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      Workers Compensation (WC) 101

      This page is meant to serve as a 101 educational resource for Workers Compensation insurance.

      What is Workers Compensation Insurance?

      Firstly, Workers Compensation is sometimes referred to as WC or Work Comp.

      Workers' compensation insurance is a type of insurance policy that provides medical benefits and wage replacement to employees who are injured or become ill as a direct result of their job. This insurance is designed to protect both employees and employers in the event of a workplace accident or illness. In the event of a fatality, the coverage becomes a death benefit to the employee’s family.

      Eg: A worker injured themselves in a manufacturing facility. In this case the company has to pay for medical bills and wages for lost time (leave).

      Workers Compensation is mandatory in all states in the US except Texas. Coz Texas be great!

      Here are key aspects of workers' compensation insurance:

      1. Employee Protection: It covers medical expenses, rehabilitation costs, and lost wages for employees who are injured or become ill because of their work. This can include injuries sustained while on the job or illnesses that are a direct result of employment conditions.
      2. Employer Liability Coverage: Workers' compensation insurance also protects employers from lawsuits initiated by injured employees. It acts as a type of liability insurance by limiting the amount and type of compensation an employee can receive.
      3. Mandatory in Most Jurisdictions: In many places, workers' compensation insurance is mandatory for businesses with employees. The specific requirements can vary depending on the location and the type of work.
      4. No-Fault System: Typically, workers' compensation operates on a no-fault basis. This means that employees are generally entitled to receive benefits regardless of who was at fault for the injury or illness. In return, they forfeit their right to sue their employer for the injury in most cases. In many cases, the employee might still sue and the company might have to pay for which they get Employer’ Liability Insurance either separately or as an optional coverage on WC.
      5. Return-to-Work Programs: Some workers' compensation policies may include support for return-to-work programs, helping injured workers reintegrate into the workforce, often with modified duties that accommodate their recovery.
      6. Varies by Jurisdiction: The specifics of workers' compensation insurance, such as the benefits provided and the conditions under which it is required, can vary significantly between different countries, states, or regions.

      Overall, workers' compensation insurance plays a crucial role in providing a safety net for employees who suffer work-related injuries or illnesses, while also protecting employers from potentially costly litigation.

      Critical Elements / Breakdown of the application

      Job Code / NCCI Code / Employee Type / Work Comp Class Code / Class Code

      This is the most critical element of a WC insurance application. Every insurance company wants to know what and how many of each kind of employee is in the business and how much they are paid. This is key information to come up with a decision and premium amount.

      Eg: An accountant is less risky than a nurse in a hospital. A nurse is less risky than a construction worker. So the premium will be different based on type of employment. The number of employees of each type and the amount they are paid also matter.

      To identify the type of employee we define Job Codes. These Job codes are often called NCCI Codes, Employee Type codes, Work Comp Class Codes or just Class Codes. In CoverForce, we try to stick to using the term “Job Codes”.

      Each state has it’s own list of Job Codes. Some states have similar lists based on the NCCI recommendations. This is explained more later in the document.

      For further in-depth information on Job Codes please read: Intro to Job Codes

      Carrier Specific Job Codes

      Each carrier can also define their own list of Job codes. Most carriers will define sub-descriptions for a given state level job code. These are called Carrier Specific Job Codes.

      For example, in Alabama state there is a job code 8803 - Auditor, Accountant, Or Computer System Designer Or Programmer. Liberty Mutual further classifies this job code into 4 sub-descriptions:

      1. 162529 - ACCOUNTANT, AUDITOR OR FACTORY COST OR OFFICE SYSTEMATIZER- TRAVELING
      2. 162503 - AUDITOR/ACCOUNTANT/COMP.SYS.DESIGNER OR PROGRAMMER-TRAVELING
      3. 162537 - COMPUTER SYSTEM DESIGNERS OR PROGRAMMERS: TRAVELING
      4. 162511 - OFFICE OR FACTORY COST SYSTEMATIZER, ACCOUNTANT OR AUDITOR- TRAVELING

      For further in-depth information on Job Codes please read: Intro to Job Codes

      Locations

      The locations of the business is a required part of a WC application. In a WC application you need to provide all the locations of the business and the employee type/payroll breakdown at each location.

      This ensures that the carrier follows the state laws of the various states and can also make decisions based on geography of the location.

