I. Overview of Topic
If you're in business or starting a business you need to know the basics of workers compensation insurance. Almost every business that has employees other than the owner is required by state law to carry workers' comp. But you need to be careful. The fact is many workers compensation insurance companies can get remarkably tricky when it comes to writing policies - in their bag of tricks are such ploys as classifying the type of work your employees do incorrectly, miscalculating so-called modification factors, or making various other types of errors which, strangely enough, result in insurance costs to you that are higher than they need to be.
Besides needing to hold your own against your workers compensation insurance carrier, there's another reason to take a few minutes to learn more about this type of insurance, namely, fraud. Workers' comp fraud is the second largest category of white-collar fraud in the U.S. today, second only to income tax evasion. Fraud is said to occur in almost a quarter of all claims. It can be employee fraud (claiming to be injured more seriously than one really is), employer fraud (harassing employees who put in claims or trying to deceive the insurance company regarding the number of the company's employees), or insurance company fraud (wrongfully denying legitimate claims).
In some businesses, like construction and manufacturing, workers compensation insurance is a major expense item - and also a major source of friction and confusion. But most business owners know little or nothing about how it works or how rates are calculated. It's too complicated to cover in detail here, but I think I'm hitting most of the basics below. See Section II, below, if you wish to learn more.
Workers Compensation Insurance Basics
If you are in a business that is required by state law to purchase workers compensation insurance benefits, this is something to take seriously. In some states, notably California and Florida, businesses are getting shut down and owners criminally prosecuted for failure to carry this type of insurance. In most states you need it if you have one or more employees - California being one of the few that requires it even for one-person businesses. I've put together a list of state requirements here.
In most states you can purchase an insurance policy from a workers' comp insurance company; however in five states (ND, OH, WA, WV, WY) you must obtain coverage through that jurisdiction's state-operated fund. These state operated funds are called "monopoly state funds."
Note that thirteen states maintain state funds which compete with private insurers. So in those thirteen, you can buy your policy either from a private insurance company or from the state fund (AZ, CA, CO, ID, MD, MI, MN, MT, NY, OK, OR, PA, UT).
If for some reason you are found to be particularly risky, you will have to get your insurance from an "assigned risk" fund, and it costs considerably more.
Workers compensation insurance is regulated primarily by the states (and Washington DC) so there are 51 separate sets of rules which govern benefits, coverage, and premiums. However, a so-called "rating bureau" called the National Council on Compensation Insurance, NCCI, has developed a manual used by many states to regulate how insurance companies calculate your rates.
NCCI states rely mainly on this manual, while some other states have developed their own manuals. For example, Nevada sticks closely to the NCCI manual, whereas California has developed its own manual.
Workers' compensation policies tend to seem complex and abstruse to the uninitiated. What's more, you can't rely entirely on your insurance agent to decipher the technical terms, requirements, and options - remember, he/she has a vested interest in selling you as expensive a policy as possible. So if your premiums turn out to be fairly considerable, it's a good idea to have your policy reviewed by a lawyer with workers' comp experience or a consultant specializing in this field.
For example, do you need a guaranteed-cost policy (a policy whose premiums remain constant no matter how many claims you file) or a loss-sensitive plan? The latter will cut your costs but increase your exposure.
The basic formula insurance companies use to calculate your policy is to multiply a rate times hundred dollars of payroll. But what is this "rate"? Where does it come from? It is based on the classification of your company's type of work performed. It's to your advantage to be in a relatively "safe" classification, such as office work, as opposed to a more injury-prone classification, such as mining. Experts warn that you should be vigilant that the insurance agent does not misclassify your company - such a "mistake" can easily double your premiums.
In addition, workers compensation insurance companies apply an "experience" factor to your premiums. This is a circumlocution for a multiplier calculated on the basis of your company's claims history. The more or larger your claims, the larger the experience factor.
Assigned Risk Plans
What do you do if private insurers in your state all decline your application for insurance? Then you have to utilize the state's assigned risk plan. This is expensive insurance. Yet, I'm told, many agents sell assigned risk insurance without bothering to mention it's assigned, and the words "assigned risk" appear nowhere on the policy. Generally, rates and service are said to be better in NCCI states. However, even if your business is in an NCCI state you will probably get lower rates if you move to "voluntary" (i.e., not assigned risk) coverage as soon as possible.
Note that if you're in a "monopoly" state - i.e, a state where there are no private insurers and you must use the monopoly state fund - you can still get put in an assigned risk plan. You should clarify this with your agent.
Tips Regarding Workers Compensation Insurance
- Your insurance agent, working with his/her company's underwriter, decides what classification codes to use in developing your premium rates, as well as other risk factors. Reportedly, mistakes and oversights are legion in these types of policies (usually favoring the insurance company), so review your policy carefully, preferably with the assistance of a professional who has experience in this field.
