Workers’ Compensation: What You Need to Know in This Insurance Market
BY MIKE MARROCCOLI
Workers’ compensation is a subject that has long been a source of confusion and frustration for many operators. Soaring premiums, unexpected premium audits, and effects of employee claims on your bottom line is enough to make anyone throw their hands in the air and feel utterly helpless.
The objective of this article is to give you a better understanding of what workers’ compensation covers, how insurance premiums are calculated, and what you can do to try controlling some of your costs involved with this misunderstood coverage.
First, let’s look at some basics: If you have employees, then you need workers’ compensation. Each state requires employers to buy workers’ compensation insurance to meet your legal obligation to any worker who is injured due to either an accident occurring on the job or workplace exposure that results in an illness. This applies to everyone; whether you are a small operator with two vehicles or a larger company with hundreds of vehicles, you need to purchase workers’ compensation insurance if you have employees. In some states, if the owners are the only employees, workers’ compensation can be waived.
Workers’ compensation laws in the United States go back to the early 1900s when employees had no way of being compensated if they were injured at work. This resulted in lawsuits against employers, which was difficult on both parties involved. In 1911, the first workers’ compensation law—as we know it today with compensatory laws in exchange for release of an employees’ right to sue the employer—was passed in Wisconsin. Prior to this, other states, including New York, Maryland, and Massachusetts, had attempted to put workers’ compensation laws in place, but they did not fully address the needs of the injured worker or provide release to the employer. All states had enacted workers’ compensation laws by 1949. The system of workers’ compensation provides a much-needed balance: Employees get benefits regardless of fault, and employers get protection from lawsuits by injured employees seeking money damages for pain and suffering.
Your State Matters
You will notice that states enacted laws, which means that they call the shots on rates, benefits, and parameters of the law. That also means that what you pay in Michigan won’t be the same as what you pay in Oregon. In most states, you can purchase a policy from an insurance carrier to meet your obligation (I will talk more about the insurance marketplace later in this article). However, in some states, known as the Monopolistic States, you must purchase your coverage exclusively from a state-run fund. These states—North Dakota, Ohio, Washington, West Virginia, and Wyoming (as well as Puerto Rico)—require that coverage is purchased through the state instead of a private insurance company. Texas employers have the ability to opt out of workers’ compensation; however, those employers are exposed to legal liability in the event of an employee injury. Some other states offer insurance through their own state-run fund (not required), but this is more of a last resort for those who cannot obtain coverage through the voluntary insurance market. States with the state-run fund option include Arizona, California, Idaho, Maryland, Michigan, Minnesota, Montana, New Jersey, New York, Oklahoma, Oregon, Pennsylvania, and Utah.
Understanding Your Policy
There are two parts to a workers’ compensation policy. The first part responds to an employee who is injured in a work-related matter, although the injury does not necessarily have to occur in the workplace. This portion of the policy pays for medical benefits, wage replacement, vocational rehabilitation, and benefits paid to dependents of workers killed in the course of employment-related activities. Each state sets a specific benefit to the injured employee for disability, and there is no policy limit for these workers’ compensation benefits. Unlike your automobile policy, which will have a specified amount of coverage per accident, the first part of your workers’ compensation policy has no set limit. The issuing insurance carrier is responsible for all claims that arise, with no limit. Most workers’ compensation claims come under the first part of a policy; the second part is the employer’s liability. Part 2 does have a limit, which should be discussed with your broker. I generally recommend a $1M limit for this coverage, but it should be coordinated with any umbrella or excess coverage that you carry. Part 2 covers employers for areas of work-related bodily injury that aren’t covered by statutory state benefits. It protects your business in the case of a lawsuit by an injured employee or a survivor of the employee if you were found to be grossly negligent.
Workers’ compensation insurance is based on estimated annual payroll, and a premium is charged based on designated class codes for the type of work performed. For example, a typical chauffeured transportation company would have its payroll broken down into the following classifications: class code 7382 (chauffeurs or bus drivers); class code 8810 (clerical), which includes office workers and dispatchers; and potentially class code 8742 (outside sales). Each class code has a different premium based on the rate set by each state. The rates are set and charged per hundred dollars of payroll, with the highest risk usually assigned to chauffeurs. For example, in New Jersey, the rate for chauffeurs (code 7382) is almost $17 per $100 while clerical is just 30 cents per $100. In addition to the per hundred dollar premium, there are state-mandated taxes and fees. So if you are a N.J.-based company, at 17 percent of your payroll, your workers’ compensation costs for your chauffeurs is substantial. This does not account for the application of your experience modifier (I’ll discuss more in a minute), which adjusts that rate up or down based on your claims experience over the past four years. You should also be aware that payroll for your workers’ compensation premium basis should never include gratuities. Initial premiums are based on estimated payrolls for a 12-month policy period—the keyword being “estimated.” Then they are charged retroactively based on an audit of the actual payrolls that you paid to your employees for the 12 months of the policy period, which could result in additional premiums being due or a decrease in premiums at the end. Please do yourself a favor and keep meticulous payroll records so that an auditor does not charge your company for payrolls that include gratuities. This is a common mistake I often see, particularly for those who are new to the industry. Gratuities are always excluded from all workers’ compensation calculations.
