A Primer on Workers Comp.

When I first started this blog, I promised myself I would take the time to post featurettes on small business topics for which business school really did not prepare me.   The first such feature was on buying a business.

This week, I turn to the topic of workers comp. insurance.  Never in 2 years at one of the more storied business schools in the nation, nor in nearly 20 years at the largest corporations in the world, did I once encounter the topic of workers comp.  Now, since I bought my own business, I spend inordinate amounts of time dealing with it.

This article will focus on workers comp. from the employers point of view (most state web sites are useless to employers - they have reams of detail for workers on how to file claims or complaints, but nothing to help employers learn how it all works).

oyote Background

The workers compensation system, which is generally run state by state, has evolved as a win-win for workers and employers.  Workers are guaranteed some minimum level of medical treatment and disability pay for their on-the-job injuries, and employers avoid the possibility of lawsuits for work-related injuries.  As summarized in this Insurnace Information Institute article:

Workers compensation insurance covers the cost of medical care and rehabilitation for workers injured on the job. It also compensates them for lost wages and provides death benefits for their dependents if they are killed in work-related accidents, including terrorist attacks.

Workers compensation systems vary from state to state. State statutes and court decisions control many aspects, including the handling of claims, the evaluation of impairment and settlement of disputes, the amount of benefits injured workers receive and the strategies used to control costs.

Given the incredible proliferation of lawsuits in this country, for all its faults, the workers comp system is probably better than the alternative.  The article cited above has more on the history of workers comp as well as a nifty table of state by state benefits and requirements.  As with almost any governmental practice in this nifty Federalist system we have -- small business owners in multiple states, Beware.  Every state does it differently.

Note that workers comp is generally "no fault".  This means that it does not matter if the worker was hurt because the employer had an unsafe workplace or if the employee was ridiculously careless -- most everyone gets compensated. AllBusiness.com has more detail:

Workers' compensation laws rely on a "no fault" rule that provides benefits regardless of who is responsible for a workplace injury. There are exceptions, however, for employees who hurt themselves due to reckless behavior or drug or alcohol abuse. In addition, employees who cause self-inflicted injuries or injure themselves while off-duty or while engaged in a criminal act usually do not qualify for benefits.

There are also a wide variety of state laws regarding what types of employees qualify for workers' comp benefits. Some states exclude contractors and consultants, volunteer workers, farm workers, domestic servants, and certain other groups. States also enforce different rules about whether part-time employees qualify for benefits.

Note that I will link to some more in depth tutorials at the end of the post.

First Step - Buying Insurance

If you live in any state except Texas (where the requirements are optional), you MUST purchase workers compensation insurance for your employees.  As noted above, some may be exempt from coverage (owners, senior officers, some contractors) but if you have any paid workers at all, you will likely need a workers comp. policy.  In most states, you will call a broker, though in a few, like Washington, Wyoming, Ohio, W. Virginia and N. Dakota, you will call the state workers comp office because there are no private carriers allowed to compete with the monopoly state fund.  In other states, like Arizona, there is a state fund but it competes with private carriers.

Most business insurance agents deal with workers comp., but they can sometimes be fussy about what business they take on, especially in states with workers comp. messes like California and Florida.  So, there are a couple of things that you will be asked for in the first 30 seconds of a phone call, so you might as well be ready.

First, as with any insurance matter, they will ask for a loss run or loss history.  Ask your current or previous broker for it.  If you don't have any history, don't worry.  Unlike with say, getting a loan, getting workers comp. insurance can actually go more smoothly without any history (history only seems to be able to hurt you, not help you much).

Second, they will ask what "class codes" your labor force is.  This refers to a set of four digit numbers that have been devised to categorize different types of jobs, much like SIC codes classify business types.  A good agent should be able to figure out your code(s) from your description of the business, but if you want to get a head start, you can find a listing here, courtesy of Insurance Guys.  Depending on the state and the insurance company, you may be allowed multiple class codes or you may be required to have just one.  For example, we have some operations that combine campground jobs (expensive) with store and clerical jobs (less expensive).  However, most workers comp carriers make me call all of these workers campground (the most expensive class).  The only way to get the store workers at a cheaper rate would be to for a second subsidiary for stores with just the store workers and a separate workers comp. policy.

