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Tutorial on Workers’ Compensation
Whether you’re starting a new business or already have an established business, you need to know the basics of workers’ compensation insurance. Almost every business with employees other than the owner is required by state law to carry workers’ comp. But you have to be careful while choosing a policy. The fact is that many insurance companies can be remarkably tricky when it comes to writing policies – their bag of tricks includes misclassifying the type of work your employees do, miscalculating so-called modification factors, and making a variety of other tricks. Mistakes that, oddly enough, result in insurance costs for you that are higher than they need to be.
If you need to hold your own against your workers’ compensation insurance carrier, there is another reason to take a few minutes to learn more about this type of insurance, namely, fraud. Workers’ compensation fraud is the second largest category of white-collar fraud in the United States today, second only to income tax evasion. According to industry observers, fraud accounts for about a quarter of all claims. This can take the form of employee fraud (an employee involved in an accident claiming to be more seriously injured than he or she is), employer fraud (employees harassing employees who make claims or attempting to defraud the insurance company), or insurance company fraud (falsely denying legitimate claims). .
In many businesses, such as manufacturing and construction, workers’ comp 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 complex to cover in detail here, but I’ll try to touch on the very basics in this short article.
The Basics of Workers’ Compensation
If you are in the type of business that is required by state law to purchase workers’ compensation benefits, this is something to take seriously. In some states, notably Florida and California, businesses are being shut down and owners are criminally prosecuted for failing to carry this type of insurance. Most states require it if you have one or more employees—California is one of the few that requires it even for one-person businesses.
In most states you can purchase an insurance policy from a workers’ comp insurance company; However in five states (OH, ND, WV, WA, WY) you must obtain coverage through that jurisdiction’s state-run fund. These state-run funds are called “monopoly state funds”.
Note that thirteen states have state funds that compete with private insurers. So in those thirteen, you can buy your policy from a private insurance company or state fund (CA, AZ, CO, MD, ID, MI, MN, MT, NY, OR, OK, PA, UT).
If for some reason your business is found to be particularly risky, you will have to get your insurance from a so-called “assigned risk” fund, and this costs much more. Workers’ compensation is primarily regulated by the states (and Washington DC) so there are 51 separate sets that govern benefits, premiums, and coverage. However, a so-called “rating bureau” called the National Council on Compensation Insurance (NCCI) has developed a manual that many states use to regulate how insurance companies calculate your rates. NCCI states rely almost entirely on this manual, while some other states have developed their own manuals. For example, Nevada adheres closely to the NCCI manual, while California has developed its own manual.
Company policies on workers can seem complex and unclear to the uninitiated. Additionally, you can’t completely rely on your insurance agent to understand the technical terms, options, and requirements—remember, he has a vested interest in selling you the most expensive policy possible. So if your premiums turn out to be quite substantial, it’s a good idea to have your policy reviewed by an experienced workers’ comp attorney or consultant who specializes in this field.
For example, do you need a guaranteed-cost policy (a policy whose premium stays the same no matter how many claims you file) or a loss-sensitive plan? The latter option will reduce your cost but increase your exposure.
The basic formula almost all insurance companies use to calculate your policy is a rate times a hundred dollars of payroll. But what is this “rate”? Where does it come from? This is based on the classification of the type of work of your company. It’s always to your advantage to stay in a relatively “safe” classification, such as clerical work, as opposed to a more injury-prone classification such as construction. Experts warn that you should be careful not to have an insurance agent misclassify your company – such a “mistake” can easily double your premium.
What’s more, insurance companies essentially apply an “experience” factor to your premiums. This is a breakdown of the multiplier calculated based on your company’s claim history. The more or larger your claims, the greater the experience factor.
Defined risk plans explained
So what can you do if every private insurer in your state rejects your application for insurance? In that case, you should use a state-mandated risk plan. This is expensive insurance. However, I am told, many agents sell assigned risk insurance without specifying the assignee, and the words “assigned risk” do not appear anywhere on the policy. Generally, rates and service are said to be better in NCCI states. However, even if your company is in an NCCI state, you’ll get lower rates if you switch to “voluntary” (ie, not assigned risk) coverage as soon as possible.
