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Tutorial on Workers’ Compensation
Whether you’re starting a new business or working for an established business, you need to know the basics of workers’ compensation insurance. Almost all businesses that have employees other than the owner are required by state law to hire employees. But you need to be careful when choosing a policy. The fact is that many insurance companies can be extremely tricky when writing policies – their tricks include misclassifying the type of work employees do, miscalculating so-called adjustment factors, and many other types of tricks. errors that, oddly enough, result in higher insurance costs than necessary.
In addition to standing up to your workers’ compensation insurance provider, there is another reason to take a few minutes to learn more about this type of insurance, namely fraud. Workers’ compensation fraud is the second largest category of white-collar fraud in the United States today, behind only income tax fraud. According to industry observers, fraud occurs in almost a quarter of cases. This can take the form of employee fraud (an injured worker who claims to have suffered a more serious injury than they actually have), employer fraud (harassing employees who file claims or attempting to deceive the insurance company by employees of the company), or insurance company fraud (legal false denial of claims).
In many businesses, such as manufacturing and construction, the cost of workers is a significant expense—and a major source of friction and confusion. However, most business owners know little or nothing about how it works or how to calculate interest rates. It’s too complicated to cover in detail here, but I’ll try to cover most of the basics in this short article.
Basics of remuneration of employees
If you run the type of business that is required by state law to purchase workers’ compensation benefits, this should be taken seriously. In some states, notably Florida and California, businesses are shut down and owners prosecuted for failure to carry this type of insurance. Most states require it if you have one or more employees—California is one of the few that requires it, even for sole proprietorships.
In most states, you can purchase an insurance policy from a workers’ compensation insurance company; however, in five states (OH, ND, WV, WA, WY), you must obtain coverage through a state-operated basis in that jurisdiction. These state-run funds are called “monopoly state funds”.
Note that thirteen states maintain public funds that compete with private insurers. So, in these thirteen, you can buy your policy from a private insurance company or the state fund (CA, AZ, CO, MD, ID, MI, MN, MT, NY, OR, OK, PA, UT).
If your business is deemed particularly risky for some reason, you will need to take out insurance from a so-called ‘assigned risk’ fund, and that will cost a lot more. Workers’ compensation is primarily regulated by the states (and Washington DC), with 51 separate sets of rules governing benefits, premiums, and coverage. However, the so-called “rating agency,” the National Council on Compensation Insurance (NCCI), has developed a manual that many states use to regulate how insurance companies calculate premiums. NCCI states rely almost entirely on this manual, while some other states have developed their own manuals. For example, Nevada adheres closely to the NCCI manual, while California has developed its own manual.
Labor policies tend to seem complicated and incomprehensible to the uninitiated. Also, you can’t rely entirely on your insurance agent to decipher the technical terms, options, and requirements—remember, they’re out to sell you the most expensive policy possible. So, if the premiums turn out to be quite substantial, it’s a good idea to have your policy reviewed by an experienced workers’ comp attorney or an advisor who specializes in this area.
For example, do you need a guaranteed cost policy (a policy whose premiums stay the same no matter how many claims you make) or a loss sensitive plan? The latter option lowers your costs but increases your exposure.
The basic formula that almost all insurance companies use to calculate your policy is to multiply the interest rate by one hundred dollars of payroll. But what is this “ratio”? Where does it come from? It is based on the classification of the type of work your company does. It is always to your advantage to be placed in a relatively “safe” classification, such as office work, as opposed to a more injury-prone classification, such as construction. Experts warn that you should make sure that the insurance agent does not misrepresent your company – such a “mistake” can easily double your premiums.
Moreover, insurance companies inevitably apply an “experience” factor to premiums. This is a shorthand for a multiplier that is calculated based on a company’s claims history. The more or larger the claim, the greater the experiential factor.
Explanation of assigned risk plans
So what can you do if every private insurer in your state rejects your insurance application? In this case, the state-designated risk plan must be applied. This is expensive insurance. Yet, they say, many agents sell assigned risk insurance without mentioning that it’s assigned, and that the words “assigned risk” don’t appear anywhere on the policy. In general, prices and service are better in NCCI states. However, even if your company is in an NCCI state, you will likely receive lower premiums if you switch to “voluntary” (ie, non-assigned risk) coverage as soon as possible.