Third, they will ask for your total payroll, usually in dollars, by state, for each of these job class codes.  Most will take your word for it up front, but will audit you and your payroll records sometime during the year to ensure that the premiums are calculated on the right total.  Some insurance companies, as well as most state run programs like in Washington state, will require monthly or quarterly payroll reporting.  When you set up your payroll with a company like ADP or Paychex, you should make sure you set up your departments so you can get the workers comp data you will need.

What's my "mod"

Finally, the broker will ask you for your workers comp. experience "mod", short for modifier.  If you do not know what an experience mod is, you soon will.  A company called NCCI collects premium and loss data from most all the carriers for most businesses.  If they are tracking your company, you should get a report like this one from them (OK, the NCCI site has a web site design that won't let me link to the actual page - grrrr.  Click the link above, and find "how to understand your experience rating worksheet" under the learning center heading.).

(click image for full size)

Experience mods take into account your premiums paid and your losses as compared to other companies in the same job class code.  A modifier of 1.2 means you are 20% worse than average in claims history than others in your job code.  Note that all history is not the same - I do not know the exact formula, but I do know that 10 claims for $5000 each will be treated as worse than 1 claim for $50,000, even though the total amounts are the same.  Given this, it would really help if workers comp insurance policies could have a deductible, but many states do not allow this (I posted on this problem here).  . 

One thing to remember -- NCCI uses the amount your insurance company has reserved for a particular claim, not the actual payouts to date.  In many cases you will find, on an open claim, the insurance company may have paid out $5,000 to date, but may have say $15,000 total reserved, meaning they estimate the payouts might reach that point some day.  Check with your broker to make sure your insurance company is closing claims in the system.  Once the claim is closed out, then the experience mod will use the sometimes lower actual rather than reserved number.  Also note that experience mods are built up over a three year period, and often the last year is not included.  So, for a renewal date of June 1, 2005, your experience mod probably includes claims from June 1, 2001 to June 1, 2004.

How is My Rate Calculated?

Your base rate will depend on your state and your job class.  Rates are usually stated as premium dollars per hundred dollars of payroll.  Rates vary all over the map.  Store or clerical workers might be just a few dollars per hundred.  Our campground workers are $9-$20 per hundred.  Roofing workers can be $25 and up.  So if your rate is $6.00 per hundred, and you have $100,000 in annual payroll, your base premium will be $6,000 per year (ouch).

Now, here is why we spent so much time with experience mod.  This base premium is then multiplied by your experience mod to get your actual premium.  So, if you have an experience mod of 1.3, your premium in this example would be 1.3 times $6,000 or $7,800.  (By the way, beyond just the audits, this is why trying to hide payroll does not pay.  If you hide payroll, for the same experience, your experience mod will go up and your premiums will go up -- in the long run, you are not going to save any money).

When you see your workers comp rates, you may be tempted to self insure (we, for example, pay over $200,000 a year, and that is with a good experience mod).   Be forewarned that in most states, this is very hard to do.  There is just too much history of small companies failing to make required payments.  You CAN do it in many states, but it requires credit checks and bonding, and as a small business you will probably need to hire a third party to do the claims processing.

Help, No One Will Insure Me!

In certain industries and certain states, it can be very hard to find coverage.  For example, because campgrounds have a higher than average history of accidents, and because it is not a large market, many insurers won't touch our class code.  One of the first thing an agent will do is to check to see if the companies he represents will write for your class code(s).  By the way, this is also one of the first things that an employee outsourcing company will check, to see if they want to do business with you.  In addition to difficulties with certain class codes, certain states, like Florida, can be a problem.  For example, our company used to have a national policy that covered all 11 states that we were in.  Several years ago, that company stopped writing certain states (California and Florida were the first they dropped) and I have had to systematically stitch together coverage from multiple brokers and companies.  I currently have 5 policies to cover 10 states.

