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Tutorial on Workers’ Compensation
Whether you’re starting a new business or already in an established business, you need to know the basics of workers’ compensation insurance. Almost any business that has an employee other than an owner is required by state law to carry a workers comp. But you should be careful in choosing a policy. The truth is that many insurance companies can be very handy when it comes to writing policies – they have tricks in their bag such as misrepresenting the type of work your employees are doing, miscalculating adjustment factors, and making a variety of other mistakes. mistakes that, oddly enough, cost you more insurance than you need.
Aside from the need to stand up to your workers’ compensation insurance carrier, 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 fraud in the United States today, second only to income tax evasion. According to industry watchers, fraud accounts for nearly a quarter of all claims. It can take the form of employee fraud (an employee who has been in an accident and claims that the injury is more serious than it really is), employer fraud (harassing employees who file a claim or try to get the insurance company to report the number of employees), or defrauding the insurance company (falsely denying legitimate claims).
In many businesses, such as construction and manufacturing, labor costs are a major expense—and also a major source of conflict and confusion. But most business owners know little or nothing about how it works or how rates are calculated. 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 Workers’ Compensation
If you are in the type of business that is mandated by state law to purchase workers’ compensation benefits, this is something to take seriously. In some states, notably Florida and California, businesses can be shut down and owners prosecuted criminally for not carrying this type of insurance. Most states require one if you have one or more employees—California is one of the few that requires one-person businesses as well.
In most states you can purchase an insurance policy from a workers comp insurance company; However in five states (OH, ND, WV, WA, WY) you must get coverage through the state-administered fund that covers that jurisdiction. These state funds are called “monopoly state funds”.
Note that thirteen states maintain public funds that compete with private insurers. So in those thirteen, you can buy your policy from a private insurance company or from the state fund (CA, AZ, CO, MD, ID, MI, MN, MT, NY, OR, OK, PA, UT). .
If for some reason your business is considered particularly risky, you have to get your insurance from a so-called “assigned risk” fund, and that costs a lot more. Workers’ compensation is primarily regulated by the states (and Washington DC), so there are 51 different regulations governing benefits, premiums and coverage. However, a so-called “rating bureau” called the National Council on Compensation Insurance (NCCI) has developed a guideline used by many states to guide how insurance companies calculate your rates. 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.
Employers’ compliance policies can seem complicated and complicated to the uninitiated. However, you can’t completely rely on your insurance agent to decipher the technical terms, options and requirements – remember, he/she has a vested interest in selling you as cheap a policy as possible. So if your premiums seem outlandish, it’s a good idea to have your policy reviewed by an experienced workers’ comp attorney or a consultant who specializes in this field.
For example, do you need a guaranteed cost policy (a policy whose premiums remain the same no matter how many claims you file) or a loss-sensitive plan? The latter alternative will reduce your costs but increase your exposure.
The basic formula almost all insurance companies use to calculate your policy is to multiply the premium by a hundred dollars. But what is this “rate”? Where does it come from? It depends on the classification of the type of work your company does. It is always in your best interest to be in a relatively “safe” classification, such as clerical work, as opposed to a more vulnerable classification, such as construction. Experts warn that you should be careful that the insurance agent does not misclassify your company – such a “mistake” can easily double your premiums.
In addition, insurance companies definitely apply an “experience” factor to your premiums. This is a round for a multiplier that is calculated based on your company’s claims history. The greater or greater your demands, the greater the experience factor.
Assigned Risk Plans Explained
So what can you do if every private insurer in your state rejects your insurance application? In that case, you have to use the state risk plan. This insurance is expensive. However, I am told that many agencies sell assigned risk insurance without being able to mention it, and the words “assigned risk” do not appear anywhere in the policy. In general, rates and services are said to be better in NCCI states. However, even if your company is in an NCCI state you will likely receive lower rates if you move to “voluntary” (ie, non-designated risk) coverage as soon as possible.
Note 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 fit into an assigned risk plan. You should discuss this with your agent.
