Workers' Compensation Insurance 101

Understanding Workers’ Compensation
By QuoteFishing.com

TOPIC OVERVIEW

1. Who is Eligible?
   a) W2 Employee
   - 1. Covered
   b) 1099 Employee
   - 1. Not Covered
   - 2. Covered only if…
   
   
2. How is the cost of a policy calculated?
   a) SIC Codes
   b) Classification Codes
   c) Price per hundred
   
   
3. How is an Employer covered vs. an Employee?
   a) Employer Coverage
   - 1. Levels of Coverage
   b) Employee Coverage
   - 1. Medical
   - 2. Wage Compensation

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1. WHO IS ELIGIBLE?

• W2 Employees
  This type of employee is required by law to be included in a company’s workers’ compensation policy
  
• 1099 Employees
  This type of employee is not eligible for a company’s workers’ compensation policy as he/she is declared as an independent contractor. He/She may elect to purchase a separate policy as an independent business owner.
  
• Owner, Directors, or Officers
  This type of employee can be included or excluded from the policy at his/her discretion the policy inception or subsequent renewals
  

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Important Definitions:

• SIC Code
  This is a unique 4-digit code given to each industry of work. No other industry will have the same code. (i.e. Insurance, Lending, Real Estate, etc) You will not need to know this as your agent will be able to look up your SIC Code in his/her system. It is important to have it just so if your are ever asked you will seem more savvy then most business owners.
  
  You can find your SIC Code on the US Department of Labor's Website.
  
  
• Classification Code (Employee class code)
  This is a unique 4-digit code given to each type of duty performed by each employee. (Clerical employees will have a 8810 class code, sales will have a 9741). These codes will have a price per hundred value determined by insurance companies. The price per hundred will differ from company to company and will be a major factor in the difference in price that you receive when quoting your business with different insurance companies.
  
  When looking at different quotes, look at the amount you are being charged per hundered line by line for each job classification.
  
• Price per Hundred
  Premuim for workers compensation policies are calculated by taking each job classification's total annual payroll and mutiplying it by the price per hundred amount calculated by the insurance company. Add all totals for each job classification, this will give you an estimated annual premium. Divide by twelve to calculate what your monthly premium would be. This is only an estimate as this equation does not include applicable insurance fees and state fees such as taxes.

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2. HOW IS MY PREMIUM CALCULATED?

1. Figuring out your payroll by job classification
   
2 Clerical Employees = $80,000 in annual payroll
5 Outside Sales Employees = $300,000 in annual payroll
-Total annual payroll = $580,000 in payroll


2. Figuring out the job classification price per hundred
   
Clerical - class code 8810 = $0.50 per hundred
Sales - class code 9741 = $1.00 per hundred


3. Calculating the Premium - Full Example
   
2 Clerical Employees = $80,000 in payroll
5 Outside Sales Employees = $300,000 in payroll
->Total payroll = $580,000 in payroll
Clerical employees = $400.00 (80K multiplied by $0.50)
Sales employees = $3,000.00 (300K multiplied by $1.00)
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-> Total Annual Premium = $3,400.00
->Monthly Premium = $283.00

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3. COVERAGE: EMPLOYER vs EMPLOYEE

• Employer
  The employer portion of the policy is designed to protect the employer from lawsuits arising from its employees due to negligence on the part of the employer.
  
  3 –Levels of Coverage
  - $100,000/$100,000/$100,000
  
  a) Definition of each Coverage Level:
  - $100,000 in coverage for injury by accident – each accident max
  - $100,000 in coverage for injury by disease – each employee
  - $100,000 in coverage for injury by disease – policy limit

NOTE: It is important to note that you can increase these limits to different combination amounts. The maximum limits are usually $1 Million/$1 Million/$1 million. These limits may vary from state to state.

• Employee
  The employee portion of the policy is designed to protect the employee when injured and compensate such employee for any lost wages when he/she cannot perform the duties that he/she was hired to perform. Compensation is calculated differently for each state so we recommend that you either call your state's workers' compensation division or your agent to discuss the exact amount of compensation your state has designated for loss of wage compensation.
  
  a) Medical Coverage
  - 1. Medical benefits are unlimited
  - 2. Chiropractic services must be pre-approved
  
  b) Wage Compensation
  - 1. Usually around 50% of current pay
  - 2. Maximum is usually around $ 3,240 per month but varies from State to State

Experience Modification Rating

It is important to first state that your company's experience modification rate only applies to your workers' compensation policy. In simple terms, your "Experience Mod" compares your workers’ compensation claims experience to other employers of similar size operating in the same type of business. If you have less claims than other companies of the same size and industry you will receive a higher Experience Mod ratio. This ratio is used against your annual premium and results as a discount. Experienced companies that monitor their workers' compensation premium understand and utilize their Experience Mod annually.

Understanding your experience modification rating and monitoring it regularly is key in reducing your Workers’ Compensation costs. It is also an excellent measure of how your loss prevention and control practices stack up to others in your industry. Companies who effectively manage their Safety Programs not only understand how this works but also have assigned someone to monitor this on a regular basis. It has a direct correlation to how much you pay in Workers’ Compensation Premiums. For information click here to see our Experience Modification post.




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DISCLOSURE: All entries by QuoteFishing.com are for informational purposes only and it is always recommended that you consult with your local insurance agent as coverage, definitions and claims procedures may differ from state to state.