Understanding Workers Compensation Insurance
A story about Workers Compensation Insurance:
Meet Alex. Alex works at a sign manufacturer, printing signs on their format digital printer. He spends a lot of time on his feet, printing out a variety of signs and banners for their customers.
One day, while handling a large political sign for a client — they’re printing on 3/4″ plywood, so it can be seen from the road — Alex drops the 65 pound finished sign on his foot, and breaks several bones.
The sign is repaired and saved, but Alex isn’t as lucky. He goes to the emergency room, and is given a cast to wear for six weeks while his foot heels. This means he can’t stand at his printer to complete his work. As a result, Alex gets the time off to recuperate for a few weeks. Eventually, he can return and do some light work while he recovers.
More unfortunately, Alex is an hourly employee, which means he’s not getting paid for those few weeks while his foot begins to heal.
Workers’ compensation insurance to the rescue!
Since Alex’s employer carries Workers Compensation Insurance, the insurance covers Alex’s wages while he is at home. His medical bills get paid as well. He won’t actually lose any money as a result of his accident. Once Alex recovers, he can get back to work, and the workers’ comp insurance shuts back off again.
What is Workers Compensation Insurance?
So in Alex’s case, it doesn’t matter if he dropped a sign on his foot at work, or sprained his ankle making a delivery, or fell out of the cherry picker installing a neon sign at a shopping plaza. If it happened in the performance of his work duties, he is covered.
Of course, there are some limits associated with every workers’ comp policy. If you are in New York, the limits are as follows:
- Statutory limits per occurrence: $100,000.
- Per employee bodily injury by disease: $100,000.
- Policy limit: $500,000.
All workers’ comp policies have limits. Some States like New York have statutory limits. This means they will pay whatever amount the damages are irrespective of limits. Other States have limits like those listed above to which they adhere to.
Higher limits of workers compensation insurance are available and we often see requests for
$1 million/$1 Million/ $1 million. Limits like this are often required by contract when dealing with certain agencies or organizations. We can also provide excess workers’ compensation coverage for those contracts that require even higher than a $1 million limit.
What does Workers Comp Cover?
It covers any injury or illness as long as it happens during while you are performing work-related duties, and it keeps you from working for a specific period of time (this varies from state to state as well). In addition, it will cover medical costs, such as a trip to the doctor and/or emergency room.
Who Should Have Workers Compensation Insurance?
Nearly everyone. There are a couple of exceptions, and we’ll cover those shortly. Suffice it to say right now that this is something everyone should have.
Important Things to Know About Workers Compensation
There are a few important things you should know about workers comp:
- Who needs to have it
- How it’s figured
- How it’s governed
- Why you shouldn’t ever try to go without it
Executives Are Sometimes Exempt From Coverage
The state of New York allows an executive of a corporation to elect whether they want to be included in workers compensation or not. You do not have a choice of whether you cover your employees, because you have to. The law requires it.
However, as an executive, you do have a choice. If you pay yourself a salary as an executive of an entity, you are not required to pay workers compensation for your own money. Nevertheless, if you do not provide compensation coverage for yourself, and you are injured, you do not get paid.
This means if you have a one-person corporation, you’re not required to carry workers compensation insurance for yourself. If there are two officers in the corporation, both can choose to be included or excluded together. However, you cannot have one get it and one go without. In addition, if there are more than two officers in the organization, then all must be included. There is no option for being excluded if there are more than two officers.
(If you are a sole proprietor, you may still need to show that you do not need workers compensation. DurAmerica can issue those documents as well. It’s basically a certificate that says you certify you don’t have any employees and you choose to be exempt from coverage.)
In other states, like New Jersey, no one is exempt at any time. Everybody must have workers compensation coverage. Most states give you the option of being included or not. However, there are some states that do not allow this. That means you need to ask your insurance professional about your required coverage before you decide you do not want it.
Coverage Costs Are Based on Classification
As far as the employee rates are concerned, they are based on the classification you put down on their forms. Every classification has a rate, and that rate is determined by how risky the job is, as well as on every $100 you collect in salary.
For example, a roofer pays a certain rate based on the riskiness of the job, plus their regular salary. When you add up all the classifications within a company, it determines the insurance premium for the company. Furthermore, you can see how an office employee is much cheaper than a contractor is, because the inherent risk is much lower.
How Workers Compensation is Governed
Workers compensation companies — and that includes DurAmerica — are governed by the Workers Compensation Board. The Board is the group that determines the rates for each class code. In theory, every workers compensation company has the same rates because based on the criteria determined by The Board.
There are minor adjustments possible through an experience modification rate, or “mod”. It does not necessarily pay to shop around to the different workers compensation companies. That’s because The Board also monitors each company and its employees. This is to determine rates, as well as whether any fraud is being perpetrated.
A workers compensation company can only give the mod when the employer has had coverage for over three years. For example, a company that has been in business for three years with zero claims obtains a mod of 1.0. But if you have claims at your company, your mod goes up, 1.1, 1.2, 1.3, etc. This means your rates go higher. Even a 1.3 is considered extremely high risk, and can affect your rates.
However, if you do not have claims, your mod can go down to .95, .90, .85. The further down it goes, the more credit you receive as a rate reduction on your rate. Therefore, the fewer payouts you have, and/or the longer you can go without a claim, the lower your insurance payment will be.
Key Factors Determining Your Mod
That is because the two contributions to a mod are 1) the frequency of injuries, and 2) the amount of payouts. How often, and what the payouts are for, can determine the mods.
