58: Your Workers’ Compensation Insurance Policy

An overview of the elements of a workers compensation insurance policy
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Are you familiar with the elements of your workers’ compensation insurance policy?

The first show I did on work comp insurance was episode 11, which was a 100,000 foot overview. I covered what it pays for, talked about how benefits vary by state, and explained that it’s compulsory insurance. In other words, you’re required to have it if you have employees, with very few exceptions.

On episode 11 – I also promised to do more episodes on work comp insurance…. and I did. On episode 27 I talked about how your traveling employees are covered for work related injuries, and on episode 28 I talked about the same issue, but as it relates to telecommuters. I also did episode 40 on the Assigned Risk Plan, which is where employers buy work comp insurance when they can’t find a company who will write them a policy on a voluntary basis.

I’ve been calling it work comp which is short for workers’ compensation but the full name is actually Workers’ Compensation and Employers’ Liability Insurance. I’m going to keep referring to it as work comp insurance or I might say workers’  compensation … either way, now you know what I’m referring to.

So you already know it’s mandatory to have work comp insurance if you have even one employee. You know that the benefits it pays are mandated by the State, and therefore, they vary. The benefit framework is pretty universal, but there are a lot of variations in the level of benefits and the rules surrounding how they are paid.

Anatomy of the coverage:

Your work comp coverage is comprised of an Information Page, the Policy, and Endorsements. The Policy has 6 parts, which are like chapters, and the number of endorsements it has depends on a lot of different factors. Most insurance companies use the same policy template and add endorsements to make it comply with state law, and to accommodate special coverage situations.

The detailed benefits the policy pays aren’t included in the document because it has to pay the state mandated benefits and that would kill too many trees so the policy simply incorporates those benefits by reference to state law.

Information Page: 

This is where you’ll find the specific details that apply to you. For example, who is the insured and what is the coverage period. It tells you which states you are insured in and how much the premium is. Well, it gives you an estimate of the premium based on the payroll by class code or job type that you gave your agent during the application process. This might have been your prior 12 months of actual payroll, or an estimate of your future payroll based on what you think you’ll pay.

Either way, the insurance company will want to true it up at the end of the policy. You might have to report actual payroll each month, and the insurance company might adjust your payments if the month to month payroll starts to change significantly from the original estimate.

What you should do is calculate your true premium each pay period. All the information you need to do determine your net or cost rate by class code is on the Information Page of your policy. But it can be difficult to calculate if you aren’t familiar with the equation, so ask your insurance agent to provide you with the rates. To calculate the actual premium, divide the total wages for the pay period by 100 then multiply that by the rate. Say you paid $30,000 in wages under the clerical class code 8810 and your rate is 25 cents. The premium would be $75.00.

Your insurance company may also decide to do an onsite audit at the end of the policy. If that happens, and you’ve already tracked your cost each pay period, so you’ll already know what the adjustment is going to be. That is unless you didn’t use the right wages, you calculated the rate by class code incorrectly, or you misclassified employees.

 The policy parts:

Let’s go over the policy. Like I said earlier, it has 6 parts or chapters. Parts one and two are the different types of coverage, workers compensation is part 1, and employers liability is part 2. I’m not going to get into what employers’ liability covers in this episode because claims under part 2 are fairly uncommon, and it would take an entire episode to explain it.

Part 3 identifies the other states where the insurance applies. All the states where you have employees should be listed on the Information Page, section 3A. If there are states where you expect to have employees later on in the policy period or you have employees that regularly travel to a specific state for work, you’ll want to make sure those states are listed in Part 3 of the policy.

If your employee is injured in a state that isn’t listed on the policy in either of these two areas, and if they file a claim and qualify for benefits, and the benefits are better in that state, the policy will only pay the benefits of one of the states you’re insured in, and you’ll have come out of pocket for the difference.

Part four explains what you have to do when an injury occurs that MAY be covered. So even if you don’t think your employee’s injury is work related, you still need to report it. Your duties boil down to:

  • Reporting the claim.
  • Providing all the information you have about it.
  • Making sure your employee  gets immediate medical services.
  • Cooperate with the insurance company during their investigation.
  • Don’t make any payments on your own, and;
  • Don’t waive your rights to recover damages from a third party who might have some fault in the injury.

Part five is all about premium and the key point here is the audit provision. You agree to be audited and to maintain the records necessary for the audit for a period of 3 years after the policy ends.

Part six is called Conditions. It allows the insurance company to inspect your workplaces and operations. It talks about the policy being non-transferrable, and it covers cancellation.

When it comes to the insurance company’s ability to cancel the policy however, this section is usually overridden by an endorsement because cancellation terms vary by state. Cancellation laws are designed to make it hard for the insurance company to kick you to the curb.  In most states an insurance company only has a few reasons why they can cancel your policy before it’s expiration. The main reason being non-payment of premium.

Endorsements:

And finally, there are endorsements, lots and lots of endorsements. There are mandated endorsements such as the Terrorism Risk Insurance Act Endorsement or TRIA, and voluntary endorsements such as the Waiver of Subrogation.

TRIA is the result of the awful terrorist attacks on September 11, 2001. Work comp insurance doesn’t have a policy limit like your auto policy or your property insurance, and it doesn’t exclude employee injuries resulting from terrorism. So when 911 happened, the work comp insurers (well mostly the reinsurers i.e. the insurance companies that insure the insurance companies) lost billions.

TRIA was passed in 2002 and it limits insurance company’s work comp liability in the event losses from terrorism exceed a certain aggregate limit. It also requires the government to partially reimburse the insurance companies for some of the losses they incur within the limit. For this, you pay a premium to the federal government.

The US Treasury manages the TRIA premiums but I wasn’t able to find out how much they’ve collected. Either way, I’m sure they’ve loaned it all out to the cash strapped Federal government, and the fund is probably nothing more than worthless IOU’s, just like the Social Security “trust fund”.

Conclusion:

  • Work comp is compulsory.
  • Your policy pays the state mandated benefits.
  • Your policy has three sections or elements – the information page, the policy, and the endorsements.
  • The policy has 6 parts, or chapters.
  • Your policy is subject to audit.
  • Calculate your premium each pay period. Have your agent get you the net or cost rates by class code so you can do this.
  • Report all injuries. Even those that may not be work related.
  • Read the cancellation endorsement every policy year to make sure you understand it.
  • TRIA is another corporate welfare tax that we’ll never get rid of, and the Treasury has blow the money on prostitutes and parties. I’m joking….sort of.

About the author, Thomas

I have 20 of years insurance industry experience in C-level management, focusing on all aspects of workers compensation, risk management, loss control, employee benefits, HR, payroll and professional employer organization (“PEO”) operations. Currently, I am the owner and CEO of Humanly HR, and founder and host of SmallBiz Brainiac; a podcast providing employer intelligence to small business owners.

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