Workers’ Compensation Basics
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Disclaimer
Insurance forms and endorsements vary based on insurance company; changes
in edition dates; regulations; court decisions; and state jurisdiction. The
instructional materials provided by The Insurance Community Center and its
authors is intended as a general guideline and any interpretations provided by
The Community do not modify or revise insurance policy language.
•Information which is copyrighted and proprietary to Insurance Services Office,
Inc. (“ISO Material”) is included in this publication. Use of the ISO Material is
limited to ISO Participating Insurers and their Authorized Representatives. Use
by ISO Participating Insurers is limited to use in those jurisdictions for which
the insurer has an appropriate participation with ISO. Use of the ISO Material
by Authorized Representatives is limited to use solely on behalf of one or more
ISO Participating Insurers.
•The authors of these materials and The Insurance Community Center assumes
neither liability nor responsibility to any person or business with respect to any
loss that is alleged to be caused directly or indirectly as a result of the
instructional materials provided.
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Copyright 2010
All Rights Reserved
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What this class will cover
1. The evolution of Workers’ Compensation
laws in the U. S.
2. Workers’ Compensation coverage
concepts
3. Basics of providing Workers’
Compensation coverage
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Before There Was WC in the US
Employees had to sue employer for negligence or
some other form of tort for injury or illness
Employees often had no resources to sue
Relied upon other resources, such as charity
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Foundation of WC Laws in the US
Wisconsin first
state in 1911
All by 1948
Exclusive
remedy
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No fault
coverage /
statutory
benefits
Employers
protected from
lawsuits
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Objectives of WC Laws
Provide reasonable benefits
Reduce lawsuits
Encourage safety
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WC Legal Concepts
Strict liability
• No need to prove negligence by employer
Employee retains some legal rights to
sue employer
•
•
•
•
Employer assault
Fraudulent concealment of injury
Injury / illness caused by employer product
Employer removal of safeguards
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Employers Liability
• Some states WC not mandatory for one or two
employees
• On the job injury NOT occupational disease or
AOE/COE
• Some states permit suits and recovery by
spouses for damages (loss of consortium,
comfort and affection)
• Third party "Action Over" suits (noncontractual)
• Exception to “exclusive remedy” to the degree
not excluded from policy
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Individual State Differences
Benefits vary by state
Texas allows employers to “opt-out” of WC
system
Monopolistic states
Coverage provided through
state program only
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ND, OH, WA, WY
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Individual State Differences
Competitive market
All other states allow competition among insurers
Residual pool coverage
Assigned risk type of coverage when employers
don’t qualify for competitive market due to losses
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Employer and Employee
Definitions
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Employer Defined by State Statutes
Generally – any employer of a natural
person in service to the employer
Some states have minimum number of
employees before required to carry WC
Many states have exceptions for certain
occupations
• Farm labor
• Domestics
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Employer
Most states have exceptions for
certain positions
• Sole proprietors with no other employees
• Partners of a partnership
• Executive officers that are also owners
• Members of a Limited Liability Company
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Employee
Natural person
engaged in the
service of an
employer to
benefit the
employer or a
third party
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Questions
remain
regarding
independent
contractor
status
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Employee or Independent Contractor
Does “employer” have right to
control the work
Does “employer” control quality
of work
Does “employee” work only for
the “employer”
IRS has criterion that may be
helpful
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IRS Guidelines
• Does employer set the times and places of
work
• Does employer provide the tools,
equipment, vehicles, materials for the job
• Does employer provide training
• Does employer reimburse for expenses
• Does employer file W-2 or 1099
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IRS Guidelines
• Does employee personally perform the
services
• Does employee continuous perform work
for the same employer
• Does employee maintain separate
business with required license, permit and
insurance
• Does employee file as a business
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Qualifying Injury / Illness
Accidents
Occupational Disease
Arising out of
employment (AOE)
In the course of
employment (COE)
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Penalties
All states have
penalties by
statute that
apply to
employers not
providing WC
coverage when
required
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Fines vary by
state
Jail
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The Workers’ Compensation
Policy
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Policy Forms
Coverage follows
state law
Standardized form
created and used
by many states
National Council
on Compensation
Insurance
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Required Information
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Required Information To Complete
Application for Coverage
Employer Name and type of
Entity
Known States of
Employment
Possible States of
Employment
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Required Information To Complete
