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All About Workers' Compensation Insurance
Workers' Compensation ( also known as Workman's Comp or Work Comp) is regulated by each state, and the rules regarding this business obligation can vary significantly.
Most states utilize a system where employers are required to purchase insurance to meet this statutory obligation, but some states maintain a state-run fund that competes with private insurance.
(California and New York and Colorado, Idaho, Maryland, Montana, Oklahoma, Oregona, Pennsylvania, and Utah.)
A few states (Ohio, Washington, Wyoming, North Dakota,as well as Puerto Rico and the U.S. Virgin Islands)require employers to use only their state fund and do not allow private insurance. For the details on each state, check our State by State directory.
Many states allow a qualifying employer to self-insure for Workers' Compensation coverage. The specific requirements for qualifying for self-insurance vary from state to state, but generally this is a viable option only for very large employers. Not all states allow self-insurance, so it's important to determine what the specific rules are in your particular state.
Another option that many states have allowed in recent years is group self insurance. These are usually set up as trusts that are established by business groups or associations.
Under such programs, an employer can obtain valid coverage through a program that appears to be essentially the same as a conventional insurance policy. But group self-insurance has significant differences from traditional insurance. Most importantly, the long term financial stability of such group programs has been questionable in many instances. Although many group self-insurance programs have been administered conservatively and carefully, many others have not been. When a group self-insurance program fails, it can expose members and former members to significant assessments to make up shortfalls.
Thus, members and former members can end up being billed not just for their own losses, but for the overall losses of the group. Not all states allow such group plans for Workers Comp.
The most common way for employers to meet their statutory obligations for Workers' Compensation coverage is to purchase an insurance policy from an approved insurance company.
If your company purchases Workers' Compensation insurance, your premium is calculated according to a certain format. Some of the fine details of that format can vary from state to state, but there is also a considerable degree of uniformity from state to state regarding how premiums are calculated.
The fundamental basis of Workers Compensation insurance premium is a rate times remuneration (mainly, but not exclusively, payroll.)
That remuneration gets assigned to various classification codes, depending on the nature of the business, and each classifications carries a particular manual rate. For example, the rate for roofing work might be $40 per hundred dollars of remuneration, while the manual rate for clerical work might be $0.40 per hundred dollars of payroll.
The manual rate is intended to be roughly commensurate with the exposure to workplace injury.
Manual rates will vary significantly from one state to another. This is because the benefits payable to workers under Workers Compensation statutes can vary significantly from one state to another.
In many states, the manual rates of one insurance company can vary from those of other insurance companies.
The manual premium that results from multiplying remuneration by manual rates gets further adjusted by application of an experience modification factor (also known as an EMR, experience mod, Experience Modification Rating, X-Mod, or just mod.) Employers have to be above a certain minimum premium size to qualify for experience rating.
In states without Workers Comp state funds, there is an Assigned Risk plan to make sure employers can get Workers Comp coverage even when insurance companies are unwilling to underwrite coverage for an employer in the "voluntary market."
Premium charges in most Assigned Risk plans are significantly higher than charges in the voluntary market.
Just about every state (except Texas) requires employers to satisfy their Workers Compensation obligations by either being approved to self-insure, join a group self-insurance program, or purchase an insurance policy from an approved insurer (or state fund in some jurisdictions.)
The particular size threshold for when this requirement kicks in can vary from one state to another. Many states require that every employer with any employees must get approved Workers Compensation coverage, but some states don't require this until the employer has a certain minimum number of workers (this number is typically very low.)
If an employer has permanent workers in multiple states, or has workers who reside in other states, or workers who travel to other states, it is imperative that the Workers Compensation insurance policy for that employer cover operations in those other states.
A Workers Compensation policy only insures against liabilities for the particular state or states shown on the Declarations Page.
Most states allow sole proprietors or partners to not cover themselves (although they can voluntarily elect to cover themselves.) But as soon as such employers have employees the state will require the employer to cover those employees (although some states allow employers with only one or two workers to not get coverage.) Most states also allow executive officers of a corporation to opt out of Workers Compensation coverage. The details vary from one state to another.
Many states also allow employers to get Work Comp coverage through a PEO, or employee leasing. In such arrangements, the employer becomes a "co-employer" via a legal agreement with the PEO (Professional Employer Organization.) There are positives and potential negatives to obtaining coverage through a PEO. A PEO can potentially obtain Workers Comp coverage at lower costs than a small individual employer can. But PEOs can also encounter problems in keeping their Workers Comp coverage, and sometimes the client companies of a PEO can be left abruptly without coverage if something goes wrong behind the scenes at their PEO. There have also been some high-profile cases in recent years where some PEOs were engaging in fraudulent activity in regards to Workers Compensation coverage.
In addition to state Workers' Compensation liabilities, an employer can also have liability for federal Workers' Compensation statutes, if work is being done on navigable waters of the U.S., or involves maritime exposures, or is being done on defense bases or certain other federal jurisdictions.
Coverage for these liabilities needs to be specifically endorsed onto an employer's Workers' Compensation insurance policy.
To learn more about the details of how the premium charges for Workers' Compensation insurance are calculated, return to our online guide to Workers' Compensation insurance for details on classification codes, experience modifiers, payroll & audits, PEOs and more.
Consultants on Workers Comp Classification Codes, Experience Modifiers, Payroll Audits, & More
We've been helping employers since 1987, making Advanced Insurance Management one of the oldest and most experienced firms in the field of premium recovery.