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
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.
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.
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.
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.
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
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.
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.