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Workers’ Compensation, Explained

A Glossary Of Commonly-Used Terms

Workers’ comp is… complicated! And if you’re a small business owner who wants to understand the basics about workers’ compensation and how it works, you may not be sure where to start.

That’s why WorkCompOne has put together a list of some of the most frequently-used terms in the industry, as well as simple definitions about what each one means.

Workers’ Compensation

This is a term used to refer to the system of laws, regulatory bodies, judicial rulings and other systems that govern the compensation of workers who are injured on the job in each state. It also covers things like how much compensation is necessary, who qualifies for workers’ compensation, and other such details.

Each state has their own workers’ compensation laws, which vary across state lines. A business in Ohio, for example, will have different workers’ compensation requirements than one in Indiana, California or Alaska. The exact requirements can vary quite a bit depending on your state. That’s one of the reasons that rates for workers’ compensation insurance vary so much across state lines.

Workers’ Compensation Insurance

Workers’ compensation insurance is the insurance product that covers the payment of an injured employee’s medical bills, rehabilitation and lost wages. Like any commercial insurance policy, business owners can purchase coverage and pay a premium. If or when an employee is injured on the job, the employer can file a claim to cover expenses.

This is a type of “no-fault” insurance that’s specifically meant to cover workplace injuries. “No-fault” means that it doesn’t matter who is found to be at fault or liable for the injury. In some instances, state law requires the employer to carry coverage in order to operate legally.

Another unique thing about workers’ compensation insurance is that it is usually an “exclusive remedy.” In other words, if an injured worker is covered by a workers’ compensation policy, they cannot sue or take any other legal action against the employer or business. They are exclusively compensated through the workers’ compensation claim. There are some rare exceptions on a state-by-state basis, but this is broadly true for most policies and states.

Classification Code

A classification code is a number used by workers’ compensation rating bureaus and insurance companies to indicate the profession of an employee – and the corresponding level of risk. There are a ton of common classification codes – for example, 0042 is the code for Landscape Gardening & Drivers, and 8001 is the code for Florists.

Every worker has different levels of risk. A construction worker is more likely to get injured than a secretary. So when providing coverage, insurance companies look at classification codes to help determine how much an employer has to pay.

Workers’ Compensation Policy

This is the actual policy that is issued when a company purchases workers’ compensation insurance. The employer often pays a monthly premium, in exchange for coverage of all employees. Note that the employer must foot the bill for workers’ comp insurance; premium costs can not be passed on to employees.

The policy will cover all of the details about what benefits workers will receive if they're injured on the job, as required by state law. This may include things like:

  • Medical bills
  • Lost wages
  • Vocational rehabilitation services
  • Funeral expenses for deadly injuries

Employee benefits generally have no limits and no exclusions. The insurer will pay out the claim to cover any bills needed to treat the employee’s injury, illness or rehabilitation.

There are limits to how much each policy will pay for employer’s liability. This would apply if an employee claimed negligence, and this portion of the policy would cover the employer’s legal defense and any awarded damages. For example, if a policy has a “100 / 500 /100” limit, that means it will pay out $100K per accident, $500K per disease per policy year, and $100K per employee. The coverage you need may vary depending on your line of business and your line of work.

Workers’ Compensation Insurance Rate

The workers’ compensation insurance rate is also called a “Premium Index Rate.” This is a significant part of calculating your workers’ compensation costs. Rates vary from state to state, and can be higher for some types of businesses than others.

These rates are calculated based on your total payroll. A rate of $2.00 would mean that you pay $2 in coverage per $100 of payroll costs. That would add up to $2,000 per year if you have a payroll of $100,000.

Rates vary from state to state because different states have higher or lower limits, or more restrictive requirements for workers’ compensation. For example, New York requires every single person who works in a business to be covered with workers’ compensation. On the other hand, workers’ compensation is completely optional in Texas.

Workers Compensation Premium

This is the total amount that you’ll pay for a 12-month policy. It’s calculated by taking the company’s worker’s compensation rate(s) and multiplying it by payroll – then applying any credits or debits to the policy.

Credits are basically discounts on the policy, which businesses may be entitled to based on their safety record, the size of the business, employing safety measures, etc. Debits, as you may have guessed, are the opposite. These are additional fees that may be tacked onto a policy based on line of work, past claims and safety history. Credits and debits may also apply at the policy’s annual audit, if actual reported payroll varies from the initial estimate.

The result is the final premium. This is calculated as a yearly rate, but you typically have the option of paying annually or monthly, depending on what makes more sense for your business. Some insurers may offer a credit for paying annually. Other terms you might hear:

  • Manual Premium: Workers’ compensation premium prior to the application of the experience modification factor and any other credits and debits. It is calculated based on the employer’s payroll and the insurer’s premium rates by payroll code.
  • Modified Premium: Workers’ compensation premium after the application of an experience modification factor. Does not reflect any schedule credits or debits.
  • Standard Premium: Premium after application of experience modification factor and schedule credits and/or debits, but before premium discount.
  • Audited Premium: Final premium for the policy term based on actual payroll exposures.

Workers' Compensation Insurance Audit

This is an audit that’s either done when a policy expires, or during the annual renewal period. In this audit, the insurer will review payroll to adjust the workers’ compensation premium based on the actual reported wages over the past year.

