Tutorial on Workers’ Compensation

Whether you’re starting a new business or already in an established 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 in choosing a policy. The fact is many 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, and making a variety of other types of mistakes which, oddly enough, result in insurance costs to you that are higher than they need to be.

Beyond 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’ 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 occurs in almost a fourth of all claims. It can take the form of employee fraud (an employee who’s been in an accident claiming to be injured more seriously than he/she 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 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 complicated to cover in detail here, but I’ll try to touch upon most of the basics in this brief article.

Basics of Workers’ Compensation

If you are in the type of business that is mandated by state law to purchase workers compensation benefits, this is something to take seriously. In some states, notably Florida and California, businesses are getting shut down and owners prosecuted criminally 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.

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-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 (CA, AZ, CO, MD, ID, MI, MN, MT, NY, OR, OK, PA, UT).

If for some reason your business is found to be especially risky, you will have to get your insurance from a so-called “assigned risk” fund, and it costs considerably more. Workers’ compensation is regulated primarily by the states (and Washington DC) so there are 51 separate sets of rules which govern benefits, premiums, and coverage. 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 almost completely 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’ comp policies tend to seem complicated and abstruse to the uninitiated. In addition, you can’t rely entirely on your insurance agent to decipher the technical terms, options, and requirements – 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.

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