Application for Coverage
Number of Employees
Job Descriptions
Annual Payroll by
Descriptions
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Purpose of Payroll and Job
Descriptions
Premium charge
developed based upon
payroll and classifications
Descriptions of jobs
identifies classification to
be assigned
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Purpose of Payroll and Job
Descriptions
• Basic rules apply – established by
– NCCI or other rating bureau
– Non-NCCI States
•
•
•
•
•
California
New York
New Jersey
Delaware
Pennsylvania
– These states use classification systems similar
to NCCI
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NCCI
• Publishes classification codes in their
Scopes Manual / eSCAD on line WCIRB
– An alphabetical index
– Numerical index
– www.ncci.com
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Establishing Classifications
• Each specific job classification is assigned
a four-digit number (code)
• Each code has its own rate used to
establish premium
• Governing class
– The code that most accurately describes the
business operations
– Carries highest amount of payroll (other
than standard exceptions)
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Establishing Classifications
• Standard exceptions
– NOT included in governing class unless
specifically included
• Examples
– Clerical
– Outside sales
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Standard Classification System
• Contains over 700 industry classifications
and describes groups of employers whose
businesses are relatively similar
• NPD – No Payroll Division
– All payroll goes in governing class no
separation of payroll for clerical or outside
sales
• NOC – Not otherwise classified
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Classification by Industry Group
• Groups businesses with similar hazards
• Costs distributed fairly among similar
business
• Grouping allows cost control through
industry wide safety and loss prevention
• New industries can add classifications
– Large enough group
– Identifiable job risks
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Classification by Industry Group
• Assignment by analogy
– Type of business not explicitly classified
– Uses similar business classifications and
hazards
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Step to Determine Proper Class
1. Review classification pages of the Basic
Manual
2. See alphabetical index in Scopes Manual
3. See industry index of Scopes Manual
4. Review phraseology under each possible
industry group
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More Than One Governing Class
• Type of industry requires separate rating
by classifications
• Employer separates payroll
• Example - construction
– Drywall
– Framing
– Roofing
– Electrical
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Premium Development
• Proper classification
• Proper payroll
– Company owners may have minimum and
maximum payrolls
• Insurance company loss factors
– Used to increase basic rates for loss
adjustment costs and expenses
• Experience modification factor
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Experience Modification Factor
• This is a factor used by insurance companies
for insureds that qualify based upon the
amount of annual premium paid
• Rating bureaus (NCCI and others) compare
the insured’s loss data to the average of all
employers in that state that have the same
classification codes
• Can increase or decrease the premium
developed by the classification code rate
time the payroll
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Experience Modification Factor
• Frequency and/or severity or both affect
the Ex Mod
• Typically a period of time is used for
payroll and loss data collection, often four
years and excluding the most recent policy
year
• System designed to provide a safer work
environment for employees
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Experience Modification Factor
• Rewards employers with good loss
records
• Penalizes employers with worse than
average loss records
• Eligibility –NCCI (varies by state)
– The minimum premium requirements range
from $2,500 to $5,750 annually or from
$4,500 to $11,500 for the last 2 years of the
experience period
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Eligibility
• Eligibility ’09 for Experience Period- CA
– $16,300 in premium based on Current (2010)
– Pure Premium Rate during experience period
– Remuneration during experience period
times current pure premium
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Software Systems to Help
Analyze Mod
• www.specificsoftware.com
• www.intellicomp.com
• ModMaster: www.specificsoftware.com
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Information Used to Calculate Mod
• Unit Statistical Filings
• Audited payroll by classification
• Claim information
– Valuation dates are 18, 30, 42, 54, 66 months
after the inception of policy
– Filing date – 2 months after valuation
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Business Ownership Affect on Ex Mod
• Most states have regulations pertaining
to the sale or acquisition of a business
and how that affects the business Ex Mod
• If the business is maintained as a
separate entity with new owners, it will
keep the same Ex Mod unless:
– There is a material change in ownership AND
either
• a material change in operations or
• a material change in employees
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WC Coverage Review
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WC Coverage Basics
• Named insured should be the actual
employer name
• Mailing address
• Locations of work
• Payroll information
• Classification of jobs
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What is Shown on The Dec Page
1 Part 1 is the statutory coverage and pays
state required benefits
2 Policy Period
3 A This is where all states are listed where
operations or work locations are known
3 B Part 2 is Employer’s Liability – defends the
insured if the employee is allowed to sue
Limits of insurance $500,000 up to
$2,000,000
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The Declarations Page
3 C This section should include language that
states: “all other states, other than
monopolistic states or those shown in 3A.