Note that if you’re in a “monopoly” state — that is, a state where there are no private insurers and you must use a monopoly state fund — you can still be placed in a designated risk plan. You should discuss this with your agent.
Some Tips Regarding Workers’ Compensation Insurance
– Your agent, working with his/her company’s underwriter, decides which classification codes to use to develop your premium rates, as well as various other risk factors. According to the report, mistakes and oversights happen in these types of policies (usually on the side of the insurance company), so review your policy carefully, preferably with the help of a professional experienced in this field.
– Be sure to read your policy’s information page thoroughly – it contains the most important details you need to check.
– Your company should be especially careful when hiring independent contractors. If the independent contractor does not carry workers and is injured, you will be held responsible for all costs associated with the claim.
– Always ensure that you indicate by name all insured legal entities that are in any way connected to your business. For example, if you own a building, you should be named on your policy as the legal owner of the property, as well as the owner of the business.
– Also you should be aware of federal employees comp exposure. In addition to state requirements, some federal laws also impose obligations on employers. You can add coverage to your workers’ compensation policy for actions such as the following (eg, by adding a supplement): Federal Coal Mine Health and Safety Act (benefits for miners with black lung disease; Longshore and Harbor Workers Compensation Act) (benefits for workers injured in maritime employment); and the Migrant and Seasonal Agricultural Workers Protection Act (housing and security benefits to seasonal and migrant agricultural workers).
The NCCI manual is not used to calculate rates in Delaware, California, Indiana, Massachusetts, Michigan, Minnesota, New York, New Jersey, North Carolina, Pennsylvania, Wisconsin, and Texas. (All other states use it.)
If you or the professional you hire feels that your premium rates should not be based on the rules and specifications in the NCCI manual (or other state appraisal manual), your initial step should be to contact your agent, say. Experts, and request changes; If that doesn’t work, you should contact NCCI or the appropriate state rating bureau directly and point out the errors in your policy.
Is Your Company Required to Pay Workers’ Compensation Benefits to Illegal Aliens? According to experts, the answer depends on whether an “employee” who works “in the service of another” qualifies under a “contract of hire” under your state statute. So far, Ohio and New York courts have upheld the right of aliens to receive benefits; Wyoming, Virginia and Florida do not.
Note that only Texas, out of all 50 states, does not require employers to carry WC insurance.
About workers compensation fraud
Workers’ compensation is a no-fault system for providing monetary benefits to injured or ill workers while simultaneously protecting employers from lawsuits. But the system is open to fraud on several fronts. In an attempt to reduce premiums, employers may reduce the total number of their employees or misrepresent the type of work they do; Workers may claim benefits they are not entitled to, for example, by exaggerating the severity of injuries; Insurers can also intentionally miscalculate premiums and this is, unfortunately, not uncommon.
Unsurprisingly, it is employer fraud that is the leading type of workers’ comp fraud. According to a recent study reported by the National Commission on State Workers’ Compensation Laws, more than 13% of employers studied were operating without legally required workers’ compensation insurance. Additionally, others were found to have defrauded the system by intentionally misclassifying or underreporting their wages or falsely representing employees as independent contractors.
Arguably, the most well-known type of workers’ compensation fraud—the one most often covered by the media—involves workers claiming disabilities that don’t exist. Most insurance companies have established internal Special Investigation Units (SIU’s) in recent years to deal with this type of fraud. Claims adjusters report suspected cases to their company’s SIU, which then uses surveillance, background checks, videotaping, medical record checks and other tools to document fraud, then forwards the cases to the attorney general for prosecution. Criminal penalties for workers who try to game the system can be extremely severe.
As an example of how the 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 he was listed on the Internet as an officer of an outdoor recreation club while receiving these benefits. Surveillance was carried out and he was found to be involved in mountain trekking, carrying heavy loads and other activities indicating that he was not disabled. Criminal charges were filed and convictions were obtained, resulting in lengthy prison terms.
The moral of the story is simply this: don’t cheat the workers’ comp. Insurance companies now employ teams of special investigators who will doggedly pursue any suspicious claim and, if fraud can be proven, will press charges without hesitation.
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