      Eg: The WC minimum coverage for a construction worker in CA might be different than in TX. In that case, the carrier will want to know the locations and employee type at each location to follow the correct laws.

      Industry Type / Industry Code

      Some carriers also use the industry type to determine the underwriting questions for a business, the decision to insure the business or not and the premium amount. This is less common compared to using the job codes. Carriers that base their underwriting questions on the industry code will still ask for the state level job code for determining the premium amount.

      Most carriers have their own list of industry codes that they define and maintain. Some carriers follow standardized lists such as NAICS or SIC.

      For further details on Industry Codes please read: Intro to Industry Codes

      Experience Modifiers / Emod / ModFactor / Exp Mod Rating

      Experience modifiers are a numerical factor that adjusts the cost of an employer's workers' compensation insurance premiums based on the company's claim history relative to other companies in the same industry. This factor, often called an "Experience Modification Rate" (EMR) or "mod," is a reflection of the safety record and workers' compensation claims history of a business.

      The primary purpose of the experience modifier is to incentivize workplace safety and loss prevention. Employers with fewer and less severe accidents than average for their industry receive a lower modifier, which can reduce their insurance premiums. Conversely, employers with more or more severe accidents than average will have a higher modifier, increasing their premiums.

      An EMod of 1.0 is considered the industry average. If a business has an EMod less than 1.0, the workers' compensation premium will be lower than average for the industry, reflecting a better than average safety record. An EMod greater than 1.0 indicates a worse than average record, resulting in higher premiums.

      The rules and formulas for calculating experience modifiers can vary from one state to another since workers' compensation insurance is regulated at the state level. However, the National Council on Compensation Insurance (NCCI) provides these calculations for many states, while some states operate their independent rating bureaus.

      Other Modifiers

      1. Schedule Rating: In a workers' compensation policy, a scheduled rating is a way for insurance companies to adjust the premium based on specific characteristics of the policyholder's business, independent of their past claim history. This essentially means that insurers can reward businesses with good safety practices and penalize those with higher risks, leading to fairer and more accurate pricing.
      2. Merit Rating: In workers' compensation, merit rating is a system where policyholders' premiums are adjusted based on factors beyond their past claims history (eg: a Return-to-work program for employees who had injuries). Similar to scheduled modifiers, it aims for fairer pricing by considering an organization's current risk profile.

      Owners/Officers Coverage

      Owners and Officers coverage in Workers' Compensation (WC) refers to an optional insurance coverage that allows business owners and officers (typically of corporations or LLCs) to include or exclude themselves from their company's workers' compensation policy. The rules and options regarding this coverage can vary significantly between states, but the essence is to provide flexibility regarding whether owners and officers want to be covered under the company's WC policy.

      Each state has defined rules on whether:

      1. Owners/Officers should by default be included or excluded depending on the Legal Entity type of the business
        1. Fake Eg: NY state might have a rule that says owners are by default included in the coverage when the legal entity is a LLC, but not included by default when the legal entity is a General Partnership.
      2. Some states will also have rules on whether you can modify the above mentioned defaults for Owners/Officers coverage

      Federal Employer Identification Number (FEIN)

      Federal Employer Identification Number (FEIN) or Employer Identification Number (EIN), is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to business entities operating in the United States for the purposes of identification. Essentially, it acts as a Social Security Number (SSN) for a business. That means it is a unique number assigned to a business to identify it uniquely.

      Loss Types

      In Workers Compensation when providing information about past losses you also have to provide the loss type of the loss. Loss here means a loss to the carrier due to previous claims or a loss to the company for a rejected claim. There are 3 loss types in WC:

      1. Medical - This loss type indicates that the claim was for an incident that required medical treatment. Eg: Worker got injured in a factory and had to get stitches
      2. Lost Time / Indemnity - This loss type indicates that the claim was for an incident that resulted in the employee not being able to work for a few days. Eg: Employee fractured their leg and therefore could not work for 2 months.
      3. Both - This is for cases where the claim included both a Medical portion and a Lost time portion.

      NCCI vs Independent vs Monopolistic States

      While Workers Compensation insurance is usually mandatory in every state each state has different rules on how they regulate WC insurance.

