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Workers Compensation Insurance
 

Coverage Information:

What's protected?  What's not protected?

Nearly all state workers compensation laws designate a few types of injuries as not compensable. For example, the majority of states stipulate that neither intentionally self-inflicted injuries nor injuries sustained in an attempt to injure someone else are compensable. Some states prohibit compensation for injuries sustained while the employee was committing a crime. The purpose of exclusions such as these is to remove from coverage injuries that are not truly the result of the employment.

Significant to the construction industry, some states provide that injuries suffered as a result of the employee’s willful failure to use a safety device are not compensable. This provision may be inapplicable if the use of the safety device was not actively and consistently enforced.

How is my premium determined?

Workers compensation insurance premiums are unwieldy to compute, and variations in methods exist across states. However, the basics are similar and worthy discussion. Premiums are based on covered payroll, covered employees’ risk classifications, and usually an experience modifier.

The NCCI (The National Council on Compensation Insurance) keeps records of the payroll and loss experienced by all risk classifications and determines the amount of expected losses per $100 of payroll for each classification. Other insurer costs and profits can then be added to these loss costs to develop a rate for each classification. The standard rates can be modified to reflect specific risk characteristics of the insured as well as its past loss history (through experience modification). This rate is the multiplied by the exposure base (payroll divided by 100) to determine the premium to charge.

Payroll – An estimated payroll amount, based on historical records or expectations for the current period, is used to determine an estimated premium at the beginning of the policy period. At policy expiration, the insured’s actual payroll records are audited to determine the final premium. You will usually pay an additional premium or receive a premium refund at that time.

Classification – This process is used to determine the operation of the employer, which in turn will determine the classification of your employees. Once the appropriate classification is determined, the corresponding rate can then be found. Because there can be substantial variations in the rate applicable to one classification as opposed to another, time spent by you and your insurance representative to assure the proper classifications are being used to rate its insurance is generally a very worthwhile investment. Improper classification is a tool used by untrustworthy insurance agencies – Initially the improper classification can lower your annual premium, making the agent appear to have found you the best possible rate, however at your mandatory annual audit the proper classification will be used by the auditing firm and you will regrettably owe your insurance carrier the additional premium which can range in the thousands of dollars and more, depending on your classification and payroll.

Hebert Insurance Agency aids all of our clients before audit time comes around. Our helpful education packets, notification for pre-audits, and proper communication throughout the year regarding payroll and types of work performed allow our clients to be prepared and receive the best information tailored to their policy.

The Audit Process

The first thing you need to know is why an audit is being requested. Workers compensation premium is determined by exposures.

The two basic exposures for a workers compensation policy are payroll (remuneration) and cost of uninsured subcontractors. Audited premiums are, in whole, based on: Rates, Payrolls, Classifications, Experience Modifications, Discounts and Credits. When a workers compensation policy is first set up the premium is based on estimated exposures, or best estimates of the future. After the policy expires the actual exposure for the policy period will be determined by the audit. Once the audit is completed the insurance carrier will prepare and send a final audit statement. This statement will indicate any additional premium you owe or any credit due as determined by the Auditor.

5 Steps to the Audit Process
Step 1 Scheduling:
You will be contacted in advance by a letter or phone call to schedule an audit appointment.

When making your appointment, obtain the auditor’s name and phone number. If you need to cancel your audit appointment, please call the auditor as soon as possible. You’d give the auditor another appointment date at that time. If an appointment is not made within a reasonable time period, an estimated audit will be used by the auditing firm in determining your premium, which could turn out to be much higher.
 
Step 2 Financial Records:
The financial records which should be available at the auditor’s request, include:

• Payroll Records – YTD (Year to Date) payroll registers
• Quarterly Payroll Tax Reports
• Cash Disbursement Journal or Business Checkbook
• Job Contracts
• General Ledger
 
Step 3 Remuneration:
Remuneration means money or substitutes for money. (Premium = Rate × Remuneration)

Remuneration excludes - Severance pay, business expense reimbursements, uniform allowance, payments for active military duty, employer-provided prerequisites (perks) such as: use of an auto.

Exclusion of overtime payroll - the extra pay for overtime shall be excluded from the payroll on which premium is computed, as long as it is kept separate in the payroll records.

Example: An employee’s hourly wage is $8.00, their overtime is $12.00/hour, the extra $4.00/hour is excluded.
 
Step 4 Classification:
The auditor will review your job contracts to determine which classification codes are pertinent to the policy period. Each job may be subject to an individual classification code.

If your job contracts are not available, the auditor will review your invoices. If you were involved in a wrap-up project, the auditor will need a copy of the contract and the actual payroll for the wrap-up job.
 
Step 5 Subcontractors:
The auditor will review your cash disbursements journal to account for payments made to your subcontractors.

For each subcontractor you hire, the auditor will look for: A Certificate of workers compensation insurance, Notice of Independent contractor, General Liability Certificate, and a Business Invoice.

All subcontractors and independent contractors that have not provided the requested documentation will be included on the audit and billed for premium charge.


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