The vast majority of companies need to purchase workers’ compensation coverage, and with your expertise, they can have great confidence in navigating the process from beginning to end.
Business owners need to have working knowledge of what worker’s compensation does, why they need it, and what their responsibilities are. There is a lot for business owners to comprehend about workers’ compensation, and they need their brokers and agents to guide them along the way.
Our brokers’ guide to workers’ compensation will give you plenty of talking points when you meet with clients to sell them a policy, review their coverage, engage in an audit, and file a claim.
What Clients Need to Know About Workers’ Compensation
Workers’ compensation is considered a form of social insurance because of the social relationship between the employer and its workers. As a commercial insurance policy, workers’ compensation pays for certain expenses for eligible workers who become injured due to a work-related incident.
Workers’ compensation pays for:
- Lost wages
- Medical costs
- Rehabilitation costs
- Death benefits
While workers’ compensation policies protect workers, they also protect businesses if an employee files a civil suit against the company.
Most, but not all companies are legally required to carry workers’ compensation policies, and each state sets its own laws and regulations for workers’ compensation policies.
State Laws
Each state determines who sells workers’ compensation policies including which companies must purchase policies and what the penalties are for not having it. Employers may purchase workers’ compensation policies even if their state does not require them to buy them.
For example, in certain states, employers may only purchase workers’ compensation policies from an insurance company that is run by the state or from the state itself. In other states, employers must purchase workers’ compensation insurance from a private insurer.
For example, North Dakota, Washington, Wyoming, and Ohio are called monopolistic states as employers must purchase workers’ compensation coverage from a fund operated by the state. The same is true for Puerto Rico and the U.S. Virgin Islands.
States can impose penalties on employers who fail to purchase workers’ compensation insurance including loss of the business license, fines, or even jail time. The fines are steep in some states. For example, Illinois employers that do not provide workers’ compensation insurance may face fines of up to $500 per day. Officers and directors in Illinois may be held personally liable and may be fined up to $10,000.
About 30 states have something called “Second Injury Funds” which is a program designed to encourage employers to re-hire previously injured workers. The concept of “Second Injury Funds” is to help employers cover losses if a disabled worker gets injured at work for the second time.
Business owners should also be aware that their customers may ask for a workers’ compensation certificate to prevent a situation where they must file a claim against their own insurance if one of their employees gets injured at their residence, facility, or on their grounds.
A common question insurance brokers will run into when discussing Workers’ Compensation with their clients is how policy premiums are determined. In this article, we discuss the various factors that determine the cost your client’s policy.
How Insurance Companies Calculate Workers’ Compensation
Several different factors go into calculating the premiums for workers’ compensation policies. These are some of the factors that impact premiums:
- Number of employees
- Amount of payroll
- Job classifications
- Risk exposures
- Type of industry
- State requirements
- Claims experience
The National Council on Compensation Insurance or a rating bureau established by the state determines classification codes for each job description. The classification code corresponds to a specific rate. The insurance company then uses a formula to determine the estimated premium.
The general workers’ compensation formula is:
Code rate X the claims experience modification number ÷ every $100 of payroll = the premium.
To help clients understand the rating system, it may help to create a scenario. Let’s say that the workers’ compensation rate for a tree care business was $10 for $100 of payroll. The company had five tree trimmers working for them and each earned $50,000 per year. The company had no claims, so there was no experience modifier.
The formula would be $10.00 X ($250,000 ÷ 100) = $25,000
Business owners should also be aware that family members, contractors, subcontractors, and working directors may also be covered under a workers’ compensation policy. For that reason, their salaries may be factored into the rate.
It is essential to impress upon business owners the importance of keeping accurate payroll records, as the company will be audited at the end of the policy term.
For your clients, an audit can be one of the most challenging aspects of running a business. Many are unsure of the requirements they need to meet in order to successfully navigate an audit and thus rely on your expertise to get them through it. In this article, we’ll detail how your clients can set themselves up to successfully manage audits without too many bumps in the road.
Understanding a Workers’ Compensation Audit
Clients often become uneasy or stressed when it comes time for a workers’ compensation audit. You can help ease their angst by helping them understand the process and reminding them that it’s a common practice for all companies that have workers’ compensation policies.
Be sure to inform clients that the premium clients pay for a worker’s compensation policy is merely an estimate. At the end of the term, the insurance company will review the data and adjust the premium accordingly if appropriate. The business can expect one of three outcomes – the premium will increase, decrease, or remain the same. If the premium increases, the business will have to pay the difference. The business could expect a refund if the premium decreased.
In the example above, if the business added a tree trimmer halfway through the year, they would owe an additional premium, and if a tree trimmer quit during the year, the business would be entitled to a refund.
Your clients will appreciate it if you share the following tips with your clients to prepare them for their workers’ compensation audit:
- Use generally accepted accounting principles (GAAP) for recordkeeping
- Have IRS 941 forms available for the last four quarters
- Gather copies of 1099s the business issued over the year
- Payroll reports should list employee names, job duties, states they worked in, and the gross payroll
- Record overtime, rewards, severance, officer exemptions, tips, and payments for active military duty separately
- Include salaries, job duties, and payroll for officers and owners as well as how many weeks they worked and their ownership percentage
- Record contractors and subcontractors, their job duties, and payroll, and gather certificates of insurance
By keeping accurate records and having all the proper data and documents ready, the workers’ compensation audit will go as smoothly as possible.
Claims have the potential to decimate your client’s business if they aren’t secured with the right coverage. Additionally, Workers’ Compensation fraud is sometimes a common occurrence that your clients need to safeguard themselves from. In this article, we’ll discuss Workers’ Compensation claims, fraud, and laws in place to protect both employees and businesses.
Workers’ Compensation Claims and Fighting Fraud
Businesses must report employee injuries to the insurance company immediately, so this is an important talking point with clients. Employers must report the injury even if the employee is only off work for one day. Business owners who don’t file worker’s compensation claims could face penalties.
While workers’ compensations may be legitimate, brokers, agents, and business owners should be vigilant about detecting insurance fraud. Employees are sometimes the perpetrators of fraud, yet medical providers or vendors may also commit insurance fraud.
According to the Coalition Against Insurance Fraud, about 10% of property and casualty losses are fraudulent. While the percentage is relatively small, it costs American consumers $308.6 billion each year.
The following tips will help businesses prevent workers’ compensation fraud:
- Create a zero-tolerance policy for workers’ compensation fraud
- Establish clear safety policies and post signage to reinforce them
- Hold regular safety meetings and offer incentives for meeting safety goals
- Watch for red flags on employee background checks (spotty work records, criminal records, etc.)
- Install video cameras to monitor employee safety (in accordance with video surveillance laws)
Businesses will welcome such tips which will keep their employees safer and lower their workers’ compensation premiums.
Workers’ Compensation Laws and Policies Protect Employees and Businesses
Workers’ compensation laws and policies are designed to protect employees and the business, and it’s helpful to reiterate this concept to your clients.
Employees will appreciate working for a company that keeps them safe on the job and that they will be fairly compensated if they unexpectedly get injured at work. Workers’ compensation will provide them with the funds to recover from their injuries and return to work at the earliest possible opportunity.
At the same time, business owners have the assurance they will pay a fair premium for their workers’ compensation policy, and it will help them attract top talent and retain it.
Final Thoughts
Finding Workers’ Compensation coverage tailored your client’s that can meet your client’s business and industry specific needs can be extremely challenging. NIP Group’s experts stand ready to assist you in catering to your client’s needs by providing the necessary coverage they need and deserve.
Reach out to us today at 866-653-6945 to inquire about how we can support you!