Unlike your automobile policy, which will have a specified amount of coverage per accident, the first part of your workers’ compensation policy has no set limit."
What’s My Mod?
Once the premium is calculated based upon the payroll, there is another multiplier called an experience modifier, or mod, which is applied to your premium. The National Council on Compensation Insurance (NCCI) calculates your mod, or some states have their own rating boards that promulgate it each year. The mod is an adjustment of your premium, either a credit or debit, based on your company’s claims. Once you have had workers’ compensation in place for at least three years and (generally) a premium in excess of $4,000, you will have a calculated mod.
For companies with mods, I have some very strong advice: Hire a professional to make certain that your mod is correct. There are thousands of companies that are overpaying for their insurance because of errors. It’s not uncommon for claims that have been settled but still remain on your loss runs to negatively impact your mod. I work with a professional consulting organization (CCG Premium Recovery Group) that performs analyses on workers’ compensation policies to make certain that the mod is correct. If you’re wondering how this happens, here’s what I was told: Mistakes are unintentional. Claim reserves are not questioned or confirmed each year, and payroll audits and classifications are not verified. They go unnoticed and add up quickly over the years. The first client I referred to CCG saved thousands of dollars in just the current year. The best thing about a professional premium recovery consultant is that they work on a contingency basis. I recommend that all of my clients now consider this analysis as standard operating procedure. It’s “found” money that belongs to you.
The “Gray Area”
For decades, this industry has grappled with the tax and labor issues of independent contractors. Your accountant may be advising you that for tax purposes this is acceptable to the IRS; however, for workers’ compensation this is not the case. If you are issuing 1099s to chauffeurs, or you are paying an affiliate, then you must have proof that the individual or company that you are paying has workers’ compensation in place, or at the time of audit you will be paying for this disbursement in your premium. I recommend that you obtain a certificate of insurance from any and all affiliates and independent contractors naming your company as additional insured. Keep a copy of this document in your files, as you will need to present it to the insurance company at the time of your workers’ compensation audit.
The old adage “safety is no accident” is certainly applicable to your workers’ compensation policy. Effective and ongoing loss control programs will result in reducing the cost of your insurance, which should include regular chauffeur training. Most everyone requires new hires to go through a strenuous program; however, the companies that have long-term success with good loss experience continue the training at an ongoing basis for all chauffeurs. Courses should include new material and utilize new technology. Accident prevention is your goal as a business owner or operations manager. A comprehensive chauffeur safety manual should be implemented, addressing all aspects of the job, including handling of client’s luggage or packages, accident reporting procedures, and tips that will make you and your customers confident that they are in a vehicle operated by a cautious and safety-minded chauffeur.
It is also important that you have a return-to-work policy for your company. A return-to-work policy will acknowledge that employees should report for duty as soon as possible, and that modified duty employment is available to them. Statistically, the longer injured employees are out of work, the less likely they are to return to the workplace. The objective of a return-to-work policy is to enable the employee to return as soon as possible to good health, productivity, and full earning capacity.
The Insurance Marketplace
We are now in what is called a “hard market” for all types of insurance. This is characterized by higher premiums, scrutiny of all risks by underwriters, and fewer insurance carriers offering to insure transportation risks. This is certainly true with regard to workers’ compensation, as many of you have no doubt experienced. It is becoming increasingly difficult to find insurance carriers who are willing to offer workers’ compensation to operators, particularly if you have had any significant claim activity. The dilemma can be overwhelming. Make sure you are working with an insurance broker who specializes in public transportation. We know the carriers and have the relationships to help you successfully navigate these turbulent waters. That being said, here are two out-of-the-box suggestions to consider if you are having a problem with your workers’ compensation:
• Consider a Pay As You Go Policy. While offered by a very few companies, it gives you the option of paying for your workers’ compensation as you run your payroll. The advantage is that you will never have an audit. You are paying the premium for your workers’ compensation at the time you issue each payroll. The disadvantage is that you may have to switch payroll companies, or use the insurance company’s payroll service to take part in this program.
• Hire a Professional Employer Organization (PEO). A PEO, sometimes known as an employee leasing company, is another potential solution in this hard market. A PEO firm provides a service in which the employer can outsource employee management tasks and benefits such as workers’ compensation, payroll, and HR issues. It’s an administrative partnership delivering products to you and your employees through a co-employer relationship. You still control the day-to-day management of your employees, but take advantage of services usually only available to a larger group of employees. I work with a specific PEO that shops the workers’ compensation for my clients. I had a very recent success with one of my chauffeured transportation clients who had two very unfortunate and unavoidable large workers’ compensation claims that caused her experience mod to go through the roof. By introducing this client to the PEO, she was able to reduce the overall cost of the workers’ compensation by $50,000 this year. A PEO requires a bit of a different thought process than a traditional payroll service or employee benefit delivery option does, but in the end, it may save you enough money to wrap your head and arms around this arrangement.
Your workers’ compensation may be one of the most difficult insurance issues on your plate right now. However, by working with an insurance professional who understands both your company and the transportation industry, you should have enough options available to help you find a competitive and acceptable solution, at least until we see a change in the current market conditions. [CD0415]
Michael Marroccoli, CIC, MBA, is a Regional Vice President with The Capacity Group. He can be reached at email@example.com.