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Consultants On Workers Compensation Premiums, Audits,
Classification Codes, Experience Modifiers
Insurance companies use a classification system to calculate Workers Compensation insurance premiums.
The details of these classification codes are created by what are known as Rating Bureaus, of which the best known may be the National Council on Compensation Insurance, or NCCI.
But some states operate their own, non-NCCI Rating Bureaus, and these can have classification rules that differ from those of NCCI in some details.
This classification system is one of the fundamental aspects of pricing Workers Compensation insurance in the United States.
This system assigns different workplace exposures into a system of codes, each one with a manual rate commensurate with the risk associated with that kind of work in a particular state.
To use an obvious example, the classification code for a clerical worker (Code 8810) should carry a significantly lower rate than the code for a roofer, (Code 5551)because the odds of a roofer being injured are much higher than those of an office worker. The manual rate for a clerical worker might typically be around $0.40 per hundred dollars of payroll, while the manual rate for a roofer would typically be more like $40.00 per hundred dollars of payroll.
Of course, once you move beyond such obvious examples, the question of proper classification of workplace exposure can get a lot more complicated. Incorrect classification of workplace exposures is one of the most common mistakes that A.I.M. finds and corrects for clients.
For example, how about a worker who just goes out and does estimates for roofing work? In most states, NCCI says those workers also go into the roofing class code 5551 (particularly if they have to go on a roof as part of that work.)
But there can sometimes arguably be exceptional situations where such workers would go into a less expensive class. A lot can depend on the particular state in question, as well as how the company is actually set up.
As a general rule, NCCI says that such estimators go into Code 5551, even though that doesn't strike a lot of folks as being really fair. An estimator really doesn't have the same exposure to workplace injury as a roofer, yet NCCI generally tries to assign such estimators to the roofing code.
And just to complicate this example further, remember that a few NCCI states have what are called "State Special" rules about this classification, so in those states the details of which workers get put into the roofing class can vary. Even the Code number may vary, with the use of State Specials. And some states don't use the NCCI system (although most do.)
Again, in most states, the classification system used is one devised and maintained by NCCI, the National Council on Compensation Insurance. NCCI is an independent organization, an "Advisory Organization", to use the current preferred term. (Most insurance people still refer to it as a "Rating Bureau"). Generally, insurance companies don't develop their own classification systems for Workers Comp, but instead find it more convenient to use a system developed by such a rating bureau.
NCCI is largely funded by insurance companies, and insurance company executives make up a majority of its board members. But NCCI is independent of those insurance companies, or at least as independent as any organization can be that has such close financial and management ties with the insurance industry.
NCCI has devised a classification system used by insurance companies to of approximately 550 "National" classification codes, intended to cover workplace exposures. NCCI devises the manuals and rules regarding classification that are used in most states, and also is responsible for determining the correct classifications for particular employers (in those states that use the NCCI system).
These National classifications are supplemented by what NCCI terms "State Specials", classifications or classification definitions that apply in only one state.
NCCI details what kinds of work are intended to be included in each classification code in the "Scopes manual". The Scopes manual is published and updated regularly by NCCI. The Scopes manual is copyrighted by NCCI, so the only way to obtain a copy of this manual is to order one from NCCI.
There are a handful of states that do not use the NCCI classification system: California, New Jersey, New York, Delaware, and Pennsylvania are states that have their own classification systems. Texas until 2014 had their Department of Insurance operate independently of NCCI, but Texas now has fully adopted NCCI classifications and manual rules, subject to some "State Specials".
Many other states also have some "state special" classifications that vary significantly from NCCI definitions for certain workplace exposures. To see which states are NCCI jurisdictions and which have independent rating bureaus, consult our state-by-state directory.
In general, the NCCI classification system seeks to classify the overall business enterprise of an employer, not the particular work performed by specific employees. For that reason, a janitor working at a manufacturing plant will be assigned to the overallmanufacturing classification used by that plant, not to a janitorial classification.
The NCCI classification system makes an exception to this approach for construction-type classifications. For these employers,multiple classifications may be assigned to employees, depending on the actual work done. But work records must show specific hours at the various tasks for a worker's time to be split among the appropriate classifications.
Even for non-construction employers, more than a single classification code is usually used on a policy, because the NCCI has established that certain workplace exposures are almost always eligible to be broken out into their own classification--clerical, outside sales, and sometimes (but not always) drivers.
Determining what the proper classification code is for a particular employer is not always easy, even for NCCI. AIM has helped a number of clients who were misclassified into more expensive classes not just by their insurance company, but by NCCI itself. This is not so much a criticism of NCCI itself as it is a reflection of the complexity of the classification system. Sometimes small details can make a big difference in which classification code is assigned to an employer, which in turn can make a big difference in rates and premium.
In The Real World...
Who determines the classification codes used on an employer's Workers Compensation insurance policy? It can be a bit of a complicated process involving multiple parts of the insurance system. Consider:
The insurance industry doesn't make it easy for an employer to figure out classifications rules, either. The insurance manuals can be difficult to understand, or in some jurisdictions relatively lacking in detail, even when an employer can get access to them. Insurance jargon like NOC (Not Otherwise Classified) or NPD (Non Premium Divisible) can also make it difficult for an employer to understand these insurance manuals. Consult our glossary for definitions of these and other terms.
There can be other complications that enter into the equation as well. Each legal entity in a state is supposed to be separately classified. And if there isn't a specific classification that neatly fits an employer, then "classification by analogy" is done, assigning the existing classification that seems to best fit the employer's operations. Such situations often lead to disputes between insurer and employer.
Because Workers Compensation insurance is, to a very great extent, a state-by-state matter, not only can the classification rules vary from one state to another, so too can the mechanisms for disputing or appealing a classification decision by an insurer or rating bureau.
AIM has experience helping clients in all states that allow insurance for Workers Compensation (and even in Ohio, which maintains a monopoly state fund for Workers Compensation, but where the NCCI classification system is now used.) So we are experienced in working with and appealing classification decisions by NCCI and also by other independent state systems, such as California, Delaware, Pennsylvania, Michigan, New Jersey and New York.
Often, we find employers misclassified into a more expensive classification for years, in spite of competitive bidding by various agents and insurers. And we've helped employers successfully appeal and reverse classification decisions by NCCI and other rating bureaus.
We here at AIM are often asked by employers if they can find details of this NCCI classification system online. The answer, surprisingly, is no. One would think that such information would be publicly available somewhere on the internet, as it is so fundamental to the pricing of Workers Comp insurance. But NCCI views that manual, known as the Scopes manual, as proprietary and copyrighted material, which they sell. So NCCI doesn't want that material available freely. To get that information, one must purchase a copy of the manual from NCCI, either a hard copy or an electronic subscription.
An employer may be able to get information about specific classification entries in the Scopes manual from their agent, but not all agents have up-to-date copies of this manual.
Advanced Insurance Management LLC doesn't sell insurance. Instead, we consult with employers about proper Workers Compensation insurance classifications, experience modifiers, payroll audits, and other technical aspects that determine Workers Compensation insurance premiums.
AIM helps employers successfully dispute classifications used by insurance companies. We also provide expert witness services in legal disputes with insurance companies over proper classifications, rates, experience modifiers, and audit premium charges.
Find out if your employees have been misclassified by emailing Advanced Insurance Management at email@example.com.
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.
"Advanced Insurance Management has been a tremendous help to Allied Welding, Inc., and has saved us money and generated a significant refund on our Workers' Compensation by finding an error in our classifications. We value their expertise."--Allied Welding