The Board creates rules about how the workers compensation company can determine the mod, but even those won’t vary from company to company. Think of it as your “permanent record” our teachers all threatened us with as children. Your claims will follow your company around. If you switched to a new insurance company, the new one will ask your old insurance company for your mod to see how risky of a client you are. This is even true for employees within the company.
Changing Your Classification
What’s interesting about The Board is that they track classifications for your business, and they know that certain classifications are much higher than others. Let’s say you’re a contractor, and you open up a policy with a workers compensation company, tell them you’re a roofer, and work that way for two years.
Then, you go to a new insurance company and tell them you’re a carpenter (or the broker classifies you as a carpenter), because a carpenter is a significantly lower rate than a roofer. Once that happens, an electronic notification is sent to The Board for every workers compensation policy that’s opened or closed. Once you open up a policy, the insurance company notifies The Board that you opened a policy, and notifies them again when you close it.
Then, The Board gets an electronic notification that you are no longer a roofer, you’re a carpenter. They then send a notification to the new insurance company. That alerts them about your previous status with your previous insurance company. We now have to prove that you are indeed a carpenter, or figure out a way to switch the classification code back to roofing, and your old rates. (However, it doesn’t pay to lie about your classification, as you’ll see shortly.)
The Penalties Surrounding Workers Compensation
We want to be extra strenuous in our warnings about workers compensation insurance.
For one thing, never, ever lie about your workers compensation coverage, classifications, or your injuries. We have seen people get into serious trouble for not having it, or for trying to lie about their classifications in order to earn a lower rate.
Remember earlier, when we said an office worker’s rates are lower than a carpenter’s? Imagine if someone opened a company called ABC Services, and said they were a software company, but they were really a construction company, building homes and repairing roofs.
Then, let’s say one of your builders fell off a ladder and broke their ankle. When the workers compensation company reviews that claim, they’re going to wonder what a software developer was doing up on a ladder, wearing a tool belt and hard hat.
They would investigate the circumstances surrounding the accident, and discover the truth. Now, the company would still cover the injured worker for however long it took, but the owner of the company would be charged with fraud, and would have some serious problems.
Second, you absolutely have to have workers compensation insurance for all employees. It’s the law.
We mentioned earlier than one or two officers in a one- or two-officer company can choose not to be covered by workers compensation. And even that varies from state to state. However, everyone else must be covered. Everyone, from the VP of Marketing to the overnight cleaning crew requires coverage.
And if you don’t, you can be severely penalized by The Board.
Here’s a hypothetical example:
Imagine a customer has just opened up a house cleaning service. She comes into the office and wants general liability insurance (which we can provide). However, she doesn’t have employees so she doesn’t get workers compensation insurance. We tell her that if she ever does get employees, she needs to have the insurance in place before she ever cuts her first employee paycheck.
Our customer does very well, and eventually begins to grow. She hires a few employees, but forgets to get the workers compensation insurance. The Board (you remember The Workers Compensation Board) knows almost immediately that the new employees have started, but they let time pass.
They’ll let three or four months go by. They’ll then send our customer a notice. This will be a demand of proof of the workers compensation coverage going back for the last four months.
But our hypothetical customer doesn’t have it, unfortunately, and after negotiations go back and forth, she owes The Board $24,000 in penalties. Since she does not have that much money, they shut down her business completely.
Risks Are Too High to Outweigh the Benefits
In short, the penalty for workers compensation is big. You can be charged $2,000 for every 10 days of not having coverage. Regardless of what your classifications are, regardless of what your company does, the penalty is $2000 for every 10 days of non-coverage.
In our hypothetical story, our customer went 120 days without any coverage. That’s 12 x $2,000, which means a $24,000 penalty. Add additional penalties and fees on top of that, and you have a very big financial mess on your hands.
It’s even worse if there’s an injury and you don’t have coverage. Then, you face the very strong possibility of going to prison. If you have been in business and you knew you needed the insurance and did not get it, you can go to jail for fraud.
In short, it’s required for every worker you have, and you must properly classify each of them. It’s not something you should gamble with. You absolutely need workers compensation insurance for your business.
This is also why it’s necessary for sub-contractors to show their general contractors that they have a workers compensation policy. The insurance company can come in and charge that general contractor based on the amount of money paid to the sub-contractor.
The Big Takeaway
Workers Compensation is a product that you should not take up on your own. Have a professional that knows what they are doing handle it. There are a number of factors that determine eligibility and pricing including classification, prior history, loss data, payroll factors for executives, and many others. A professional can tell you how to classify the workers properly and how to handle the executive payroll to keep the costs manageable.
Workers comp insurance is a mighty beast, and can be frightening and dangerous, if it’s not handled appropriately and with care.
This is why it behooves you to make sure you know what you are doing. It’s why you should work with an insurance professional who has the knowledge and experience to deal with Workers Compensation Insurance and The Board in any state.
If you do not have a qualified professional, it can really cost you a lot of money. If you forget to insure a couple of employees, or you list the wrong classification, you can be hit hard with penalties. Working with an experienced insurance professional can make a big difference. They will get you the right insurance coverage for you and your employees so you can avoid stiff penalties and possible jail time.
If you own a business, you need to take steps to protect yourselves and your employees. If you would like to know more, please contact us to speak to a DurAmerica Insurance professional. DurAmerica:
- understands the workers compensation world very well
- works with most of the major carriers
- know all their coverage policies and nuances
- can help you get the best
- possible price and coverage.