Why Workers Compensation?
Almost all employers are required to carry Workers’ Compensation insurance coverage, however, the specific details can vary by state. There is a number of issues related to workers’ compensation coverage that are either unknown to most or easily misunderstood. Here are five tips that will better help you manage your workers’ compensation insurance:
1. Underestimating payroll on your Workers’ Compensation Policy
At the end of your policy period a final audit may be conducted to capture your actual payroll for the policy term and determine your final premium. If your payroll is higher than estimated, you will owe an additional premium. If it is lower, you will receive a return premium.
Whether or not an audit is completed can be dependent on the size of your premium or the state you are located in. If your policy annual premium is less than $3,500, you may only get audited every three years. Most businesses don’t want to owe additional premium at audit time, so it is important to keep in mind that if your business grows, or you buy another location your payroll will grow as well, and it will likely be significantly higher than what you estimated for the year. It is wise to plan for an increase in premium due to higher payroll by setting money aside to pay the premium that will be due concluding the audit.
2. Workers’ Compensation Audits
Your workers’ compensation audit should be taken seriously, as it can result in a substantial premium increase if not addressed. If a business owner chooses not to respond to a workers’ compensation auditor, the auditor will process the audit with an automatic increase in payroll of 50%. The business owner will be billed for the additional premium based on the automatic payroll increase. It is in the policyholder’s best interest to be responsive if contacted by an auditor.
3. Officer Inclusion/Exclusion and Election of Coverage Form
Laws regarding covering or excluding officers for coverage on your Work Comp policy vary by state. You may be legally required to submit an Election of Coverage Form to the Insurance Bureau in your state. To ensure that your choice to include or exclude officers under your workers’ compensation policy is properly documented, please contact your insurance program representative. We assist our customers in completing any documentation accurately to help avoid surprise premiums due at audit. If the proper Election of Coverage Form is not submitted timely, it may impact the premium calculated upon audit, or coverage provided in the event of a loss.
4. Canceling Your Workers’ Compensation Policy Mid-term
As a general rule, a policyholder may choose to cancel his/her insurance policy at any time by giving written notice to his/her insurance agent. It is important to note that it is common practice in the insurance industry for a ‘short rate’ penalty fee to be assessed on policies that are canceled prior to the expiration date. This penalty fee is usually a sliding percentage that is based on how long the policy has been in force. For example, cancellation nine months into the policy inception would yield a lesser penalty than one canceled three months after inception.
Why do insurance companies impose the fee? Insurance companies issue a policy to cover a 12-month period and expect the policy to remain in-force the duration of those 12 months. It costs the insurance company money to quote and issue a policy and then cancel it a few months later, so they endeavor to recoup some of that expense. The NCCI (National Council on Compensation Insurance) also supports imposing the fee. They gather statistical data that helps set rates for each class code and state. In addition, they compile information in order to calculate experience modifications on individual policies. When a policy period changes (ie: canceled prior to the expiration date), it disrupts NCCI’s statistical calculations. The short rate penalty fee encourages policyholders to keep their policy in force for the full 12-month period.
5. What is an Experience Modification?
Once an owner has been in business a few years and reaches a certain workers’ compensation premium size (it depends on the state, but around $5,000), the NCCI or their State Bureau will calculate an experience modification. This “mod” factor is a result of the business’s loss experience and will be applied to the owner’s work comp premium. If an owner has better than average losses for their class and state, they will get a discount off of their workers’ compensation premium. If they have worse than average losses they will pay more because of a debit being added. Having a reputable claims handling group is also critical to keeping the experience mod low because if a claim is mishandled by the adjusting firm it can cause the business’s experience mod to be higher than it might otherwise have been. The BST Insurance Program works with financially secure insurance companies and experienced claim adjusting firms.