This is the kind of situation that can quickly lead to panic - workers comp insurance is required, but you can't find anyone who will provide it.  Fortunately, states have recognized this situation and generally have an insurer of last resort or state fund who will cover you, though you may not like the price.  You can learn more about these insurers here-- keep clicking "next" at the bottom for more.  The article goes across several pages.  I would like to say that these state funds provide a backstop to make sure you will be insured, but that is not necesarily the case.  Not every state has an insurer of last resort or state fund.  And, though it surpised me the first time it happened, state funds can turn you down.  SAIF, the state fund in Oregon, turned our company down for reasons I do not understand to this day (we have a perfect zero claims record in that state).  Fortunately they were just our backup option, and a private insurer had already accepted us.

By the way, do not wait until the last minute to pursue your workers comp policy or renewal - expect at least 2 weeks for a decision, and even then the decision could be "no, we won't cover you" and you will have to start from square one.  (Update:  I have been told that in CA, if you go directly to the state fund, it can take 4-6 weeks to get a decision, but a private broker can get you into a State Fund policy in days.  I never tried to go direct, but I have a State Fund policy via a private broker and can attest it was pretty quick that way.  As you should with any other aspect of California business, assume that CA workers comp. is more expensive, more difficult, with more litigation land mines and more anti-business traps than most any other state you deal with).

Filing Claims and other details

First, like a lot of other HR type issues, many states require certain workers comp related materials to be posted in the workplace, along with minimum wage posters, etc.  You insurance company should provide you with these posters as well as with claims forms and a claims process.  Make sure to use thei insurer's claims process, and teach your managers to carefully document all injuries.  Not only will you need detail about how the injury occurred, but you will also need to keep track of the days of work the worker missed due to the injury.  Give the insurance company the facts and get out of the way.  There is a lot of potential liability today from denial of deserved workers comp benefits, and you do not want to be in this loop.  It is your insurance company's job to determine the validity of the claim and benefits.  Leave that to them.  If you suspect fraud, detail that to the insurance company but then let them run with it.

Depending on the company, your insurance company will probably give you a few other tools to help manage costs.  First, they may have a deal with a local HMO or provider network to provide diagnosis and care.  Try to route your workers to this network - it can save a lot of time and money.  Also, insurance companies often offer free risk analyses and on-site audits.  By all means take them up on it - its one of the last free services around and can really have value.  Finally, insurance companies are increasingly recommending process changes to your HR process to provide for new employee physicals (to baseline pre-existing conditions) and for drug and alcohol testing (because injuries related to these are not compensable).


Hopefully some of this has been helpful.  NCCI has a more complete training package here (same site problem - click on "Introduction to Workers Compensation" under Learning Center and then click it again on the next page).  More detailed state by state data is in this article.  I have never worked with these guys but mostchoice.com seems to have an informative web site.  In putting together this post, I also used the Insurance Guys web site -- they have contacted me in the past and if you are out in CA, they claim to be able to have access to many different underwriters to get folks the best policy.  Cal-Nevada Insurance did a good job for me.  I have related posts on workers comp here and here.

By the way, many states have broken workers comp.  To give you a hint at the problems, the number of injuries per hour worked has fallen for decades, but the workers comp costs per hour worked still keep going up.  The reason is that the cost to treat a given injured worker has risen at more than twice the overall rate of inflation for health care.  But we will delve into this in a future post.


  1. Accidental Verbosity:

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  2. Greg Arnold:

    That was explained extremely well. If you plan on delving any deeper into work comp, please list PEO's as another valuable source for work comp insurance. PEO's - aka Employee Leasing Companies - are payroll companies with the added benefit of "pay-as-you-go" workers comp insurance. PEO's extend their master policy to their client companies, and therefore they pay / manage claims. There are no deposits and audits are rare. Some PEO's offer free risk management to their client companies as a proactive approach to MOD management. Some PEO's cater to a broad spectrum of industry, while others serve a niche, like construction, for example. PEO's generally require an applicant company to provide an underwriting application (or standard work comp Acord application), & loss runs (or an affidavit from the owner testifying to loss history); submissions generally take a week or less to underwrite, and in some cases will underwrite in a day if a client has just been notified of cancellation and is facing a lapse in coverage.

