so it only reflects true employees.

2. Transfer risk to Lessors, Vendors, Contractors, and sub-contracts through

Certificates of Insurance and Hold-Harmless clauses.

3. Check that employees are properly classified for state MOD calculation.

4. Look for all credits and discounts available from carriers and the state.

5. When considering a Retrospective Program, use fully trained and experienced, underwriters,

Insurance brokers and risk managers.

6. Fully explore all pros and cons for self-insurance or in joining industry groups or pools.

7. If a penalty or assessment is in effect, seek ways to correct the shortcomings that caused it.

8. Perform Claim Audits prior to renewal.

Author Michael B. Stack, CPA, Principal, Amaxx Risk Solutions, Inc. is an expert in employer communication systems and part of the Amaxx team helping companies reduce their workers compensation costs by 20% to 50%. He is a writer, speaker, and website publisher.  www.reduceyourworkerscomp.com.  Contact: mstack@reduceyourworkerscomp.com.

©2014 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law.

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WC GROUP:  http://www.linkedin.com/groups?homeNewMember=&gid=1922050/

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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.

Most employers never think about the possibility that their workers’ compensation insurer could go bankrupt.  Many risk managers think that with the high premiums work comp insurers charge, there is no way an insurer could go bankrupt, but it happens, and with the state of the economy, it is happening more frequently.

Insurers Bankrupt From Poor Claims Handling & Inadequate Premiums

There are two primary reasons workers’ compensation insurers go bankrupt – poor claims handling and inadequate premiums.  If the claims are not properly adjusted, the poor claims handling results in leakage – payments that are not justified.  If the amount of leakage is greater than what the profit margin would be if the claims were handled properly, the insurer has a negative cash flow, which cannot be sustained for an extended period of time.

If the claims are totally handled correctly, but the insurer has not properly underwritten the risk, and the premiums collected are inadequate to cover the cost of operations. Again, the insurer has a negative cash flow which cannot be sustained for an extended period of time.

Every state has financial stability guidelines that insurance companies within their state must comply.  These financial requirements include having adequate assets to pay their cost of operations and the expected cost of their claims.  When the Department of Insurance or other state agency determines that an insurance company does not have the necessary assets to cover their cost, the initial action taken by the state agency will be to have a court to issue a court order for “rehabilitation”.

Court Appoints a Receiver

When an insurance company is placed in rehabilitation, the court will instruct the “receiver” (often the state insurance commissioner) to take possession of the property of the insurance company [their assets], to conduct the insurer’s business, and take the necessary steps to rehabilitate the company to where it can return to profitability and stay in business. 

If the receiver determines that the liabilities of the workers’ compensation insurer are too great to overcome, and the work comp insurer cannot return to being profitable, the receiver will advise the state court.  The state court then issues a “liquidation” order requiring all assets of the insurer be used to pay the claims the workers’ compensation insurer has outstanding. 

Guaranty Fund Takes Over Payments On Open Claims

Every state and the District of Columbia has a “guaranty fund” which takes over the handling of the open workers’ compensation claims of injured employees residing within their jurisdiction.  The guaranty fund is usually a special purpose non-profit corporation of the state. Each state has only one insurance guaranty fund. The guaranty funds of all states belong to The National Conference of Insurance Guaranty Funds.

The guaranty fund obtains the money to pay the claims of the bankrupt insurer by assessing a fee from every other workers’ compensation insurer licensed to do business within the state.  The amount of assessment is in proportion to the total dollar volume of workers’ compensation insurance premiums of the assessed insurers.

The good news: the employer does not have to pay the work comp claims of their bankrupt insurer. 

The bad news:  The transfer of work comp claim files from the bankrupt insurer to the guaranty fund is seldom a seamless process.  Often the payment of medical bills, indemnity payments and payments to vendors are disrupted, creating inconvenience and often a quite a bit of hassle for both the injured employee and the employer.  Plus, remember one of the primary reason work comp insurers go bankrupt – poor claim handling that created overpayments on claims.  Those overpayments of claims are now a part of the employer’s loss history, which will impact the cost of work comp premiums for the next five years.

Carriers Should Be ‘A’ Rated or Better

Employers can protect themselves from having to deal with a bankrupt insurer, whether for property, casualty or workers’ compensation.  Employers should always check the financial stability rating of the insurer through A.M. Best, Moody’s or S&P.  An insurance company with a financial stability rating lower than A is a cause for concern.  If the insurance company has financial stability rating lower than B, the wise employer will ask their broker to find a more financially stable insurance company.