Keep in mind that if you’re in a “monopoly” state—that is, a state where there are no private insurers and you have to use the monopoly state fund—you can still get into an assigned risk plan. You should discuss this with your agent.
Some tips about workers’ compensation insurance
– Your agent will work with your company’s underwriter to decide what classification codes to use in setting fees, as well as various other risk factors. Errors and omissions are said to be legion with this type of policy (usually preferred by the insurance company), so review your policy carefully, preferably with the help of a professional who is knowledgeable in this area.
– Be sure to read the policy information page carefully – it contains the most important information you need to check.
– You should be especially careful if your company employs independent contractors. If the independent contractor does not carry workers’ compensation and you are injured, you will be responsible for all costs associated with the claim.
– Always be sure to list as a named insured any legal entity that is in any way connected to your business. For example, if you own the building in which it is located, you should be listed on the policy as the legal owner of the property as well as the owner of the business.
– You should also be aware of the ferry exposure of federal workers. In addition to state requirements, some federal laws impose obligations on employers. By approval (i.e., adding an amendment), you can add coverage to your workers’ compensation policy for actions like the following: Federal Coal Mine Health and Safety Act (benefits for miners suffering from black lung disease; Longshore and Harbor Workers Compensation Act (benefits for employees injured while working at sea) and Migrant and Seasonal Agricultural Workers Protection Act (Housing and Security Benefits for Seasonal and Migrant Agricultural Workers).
The NCCI Handbook cannot be used to calculate fees in: Delaware, California, Indiana, Massachusetts, Michigan, Minnesota, New York, New Jersey, North Carolina, Pennsylvania, Wisconsin, and Texas. (All other states use this.)
If either you or a professional you hire feels that your premium is not what it should be based on the rules and regulations of the NCCI Handbook (or other state rating manual), the first step is to contact your agent, say the experts and ask for changes; If that doesn’t work, then contact NCCI or the appropriate state certification agency directly and point out the errors in the policy as written.
Is Your Company Required to Pay Workers’ Compensation Benefits to Illegal Aliens? Experts say the answer depends on whether the illegal alien is considered an “employee” under your state’s laws, working in the “service” of another under a “contract of lease.” So far, courts in Ohio and New York have upheld the aliens’ right to care; Wyoming, Virginia and Florida do not.
Keep in mind that of the 50 states, only Texas does not require employers to provide toilet insurance.
About workers’ compensation fraud
Workers’ comp is a no-fault system that provides monetary benefits to injured or ill workers while protecting employers from lawsuits. But the system is wide open to fraud on many fronts. Employers trying to reduce premiums may understate the total number of employees or misrepresent the type of work they do; workers may claim benefits to which they are not entitled, for example by exaggerating the severity of the injury; even the insurance companies themselves intentionally miscalculate premiums, and this is unfortunately not uncommon.
Surprisingly, employer fraud is the main type of employee fraud. According to a recent study published by the National Committee on State Workers’ Compensation Laws, more than 13% of employers surveyed did not have legally required workers’ compensation insurance. Others were also found to have defrauded the system by intentionally misclassifying or understating their payroll, or falsely representing employees as independent contractors.
Of course, the most well-known type of workers’ compensation fraud—the one most often reported in the media—is workers who claim a disability that doesn’t exist. In recent years, most insurance companies have established internal special investigation units (SIUs) to deal with this type of fraud. Claims handlers report suspicious cases to their company’s SIU, which uses surveillance, background checks, video recordings, medical record checks and other tools to document the fraud, then forwards the cases to the Attorney General for prosecution. The criminal penalties that can be imposed on employees who try to game the system can be extremely severe.
As an example of how the SIU review system works, CompSource Oklahoma recently reviewed a female claimant who received permanent total disability benefits for back injuries resulting from a slip and fall. The company’s SIU team found that while receiving these benefits, he was posing online as an officer of an outdoor recreation club. Surveillance was set up and he was found to be hiking, carrying heavy objects, and engaging in other activities that indicated he was not impaired. He was criminally charged and convicted, resulting in a lengthy prison sentence.
The moral of the story is simply this: Don’t cheat workers. Insurance companies now employ teams of special investigators who doggedly pursue any suspicious claims, and when fraud is proven, they don’t hesitate to press charges.
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