If you have employees, you probably need a workers’ compensation policy. Nearly one in five small business owners needs to carry work comp. Unfortunately, shopping for it can be confusing, and many traditional insurers don’t want to bother with policies for small businesses.
Here’s what you need to know to shop work comp the smart way.
1. Know Your State Requirements
Workers’ compensation is regulated at the state level, so reviewing and understanding your state’s regulations should be your first priority. Your state will dictate where you can shop for a policy and which employees must be covered.
- You must comply with any and all states where your employees are performing work, or ask about an All States Endorsement.
- Your policy will only provide coverage within state lines. Again, obtain multi-state coverage if you need it.
- Work comp only covers injuries that employees sustain while on the job. For other injuries or damage, you might need a general liability policy.
2. Create Clear Job Descriptions
Workers’ compensation rates are based on Classification Codes, a numeric system that assigns the likelihood of injury for any type of work.
If you need work comp now, break down your current employee payroll based on the type of work they do. For example, the company below will need work comp for an administrative assistant ($40,00 payroll) and accountants ($150,000 payroll).
Get in the habit of drafting clear descriptions of roles within your company. This will make it easier for an insurance underwriter to classify your employees accurately.
Learn more about work comp: The Small Business Owner’s Guide to Workers’ Compensation Insurance
3. Estimate and Monitor Payroll
Whether your business is growing, contracting or experiencing turnover, your payroll is unlikely to stay the same over the course of 12 months.
When buying workers’ compensation coverage, estimate annual payroll based on your current circumstances. At the end of the year, your audit will include checking the actual payroll, and your insurance carrier will issue a credit or bill as needed.
To improve cash flow, monitor and report your current payroll throughout the year. Some insurers will adjust your coverage, and therefore your premium, as payroll fluctuates.
4. Have Your Existing Policy Handy
If you have coverage already, have your current work comp policy accessible, especially if you’re shopping around with multiple carriers. You’ll likely be asked for information on the policy that will expedite the process, and get you covered faster.
Some key information to have on-hand:
- Class Codes: As we mentioned above, your payroll will be broken down into job descriptions. If you already have assigned class codes, the insurance agent can use these to calculate your premium, and make sure that they’re correct.
- Experience Modifier: If you’ve been in business for several years, you may have been assigned an Experience Modifier. This number takes into account your history of claims, and compare it to similar businesses. Depending on whether you are above or below average, you will receive a mandatory debit or credit on your premium.
- Loss Runs: If you have a more complex business with higher premiums, underwriters will require “loss runs,” which are claims reports that show all claims that have been paid on your behalf for a specified period of time. These can be easily ordered from your current insurance company or agent.
5. Ask About Discounts and Credits
Employers can’t control most of what is used to calculate premiums: Your state’s workers’ comp rates, available insurers and business class codes. But you can control costs by asking about discounts and credits, such as:
- Workplace safety programs: Most insurance companies will recognize and reward a formal safety program. Talk to your insurance agent or carrier to find a program that qualifies.
- Formal training programs: Similarly, many structured safety training programs, such as a 90-day program for new hires, can result in a credit on your policy.
- Owner exceptions: In some states, employers can choose to exempt themselves from coverage, which will reduce your premium.
- Payment plans: Many carriers offer a variety of payment plans (annual, semi-annual, quarterly). While not a discount, paying in larger installments will reduce billing fees tacked onto each payment. These savings can add up for small businesses.
- Payroll reporting: Pay a more accurate premium on a monthly basis. This increasingly popular option allows business owners to report company payroll monthly and be billed for that amount. For businesses that keep a close eye on cash flow, this can be a good alternative to traditional premiums, which correct for payroll changes at the end of the year.
6. Review Your Audit and Policy Annually
At year’s end, your insurer will conduct an audit, and you can choose to renew or seek coverage from another carrier. Even if you’re not switching carriers, it’s important to review your audit and policy carefully.
- Check for errors: Double-check your audit for any potential errors, so they can be corrected.
- Make necessary updates: If your business model, size, geographic market or payroll have changed over the past year, make sure your new policy reflects these changes.
7. Find a Work Comp Expert
Most importantly, work with an insurance agent that knows the workers’ compensation system in your state. They will be best suited to make sure your workforce is classified accurately, and find you the policies and coverage that’s right for your business.