      Monopolistic States

      These are states that do not allow private insurance companies to sell WC insurance in the state. The state itself will have a government-operated insurance fund. All businesses have to purchase WC insurance from the state/government operated insurance fund.

      There are 4 such states in the US: Ohio, Wyoming, Washington, and North Dakota

      NCCI States

      Most states in the US are NCCI states. Specifically, 36 out of the 51 states are NCCI states. That is they set their rules based on the recommendation of the National Council on Compensation Insurance (NCCI). The National Council on Compensation Insurance (NCCI) is a U.S. insurance rating and data collection bureau specializing in workers' compensation.

      NCCI states use the data and recommendations of the NCCI system to set their own rules and regulations.

      NCCI states generally develop their job code list based on the NCCI job code list. There might be few changes but for the most part they follow the NCCI job code list.

      Even the Experience modifier is shared between states that follow the NCCI recommendation. That way the loss data is collected by NCCI and the modifier is also calculated by NCCI. The NCCI states can just use the FEIN number to get the experience modifier for a business from the NCCI central database.

      This is also the reason many times the job codes in WC are referred to as NCCI code since they are set by the NCCI agency.

      Independent States

      Independent states are those that are not monopolistic and neither follow the NCCI for rules and recommendations for WC. They have their own list of job codes and their own independent rules for WC insurance. They might still work with the NCCI bureau at times in a consulting manner, but the actual rules and decisions are made by the independent state WC agency.

      Independent states may or may not follow the NCCI Experience modifier rating. In most cases they have their own Experience modifier reporting system and loss data collection system.

      Independent States: California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, and Wisconsin.

      Uninsured vs Insured Subcontractors

      Working with insured vs. uninsured subcontractors affects the workers' compensation insurance in two main ways:

      1. The premium amount
      2. The process of year-end audits

      Insured Subcontractors have lower risk:

      1. They carry their own insurance, so any claims their employees make don't affect the hiring company’s insurance or premiums.
      2. Simpler Audits: You can show their insurance certificates during audits, making the process smoother and avoiding premium hikes for covering extra risks.

      Uninsured Subcontractors have higher risk:

      1. If their employees get injured, your insurance might have to pay, leading to higher premiums for you.
      2. Complicated Audits: Audits can get trickier and might result in higher premiums if it's found that you were effectively covering the uninsured subcontractors.

      Rating Factors

      The core rating factors for a WC policy are:

      1. Employee Details by Location: This includes the employee type, number of each type of employee, where they are located (by state usually), and their payroll (salary)
      2. Locations
      3. Experience modifiers
      4. Owners/Officers coverage (Include or exclude)
      5. Past losses
        1. Loss Amount
        2. Loss Type
        3. Date of loss

      There are also other factors that go into making the decision to insure a business or not and how much premium to charge. But the above ones are the core factors.

      Liability Limits

      The liability limits of a WC policy are:

      1. Per Accident Limit - This is the maximum amount of money that will be paid out for a single incident/claim in the policy term (usually 1 year). Each incident/claim can use the full maximum amount
        1. Eg: ($100K) If a machine breaks and injures 4 people the maximum amount that will be paid out is $100K.
      2. Per Disease Employee Limit - This is the total amount of money that will be paid out to a single employee in the policy term. That is if an employee has multiple incidents/claims they will only get up to this limit in total for that policy term.
        1. Eg: ($100K) If an employee is injured in February and then again in November then the maximum amount paid out for their claims would be $100K
        2. The term “per disease” might be confusing, please ignore. It is probably named this way due to legacy reasons.
      3. Per Policy Limit - This is the total amount of money that will be paid out for all the claims in the policy term. If the business exceeds this amount they will not be covered by the insurance anymore in that policy term.
        1. Eg: ($500K) If there was an incident/claim in February and March each for $250K then after March the business will not get anymore money from the insurance company for any new incidents/claims.

      The Per Accident, Per Policy and Per Disease limits offered by a carrier are a preset list. Most common limits are 100K/500K/100K , 500K/1M/500K , 1M/1M/1M, 1M/2M/1M

      The WC liability limits offered (preset list) can change based on the Carrier and State. Some carriers might also change the limits offered based on the type of business. Each carrier also has different rules about the limits offered in case of a business that has locations in more than one state.

      Besides the standard limits mentioned above each carrier might have limits for various optional coverages included in the WC policy.