- Read your policy's Information Page in detail - it contains the most important details you need to check.
- Be careful when your company hires independent contractors. If the independent contractor does not carry workers compensation insurance and is injured, you will be held responsible for all costs connected with the claim.
- Make sure you show as named insured all legal entities connected with your business. For example, if you own the building it's in, you should be named on your policy as legal owner of the property, as well as owner of the business.
- Also be aware of federal workers compensation insurance exposures. In addition to state requirements, some federal legislation also imposes liabilities on employers. You can add coverage for acts such as the following to your workers' compensation policy by endorsement (i.e., by adding a supplement): Longshore and Harbor Workers Compensation Insurance Act (benefits to employees injured in maritime employment); Federal Coal Mine Health and Safety Act (benefits to miners who contract black lung disease); and Migrant and Seasonal Agricultural Worker Protection Act (housing and safety benefits to migrant and seasonal agricultural workers).
- The NCCI Manual is not used for calculating rates in: California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, Texas, and Wisconsin. (All other states use it.)
- If you or a professional you hire feels that your premium rates are not what they should be, given the rules and specifications in the NCCI Manual (or other state rating manual), you should first contact your agent, say the experts, and request changes; if this doesn't work, then you should directly contact NCCI or the appropriate state rating bureau and point out the errors in your policy as written.
- Is your company required to pay workers' compensation benefits to illegal aliens? According to experts, the answer depends on whether the illegal alien qualifies under your state's statute as an "employee" working "in the service of" another under a "contract of hire." So far, Ohio and New York courts have upheld the right of aliens to receive benefits; Virginia, Wyoming and Florida have not.
- Note that Texas, alone among all 50 states, does not require employers to carry workers compensation insurance.
Workers Compensation Fraud
Workers' compensation is a no fault system for providing benefits to injured or ill workers while shielding employers from lawsuits. But the system is open to fraud on a number of fronts. Employers, attempting to reduce premiums, may understate their total number of employees or misrepresent the type of work they do; workers may claim benefits they're not entitled to, for example, by exaggerating the seriousness of an injury; even insurers themselves may intentionally miscalculate premiums and this is, unfortunately, not uncommon.
Somewhat surprisingly, employer fraud is the major type of workers compensation insurance fraud. According to a recent study reported by the National Commission on State Workmen's Compensation Laws, over 13% of employers studied were operating without legally required workers' compensation insurance. In addition, others were found to be cheating the system by intentionally underreporting or misclassifying their payroll or by falsely representing employees as independent contractors.
Of course the best-known type of fraud - the type most often covered by the media -- involves workers claiming disabilities that don't exist. Most insurance companies have in recent years set up internal Special Investigative Units (SIU's) to combat this type of fraud. Claims adjusters report suspicious cases to their company's SIU's, which then use surveillance, videotaping, background checks, medical records checks and other tools to document fraud, then turn the cases over to the Attorney General for prosecution. Criminal penalties to workers trying to game the system can be very severe.
Incidentally, if you'd like to see a list of red flags indicating possible fraud, in a workers' compensation claim, click here.
As an example of how the new SIU investigation system works, CompSource Oklahoma recently investigated a female claimant who was receiving permanent total disability benefits for back injuries from a slip-and-fall accident. The company's SIU team discovered that while receiving these benefits she was listed on the Internet as an officer of an outdoor recreational club. Surveillance was set up and it was found that she was engaged in mountain hiking, carrying heavy items and other activities indicating she was not disabled. Criminal charges were filed and a conviction obtained, resulting in a fairly lengthy prison term.
Moral of story: don't commit workers compensation insurance fraud. Insurance companies now employ teams of professional investigators who will doggedly pursue a any suspicious claim and, if fraud can be proven, will press charges without the least hesitation.
That's it - our ten minutes are up! (OK, maybe twelve or thirteen if
you're a slow reader.) Below is a listing of Web resources to help you
continue your research on workers compensation insurance.
II. For Additional Research
This Section provides reviews and recommendations of Web sites and other
E-MedicalTrace is a workers' compensation insurance fraud-fighting tool offered by Washington Research Associates, Inc. One of the most common types of fraud involves a claimant attributing on-the-job injury to a pre-existing medical condition. For example, the claimant is seriously injured in an auto accident, then later puts in a workers' comp claim through his employer, attempting to attribute his back injury to a slip-and-fall while on-the-job. E-MedicalTrace would uncover his previous medical treatment at a local hospital, exposing the fraud. Upon receiving your order, E-MedicalTrace researchers contact every hospital in your claimant's area-of-residence and request all records pertaining to the claimant. If needed, E-MedicalTrace will also search pharmacy records in your claimant's area-of-residence. Please note that this service requires a signed consent form from the claimant (to be faxed to Washington Research Associates Inc), and is only available to insurance and law firms.