October 4, 2018 |
Like most businesses in California, almost anyone who employs workers is required to also have workers’ compensation insurance in place to protect such employees from injuries and harm while working. This is well known as general business practice. However, what is not well understood are the codes used by the coverage industry to determine the cost and premium the business pays for the necessary coverage.
The industry codes total more than 700 and each one represents a specific type of employee category. Inside that category is a risk definition and likely hazard that type of employee is exposed to. Also contained is a financial value associated with the related risks and hazards, and a basic schedule that an insurance provider can use when determining a premium for a business.
So, let’s use an example. Your business involves interior design and most of the clients are retail/residential customers. This customer base remains in place for a while until the business grows and the customer base changes with a new influx of commercial clients. That change produces far more business in sales, but the nature of the work changes as well. To take on the work, your business brings on administrative staff for the paperwork and a general contractor for construction work and repair. By law the policy in place for your business needs to provide coverage to existing employees and your two new additions. The admin staff will get a work code for clerical employees. The general contractor will be given a code for construction or similar. Obviously, the risk level of the admin staff will be lower than that of the general contractor.
Because workers’ compensation involves so many different types of employees, the current platform for risk-related codes is huge and extremely hard for a non-insurance person to navigate and make sense of. In fact, most business owners have no idea how the insurance world even structures the codes or groups them, much less how they are valued. However, despite the extreme number of codes there are a few basic principles to remember:
It’s very common for an employer to have more than one type of employee and, as a result, more than one code in the business’ coverage calculation. This is where things can get complicated, especially as the percentages of employees within the same organization begin to change as the nature of the business changes.
Any given day workers’ compensation codes are referenced and applied to company policies, big and small, based on quick initial review of employees. Then with more detailed reviews things change again.
The usage of actual codes is determined by insurance providers. These companies then turn around and apply a given code to a coverage customer. However, the insurance provider is not the only player involved who can assign a code or change a code in a policy.
Typically, every year an insurance provider has an auditor visit or call a covered business to evaluate its records and current employee status. If enough of a change has occurred, the auditor will confirm the need for a code change. That in turn triggers a premium change for the next year.
There are recognized agencies and entities that generate workers’ compensation codes. Some involve government, and some involve industry associations that have been in the code creation process for a very long time. As a result, these associations are treated as experts that ethical providers follow.
The National Council on Compensation Insurance (NCCI) are the kingmakers when it comes to the creation of codes and all the work that goes into how they are valued. Dubbed the Scopes Manual, the NCCI’s work is regularly updated and published by NCCI, which in turn charges a hefty price for access to the information. Most of NCCI’s customers are insurance providers.
The NCCI isn’t the only voice on the matter. A number of states have their own codes by law or regulation. California is one of these jurisdictions.
The NCCI has significant resources focused on the code classification system used nationwide and continues to do so year after year. The system is so well-researched and constructed it withstands legal challenges easily and is often cited by attorneys in their own litigation efforts.
The NCCI codes are also the basis for many auditors in performing their evaluations and estimations of what a company should pay for a premium. In fact, in many cases auditors use the NCCI’s standards as the rule to follow and deviations in companies are then identified as findings.
The WCIRB is, interestingly, an industry association in California representing all the major workers’ compensation providers in the state. The WCIRB provides independent analysis and model rates that providers can use for premium-setting.
The WCIRB is focused on providing model rates based on heavy actuarial research that insurance providers can then use for premium-setting. Additionally, the WCIRB provides extensive educational tools for providers to stay in compliance and improve their coverage practices.
The WCIRB has an executive body and committees with specific authorities. Combined, these players provide the leadership and direction of the WCIRB.
The main leadership of the WCIRB is its governing committee. This internal body sets policy and provides overall direction and leadership for the association as well as oversight of administration.
This group provides the workhorse research that produces the premium codes and rates California providers depend on for premium costing.
This body of the WCIRB is usually the most involved with government regulation, commenting and researching heavily every aspect of California law and regulation on workers’ compensation.
Unfortunately, mistakes are made on a regular basis. Those errors can be incorrectly incorporated into rates and the premiums a company ends up having to pay.
A big mistake category can be the result of the very audit a provider performs to make sure the company’s employee population is accurately measured and priced in a coverage premium. An audit miscalculation, bad math, missed information or bad judgment all can contribute to a bad premium being paid again and again.
Another quadrant of error involves the employer’s actions when coding employees. Sometimes it’s a pure accident, but a good number of times an employer is trying to outsmart the system and places employees in less costly codes to avoid paying a high premium. This works until the insurance provider audits the company and discovers the error.
Because workers’ compensation is one of the highest costs associated with having employees and there is so much liability held by a business in regard to the coverage and safety of its employees, it is imperative that a company has its employees properly class coded. If you’re not sure how that actually works, it’s worth the time to bring in some workers’ compensation expertise to get it done accurately.
Workers’ compensation class codes were never written for the general public. They are an insurance risk evaluation product to be sold to insurance providers and their actuarial. You will save yourself and your company a lot of headache, inaccuracy, and money by bringing in a workers’ compensation expert to make sense of it all.
There is no easy way around it; companies have to spend some time and effort making sure their classification codes are used correctly. It’s worth the trouble, and there is no automatic evaluation one can buy off the Internet. Any fly-by-night provider offering such quick tools should be avoided because it’s a pretty good bet the “instant analysis” they have online is just a sales scam which will cost a lot more later on. Do the work, take the time, and get your codes set up correctly. In the long run, your business will save far more, and your people will be protected correctly.
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