Most businesses are required to obtain a workers compensation policy to cover employees injured on the job. The premium is paid by the employer, and is based on the type of work being performed by the employees. For every $100 of wages paid to employees, the insurance company charges a certain "rate" which fluctuates on the type of work being done, the particular insurance company issuing the policy, and the location of the insured. Even though rates have been declining in recent years, premiums may still be rising because payrolls have increased due to raises and the growth in employment. Because this is a large expense item for most businesses, careful monitoring will help prevent you from being overcharged. There are several ways to cut this expense, and a careful review of your situation is necessary. If you were overcharged in the past, you may be entitled to a refund by requesting the insurance company to conduct a re-audit.

Overstated Payrolls

Since the basis of premium is payroll, companies must ensure that the payroll being reported to the insurance company is correct. Many businesses overstate their payrolls by not removing certain items which are excludable from the premium calculation. Tips, premium overtime, severance pay, third party sick pay, expense reimbursements, payments for active military duty, and employer provided perks are not generally included as remuneration. In addition, there are limits on the wages of officers and inactive employees still receiving payroll. These items are the most commonly excludable items, but there are many more that vary from state to state.

Experience Modifiers

Once companies reach a certain premium level (usually around $5500, but this can vary from state to state), they are rewarded or penalized based on their prior claims experience. By preventing and reducing claims, the experience modification factor can be lowered. Each insured that qualifies for experience rating receives a free worksheet from NCCI (or an independent rating bureau), which compares premiums with claims over a three year period. Often, the calculation is wrong because claims were reserved in error, subrogated, or simply assigned to the wrong risk. Many mistakes are identified by reviewing the experience rating worksheet, which is sent every year by the NCCI. It is important to review the claims before the information is submitted to the NCCI by meeting with the claims adjuster.

Ask About Discounts

Discounts are available if you know about them. If you participate in a certified managed care program (which also helps reduce your experience mod), you should get a credit. This credit is mandatory in some states. Carriers also offer Schedule Rating Credits up to 25%. Deductible credits can range from $500-$5000 on the small side, or vary to an agreed upon percentage, often in the 30% range. Remember those rates per $100 of payroll - many insurance carriers have subsidiaries and file for different rates under each one. Find out if you are getting preferred rates. Ask about safety credits and dividend or retention plans. All of these items can help reduce your premiums.

Is The Audit Correct?

The insurance carrier will perform an audit when the policy expires. Was it performed on time? Some states impose time limits for completing the audits, and being allowed to collect additional premiums. It is here that your final premium will be determined, based on payrolls and classifications. Do not misrepresent job duties or give false information on payrolls - you may be committing fraud. As a general rule, the classifications on the audit will mirror the codes shown on your policy. Sometimes, new classifications are added, and this is a red flag for possibly being overcharged. Unless your operation has changed, the carrier is usually not permitted to add a new, higher rated classification at audit. If this has happened, you may be entitled to a revised audit and refund. You may also be entitled to a refund if you've been misclassified in the past, and just recently became aware of it.

Surprises At Final Audit

Always ask for a copy of the final audit worksheets, and have the auditor explain how the figures were determined. Check the payrolls for logic and consistency with your prior audit. Were all the deductions made? Are the wages assigned to the proper classifications? Did anyone change job duties during the year to a less risky operation? Do any employees have multiple job duties (such as a truck driver and a shop worker)? If so, be sure to maintain an accurate summary because that employee's wage can now be assigned to two different class codes, each having different rates. Was the audit performed on time?

Uninsured Subcontractors

If you hire subcontractors, be sure to get a certificate of insurance from them when you hire them. Do not wait until the final audit is scheduled. Otherwise, you may have to pay premium based on the cost of the contract, and carriers are aggressively charging for subs and charging premiums whenever possible. For labor only contracts, 90% of the contract price may be considered payroll. On labor and material contracts, no less than 50% shall be included. And, for mobile equipment operators, the amount included will not be less than 33 1/3%. Very often, the entire contract price is included as payroll, resulting in premium overcharges. Keep in mind that there are always status tests to determine an employer/employee relationship.

Minimum Premiums Can Be Lowered

Many sole proprietors are required to obtain policies, even though they have no employees. Since a general contractor may be held liable for the injuries of an uninsured subcontractor, proof of insurance is often required before the sub is allowed to work. The subcontractor would then obtain a minimum premium policy, which costs about $1000 per year. If the subcontractor worked alone for the entire year, and had no payroll, a partial refund should be made by the insurance carrier to the sub, based on the "clerical" minimum premium rule. Although it seems to be a contradiction, a minimum premium policy can be lowered, also.


By closely monitoring the audit, shopping around, and implementing a safety program, you will help minimize this mandated expense. Pricing is extremely competitive today, and insurance companies want your business. Ask a lot of questions. You may be overpaying on your premiums without knowing it. The insurance industry and pricing structure will not seem so intimidating once you know what to ask for, and find out what is available in today's marketplace.