  3. Jasen:

    Using a P.M.L. Worldwide member PEO Company, or Employee Leasing Company, makes leasing employees a cost-effective convenience for any small business owner. The reductions in cost are made possible through volume discounts by pooling your company's employees together with P.M.L.'s for worker's compensation, health, dental, vision and life insurance benefits, state taxes, S.U.T.A. taxes, federal taxes, etc. P.M.L. clients' paperwork hassle and time consuming follow up are reduced, and sometimes eliminated, because P.M.L. does the work for them. All payroll related taxes, filings and reports are also handled by P.M.L., leaving the business owner free to take care of the things he or she went into business for... Making A Profit! Please feel free to visit PML Worldwide HERE or call 800-567-0235 ext. 201 for more information.

  4. Merideth Carleton:

    Have you seen this before? It's a number guessing game: http://www.amblesideprimary.com/ambleweb/mentalmaths/guessthenumber.html. I guessed 58664, and it got it right! Pretty neat.

  5. Marshall Carr:

    PEO's - aka Employee Leasing Companies are not always the best solution for an employer that feels that they are paying too much for workers compensation coverage.

    Most insurance carriers will not write Workers Compensation coverage for PEO's. The reason being is because the insurance company can not control the risk. A loss control representative (sometimes called a safety engineer) can not make a direct impact on the safety of the PEO because the risk is spread out among many, many employers. This in turn causes underwriters to fear PEO's. If a PEO has truckers, contractors, and other higher risk industry groups in their customer group; they have even more difficulty finding coverage.

    The result is that PEO's get charged some of the highest rates insurance companies can offer.

    Some PEO's try to convince employers that they can save them money because they will drop their own modification factor (x-mod) take on the PEO's x-mod. This may benefit an employer that has a high x-mod (>1.25). However, as history has shown time after time, PEO's that take on customers with high x-mods eventually fail. They fail because the PEO's x-mod will go up and they are no longer a cost saver. Thus losing all their customers.

    If you decide to use a PEO, you should make a thorough analysis of the PEO's x-mod history. If the PEO will not share this with you - stay away. If you see the x-mod steadily climbing - stay away. If the PEO has not been in business long enough to have an x-mod history - stay away - or you may get burned in the long run.

  6. PEO Advisor:


    Your comments about PEOs are not quite accurate. In fact many PEOs aggressively manage work comp claims. Why? Because a work comp claim goes against the PEO's experience and could affect its ability to compete. This is one of the greatest benefits of a PEO. Each PEO has a department that will manage each claim, working to find a quick resolution. These efforts will inevitably result in a much lower claim cost. Many insurance companies would just pay the claim and re-rate the client’s mod.

  7. Richard:

    PEOs are the worst thing that has ever happened to the construction industry. First, they only provide half the coverage of a standard work comp policy, as they specifically exclude any lower tier subcontractors or suppliers. Construction is a tiered industry - period. There is no such thing as not having lower tiers in construction unless you happen to be the last materials supplier in the sub-sub line. This forces the contractor/subcontractor to procure an additional work comp policy in their company's name, called a minimum premium policy. They don't tell the clients in the construction industry this, though, when they are signing them up. In FL, the only source for a minimum premium policy is through the JUA. Not only that, PEOs have enough conditions for what constitutes the account being "in good standing," that the accounts are never in good standing and they deny the claims. Add to that the problem of the employers liability no longer being included on the umbrella policy because the contractor no longer has a work comp policy in their name. PEOs should be banned from the construction industry unless they either issue A rated work comp policies in the contractors name (NOT the alternate employer endorsement, which allows NO more protection for a GC or CM from a subcontrator's lower tiers), or require them to provide the minimum premium policy from an A rated company. PEO and Crook are synonymous in my book.