This allows the benefits in those possible
work states to be paid, rather than the
state benefits of those shown in 3A which
may be lower
4 Classification schedule to develop
premium
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Coverage Review – Part 1
• General Section
– Covers all of employers workplaces listed on
the Dec (Information) Page as well as all
locations shown in 3. A.
• Insurance applies
– AOE / COE
– Pay all claims required
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Coverage Review – Part 1
• Benefits paid
– Medical
– Disability
– Death
– Rehabilitation costs
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Coverage Review – Part 1
• Payments not paid by insurance – any
additional money required because of:
– Serious and willful misconduct
– Knowingly violated the law in employment
– Failure to comply with health or safety law
or regulation
– Discharge, coerce or discriminate against an
employee
• Statutory provisions apply
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Coverage Review – Part 2
• Pays defense and damages for lawsuits
filed by employees or dependents
against the named insured employer
• Insurance applies
– Bodily injury by accident or by disease – AOE
/ COE and occur during policy period
– Necessary or incidental to work
– Suit must be brought within the US,
territories or possessions or Canada
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Coverage Review – Part 2
• If the insured is performing work in a
monopolistic state, the statutory coverage is
purchased through the state
• Employer’s Liability is not included
– Must purchase Stop Gap Liability
– Some states require this to be added to the
Commercial General Liability policy
– Others may allow this to be added to another
WC policy carried by the insured
• Show this coverage as an underlying
coverage on the Umbrella policy
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Coverage Review – Part 2
• Insuring Agreement
– Pays all sums legally liable
– Care and loss of services
– Consequential BI to spouse, child, parent,
brother or sister of injured employee
– BI to an employee arising of a capacity
other than as an employer (such as a
manufacturer of a product that causes the
injury)
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Coverage Review – Part 2
• Exclusions
–
–
–
–
Contractually assumed liability
Punitive damages
Knowledgeable violation of law
Obligations required under any WC law –
covered under Part 1
– BI outside US, territories, possessions or
Canada, except for outside temporarily
– Damages arising out of coercion, criticism,
discrimination, harassment
– Covered under federal laws
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Coverage Review – Part 3
• Other states
– 3. C. applies only if one or more states are
shown and work begins in disclosed states
after policy effective date
– Any work that begins before effective date
of policy and not reported within 30 days –
no coverage
– Reimburse for benefits if not permitted to
pay directly
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Employee Outside Listed State or US
• Most state laws allow benefits for
residents working temporarily outside
their own state or country
• Many states may allow benefits for nonresidents if the requirements of that
State are met
– 23 states cover all in-state injures
– 4 states have special limits (AZ)
– 6 states exclude if covered in another state
(CA)
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Employee Outside Listed State or US
• Miscellaneous
– Other states leave it up the courts to
decide except
• OH bars claims by those temporarily in state
• NY fact specific
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Coverage Review – Part 4
• Duties after a loss
– Report
– Give specifics of injury or illness
– Send demands and notices
– Cooperate
– Do nothing to impair subrogation rights
– No voluntary payments
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Worker's Compensation
Endorsements / Coverages
• Voluntary Compensation and Employers
Liability Coverage – WC 00 03 11 A
– Provides benefits to persons not subject to
the Act
– Describe the type of employment in the
Endorsement Schedule
– Examples of use:
• Sole proprietors, partners or officers don’t fall
under the Act
• Types of employment not covered under the Act
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WC - Federal Endorsements
• Longshore and Harbor Workers’
Compensation Act - WC 00 02 06
– Provides WC benefits to employees, (other than
masters and members of crew of a vessel)
– Injured in maritime employment
• Loading and unloading a vessel
• Repairing or rebuilding a vessel
• Subject to size (ft of vessel and tonnage)
– 1984 – Specific exceptions
• Restaurants, clerical, employed by marina and more….
• If subject to state workers’ compensation coverage
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Waiver of Subrogation
• Specific endorsement added to a
Workers’ Compensation to waive the
carriers right to go against the
organization named who may be
responsible for the accident
• A charge is typically made if the
insurance company will allow
subrogation rights to be waived
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References and Resources
• NCCI – National Council on Compensation –
See Silverplume / Sage to Access
• WCIRB www.wcirbonline.com
• U.S. Chamber of Commerce (202) 463-5381
– 2009 Analysis of Workers Compensation Laws
• The Workers Compensation Guide – See
Silverplume / Sage
• International Risk Management Institute
www.irmi.com 1-800-827-4242
• Your bureau manual – WCIRB, NCCI or
others
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