Author Rebecca Shafer, JD, President of Amaxx Risk Solutions, Inc. is a national expert in the field of workers compensation. She is a writer, speaker, and publisher. Her expertise is working with employers to reduce workers compensation costs, and her clients include airlines, healthcare, printing/publishing, pharmaceuticals, retail, hospitality, and manufacturing. She is the author of the #1 selling book on cost containment, Workers Compensation Management Program: Reduce Costs 20% to 50%. Contact:RShafer@ReduceYourWorkersComp.com. 

 
Editor Michael B. Stack, CPA, Director of Operations, Amaxx Risk Solutions, Inc. is an expert in employer communication systems and part of the Amaxx team helping companies reduce their workers compensation costs by 20% to 50%. He is a writer, speaker, and website publisher. www.reduceyourworkerscomp.com. Contact: mstack@reduceyourworkerscomp.com. 

©2013 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law.

Employers in 2013 are finding it difficult to renew their existing workers’ compensation policy or to obtain coverage from a new workers’ compensation insurer.  For many employers, 5% to 10% price increases in 2012 are being followed by another 5% to 10% price increase in 2013.  Workers’ compensation insurance has become the most difficult insurance line for many risk managers to obtain. Work comp also has become the highest cost component of many employers’ insurance programs.

The Work Comp Insurance Market is “Hardening”

If you ask insurance brokers what is causing the price increases in workers’ compensation or the difficulty in finding work comp coverage, you will often get the reply that the market is “hardening.”  A “hard” insurance market is a period of time where insurance brokers have to work extra hard to find any coverage or affordable coverage for their clients.  This “hardening” of the insurance market is being caused by several factors, including:

• Stringent capital requirements are dampening insurers’ risk appetite
• A low interest rate environment has lowered the income insurance companies get from their investments
• Insurers have been incurring underwriting losses – paying out more on claims and related cost then they are taking in, in premiums
• The component costs of workers’ compensations, both indemnity (wages) and medical have been steadily increasing, especially the cost of medical care, which continues to accelerate as a percentage of the overall cost of workers’ compensation

The response of the insurance companies to the above factors is to become more selective on whom they will insure.  If insurers are willing to provide workers’ compensation insurance, they do not want to incur an underwriting loss to do so; hence the insurers raise their premiums to a level where they anticipate they can make an acceptable level of profit.

Employers Need to Take Action to Control Their Premiums

Employers do not have to sit idly by while their workers’ compensation insurance premiums continue to go higher and higher.  There are several steps employers can take to put the brakes on the unrelenting upward spiral of work comp costs.  This includes:

• Analyzing the risk financing strategy
  • Self insurance
  • High deductible program
  • Full coverage through a work comp insurer
    • Multi-year program
    • Negotiated fixed future price increases
• Evaluating and reevaluating the risk management strategy
• Improving the safety program
  • Analyzing and updating the safety program
    • Identifying the drivers of frequent accidents
    • Identifying the types of accidents that have high severity
    • Increasing enforcement of established safety procedures
    • Training of employees, supervisors and managers on how to be safe
    • Creating a culture of safety
    • Auditing safety compliance
• Screening new hires to eliminate job candidates prone to injury
• Claims management practices
  • Immediate reporting of accidents
  • Required or recommended medical providers
  • Frequent follow up with the injured employee by both the adjuster and the employer
  • Transitional duty programs
  • Medical management

Employers who take the above actions make themselves more attractive to workers’ compensation insurers.  These steps reduce the likelihood of accidents and the resulting workers’ compensation claims.  The workers’ compensation market will remain “hard” for employers who make limited efforts to control the cost of their workers’ compensation claims.  The cost of workers’ compensation premiums will not go up near as high for the employers who proactively manage their workers’ compensation program.

Author Michael B. Stack, CPA, Director of Operations, Amaxx Risk Solutions, Inc. is an expert in employer communication systems and part of the Amaxx team helping companies reduce their workers compensation costs by 20% to 50%. He is a writer, speaker, and website publisher.  www.reduceyourworkerscomp.com.  Contact: mstack@reduceyourworkerscomp.com.

©2013 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law.