When you first buy your policy, you’ll have to estimate your anticipated wages for the year. At the audit, you will be credited if you overestimated your payroll, or you will be debited if you underestimated your payroll. Yearly audits are necessary to make sure you’ve got adequate coverage, and that you’re paying the proper amount in premiums.

Limits of Liability 

Limits of liability, as it pertains to an insurance policy, refers to the maximum amount of money an insurer will pay out in the event of a covered claim. For example, a limit of $100,000/$500,000/$100,000 on a workers' compensation policy means the policy will pay out a maximum of $100,000 per accident, $500,000 per policy, and $100,000 per employee.

Workers’ compensation limits are structured differently than other insurance policies, however. This limits outline how much the insurer will pay to cover the employer's liability — in other words, legal defense and damages. There are no limits to the amount a policy will pay out for the injured employee's care. 

Small Business Insurance

Small business insurance, also known as commercial insurance, protects a company’s assets, income and property. The three general types of coverage provided by a small business insurance policy are: business interruption coverage, business property coverage and general liability coverage

A small business insurance policy can help protect against both financial losses and covered perils. Covered perils include events such as fire, theft, wind, and falling objects. Like any insurance product, small business owners pay a premium in exchange for coverage outlined in the policy. But small businesses often struggle insurance companies willing to write smaller company (and therefore, small premium) accounts. 

Employer’s Liability

Employer’s liability insurance protects your company if an employee files a lawsuit related to a workplace injury or illness. This coverage is part of a workers’ compensation policy. Whereas workers’ comp itself pays for medical expenses and lost wages associated with an injury or illness, employer’s liability insurance kicks in if your company is found to be negligent. 

This is not to be confused with Employment Practices Liability Insurance, which covers personnel-related disputes, such as wrongful termination lawsuits; discrimination in hiring, firing or management; and sexual harassment claims.

Workers’ Compensation Quote

A workers’ compensation quote provides an overview of how much you would pay for a policy, as well as the coverage you’d receive in return. Some quotes are estimates, and the insurer needs more information to finalize the price. Other quotes are bindable, or ready to be purchased immediately. 

You can secure a quote directly from a workers’ compensation insurance provider or via a broker. Quotes can vary based on many factors, such as location, number of employees, and industry.  

Workers’ Compensation Claim

A workers’ compensation claim comes about when an employee is injured on the job and unable to work. They file a claim with your insurance company, and the employee receives compensation as they recover. It pays for things such as lost wages, medical treatment, ongoing care, funeral costs and disability benefits.  

Date of Injury (DOI)

Date when injury or illness occurred or, in the case of repetitive exposure injuries or illness, when it first became apparent that symptoms were work related.

Death Benefits

Benefits paid to surviving dependents when an employee dies as a result of injury or illness caused by their employment.

Experience Modification Factor

An adjustment to the Manual Premium, calculated by an advisory organization (also known as rating bureaus), such as NCCI. It’s based on historic loss and payroll data of a particular insured. Also known as the experience modifier, experience modification rate, experience mod, ex-mod, EMR, EMF or simply the mod.

Businesses with a history of claims and new businesses often find it difficult to secure a workers’ compensation policy. Furthermore, when they do find a provider, they’re likely to pay higher rates. 

After three years of conducting business in a specific industry, a company is assigned an experience modifier. This shows a company’s workplace safety record as compared to other organizations in the same class code. Insurance companies must then use this to credit or debit your final premium cost.  

Loss Runs

Loss runs are insurance company reports that show all claims that have been paid on your behalf for a specified period of time. These reports generally apply to more complex businesses with higher premiums. 

State Fund

Some (not all) states have a government-funded state fund that provides protection for business owners in the event of an employee injury or illness. Four states require that workers’ compensation insurance be purchased through a state fund: North Dakota, Ohio, Washington, and Wyoming. 

Assigned Risk Pool

The assigned risk pool — also known as the assigned risk plan — was established by states to ensure that employers can obtain a workers’ compensation policy even if they’re unable to purchase coverage on the open market. Companies that often turn to the assigned risk pool include those with a poor loss history, new businesses, and employers in dangerous industries.  

Rating Bureau

A rating bureau is an organization that collects workers’ compensation data (such as premiums and losses), develops industry standard policy forms, and calculates advisory rating information. This information is then filed with regulators on behalf of insurance providers that purchase the service. 

Most states use NCCI to set workers' compensation insurance rates and use its classification codes, though some states have their own rating bureaus in place. 

Independent Medical Examination (IME)

Requested by an employer or insurer to serve as an objective evaluation of an injured employee’s condition. IMEs are used in situation where the findings of an employee’s self-selected doctor need to be verified.

Lump Sum Payment

The award of workers’ compensation benefits in one or more partial or total payments, instead of in weekly or biweekly payouts.

Occupational Disease

Illness or disease primarily caused by exposures faced by an employee in their work environment over the course of their employment.

Occupational Injury

Any injury, illness or death that results from a work-related event or from repetitive trauma or other repetitive acts required of an employee over the course of their employment.

Premium Discount

A premium credit, based on the size of the premium that is paid.

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