Some Tips About Workers’ Compensation Insurance
– Your agent, working with his/her company underwriter, decides which classification codes to use in developing your premium rates, as well as various risk factors. Reportedly, errors and oversights are legion in these types of policies (usually to the satisfaction of the insurance company), so review your policy carefully, preferably with the help of a professional with experience in this field.
– Be sure to read your Policy Information Page carefully – it contains the most important details you need to check.
– You should be especially careful when your company hires independent contractors. If the independent contractor fails to collect the workers and is injured, you will be responsible for all costs associated with the claim.
– Always be sure to list all legal entities that are in any way related to your business as named insurers. For example, if you own the building it’s in, you should be listed on your policy as the legal owner of the property, as well as the owner of the business.
– You should also be aware of federal employee abuse. In addition to state requirements, some federal laws also impose obligations on employers. You can add coverage to your workers’ compensation policy by opting out (ie, adding an addendum) for the following actions: Federal Coal Mine Health and Safety Act (benefits for miners with black lung disease; Act Longshore and Harbor Workers’ Compensation (Benefits for workers injured in maritime service); and the Migrant and Seasonal Agricultural Workers Protection Act (Housing and safety benefits for seasonal and migrant agricultural workers).
The NCCI Manual is not used to calculate rates in: Delaware, California, Indiana, Massachusetts, Michigan, Minnesota, New York, New Jersey, North Carolina, Pennsylvania, Wisconsin, and Texas. (All other states use it.)
If you or a professional you hire feels that your premium rates are not what they should be, based on the rules and specifications in the NCCI Manual (or other state rate manual), your first step should be to contact your representative, say the expert, and request changes; if this does not work, then you should contact NCCI or the appropriate polling agency directly and point out the errors in your policy as written.
Is your company required to pay workers compensation to illegal aliens? According to experts, the answer depends on whether the illegal alien qualifies under your state’s laws as an “employee” who works under a “contract of employment in the service” of another. Currently, courts in Ohio and New York uphold the right of aliens to receive benefits; Wyoming, Virginia, and Florida do not exist.
Note that only Texas, among all 50 states, does not require employers to carry WC insurance.
About workers’ compensation fraud
Workers’ comp is a no-fault system for providing financial benefits to injured or ill workers while protecting employers from lawsuits. But the system is open to fraud in many ways. Employers, trying to reduce premiums, may understate the total number of their employees or misrepresent the type of work they do; Workers can claim benefits they are not entitled to, for example, by increasing the severity of an injury; Even insurers themselves may deliberately miscalculate premiums and unfortunately this is not surprising.
Surprisingly, it is employer fraud that is the leading type of employee fraud. According to a recent study published by the National Commission on State Workers’ Compensation Laws, more than 13% of employers surveyed were operating without legally required workers’ compensation insurance. Additionally, others were found to be defrauding the system by intentionally misclassifying or underreporting their wages or falsely representing employees as independent contractors.
Arguably the most well-known type of workers’ compensation fraud—the one most often reported by the media—involves workers claiming disabilities that don’t exist. Most insurance companies have established internal Special Investigations Units (SIUs) in recent years to deal with this type of fraud. Claims managers report suspected cases to their company’s SIUs, who then use surveillance, background checks, video, medical record checks and other tools to document fraud, then turn the cases over to the Attorney General for prosecution. Criminal penalties for workers who try to game the system can be very severe.
As an example of how the SIU’s investigative system works, CompSource Oklahoma recently investigated a female plaintiff who was awarded unlimited benefits for back injuries from a slip-and-fall accident. The company’s SIU team found that he was listed on the Internet as an employee of an outdoor recreation club while receiving these benefits. He was observed and found to be engaged in climbing, carrying heavy objects and other activities indicating that he is not disabled. Criminal charges were opened and an arrest warrant was issued as a result.
The moral of the story is simply this: Don’t cheat your company’s employees. Insurance companies now employ teams of professional investigators who will constantly monitor any suspicious claim and, if fraud is proven, will file a lawsuit without hesitation.
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